As filed with the Securities and Exchange Commission on August 28, 1995
1933 Act Registration No. 33-_____
Investment Company Act of 1940 File No. 811-4558
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------
FORM N-14
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
[ ] Pre-Effective Amendment No. __ [ ] Post-Effective Amendment No. __
--------------------
STATE STREET RESEARCH TAX-EXEMPT TRUST
(Exact Name of Registrant as Specified in Charter)
One Financial Center, Boston, Massachusetts 02111
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (617) 482-3920
Francis J. McNamara, III, Esq.
Senior Vice President, Secretary and General Counsel
State Street Research & Management Company
One Financial Center
Boston, Massachusetts 02111
(Name and Address of Agent for Service)
Copies of Communications to:
Geoffrey R.T. Kenyon, Esq.
Goodwin, Procter & Hoar
Exchange Place
Boston, Massachusetts 02109
Approximate Date of Proposed Public Offering: As soon as practicable
after the effective date of this Registration Statement.
--------------------
The Registrant hereby declares that, pursuant to Rule 24f-2(a)(1) under
the Investment Company Act of 1940, as amended, it has registered an indefinite
number of securities under the Securities Act of 1933 pursuant to such rule;
accordingly no fee is payable herewith.
The Registrant's Rule 24f-2 Notice for the fiscal year ended December 31,
1994 was filed with the Securities and Exchange Commission on or about February
28, 1995.
It is proposed that this filing will become effective thirty days after
filing pursuant to Rule 488.
<PAGE>
STATE STREET RESEARCH TAX-EXEMPT TRUST
CONTENTS OF REGISTRATION STATEMENT
This Registration Statement contains the following pages and documents:
Front Cover
Contents Page
Cross-Reference Sheet
Letter to Shareholders of State Street Research California
Tax-Free Fund
Notice of Special Meeting of Shareholders of State Street
Research California Tax-Free Fund
Letter to Shareholders of State Street Research Florida
Tax-Free Fund
Notice of Special Meeting of Shareholders of State Street
Research Florida Tax-Free Fund
Letter to Shareholders of State Street Research
Pennsylvania Tax-Free Fund
Notice of Special Meeting of Shareholders of State Street
Research Pennsylvania Tax-Free Fund
Part A - Joint Proxy Statement/Prospectus Concerning
Acquisition of the Assets of the California Tax-Free Fund
Part A - Joint Proxy Statement/Prospectus Concerning Acquisition
of the Assets of the Florida Tax-Free Fund
Part A - Joint Proxy Statement/Prospectus Concerning Acquisition
of the Assets of the Pennsylvania Tax-Free Fund
Part B - Statement of Additional Information
Part C - Other Information
Signature Page
Exhibits
<PAGE>
STATE STREET RESEARCH TAX-EXEMPT TRUST
CROSS REFERENCE SHEET
Pursuant to Rule 481(a)
Caption or Location in Each
Form N-14 Item No. and Caption Proxy Statement/Prospectus
------------------------------ -----------------------------
<TABLE>
<CAPTION>
Part A
- ------
<S> <C> <C>
1. Beginning of Registration Statement Cover Page; Cross Reference
Sheet and Outside Front Cover
Page of Prospectus
2. Beginning and Outside Back Table of Contents
Cover Page of Prospectus
3. Synopsis Information and Risk Summary; Risk Factors; Comparison of
Factors Investment Objectives and Policies
4. Information About the Transaction Summary; Reasons for the
Reorganization; Information About
the Reorganization; Comparative
Information on Shareholder Rights;
Exhibit A (Agreement and Plan of
Reorganization and Liquidation)
5. Information About the Registrant Cover Page; Summary;
Information About the
Reorganization; Comparison of
Investment Objective and Policies;
Comparative Information on
Shareholder Rights; Additional
Information About The Funds
6. Information About the Company Summary; Information About the
Being Acquired Reorganization; Comparison of
Investment Objectives and Policies;
Comparative Information on
Shareholder Rights; Additional
Information About The Funds
7. Voting Information Summary; Information About the
Reorganization; Comparative
Information on Shareholder Rights;
Voting Information
8. Interest of Certain Persons and
Experts Financial Statements
and Experts; Legal Matters
9. Additional Information Required Not Applicable
for Reoffering By Persons Deemed
to be Underwriters
<PAGE>
Caption or Location in Statement of
Additional Information
--------------------------------------
Part B
- ------
10. Cover Page Cover Page
11. Table of Contents Cover Page
12. Additional Information About the Cover Page; Statement of Additional
Registrant Information of State Street Research
Tax-Exempt Fund
13. Additional Information About the Cover Page; Statement of
Company Being Acquired Additional Information of State
Street Research California Tax-Free
Fund; Statement of Additional
Information of State Street
Research Florida Tax-Free Fund;
Statement of Additional Information
of State Street Research
Pennsylvania Tax-Free Fund
14. Financial Statements Statement of Additional Information
of State Street Research Tax-Exempt
Fund; Statement of Additional
Information of State Street
Research California Tax-Free Fund;
Statement of Additional Information
of State Street Research Florida
Tax-Free Fund; Statement of
Additional Information of State
Street Research Pennsylvania
Tax-Free Fund; Semiannual Report
for State Street Research Tax-Exempt
Fund; Semiannual Report for State Street
Research California Tax-Free Fund;
Semiannual Report for
State Street Research Florida
Tax-Free Fund; Semiannual Report
for State Street Research Pennsylvania
Tax-Free Fund; Pro Forma Financials
for State Street Research Tax-Exempt Fund
and State Street Research California
Tax-Free Fund
</TABLE>
203224.c1
<PAGE>
STATE STREET RESEARCH CALIFORNIA TAX-FREE FUND
a series of
State Street Research Tax-Exempt Trust
One Financial Center
Boston, Massachusetts 02111
Dear Shareholder:
You are cordially invited to attend a Special Meeting of Shareholders of
the State Street Research California Tax-Free Fund (the "California Tax-Free
Fund"), a series of State Street Research Tax-Exempt Trust (the "Trust"), to be
held at the offices of the Trust at One Financial Center, 31st Floor, Boston,
Massachusetts 02111 on [____________], 1995 at 2:00 p.m. local time.
At this important meeting you will be asked to consider and approve an
Agreement and Plan of Reorganization and Liquidation between the California
Tax-Free Fund and State Street Research Tax Exempt Fund (the "Tax-Exempt Fund"),
another series of the Trust.
If the proposal is approved by the shareholders of the California Tax-Free
Fund, the Tax-Exempt Fund would acquire substantially all of the assets and
liabilities of the California Tax-Free Fund. As a result of this transaction,
you would receive, in exchange for your shares of the California Tax-Free Fund,
shares of the corresponding class of the Tax-Exempt Fund with an aggregate value
equivalent to the aggregate net asset value of your California Tax-Free Fund
investment at the time of the transaction. The transaction is conditioned upon
the receipt of an opinion of counsel to the effect that the transaction would be
free from Federal income taxes to you and your Fund.
The Board of Trustees of the Trust has determined that the proposed
reorganization should provide benefits to shareholders of the California
Tax-Free Fund due to the enhanced economies of scale and more efficient
operations which are expected to result from combining funds with the same
investment manager, the same multiple class structure, the same sales load
structure and similar investment objectives and policies.
I thank you for your participation as a shareholder and urge you to please
exercise your right to vote by completing, dating and signing the enclosed proxy
card. A self-addressed, postage-paid envelope has been enclosed for your
convenience. We look forward to receiving your vote.
IT IS VERY IMPORTANT THAT YOUR VOTING INSTRUCTIONS BE RECEIVED NO LATER
THAN _____________, 1995.
Instructions for shares held of record in the name of a nominee, such as a
broker-dealer, may be subject to earlier cut-off dates established by such
intermediaries to facilitate a timely response.
Sincerely,
Ralph F. Verni
Chairman of the Board,
President and Chief Executive Officer
<PAGE>
STATE STREET RESEARCH CALIFORNIA TAX-FREE FUND
a series of
State Street Research Tax-Exempt Trust
One Financial Center
Boston, Massachusetts 02111
---------------------------------
NOTICE OF SPECIAL MEETING
OF SHAREHOLDERS
To Be Held On ____________, 1995
---------------------------------
A Special Meeting of Shareholders of State Street Research California
Tax-Free Fund (the "California Tax-Free Fund"), a portfolio series of State
Street Research Tax-Exempt Trust, a Massachusetts business trust (the "Trust"),
will be held at the offices of the Trust, One Financial Center, 31st Floor,
Boston, Massachusetts 02111, on ___________, 1995, at 2:00 p.m. local time
(the "Meeting") for the following purposes:
1. To consider and act upon an Agreement and Plan of Reorganization and
Liquidation providing for the transfer of the assets of the
California Tax-Free Fund (subject to its liabilities) to the State
Street Research Tax-Exempt Fund (the "Tax-Exempt Fund") in exchange
for Class A, Class B, Class C and Class D shares of the Tax-Exempt
Fund, the distribution of such shares to shareholders of the
California Tax-Free Fund and the subsequent liquidation and
dissolution of the California Tax-Free Fund; and
2. To consider and act upon any matter incidental to the foregoing and
to transact such other business as may properly come before the
Meeting and any adjournments thereof.
The close of business on _____________, 1995 has been fixed as the record
date for the determination of shareholders entitled to notice of, and to vote
at, the Meeting and any adjournments thereof.
YOUR VOTE IS IMPORTANT REGARDLESS OF THE SIZE OF YOUR HOLDINGS IN THE
FUND. WHETHER OR NOT YOU EXPECT TO BE PRESENT AT THE MEETING, PLEASE COMPLETE
AND SIGN THE ENCLOSED PROXY CARD AND RETURN IT PROMPTLY IN THE ENCLOSED
ENVELOPE, WHICH NEEDS NO POSTAGE IF MAILED IN THE UNITED STATES. IF YOU DESIRE
TO VOTE IN PERSON AT THE MEETING, YOU MAY REVOKE YOUR PROXY.
By Order of the Trustees
FRANCIS J. MCNAMARA, III
Secretary
___________, 1995
Date of Notice
191356.c1
<PAGE>
STATE STREET RESEARCH FLORIDA TAX-FREE FUND
a series of
State Street Research Tax-Exempt Trust
One Financial Center
Boston, Massachusetts 02111
Dear Shareholder:
You are cordially invited to attend a Special Meeting of Shareholders of
the State Street Research Florida Tax-Free Fund (the "Florida Tax-Free Fund"), a
series of State Street Research Tax-Exempt Trust (the "Trust"), to be held at
the offices of the Trust at One Financial Center, 31st Floor, Boston,
Massachusetts 02111 on [____________], 1995 at 3:00 p.m. local time.
At this important meeting you will be asked to consider and approve an
Agreement and Plan of Reorganization and Liquidation between the Florida
Tax-Free Fund and State Street Research Tax Exempt Fund (the "Tax-Exempt Fund"),
another series of the Trust.
If the proposal is approved by the shareholders of the Florida Tax-Free
Fund, the Tax-Exempt Fund would acquire substantially all of the assets and
liabilities of the Florida Tax-Free Fund. As a result of this transaction, you
would receive, in exchange for your shares of the Florida Tax-Free Fund, shares
of the corresponding class of the Tax-Exempt Fund with an aggregate value
equivalent to the aggregate net asset value of your Florida Tax-Free Fund
investment at the time of the transaction. The transaction is conditioned upon
the receipt of an opinion of counsel to the effect that the transaction would be
free from Federal income taxes to you and your Fund.
The Board of Trustees of the Trust has determined that the proposed
reorganization should provide benefits to shareholders of the Florida Tax-Free
Fund due to the enhanced economies of scale and more efficient operations which
are expected to result from combining funds with the same investment manager,
the same multiple class structure, the same sales load structure and similar
investment objectives and policies.
I thank you for your participation as a shareholder and urge you to please
exercise your right to vote by completing, dating and signing the enclosed proxy
card. A self-addressed, postage-paid envelope has been enclosed for your
convenience. We look forward to receiving your vote.
IT IS VERY IMPORTANT THAT YOUR VOTING INSTRUCTIONS BE RECEIVED NO LATER
THAN _____________, 1995.
Instructions for shares held of record in the name of a nominee, such as a
broker-dealer, may be subject to earlier cut-off dates established by such
intermediaries to facilitate a timely response.
Sincerely,
Ralph F. Verni
Chairman of the Board, President
and Chief Executive Officer
<PAGE>
STATE STREET RESEARCH FLORIDA TAX-FREE FUND
a series of
State Street Research Tax-Exempt Trust
One Financial Center
Boston, Massachusetts 02111
---------------------------------
NOTICE OF SPECIAL MEETING
OF SHAREHOLDERS
To Be Held On ____________, 1995
---------------------------------
A Special Meeting of Shareholders of State Street Research Florida
Tax-Free Fund (the "Florida Tax-Free Fund"), a portfolio series of State Street
Research Tax-Exempt Trust, a Massachusetts business trust (the "Trust"), will be
held at the offices of the Trust, One Financial Center, 31st Floor, Boston,
Massachusetts 02111, on ___________, 1995, at 3:00 p.m. local time (the
"Meeting") for the following purposes:
1. To consider and act upon an Agreement and Plan of Reorganization and
Liquidation providing for the transfer of the assets of the Florida
Tax-Free Fund (subject to its liabilities) to the State Street
Research Tax-Exempt Fund (the "Tax-Exempt Fund") in exchange for
Class A, Class B, Class C and Class D shares of the Tax-Exempt Fund,
the distribution of such shares to shareholders of the Florida
Tax-Free Fund and the subsequent liquidation and dissolution of the
Florida Tax-Free Fund; and
2. To consider and act upon any matter incidental to the foregoing and
to transact such other business as may properly come before the
Meeting and any adjournments thereof.
The close of business on _____________, 1995 has been fixed as the record
date for the determination of shareholders entitled to notice of, and to vote
at, the Meeting and any adjournments thereof.
YOUR VOTE IS IMPORTANT REGARDLESS OF THE SIZE OF YOUR HOLDINGS IN THE
FUND. WHETHER OR NOT YOU EXPECT TO BE PRESENT AT THE MEETING, PLEASE COMPLETE
AND SIGN THE ENCLOSED PROXY CARD AND RETURN IT PROMPTLY IN THE ENCLOSED
ENVELOPE, WHICH NEEDS NO POSTAGE IF MAILED IN THE UNITED STATES. IF YOU DESIRE
TO VOTE IN PERSON AT THE MEETING, YOU MAY REVOKE YOUR PROXY.
By Order of the Trustees
FRANCIS J. MCNAMARA, III
Secretary
___________, 1995
Date of Notice
203297.c1
<PAGE>
STATE STREET RESEARCH PENNSYLVANIA TAX-FREE FUND
a series of
State Street Research Tax-Exempt Trust
One Financial Center
Boston, Massachusetts 02111
Dear Shareholder:
You are cordially invited to attend a Special Meeting of Shareholders of
the State Street Research Pennsylvania Tax-Free Fund (the "Pennsylvania Tax-Free
Fund"), a series of State Street Research Tax-Exempt Trust (the "Trust"), to be
held at the offices of the Trust at One Financial Center, 31st Floor, Boston,
Massachusetts 02111 on [____________], 1995 at 4:00 p.m. local time.
At this important meeting you will be asked to consider and approve an
Agreement and Plan of Reorganization and Liquidation between the Pennsylvania
Tax-Free Fund and State Street Research Tax Exempt Fund (the "Tax-Exempt Fund"),
another series of the Trust.
If the proposal is approved by the shareholders of the Pennsylvania
Tax-Free Fund, the Tax-Exempt Fund would acquire substantially all of the assets
and liabilities of the Pennsylvania Tax-Free Fund. As a result of this
transaction, you would receive, in exchange for your shares of the Pennsylvania
Tax-Free Fund, shares of the corresponding class of the Tax-Exempt Fund with an
aggregate value equivalent to the aggregate net asset value of your Pennsylvania
Tax-Free Fund investment at the time of the transaction. The transaction is
conditioned upon the receipt of an opinion of counsel to the effect that the
transaction would be free from Federal income taxes to you and your Fund.
The Board of Trustees of the Trust has determined that the proposed
reorganization should provide benefits to shareholders of the Pennsylvania
Tax-Free Fund due to the enhanced economies of scale and more efficient
operations which are expected to result from combining funds with the same
investment manager, the same multiple class structure, the same sales load
structure and similar investment objectives and policies.
I thank you for your participation as a shareholder and urge you to please
exercise your right to vote by completing, dating and signing the enclosed proxy
card. A self-addressed, postage-paid envelope has been enclosed for your
convenience. We look forward to receiving your vote.
IT IS VERY IMPORTANT THAT YOUR VOTING INSTRUCTIONS BE RECEIVED NO LATER
THAN _____________, 1995.
Instructions for shares held of record in the name of a nominee, such as a
broker-dealer, may be subject to earlier cut-off dates established by such
intermediaries to facilitate a timely response.
Sincerely,
_______________, 1995 Ralph F. Verni
Chairman of the Board, President
and Chief Executive Officer
<PAGE>
STATE STREET RESEARCH PENNSYLVANIA TAX-FREE FUND
a series of
State Street Research Tax-Exempt Trust
One Financial Center
Boston, Massachusetts 02111
---------------------------------
NOTICE OF SPECIAL MEETING
OF SHAREHOLDERS
To Be Held On April 21, 1995
---------------------------------
A Special Meeting of Shareholders of State Street Research Pennsylvania
Tax-Free Fund (the "Pennsylvania Tax-Free Fund"), a portfolio series of State
Street Research Tax-Exempt Trust, a Massachusetts business trust (the "Trust"),
will be held at the offices of the Trust, One Financial Center, 31st Floor,
Boston, Massachusetts 02111, on ___________, 1995, at 4:00 p.m. local time (the
"Meeting") for the following purposes:
1. To consider and act upon an Agreement and Plan of Reorganization and
Liquidation providing for the transfer of the assets of the
Pennsylvania Tax-Free Fund (subject to its liabilities) to the State
Street Research Tax-Exempt Fund (the "Tax-Exempt Fund") in exchange
for Class A, Class B, Class C and Class D shares of the Tax-Exempt
Fund, the distribution of such shares to shareholders of the
Pennsylvania Tax-Free Fund and the subsequent liquidation and
dissolution of the Pennsylvania Tax-Free Fund; and
2. To consider and act upon any matter incidental to the foregoing and
to transact such other business as may properly come before the
Meeting and any adjournments thereof.
The close of business on _____________, 1995 has been fixed as the record
date for the determination of shareholders entitled to notice of, and to vote
at, the Meeting and any adjournments thereof.
YOUR VOTE IS IMPORTANT REGARDLESS OF THE SIZE OF YOUR HOLDINGS IN THE
FUND. WHETHER OR NOT YOU EXPECT TO BE PRESENT AT THE MEETING, PLEASE COMPLETE
AND SIGN THE ENCLOSED PROXY CARD AND RETURN IT PROMPTLY IN THE ENCLOSED
ENVELOPE, WHICH NEEDS NO POSTAGE IF MAILED IN THE UNITED STATES. IF YOU DESIRE
TO VOTE IN PERSON AT THE MEETING, YOU MAY REVOKE YOUR PROXY.
By Order of the Trustees
FRANCIS J. MCNAMARA, III
Secretary
___________, 1995
Date of Notice
203299.c1
<PAGE>
JOINT PROXY STATEMENT/PROSPECTUS
Concerning the Acquisition of the Assets of
STATE STREET RESEARCH CALIFORNIA TAX-FREE FUND
By and in Exchange for Shares of
STATE STREET RESEARCH TAX-EXEMPT FUND
each a series of
State Street Research Tax-Exempt Trust
One Financial Center
Boston, Massachusetts 02111
(800) 562-0032
This Joint Proxy Statement/Prospectus relates to the proposed transfer of
the assets and liabilities of the State Street Research California Tax-Free Fund
(the "California Tax-Free Fund"), a series of the State Street Research
Tax-Exempt Trust (the "Trust"), a Massachusetts business trust, to the State
Street Research Tax-Exempt Fund (the "Tax-Exempt Fund"), another series of the
Trust in exchange for Class A, Class B, Class C and Class D shares of beneficial
interest, $.001 par value per share, of the Tax-Exempt Fund ("Tax-Exempt Fund
Shares"). Following such transfer, Tax-Exempt Fund Shares will be distributed to
shareholders of the California Tax-Free Fund in liquidation of the California
Tax-Free Fund, and the California Tax-Free Fund will be dissolved. As a result
of the proposed transaction, each shareholder will receive in exchange for his
or her shares of the California Tax-Free Fund shares of the corresponding class
of the Tax-Exempt Fund with an aggregate value equal to the value of such
shareholder's shares of the California Tax-Free Fund, calculated as of the close
of business on the business day immediately prior to the exchange.
This Joint Proxy Statement/Prospectus is furnished to the shareholders of
the California Tax-Free Fund in connection with the solicitation of proxies by
and on behalf of the Trust's Board of Trustees to be used at a Special Meeting
of Shareholders of the California Tax-Free Fund to be held at the offices of the
Trust, One Financial Center, 31st Floor, Boston, Massachusetts 02111, at 2:00
p.m. local time on [________], 1995 and at any adjournments thereof (the
"Meeting"). This document also serves as a Prospectus of the Tax-Exempt Fund and
covers the proposed issuance of Tax-Exempt Fund Shares. The California Tax-Free
Fund and the Tax-Exempt Fund may hereinafter be referred to collectively as the
"Funds"
<PAGE>
and individually as a "Fund." The Board of Trustees of the Trust may hereinafter
be referred to as the "Board of Trustees."
The investment objective of the Tax-Exempt Fund, a diversified series of
the Trust, an open-end management investment company, is to seek a high level of
interest income exempt from federal income taxes. In seeking to achieve its
investment objective, the Tax-Exempt Fund invests primarily in tax-exempt debt
obligations which the investment manager of the Fund believes will not involve
undue risk.
This Joint Proxy Statement/Prospectus, which should be retained for future
reference, sets forth concisely the information that a shareholder of the
Tax-Exempt Fund and the California Tax-Free Fund should know before investing.
This Joint Proxy Statement/Prospectus is accompanied by the Prospectus of the
Tax-Exempt Fund dated May 1, 1995, which is incorporated by reference herein.
The Prospectus of the California Tax-Free Fund dated May 1, 1995 is incorporated
by reference herein. A Statement of Additional Information dated [_________],
1995 containing additional information relevant to the proposed transaction has
been filed with the Securities and Exchange Commission and is incorporated by
reference into this Joint Proxy Statement/Prospectus. A copy of such Statement
and a copy of the Prospectus of the California Tax-Free Fund may be obtained
without charge by writing to the Tax-Exempt Fund, One Financial Center, Boston,
Massachusetts 02111, or by calling toll-free (800) 562-0032.
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 UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
________ __, 1995
Date of Joint Proxy Statement/Prospectus
2
<PAGE>
TABLE OF CONTENTS
Page
SUMMARY ................................................................... 4
RISK FACTORS .............................................................. 10
REASONS FOR THE REORGANIZATION ............................................ 11
INFORMATION ABOUT THE REORGANIZATION ...................................... 12
COMPARISON OF INVESTMENT OBJECTIVES AND POLICIES .......................... 16
COMPARATIVE INFORMATION ON DISTRIBUTION ARRANGEMENTS ...................... 20
COMPARATIVE INFORMATION ON SHAREHOLDER SERVICES ........................... 22
FISCAL YEAR ............................................................... 22
PERFORMANCE ............................................................... 22
COMPARATIVE INFORMATION ON SHAREHOLDER RIGHTS ............................. 23
MANAGEMENT ................................................................ 24
ADDITIONAL INFORMATION ABOUT THE FUNDS .................................... 25
VOTING INFORMATION ........................................................ 26
DISSENTERS' RIGHTS ........................................................ 27
EXPERTS ................................................................... 28
OTHER MATTERS ............................................................. 28
NO ANNUAL MEETING OF SHAREHOLDERS ......................................... 28
Exhibit A: Agreement and Plan of Reorganization and Liquidation ........... A-1
3
<PAGE>
SUMMARY
The following is a summary of certain information contained in or
incorporated by reference in this Joint Proxy Statement/Prospectus. This summary
is not intended to be a complete statement of all material features of the
proposed Reorganization (as hereinafter defined) and is qualified in its
entirety by reference to the full text of this Joint Proxy Statement/Prospectus
and the documents referred to herein.
Proposed Transaction. The Board of Trustees of the Trust has approved an
Agreement and Plan of Reorganization and Liquidation (the "Plan of
Reorganization") providing for the transfer of all of the assets of the
California Tax-Free Fund to the Tax-Exempt Fund (subject to the assumption by
the Tax-Exempt Fund of all of the liabilities of the California Tax-Free Fund
including those reflected on a statement of assets and liabilities of that Fund
as of the close of business on the Valuation Date, as hereinafter defined) in
exchange for Tax-Exempt Fund Shares at a closing to be held following the
satisfaction of the conditions to the Reorganization (the "Closing"). The
aggregate net asset value of full and fractional Tax-Exempt Fund Shares to be
issued to shareholders of the California Tax-Free Fund will equal the value of
the aggregate net assets of the California Tax-Free Fund as of the close of
business on the business day immediately prior to the Closing (the "Valuation
Date"). The number of Class A, Class B, Class C and Class D shares (which may
hereinafter be referred to collectively as the "shares" or individually as a
"share") to be issued to the California Tax-Free Fund will be determined by
dividing (a) the aggregate net assets attributable to each class of shares of
the California Tax-Free Fund by (b) the net asset value per Class A, Class B,
Class C and Class D share, respectively, of the Tax-Exempt Fund, each computed
as of the close of business on the Valuation Date. Tax-Exempt Fund Shares will
be distributed to shareholders of the California Tax-Free Fund in liquidation of
the California Tax-Free Fund, and the California Tax-Free Fund will be
dissolved. The proposed transaction described above is referred to in this Joint
Proxy Statement/Prospectus as the "Reorganization."
As a result of the Reorganization, each shareholder will receive, in
exchange for his or her shares of the California Tax-Free Fund, shares of the
corresponding class of the Tax-Exempt Fund with an aggregate value equal to the
value of such shareholder's shares of the California Tax-Free Fund, calculated
as of the close of business on the Valuation Date. For example, Class A
shareholders of the California Tax-Free Fund would receive Class A shares of the
Tax-Exempt Fund.
At or prior to the Closing, the California Tax-Free Fund shall declare a
dividend or dividends which, together with all previous such dividends, shall
have the effect of distributing to the California Tax-Free Fund's shareholders
all of the California Tax-Free Fund's investment company income for all taxable
years ending at or prior to the Closing (computed without regard to any
deduction for dividends paid) and all of its net capital gains realized (after
reduction for any capital loss carry-forward) in all taxable years ending at or
prior to the Closing. The Trustees, including the Trustees who are not
"interested persons" of the Trust as defined in the Investment Company Act of
1940, as amended (the "1940 Act"), have determined that the interests of
existing shareholders of the California Tax-Free Fund and the Tax-Exempt Fund,
4
<PAGE>
respectively, will not be diluted as a result of the transactions contemplated
by the Reorganization and that the Reorganization would be in the best interests
of the shareholders of the California Tax-Free Fund and the Tax-Exempt Fund,
respectively. See "Information About the Reorganization."
The Trustees of the Trust recommend that the shareholders of the
California Tax-Free Fund vote FOR approval of the Plan of Reorganization.
Approval of the Plan of Reorganization by the shareholders of the
California Tax-Free Fund is a condition of the consummation of the
Reorganization. The affirmative vote of the holders of a majority of the
outstanding voting shares of such Fund (within the meaning of the 1940 Act),
voting together as a single class, is required to approve the Plan of
Reorganization on behalf of such Fund. A "majority" vote is defined in the 1940
Act as the vote of the holders of the lesser of (a) 67% or more of the voting
shares of a Fund, voting together as a single class, present at the Meeting, if
the holders of more than 50% of the outstanding voting shares are present or
represented by proxy, or (b) more than 50% of the outstanding voting shares of a
Fund, voting together as a single class. See "Voting Information."
Tax Consequences. Counsel to the Funds, Goodwin, Procter & Hoar, has
opined that, subject to customary assumptions and representations, upon
consummation of the Reorganization and the transfer of substantially all of the
assets of the California Tax-Free Fund to the Tax-Exempt Fund: (i) the transfer
of all the assets of the California Tax-Free Fund for Tax-Exempt Fund Shares and
the assumption by the Tax-Exempt Fund of all liabilities of the California
Tax-Free Fund will constitute a "reorganization" for federal income tax
purposes, and the California Tax-Free Fund and the Tax-Exempt Fund will each be
a "party to a reorganization" for federal income tax purposes; (ii) no gain or
loss will be recognized by the Tax-Exempt Fund or the California Tax-Free Fund
upon the transfer of the California Tax-Free Fund assets to the Tax-Exempt Fund
in exchange for Tax-Exempt Fund Shares; (iii) no gain or loss will be recognized
by shareholders of the California Tax-Free Fund upon the exchange of shares of
the California Tax-Free Fund for Tax-Exempt Fund Shares; (iv) the basis of
Tax-Exempt Fund Shares received by each California Tax-Free Fund shareholder
pursuant to the Reorganization will be the same as the basis of the California
Tax-Free Fund shares exchanged therefor; and (v) the basis of the California
Tax-Free Fund assets in the hands of the Tax-Exempt Fund will be the same as the
basis of such assets in the hands of the California Tax-Free Fund immediately
prior to the Reorganization. The receipt of such an opinion upon the Closing is
a condition to the Reorganization. See "Information About the Reorganization."
Investment Objectives and Policies. Unlike the California Tax-Free Fund,
the Tax-Exempt Fund does not include as an investment objective the earning of
interest income exempt from California State personal income taxes. In other
respects, however, the investment objectives, policies and restrictions of the
Funds are substantially similar. To the extent that there are other differences
in the policies and restrictions of the Funds, shareholders should consider such
differences. These differences are discussed below under "Comparison of
Investment Objectives and Policies."
5
<PAGE>
The investment objective of the California Tax-Free Fund is to seek a high
level of interest income exempt from federal income taxes and California State
personal income taxes. The Fund invests primarily in investment grade securities
issued by or on behalf of the State of California or its political subdivisions
and by other governmental entities. The California Tax-Free Fund may invest up
to 20% of the Fund's assets in securities rated below BBB by Standard & Poor's
Corporation ("S&P") or Baa by Moody's Investors Service, Inc. ("Moody's") or
unrated securities that the Investment Manager (as hereinafter defined) believes
to be of equivalent investment quality to comparably rated securities.
The investment objective of the Tax-Exempt Fund is to seek a high level of
interest income exempt from federal income taxes. The Fund invests primarily in
investment grade tax-exempt debt obligations. The Tax-Exempt Fund may invest up
to 20% of the Fund's assets in securities rated below BBB by S&P or Baa by
Moody's or unrated securities that the Investment Manager (as hereinafter
defined) believes to be of equivalent investment quality to comparably rated
securities.
Management and Other Service Providers. The business affairs of the Trust
are managed by its Board of Trustees. For each of the Funds, State Street
Research & Management Company (the "Investment Manager") serves as investment
adviser, State Street Research Investment Services, Inc. serves as distributor
(the "Distributor") and State Street Bank and Trust Company serves as custodian
and as transfer agent and dividend paying agent ("SSBT").
The Investment Manager and the Distributor are indirect wholly-owned
subsidiaries of Metropolitan Life Insurance Company ("Metropolitan Life"). SSBT
is not affiliated with the Investment Manager, the Distributor, Metropolitan
Life, the Trust or the Funds. See "Management."
6
<PAGE>
Advisory Fees and Expenses. The following tables summarize the shareholder
transaction expenses applicable to each Fund and the annual operating expenses
for the Funds on an individual basis and for the Tax-Exempt Fund on a pro forma
basis after giving effect to the Reorganization. This table is followed by an
example illustrating the effect of these expenses on a $1,000 investment in each
Fund.
Shareholder Transaction Expenses Applicable to Tax-Exempt Fund and California
Tax-Free Fund
<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
- --------------------
(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.
(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.
Table of Expenses of Tax-Exempt Fund (individually and on a pro forma basis) and California Tax-Free Fund
Tax-Exempt Fund California Tax-Free Fund
Class A Class B Class C Class D Class A Class B Class C Class D
<S> <C> <C> <C> <C> <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% 0.55% 0.55% 0.55% 0.55%
12b-1 Fees................. 0.25% 1.00% None 1.00% 0.25% 1.00% None 1.00%
Other Expenses............. 0.36% 0.36% 0.36% 0.36% 0.90% 0.90% 0.90% 0.90%
---- ---- ---- ---- ---- ---- ---- ----
Less Voluntary Reduction - - - - (0.60%) (0.60%) (0.60%) (0.60%)
Total Fund Operating Expenses 1.16% 1.91% 0.91% 1.91% 1.10% 1.85% 0.85% 1.85%
==== ==== ==== ==== ==== ==== ==== ====
Pro Forma Tax-Exempt Fund (1)
Class A Class B Class C Class D
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%
Less Voluntary Reduction ----- ---- ---- ----
Total Fund Operating Expenses 1.16% 1.91% 0.91% 1.91%
===== ==== ==== ====
- ---------------------
(1) Does not reflect the effect of proposed similar reorganizations of two other state-specific tax-free mutual funds into the
Tax-Exempt Fund to occur at about the same time as the proposed reorganization described herein. The pro-forma expenses of the
Tax-Exempt Fund after giving effect to the other proposed reorganizations is not expected to be materially different.
7
<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:
Tax-Exempt Fund California Tax-Free Fund
1 Year 3 Years 5 Years 10 Years 1 Year 3 Years 5 Years 10 Years
------ ------- ------ -------- ------ ------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Class A shares................. $56 $80 $106 $180 $56 $78 $103 $173
Class B shares(1).............. $69 $90 $123 $204 $69 $88 $120 $197
Class C shares................. $ 9 $29 $ 50 $112 $ 9 $27 $47 $105
Class D shares................. $29 $60 $103 $223 $29 $58 $100 $217
Pro Forma Tax-Exempt Fund
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
You would pay the following expenses on the same investment, assuming no
redemption:
Tax-Exempt Fund California Tax-Free Fund
1 Year 3 Years 5 Years 10 Years 1 Year 3 Years 5 Years 10 Years
- ------ ------- ------- -------- -------- ------ ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Class B (1)................ $19 $60 $103 $204 $19 $58 $100 $197
Class D .................. $19 $60 $103 $223 $19 $58 $100 $217
Pro Forma Tax-Exempt Fund
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
- --------------------
(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.
</TABLE>
Multiple Class Structure; Distribution Arrangements. Each Fund has
outstanding and offers four classes of shares, which may be purchased through
securities dealers which have entered into sales agreements with the Distributor
at the next determined net asset value per share plus, in the case of all
classes except the 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). In the proposed
Reorganization, shareholders of the California Tax-Free Fund will receive the
corresponding class of shares of the Tax-Exempt Fund which they currently hold
in the California Tax-Free Fund. The Class A, Class B, Class C and Class D
shares of the Tax-Exempt Fund have identical arrangements with respect to the
imposition of initial and contingent deferred sales charges and distribution and
service fees as the comparable class of shares of the California Tax-Free Fund.
Because the Reorganization will be effected at net asset value without the
imposition of a sales charge, Tax-Exempt Fund Shares
8
<PAGE>
acquired by shareholders of the California Tax-Free Fund pursuant to the
proposed Reorganization would not be subject to any initial sales charge or
contingent deferred sales charge as a result of the Reorganization. However,
holders of the Tax-Exempt Fund Shares acquired as a result of the Reorganization
would continue to be subject to a contingent deferred sales charge upon
subsequent redemption to the same extent as if they had continued to hold their
shares of the California Tax-Free Fund. For purposes of computing the contingent
deferred sales charge that may be payable upon disposition of any acquired Class
A, Class B and Class D shares of the Tax-Exempt Fund, the holding period of the
redeemed shares is "tacked" to the holding period of the California Tax-Free
Fund. See "Comparative Information on Distribution Arrangements."
Dividends. The Funds have identical policies with regard to dividends and
distributions. Each Fund's policy is to declare a dividend each day in an amount
based on monthly projections of its future net investment income and will pay
such dividends monthly. Consequently, the amount of each daily dividend may
differ from actual net investment income as determined under generally accepted
accounting principles. 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). After the closing of the
Reorganization, California Tax-Free Fund shareholders who currently have
dividends reinvested will continue to have dividends reinvested in the
Tax-Exempt Fund and those who currently have capital gains reinvested will
continue to have capital gains reinvested in the Tax-Exempt Fund. The number of
shares received in connection with any such reinvestment will be based upon the
net asset value per share of the applicable class of shares of the Tax-Exempt
Fund in effect on the record date. See "Comparative Information on Shareholder
Services."
Exchange Rights. Each Fund currently has identical exchange privileges.
Shareholders of the California Tax-Free Fund may exchange their shares for
shares of a corresponding class of shares, when available, of certain funds as
determined by the Distributor, 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 such fund may
similarly exchange their shares for shares of an available corresponding class
of the California Tax-Free Fund. See "Comparative Information on Shareholder
Services."
Redemption Procedures. Each Fund offers the same redemption features,
including the acceptance of redemption requests by mail, telephone and wire,
provided that applicable conditions are met. Any request to redeem shares of the
California Tax-Free Fund received and processed prior to the Reorganization will
be treated as a redemption of shares of the California Tax-Free Fund. Any
request to redeem shares received or processed after the Reorganization will be
treated as a request to redeem shares of the Tax-Exempt Fund. See "Comparative
Information on Shareholder Services."
Minimum Account Size. Each Fund reserves the right to redeem an account if
the aggregate value of the shares in such account is less than $1,500 for a
period of 60 days after
9
<PAGE>
notice is mailed to the applicable shareholder, or to impose a maintenance fee
on such account after 60 days' notice. Currently, the maintenance fee is $18
annually. The Tax-Exempt Fund shareholder accounts established pursuant to the
Reorganization with a value of less than $1,500 will therefore be subject to
redemption upon 60 days' prior notice or the annual maintenance fee. During such
60-day period, a shareholder will have the option of avoiding such redemption or
maintenance fee by increasing the value of the account to $1,500 or more.
Certain Affiliations. To the extent that the Investment Manager and its
affiliates may own 5% or more of the California Tax-Free Fund, such Fund may be
deemed to be an "affiliated person," as defined in the 1940 Act, of the
Investment Manager or its affiliates. See "Information About the
Reorganization."
RISK FACTORS
The investment risks of both Funds are generally similar because of the
similarities of investment objectives and policies of the Funds. However, the
California Tax-Free 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, whereas the
Tax-Exempt Fund is subject to an investment restriction that prohibits more than
25% of the assets of the Fund from being invested in securities of issuers
conducting their principal activities in the same state. See "Comparison of
Investment Objectives and Policies." Such risks are more fully discussed under
the caption "The Fund's Investments" in the Prospectus of the Tax-Exempt Fund
enclosed with this Joint Proxy Statement/Prospectus and under the caption "The
Fund's Investments" in the Prospectus of the California Tax-Free Fund (available
upon request).
The Tax-Exempt Fund invests primarily in notes and bonds issued by or on
behalf of state and local governmental units. The California Tax-Free Fund
invests primarily in obligations issued by or on behalf of the State of
California, its political subdivisions, municipalities and public authorities
and by other governmental entities. In the case of each Fund, the value of such
investments will generally fluctuate inversely with changes in prevailing
interest rates. When interest rates increase, the value of debt securities and
shares of a Fund can be expected to decline.
There are risks in any investment program, and there is no assurance that
either 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.
10
<PAGE>
REASONS FOR THE REORGANIZATION
In reaching the decision to recommend that the shareholders of the
California Tax-Free Fund vote to approve the Reorganization, the Board of
Trustees, including the Trustees who are not interested persons of the Trust,
concluded that the Reorganization would be in the best interests of the
respective Funds and that the interests of existing shareholders of the
respective Funds will not be diluted as a consequence thereof. In making this
determination, the Trustees considered a number of factors, including the
smaller size and higher gross expenses of the California Tax-Free Fund compared
to the Tax-Exempt Fund and the efficiencies resulting from combining the
operations of two separate funds with the same investment manager, the same
multiple class structure, the same sales load structure and similar investment
objectives and policies.
As reflected in the capitalization table in "Information About the
Reorganization--Capitalization" set forth below, the California Tax-Free Fund is
small in size. As a result, its gross expenses are relatively high and have been
subsidized by the Distributor since inception; see "Table of Expenses of
Tax-Exempt Fund (individually and on a pro forma basis) and California Tax-Free
Fund" set forth in the "Summary" above. The Distributor reserves the right to
discontinue at any time its voluntary subsidization of expenses of the
California Tax-Free Fund; consequently, such Fund's expenses could increase in
the future. On the other hand, the Tax-Exempt Fund has substantially more assets
and a lower, unsubsidized expense ratio. By combining the assets of the two
Funds, each Fund could, over time, possibly benefit from certain economies of
scale. In particular, greater portfolio diversification and more efficient
portfolio management could result from a larger asset base. Greater
diversification is expected to be beneficial to shareholders because it may
reduce the negative effect which the adverse performance of any one portfolio
security may have on the performance of the portfolio as a whole. Because each
Fund has the same investment adviser, custodian and distributor, combining the
Funds could, over time, produce administrative economies of scale, resulting in
net benefits to the Funds' shareholders. The Trustees considered, among other
things, the benefit to the Funds of elimination of duplication of services such
as producing separate prospectuses and shareholder reports.
The above-cited benefits offset the loss to the shareholders of the
California Tax-Free Fund of having a fund more devoted to investments which
produce income which is tax-exempt for both federal and California income tax
purposes, as compared to the Tax-Exempt Fund which focuses primarily on
securities exempt from federal income taxes. Income from the Tax-Exempt Fund
will be subject to more California personal income tax than the income from the
California Tax-Free Fund.
The Board of Trustees of the Trust believes that the proposed
Reorganization is in the best interests of the shareholders of the California
Tax-Free Fund and recommend that shareholders of the California Tax-Free Fund
vote FOR the Reorganization.
11
<PAGE>
INFORMATION ABOUT THE REORGANIZATION
At a meeting held on August 2, 1995, the Board of Trustees of the
Trust approved the Plan of Reorganization substantially in the form set forth
as Exhibit A to this Joint Proxy Statement/Prospectus.
Plan of Reorganization. The Plan of Reorganization provides that, at the
Closing, the Tax-Exempt Fund will acquire all of the assets of the California
Tax-Free Fund (subject to the assumption by the Tax-Exempt Fund of all of the
liabilities of the California Tax-Free Fund including all liabilities reflected
on an unaudited statement of assets and liabilities) in exchange for Tax-Exempt
Fund Shares. The aggregate net asset value of full and fractional Tax-Exempt
Fund Shares to be issued to shareholders of the California Tax-Free Fund will
equal the value of the aggregate net assets of the California Tax-Free Fund as
of the close of business on the Valuation Date. The number of Class A, Class B,
Class C and Class D shares to be issued to the California Tax-Free Fund will be
determined by dividing (a) the aggregate net assets in each class of shares of
the California Tax-Free Fund by (b) the net asset value per Class A, Class B,
Class C and Class D share, respectively, of the Tax-Exempt Fund, each computed
as of the close of business on the Valuation Date. Portfolio securities of the
California Tax-Free Fund and the Tax-Exempt Fund will be valued in accordance
with the valuation practices of the Tax-Exempt Fund which are described under
the caption "Purchase of Shares" in the Tax-Exempt Fund Prospectus and which are
substantially identical to those of the California Tax-Free Fund.
The Tax-Exempt Fund will assume all liabilities, including all expenses,
costs, charges and reserves reflected on an unaudited statement of assets and
liabilities of the California Tax-Free Fund prepared as of the close of business
on the Valuation Date in accordance with generally accepted accounting
principles consistently applied from the prior audited period. Such statement of
assets and liabilities will reflect all liabilities known to the California
Tax-Free Fund and the Tax-Exempt Fund as of the date thereof. At or prior to the
Closing, the California Tax-Free Fund shall declare a dividend or dividends
which, together with all prior such dividends, shall have the effect of
distributing to the California Tax-Free Fund's shareholders all of the
California Tax-Free Fund's investment company income for all taxable years
ending at or prior to the Closing (computed without regard to any deduction for
dividends paid) and all of its net capital gains realized (after reduction for
any capital loss carry-forward) in all taxable years ending at or prior to the
Closing.
At or as soon as practicable after the Closing, the California Tax-Free
Fund will liquidate and distribute pro rata to its shareholders of record as of
the close of business on the Valuation Date the full and fractional Tax-Exempt
Fund Shares received by the California Tax-Free Fund. Such liquidation and
distribution will be accomplished by the establishment of shareholder accounts
on the share records of the Tax-Exempt Fund in the name of each such shareholder
of the California Tax-Free Fund, representing the respective pro rata number of
full and fractional Tax-Exempt Fund Shares due such shareholder. All of the
Tax-Exempt Fund's future
12
<PAGE>
distributions attributable to the shares issued in the Reorganization will be
paid to shareholders in cash or invested in additional shares of the Tax-Exempt
Fund at the price in effect as described in the Tax-Exempt Fund's Prospectus on
the respective payment dates in accordance with instructions previously given by
the shareholder to the California Tax-Free Fund's transfer agent. As of the
Closing, each outstanding certificate which, prior to the Closing, represented
shares of the California Tax-Free Fund will be deemed for all purposes to
evidence ownership of the number of Tax-Exempt Fund Shares issuable with respect
thereto pursuant to the Reorganization. After the Closing, certificates
originally representing shares of Class A or Class C of the California Tax-Free
Fund will be rendered null and void and nonnegotiable; upon special request and
surrender of such certificates to SSBT as transfer agent, holders of these
nonnegotiable certificates shall be entitled to receive certificates
representing the number of Tax-Exempt Fund Shares issuable with respect thereto.
All Class B and Class D shares of the Tax-Exempt Fund are held of record in book
entry form and no certificates for such shares will be issued.
Notwithstanding approval by shareholders of the California Tax-Free Fund,
the Plan of Reorganization may be terminated at any time prior to the
consummation of the Reorganization without liability on the part of either party
or its respective Trustees, officers or shareholders, by either party on written
notice to the other party if circumstances should develop that, in the opinion
of the Trust, make proceeding with the Reorganization inadvisable. The Plan of
Reorganization may be amended, waived or supplemented in such manner as may be
mutually agreed upon by the authorized officers of the Trust; provided, however,
that following the Meeting, no such amendment, waiver or supplement may have the
effect of changing the provision for determining the number of Tax-Exempt Fund
Shares to be issued to the California Tax-Free Fund shareholders to the
detriment of such shareholders without their further approval. The expenses
incurred in connection with entering into and carrying out the provisions of the
Plan of Reorganization, whether or not the Reorganization is consummated, will
be apportioned between Distributor and the Funds in a fair and equitable manner.
Description of Tax-Exempt Fund Shares. Full and fractional shares of the
Tax-Exempt Fund will be issued to the California Tax-Free Fund shareholders in
accordance with the procedures under the Plan of Reorganization as described
above. Each share will be fully paid and nonassessable by the Trust when issued
and transferable without restrictions and will have no preemptive or cumulative
voting rights and have only such conversion or exchange rights as the Board of
Trustees of the Trust may grant in its discretion.
Federal Income Tax Consequences. Counsel to the Funds, Goodwin, Procter &
Hoar, has opined that, subject to customary assumptions and representations, on
the basis of the existing provisions of the Internal Revenue Code (the "Code"),
the Treasury Regulations promulgated thereunder and current administrative and
judicial interpretations thereof, for federal income tax purposes: (i) the
transfer of all the assets of the California Tax-Free Fund in exchange for
Tax-Exempt Fund Shares and the assumption by the Tax-Exempt Fund of all
liabilities of the California Tax-Free Fund will constitute a "reorganization"
within the meaning of Section 368(a)(1)(C) of the Code, and the California
Tax-Free Fund and the Tax-Exempt Fund each will be a "party to a reorganization"
within the meaning of Section 368(b) of the Code; (ii) no gain
13
<PAGE>
or loss will be recognized by the California Tax-Free Fund or the Tax-Exempt
Fund upon the transfer of the California Tax-Free Fund assets to the Tax-Exempt
Fund in exchange for Tax-Exempt Fund Shares; (iii) no gain or loss will be
recognized by shareholders of the California Tax-Free Fund upon the exchange of
the California Tax-Free Fund shares for Tax-Exempt Fund Shares; (iv) the basis
of Tax-Exempt Fund Shares received by each California Tax-Free Fund shareholder
pursuant to the Reorganization will be the same as the basis of the California
Tax-Free Fund shares exchanged therefor; (v) the basis of the California
Tax-Free Fund assets in the hands of the Tax-Exempt Fund will be the same as the
basis of such assets in the hands of the California Tax-Free Fund immediately
prior to the Reorganization. The receipt of such an opinion upon the Closing is
a condition to the consummation of the Reorganization. If the transfer of the
assets of the California Tax-Free Fund in exchange for Tax-Exempt Fund Shares
and the assumption by the Tax-Exempt Fund of the liabilities of the California
Tax-Free Fund do not constitute a tax-free reorganization, each California
Tax-Free Fund shareholder will recognize gain or loss equal to the difference
between the value of Tax-Exempt Fund Shares such shareholder acquires and the
tax basis of such shareholder's California Tax-Free Fund shares.
Shareholders of the Funds should consult their tax advisers regarding the
effect, if any, of the proposed Reorganization in light of their individual
circumstances. Since the foregoing discussion relates only to the federal income
tax consequences of the Reorganization, shareholders of the Funds should also
consult their tax advisers as to state and local tax consequences, if any, of
the Reorganization.
Capitalization. The following table sets forth the capitalization of the
California Tax-Free Fund and the Tax-Exempt Fund as of June 30, 1995, and on a
pro forma basis as of that date giving effect to the proposed acquisition of
assets at net asset value. The pro forma data reflects an exchange ratio of
1.0005, 1.0023, 1.0042 and 1.0029 for Class A, Class B, Class C and Class D
shares, respectively, of the Tax-Exempt Fund issued for each Class A, Class B,
Class C and Class D share, respectively, of the California Tax-Free Fund.
14
<PAGE>
California
Tax-Exempt Tax-Free Combined After
Fund Fund Reorganization (1)
Net assets (in millions)...... $272.3 $28.6 $300.9
Net asset value per share
Class A.................. $7.82 $7.82 $7.82
Class B.................. $7.81 $7.83 $7.81
Class C.................. $7.80 $7.83 $7.80
Class D.................. $7.81 $7.83 $7.81
Shares outstanding
Class A.................. 29,860,742 1,032,698 30,893,925
Class B.................. 4,779,340 444,447 5,224,830
Class C.................. 46,835 2,088,885 2,144,440
Class D.................. 144,825 89,776 234,864
- --------------
(1) Does not reflect the effect of proposed similar reorganizations of two
other state-specific tax-free mutual funds into the Tax-Exempt Fund to
occur at about the same time as the proposed reorganization described
herein. The combined assets as of June 30, 1995 of all three funds to be
reorganized into the Tax-Exempt Fund was $56.5 million.
The table set forth above should not be relied on to reflect the number of
shares to be received in the Reorganization; the actual number of shares to be
received will depend upon the net asset value and number of shares outstanding
of each Fund at the time of the Reorganization.
The following table sets forth the number of outstanding shares of
beneficial interest of each Fund as of June 30, 1995, and the approximate
percentages of the outstanding shares of each Fund that were beneficially owned
by the Investment Manager, the Distributor and Metropolitan Life, their indirect
parent. The Board of Trustees of the Trust does not know of any other person who
beneficially owned more than five percent of the outstanding shares of any class
of each of the California Tax-Free Fund or the Tax-Exempt Fund on June 30,
1995. In addition, as of such date, the Trustees and officers of the Trust as a
group owned less than one percent of the outstanding shares of each of the
California Tax-Free Fund and the Tax-Exempt Fund. The Adviser and its affiliates
have indicated to the Trust that with respect to their shares of the California
Tax-Free Fund they intend to vote for and against the proposal in the same
relative proportion as do the other shareholders of the California Tax-Free
Fund who cast votes at the Meeting.
15
<PAGE>
<TABLE>
<CAPTION>
Outstanding Shares Owned Outstanding Shares Owned Outstanding Shares Owned
by Metropolitan Life by the Distributor by the Investment Manager
Total Shares Number % of Total Number % of Total Number % of Total
Name of Fund Outstanding of Shares Outstanding of Shares Outstanding of Shares Outstanding
<S> <C> <C> <C> <C> <C> <C> <C>
California Tax-Free Fund
Class A....... 1,032,698 61,260 6.0 -- -- -- --
--------- ------ ---- ------ ------ ------ ------
Class B....... 444,447 -- -- -- -- -- --
--------- ------ ---- ------ ------ ------ ------
Class C....... 2,088,885 269,839 12.9 -- -- -- --
--------- ------ ---- ------ ------ ------ ------
Class D....... 89,776 61,259 68.2 1 -- -- --
--------- ------ ---- ------ ------ ------ ------
All Classes... 3,655,806 392,358 10.7 1 -- -- --
--------- ------ ---- ------ ------ ------ ------
Tax-Exempt Fund
Class A....... 29,860,742 -- -- 13,825 0.0 -- --
--------- ------ ---- ------ ------ ------ ------
Class B....... 4,779,340 -- -- -- -- -- --
--------- ------ ---- ------ ------ ------ ------
Class C....... 46,835 122 0.3 -- -- -- --
--------- ------ ---- ------ ------ ------ ------
Class D....... 144,825 61,135 42.2 -- -- -- --
--------- ------ ---- ------ ------ ------ ------
All Classes... 34,831,742 61,257 0.2 13,825 0.0 -- --
--------- ------ ---- ------ ------ ------ ------
</TABLE>
COMPARISON OF INVESTMENT OBJECTIVES AND POLICIES
Information about the investment objectives and policies of the California
Tax-Free Fund and the Tax-Exempt Fund is summarized below. More complete
information regarding the same is set forth in the Prospectus of the Tax-Exempt
Fund dated May 1, 1995 which is incorporated by reference herein and enclosed
herewith, the Prospectus of the California Tax-Free Fund dated May 1, 1995 which
is incorporated by reference herein, and in the Statement of Additional
Information which have been filed with the Securities and Exchange Commission in
connection with the Reorganization. Shareholders should consult such
Prospectuses and the Statement of Additional Information for a more thorough
comparison.
Investment Objectives. The investment objective of the California Tax-Free
Fund is to seek a high level of interest income exempt from federal income taxes
and California State personal income taxes. The Fund invests primarily in
investment grade securities issued by or on behalf of the State of California or
its political subdivisions and by other governmental entities. The California
Tax-Free Fund may invest up to 20% of the Fund's assets in securities rated
below BBB by S&P or Baa by Moody's or unrated securities that the Investment
Manager believes to be of equivalent investment quality to comparably rated
securities.
The investment objective of the Tax-Exempt Fund is to seek a high level of
interest income exempt from federal income taxes. The Fund invests primarily in
investment grade tax-exempt debt obligations. The Fund may invest up to 20% of
the Fund's assets in securities rated below BBB by S&P or Baa by Moody's or
unrated securities that the Investment Manager believes to be of equivalent
investment quality to comparably rated securities.
There are differences in the investment objectives of the two Funds. Under
normal circumstances, substantially all of the dividends paid by the California
Tax-Free Fund are expected to be exempt from both federal and California State
personal income taxes; dividends paid by the Tax-Exempt Fund are generally
exempt only from federal income tax. The California Tax-Free
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Fund invests primarily in securities issued by or on behalf of the State of
California or its political subdivisions. The Tax-Exempt Fund's investment
objective, in contrast, does not obligate it to invest primarily in securities
issued by or on behalf of the State of California or its political subdivisions;
rather, it invests in securities issued by a variety of state and local
governmental units. Both Funds, however, generally invest in debt securities
with interest income exempt from federal income taxes, pursue substantially
similar strategies of achieving their investment objective and are subject to
similar investment restrictions.
Investment Restrictions. While the investment restrictions of the
California Tax-Free Fund are similar in certain respects to those of the
Tax-Exempt Fund, there are subtle differences. Set forth below is a summary of
the similarities of and differences between the existing investment restrictions
of the California Tax-Free Fund and the investment restrictions of the
Tax-Exempt Fund. The summary is qualified in its entirety by reference to and is
made subject to the complete text of the investment restrictions of each Fund,
which are set forth in the Statement of Additional Information of each Fund. The
investment objective of each Fund and certain of the investment restrictions of
each Fund are deemed fundamental, which means that they may not be changed
without the approval of a majority of such Fund's outstanding voting securities
(as defined in the 1940 Act). Investment restrictions which are not deemed
fundamental may be changed by a Fund's Trustees without shareholder approval.
1. The Tax-Exempt Fund has a fundamental investment restriction which
prohibits the Fund from investing in a security if the transaction would
result in more than five percent of the Fund's total assets being invested
in any one issuer or if the transaction would result in the Fund's owning
more than ten percent of the voting securities of any one issuer (except
securities issued or guaranteed by the U.S. Government or its agencies or
instrumentalities or backed by the U.S. Government). The California
Tax-Free Fund has a fundamental investment restriction which prohibits the
Fund from investing in a security if the transaction would result in, with
respect to 75% of the Fund's total assets, more than five percent of the
Fund's total assets being invested in any one issuer or if the transaction
would result in the Fund's owning more than ten percent of the voting
securities of any one issuer (except 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 U.S. Government
securities to the extent excludable under relevant regulatory
interpretations).
2. The Tax-Exempt Fund is subject to a fundamental restriction that prohibits
the purchase of securities of issuers that have been in continuous
operation for less than three years if such purchase would cause more than
five percent of the total assets of the Fund to be invested in the
securities of such issuers, unless such securities are rated BBB or higher
by S&P or Ba or higher by Moody's. 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
California Tax-Free Fund has a substantially similar restriction; however,
the Fund excludes from this restriction repurchase agreements involving
U.S. Government Securities to the extent excludable under relevant
regulatory interpretations.
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3. Both Funds are subject to a fundamental investment restriction which
states that the Fund may not issue senior securities.
4. Both Funds have a fundamental investment restriction prohibiting
underwriting or participating in the marketing of securities of other
issuers. For each Fund, this restriction however, provides an exception
for such Fund if it were to purchase securities of other issuers for
investment, either from the issuers, persons in a control relationship
with the issuers or from underwriters of such securities. The applicable
restriction on the California Tax-Free Fund provides an exception in
circumstances where, in connection with the disposition of the Fund's
securities, the Fund may be deemed an underwriter under certain federal
securities laws.
5. Both Funds have a fundamental investment restriction prohibiting the
purchase or sale of fee simple interests in real estate. The California
Tax-Free Fund's restriction clarifies, however, that such Fund may
purchase and sell other interests in real estate including securities
which are secured by real estate or securities of companies which own or
invest or deal in real estate.
6. The Tax-Exempt Fund has a fundamental investment restriction prohibiting
the Fund from investing in commodities or commodity contracts, except that
the Fund may invest in financial futures contracts and options on futures
contracts. The California Tax-Free Fund is subject to a fundamental
investment restriction prohibiting it from investing in commodities or
commodity contracts in excess of ten percent of the Fund's total assets
(except for investments in futures contracts and options on futures
contracts on securities or securities indices).
7. Both Funds have fundamental investment restrictions prohibiting the Funds
from conducting arbitrage transactions (subject to certain exceptions such
as that the Fund may invest in futures and options for hedging purposes).
8. Both Funds are subject to substantially similar fundamental investment
restrictions which prohibit the lending of assets of the Funds, subject to
exceptions for the purchase of bonds, debentures, notes and similar
obligations (including repurchase agreements) in accordance with each
Fund's investment policies and objectives. In addition, the California
Tax-Free Fund may lend portfolio securities without violating this
restriction.
9. Both Funds have a fundamental investment restriction regarding illiquid
securities which states that the Fund may not invest more than ten percent
of its total assets in illiquid securities, including securities
restricted as to resale and repurchase agreements extending for more than
seven days and, in the case of the Tax-Exempt Fund, other securities which
are not readily marketable. The California Tax-Free Fund also includes
options not listed and traded on any national securities exchange in the
definition of illiquid securities. A current nonfundamental policy of the
California Tax-Free Fund prohibits the Fund from
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investing more than five percent of the Fund's total assets in restricted
securities, while the same prohibition is a fundamental investment
restriction of the Tax-Exempt Fund.
10. Both Funds have fundamental investment restrictions prohibiting them from
investing in interests in oil, gas or other mineral exploration or
development programs, subject to certain exceptions. The Tax-Exempt Fund
may invest in securities which are based, directly or indirectly, on the
credit of companies which invest in or sponsor such exploration programs.
The California Tax-Free Fund, on the other hand, may invest in securities
issued by companies which invest in or sponsor such exploration programs
and in securities indexed to the price of oil, gas or other minerals.
11. The California Tax-Free Fund is subject to a fundamental investment
restriction which prohibits the Fund from making an investment which would
cause more than 25% of the value of the Fund's total assets to be invested
in securities of issuers principally engaged in any one industry. This
restriction does not apply to investments in securities issued or
guaranteed by the U.S. Government or its agencies or instrumentalities
(including repurchase agreements involving U.S. Government Securities to
the extent excludable under relevant regulatory interpretations). The
Tax-Exempt Fund does not have such a restriction.
12. The Tax-Exempt Fund is subject to a fundamental investment restriction
which prohibits the Fund from making an investment which would cause more
than 25% of the value of the Fund's total assets to be invested in
securities of issuers conducting their principal activities in the same
state. This restriction does not apply to investments in securities issued
or guaranteed by the U.S. Government or its agencies or instrumentalities
or backed by the U.S. Government). The California Tax-Free Fund does not
have such a restriction.
13. The Tax-Exempt Fund is subject to a fundamental investment restriction
that prohibits the borrowing of money (through reverse repurchase
agreements or otherwise) except for extraordinary and emergency purposes,
and then not in an amount in excess of ten percent of the value of its
total assets, provided that reverse repurchase agreements shall not exceed
five percent of its total assets and that additional investments will be
suspended during any period when borrowing exceeds five percent of total
assets. The California Tax-Free Fund has a fundamental investment
restriction stating that the Fund may not borrow money except for
borrowings from banks for extraordinary and emergency purposes, and then
not in an amount in excess of 25% of the value of its total assets, and
except insofar as reverse repurchase agreements may be regarded as
borrowing. In addition, as a matter of current operating, but not
fundamental, policy, the California Tax-Free Fund will not purchase
additional portfolio securities at any time when it has outstanding money
borrowings in excess of five percent of the Fund's total assets (taken at
current value).
14. Pursuant to a nonfundamental investment restriction, neither Fund may
purchase securities of any company in which any officer or Trustee of such
Fund or its investment adviser owns more than one half of one percent of
the outstanding securities, or in which all of the
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officers and Trustees of such Fund and its investment adviser, as a group,
own more than five percent of such securities.
15. Both Funds have a nonfundamental investment restriction stating that the
Fund may not hypothecate, mortgage or pledge any of its assets except to
secure permitted borrowings (and then, in the case of the Tax-Exempt Fund,
not in excess of ten percent of the Tax-Exempt Fund's assets). Under each
Fund's restriction, financial futures and options on financial futures are
not deemed to involve a pledge of assets.
16. Both Funds have a nonfundamental investment restriction stating that the
Fund may not invest in companies for the purpose of exercising control
over the management of such companies.
17. Pursuant to substantially similar nonfundamental investment restrictions,
each Fund may not invest in securities of any other investment company,
except in connection with a merger, consolidation or similar
reorganization, if such investment would represent more than three percent
of the outstanding voting stock of such other company or more than five
percent of the value of the total assets of the Fund, or if such
investments in the aggregate would exceed ten percent of the value of the
total assets of the Fund.
18. The California Tax-Free Fund has a nonfundamental investment restriction
prohibiting the Fund from purchasing securities on margin or making short
sales of securities or maintaining a short position, except for short
sales "against the box" (as a matter of current operating, but not
fundamental policies, neither Fund will make short sales or maintain a
short position unless not more than five percent of the Fund's net assets
(taken at current value) is held as collateral for such sales at any
time). Similarly, the Tax-Exempt Fund is subject to a nonfundamental
investment restriction barring it from purchasing securities on margin,
making short sales of securities or purchasing or dealing in puts, calls,
straddles or spreads with respect to any security, except in connection
with the purchase or writing of options, including options on financial
futures, and futures contracts.
19. The California Tax-Free Fund is subject to a nonfundamental investment
restriction prohibiting the Fund from investing in warrants which would
comprise more than five percent of the value of its total assets. Warrants
initially attached to securities and acquired by the Fund upon original
issuance thereof shall be deemed to be without value. The Tax-Exempt Fund
is not subject to such a restriction.
COMPARATIVE INFORMATION ON DISTRIBUTION ARRANGEMENTS
Class A shares of each Fund 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.
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Class B shares of each Fund 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 these 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 of each Fund are offered only to certain pension and other
employee benefit plans, large institutions and under sponsored arrangements. 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 of each Fund 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.
Because the Reorganization will be effected at net asset value without the
imposition of a sales charge, Tax-Exempt Fund Shares acquired by shareholders of
the California Tax-Free Fund pursuant to the proposed Reorganization would not
be subject to any initial sales charge or contingent deferred sales charge as a
result of the Reorganization. However, holders of the Tax-Exempt Fund Shares
acquired as a result of the Reorganization would continue to be subject to a
contingent deferred sales charge upon subsequent redemption to the same extent
as if they had continued to hold their shares of the California Tax-Free Fund.
Each Fund has adopted a Plan of Distribution Pursuant to Rule 12b-1 (the
"Distribution Plan") in accordance with the regulations promulgated under 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:
Class of Shares
of Each Fund Service Fee Distribution Fee
------------ ----------- ----------------
A 0.25% None
B 0.25% 0.75%
C None None
D 0.25% 0.75%
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. In addition,
the Distributor generally pays an initial commission to dealers for the sale of
shares of each Fund with a portion of such commission representing payment for
personal services and/or the maintenance of shareholder accounts by such
dealers. Dealers who have sold Class A shares of each Fund are eligible for
further reimbursement commencing as of the time of such sale. Dealers who have
sold Class B and Class D shares of each Fund are eligible
21
<PAGE>
for further reimbursement after the first year during which such shares have
been held of record by such dealer as nominee for its clients (or by such
clients directly). Any service fees received by the Distributor and not
allocated to dealers may be applied by the Distributor in reduction of expenses
incurred by it directly for personal services and/or 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. 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.
Class A shares of the Funds may be purchased without a sales charge by
certain Trustees, directors, officers, employees, their relatives and other
persons directly or indirectly related to the Funds or affiliated entities.
Class A shares of the Funds may also be sold at a reduced sales charge or
without a sales charge pursuant to certain sponsored arrangements or managed
fee-based programs.
COMPARATIVE INFORMATION ON SHAREHOLDER SERVICES
Each Fund offers the same shareholder services, including the Open Account
System, reinvestment privileges, a systematic withdrawal plan, a dividend
allocation plan, telephone purchases, telephone exchanges, telephone redemptions
and access to the Investamatic Check Program, an automatic investment program.
Because each Fund currently offers the same shareholder services, after the
closing of the proposed Reorganization the same services will continue to be
available to the shareholders of the California Tax-Free Fund.
FISCAL YEAR
Both Funds operate on fiscal years ending December 31.
PERFORMANCE
Tax-Exempt Fund
The following is a discussion of the performance of the Tax-Exempt Fund
for the six months ended June 30, 1995 and the fiscal year ended December 31,
1994.
The six months ended June 30, 1995 were better than the year ended
December 31, 1994. The Fund had a positive return through the first half of
1995, although it trailed the average for its category because the portfolio was
conservatively positioned. The Fund had shortened its duration (a measure of a
fund's sensitivity to interest rate changes) to protect it if interest rates
increased, as had happened throughout 1994. When interest rates fell sharply
instead, the Fund did not enjoy the full benefit of the market rally.
The Fund has extended its duration slightly, which will help in an
environment of falling rates. In addition, the Fund has upgraded the quality of
bonds in the portfolio and increased the percentage of insured bonds. As of June
30, 1995, the bonds in the portfolio had an average credit quality of AA.
Average Annual Total Return for periods ended June 30, 1995:
Life of Fund
1 year 5 years (since 8/25/86)
- ------- ------ ------- ---------------
Class A +1.46% +6.21% +6.49%
Class B +0.32% +6.53% +6.84%
Class C +6.38% +7.25% +7.08%
Class D +4.32% +6.83% +6.84%
In 1994, the bond market was repeatedly buffeted by uncertainty over the
strength of the economy and the timing of the Fed's next rate increase. When the
municipal bond market declined sharply in February, March and April 1994, the
Fund attempted to reduce risk in the portfolio by replacing longer-term bonds
with less interest-rate-sensitive, shorter-term bonds. In some cases we sold
bonds for losses and replaced them with higher-yielding, more defensive bonds.
The Fund also increased the quality of the portfolio, because higher quality
bonds tend to perform better in weak markets.
The portfolio holds a number of bonds from so-called "specialty
states"--states where there are tax incentives to buy in-state bonds or where
bonds tend to be in short supply. Typically, demand is fairly consistent for
such bonds, which can be advantageous in a bad market. Specialty states include
Massachusetts, North Carolina (which also offers very high quality), New York,
Ohio and Connecticut.
Comparison Of Change In Value Of A $10,000 Investment In Tax-Exempt Fund And
The Lehman Municipal Bond Index
State Street Research Tax-Exempt Fund - Class A
LINE CHART DATA
(INCEPTION VALUE = $9,550)
VALUE OF
ACCOUNT OF
VALUE OF LEHMAN MUNI BOND
ACCOUNT AT INDEX AT
DATE YEAR END YEAR END
8/25/86 $ 9,550 $10,000
12/31/86 9,889 10,371
12/31/87 9,748 10,527
12/31/88 11,063 11,597
12/31/89 12,128 12,849
12/31/90 12,713 13,785
12/31/91 14,213 15,459
12/31/92 15,538 16,821
12/31/93 17,420 18,888
12/31/94 16,218 17,911
State Street Research Tax-Exempt Fund - Class B
LINE CHART DATA
(INCEPTION VALUE = $10,000)
VALUE OF
ACCOUNT OF
VALUE OF LEHMAN MUNI BOND
ACCOUNT AT INDEX AT
DATE YEAR END YEAR END
8/25/86 $10,000 $10,000
12/31/86 10,355 10,371
12/31/87 10,208 10,527
12/31/88 11,585 11,597
12/31/89 12,699 12,849
12/31/90 13,313 13,785
12/31/91 14,883 15,459
12/31/92 16,270 16,821
12/31/93 18,165 18,888
12/31/94 16,786 17,911
State Street Research Tax-Exempt Fund - Class C
LINE CHART DATA
(INCEPTION VALUE = $10,000)
VALUE OF
ACCOUNT OF
VALUE OF LEHMAN MUNI BOND
ACCOUNT AT INDEX AT
DATE YEAR END YEAR END
8/25/86 $10,000 $10,000
12/31/86 10,355 10,371
12/31/87 10,208 10,527
12/31/88 11,585 11,597
12/31/89 12,699 12,849
12/31/90 13,313 13,785
12/31/91 14,883 15,459
12/31/92 16,270 16,821
12/31/93 18,224 18,888
12/31/94 17,028 17,911
State Street Research Tax-Exempt Fund - Class D
LINE CHART DATA
(INCEPTION VALUE = $10,000)
VALUE OF
ACCOUNT OF
VALUE OF LEHMAN MUNI BOND
ACCOUNT AT INDEX AT
DATE YEAR END YEAR END
8/25/86 $10,000 $10,000
12/31/86 10,355 10,371
12/31/87 10,208 10,527
12/31/88 11,585 11,597
12/31/89 12,699 12,849
12/31/90 13,313 13,785
12/31/91 14,883 15,459
12/31/92 16,270 16,821
12/31/93 18,163 18,888
12/31/94 16,784 17,911
All returns represent past performance, which is no guarantee of future results.
The investment return and principal value of an investment made in the
Tax-Exempt Fund will fluctuate and shares, when redeemed, may be worth more or
less than their original cost. All returns assume reinvestment of capital gain
distributions and income dividends. In March 1992, the Tax-Exempt Fund changed
its investment objective to eliminate requirements that specify that a
percentage of the Tax-Exempt Fund be invested in certain rating categories.
Previously, it was required to invest 80% in securities rated A, BBB, BB or
better. Past performance, therefore, may not be indicative of future results.
Shares of the Tax-Exempt Fund had no class designations until June 7, 1993, when
designations were assigned based on the pricing and 12b-1 fees applicable to
shares sold thereafter. Performance data for a specified class include periods
prior to the adoption of class designations. "A" share returns for each of the
periods reflect the maximum 4.5% sales charge. "B" share returns for the 1- and
5-year periods reflect a 5% and a 2% contingent deferred sales charge,
respectively. "C" shares, offered without a sales charge, are available only to
certain employee benefit plans and large institutions. "D" share return for the
1-year period reflects a 1% contingent deferred sales charge. Performance for
"B" and "D" shares prior to June 7, 1993, reflects annual 12b-1 fees of .25% and
performance thereafter reflects annual 12b-1 fees of 1%, which will reduce
subsequent performance. The Lehman Muni Bond Index represents approximately
15,000 fixed-coupon, investment-grade municipal bonds. The index is unmanaged
and does not take sales charges into consideration. Direct investment in the
index is not possible; results are for illustrative purposes only.
Further information about each Fund's performance is contained in each
Fund's annual and semiannual reports, which may be obtained without charge by
writing to the Funds at One Financial Center, Boston, Massachusetts 02111, or
calling (800) 562-0032.
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COMPARATIVE INFORMATION ON SHAREHOLDER RIGHTS
General. The California Tax-Free Fund and the Tax-Exempt Fund are series
of the Trust which was established in 1985 under the laws of The Commonwealth of
Massachusetts. The California Tax-Free Fund commenced operations in 1989, and
the Tax-Exempt Fund commenced operations in 1986. Both Funds are governed by a
Second Amended and Restated Master Trust Agreement dated June 5, 1993, as
further amended thereafter. As a Massachusetts business trust, the Trust's
operations are governed by its Master Trust Agreement and applicable federal and
Massachusetts laws. The above-referenced Master Trust Agreement may hereinafter
be referred to as the "Master Trust Agreement."
Shares of the California Tax-Free Fund and the Tax-Exempt Fund. The
beneficial interests in each of the California Tax-Free Fund and the Tax-Exempt
Fund are represented by transferable shares, par value $.001 per share. The
Master Trust Agreement permits the Trustees to issue an unlimited number of
shares and to divide such shares into an unlimited number of series. As of the
date hereof, the Trust has five operating series: the California Tax-Free Fund,
the Tax-Exempt Fund, State Street Research New York Tax-Free Fund, State Street
Research Florida Tax-Free Fund and State Street Research Pennsylvania Tax-Free
Fund. Each share of any Trust series represents an equal proportionate interest
in the assets and liabilities, excluding differences in class expenses,
belonging to that series. As such, each share is entitled to dividends and
distributions out of the income (after expenses) belonging to that series as
declared by the Board of Trustees.
Voting Requirements. Generally, the provisions of the Master Trust
Agreement of the Trust may be amended at any time, so long as such amendment
does not adversely affect the rights of any shareholder with respect to which
such amendment is or purports to be applicable and so long as such amendment is
not in contravention of applicable law, by an instrument in writing signed by a
majority of the then Trustees (or by an officer of such Trust pursuant to the
vote of a majority of such Trustees). Generally, any amendment to the Trust's
Master Trust Agreement that adversely affects the rights of shareholders of one
or more series may be adopted by a majority of the then Trustees of the Trust
when authorized by shareholders holding a majority of the shares entitled to
vote.
Voting Rights. The Master Trust Agreement of the Trust provides that
special meetings of shareholders for any purpose requiring action by
shareholders under such Master Trust Agreement or the Trust's By-laws shall be
called upon the written request of holders of at least ten percent of the
outstanding shares of the Trust or, as the context may require, a series
thereof. The Master Trust Agreement of the Trust provides in general that
shareholders have the power to vote only on the following matters, each as more
fully described in such Master Trust Agreements: (i) the election or removal of
Trustees as provided in the Master Trust Agreement; (ii) with respect to certain
contracts, such as contracts for investment advisory or management services, to
the extent required as provided in the Master Trust Agreement as a whole; (iii)
with respect to any termination or reorganization of the Trust; (iv) an
amendment of the Master Trust Agreement as provided in the Master Trust
Agreement; (v) to the same extent as the stockholders of a Massachusetts
business corporation as to whether or not a court action, proceeding or claim
should or should not be brought
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<PAGE>
or maintained derivatively or as a class action on behalf of the Trust, any
Sub-Trust thereof or its stockholders; and (vi) with respect to such additional
matters relating to the Trust as may be required by the 1940 Act, the Master
Trust Agreement, the By-laws or any registration of the Trust with the
Securities and Exchange Commission (or any successor agency) or any state, or as
the Trustees may consider necessary or desirable. Certain of the foregoing
matters will involve separate votes of one or more series of a Trust, while
others will require a vote of the Trust's shareholders as a whole.
Shareholder Liability. Under Massachusetts law, shareholders of a
Massachusetts business 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. The Master Trust Agreement of the Trust provides for
indemnification, under certain circumstances, out of Trust property for all
losses and expenses of any shareholder held personally liable by virtue of his
status as such, and not because of such shareholder's acts or omissions or for
some other reason, for the obligations of the Trust. Thus, the risk of a
shareholder incurring financial loss on account of shareholder liability is
considered by the Trust to be remote since it is limited to circumstances in
which a disclaimer is inoperative and the Trust itself would be unable to meet
its obligations.
Liability of Trustees and Officers. Under the Master Trust Agreement of
the Trust, Trustees and officers will be indemnified, under certain
circumstances, for all liabilities, including the expenses of litigation,
against them unless their conduct is determined to constitute willful
misfeasance, bad faith, gross negligence or reckless disregard of their duties,
such determination to be based upon the outcome of a court action or
administrative proceeding or a reasonable determination, following a review of
the facts, by (a) a vote of a majority of a quorum of the Trustees who are
neither "interested persons" of the Trust as defined in the 1940 Act nor parties
to the proceeding or (b) an independent legal counsel in a written opinion. The
Trust may also advance money for these expenses provided that the Trustee or
officer undertakes to repay the Trust if his or her conduct is later determined
to preclude indemnification and certain other conditions are met. It should be
noted that it is the view of the staff of the Securities and Exchange Commission
that to the extent that any provisions such as those described above are
inconsistent with the 1940 Act including Section 17 thereof, the provisions of
the 1940 Act are preemptive.
The foregoing is only a summary of certain of the provisions of the
Trust's Master Trust Agreement and By-laws. Shareholders should refer directly
to the provisions of the Master Trust Agreement and By-laws for their full text.
MANAGEMENT
The investment manager for each of the Funds 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. As
24
<PAGE>
of June 30, 1995, the Investment Manager had assets of approximately $26.2
billion under management.
The portfolio manager for the Tax-Exempt Fund is Susan W. Drake. Ms. Drake
has managed the Tax-Exempt Fund since 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.
The portfolio manager for the California Tax-Free Fund is Paul J. Clifford.
Mr. Clifford has managed the California Tax-Free Fund since 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.
ADDITIONAL INFORMATION ABOUT THE FUNDS
Information about the Tax-Exempt Fund is included in its current
Prospectus dated May 1, 1995, a copy of which is included herewith and
incorporated by reference herein. Additional information about the Tax-Exempt
Fund is included in the Fund's Statement of Additional Information dated May 1,
1995. This Statement of Additional Information has been filed with the
Securities and Exchange Commission (the "SEC") and is incorporated by reference
herein. Copies of this Statement may be obtained without charge by writing to
State Street Research Tax-Exempt Fund, One Financial Center, Boston,
Massachusetts 02111, or by calling (800) 562-0032.
Information about the California Tax-Free Fund is included in its current
Prospectus dated May 1, 1995, which is incorporated by reference herein.
Additional information about the California Tax-Free Fund is included in the
Fund's Statement of Additional Information dated May 1, 1995. This Statement of
Additional Information has been filed with the SEC and is incorporated by
reference herein. Copies of this Statement may be obtained without charge by
writing to State Street Research California Tax-Free Fund, One Financial Center,
Boston, Massachusetts 02111 or by calling (800) 562-0032.
Each Fund is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended, and the 1940 Act, and in accordance therewith
files proxy material, reports and other information with the Securities and
Exchange Commission. These reports can be inspected and copied at the Public
Reference Facilities maintained by the Securities and Exchange Commission at
Judiciary Plaza, 450 Fifth Street, N.W., Washington, DC 20549, as well as at the
following regional offices: New York Regional Office, 75 Park Place, Room 1228,
New York, NY 10007; and Chicago Regional Office, Northwestern Atrium Center, 500
West Madison Street, Suite 1400, Chicago IL 60661. Copies of such material can
also be obtained from the Public Reference Branch, Office of Consumer Affairs
and Information Services, Securities and Exchange Commission, Judiciary Plaza,
450 Fifth Street, N.W., Washington DC 20549 at prescribed rates.
25
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VOTING INFORMATION
Any shareholder who has given a proxy has the right to revoke it at any
time prior to its exercise by attending the Meeting and voting his or her shares
in person or by submitting a written notice of revocation or a later-dated proxy
to the Trust at the address of the Trust set forth on the cover page of this
Joint Proxy Statement/Prospectus prior to the date of the Meeting. Shareholders
of record of the California Tax-Free Fund at the close of business on
[____________,] 1995 (the "Record Date") will be entitled to notice of, and to
vote at, the Meeting of the Fund or to vote at any adjournments thereof. This
Joint Proxy Statement/Prospectus, proxies and accompanying Notice of Meeting
were first sent or given to shareholders of the Funds on or about
[____________,] 1995.
As of the Record Date, there were approximately [_______], [______],
[_______] and [_____] issued and outstanding Class A, Class B, Class C and Class
D shares, respectively, of the California Tax-Free Fund. Each share of such Fund
is entitled to one vote, with a proportionate vote for each fractional share.
If the enclosed proxy is properly executed and returned in time to be
voted at the Meeting, the shares represented thereby will be voted in accordance
with the instructions on the proxy. Unless instructions to the contrary are
marked thereon, the proxy will be voted for the proposal described herein and,
in the discretion of the persons named herein as proxies, to take such further
action as they may determine appropriate in connection with any other matter
which may properly come before the Meeting or any adjournments thereof. The
Board of Trustees does not currently know of any matter to be considered at the
Meeting other than the proposal to approve the Plan of Reorganization.
The affirmative vote of the holders of a majority of the outstanding
voting shares of the California Tax-Free Fund (within the meaning of the 1940
Act), voting together as a single class, is required to approve the Plan of
Reorganization on behalf of such Fund. Under the 1940 Act, the vote of a
majority of the outstanding voting shares means the vote of the lesser of (a)
67% or more of the voting shares of a Fund, voting together as a single class,
present at the Meeting, if the holders of more than 50% of the outstanding
voting shares are present or represented by proxy, or (b) more than 50% of the
outstanding voting shares of a Fund, voting together as a single class. Approval
of the Plan of Reorganization by the shareholders of the California Tax-Free
Fund is a condition of the consummation of the Reorganization. If the
Reorganization is not approved, the Trustees of the Trust will continue the
management of the California Tax-Free Fund and the Tax-Exempt Fund,
respectively, and may consider other alternatives in the best interests of each
Fund's shareholders.
The holders of a majority of the shares entitled to vote of the California
Tax-Free Fund outstanding at the close of business on the Record Date present in
person or represented by proxy constitute a quorum for the Meeting; however, as
noted above, the affirmative vote of a majority of the voting shares of such
Fund, voting together as a single class (within the meaning of the 1940 Act) is
required to approve the Reorganization. In the event a quorum is not present at
the Meeting or in the event a quorum is present at the Meeting but sufficient
votes to approve the Plan of Reorganization are not received, the persons named
as proxies may propose one or more adjournments without further notice to
26
<PAGE>
shareholders of the Meeting to permit further solicitation of proxies provided
such persons determine, after consideration of all relevant factors, including
the nature of the proposal, the percentage of votes then cast, the percentage of
negative votes then cast, the nature of the proposed solicitation activities and
the nature of the reasons for such further solicitation, that an adjournment and
additional solicitation is reasonable and in the interests of shareholders.
For purposes of determining the presence of a quorum for transacting
business at the Meeting and for determining whether sufficient votes have been
received for approval of the proposal to be acted upon at the Meeting,
abstentions and broker "non-votes" (that is, proxies from brokers or nominees
indicating that such persons have not received instructions from the beneficial
owner or other persons entitled to vote shares on a particular matter with
respect to which the brokers or nominees do not have discretionary power) will
be treated as shares that are present at the Meeting, but which have not been
voted. For this reason, abstentions and broker non-votes will assist the
California Tax-Free Fund in obtaining a quorum, but both have the practical
effect of a "no" vote for purposes of obtaining the requisite vote for approval
of the proposals to be acted upon at the Meeting.
Expenses of the Reorganization will be apportioned between the Distributor
and the Funds in a fair and equitable manner. The Distributor will assume
one-half of the expenses and the other half will be allocated to the Tax-Exempt
Fund and the California Tax-Free Fund in an appropriate manner on the basis of
identifiable direct costs or otherwise on the basis of relative net assets. Such
expenses include costs of preparing, printing and mailing the enclosed proxy,
accompanying notice and Joint Proxy Statement/Prospectus and all other costs in
connection with solicitation of proxies, including any additional solicitation
by letter, telephone or telegraph. In addition to solicitation of proxies by
mail, officers of the Trust and officers and regular employees of the Investment
Manager, affiliates of the Investment Manager, or other representatives of the
Trust may also solicit proxies by telephone or telegram or in person. A proxy
solicitation firm may also be retained to assist in any special, personal
solicitation of proxies. The costs of retaining such a firm is not expected to
exceed [$____].
THE TRUSTEES OF THE TRUST, INCLUDING THE
INDEPENDENT TRUSTEES OF THE TRUST,
RECOMMEND APPROVAL OF THE PLAN OF REORGANIZATION.
DISSENTERS' RIGHTS
Neither the Master Trust Agreement of the Trust nor Massachusetts law
grants the shareholders of the California Tax-Free Fund any rights in the nature
of dissenters' rights of appraisal with respect to any action upon which such
shareholders may be entitled to vote; however, the normal right of mutual fund
shareholders to redeem their shares is not affected by the proposed
Reorganization.
27
<PAGE>
EXPERTS
The financial statements of the Tax-Exempt Fund and the California
Tax-Free Fund for the fiscal year ended December 31, 1994 included in each
Fund's Statement of Additional Information have been incorporated herein by
reference in reliance on the reports of Price Waterhouse LLP, independent
accountants, given on the authority of that firm as experts in accounting and
auditing. Certain legal matters with respect to the issuance of the shares of
the Trust will be passed upon by Goodwin, Procter & Hoar, Boston, Massachusetts.
OTHER MATTERS
The Board of Trustees does not intend to present any other business at the
Meeting, nor are they aware that any shareholder intends to do so. If, however,
any other matters are properly brought before the Meeting, the persons named in
the accompanying proxy will vote thereon in accordance with their judgment.
NO ANNUAL MEETING OF SHAREHOLDERS
There will be no annual or further special meetings of shareholders of the
Funds unless required by applicable law or called by the Trustees of such Fund
in their discretion. In accordance with the 1940 Act, or under the Trust's
Master Trust Agreement, as amended, any Trustee may be removed (i) by a written
instrument, signed by at least two-thirds of the number of Trustees in office
immediately prior to such removal, specifying the date upon which such removal
shall become effective; (ii) by a vote of shareholders holding not less than
two-thirds of the shares of the Trust then outstanding, cast in person or by
proxy at a meeting called for the purpose or (iii) by a written declaration
signed by shareholders holding not less than two-thirds of the shares then
outstanding and filed with the Trust's custodian. Shareholders holding 10% or
more of the shares of the Trust then outstanding can require that the Trustees
call a meeting of shareholders for the purpose of voting on the removal of one
or more Trustees. In addition, if ten or more shareholders who have been such
for at least six months and who hold in the aggregate shares with a net asset
value of at least $25,000 or at least 1% of the outstanding Fund shares, inform
the Trustees that they wish to communicate with other shareholders, the Trustees
will either give such shareholders access to the shareholder list or inform them
of the cost involved if the Funds forward material to shareholders on their
behalf. If the Trustees object to mailing such materials, they must inform the
Securities and Exchange Commission and thereafter comply with the requirements
of the 1940 Act.
Shareholders wishing to submit proposals for inclusion in a proxy
statement for a subsequent shareholder meeting should send their written
proposals to the Secretary of the State Street Research Tax-Exempt Trust, One
Financial Center, 31st Floor, Boston, Massachusetts 02111. Shareholder proposals
should be received in a reasonable time before the solicitation is made.
28
<PAGE>
WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING, PLEASE FILL IN, DATE AND
SIGN THE ENCLOSED PROXY AND RETURN IT PROMPTLY IN THE ENCLOSED ENVELOPE. NO
POSTAGE IS NECESSARY IF IT IS MAILED IN THE UNITED STATES.
190063.c2
7/24/95
<PAGE>
EXHIBIT A
AGREEMENT AND PLAN OF REORGANIZATION AND LIQUIDATION
AGREEMENT AND PLAN OF REORGANIZATION AND LIQUIDATION dated as of
_________, 1995 by and between State Street Research Tax-Exempt Trust, a
Massachusetts business trust (the "Tax-Exempt Trust"), on behalf of the State
Street Research California Tax-Free Fund series of the Tax-Exempt Trust (the
"California Tax-Free Fund") and the Tax-Exempt Trust on behalf of the State
Street Research Tax-Exempt Fund series of the Tax-Exempt Trust (the "Tax-Exempt
Fund").
W I T N E S S E T H:
WHEREAS, the Tax-Exempt Trust is a diversified, open-end management
investment company registered under the Investment Company Act of 1940, as
amended (the "1940 Act");
WHEREAS, this Agreement is intended to be and is adopted as a plan of
reorganization and liquidation within the meaning of Section 368(a)(1)(C) of the
Internal Revenue Code of 1986, as amended, such reorganization to consist of the
transfer of all of the assets of the California Tax-Free Fund in exchange solely
for Class A, Class B, Class C and Class D shares of common stock, $.001 par
value per share, of the Tax-Exempt Fund ("Tax-Exempt Fund Shares") and the
assumption by the Tax-Exempt Fund of all of the liabilities of California
Tax-Free Fund and the distribution, after the Closing hereinafter referred to,
of Tax-Exempt Fund Shares to the shareholders of the California Tax-Free Fund in
liquidation of the California Tax-Free Fund, all upon the terms and conditions
hereinafter set forth in this Agreement (collectively, the "Reorganization");
and
WHEREAS, the Trustees of the Tax-Exempt Trust, including a majority of the
Trustees and the Trustees who are not interested persons, have determined that
participating in the transactions contemplated by this Agreement is in the best
interests of each of the Funds.
NOW, THEREFORE, in consideration of the mutual promises herein contained,
the parties hereto agree as follows:
1. Transfer of Assets. Subject to the terms and conditions set forth
herein, at the closing provided for in Section 5 (herein referred to as the
"Closing") the Tax-Exempt Trust on behalf of the California Tax-Free Fund shall
transfer all of the assets of the California Tax-Free Fund, and assign all
Assumed Liabilities (as hereinafter defined) to the Tax-Exempt Fund, and the
Tax-Exempt Trust on behalf of the Tax-Exempt Fund shall acquire all such assets,
and shall assume all such Assumed Liabilities (as hereinafter defined), upon
delivery to the Tax-Exempt Trust on behalf of the California Tax-Free Fund of
Tax-Exempt Fund Shares having a net asset value equal to the value of the net
assets of the California Tax-Free Fund transferred (the "New Shares"). "Assumed
Liabilities" shall mean all liabilities, including all expenses, costs, charges
and reserves reflected in an unaudited statement of assets and liabilities of
the California Tax-Free Fund as of the close of business on the Valuation Date
(as hereinafter defined), determined in accordance with generally accepted
accounting principles consistently applied from the prior audited period. The
net asset value of the New Shares and the value of the net assets of the
California Tax-Free Fund to be transferred shall be determined as of the close
of regular trading on the New York Stock Exchange on the business day next
preceding the Closing (the "Valuation Date") using the valuation procedures set
forth in the then current prospectus and statement
<PAGE>
of additional information of the Tax-Exempt Fund. All Assumed Liabilities of the
California Tax-Free Fund, to the extent that they exist at or after the Closing,
shall after the Closing attach to the Tax-Exempt Fund and may be enforced
against Tax-Exempt Fund to the same extent as if the same had been incurred by
Tax-Exempt Fund.
2. Liquidation of the California Tax-Free Fund. At or as soon as
practicable after the Closing, the California Tax-Free Fund will be liquidated
and the New Shares delivered to the Tax-Exempt Trust on behalf of the California
Tax-Free Fund will be distributed to shareholders of the California Tax-Free
Fund, each shareholder to receive the number of New Shares of the corresponding
class and equal to the pro rata portion of shares of beneficial interest of the
California Tax-Free Fund held by such shareholder as of the close of business on
the Valuation Date. Such liquidation and distribution will be accompanied by the
establishment of an open account on the share records of the Tax-Exempt Fund in
the name of each shareholder of the California Tax-Free Fund and representing
the respective pro rata number of New Shares due such shareholder. As soon as
practicable after the Closing, the Tax-Exempt Trust shall file on behalf of the
California Tax-Free Fund such instruments of dissolution, if any, as are
necessary to effect the dissolution of the California Tax-Free Fund and shall
take all other steps necessary to effect a complete liquidation and dissolution
of the California Tax-Free Fund. As of the Closing, each outstanding certificate
which, prior to the Closing, represented shares of the California Tax-Free Fund
will be deemed for all purposes to evidence ownership of the number of
Tax-Exempt Fund Shares issuable with respect thereto pursuant to the
Reorganization. After the Closing, certificates originally representing shares
of Class A or Class C of the California Tax-Free Fund will be rendered null and
void and nonnegotiable; upon special request and surrender of such certificates
to State Street Bank and Trust Company as transfer agent, holders of these
nonnegotiable certificates shall be entitled to receive certificates
representing the number of Tax-Exempt Fund Shares issuable with respect thereto.
All Class B and Class D shares of the Tax-Exempt Fund are held of record in book
entry form and no certificates for such shares will be issued.
3. Representations and Warranties.
a. The Tax-Exempt Trust, on behalf of the California Tax-Free Fund,
hereby represents and warrants to the Tax-Exempt Fund as follows:
(i) the Tax-Exempt Trust is duly organized, validly
existing and in good standing under the laws of The Commonwealth of
Massachusetts and has full power and authority to conduct its business
as presently conducted;
(ii) the Tax-Exempt Trust has full power and authority to
execute, deliver and carry out the terms of this Agreement on behalf of
the California Tax-Free Fund;
(iii) the execution and delivery of this Agreement on behalf
of the California Tax-Free Fund and the consummation of the transactions
contemplated hereby are duly authorized and no other proceedings on the
part of the Tax-Exempt Trust or the shareholders of the California
Tax-Free Fund (other than as contemplated in Section 4(h)) are necessary
to authorize this Agreement and the transactions contemplated hereby;
(iv) this Agreement has been duly executed by the Tax-Exempt
Trust on behalf of the California Tax-Free Fund and constitutes its valid
and binding obligation, enforceable in accordance with its terms, subject
to applicable bankruptcy, reorganization, insolvency, moratorium and other
rights affecting creditors' rights generally, and general equitable
principles;
2
<PAGE>
(v) neither the execution and delivery of this Agreement by the
Tax-Exempt Trust on behalf of the California Tax-Free Fund, nor the
consummation by the Tax-Exempt Trust on behalf of the California Tax-Free
Fund of the transactions contemplated hereby will conflict with, result in
a breach or violation of or constitute (or with notice, lapse of time or
both constitute) a breach of or default under, the Master Trust Agreement
or By-Laws of the Tax-Exempt Trust, or any statute, regulation, order,
judgment or decree, or any instrument, contract or other agreement to
which the Tax-Exempt Trust is a party or by which the Tax-Exempt Trust or
any of its assets is subject or bound; and
(vi) no authorization, consent or approval of any governmental
or other public body or authority or any other party is necessary for the
execution and delivery of this Agreement by the Tax-Exempt Trust on behalf
of the California Tax-Free Fund or the consummation of any transactions
contemplated hereby by the Tax-Exempt Trust, other than as shall be
obtained at or prior to the Closing.
(b) The Tax-Exempt Trust, on behalf of the Tax-Exempt Fund, hereby
represents and warrants to the California Tax-Free Fund as follows:
(i) The Tax-Exempt Trust is duly organized, validly
existing and in good standing under the laws of The Commonwealth of
Massachusetts and has full power and authority to conduct its business
as presently conducted;
(ii) The Tax-Exempt Trust has full power and authority to
execute, deliver and carry out the terms of this Agreement on behalf of
the Tax-Exempt Fund;
(iii) the execution and delivery of this Agreement on behalf
of the Tax-Exempt Fund and the consummation of the transactions
contemplated hereby are duly authorized and no other proceedings on the
part of the Tax-Exempt Trust or the shareholders of the Tax-Exempt Fund
are necessary to authorize this Agreement and the transactions
contemplated hereby;
(iv) this Agreement has been duly executed by the Tax-Exempt
Trust on behalf of the Tax-Exempt Fund and constitutes its valid and
binding obligation, enforceable in accordance with its terms, subject to
applicable bankruptcy, reorganization, insolvency, moratorium and other
rights affecting creditors' rights generally, and general equitable
principles;
(v) neither the execution and delivery of this Agreement by the
Tax-Exempt Trust on behalf of the Tax-Exempt Fund, nor the consummation by
the Tax-Exempt Trust on behalf of the Tax-Exempt Fund of the transaction
contemplated hereby will conflict with, result in a breach or violation of
or constitute (or with notice, lapse of time or both constitute) a breach
of or default under, the Master Trust Agreement or By-Laws of the
Tax-Exempt Trust, or any statute, regulation, order, judgment or decree,
or any instrument, contract or other agreement to which the Tax-Exempt
Trust is a party or by which the Tax-Exempt Trust or any of its assets is
subject or bound; and
3
<PAGE>
(vi) no authorization, consent or approval of any
governmental or other public body or authority or any other party is
necessary for the execution and delivery of this Agreement by the
Tax-Exempt Trust on behalf of the Tax-Exempt Fund or the consummation
of any transactions contemplated hereby by the Tax-Exempt Trust, other
than as shall be obtained at or prior to the Closing.
4. Conditions Precedent. The obligations of the Tax-Exempt Trust on
behalf of the California Tax-Free Fund and the Tax-Exempt Trust on behalf of the
Tax-Exempt Fund to effectuate the plan of reorganization and liquidation
hereunder shall be subject to the satisfaction of the following conditions:
(a) At or immediately prior to the Closing, the Tax-Exempt Trust
shall have declared and paid a dividend or dividends which, together with all
previous such dividends, shall have the effect of distributing to the
shareholders of the California Tax-Free Fund all of such Fund's investment
company taxable income for taxable years ending at or prior to the Closing
(computed without regard to any deduction for dividends paid) and all of its net
capital gain, if any, realized in taxable years ending at or prior to the
Closing (after reduction for any capital loss carry-forward).
(b) A registration statement of the Tax-Exempt Fund on Form N-14
under the Securities Act of 1933, as amended (the "Securities Act"), registering
the New Shares under the Securities Act, and such amendment or amendments
thereto as are determined by the Board of Trustees of the Tax-Exempt Trust to be
necessary and appropriate to effect such registration of the New Shares (the
"Registration Statement"), shall have been filed with the Commission and the
Registration Statement shall have become effective, and no stop-order suspending
the effectiveness of such Registration Statement shall have been issued, and no
proceeding for that purpose shall have been initiated or threatened by the
Commission (and not withdrawn or terminated);
(c) The New Shares shall have been duly qualified for offering
to the public in all states in which such qualification is required for
consummation of the transactions contemplated hereunder;
(d) All representations and warranties of the Tax-Exempt Trust on
behalf of the California Tax-Free Fund contained in this Agreement shall be true
and correct in all material respects as of the date hereof and as of the
Closing, with the same force and effect as if then made, and the Tax-Exempt
Trust on behalf of the Tax-Exempt Fund shall have received a certificate of an
officer of the Tax-Exempt Trust acting on behalf of the California Tax-Free Fund
to that effect in form and substance reasonably satisfactory to the Tax-Exempt
Trust on behalf of the Tax-Exempt Fund;
(e) All representations and warranties of the Tax-Exempt Trust on
behalf of the Tax-Exempt Fund contained in this Agreement shall be true and
correct in all material respects as of the date hereof and as of the Closing,
with the same force and effect as if then made, and the Tax-Exempt Trust on
behalf of the California Tax-Free Fund shall have received a certificate of an
officer of the Tax-Exempt Trust acting on behalf of the Tax-Exempt Fund to that
effect in form and substance reasonably satisfactory to the Tax-Exempt Trust on
behalf of the California Tax-Free Fund;
(f) The Tax-Exempt Trust on behalf of the California Tax-Free Fund
and the Tax-Exempt Trust on behalf of the Tax-Exempt Fund shall have received an
opinion from Goodwin, Procter & Hoar regarding tax matters in connection with
the Reorganization;
4
<PAGE>
(g) The Tax-Exempt Trust on behalf of the Tax-Exempt Fund shall have
received an agreed upon procedures report, in accordance with established
accounting standards for such reports, of Price Waterhouse LLP, auditors for the
Tax-Exempt Trust, as to the unaudited statement of assets and liabilities
described in Section 1 of this Agreement; and
(h) A vote approving this Agreement and the Reorganization
contemplated hereby shall have been adopted by at least a majority of the
outstanding voting Class A, Class B, Class C and Class D shares of beneficial
interest of the California Tax-Free Fund (within the meaning of the 1940 Act),
voting together as a single class, entitled to vote at the special meeting of
shareholders of the California Tax-Free Fund duly called for such purpose.
(i) The Funds shall have received from the Commission an order
approving the Funds' application pursuant to Section 17(b) of the 1940 Act for
an order exempting the Reorganization from Section 17(a) of the 1940 Act and
pursuant to Rule 17d-1 under the 1940 Act for an order exempting the
Reorganization from Section 17(d) of the1940 Act and Rule 17d-1 thereunder.
5. Closing. The Closing shall be held at the offices of the Tax-Exempt
Trust and shall occur (a) immediately prior to the opening of business on the
first Monday following receipt of all necessary regulatory approvals and the
final adjournment of the meeting of shareholders of the California Tax-Free Fund
at which this Agreement is considered or (b) such later time as the parties may
agree. All acts taking place at the Closing shall be deemed to take place
simultaneously unless otherwise provided. At, or as soon as may be practicable
following the Closing, the Tax-Exempt Fund shall distribute the New Shares to
the California Tax-Free Fund Record Holders (as herein defined) by instructing
the Tax-Exempt Fund to register the appropriate number of New Shares in the
names of the California Tax-Free Fund's shareholders and the Tax-Exempt Fund
agrees promptly to comply with said instruction. The shareholders of record of
the California Tax-Free Fund as of the close of business on the Valuation Date
shall be certified by the Tax-Exempt Trust's transfer agent (the "California
Tax-Free Fund Record Holders").
6. Expenses. The expenses incurred in connection with the transactions
contemplated by this Agreement, whether or not the transactions contemplated
hereby are consummated, will be apportioned between State Street Research
Investment Services, Inc. (the "Distributor"), the distributor for each of the
Funds, and the Funds in a fair and equitable manner. The Distributor will assume
one-half of the expenses and the other half will be allocated to the Tax-Exempt
Fund and the California Tax-Free Fund in an appropriate manner on the basis of
identifiable direct costs or otherwise on the basis of relative net assets. Such
expenses include, without limitation, (i) expenses incurred in connection with
the entering into and the carrying out of the provisions of this Agreement; (ii)
expenses associated with the preparation and filing of the registration
statement on Form N-14 contemplated hereby; (iii) registration or qualification
fees and expenses of preparing and filing such forms as are necessary to qualify
the New Shares under applicable blue sky laws; (iv) postage; (v) printing; (vi)
accounting fees; (vii) legal fees; and (viii) solicitation costs of the
transaction.
7. Termination. This Agreement and the transactions contemplated hereby
may be terminated and abandoned by resolution of the Board of Trustees of the
Tax-Exempt Trust, at any time prior to the Closing, if circumstances should
develop that, in the opinion of the Board of Trustees, in its sole discretion,
make proceeding with this Agreement inadvisable. In the event of any such
termination, there shall be no liability for damages on the part of either the
California Tax-Free Fund or the Tax-Exempt Fund, or their respective trustees or
officers, to the other party or its trustees or officers.
5
<PAGE>
8. Amendments. This Agreement may be amended, waived or
supplemented in such manner as may be mutually agreed upon in writing by the
authorized officers of the Tax-Exempt Trust acting on behalf of the
California Tax-Free Fund and by the authorized officers of the Tax-Exempt
Trust acting on behalf of the Tax-Exempt Fund; provided, however, that
following the meeting of the California Tax-Free Fund shareholders called by
the Tax-Exempt Trust pursuant to Section 4(h) of this Agreement, no such
amendment, waiver or supplement may have the effect of changing the
provisions for determining the number of Tax-Exempt Fund Shares to be issued
to the California Tax-Free Fund shareholders under this Agreement to the
detriment of such shareholders without their further approval.
9. Governing Law. This Agreement shall be governed and construed in
accordance with the laws of The Commonwealth of Massachusetts, except as to
matters of conflicts of laws.
10. Further Assurances. The Tax-Exempt Trust shall take such further
action, prior to, at, and after the Closing, as may be necessary or desirable
and proper to consummate the transactions contemplated hereby.
11. Limitations of Liability. The term "Tax-Exempt Trust" means and
refers to the trustees from time to time serving under the Master Trust
Agreement of the Tax-Exempt Trust, as the same may subsequently thereto have
been, or subsequently hereto be, amended. It is expressly agreed that the
obligations of the Tax-Exempt Trust hereunder shall not be binding upon any of
the Trustees, shareholders, nominees, officers, agents or employees of the
Tax-Exempt Trust, personally, but bind only the assets and property of the
California Tax-Free Fund series of the Tax-Exempt Trust and the Tax-Exempt Fund
series of the Tax-Exempt Trust, as the case may be, as provided in the Master
Trust Agreement of the Tax-Exempt Trust. The execution and delivery of this
Agreement have been authorized by the Trustees of the Tax-Exempt Trust and
signed by an authorized officer of the Tax-Exempt Trust, acting as such, and
neither such authorization nor such execution and delivery shall be deemed to
have been made individually or to impose any personal liability, but shall bind
only the trust property of the Tax-Exempt Trust as provided in its Master Trust
Agreement. The Master Trust Agreement of the Tax-Exempt Trust provides, and it
is expressly agreed, that each Sub-Trust of the Tax-Exempt Trust shall be
charged with the liabilities in respect of that Sub-Trust and all expenses,
costs, charges or reserves belonging to that Sub-Trust.
6
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the date first set forth above by their duly authorized
representatives.
STATE STREET RESEARCH TAX-EXEMPT TRUST, on
behalf of its State Street Research
California Tax-Free Fund series
Attest:
By:
- -------------------- ----------------------------
ATTEST: STATE STREET RESEARCH TAX-EXEMPT TRUST,
on behalf of its State Street Research
Tax-Exempt Fund series
By:
- ----------------------- ------------------------------
197933.c1
7/24/95
<PAGE>
JOINT PROXY STATEMENT/PROSPECTUS
Concerning the Acquisition of the Assets of
STATE STREET RESEARCH FLORIDA TAX-FREE FUND
By and in Exchange for Shares of
STATE STREET RESEARCH TAX-EXEMPT FUND
each a series of
State Street Research Tax-Exempt Trust
One Financial Center
Boston, Massachusetts 02111
(800) 562-0032
This Joint Proxy Statement/Prospectus relates to the proposed transfer of
the assets and liabilities of the State Street Research Florida Tax-Free Fund
(the "Florida Tax-Free Fund"), a series of the State Street Research Tax-Exempt
Trust (the "Trust"), a Massachusetts business trust, to the State Street
Research Tax-Exempt Fund (the "Tax-Exempt Fund"), another series of the Trust in
exchange for Class A, Class B, Class C and Class D shares of beneficial
interest, $.001 par value per share, of the Tax-Exempt Fund ("Tax-Exempt Fund
Shares"). Following such transfer, Tax-Exempt Fund Shares will be distributed to
shareholders of the Florida Tax-Free Fund in liquidation of the Florida Tax-Free
Fund, and the Florida Tax-Free Fund will be dissolved. As a result of the
proposed transaction, each shareholder will receive in exchange for his or her
shares of the Florida Tax-Free Fund shares of the corresponding class of the
Tax-Exempt Fund with an aggregate value equal to the value of such shareholder's
shares of the Florida Tax-Free Fund, calculated as of the close of business on
the business day immediately prior to the exchange.
This Joint Proxy Statement/Prospectus is furnished to the shareholders of
the Florida Tax-Free Fund in connection with the solicitation of proxies by and
on behalf of the Trust's Board of Trustees to be used at a Special Meeting of
Shareholders of the Florida Tax-Free Fund to be held at the offices of the
Trust, One Financial Center, 31st Floor, Boston, Massachusetts 02111, at 3:00
p.m. local time on [________], 1995 and at any adjournments thereof (the
"Meeting"). This document also serves as a Prospectus of the Tax-Exempt Fund and
covers the proposed issuance of Tax-Exempt Fund Shares. The Florida Tax-Free
Fund and the Tax-Exempt Fund may hereinafter be referred to collectively as the
"Funds" and individually as a "Fund." The Board of Trustees of the Trust may
hereinafter be referred to as the "Board of Trustees."
<PAGE>
The investment objective of the Tax-Exempt Fund, a diversified series of
the Trust, an open-end management investment company, is to seek a high level of
interest income exempt from federal income taxes. In seeking to achieve its
investment objective, the Tax-Exempt Fund invests primarily in tax-exempt debt
obligations which the investment manager of the Fund believes will not involve
undue risk.
This Joint Proxy Statement/Prospectus, which should be retained for future
reference, sets forth concisely the information that a shareholder of the
Tax-Exempt Fund and the Florida Tax-Free Fund should know before investing. This
Joint Proxy Statement/Prospectus is accompanied by the Prospectus of the
Tax-Exempt Fund dated May 1, 1995, which is incorporated by reference herein.
The Prospectus of the Florida Tax-Free Fund dated May 1, 1995 is incorporated by
reference herein. A Statement of Additional Information dated [_________], 1995
containing additional information relevant to the proposed transaction has been
filed with the Securities and Exchange Commission and is incorporated by
reference into this Joint Proxy Statement/Prospectus. A copy of such Statement
and a copy of the Prospectus of the Florida Tax-Free Fund may be obtained
without charge by writing to the Tax-Exempt Fund, One Financial Center, Boston,
Massachusetts 02111, or by calling toll-free (800) 562-0032.
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 UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
________ __, 1995
Date of Joint Proxy Statement/Prospectus
2
<PAGE>
TABLE OF CONTENTS
Page
SUMMARY ................................................................... 4
RISK FACTORS .............................................................. 10
REASONS FOR THE REORGANIZATION ............................................ 11
INFORMATION ABOUT THE REORGANIZATION ...................................... 12
COMPARISON OF INVESTMENT OBJECTIVES AND POLICIES .......................... 16
COMPARATIVE INFORMATION ON DISTRIBUTION ARRANGEMENTS ...................... 20
COMPARATIVE INFORMATION ON SHAREHOLDER SERVICES ........................... 22
FISCAL YEAR ............................................................... 22
PERFORMANCE ............................................................... 22
COMPARATIVE INFORMATION ON SHAREHOLDER RIGHTS ............................. 23
MANAGEMENT ................................................................ 24
ADDITIONAL INFORMATION ABOUT THE FUNDS .................................... 25
VOTING INFORMATION ........................................................ 26
DISSENTERS' RIGHTS ........................................................ 27
EXPERTS ................................................................... 28
OTHER MATTERS ............................................................. 28
NO ANNUAL MEETING OF SHAREHOLDERS ......................................... 28
Exhibit A: Agreement and Plan of Reorganization and Liquidation ........... A-1
3
<PAGE>
SUMMARY
The following is a summary of certain information contained in or
incorporated by reference in this Joint Proxy Statement/Prospectus. This summary
is not intended to be a complete statement of all material features of the
proposed Reorganization (as hereinafter defined) and is qualified in its
entirety by reference to the full text of this Joint Proxy Statement/Prospectus
and the documents referred to herein.
Proposed Transaction. The Board of Trustees of the Trust has approved an
Agreement and Plan of Reorganization and Liquidation (the "Plan of
Reorganization") providing for the transfer of all of the assets of the Florida
Tax-Free Fund to the Tax-Exempt Fund (subject to the assumption by the
Tax-Exempt Fund of all of the liabilities of the Florida Tax-Free Fund including
those reflected on a statement of assets and liabilities of that Fund as of the
close of business on the Valuation Date, as hereinafter defined) in exchange for
Tax-Exempt Fund Shares at a closing to be held following the satisfaction of the
conditions to the Reorganization (the "Closing"). The aggregate net asset value
of full and fractional Tax-Exempt Fund Shares to be issued to shareholders of
the Florida Tax-Free Fund will equal the value of the aggregate net assets of
the Florida Tax-Free Fund as of the close of business on the business day
immediately prior to the Closing (the "Valuation Date"). The number of Class A,
Class B, Class C and Class D shares (which may hereinafter be referred to
collectively as the "shares" or individually as a "share") to be issued to the
Florida Tax-Free Fund will be determined by dividing (a) the aggregate net
assets attributable to each class of shares of the Florida Tax-Free Fund by (b)
the net asset value per Class A, Class B, Class C and Class D share,
respectively, of the Tax-Exempt Fund, each computed as of the close of business
on the Valuation Date. Tax-Exempt Fund Shares will be distributed to
shareholders of the Florida Tax-Free Fund in liquidation of the Florida Tax-Free
Fund, and the Florida Tax-Free Fund will be dissolved. The proposed transaction
described above is referred to in this Joint Proxy Statement/Prospectus as the
"Reorganization."
As a result of the Reorganization, each shareholder will receive, in
exchange for his or her shares of the Florida Tax-Free Fund, shares of the
corresponding class of the Tax-Exempt Fund with an aggregate value equal to the
value of such shareholder's shares of the Florida Tax-Free Fund, calculated as
of the close of business on the Valuation Date. For example, Class A
shareholders of the Florida Tax-Free Fund would receive Class A shares of the
Tax-Exempt Fund.
At or prior to the Closing, the Florida Tax-Free Fund shall declare a
dividend or dividends which, together with all previous such dividends, shall
have the effect of distributing to the Florida Tax-Free Fund's shareholders all
of the Florida Tax-Free Fund's investment company income for all taxable years
ending at or prior to the Closing (computed without regard to any deduction for
dividends paid) and all of its net capital gains realized (after reduction for
any capital loss carry-forward) in all taxable years ending at or prior to the
Closing. The Trustees, including the Trustees who are not "interested persons"
of the Trust as defined in the Investment Company Act of 1940, as amended (the
"1940 Act"), have determined that the interests of existing shareholders of the
Florida Tax-Free Fund and the Tax-Exempt Fund,
4
<PAGE>
respectively, will not be diluted as a result of the transactions contemplated
by the Reorganization and that the Reorganization would be in the best interests
of the shareholders of the Florida Tax-Free Fund and the Tax-Exempt Fund,
respectively. See "Information About the Reorganization."
The Trustees of the Trust recommend that the shareholders of the Florida
Tax-Free Fund vote FOR approval of the Plan of Reorganization.
Approval of the Plan of Reorganization by the shareholders of the Florida
Tax-Free Fund is a condition of the consummation of the Reorganization. The
affirmative vote of the holders of a majority of the outstanding voting shares
of such Fund (within the meaning of the 1940 Act), voting together as a single
class, is required to approve the Plan of Reorganization on behalf of such Fund.
A "majority" vote is defined in the 1940 Act as the vote of the holders of the
lesser of (a) 67% or more of the voting shares of a Fund, voting together as a
single class, present at the Meeting, if the holders of more than 50% of the
outstanding voting shares are present or represented by proxy, or (b) more than
50% of the outstanding voting shares of a Fund, voting together as a single
class. See "Voting Information."
Tax Consequences. Counsel to the Funds, Goodwin, Procter & Hoar, has
opined that, subject to customary assumptions and representations, upon
consummation of the Reorganization and the transfer of substantially all of the
assets of the Florida Tax-Free Fund to the Tax-Exempt Fund: (i) the transfer of
all the assets of the Florida Tax-Free Fund for Tax-Exempt Fund Shares and the
assumption by the Tax-Exempt Fund of all liabilities of the Florida Tax-Free
Fund will constitute a "reorganization" for federal income tax purposes, and the
Florida Tax-Free Fund and the Tax-Exempt Fund will each be a "party to a
reorganization" for federal income tax purposes; (ii) no gain or loss will be
recognized by the Tax-Exempt Fund or the Florida Tax-Free Fund upon the transfer
of the Florida Tax-Free Fund assets to the Tax-Exempt Fund in exchange for
Tax-Exempt Fund Shares; (iii) no gain or loss will be recognized by shareholders
of the Florida Tax-Free Fund upon the exchange of shares of the Florida Tax-Free
Fund for Tax-Exempt Fund Shares; (iv) the basis of Tax-Exempt Fund Shares
received by each Florida Tax-Free Fund shareholder pursuant to the
Reorganization will be the same as the basis of the Florida Tax-Free Fund shares
exchanged therefor; and (v) the basis of the Florida Tax-Free Fund assets in the
hands of the Tax-Exempt Fund will be the same as the basis of such assets in the
hands of the Florida Tax-Free Fund immediately prior to the Reorganization. The
receipt of such an opinion upon the Closing is a condition to the
Reorganization. See "Information About the Reorganization."
Investment Objectives and Policies. Unlike the Florida Tax-Free Fund, the
Tax-Exempt Fund does not seek to be predominantly invested in assets which are
exempt from Florida State taxes on intangible personal property. In other
respects, however, the investment objectives, policies and restrictions of the
Funds are substantially similar. To the extent that there are other differences
in the policies and restrictions of the Funds, shareholders should consider such
differences. These differences are discussed below under "Comparison of
Investment Objectives and Policies."
5
<PAGE>
The investment objective of the Florida Tax-Free Fund is to seek a high
level of interest income exempt from federal income taxes and Florida State
taxes on intangible personal property. The Fund invests primarily in investment
grade securities issued by or on behalf of the State of Florida or its political
subdivisions and by other governmental entities. The Florida Tax-Free Fund may
invest up to 25% of the Fund's assets in securities rated as low as CC by
Standard & Poor's Corporation ("S&P") or Ca by Moody's Investors Service, Inc.
("Moody's") or unrated securities that the Investment Manager (as hereinafter
defined) believes to be of equivalent investment quality to comparably rated
securities. During the current year, the Investment Manager (as hereinafter
defined) does not anticipate that the Fund will invest in securities rated BB or
lower by S&P or Ba or lower by Moody's or in unrated securities of similar
investment quality.
The investment objective of the Tax-Exempt Fund is to seek a high level of
interest income exempt from federal income taxes. The Fund invests primarily in
investment grade tax-exempt debt obligations. The Tax-Exempt Fund may invest up
to 20% of the Fund's assets in securities rated below BBB by S&P or Baa by
Moody's or unrated securities that the Investment Manager (as hereinafter
defined) believes to be of equivalent investment quality to comparably rated
securities.
Management and Other Service Providers. The business affairs of the Trust
are managed by its Board of Trustees. For each of the Funds, State Street
Research & Management Company (the "Investment Manager") serves as investment
adviser, State Street Research Investment Services, Inc. serves as distributor
(the "Distributor") and State Street Bank and Trust Company serves as custodian
and as transfer agent and dividend paying agent ("SSBT").
The Investment Manager and the Distributor are indirect wholly-owned
subsidiaries of Metropolitan Life Insurance Company ("Metropolitan Life"). SSBT
is not affiliated with the Investment Manager, the Distributor, Metropolitan
Life, the Trust or the Funds. See "Management."
6
<PAGE>
Advisory Fees and Expenses. The following tables summarize the shareholder
transaction expenses applicable to each Fund and the annual operating expenses
for the Funds on an individual basis and for the Tax-Exempt Fund on a pro forma
basis after giving effect to the Reorganization. This table is followed by an
example illustrating the effect of these expenses on a $1,000 investment in each
Fund.
Shareholder Transaction Expenses Applicable to Tax-Exempt Fund and Florida
Tax-Free Fund
<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.
(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.
Table of Expenses of Tax-Exempt Fund (individually and on a pro forma basis)
and Florida Tax-Free Fund
<TABLE>
<CAPTION>
Tax-Exempt Fund Florida Tax-Free Fund
Class A Class B Class C Class D Class A Class B Class C Class D
<S> <C> <C> <C> <C> <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% 0.55% 0.55% 0.55% 0.55%
12b-1 Fees................. 0.25% 1.00% None 1.00% 0.25% 1.00% None 1.00%
Other Expenses............. 0.36% 0.36% 0.36% 0.36% 1.52% 1.52% 1.52% 1.52%
---- ---- ---- ---- ---- ---- ---- ----
Less Voluntary Reduction - - - - (1.82%) (1.82%) (1.82%) (1.82%)
Total Fund Operating Expenses 1.16% 1.91% 0.91% 1.91% 0.50% 1.25% 0.25% 1.25%
==== ==== ==== ==== ==== ==== ==== ====
Pro Forma Tax-Exempt Fund (1)
Class A Class B Class C Class D
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%
Less Voluntary Reduction ----- ---- ---- ----
Total Fund Operating Expenses 1.16% 1.91% 0.91% 1.91%
===== ==== ==== ====
- ---------------------
</TABLE>
(1) Does not reflect the effect of proposed similar reorganizations of two
other state-specific tax-free mutual funds into the Tax-Exempt Fund to occur at
about the same time as the proposed reorganization described herein. The
pro-forma expenses of the Tax-Exempt Fund after giving effect to the other
proposed reorganizations is not expected to be materially different.
7
<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>
Tax-Exempt Fund Florida Tax-Free Fund
1 Year 3 Years 5 Years 10 Years 1 Year 3 Years 5 Years 10 Years
- ------- ------ ------- ------- -------- ------ ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Class A shares................. $56 $80 $106 $180 $50 $60 $72 $105
Class B shares(1).............. $69 $90 $123 $204 $63 $70 $89 $130
Class C shares................. $ 9 $29 $ 50 $112 $ 3 $8 $14 $32
Class D shares................. $29 $60 $103 $223 $23 $40 $69 $151
Pro Forma Tax-Exempt Fund
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
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
You would pay the following expenses on the same investment, assuming no
redemption:
Tax-Exempt Fund Florida Tax-Free Fund
1 Year 3 Years 5 Years 10 Years 1 Year 3 Years 5 Years 10 Years
- ------ ------- ------- ------- -------- ------ ------- ------- --------
Class B (1)................ $19 $60 $103 $204 $13 $40 $69 $130
Class D .................. $19 $60 $103 $223 $13 $40 $69 $151
Pro Forma Tax-Exempt Fund
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
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.
Multiple Class Structure; Distribution Arrangements. Each Fund has
outstanding and offers four classes of shares, which may be purchased through
securities dealers which have entered into sales agreements with the Distributor
at the next determined net asset value per share plus, in the case of all
classes except the 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). In the proposed
Reorganization, shareholders of the Florida Tax-Free Fund will receive the
corresponding class of shares of the Tax-Exempt Fund which they currently hold
in the Florida Tax-Free Fund. The Class A, Class B, Class C and Class D shares
of the Tax-Exempt Fund have identical arrangements with respect to the
imposition of initial and contingent deferred sales charges and distribution and
service fees as the comparable class of shares of the Florida Tax-Free Fund.
Because the Reorganization will be effected at net asset value without the
imposition of a sales charge, Tax-Exempt Fund Shares
8
<PAGE>
acquired by shareholders of the Florida Tax-Free Fund pursuant to the proposed
Reorganization would not be subject to any initial sales charge or contingent
deferred sales charge as a result of the Reorganization. However, holders of the
Tax-Exempt Fund Shares acquired as a result of the Reorganization would continue
to be subject to a contingent deferred sales charge upon subsequent redemption
to the same extent as if they had continued to hold their shares of the Florida
Tax-Free Fund. For purposes of computing the contingent deferred sales charge
that may be payable upon disposition of any acquired Class A, Class B and Class
D shares of the Tax-Exempt Fund, the holding period of the redeemed shares is
"tacked" to the holding period of the Florida Tax-Free Fund. See "Comparative
Information on Distribution Arrangements."
Dividends. The Funds have identical policies with regard to dividends and
distributions. Each Fund's policy is to declare a dividend each day in an amount
based on monthly projections of its future net investment income and will pay
such dividends monthly. Consequently, the amount of each daily dividend may
differ from actual net investment income as determined under generally accepted
accounting principles. 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). After the closing of the
Reorganization, Florida Tax-Free Fund shareholders who currently have dividends
reinvested will continue to have dividends reinvested in the Tax-Exempt Fund and
those who currently have capital gains reinvested will continue to have capital
gains reinvested in the Tax-Exempt Fund. The number of shares received in
connection with any such reinvestment will be based upon the net asset value per
share of the applicable class of shares of the Tax-Exempt Fund in effect on the
record date. See "Comparative Information on Shareholder Services."
Exchange Rights. Each Fund currently has identical exchange privileges.
Shareholders of the Florida Tax-Free Fund may exchange their shares for shares
of a corresponding class of shares, when available, of certain funds as
determined by the Distributor, 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 such fund may
similarly exchange their shares for shares of an available corresponding class
of the Florida Tax-Free Fund. See "Comparative Information on Shareholder
Services."
Redemption Procedures. Each Fund offers the same redemption features,
including the acceptance of redemption requests by mail, telephone and wire,
provided that applicable conditions are met. Any request to redeem shares of the
Florida Tax-Free Fund received and processed prior to the Reorganization will be
treated as a redemption of shares of the Florida Tax-Free Fund. Any request to
redeem shares received or processed after the Reorganization will be treated as
a request to redeem shares of the Tax-Exempt Fund. See "Comparative Information
on Shareholder Services."
Minimum Account Size. Each Fund reserves the right to redeem an account if
the aggregate value of the shares in such account is less than $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
9
<PAGE>
after 60 days' notice. Currently, the maintenance fee is $18 annually. The
Tax-Exempt Fund shareholder accounts established pursuant to the Reorganization
with a value of less than $1,500 will therefore be subject to redemption upon 60
days' prior notice or the annual maintenance fee. During such 60-day period, a
shareholder will have the option of avoiding such redemption or maintenance fee
by increasing the value of the account to $1,500 or more.
Certain Affiliations. To the extent that the Investment Manager and its
affiliates may own 5% or more of the Florida Tax-Free Fund, such Fund may be
deemed to be an "affiliated person," as defined in the 1940 Act, of the
Investment Manager or its affiliates. See "Information About the
Reorganization."
RISK FACTORS
The investment risks of both Funds are generally similar because of the
similarities of investment objectives and policies of the Funds. However, the
Florida Tax-Free Fund's ability to achieve its investment objective depends on
the ability of the issuers of Florida municipal obligations to meet their
continuing obligations for the payment of principal and interest, whereas the
Tax-Exempt Fund is subject to an investment restriction that prohibits more than
25% of the assets of the Fund from being invested in securities of issuers
conducting their principal activities in the same state. See "Comparison of
Investment Objectives and Policies." Such risks are more fully discussed under
the caption "The Fund's Investments" in the Prospectus of the Tax-Exempt Fund
enclosed with this Joint Proxy Statement/Prospectus and under the caption "The
Fund's Investments" in the Prospectus of the Florida Tax-Free Fund (available
upon request).
The Tax-Exempt Fund invests primarily in notes and bonds issued by or on
behalf of state and local governmental units. The Florida Tax-Free Fund invests
primarily in obligations issued by or on behalf of the State of Florida, its
political subdivisions, municipalities and public authorities and by other
governmental entities. In the case of each Fund, the value of such investments
will generally fluctuate inversely with changes in prevailing interest rates.
When interest rates increase, the value of debt securities and shares of a Fund
can be expected to decline.
There are risks in any investment program, and there is no assurance that
either 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.
10
<PAGE>
REASONS FOR THE REORGANIZATION
In reaching the decision to recommend that the shareholders of the Florida
Tax-Free Fund vote to approve the Reorganization, the Board of Trustees,
including the Trustees who are not interested persons of the Trust, concluded
that the Reorganization would be in the best interests of the respective Funds
and that the interests of existing shareholders of the respective Funds will not
be diluted as a consequence thereof. In making this determination, the Trustees
considered a number of factors, including the smaller size and higher gross
expenses of the Florida Tax-Free Fund compared to the Tax-Exempt Fund and the
efficiencies resulting from combining the operations of two separate funds with
the same investment manager, the same multiple class structure, the same sales
load structure and similar investment objectives and policies.
As reflected in the capitalization table in "Information About the
Reorganization--Capitalization" set forth below, the Florida Tax-Free Fund is
small in size. As a result, its gross expenses are relatively high and have been
subsidized by the Distributor since inception; see "Table of Expenses of
Tax-Exempt Fund (individually and on a pro forma basis) and Florida Tax-Free
Fund" set forth in the "Summary" above. The Distributor reserves the right to
discontinue at any time its voluntary subsidization of expenses of the Florida
Tax-Free Fund; consequently, such Fund's expenses could increase in the future.
On the other hand, the Tax-Exempt Fund has substantially more assets and a
lower, unsubsidized expense ratio. By combining the assets of the two Funds,
each Fund could, over time, possibly benefit from certain economies of scale. In
particular, greater portfolio diversification and more efficient portfolio
management could result from a larger asset base. Greater diversification is
expected to be beneficial to shareholders because it may reduce the negative
effect which the adverse performance of any one portfolio security may have on
the performance of the portfolio as a whole. Because each Fund has the same
investment adviser, custodian and distributor, combining the Funds could, over
time, produce administrative economies of scale, resulting in net benefits to
the Funds' shareholders. The Trustees considered, among other things, the
benefit to the Funds of elimination of duplication of services such as producing
separate prospectuses and shareholder reports.
The above-cited benefits offset the loss to the shareholders of the
Florida Tax-Free Fund of having a fund more devoted to investments which is
tax-exempt for both federal income and Florida intangible personal property tax
purposes, as compared to the Tax-Exempt Fund which focuses primarily on
securities exempt from federal income taxes. Assets of the Tax-Exempt Fund will
be subject to more Florida intangible personal property tax than the assets of
the Florida Tax-Free Fund.
The Board of Trustees of the Trust believes that the proposed
Reorganization is in the best interests of the shareholders of the Florida
Tax-Free Fund and recommend that shareholders of the Florida Tax-Free Fund vote
FOR the Reorganization.
11
<PAGE>
INFORMATION ABOUT THE REORGANIZATION
At a meeting held on August 2, 1995, the Board of Trustees of the Trust,
approved the Plan of Reorganization substantially in the form set forth as
Exhibit A to this Joint Proxy Statement/Prospectus.
Plan of Reorganization. The Plan of Reorganization provides that, at the
Closing, the Tax-Exempt Fund will acquire all of the assets of the Florida
Tax-Free Fund (subject to the assumption by the Tax-Exempt Fund of all of the
liabilities of the Florida Tax-Free Fund including all liabilities reflected on
an unaudited statement of assets and liabilities) in exchange for Tax-Exempt
Fund Shares. The aggregate net asset value of full and fractional Tax-Exempt
Fund Shares to be issued to shareholders of the Florida Tax-Free Fund will equal
the value of the aggregate net assets of the Florida Tax-Free Fund as of the
close of business on the Valuation Date. The number of Class A, Class B, Class C
and Class D shares to be issued to the Florida Tax-Free Fund will be determined
by dividing (a) the aggregate net assets in each class of shares of the Florida
Tax-Free Fund by (b) the net asset value per Class A, Class B, Class C and Class
D share, respectively, of the Tax-Exempt Fund, each computed as of the close of
business on the Valuation Date. Portfolio securities of the Florida Tax-Free
Fund and the Tax-Exempt Fund will be valued in accordance with the valuation
practices of the Tax-Exempt Fund which are described under the caption "Purchase
of Shares" in the Tax-Exempt Fund Prospectus and which are substantially
identical to those of the Florida Tax-Free Fund.
The Tax-Exempt Fund will assume all liabilities, including all expenses,
costs, charges and reserves reflected on an unaudited statement of assets and
liabilities of the Florida Tax-Free Fund prepared as of the close of business on
the Valuation Date in accordance with generally accepted accounting principles
consistently applied from the prior audited period. Such statement of assets and
liabilities will reflect all liabilities known to the Florida Tax-Free Fund and
the Tax-Exempt Fund as of the date thereof. At or prior to the Closing, the
Florida Tax-Free Fund shall declare a dividend or dividends which, together with
all prior such dividends, shall have the effect of distributing to the Florida
Tax-Free Fund's shareholders all of the Florida Tax-Free Fund's investment
company income for all taxable years ending at or prior to the Closing (computed
without regard to any deduction for dividends paid) and all of its net capital
gains realized (after reduction for any capital loss carry-forward) in all
taxable years ending at or prior to the Closing.
At or as soon as practicable after the Closing, the Florida Tax-Free Fund
will liquidate and distribute pro rata to its shareholders of record as of the
close of business on the Valuation Date the full and fractional Tax-Exempt Fund
Shares received by the Florida Tax-Free Fund. Such liquidation and distribution
will be accomplished by the establishment of shareholder accounts on the share
records of the Tax-Exempt Fund in the name of each such shareholder of the
Florida Tax-Free Fund, representing the respective pro rata number of full and
fractional Tax-Exempt Fund Shares due such shareholder. All of the Tax-Exempt
Fund's future
12
<PAGE>
distributions attributable to the shares issued in the Reorganization will be
paid to shareholders in cash or invested in additional shares of the Tax-Exempt
Fund at the price in effect as described in the Tax-Exempt Fund's Prospectus on
the respective payment dates in accordance with instructions previously given by
the shareholder to the Florida Tax-Free Fund's transfer agent. As of the
Closing, each outstanding certificate which, prior to the Closing, represented
shares of the Florida Tax-Free Fund will be deemed for all purposes to evidence
ownership of the number of Tax-Exempt Fund Shares issuable with respect thereto
pursuant to the Reorganization. After the Closing, certificates originally
representing shares of Class A or Class C of the Florida Tax-Free Fund will be
rendered null and void and nonnegotiable; upon special request and surrender of
such certificates to SSBT as transfer agent, holders of these nonnegotiable
certificates shall be entitled to receive certificates representing the number
of Tax-Exempt Fund Shares issuable with respect thereto. All Class B and Class D
shares of the Tax-Exempt Fund are held of record in book entry form and no
certificates for such shares will be issued.
Notwithstanding approval by shareholders of the Florida Tax-Free Fund, the
Plan of Reorganization may be terminated at any time prior to the consummation
of the Reorganization without liability on the part of either party or its
respective Trustees, officers or shareholders, by either party on written notice
to the other party if circumstances should develop that, in the opinion of the
Trust, make proceeding with the Reorganization inadvisable. The Plan of
Reorganization may be amended, waived or supplemented in such manner as may be
mutually agreed upon by the authorized officers of the Trust; provided, however,
that following the Meeting, no such amendment, waiver or supplement may have the
effect of changing the provision for determining the number of Tax-Exempt Fund
Shares to be issued to the Florida Tax-Free Fund shareholders to the detriment
of such shareholders without their further approval. The expenses incurred in
connection with entering into and carrying out the provisions of the Plan of
Reorganization, whether or not the Reorganization is consummated, will be
apportioned between Distributor and the Funds in a fair and equitable manner.
Description of Tax-Exempt Fund Shares. Full and fractional shares of the
Tax-Exempt Fund will be issued to the Florida Tax-Free Fund shareholders in
accordance with the procedures under the Plan of Reorganization as described
above. Each share will be fully paid and nonassessable by the Trust when issued
and transferable without restrictions and will have no preemptive or cumulative
voting rights and have only such conversion or exchange rights as the Board of
Trustees of the Trust may grant in its discretion.
Federal Income Tax Consequences. Counsel to the Funds, Goodwin, Procter &
Hoar, has opined that, subject to customary assumptions and representations, on
the basis of the existing provisions of the Internal Revenue Code (the "Code"),
the Treasury Regulations promulgated thereunder and current administrative and
judicial interpretations thereof, for federal income tax purposes: (i) the
transfer of all the assets of the Florida Tax-Free Fund in exchange for
Tax-Exempt Fund Shares and the assumption by the Tax-Exempt Fund of all
liabilities of the Florida Tax-Free Fund will constitute a "reorganization"
within the meaning of Section 368(a)(1)(C) of the Code, and the Florida Tax-Free
Fund and the Tax-Exempt Fund each will be a "party to a reorganization" within
the meaning of Section 368(b) of the Code; (ii) no gain or
13
<PAGE>
loss will be recognized by the Florida Tax-Free Fund or the Tax-Exempt Fund upon
the transfer of the Florida Tax-Free Fund assets to the Tax-Exempt Fund in
exchange for Tax-Exempt Fund Shares; (iii) no gain or loss will be recognized by
shareholders of the Florida Tax-Free Fund upon the exchange of the Florida
Tax-Free Fund shares for Tax-Exempt Fund Shares; (iv) the basis of Tax-Exempt
Fund Shares received by each Florida Tax-Free Fund shareholder pursuant to the
Reorganization will be the same as the basis of the Florida Tax-Free Fund shares
exchanged therefor; (v) the basis of the Florida Tax-Free Fund assets in the
hands of the Tax-Exempt Fund will be the same as the basis of such assets in the
hands of the Florida Tax-Free Fund immediately prior to the Reorganization. The
receipt of such an opinion upon the Closing is a condition to the consummation
of the Reorganization. If the transfer of the assets of the Florida Tax-Free
Fund in exchange for Tax-Exempt Fund Shares and the assumption by the Tax-Exempt
Fund of the liabilities of the Florida Tax-Free Fund do not constitute a
tax-free reorganization, each Florida Tax-Free Fund shareholder will recognize
gain or loss equal to the difference between the value of Tax-Exempt Fund Shares
such shareholder acquires and the tax basis of such shareholder's Florida
Tax-Free Fund shares.
Shareholders of the Funds should consult their tax advisers regarding the
effect, if any, of the proposed Reorganization in light of their individual
circumstances. Since the foregoing discussion relates only to the federal income
tax consequences of the Reorganization, shareholders of the Funds should also
consult their tax advisers as to state and local tax consequences, if any, of
the Reorganization.
Capitalization. The following table sets forth the capitalization of the
Florida Tax-Free Fund and the Tax-Exempt Fund as of June 30, 1995, and on a pro
forma basis as of that date giving effect to the proposed acquisition of assets
at net asset value. The pro forma data reflects an exchange ratio of 1.2021,
1.2029, 1.2057 and 1.2032 for Class A, Class B, Class C and Class D shares,
respectively, of the Tax-Exempt Fund issued for each Class A, Class B, Class C
and Class D share, respectively, of the Florida Tax-Free Fund.
14
<PAGE>
Florida
Tax-Exempt Tax-Free Combined After
Fund Fund Reorganization (1)
--------- -------- -----------------
Net assets (in millions)...... $272.3 $11.2 $283.5
Net asset value per share
Class A.................. $7.82 $9.40 $7.82
Class B.................. $7.81 $9.39 $7.81
Class C.................. $7.80 $9.40 $7.80
Class D.................. $7.81 $9.40 $7.81
Shares outstanding
Class A.................. 29,860,742 353,718 30,285,948
Class B.................. 4,779,340 330,494 5,176,894
Class C.................. 46,835 368,120 490,677
Class D.................. 144,825 138,585 311,576
- --------------
(1) Does not reflect the effect of proposed similar reorganizations of two
other state-specific tax-free mutual funds into the Tax-Exempt Fund to
occur at about the same time as the proposed reorganization described
herein. The combined assets as of June 30, 1995 of all three funds to be
reorganized into the Tax-Exempt Fund was $56.5 million.
The table set forth above should not be relied on to reflect the number of
shares to be received in the Reorganization; the actual number of shares to be
received will depend upon the net asset value and number of shares outstanding
of each Fund at the time of the Reorganization.
The following table sets forth the number of outstanding shares of
beneficial interest of each Fund as of June 30, 1995, and the approximate
percentages of the outstanding shares of each Fund that were beneficially owned
by the Investment Manager, the Distributor and Metropolitan Life, their indirect
parent. The Board of Trustees of the Trust does not know of any other person who
beneficially owned more than five percent of the outstanding shares of any class
of each of the Florida Tax-Free Fund or the Tax-Exempt Fund on June 30, 1995.
In addition, as of such date, the Trustees and officers of the Trust as a group
owned less than one percent of the outstanding shares of each of the Florida
Tax-Free Fund and the Tax-Exempt Fund. The Adviser and its affiliates have
indicated to the Trust that with respect to their shares of the Florida Tax-Free
Fund they intend to vote for and against the proposal in the same relative
proportion as do the other shareholders of the Florida Tax-Free Fund who cast
votes at the Meeting.
15
<PAGE>
<TABLE>
<CAPTION>
Outstanding Shares Owned Outstanding Shares Owned Outstanding Shares Owned
by Metropolitan Life by the Distributor by the Investment Manager
------------------------ ------------------------ -------------------------
Total Shares Number % of Total Number % of Total Number % of Total
Name of Fund Outstanding of Shares Outstanding of Shares Outstanding of Shares Outstanding
<S> <C> <C> <C> <C> <C> <C> <C>
Florida Tax-Free Fund
Class A....... 353,718 52,487 14.8 -- -- 1 0.0
Class B........ 330,494 52,487 15.9 -- -- 1 0.0
Class C........ 368,120 367,408 99.8 -- -- 1 0.0
Class D........ 138,585 52,487 37.9 -- -- 1 0.0
All Classes.... 1,190,917 524,869 44.1 -- -- 4 0.0
Tax-Exempt Fund
Class A........ 29,860,742 -- -- 13,825 0.0 -- --
Class B........ 4,779,340 -- -- -- -- -- --
Class C........ 46,835 122 0.3 -- -- -- --
Class D........ 144,825 61,135 42.2 -- -- -- --
All Classes.... 34,831,742 61,257 0.2 13,825 0.0 -- --
</TABLE>
COMPARISON OF INVESTMENT OBJECTIVES AND POLICIES
Information about the investment objectives and policies of the Florida
Tax-Free Fund and the Tax-Exempt Fund is summarized below. More complete
information regarding the same is set forth in the Prospectus of the Tax-Exempt
Fund dated May 1, 1995 which is incorporated by reference herein and enclosed
herewith, the Prospectus of the Florida Tax-Free Fund dated May 1, 1995 which is
incorporated by reference herein, and in the Statement of Additional Information
which have been filed with the Securities and Exchange Commission in connection
with the Reorganization. Shareholders should consult such Prospectuses and the
Statement of Additional Information for a more thorough comparison.
Investment Objectives. The investment objective of the Florida Tax-Free
Fund is to seek a high level of interest income exempt from federal income taxes
and Florida State taxes on intangible personal property. The Fund invests
primarily in investment grade securities issued by or on behalf of the State of
Florida or its political subdivisions and by other governmental entities. The
Florida Tax-Free Fund may invest up to 25% of the Fund's assets in securities
rated as low as CC by S&P or Ca by Moody's or unrated securities that the
Investment Manager believes to be of equivalent investment quality to comparably
rated securities. During the current year, the Investment Manager (as
hereinafter defined) does not anticipate that the Fund will invest in securities
rated BB or lower by S&P or Ba or lower by Moody's or in unrated securities of
similar investment quality.
The investment objective of the Tax-Exempt Fund is to seek a high level of
interest income exempt from federal income taxes. The Fund invests primarily in
investment grade tax-exempt debt obligations. The Fund may invest up to 20% of
the Fund's assets in securities rated below BBB by S&P or Baa by Moody's or
unrated securities that the Investment Manager believes to be of equivalent
investment quality to comparably rated securities.
16
<PAGE>
There are differences in the investment objectives of the two Funds. Under
normal circumstances, substantially all of the dividends paid by the Florida
Tax-Free Fund are expected to be exempt from both federal and Florida State
taxes on intangible personal property; dividends paid by the Tax-Exempt Fund are
generally exempt only from federal income tax. The Florida Tax-Free Fund invests
primarily in securities issued by or on behalf of the State of Florida or its
political subdivisions. The Tax-Exempt Fund's investment objective, in contrast,
does not obligate it to invest primarily in securities issued by or on behalf of
the State of Florida or its political subdivisions; rather, it invests in
securities issued by a variety of state and local governmental units. Both
Funds, however, generally invest in debt securities with interest income exempt
from federal income taxes, pursue substantially similar strategies of achieving
their investment objective and are subject to similar investment restrictions.
Investment Restrictions. While the investment restrictions of the Florida
Tax-Free Fund are similar in certain respects to those of the Tax-Exempt Fund,
there are subtle differences. Set forth below is a summary of the similarities
of and differences between the existing investment restrictions of the Florida
Tax-Free Fund and the investment restrictions of the Tax-Exempt Fund. The
summary is qualified in its entirety by reference to and is made subject to the
complete text of the investment restrictions of each Fund, which are set forth
in the Statement of Additional Information of each Fund. The investment
objective of each Fund and certain of the investment restrictions of each Fund
are deemed fundamental, which means that they may not be changed without the
approval of a majority of such Fund's outstanding voting securities (as defined
in the 1940 Act). Investment restrictions which are not deemed fundamental may
be changed by a Fund's Trustees without shareholder approval.
1. The Tax-Exempt Fund has a fundamental investment restriction which
prohibits the Fund from investing in a security if the transaction would
result in more than five percent of the Fund's total assets being invested
in any one issuer or if the transaction would result in the Fund's owning
more than ten percent of the voting securities of any one issuer (except
securities issued or guaranteed by the U.S. Government or its agencies or
instrumentalities or backed by the U.S. Government). The Florida Tax-Free
Fund does not have such a restriction.
2. The Tax-Exempt Fund is subject to a fundamental restriction that prohibits
the purchase of securities of issuers that have been in continuous
operation for less than three years if such purchase would cause more than
five percent of the total assets of the Fund to be invested in the
securities of such issuers, unless such securities are rated BBB or higher
by S&P or Ba or higher by Moody's. 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
Florida Tax-Free Fund does not have such a restriction.
3. Both Funds are subject to a fundamental investment restriction which
states that the Fund may not issue senior securities.
17
<PAGE>
4. Both Funds have a fundamental investment restriction prohibiting
underwriting or participating in the marketing of securities of other
issuers. For each Fund, this restriction however, provides an exception
for such Fund if it were to purchase securities of other issuers for
investment, either from the issuers, persons in a control relationship
with the issuers or from underwriters of such securities. The applicable
restriction on the Florida Tax-Free Fund provides an exception in
circumstances where, in connection with the disposition of the Fund's
securities, the Fund may be deemed an underwriter under certain federal
securities laws.
5. Both Funds have a fundamental investment restriction prohibiting the
purchase or sale of fee simple interests in real estate. The Florida
Tax-Free Fund's restriction clarifies, however, that such Fund may
purchase and sell other interests in real estate including securities
which are secured by real estate or securities of companies which own or
invest or deal in real estate.
6. The Tax-Exempt Fund has a fundamental investment restriction prohibiting
the Fund from investing in commodities or commodity contracts, except that
the Fund may invest in financial futures contracts and options on futures
contracts. The Florida Tax-Free Fund is subject to a fundamental
investment restriction prohibiting it from investing in commodities or
commodity contracts in excess of ten percent of the Fund's total assets
(except for investments in futures contracts and options on futures
contracts on securities or securities indices).
7. The Tax-Exempt Fund has a fundamental investment restriction prohibiting
the Fund from conducting arbitrage transactions (subject to certain
exceptions such as that the Fund may invest in futures and options for
hedging purposes). The Florida Tax-Free Fund has a nonfundamental
investment restriction against engaging in transactions in options except
in connection with options on securities, securities indices and
currencies, and options on futures on securities, securities indices and
currencies.
8. Both Funds are subject to substantially similar fundamental investment
restrictions which prohibit the lending of assets of the Funds, subject to
exceptions for the purchase of bonds, debentures, notes and similar
obligations (including repurchase agreements) in accordance with each
Fund's investment policies and objectives. In addition, the Florida
Tax-Free Fund may lend portfolio securities without violating this
restriction.
9. The Tax-Exempt Fund has a fundamental investment restriction regarding
illiquid securities which states that the Fund may not invest more than
ten percent of its total assets in illiquid securities, including
securities restricted as to resale and repurchase agreements extending for
more than seven days and other securities which are not readily
marketable. A current nonfundamental investment restriction of the Florida
Tax-Free Fund prohibits the purchase of any securities or the entering
into of a repurchase agreement if as a result more than 15% of the Fund's
total assets would be invested in securities that are not readily
marketable and
18
<PAGE>
repurchase agreements not entitling the holder to payment of principal
and interest within seven days.
10. The Tax-Exempt Fund has a fundamental investment restriction and the
Florida Tax-Free Fund has a non-fundamental investment restriction
prohibiting them from investing in interests in oil, gas or other mineral
exploration or development programs, subject to certain exceptions. The
Tax-Exempt Fund may invest in securities which are based, directly or
indirectly, on the credit of companies which invest in or sponsor such
exploration programs. The Florida Tax-Free Fund, on the other hand, may
invest in securities issued by companies which invest in or sponsor such
exploration programs and in securities indexed to the price of oil, gas or
other minerals.
11. The Florida Tax-Free Fund is subject to a fundamental investment
restriction which prohibits the Fund from making an investment which would
cause more than 25% of the value of the Fund's total assets to be invested
in securities issued in connection with the financing of projects with
similar characteristics. The Tax-Exempt Fund does not have such a
restriction.
12. The Tax-Exempt Fund is subject to a fundamental investment restriction
which prohibits the Fund from making an investment which would cause more
than 25% of the value of the Fund's total assets to be invested in
securities of issuers conducting their principal activities in the same
state. This restriction does not apply to investments in securities issued
or guaranteed by the U.S. Government or its agencies or instrumentalities
or backed by the U.S. Government). The Florida Tax-Free Fund does not have
such a restriction.
13. The Tax-Exempt Fund is subject to a fundamental investment restriction
that prohibits the borrowing of money (through reverse repurchase
agreements or otherwise) except for extraordinary and emergency purposes,
and then not in an amount in excess of ten percent of the value of its
total assets, provided that reverse repurchase agreements shall not exceed
five percent of its total assets and that additional investments will be
suspended during any period when borrowing exceeds five percent of total
assets. The Florida Tax-Free Fund has a fundamental investment restriction
stating that the Fund may not borrow money except for borrowings from
banks for extraordinary and emergency purposes, and then not in an amount
in excess of 25% of the value of its total assets, and except insofar as
reverse repurchase agreements may be regarded as borrowing.
14. Pursuant to a nonfundamental investment restriction, the Tax-Exempt Fund
may purchase securities of any company in which any officer or Trustee of
the Fund or its investment adviser owns more than one half of one percent
of the outstanding securities, or in which all of the officers and
Trustees of the Fund and its investment adviser, as a group, own more than
five percent of such securities. The Florida Tax-Free Fund does not have
such an investment restriction.
19
<PAGE>
15. Both Funds have a nonfundamental investment restriction stating that the
Fund may not hypothecate, mortgage or pledge any of its assets except to
secure permitted borrowings (and then, in the case of the Tax-Exempt Fund,
not in excess of ten percent of the Tax-Exempt Fund's assets). Under each
Fund's restriction, financial futures, options on financial futures and
similar arrangements are not deemed to involve a pledge of assets.
16. Both Funds have a nonfundamental investment restriction stating that the
Fund may not invest in companies for the purpose of exercising control
over the management of such companies.
17. Pursuant to substantially similar nonfundamental investment restrictions,
each Fund may not invest in securities of any other investment company,
except in connection with a merger, consolidation or similar
reorganization, if such investment would represent more than three percent
of the outstanding voting stock of such other company or more than five
percent of the value of the total assets of the Fund, or if such
investments in the aggregate would exceed ten percent of the value of the
total assets of the Fund.
18. The Florida Tax-Free Fund has a nonfundamental investment restriction
prohibiting the Fund from purchasing securities on margin or making short
sales of securities or maintaining a short position, except for short
sales "against the box" (as a matter of current operating, but not
fundamental policies, neither Fund will make short sales or maintain a
short position unless not more than five percent of the Fund's net assets
(taken at current value) is held as collateral for such sales at any
time). Similarly, the Tax-Exempt Fund is subject to a nonfundamental
investment restriction barring it from purchasing securities on margin,
making short sales of securities or purchasing or dealing in puts, calls,
straddles or spreads with respect to any security, except in connection
with the purchase or writing of options, including options on financial
futures, and futures contracts.
19. The Florida Tax-Free Fund is subject to a nonfundamental investment
restriction prohibiting the Fund from investing in warrants which would
comprise more than five percent of the value of its net assets, provided
that warrants not listed on the New York or American Stock Exchanges shall
be further limited to two percent of the Funds net assets. Warrants
initially attached to securities and acquired by the Fund upon original
issuance thereof shall be deemed to be without value. The Tax-Exempt Fund
is not subject to such a restriction.
COMPARATIVE INFORMATION ON DISTRIBUTION ARRANGEMENTS
Class A shares of each Fund 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 of each Fund 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 these
20
<PAGE>
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 of each Fund are offered only to certain pension and other
employee benefit plans, large institutions and under sponsored arrangements. 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 of each Fund 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.
Because the Reorganization will be effected at net asset value without the
imposition of a sales charge, Tax-Exempt Fund Shares acquired by shareholders of
the Florida Tax-Free Fund pursuant to the proposed Reorganization would not be
subject to any initial sales charge or contingent deferred sales charge as a
result of the Reorganization. However, holders of the Tax-Exempt Fund Shares
acquired as a result of the Reorganization would continue to be subject to a
contingent deferred sales charge upon subsequent redemption to the same extent
as if they had continued to hold their shares of the Florida Tax-Free Fund.
Each Fund has adopted a Plan of Distribution Pursuant to Rule 12b-1 (the
"Distribution Plan") in accordance with the regulations promulgated under 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:
Class of Shares
of Each Fund Service Fee Distribution Fee
-------------- ----------- ----------------
A 0.25% None
B 0.25% 0.75%
C None None
D 0.25% 0.75%
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. In addition,
the Distributor generally pays an initial commission to dealers for the sale of
shares of each Fund with a portion of such commission representing payment for
personal services and/or the maintenance of shareholder accounts by such
dealers. Dealers who have sold Class A shares of each Fund are eligible for
further reimbursement commencing as of the time of such sale. Dealers who have
sold Class B and Class D shares of each Fund are eligible for further
reimbursement after the first year during which such shares have been held of
record by such dealer as nominee for its clients (or by such clients directly).
Any service fees received by the
21
<PAGE>
Distributor and not allocated to dealers may be applied by the Distributor in
reduction of expenses incurred by it directly for personal services and/or 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. 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.
Class A shares of the Funds may be purchased without a sales charge by
certain Trustees, directors, officers, employees, their relatives and other
persons directly or indirectly related to the Funds or affiliated entities.
Class A shares of the Funds may also be sold at a reduced sales charge or
without a sales charge pursuant to certain sponsored arrangements or managed
fee-based programs.
COMPARATIVE INFORMATION ON SHAREHOLDER SERVICES
Each Fund offers the same shareholder services, including the Open Account
System, reinvestment privileges, a systematic withdrawal plan, a dividend
allocation plan, telephone purchases, telephone exchanges, telephone redemptions
and access to the Investamatic Check Program, an automatic investment program.
Because each Fund currently offers the same shareholder services, after the
closing of the proposed Reorganization the same services will continue to be
available to the shareholders of the Florida Tax-Free Fund.
FISCAL YEAR
Both Funds operate on fiscal years ending December 31.
PERFORMANCE
Tax-Exempt Fund
The following is a discussion of the performance of the Tax-Exempt Fund
for the six months ended June 30, 1995 and the fiscal year ended December 31,
1994.
The six months ended June 30, 1995 were better than the year ended
December 31, 1994. The Fund had a positive return through the first half of
1995, although it trailed the average for its category because the portfolio was
conservatively positioned. The Fund had shortened its duration (a measure of a
fund's sensitivity to interest rate changes) to protect it if interest rates
increased, as had happened throughout 1994. When interest rates fell sharply
instead, the Fund did not enjoy the full benefit of the market rally.
The Fund has extended its duration slightly, which will help in an
environment of falling rates. In addition, the Fund has upgraded the quality of
bonds in the portfolio and increased the percentage of insured bonds. As of June
30, 1995, the bonds in the portfolio had an average credit quality of AA.
Average Annual Total Return for periods ended June 30, 1995:
Life of Fund
1 year 5 years (since 8/25/86)
- ------- ------ ------- ---------------
Class A +1.46% +6.21% +6.49%
Class B +0.32% +6.53% +6.84%
Class C +6.38% +7.25% +7.08%
Class D +4.32% +6.83% +6.84%
In 1994, the bond market was repeatedly buffeted by uncertainty over the
strength of the economy and the timing of the Fed's next rate increase. When the
municipal bond market declined sharply in February, March and April 1994, the
Fund attempted to reduce risk in the portfolio by replacing longer-term bonds
with less interest-rate-sensitive, shorter-term bonds. In some cases we sold
bonds for losses and replaced them with higher-yielding, more defensive bonds.
The Fund also increased the quality of the portfolio, because higher quality
bonds tend to perform better in weak markets.
The portfolio holds a number of bonds from so-called "specialty
states"--states where there are tax incentives to buy in-state bonds or where
bonds tend to be in short supply. Typically, demand is fairly consistent for
such bonds, which can be advantageous in a bad market. Specialty states include
Massachusetts, North Carolina (which also offers very high quality), New York,
Ohio and Connecticut.
Comparison Of Change In Value Of A $10,000 Investment In Tax-Exempt Fund And
The Lehman Municipal Bond Index
State Street Research Tax-Exempt Fund - Class A
LINE CHART DATA
(INCEPTION VALUE = $9,550)
VALUE OF
ACCOUNT OF
VALUE OF LEHMAN MUNI BOND
ACCOUNT AT INDEX AT
DATE YEAR END YEAR END
8/25/86 $ 9,550 $10,000
12/31/86 9,889 10,371
12/31/87 9,748 10,527
12/31/88 11,063 11,597
12/31/89 12,128 12,849
12/31/90 12,713 13,785
12/31/91 14,213 15,459
12/31/92 15,538 16,821
12/31/93 17,420 18,888
12/31/94 16,218 17,911
State Street Research Tax-Exempt Fund - Class B
LINE CHART DATA
(INCEPTION VALUE = $10,000)
VALUE OF
ACCOUNT OF
VALUE OF LEHMAN MUNI BOND
ACCOUNT AT INDEX AT
DATE YEAR END YEAR END
8/25/86 $10,000 $10,000
12/31/86 10,355 10,371
12/31/87 10,208 10,527
12/31/88 11,585 11,597
12/31/89 12,699 12,849
12/31/90 13,313 13,785
12/31/91 14,883 15,459
12/31/92 16,270 16,821
12/31/93 18,165 18,888
12/31/94 16,786 17,911
State Street Research Tax-Exempt Fund - Class C
LINE CHART DATA
(INCEPTION VALUE = $10,000)
VALUE OF
ACCOUNT OF
VALUE OF LEHMAN MUNI BOND
ACCOUNT AT INDEX AT
DATE YEAR END YEAR END
8/25/86 $10,000 $10,000
12/31/86 10,355 10,371
12/31/87 10,208 10,527
12/31/88 11,585 11,597
12/31/89 12,699 12,849
12/31/90 13,313 13,785
12/31/91 14,883 15,459
12/31/92 16,270 16,821
12/31/93 18,224 18,888
12/31/94 17,028 17,911
State Street Research Tax-Exempt Fund - Class D
LINE CHART DATA
(INCEPTION VALUE = $10,000)
VALUE OF
ACCOUNT OF
VALUE OF LEHMAN MUNI BOND
ACCOUNT AT INDEX AT
DATE YEAR END YEAR END
8/25/86 $10,000 $10,000
12/31/86 10,355 10,371
12/31/87 10,208 10,527
12/31/88 11,585 11,597
12/31/89 12,699 12,849
12/31/90 13,313 13,785
12/31/91 14,883 15,459
12/31/92 16,270 16,821
12/31/93 18,163 18,888
12/31/94 16,784 17,911
All returns represent past performance, which is no guarantee of future
results. The investment return and principal value of an investment made in the
Tax-Exempt Fund will fluctuate and shares, when redeemed, may be worth more or
less than their original cost. All returns assume reinvestment of capital gain
distributions and income dividends. In March 1992, the Tax-Exempt Fund changed
its investment objective to eliminate requirements that specify that a
percentage of the Tax-Exempt Fund be invested in certain rating categories.
Previously, it was required to invest 80% in securities rated A, BBB, BB or
better. Past performance, therefore, may not be indicative of future results.
Shares of the Tax-Exempt Fund had no class designations until June 7, 1993, when
designations were assigned based on the pricing and 12b-1 fees applicable to
shares sold thereafter. Performance data for a specified class include periods
prior to the adoption of class designations. "A" share returns for each of the
periods reflect the maximum 4.5% sales charge. "B" share returns for the 1- and
5-year periods reflect a 5% and a 2% contingent deferred sales charge,
respectively. "C" shares, offered without a sales charge, are available only to
certain employee benefit plans and large institutions. "D" share return for the
1-year period reflects a 1% contingent deferred sales charge. Performance for
"B" and "D" shares prior to June 7, 1993, reflects annual 12b-1 fees of .25% and
performance thereafter reflects annual 12b-1 fees of 1%, which will reduce
subsequent performance. The Lehman Muni Bond Index represents approximately
15,000 fixed-coupon, investment-grade municipal bonds. The index is unmanaged
and does not take sales charges into consideration. Direct investment in the
index is not possible; results are for illustrative purposes only.
Further information about each Fund's performance is contained in each
Fund's annual and semiannual reports, which may be obtained without charge by
writing to the Funds at One Financial Center, Boston, Massachusetts 02111, or
calling (800) 562-0032.
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COMPARATIVE INFORMATION ON SHAREHOLDER RIGHTS
General. The Florida Tax-Free Fund and the Tax-Exempt Fund are series of
the Trust which was established in 1985 under the laws of The Commonwealth of
Massachusetts. The Florida Tax-Free Fund commenced operations in 1993, and the
Tax-Exempt Fund commenced operations in 1986. Both Funds are governed by a
Second Amended and Restated Master Trust Agreement dated June 5, 1993, as
further amended thereafter. As a Massachusetts business trust, the Trust's
operations are governed by its Master Trust Agreement and applicable federal and
Massachusetts laws. The above-referenced Master Trust Agreement may hereinafter
be referred to as the "Master Trust Agreement."
Shares of the Florida Tax-Free Fund and the Tax-Exempt Fund. The
beneficial interests in each of the Florida Tax-Free Fund and the Tax-Exempt
Fund are represented by transferable shares, par value $.001 per share. The
Master Trust Agreement permits the Trustees to issue an unlimited number of
shares and to divide such shares into an unlimited number of series. As of the
date hereof, the Trust has five operating series: the Florida Tax-Free Fund, the
Tax-Exempt Fund, State Street Research New York Tax-Free Fund, State Street
Research California Tax-Free Fund and State Street Research Pennsylvania
Tax-Free Fund. Each share of any Trust series represents an equal proportionate
interest in the assets and liabilities, excluding differences in class expenses
belonging to that series. As such, each share is entitled to dividends and
distributions out of the income (after expenses) belonging to that series as
declared by the Board of Trustees.
Voting Requirements. Generally, the provisions of the Master Trust
Agreement of the Trust may be amended at any time, so long as such amendment
does not adversely affect the rights of any shareholder with respect to which
such amendment is or purports to be applicable and so long as such amendment is
not in contravention of applicable law, by an instrument in writing signed by a
majority of the then Trustees (or by an officer of such Trust pursuant to the
vote of a majority of such Trustees). Generally, any amendment to the Trust's
Master Trust Agreement that adversely affects the rights of shareholders of one
or more series may be adopted by a majority of the then Trustees of the Trust
when authorized by shareholders holding a majority of the shares entitled to
vote.
Voting Rights. The Master Trust Agreement of the Trust provides that
special meetings of shareholders for any purpose requiring action by
shareholders under such Master Trust Agreement or the Trust's By-laws shall be
called upon the written request of holders of at least ten percent of the
outstanding shares of the Trust or, as the context may require, a series
thereof. The Master Trust Agreement of the Trust provides in general that
shareholders have the power to vote only on the following matters, each as more
fully described in such Master Trust Agreements: (i) the election or removal of
Trustees as provided in the Master Trust Agreement; (ii) with respect to certain
contracts, such as contracts for investment advisory or management services, to
the extent required as provided in the Master Trust Agreement as a whole; (iii)
with respect to any termination or reorganization of the Trust; (iv) an
amendment of the Master Trust Agreement as provided in the Master Trust
Agreement; (v) to the same extent as the stockholders of a Massachusetts
business corporation as to whether or not a court action, proceeding or claim
should or should not be brought
23
<PAGE>
or maintained derivatively or as a class action on behalf of the Trust, any
Sub-Trust thereof or its stockholders; and (vi) with respect to such additional
matters relating to the Trust as may be required by the 1940 Act, the Master
Trust Agreement, the By-laws or any registration of the Trust with the
Securities and Exchange Commission (or any successor agency) or any state, or as
the Trustees may consider necessary or desirable. Certain of the foregoing
matters will involve separate votes of one or more series of a Trust, while
others will require a vote of the Trust's shareholders as a whole.
Shareholder Liability. Under Massachusetts law, shareholders of a
Massachusetts business 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. The Master Trust Agreement of the Trust provides for
indemnification, under certain circumstances, out of Trust property for all
losses and expenses of any shareholder held personally liable by virtue of his
status as such, and not because of such shareholder's acts or omissions or for
some other reason, for the obligations of the Trust. Thus, the risk of a
shareholder incurring financial loss on account of shareholder liability is
considered by the Trust to be remote since it is limited to circumstances in
which a disclaimer is inoperative and the Trust itself would be unable to meet
its obligations.
Liability of Trustees and Officers. Under the Master Trust Agreement of
the Trust, Trustees and officers will be indemnified, under certain
circumstances, for all liabilities, including the expenses of litigation,
against them unless their conduct is determined to constitute willful
misfeasance, bad faith, gross negligence or reckless disregard of their duties,
such determination to be based upon the outcome of a court action or
administrative proceeding or a reasonable determination, following a review of
the facts, by (a) a vote of a majority of a quorum of the Trustees who are
neither "interested persons" of the Trust as defined in the 1940 Act nor parties
to the proceeding or (b) an independent legal counsel in a written opinion. The
Trust may also advance money for these expenses provided that the Trustee or
officer undertakes to repay the Trust if his or her conduct is later determined
to preclude indemnification and certain other conditions are met. It should be
noted that it is the view of the staff of the Securities and Exchange Commission
that to the extent that any provisions such as those described above are
inconsistent with the 1940 Act including Section 17 thereof, the provisions of
the 1940 Act are preemptive.
The foregoing is only a summary of certain of the provisions of the
Trust's Master Trust Agreement and By-laws. Shareholders should refer directly
to the provisions of the Master Trust Agreement and By-laws for their full
terms.
MANAGEMENT
The investment manager for each of the Funds 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. As
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<PAGE>
of June 30, 1995, the Investment Manager had assets of approximately $26.2
billion under management.
The portfolio manager for the Tax-Exempt Fund is Susan W. Drake. Ms. Drake
has managed the Tax-Exempt Fund since 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.
The portfolio managers for the Florida Tax-Free Fund are Ms. Drake and Paul
J. Clifford. Ms. Drake and Mr. Clifford have managed the Florida Tax-Free Fund
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.
ADDITIONAL INFORMATION ABOUT THE FUNDS
Information about the Tax-Exempt Fund is included in its current
Prospectus dated May 1, 1995, a copy of which is included herewith and
incorporated by reference herein. Additional information about the Tax-Exempt
Fund is included in the Fund's Statement of Additional Information dated May 1,
1995. This Statement of Additional Information has been filed with the
Securities and Exchange Commission (the "SEC") and is incorporated by reference
herein. Copies of this Statement may be obtained without charge by writing to
State Street Research Tax-Exempt Fund, One Financial Center, Boston,
Massachusetts 02111, or by calling (800) 562-0032.
Information about the Florida Tax-Free Fund is included in its current
Prospectus dated May 1, 1995, which is incorporated by reference herein.
Additional information about the Florida Tax-Free Fund is included in the Fund's
Statement of Additional Information dated May 1, 1995. This Statement of
Additional Information has been filed with the SEC and is incorporated by
reference herein. Copies of this Statement may be obtained without charge by
writing to State Street Research Florida Tax-Free Fund, One Financial Center,
Boston, Massachusetts 02111 or by calling (800) 562-0032.
Each Fund is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended, and the 1940 Act, and in accordance therewith
files proxy material, reports and other information with the Securities and
Exchange Commission. These reports can be inspected and copied at the Public
Reference Facilities maintained by the Securities and Exchange Commission at
Judiciary Plaza, 450 Fifth Street, N.W., Washington, DC 20549, as well as at the
following regional offices: New York Regional Office, 75 Park Place, Room 1228,
New York, NY 10007; and Chicago Regional Office, Northwestern Atrium Center, 500
West Madison Street, Suite 1400, Chicago IL 60661. Copies of such material can
also be obtained from the Public Reference Branch, Office of Consumer Affairs
and Information Services, Securities and Exchange Commission, Judiciary Plaza,
450 Fifth Street, N.W., Washington DC 20549 at prescribed rates.
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VOTING INFORMATION
Any shareholder who has given a proxy has the right to revoke it at any
time prior to its exercise by attending the Meeting and voting his or her shares
in person or by submitting a written notice of revocation or a later-dated proxy
to the Trust at the address of the Trust set forth on the cover page of this
Joint Proxy Statement/Prospectus prior to the date of the Meeting. Shareholders
of record of the Florida Tax-Free Fund at the close of business on [__________,]
1995 (the "Record Date") will be entitled to notice of, and to vote at, the
Meeting of the Fund or to vote at any adjournments thereof. This Joint Proxy
Statement/Prospectus, proxies and accompanying Notice of Meeting were first sent
or given to shareholders of the Funds on or about [__________,] 1995.
As of the Record Date, there were approximately [_______], [______],
[_______] and [_____] issued and outstanding Class A, Class B, Class C and Class
D shares, respectively, of the Florida Tax-Free Fund. Each share of such Fund is
entitled to one vote, with a proportionate vote for each fractional share.
If the enclosed proxy is properly executed and returned in time to be
voted at the Meeting, the shares represented thereby will be voted in accordance
with the instructions on the proxy. Unless instructions to the contrary are
marked thereon, the proxy will be voted for the proposal described herein and,
in the discretion of the persons named herein as proxies, to take such further
action as they may determine appropriate in connection with any other matter
which may properly come before the Meeting or any adjournments thereof. The
Board of Trustees does not currently know of any matter to be considered at the
Meeting other than the proposal to approve the Plan of Reorganization.
The affirmative vote of the holders of a majority of the outstanding
voting shares of the Florida Tax-Free Fund (within the meaning of the 1940 Act),
voting together as a single class, is required to approve the Plan of
Reorganization on behalf of such Fund. Under the 1940 Act, the vote of a
majority of the outstanding voting shares means the vote of the lesser of (a)
67% or more of the voting shares of a Fund, voting together as a single class,
present at the Meeting, if the holders of more than 50% of the outstanding
voting shares are present or represented by proxy, or (b) more than 50% of the
outstanding voting shares of a Fund, voting together as a single class. Approval
of the Plan of Reorganization by the shareholders of the Florida Tax-Free Fund
is a condition of the consummation of the Reorganization. If the Reorganization
is not approved, the Trustees of the Trust will continue the management of the
Florida Tax-Free Fund and the Tax-Exempt Fund, respectively, and may consider
other alternatives in the best interests of each Fund's shareholders.
The holders of a majority of the shares entitled to vote of the Florida
Tax-Free Fund outstanding at the close of business on the Record Date present in
person or represented by proxy constitute a quorum for the Meeting; however, as
noted above, the affirmative vote of a majority of the shares of such Fund,
voting together as a single class (within the meaning of the 1940 Act) is
required to approve the Reorganization. In the event a quorum is not present at
the Meeting or in the event a quorum is present at the Meeting but sufficient
votes to approve the Plan of Reorganization are not received, the persons named
as proxies may propose one or more adjournments without further notice to
26
<PAGE>
shareholders of the Meeting to permit further solicitation of proxies provided
such persons determine, after consideration of all relevant factors, including
the nature of the proposal, the percentage of votes then cast, the percentage of
negative votes then cast, the nature of the proposed solicitation activities and
the nature of the reasons for such further solicitation, that an adjournment and
additional solicitation is reasonable and in the interests of shareholders.
For purposes of determining the presence of a quorum for transacting
business at the Meeting and for determining whether sufficient votes have been
received for approval of the proposal to be acted upon at the Meeting,
abstentions and broker "non-votes" (that is, proxies from brokers or nominees
indicating that such persons have not received instructions from the beneficial
owner or other persons entitled to vote shares on a particular matter with
respect to which the brokers or nominees do not have discretionary power) will
be treated as shares that are present at the Meeting, but which have not been
voted. For this reason, abstentions and broker non-votes will assist the Florida
Tax-Free Fund in obtaining a quorum, but both have the practical effect of a
"no" vote for purposes of obtaining the requisite vote for approval of the
proposals to be acted upon at the Meeting.
Expenses of the Reorganization will be apportioned between the Distributor
and the Funds in a fair and equitable manner. The Distributor will assume
one-half of the expenses and the other half will be allocated to the Tax-Exempt
Fund and the Florida Tax-Free Fund in an appropriate manner on the basis of
identifiable direct costs or otherwise on the basis of relative net assets. Such
expenses include costs of preparing, printing and mailing the enclosed proxy,
accompanying notice and Joint Proxy Statement/Prospectus and all other costs in
connection with solicitation of proxies, including any additional solicitation
by letter, telephone or telegraph. In addition to solicitation of proxies by
mail, officers of the Trust and officers and regular employees of the Investment
Manager, affiliates of the Investment Manager, or other representatives of the
Trust may also solicit proxies by telephone or telegram or in person. A proxy
solicitation firm may also be retained to assist in any special, personal
solicitation of proxies. The costs of retaining such a firm is not expected to
exceed [$____].
THE TRUSTEES OF THE TRUST, INCLUDING THE
INDEPENDENT TRUSTEES OF THE TRUST,
RECOMMEND APPROVAL OF THE PLAN OF REORGANIZATION.
DISSENTERS' RIGHTS
Neither the Master Trust Agreement of the Trust nor Massachusetts law
grants the shareholders of the Florida Tax-Free Fund any rights in the nature of
dissenters' rights of appraisal with respect to any action upon which such
shareholders may be entitled to vote; however, the normal right of mutual fund
shareholders to redeem their shares is not affected by the proposed
Reorganization.
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<PAGE>
EXPERTS
The financial statements of the Tax-Exempt Fund and the Florida Tax-Free
Fund for the fiscal year ended December 31, 1994 included in each Fund's
Statement of Additional Information have been incorporated herein by reference
in reliance on the reports of Price Waterhouse LLP, independent accountants,
given on the authority of that firm as experts in accounting and auditing.
Certain legal matters with respect to the issuance of the shares of the Trust
will be passed upon by Goodwin, Procter & Hoar, Boston, Massachusetts.
OTHER MATTERS
The Board of Trustees does not intend to present any other business at the
Meeting, nor are they aware that any shareholder intends to do so. If, however,
any other matters are properly brought before the Meeting, the persons named in
the accompanying proxy will vote thereon in accordance with their judgment.
NO ANNUAL MEETING OF SHAREHOLDERS
There will be no annual or further special meetings of shareholders of the
Funds unless required by applicable law or called by the Trustees of such Fund
in their discretion. In accordance with the 1940 Act, or under the Trust's
Master Trust Agreement, as amended, any Trustee may be removed (i) by a written
instrument, signed by at least two-thirds of the number of Trustees in office
immediately prior to such removal, specifying the date upon which such removal
shall become effective; (ii) by a vote of shareholders holding not less than
two-thirds of the shares of the Trust then outstanding, cast in person or by
proxy at a meeting called for the purpose or (iii) by a written declaration
signed by shareholders holding not less than two-thirds of the shares then
outstanding and filed with the Trust's custodian. Shareholders holding 10% or
more of the shares of the Trust then outstanding can require that the Trustees
call a meeting of shareholders for the purpose of voting on the removal of one
or more Trustees. In addition, if ten or more shareholders who have been such
for at least six months and who hold in the aggregate shares with a net asset
value of at least $25,000 or at least 1% of the outstanding Fund shares, inform
the Trustees that they wish to communicate with other shareholders, the Trustees
will either give such shareholders access to the shareholder list or inform them
of the cost involved if the Funds forward material to shareholders on their
behalf. If the Trustees object to mailing such materials, they must inform the
Securities and Exchange Commission and thereafter comply with the requirements
of the 1940 Act.
Shareholders wishing to submit proposals for inclusion in a proxy
statement for a subsequent shareholder meeting should send their written
proposals to the Secretary of the State Street Research Tax-Exempt Trust, One
Financial Center, 31st Floor, Boston, Massachusetts 02111. Shareholder proposals
should be received in a reasonable time before the solicitation is made.
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WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING, PLEASE FILL IN, DATE AND
SIGN THE ENCLOSED PROXY AND RETURN IT PROMPTLY IN THE ENCLOSED ENVELOPE. NO
POSTAGE IS NECESSARY IF IT IS MAILED IN THE UNITED STATES.
202694.c1
<PAGE>
EXHIBIT A
AGREEMENT AND PLAN OF REORGANIZATION AND LIQUIDATION
AGREEMENT AND PLAN OF REORGANIZATION AND LIQUIDATION dated as of
_________, 1995 by and between State Street Research Tax-Exempt Trust, a
Massachusetts business trust (the "Tax-Exempt Trust"), on behalf of the State
Street Research Florida Tax-Free Fund series of the Tax-Exempt Trust (the
"Florida Tax-Free Fund") and the Tax-Exempt Trust on behalf of the State Street
Research Tax-Exempt Fund series of the Tax-Exempt Trust (the "Tax-Exempt Fund").
W I T N E S S E T H:
WHEREAS, the Tax-Exempt Trust is a diversified, open-end management
investment company registered under the Investment Company Act of 1940, as
amended (the "1940 Act");
WHEREAS, this Agreement is intended to be and is adopted as a plan of
reorganization and liquidation within the meaning of Section 368(a)(1)(C) of the
Internal Revenue Code of 1986, as amended, such reorganization to consist of the
transfer of all of the assets of the Florida Tax-Free Fund in exchange solely
for Class A, Class B, Class C and Class D shares of common stock, $.001 par
value per share, of the Tax-Exempt Fund ("Tax-Exempt Fund Shares") and the
assumption by the Tax-Exempt Fund of all of the stated liabilities of Florida
Tax-Free Fund and the distribution, after the Closing hereinafter referred to,
of Tax-Exempt Fund Shares to the shareholders of the Florida Tax-Free Fund in
liquidation of the Florida Tax-Free Fund, all upon the terms and conditions
hereinafter set forth in this Agreement (collectively, the "Reorganization");
and
WHEREAS, the Trustees of the Tax-Exempt Trust, including a majority of the
Trustees and the Trustees who are not interested persons, have determined that
participating in the transactions contemplated by this Agreement is in the best
interests of each of the Funds.
NOW, THEREFORE, in consideration of the mutual promises herein contained,
the parties hereto agree as follows:
1. Transfer of Assets. Subject to the terms and conditions set forth
herein, at the closing provided for in Section 5 (herein referred to as the
"Closing") the Tax-Exempt Trust on behalf of the Florida Tax-Free Fund shall
transfer all of the assets of the Florida Tax-Free Fund, and assign all Assumed
Liabilities (as hereinafter defined) to the Tax-Exempt Fund, and the Tax-Exempt
Trust on behalf of the Tax-Exempt Fund shall acquire all such assets, and shall
assume all such Assumed Liabilities (as hereinafter defined), upon delivery to
the Tax-Exempt Trust on behalf of the Florida Tax-Free Fund of Tax-Exempt Fund
Shares having a net asset value equal to the value of the net assets of the
Florida Tax-Free Fund transferred (the "New Shares"). "Assumed Liabilities"
shall mean all liabilities, including all expenses, costs, charges and reserves
reflected in an unaudited statement of assets and liabilities of the Florida
Tax-Free Fund as of the close of business on the Valuation Date (as hereinafter
defined), determined in accordance with generally accepted accounting principles
consistently applied from the prior audited period. The net asset value of the
New Shares and the value of the net assets of the Florida Tax-Free Fund to be
transferred shall be determined as of the close of regular trading on the New
York Stock Exchange on the business day next preceding the Closing (the
"Valuation Date") using the valuation procedures set forth in the then current
prospectus and statement of additional information
<PAGE>
of the Tax-Exempt Fund. All Assumed Liabilities of the Florida Tax-Free Fund, to
the extent that they exist at or after the Closing, shall after the Closing
attach to the Tax-Exempt Fund and may be enforced against Tax-Exempt Fund to the
same extent as if the same had been incurred by Tax-Exempt Fund.
2. Liquidation of the Florida Tax-Free Fund. At or as soon as practicable
after the Closing, the Florida Tax-Free Fund will be liquidated and the New
Shares delivered to the Tax-Exempt Trust on behalf of the Florida Tax-Free Fund
will be distributed to shareholders of the Florida Tax-Free Fund, each
shareholder to receive the number of New Shares of the corresponding class and
equal to the pro rata portion of shares of beneficial interest of the Florida
Tax-Free Fund held by such shareholder as of the close of business on the
Valuation Date. Such liquidation and distribution will be accompanied by the
establishment of an open account on the share records of the Tax-Exempt Fund in
the name of each shareholder of the Florida Tax-Free Fund and representing the
respective pro rata number of New Shares due such shareholder. As soon as
practicable after the Closing, the Tax-Exempt Trust shall file on behalf of the
Florida Tax-Free Fund such instruments of dissolution, if any, as are necessary
to effect the dissolution of the Florida Tax-Free Fund and shall take all other
steps necessary to effect a complete liquidation and dissolution of the Florida
Tax-Free Fund. As of the Closing, each outstanding certificate which, prior to
the Closing, represented shares of the Florida Tax-Free Fund will be deemed for
all purposes to evidence ownership of the number of Tax-Exempt Fund Shares
issuable with respect thereto pursuant to the Reorganization. After the Closing,
certificates originally representing shares of Class A or Class C of the Florida
Tax-Free Fund will be rendered null and void and nonnegotiable; upon special
request and surrender of such certificates to State Street Bank and Trust
Company as transfer agent, holders of these nonnegotiable certificates shall be
entitled to receive certificates representing the number of Tax-Exempt Fund
Shares issuable with respect thereto. All Class B and Class D shares of the
Tax-Exempt Fund are held of record in book entry form and no certificates for
such shares will be issued.
3. Representations and Warranties.
(a) The Tax-Exempt Trust, on behalf of the Florida Tax-Free Fund,
hereby represents and warrants to the Tax-Exempt Fund as follows:
(i) the Tax-Exempt Trust is duly organized, validly
existing and in good standing under the laws of The Commonwealth of
Massachusetts and has full power and authority to conduct its business
as presently conducted;
(ii) the Tax-Exempt Trust has full power and authority to
execute, deliver and carry out the terms of this Agreement on behalf of
the Florida Tax-Free Fund;
(iii) the execution and delivery of this Agreement on behalf of
the Florida Tax-Free Fund and the consummation of the transactions
contemplated hereby are duly authorized and no other proceedings on the
part of the Tax-Exempt Trust or the shareholders of the Florida Tax-Free
Fund (other than as contemplated in Section 4(h)) are necessary to
authorize this Agreement and the transactions contemplated hereby;
(iv) this Agreement has been duly executed by the Tax-Exempt
Trust on behalf of the Florida Tax-Free Fund and constitutes its valid and
binding obligation, enforceable in accordance with its terms, subject to
applicable bankruptcy, reorganization, insolvency, moratorium and other
rights affecting creditors' rights generally, and general equitable
principles;
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(v) neither the execution and delivery of this Agreement by the
Tax-Exempt Trust on behalf of the Florida Tax-Free Fund, nor the
consummation by the Tax-Exempt Trust on behalf of the Florida Tax-Free
Fund of the transactions contemplated hereby will conflict with, result in
a breach or violation of or constitute (or with notice, lapse of time or
both constitute) a breach of or default under, the Master Trust Agreement
or By-Laws of the Tax-Exempt Trust, or any statute, regulation, order,
judgment or decree, or any instrument, contract or other agreement to
which the Tax-Exempt Trust is a party or by which the Tax-Exempt Trust or
any of its assets is subject or bound; and
(vi) no authorization, consent or approval of any governmental
or other public body or authority or any other party is necessary for the
execution and delivery of this Agreement by the Tax-Exempt Trust on behalf
of the Florida Tax-Free Fund or the consummation of any transactions
contemplated hereby by the Tax-Exempt Trust, other than as shall be
obtained at or prior to the Closing.
(b) The Tax-Exempt Trust, on behalf of the Tax-Exempt Fund, hereby
represents and warrants to the Florida Tax-Free Fund as follows:
(i) The Tax-Exempt Trust is duly organized, validly
existing and in good standing under the laws of The Commonwealth of
Massachusetts and has full power and authority to conduct its business
as presently conducted;
(ii) The Tax-Exempt Trust has full power and authority to
execute, deliver and carry out the terms of this Agreement on behalf of
the Tax-Exempt Fund;
(iii) the execution and delivery of this Agreement on behalf of
the Tax-Exempt Fund and the consummation of the transactions contemplated
hereby are duly authorized and no other proceedings on the part of the
Tax-Exempt Trust or the shareholders of the Tax-Exempt Fund are necessary
to authorize this Agreement and the transactions contemplated hereby;
(iv) this Agreement has been duly executed by the Tax-Exempt
Trust on behalf of the Tax-Exempt Fund and constitutes its valid and
binding obligation, enforceable in accordance with its terms, subject to
applicable bankruptcy, reorganization, insolvency, moratorium and other
rights affecting creditors' rights generally, and general equitable
principles;
(v) neither the execution and delivery of this Agreement by the
Tax-Exempt Trust on behalf of the Tax-Exempt Fund, nor the consummation by
the Tax-Exempt Trust on behalf of the Tax-Exempt Fund of the transaction
contemplated hereby will conflict with, result in a breach or violation of
or constitute (or with notice, lapse of time or both constitute) a breach
of or default under, the Master Trust Agreement or By-Laws of the
Tax-Exempt Trust, or any statute, regulation, order, judgment or decree,
or any instrument, contract or other agreement to which the Tax-Exempt
Trust is a party or by which the Tax-Exempt Trust or any of its assets is
subject or bound; and
3
<PAGE>
(vi) no authorization, consent or approval of any
governmental or other public body or authority or any other party is
necessary for the execution and delivery of this Agreement by the
Tax-Exempt Trust on behalf of the Tax-Exempt Fund or the consummation
of any transactions contemplated hereby by the Tax-Exempt Trust, other
than as shall be obtained at or prior to the Closing.
4. Conditions Precedent. The obligations of the Tax-Exempt Trust on
behalf of the Florida Tax-Free Fund and the Tax-Exempt Trust on behalf of the
Tax-Exempt Fund to effectuate the plan of reorganization and liquidation
hereunder shall be subject to the satisfaction of the following conditions:
(a) At or immediately prior to the Closing, the Tax-Exempt Trust
shall have declared and paid a dividend or dividends which, together with all
previous such dividends, shall have the effect of distributing to the
shareholders of the Florida Tax-Free Fund all of such Fund's investment company
taxable income for taxable years ending at or prior to the Closing (computed
without regard to any deduction for dividends paid) and all of its net capital
gain, if any, realized in taxable years ending at or prior to the Closing (after
reduction for any capital loss carry-forward).
(b) A registration statement of the Tax-Exempt Fund on Form N-14
under the Securities Act of 1933, as amended (the "Securities Act"), registering
the New Shares under the Securities Act, and such amendment or amendments
thereto as are determined by the Board of Trustees of the Tax-Exempt Trust to be
necessary and appropriate to effect such registration of the New Shares (the
"Registration Statement"), shall have been filed with the Commission and the
Registration Statement shall have become effective, and no stop-order suspending
the effectiveness of such Registration Statement shall have been issued, and no
proceeding for that purpose shall have been initiated or threatened by the
Commission (and not withdrawn or terminated);
(c) The New Shares shall have been duly qualified for offering
to the public in all states in which such qualification is required for
consummation of the transactions contemplated hereunder;
(d) All representations and warranties of the Tax-Exempt Trust on
behalf of the Florida Tax-Free Fund contained in this Agreement shall be true
and correct in all material respects as of the date hereof and as of the
Closing, with the same force and effect as if then made, and the Tax-Exempt
Trust on behalf of the Tax-Exempt Fund shall have received a certificate of an
officer of the Tax-Exempt Trust acting on behalf of the Florida Tax-Free Fund to
that effect in form and substance reasonably satisfactory to the Tax-Exempt
Trust on behalf of the Tax-Exempt Fund;
(e) All representations and warranties of the Tax-Exempt Trust on
behalf of the Tax-Exempt Fund contained in this Agreement shall be true and
correct in all material respects as of the date hereof and as of the Closing,
with the same force and effect as if then made, and the Tax-Exempt Trust on
behalf of the Florida Tax-Free Fund shall have received a certificate of an
officer of the Tax-Exempt Trust acting on behalf of the Tax-Exempt Fund to that
effect in form and substance reasonably satisfactory to the Tax-Exempt Trust on
behalf of the Florida Tax-Free Fund;
(f) The Tax-Exempt Trust on behalf of the Florida Tax-Free Fund and
the Tax-Exempt Trust on behalf of the Tax-Exempt Fund shall have received an
opinion from Goodwin, Procter & Hoar regarding tax matters in connection with
the Reorganization;
4
<PAGE>
(g) The Tax-Exempt Trust on behalf of the Tax-Exempt Fund shall have
received an agreed upon procedures report, in accordance with established
accounting standards for such reports, of Price Waterhouse LLP, auditors for the
Tax-Exempt Trust, as to the unaudited statement of assets and liabilities
described in Section 1 of this Agreement; and
(h) A vote approving this Agreement and the Reorganization
contemplated hereby shall have been adopted by at least a majority of the
outstanding voting Class A, Class B, Class C and Class D shares of beneficial
interest of the Florida Tax-Free Fund (within the meaning of the 1940 Act),
voting together as a single class, entitled to vote at the special meeting of
shareholders of the Florida Tax-Free Fund duly called for such purpose.
(i) The Funds shall have received from the Commission an order
approving the Funds' application pursuant to Section 17(b) of the 1940 Act for
an order exempting the Reorganization from Section 17(a) of the 1940 Act and
pursuant to Rule 17d-1 under the 1940 Act for an order exempting the
Reorganization from Section 17(d) of the1940 Act and Rule 17d-1 thereunder.
5. Closing. The Closing shall be held at the offices of the Tax-Exempt
Trust and shall occur (a) immediately prior to the opening of business on the
first Monday following receipt of all necessary regulatory approvals and the
final adjournment of the meeting of shareholders of the Florida Tax-Free Fund at
which this Agreement is considered or (b) such later time as the parties may
agree. All acts taking place at the Closing shall be deemed to take place
simultaneously unless otherwise provided. At, or as soon as may be practicable
following the Closing, the Tax-Exempt Fund shall distribute the New Shares to
the Florida Tax-Free Fund Record Holders (as herein defined) by instructing the
Tax-Exempt Fund to register the appropriate number of New Shares in the names of
the Florida Tax-Free Fund's shareholders and the Tax-Exempt Fund agrees promptly
to comply with said instruction. The shareholders of record of the Florida
Tax-Free Fund as of the close of business on the Valuation Date shall be
certified by the Tax-Exempt Trust's transfer agent (the "Florida Tax-Free Fund
Record Holders").
6. Expenses. The expenses incurred in connection with the transactions
contemplated by this Agreement, whether or not the transactions contemplated
hereby are consummated, will be apportioned between State Street Research
Investment Services, Inc. (the "Distributor"), the distributor for each of the
Funds, and the Funds in a fair and equitable manner. The Distributor will assume
one-half of the expenses and the other half will be allocated to the Tax-Exempt
Fund and the Florida Tax-Free Fund on the basis of identifiable directs costs or
otherwise on the basis of relative net assets. Such expenses include, without
limitation, (i) expenses incurred in connection with the entering into and the
carrying out of the provisions of this Agreement; (ii) expenses associated with
the preparation and filing of the registration statement on Form N-14
contemplated hereby; (iii) registration or qualification fees and expenses of
preparing and filing such forms as are necessary to qualify the New Shares under
applicable blue sky laws; (iv) postage; (v) printing; (vi) accounting fees;
(vii) legal fees; and (viii) solicitation costs of the transaction.
7. Termination. This Agreement and the transactions contemplated hereby
may be terminated and abandoned by resolution of the Board of Trustees of the
Tax-Exempt Trust, at any time prior to the Closing, if circumstances should
develop that, in the opinion of the Board of Trustees, in its sole discretion,
make proceeding with this Agreement inadvisable. In the event of any such
termination, there shall be no liability for damages on the part of either the
Florida Tax-Free Fund or the Tax-Exempt Fund, or their respective trustees or
officers, to the other party or its trustees or officers.
5
<PAGE>
8. Amendments. This Agreement may be amended, waived or
supplemented in such manner as may be mutually agreed upon in writing by the
authorized officers of the Tax-Exempt Trust acting on behalf of the Florida
Tax-Free Fund and by the authorized officers of the Tax-Exempt Trust acting
on behalf of the Tax-Exempt Fund; provided, however, that following the
meeting of the Florida Tax-Free Fund shareholders called by the Tax-Exempt
Trust pursuant to Section 4(h) of this Agreement, no such amendment, waiver
or supplement may have the effect of changing the provisions for determining
the number of Tax-Exempt Fund Shares to be issued to the Florida Tax-Free
Fund shareholders under this Agreement to the detriment of such shareholders
without their further approval.
9. Governing Law. This Agreement shall be governed and construed in
accordance with the laws of The Commonwealth of Massachusetts, except as to
matters of conflicts of laws.
10. Further Assurances. The Tax-Exempt Trust shall take such further
action, prior to, at, and after the Closing, as may be necessary or desirable
and proper to consummate the transactions contemplated hereby.
11. Limitations of Liability. The term "Tax-Exempt Trust" means and
refers to the trustees from time to time serving under the Master Trust
Agreement of the Tax-Exempt Trust, as the same may subsequently thereto have
been, or subsequently hereto be, amended. It is expressly agreed that the
obligations of the Tax-Exempt Trust hereunder shall not be binding upon any of
the Trustees, shareholders, nominees, officers, agents or employees of the
Tax-Exempt Trust, personally, but bind only the assets and property of the
Florida Tax-Free Fund series of the Tax-Exempt Trust and the Tax-Exempt Fund
series of the Tax-Exempt Trust, as the case may be, as provided in the Master
Trust Agreement of the Tax-Exempt Trust. The execution and delivery of this
Agreement have been authorized by the Trustees of the Tax-Exempt Trust and
signed by an authorized officer of the Tax-Exempt Trust, acting as such, and
neither such authorization nor such execution and delivery shall be deemed to
have been made individually or to impose any personal liability, but shall bind
only the trust property of the Tax-Exempt Trust as provided in its Master Trust
Agreement. The Master Trust Agreement of the Tax-Exempt Trust provides, and it
is expressly agreed, that each Sub-Trust of the Tax-Exempt Trust shall be
charged with the liabilities in respect of that Sub-Trust and all expenses,
costs, charges or reserves belonging to that Sub-Trust.
6
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the date first set forth above by their duly authorized
representatives.
STATE STREET RESEARCH TAX-EXEMPT TRUST, on
behalf of its State Street Research Florida
Tax-Free Fund series
Attest:
- -------------------- ----------------------------
By:
ATTEST: STATE STREET RESEARCH TAX-EXEMPT TRUST,
on behalf of its State Street Research
Tax-Exempt Fund series
- --------------------- -----------------------------
By:
197933.c1
7/24/95
<PAGE>
JOINT PROXY STATEMENT/PROSPECTUS
Concerning the Acquisition of the Assets of
STATE STREET RESEARCH PENNSYLVANIA TAX-FREE FUND
By and in Exchange for Shares of
STATE STREET RESEARCH TAX-EXEMPT FUND
each a series of
State Street Research Tax-Exempt Trust
One Financial Center
Boston, Massachusetts 02111
(800) 562-0032
This Joint Proxy Statement/Prospectus relates to the proposed transfer of
the assets and liabilities of the State Street Research Pennsylvania Tax-Free
Fund (the "Pennsylvania Tax-Free Fund"), a series of the State Street Research
Tax-Exempt Trust (the "Trust"), a Massachusetts business trust, to the State
Street Research Tax-Exempt Fund (the "Tax-Exempt Fund"), another series of the
Trust in exchange for Class A, Class B, Class C and Class D shares of beneficial
interest, $.001 par value per share, of the Tax-Exempt Fund ("Tax-Exempt Fund
Shares"). Following such transfer, Tax-Exempt Fund Shares will be distributed to
shareholders of the Pennsylvania Tax-Free Fund in liquidation of the
Pennsylvania Tax-Free Fund, and the Pennsylvania Tax-Free Fund will be
dissolved. As a result of the proposed transaction, each shareholder will
receive in exchange for his or her shares of the Pennsylvania Tax-Free Fund
shares of the corresponding class of the Tax-Exempt Fund with an aggregate value
equal to the value of such shareholder's shares of the Pennsylvania Tax-Free
Fund, calculated as of the close of business on the business day immediately
prior to the exchange.
This Joint Proxy Statement/Prospectus is furnished to the shareholders of
the Pennsylvania Tax-Free Fund in connection with the solicitation of proxies by
and on behalf of the Trust's Board of Trustees to be used at a Special Meeting
of Shareholders of the Pennsylvania Tax-Free Fund to be held at the offices of
the Trust, One Financial Center, 31st Floor, Boston, Massachusetts 02111, at
4:00 p.m. local time on [________], 1995 and at any adjournments thereof (the
"Meeting"). This document also serves as a Prospectus of the Tax-Exempt Fund and
covers the proposed issuance of Tax-Exempt Fund Shares. The Pennsylvania
Tax-Free Fund and the Tax-Exempt Fund may hereinafter be referred to
<PAGE>
collectively as the "Funds" and individually as a "Fund." The Board of Trustees
of the Trust may hereinafter be referred to as the "Board of Trustees."
The investment objective of the Tax-Exempt Fund, a diversified series of
the Trust, an open-end management investment company, is to seek a high level of
interest income exempt from federal income taxes. In seeking to achieve its
investment objective, the Tax-Exempt Fund invests primarily in tax-exempt debt
obligations which the investment manager of the Fund believes will not involve
undue risk.
This Joint Proxy Statement/Prospectus, which should be retained for future
reference, sets forth concisely the information that a shareholder of the
Tax-Exempt Fund and the Pennsylvania Tax-Free Fund should know before investing.
This Joint Proxy Statement/Prospectus is accompanied by the Prospectus of the
Tax-Exempt Fund dated May 1, 1995, which is incorporated by reference herein.
The Prospectus of the Pennsylvania Tax-Free Fund dated May 1, 1995 is
incorporated by reference herein. A Statement of Additional Information dated
[_________], 1995 containing additional information relevant to the proposed
transaction has been filed with the Securities and Exchange Commission and is
incorporated by reference into this Joint Proxy Statement/Prospectus. A copy of
such Statement and a copy of the Prospectus of the Pennsylvania Tax-Free Fund
may be obtained without charge by writing to the Tax-Exempt Fund, One Financial
Center, Boston, Massachusetts 02111, or by calling toll-free (800) 562-0032.
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 UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
________ __, 1995
Date of Joint Proxy Statement/Prospectus
2
<PAGE>
TABLE OF CONTENTS
Page
SUMMARY ................................................................... 4
RISK FACTORS .............................................................. 10
REASONS FOR THE REORGANIZATION ............................................ 11
INFORMATION ABOUT THE REORGANIZATION ...................................... 12
COMPARISON OF INVESTMENT OBJECTIVES AND POLICIES .......................... 16
COMPARATIVE INFORMATION ON DISTRIBUTION ARRANGEMENTS ...................... 20
COMPARATIVE INFORMATION ON SHAREHOLDER SERVICES ........................... 22
FISCAL YEAR ............................................................... 22
PERFORMANCE ............................................................... 22
COMPARATIVE INFORMATION ON SHAREHOLDER RIGHTS ............................. 22
MANAGEMENT ................................................................ 24
ADDITIONAL INFORMATION ABOUT THE FUNDS .................................... 25
VOTING INFORMATION ........................................................ 26
DISSENTERS' RIGHTS ........................................................ 27
EXPERTS ................................................................... 28
OTHER MATTERS ............................................................. 28
NO ANNUAL MEETING OF SHAREHOLDERS ......................................... 28
Exhibit A: Agreement and Plan of Reorganization and Liquidation ........... A-1
3
<PAGE>
SUMMARY
The following is a summary of certain information contained in or
incorporated by reference in this Joint Proxy Statement/Prospectus. This summary
is not intended to be a complete statement of all material features of the
proposed Reorganization (as hereinafter defined) and is qualified in its
entirety by reference to the full text of this Joint Proxy Statement/Prospectus
and the documents referred to herein.
Proposed Transaction. The Board of Trustees of the Trust has approved an
Agreement and Plan of Reorganization and Liquidation (the "Plan of
Reorganization") providing for the transfer of all of the assets of the
Pennsylvania Tax-Free Fund to the Tax-Exempt Fund (subject to the assumption by
the Tax-Exempt Fund of all of the liabilities of the Pennsylvania Tax-Free Fund
including those reflected on a statement of assets and liabilities of that Fund
as of the close of business on the Valuation Date, as hereinafter defined) in
exchange for Tax-Exempt Fund Shares at a closing to be held following the
satisfaction of the conditions to the Reorganization (the "Closing"). The
aggregate net asset value of full and fractional Tax-Exempt Fund Shares to be
issued to shareholders of the Pennsylvania Tax-Free Fund will equal the value of
the aggregate net assets of the Pennsylvania Tax-Free Fund as of the close of
business on the business day immediately prior to the Closing (the "Valuation
Date"). The number of Class A, Class B, Class C and Class D shares (which may
hereinafter be referred to collectively as the "shares" or individually as a
"share") to be issued to the Pennsylvania Tax-Free Fund will be determined by
dividing (a) the aggregate net assets attributable to each class of shares of
the Pennsylvania Tax-Free Fund by (b) the net asset value per Class A, Class B,
Class C and Class D share, respectively, of the Tax-Exempt Fund, each computed
as of the close of business on the Valuation Date. Tax-Exempt Fund Shares will
be distributed to shareholders of the Pennsylvania Tax-Free Fund in liquidation
of the Pennsylvania Tax-Free Fund, and the Pennsylvania Tax-Free Fund will be
dissolved. The proposed transaction described above is referred to in this Joint
Proxy Statement/Prospectus as the "Reorganization."
As a result of the Reorganization, each shareholder will receive, in
exchange for his or her shares of the Pennsylvania Tax-Free Fund, shares of the
corresponding class of the Tax-Exempt Fund with an aggregate value equal to the
value of such shareholder's shares of the Pennsylvania Tax-Free Fund, calculated
as of the close of business on the Valuation Date. For example, Class A
shareholders of the Pennsylvania Tax-Free Fund would receive Class A shares of
the Tax-Exempt Fund.
At or prior to the Closing, the Pennsylvania Tax-Free Fund shall declare a
dividend or dividends which, together with all previous such dividends, shall
have the effect of distributing to the Pennsylvania Tax-Free Fund's shareholders
all of the Pennsylvania Tax-Free Fund's investment company income for all
taxable years ending at or prior to the Closing (computed without regard to any
deduction for dividends paid) and all of its net capital gains realized (after
reduction for any capital loss carry-forward) in all taxable years ending at or
prior to the Closing. The Trustees, including the Trustees who are not
"interested persons" of the Trust as defined in the Investment Company Act of
1940, as amended (the "1940 Act"), have determined
4
<PAGE>
that the interests of existing shareholders of the Pennsylvania Tax-Free Fund
and the Tax-Exempt Fund, respectively, will not be diluted as a result of the
transactions contemplated by the Reorganization and that the Reorganization
would be in the best interests of the shareholders of the Pennsylvania Tax-Free
Fund and the Tax-Exempt Fund, respectively. See "Information About the
Reorganization."
The Trustees of the Trust recommend that the shareholders of the
Pennsylvania Tax-Free Fund vote FOR approval of the Plan of Reorganization.
Approval of the Plan of Reorganization by the shareholders of the
Pennsylvania Tax-Free Fund is a condition of the consummation of the
Reorganization. The affirmative vote of the holders of a majority of the
outstanding voting shares of such Fund (within the meaning of the 1940 Act),
voting together as a single class, is required to approve the Plan of
Reorganization on behalf of such Fund. A "majority" vote is defined in the 1940
Act as the vote of the holders of the lesser of (a) 67% or more of the voting
shares of a Fund, voting together as a single class, present at the Meeting, if
the holders of more than 50% of the outstanding voting shares are present or
represented by proxy, or (b) more than 50% of the outstanding voting shares of a
Fund, voting together as a single class. See "Voting Information."
Tax Consequences. Counsel to the Funds, Goodwin, Procter & Hoar, has
opined that, subject to customary assumptions and representations, upon
consummation of the Reorganization and the transfer of substantially all of the
assets of the Pennsylvania Tax-Free Fund to the Tax-Exempt Fund: (i) the
transfer of all the assets of the Pennsylvania Tax-Free Fund for Tax-Exempt Fund
Shares and the assumption by the Tax-Exempt Fund of all liabilities of the
Pennsylvania Tax-Free Fund will constitute a "reorganization" for federal income
tax purposes, and the Pennsylvania Tax-Free Fund and the Tax-Exempt Fund will
each be a "party to a reorganization" for federal income tax purposes; (ii) no
gain or loss will be recognized by the Tax-Exempt Fund or the Pennsylvania
Tax-Free Fund upon the transfer of the Pennsylvania Tax-Free Fund assets to the
Tax-Exempt Fund in exchange for Tax-Exempt Fund Shares; (iii) no gain or loss
will be recognized by shareholders of the Pennsylvania Tax-Free Fund upon the
exchange of shares of the Pennsylvania Tax-Free Fund for Tax-Exempt Fund Shares;
(iv) the basis of Tax-Exempt Fund Shares received by each Pennsylvania Tax-Free
Fund shareholder pursuant to the Reorganization will be the same as the basis of
the Pennsylvania Tax-Free Fund shares exchanged therefor; and (v) the basis of
the Pennsylvania Tax-Free Fund assets in the hands of the Tax-Exempt Fund will
be the same as the basis of such assets in the hands of the Pennsylvania
Tax-Free Fund immediately prior to the Reorganization. The receipt of such an
opinion upon the Closing is a condition to the Reorganization. See "Information
About the Reorganization."
Investment Objectives and Policies. Unlike the Pennsylvania Tax-Free Fund,
the Tax-Exempt Fund does not include as an investment objective the earning of
interest income exempt from Pennsylvania State personal income taxes. In other
respects, however, the investment objectives, policies and restrictions of the
Funds are substantially similar. To the extent that there are other differences
in the policies and restrictions of the Funds, shareholders
5
<PAGE>
should consider such differences. These differences are discussed below under
"Comparison of Investment Objectives and Policies."
The investment objective of the Pennsylvania Tax-Free Fund is to seek a
high level of interest income exempt from federal income taxes and Pennsylvania
State personal income taxes. The Fund invests primarily in investment grade
securities issued by or on behalf of the State of Pennsylvania or its political
subdivisions and by other governmental entities. The Pennsylvania Tax-Free Fund
may invest up to 25% of the Fund's assets in securities rated as low as CC by
Standard & Poor's Corporation ("S&P") or Ca by Moody's Investors Service, Inc.
("Moody's") or unrated securities that the Investment Manager (as hereinafter
defined) believes to be of equivalent investment quality to comparably rated
securities. During the current year, the Investment Manager (as defined herein)
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 similar investment quality.
The investment objective of the Tax-Exempt Fund is to seek a high level of
interest income exempt from federal income taxes. The Fund invests primarily in
investment grade tax-exempt debt obligations. The Tax-Exempt Fund may invest up
to 20% of the Fund's assets in securities rated below BBB by S&P or Baa by
Moody's or unrated securities that the Investment Manager (as hereinafter
defined) believes to be of equivalent investment quality to comparably rated
securities.
Management and Other Service Providers. The business affairs of the Trust
are managed by its Board of Trustees. For each of the Funds, State Street
Research & Management Company (the "Investment Manager") serves as investment
adviser, State Street Research Investment Services, Inc. serves as distributor
(the "Distributor") and State Street Bank and Trust Company serves as custodian
and as transfer agent and dividend paying agent ("SSBT").
The Investment Manager and the Distributor are indirect wholly-owned
subsidiaries of Metropolitan Life Insurance Company ("Metropolitan Life"). SSBT
is not affiliated with the Investment Manager, the Distributor, Metropolitan
Life, the Trust or the Funds. See "Management."
6
<PAGE>
Advisory Fees and Expenses. The following tables summarize the shareholder
transaction expenses applicable to each Fund and the annual operating expenses
for the Funds on an individual basis and for the Tax-Exempt Fund on a pro forma
basis after giving effect to the Reorganization. This table is followed by an
example illustrating the effect of these expenses on a $1,000 investment in each
Fund.
Shareholder Transaction Expenses Applicable to Tax-Exempt Fund and
Pennsylvania Tax-Free Fund
<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
- --------------------
(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.
(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.
Table of Expenses of Tax-Exempt Fund (individually and on a pro forma basis) and Pennsylvania
Tax-Free Fund
</TABLE>
<TABLE>
<CAPTION>
Tax-Exempt Fund Pennsylvania Tax-Free Fund
Class A Class B Class C Class D Class A Class B Class C Class D
<S> <C> <C> <C> <C> <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% 0.55% 0.55% 0.55% 0.55%
12b-1 Fees................. 0.25% 1.00% None 1.00% 0.25% 1.00% None 1.00%
Other Expenses............. 0.36% 0.36% 0.36% 0.36% 1.37% 1.37% 1.37% 1.37%
Less Voluntary Reduction - - - - (1.67%) (1.67%) (1.67%) (1.67%)
---- ---- ---- ---- ---- ---- ---- ----
Total Fund Operating Expenses 1.16% 1.91% 0.91% 1.91% 0.50% 1.25% 0.25% 1.25%
==== ===== ==== ==== ==== ==== ==== ====
Pro Forma Tax-Exempt Fund (1)
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%
Less Voluntary Reduction - - - -
----- ----- ----- -----
Total Fund Operating Expenses 1.16% 1.91% 0.91% 1.91%
===== ===== ===== =====
- ---------------------
(1) Does not reflect the effect of proposed similar reorganizations of two other state-specific
tax-free mutual funds into the Tax-Exempt Fund to occur at about the same time as the proposed
reorganization described herein. The pro-forma expenses of the Tax-Exempt Fund after giving
effect to the other proposed reorganizations is not expected to be materially different.
</TABLE>
7
<PAGE>
Example:
<TABLE>
<CAPTION>
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:
Tax-Exempt Fund Pennsylvania Tax-Free Fund
1 Year 3 Years 5 Years 10 Years 1 Year 3 Years 5 Years 10 Years
------ ------- ------- ------- ------ ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Class A shares................. $56 $80 $106 $180 $50 $60 $72 $105
Class B shares(1).............. $69 $90 $123 $204 $63 $70 $89 $130
Class C shares................. $ 9 $29 $ 50 $112 $ 3 $ 8 $14 $32
Class D shares................. $29 $60 $103 $223 $23 $40 $69 $151
Pro Forma Tax-Exempt Fund
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
You would pay the following expenses on the same investment, assuming no
redemption:
Tax-Exempt Fund Pennsylvania Tax-Free Fund
1 Year 3 Years 5 Years 10 Years 1 Year 3 Years 5 Years 10 Years
------ ------- ------- -------- ------ ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Class B (1)................ $19 $60 $103 $204 $19 $58 $100 $197
Class D .................. $19 $60 $103 $223 $19 $58 $100 $217
Pro Forma Tax-Exempt Fund
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
<S> <C> <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.
Multiple Class Structure; Distribution Arrangements. Each Fund has
outstanding and offers four classes of shares, which may be purchased through
securities dealers which have entered into sales agreements with the Distributor
at the next determined net asset value per share plus, in the case of all
classes except the 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). In the proposed
Reorganization, shareholders of the Pennsylvania Tax-Free Fund will receive the
corresponding class of shares of the Tax-Exempt Fund which they currently hold
in the Pennsylvania Tax-Free Fund. The Class A, Class B, Class C and Class D
shares of the Tax-Exempt Fund have identical arrangements with respect to the
imposition of initial and contingent deferred sales charges and distribution and
service fees as the comparable class of shares of the Pennsylvania Tax-Free
Fund. Because the Reorganization will be effected at net asset value without the
imposition of a sales charge, Tax-Exempt Fund
8
<PAGE>
Shares acquired by shareholders of the Pennsylvania Tax-Free Fund pursuant to
the proposed Reorganization would not be subject to any initial sales charge or
contingent deferred sales charge as a result of the Reorganization. However,
holders of the Tax-Exempt Fund Shares acquired as a result of the Reorganization
would continue to be subject to a contingent deferred sales charge upon
subsequent redemption to the same extent as if they had continued to hold their
shares of the Pennsylvania Tax-Free Fund. For purposes of computing the
contingent deferred sales charge that may be payable upon disposition of any
acquired Class A, Class B and Class D shares of the Tax-Exempt Fund, the holding
period of the redeemed shares is "tacked" to the holding period of the
Pennsylvania Tax-Free Fund. See "Comparative Information on Distribution
Arrangements."
Dividends. The Funds have identical policies with regard to dividends and
distributions. Each Fund's policy is to declare a dividend each day in an amount
based on monthly projections of its future net investment income and will pay
such dividends monthly. Consequently, the amount of each daily dividend may
differ from actual net investment income as determined under generally accepted
accounting principles. 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). After the closing of the
Reorganization, Pennsylvania Tax-Free Fund shareholders who currently have
dividends reinvested will continue to have dividends reinvested in the
Tax-Exempt Fund and those who currently have capital gains reinvested will
continue to have capital gains reinvested in the Tax-Exempt Fund. The number of
shares received in connection with any such reinvestment will be based upon the
net asset value per share of the applicable class of shares of the Tax-Exempt
Fund in effect on the record date. See "Comparative Information on Shareholder
Services."
Exchange Rights. Each Fund currently has identical exchange privileges.
Shareholders of the Pennsylvania Tax-Free Fund may exchange their shares for
shares of a corresponding class of shares, when available, of certain funds as
determined by the Distributor, 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 such fund may
similarly exchange their shares for shares of an available corresponding class
of the Pennsylvania Tax-Free Fund. See "Comparative Information on Shareholder
Services."
Redemption Procedures. Each Fund offers the same redemption features,
including the acceptance of redemption requests by mail, telephone and wire,
provided that applicable conditions are met. Any request to redeem shares of the
Pennsylvania Tax-Free Fund received and processed prior to the Reorganization
will be treated as a redemption of shares of the Pennsylvania Tax-Free Fund. Any
request to redeem shares received or processed after the Reorganization will be
treated as a request to redeem shares of the Tax-Exempt Fund. See "Comparative
Information on Shareholder Services."
Minimum Account Size. Each Fund reserves the right to redeem an account if
the aggregate value of the shares in such account is less than $1,500 for a
period of 60 days after
9
<PAGE>
notice is mailed to the applicable shareholder, or to impose a maintenance fee
on such account after 60 days' notice. Currently, the maintenance fee is $18
annually. The Tax-Exempt Fund shareholder accounts established pursuant to the
Reorganization with a value of less than $1,500 will therefore be subject to
redemption upon 60 days' prior notice or the annual maintenance fee. During such
60-day period, a shareholder will have the option of avoiding such redemption or
maintenance fee by increasing the value of the account to $1,500 or more.
Certain Affiliations. To the extent that the Investment Manager and its
affiliates may own 5% or more of the Pennsylvania Tax-Free Fund, such Fund may
be deemed to be an "affiliated person," as defined in the 1940 Act, of the
Investment Manager or its affiliates. See "Information About the
Reorganization."
RISK FACTORS
The investment risks of both Funds are generally similar because of the
similarities of investment objectives and policies of the Funds. However, the
Pennsylvania Tax-Free Fund's ability to achieve its investment objective depends
on the ability of the issuers of Pennsylvania municipal obligations to meet
their continuing obligations for the payment of principal and interest, whereas
the Tax-Exempt Fund is subject to an investment restriction that prohibits more
than 25% of the assets of the Fund from being invested in securities of issuers
conducting their principal activities in the same state. See "Comparison of
Investment Objectives and Policies." Such risks are more fully discussed under
the caption "The Fund's Investments" in the Prospectus of the Tax-Exempt Fund
enclosed with this Joint Proxy Statement/Prospectus and under the caption "The
Fund's Investments" in the Prospectus of the Pennsylvania Tax-Free Fund
(available upon request).
The Tax-Exempt Fund invests primarily in notes and bonds issued by or on
behalf of state and local governmental units. The Pennsylvania Tax-Free Fund
invests primarily in obligations issued by or on behalf of the State of
Pennsylvania, its political subdivisions, municipalities and public authorities
and by other governmental entities. In the case of each Fund, the value of such
investments will generally fluctuate inversely with changes in prevailing
interest rates. When interest rates increase, the value of debt securities and
shares of a Fund can be expected to decline.
There are risks in any investment program, and there is no assurance that
either 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.
10
<PAGE>
REASONS FOR THE REORGANIZATION
In reaching the decision to recommend that the shareholders of the
Pennsylvania Tax-Free Fund vote to approve the Reorganization, the Board of
Trustees, including the Trustees who are not interested persons of the Trust,
concluded that the Reorganization would be in the best interests of the
respective Funds and that the interests of existing shareholders of the
respective Funds will not be diluted as a consequence thereof. In making this
determination, the Trustees considered a number of factors, including the
smaller size and higher gross expenses of the Pennsylvania Tax-Free Fund
compared to the Tax-Exempt Fund and the efficiencies resulting from combining
the operations of two separate funds with the same investment manager, the same
multiple class structure, the same sales load structure and similar investment
objectives and policies.
As reflected in the capitalization table in "Information About the
Reorganization--Capitalization" set forth below, the Pennsylvania Tax-Free Fund
is small in size. As a result, its gross expenses are relatively high and have
been subsidized by the Distributor since inception; see "Table of Expenses of
Tax-Exempt Fund (individually and on a pro forma basis) and Pennsylvania
Tax-Free Fund" set forth in the "Summary" above. The Distributor reserves the
right to discontinue at any time its voluntary subsidization of expenses of the
Pennsylvania Tax-Free Fund; consequently, such Fund's expenses could increase in
the future. On the other hand, the Tax-Exempt Fund has substantially more assets
and a lower, unsubsidized expense ratio. By combining the assets of the two
Funds, each Fund could, over time, possibly benefit from certain economies of
scale. In particular, greater portfolio diversification and more efficient
portfolio management could result from a larger asset base. Greater
diversification is expected to be beneficial to shareholders because it may
reduce the negative effect which the adverse performance of any one portfolio
security may have on the performance of the portfolio as a whole. Because each
Fund has the same investment adviser, custodian and distributor, combining the
Funds could, over time, produce administrative economies of scale, resulting in
net benefits to the Funds' shareholders. The Trustees considered, among other
things, the benefit to the Funds of elimination of duplication of services such
as producing separate prospectuses and shareholder reports.
The above-cited benefits offset the loss to the shareholders of the
Pennsylvania Tax-Free Fund of having a fund more devoted to investments which
produce income which is tax-exempt for both federal and Pennsylvania income tax
purposes, as compared to the Tax-Exempt Fund which focuses primarily on
securities exempt from federal income taxes. Income from the Tax-Exempt Fund
will be subject to more Pennsylvania personal income tax than the income from
the Pennsylvania Tax-Free Fund.
The Board of Trustees of the Trust believes that the proposed
Reorganization is in the best interests of the shareholders of the Pennsylvania
Tax-Free Fund and recommend that shareholders of the Pennsylvania Tax-Free Fund
vote FOR the Reorganization.
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<PAGE>
INFORMATION ABOUT THE REORGANIZATION
At a meeting held on August 2, 1995, the Board of Trustees of the Trust,
approved the Plan of Reorganization substantially in the form set forth as
Exhibit A to this Joint Proxy Statement/Prospectus.
Plan of Reorganization. The Plan of Reorganization provides that, at the
Closing, the Tax-Exempt Fund will acquire all of the assets of the Pennsylvania
Tax-Free Fund (subject to the assumption by the Tax-Exempt Fund of all of the
liabilities of the Pennsylvania Tax-Free Fund including all liabilities
reflected on an unaudited statement of assets and liabilities) in exchange for
Tax-Exempt Fund Shares. The aggregate net asset value of full and fractional
Tax-Exempt Fund Shares to be issued to shareholders of the Pennsylvania Tax-Free
Fund will equal the value of the aggregate net assets of the Pennsylvania
Tax-Free Fund as of the close of business on the Valuation Date. The number of
Class A, Class B, Class C and Class D shares to be issued to the Pennsylvania
Tax-Free Fund will be determined by dividing (a) the aggregate net assets in
each class of shares of the Pennsylvania Tax-Free Fund by (b) the net asset
value per Class A, Class B, Class C and Class D share, respectively, of the
Tax-Exempt Fund, each computed as of the close of business on the Valuation
Date. Portfolio securities of the Pennsylvania Tax-Free Fund and the Tax-Exempt
Fund will be valued in accordance with the valuation practices of the Tax-Exempt
Fund which are described under the caption "Purchase of Shares" in the
Tax-Exempt Fund Prospectus and which are substantially identical to those of the
Pennsylvania Tax-Free Fund.
The Tax-Exempt Fund will assume all liabilities, including all expenses,
costs, charges and reserves reflected on an unaudited statement of assets and
liabilities of the Pennsylvania Tax-Free Fund prepared as of the close of
business on the Valuation Date in accordance with generally accepted accounting
principles consistently applied from the prior audited period. Such statement of
assets and liabilities will reflect all liabilities known to the Pennsylvania
Tax-Free Fund and the Tax-Exempt Fund as of the date thereof. At or prior to the
Closing, the Pennsylvania Tax-Free Fund shall declare a dividend or dividends
which, together with all prior such dividends, shall have the effect of
distributing to the Pennsylvania Tax-Free Fund's shareholders all of the
Pennsylvania Tax-Free Fund's investment company income for all taxable years
ending at or prior to the Closing (computed without regard to any deduction for
dividends paid) and all of its net capital gains realized (after reduction for
any capital loss carry-forward) in all taxable years ending at or prior to the
Closing.
At or as soon as practicable after the Closing, the Pennsylvania Tax-Free
Fund will liquidate and distribute pro rata to its shareholders of record as of
the close of business on the Valuation Date the full and fractional Tax-Exempt
Fund Shares received by the Pennsylvania Tax-Free Fund. Such liquidation and
distribution will be accomplished by the establishment of shareholder accounts
on the share records of the Tax-Exempt Fund in the name of each such shareholder
of the Pennsylvania Tax-Free Fund, representing the respective pro rata number
of full and fractional Tax-Exempt Fund Shares due such shareholder. All of the
Tax-Exempt
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<PAGE>
Fund's future distributions attributable to the shares issued in the
Reorganization will be paid to shareholders in cash or invested in additional
shares of the Tax-Exempt Fund at the price in effect as described in the
Tax-Exempt Fund's Prospectus on the respective payment dates in accordance with
instructions previously given by the shareholder to the Pennsylvania Tax-Free
Fund's transfer agent. As of the Closing, each outstanding certificate which,
prior to the Closing, represented shares of the Pennsylvania Tax-Free Fund will
be deemed for all purposes to evidence ownership of the number of Tax-Exempt
Fund Shares issuable with respect thereto pursuant to the Reorganization. After
the Closing, certificates originally representing shares of Class A or Class C
of the Pennsylvania Tax-Free Fund will be rendered null and void and
nonnegotiable; upon special request and surrender of such certificates to SSBT
as transfer agent, holders of these nonnegotiable certificates shall be entitled
to receive certificates representing the number of Tax-Exempt Fund Shares
issuable with respect thereto. All Class B and Class D shares of the Tax-Exempt
Fund are held of record in book entry form and no certificates for such shares
will be issued.
Notwithstanding approval by shareholders of the Pennsylvania Tax-Free
Fund, the Plan of Reorganization may be terminated at any time prior to the
consummation of the Reorganization without liability on the part of either party
or its respective Trustees, officers or shareholders, by either party on written
notice to the other party if circumstances should develop that, in the opinion
of the Trust, make proceeding with the Reorganization inadvisable. The Plan of
Reorganization may be amended, waived or supplemented in such manner as may be
mutually agreed upon by the authorized officers of the Trust; provided, however,
that following the Meeting, no such amendment, waiver or supplement may have the
effect of changing the provision for determining the number of Tax-Exempt Fund
Shares to be issued to the Pennsylvania Tax-Free Fund shareholders to the
detriment of such shareholders without their further approval. The expenses
incurred in connection with entering into and carrying out the provisions of the
Plan of Reorganization, whether or not the Reorganization is consummated, will
be apportioned between Distributor and the Funds in a fair and equitable manner.
Description of Tax-Exempt Fund Shares. Full and fractional shares of the
Tax-Exempt Fund will be issued to the Pennsylvania Tax-Free Fund shareholders in
accordance with the procedures under the Plan of Reorganization as described
above. Each share will be fully paid and nonassessable by the Trust when issued
and transferable without restrictions and will have no preemptive or cumulative
voting rights and have only such conversion or exchange rights as the Board of
Trustees of the Trust may grant in its discretion.
Federal Income Tax Consequences. Counsel to the Funds, Goodwin, Procter &
Hoar, has opined that, subject to customary assumptions and representations, on
the basis of the existing provisions of the Internal Revenue Code (the "Code"),
the Treasury Regulations promulgated thereunder and current administrative and
judicial interpretations thereof, for federal income tax purposes: (i) the
transfer of all the assets of the Pennsylvania Tax-Free Fund in exchange for
Tax-Exempt Fund Shares and the assumption by the Tax-Exempt Fund of all
liabilities of the Pennsylvania Tax-Free Fund will constitute a "reorganization"
within the meaning of Section 368(a)(1)(C) of the Code, and the Pennsylvania
Tax-Free Fund and the
13
<PAGE>
Tax-Exempt Fund each will be a "party to a reorganization" within the meaning of
Section 368(b) of the Code; (ii) no gain or loss will be recognized by the
Pennsylvania Tax-Free Fund or the Tax-Exempt Fund upon the transfer of the
Pennsylvania Tax-Free Fund assets to the Tax-Exempt Fund in exchange for
Tax-Exempt Fund Shares; (iii) no gain or loss will be recognized by shareholders
of the Pennsylvania Tax-Free Fund upon the exchange of the Pennsylvania Tax-Free
Fund shares for Tax-Exempt Fund Shares; (iv) the basis of Tax-Exempt Fund Shares
received by each Pennsylvania Tax-Free Fund shareholder pursuant to the
Reorganization will be the same as the basis of the Pennsylvania Tax-Free Fund
shares exchanged therefor; (v) the basis of the Pennsylvania Tax-Free Fund
assets in the hands of the Tax-Exempt Fund will be the same as the basis of such
assets in the hands of the Pennsylvania Tax-Free Fund immediately prior to the
Reorganization. The receipt of such an opinion upon the Closing is a condition
to the consummation of the Reorganization. If the transfer of the assets of the
Pennsylvania Tax-Free Fund in exchange for Tax-Exempt Fund Shares and the
assumption by the Tax-Exempt Fund of the liabilities of the Pennsylvania
Tax-Free Fund do not constitute a tax-free reorganization, each Pennsylvania
Tax-Free Fund shareholder will recognize gain or loss equal to the difference
between the value of Tax-Exempt Fund Shares such shareholder acquires and the
tax basis of such shareholder's Pennsylvania Tax-Free Fund shares.
Shareholders of the Funds should consult their tax advisers regarding the
effect, if any, of the proposed Reorganization in light of their individual
circumstances. Since the foregoing discussion relates only to the federal income
tax consequences of the Reorganization, shareholders of the Funds should also
consult their tax advisers as to state and local tax consequences, if any, of
the Reorganization.
Capitalization. The following table sets forth the capitalization of the
Pennsylvania Tax-Free Fund and the Tax-Exempt Fund as of June 30, 1995, and on a
pro forma basis as of that date giving effect to the proposed acquisition of
assets at net asset value. The pro forma data reflects an exchange ratio of
1.1994, 1.2005, 1.2032 and 1.2008 for Class A, Class B, Class C and Class D
shares, respectively, of the Tax-Exempt Fund issued for each Class A, Class B,
Class C and Class D share, respectively, of the Pennsylvania Tax-Free Fund.
14
<PAGE>
Pennsylvania
Tax-Exempt Tax-Free Combined After
Fund Fund Reorganization (1)
Net assets (in milions)....... $272.3 $16.7 $289.0
Net asset value per share
Class A.................. $7.82 $9.38 $7.82
Class B.................. $7.81 $9.38 $7.81
Class C.................. $7.80 $9.39 $7.80
Class D.................. $7.81 $9.38 $7.81
Shares outstanding
Class A.................. 29,860,742 762,257 30,775,028
Class B.................. 4,779,340 582,091 5,413,299
Class C.................. 46,835 368,283 489,962
Class D.................. 144,825 121,100 290,237
- --------------
(1) Does not reflect the effect of proposed similar reorganizations of two
other state-specific tax-free mutual funds into the Tax-Exempt Fund to
occur at about the same time as the proposed reorganization described
herein. The combined assets as of June 30, 1995 of all three funds to be
reorganized into the Tax-Exempt Fund was $56.5 million.
The table set forth above should not be relied on to reflect the number of
shares to be received in the Reorganization; the actual number of shares to be
received will depend upon the net asset value and number of shares outstanding
of each Fund at the time of the Reorganization.
The following table sets forth the number of outstanding shares of
beneficial interest of each Fund as of June 30, 1995, and the approximate
percentages of the outstanding shares of each Fund that were beneficially owned
by the Investment Manager, the Distributor and Metropolitan Life, their indirect
parent. The Board of Trustees of the Trust does not know of any other person who
beneficially owned more than five percent of the outstanding shares of any class
of each of the Pennsylvania Tax-Free Fund or the Tax-Exempt Fund on June 30,
1995. In addition, as of such date, the Trustees and officers of the Trust as a
group owned less than one percent of the outstanding shares of each of the
Pennsylvania Tax-Free Fund and the Tax-Exempt Fund. The Adviser and its
affiliates have indicated to the Trust that with respect to their shares of the
Pennsylvania Tax-Free Fund they intend to vote for and against the proposal in
the same relative proportion as do the other shareholders of the Pennsylvania
Tax-Free Fund who cast votes at the Meeting.
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<PAGE>
<TABLE>
<CAPTION>
Outstanding Shares Owned Outstanding Shares Owned Outstanding Shares Owned
by Metropolitan Life by the Distributor by the Investment Manager
------------------------ ------------------------ -------------------------
Total Shares Number % of Total Number % of Total Number % of Total
Name of Fund Outstanding of Shares Outstanding of Shares Outstanding of Shares Outstanding
<S> <C> <C> <C> <C> <C> <C> <C>
Florida Tax-Free Fund
Class A....... 762,257 52,405 6.9 -- -- 1 0.0
Class B........ 582,091 52,405 9.9 -- -- 1 0.0
Class C........ 368,283 366,839 99.6 -- -- 1 0.0
Class D........ 121,100 52,405 43.2 -- -- 1 0.0
All Classes.... 1,833,731 524,054 29.4 -- -- 4 0.0
Tax-Exempt Fund
Class A........ 29,860,742 -- -- 13,825 0.0 -- --
Class B........ 4,779,340 -- -- -- -- -- --
Class C........ 46,835 122 0.3 -- -- -- --
Class D........ 144,825 61,135 42.2 -- -- -- --
All Classes.... 34,831,742 61,257 0.2 13,825 0.0 -- --
</TABLE>
COMPARISON OF INVESTMENT OBJECTIVES AND POLICIES
Information about the investment objectives and policies of the
Pennsylvania Tax-Free Fund and the Tax-Exempt Fund is summarized below. More
complete information regarding the same is set forth in the Prospectus of the
Tax-Exempt Fund dated May 1, 1995 which is incorporated by reference herein and
enclosed herewith, the Prospectus of the Pennsylvania Tax-Free Fund dated May 1,
1995 which is incorporated by reference herein, and in the Statement of
Additional Information which have been filed with the Securities and Exchange
Commission in connection with the Reorganization. Shareholders should consult
such Prospectuses and the Statement of Additional Information for a more
thorough comparison.
Investment Objectives. The investment objective of the Pennsylvania
Tax-Free Fund is to seek a high level of interest income exempt from federal
income taxes and Pennsylvania State personal income taxes. The Fund invests
primarily in investment grade securities issued by or on behalf of the State of
Pennsylvania or its political subdivisions and by other governmental entities.
The Pennsylvania Tax-Free Fund may invest up to 25% of the Fund's assets in
securities rated as low as CC by S&P or Ca by Moody's or unrated securities that
the Investment Manager believes to be of equivalent investment quality to
comparably rated securities. During the current year, the Investment Manager (as
defined herein) 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 similar investment quality.
The investment objective of the Tax-Exempt Fund is to seek a high level of
interest income exempt from federal income taxes. The Fund invests primarily in
investment grade tax-exempt debt obligations. The Fund may invest up to 20% of
the Fund's assets in securities rated below BBB by S&P or Baa by Moody's or
unrated securities that the Investment Manager believes to be of equivalent
investment quality to comparably rated securities.
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<PAGE>
There are differences in the investment objectives of the two Funds. Under
normal circumstances, substantially all of the dividends paid by the
Pennsylvania Tax-Free Fund are expected to be exempt from both federal and
Pennsylvania State personal income taxes; dividends paid by the Tax-Exempt Fund
are generally exempt only from federal income tax. The Pennsylvania Tax-Free
Fund invests primarily in securities issued by or on behalf of the State of
Pennsylvania or its political subdivisions. The Tax-Exempt Fund's investment
objective, in contrast, does not obligate it to invest primarily in securities
issued by or on behalf of the State of Pennsylvania or its political
subdivisions; rather, it invests in securities issued by a variety of state and
local governmental units. Both Funds, however, generally invest in debt
securities with interest income exempt from federal income taxes, pursue
substantially similar strategies of achieving their investment objective and are
subject to similar investment restrictions.
Investment Restrictions. While the investment restrictions of the
Pennsylvania Tax-Free Fund are similar in certain respects to those of the
Tax-Exempt Fund, there are subtle differences. Set forth below is a summary of
the similarities of and differences between the existing investment restrictions
of the Pennsylvania Tax-Free Fund and the investment restrictions of the
Tax-Exempt Fund. The summary is qualified in its entirety by reference to and is
made subject to the complete text of the investment restrictions of each Fund,
which are set forth in the Statement of Additional Information of each Fund. The
investment objective of each Fund and certain of the investment restrictions of
each Fund are deemed fundamental, which means that they may not be changed
without the approval of a majority of such Fund's outstanding voting securities
(as defined in the 1940 Act). Investment restrictions which are not deemed
fundamental may be changed by a Fund's Trustees without shareholder approval.
1. The Tax-Exempt Fund has a fundamental investment restriction which
prohibits the Fund from investing in a security if the transaction would
result in more than five percent of the Fund's total assets being invested
in any one issuer or if the transaction would result in the Fund's owning
more than ten percent of the voting securities of any one issuer (except
securities issued or guaranteed by the U.S. Government or its agencies or
instrumentalities or backed by the U.S. Government). The Pennsylvania
Tax-Free Fund does not have such a restriction.
2. The Tax-Exempt Fund is subject to a fundamental restriction that prohibits
the purchase of securities of issuers that have been in continuous
operation for less than three years if such purchase would cause more than
five percent of the total assets of the Fund to be invested in the
securities of such issuers, unless such securities are rated BBB or higher
by S&P or Ba or higher by Moody's. 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
Pennsylvania Tax-Free Fund does not have such a restriction.
3. Both Funds are subject to a fundamental investment restriction which
states that the Fund may not issue senior securities.
17
<PAGE>
4. Both Funds have a fundamental investment restriction prohibiting
underwriting or participating in the marketing of securities of other
issuers. For each Fund, this restriction however, provides an exception
for such Fund if it were to purchase securities of other issuers for
investment, either from the issuers, persons in a control relationship
with the issuers or from underwriters of such securities. The applicable
restriction on the Pennsylvania Tax-Free Fund provides an exception in
circumstances where, in connection with the disposition of the Fund's
securities, the Fund may be deemed an underwriter under certain federal
securities laws.
5. Both Funds have a fundamental investment restriction prohibiting the
purchase or sale of fee simple interests in real estate. The Pennsylvania
Tax-Free Fund's restriction clarifies, however, that such Fund may
purchase and sell other interests in real estate including securities
which are secured by real estate or securities of companies which own or
invest or deal in real estate.
6. The Tax-Exempt Fund has a fundamental investment restriction prohibiting
the Fund from investing in commodities or commodity contracts, except that
the Fund may invest in financial futures contracts and options on futures
contracts. The Pennsylvania Tax-Free Fund is subject to a fundamental
investment restriction prohibiting it from investing in commodities or
commodity contracts in excess of ten percent of the Fund's total assets
(except for investments in futures contracts and options on futures
contracts on securities or securities indices).
7. The Tax-Exempt Fund has a fundamental investment restriction prohibiting
the Fund from conducting arbitrage transactions (subject to certain
exceptions such as that the Fund may invest in futures and options for
hedging purposes). The Pennsylvania Tax-Free Fund has a nonfundamental
investment restriction against engaging in transactions in options except
in connection with options on securities, securities indices and
currencies, and options on futures on securities, securities indices and
currencies.
8. Both Funds are subject to substantially similar fundamental investment
restrictions which prohibit the lending of assets of the Funds, subject to
exceptions for the purchase of bonds, debentures, notes and similar
obligations (including repurchase agreements) in accordance with each
Fund's investment policies and objectives. In addition, the Pennsylvania
Tax-Free Fund may lend portfolio securities without violating this
restriction.
9. The Tax-Exempt Fund has a fundamental investment restriction regarding
illiquid securities which states that the Fund may not invest more than
ten percent of its total assets in illiquid securities, including
securities restricted as to resale and repurchase agreements extending for
more than seven days and other securities which are not readily
marketable. A current nonfundamental investment restriction of the
Pennsylvania Tax-Free Fund prohibits the purchase of any securities or the
entering into of a repurchase agreement if as a result more than 15% of
the Fund's total assets would be invested in securities that are not
readily marketable and repurchase agreements not entitling the holder to
payment of principal and interest within seven days.
18
<PAGE>
10. The Tax-Exempt Fund has a fundamental investment restriction and the
Pennsylvania Tax-Free Fund has a non-fundamental investment restriction
prohibiting them from investing in interests in oil, gas or other mineral
exploration or development programs, subject to certain exceptions. The
Tax-Exempt Fund may invest in securities which are based, directly or
indirectly, on the credit of companies which invest in or sponsor such
exploration programs. The Pennsylvania Tax-Free Fund, on the other hand,
may invest in securities issued by companies which invest in or sponsor
such exploration programs and in securities indexed to the price of oil,
gas or other minerals.
11. The Pennsylvania Tax-Free Fund is subject to a fundamental investment
restriction which prohibits the Fund from making an investment which would
cause more than 25% of the value of the Fund's total assets to be invested
in securities issued in connection with the financing of projects with
similar characteristics. The Tax-Exempt Fund does not have such a
restriction.
12. The Tax-Exempt Fund is subject to a fundamental investment restriction
which prohibits the Fund from making an investment which would cause more
than 25% of the value of the Fund's total assets to be invested in
securities of issuers conducting their principal activities in the same
state. This restriction does not apply to investments in securities issued
or guaranteed by the U.S. Government or its agencies or instrumentalities
or backed by the U.S. Government). The Pennsylvania Tax-Free Fund does not
have such a restriction.
13. The Tax-Exempt Fund is subject to a fundamental investment restriction
that prohibits the borrowing of money (through reverse repurchase
agreements or otherwise) except for extraordinary and emergency purposes,
and then not in an amount in excess of ten percent of the value of its
total assets, provided that reverse repurchase agreements shall not exceed
five percent of its total assets and that additional investments will be
suspended during any period when borrowing exceeds five percent of total
assets. The Pennsylvania Tax-Free Fund has a fundamental investment
restriction stating that the Fund may not borrow money except for
borrowings from banks for extraordinary and emergency purposes, and then
not in an amount in excess of 25% of the value of its total assets, and
except insofar as reverse repurchase agreements may be regarded as
borrowing.
14. Pursuant to a nonfundamental investment restriction, the Tax-Exempt Fund
may purchase securities of any company in which any officer or Trustee of
the Fund or its investment adviser owns more than one half of one percent
of the outstanding securities, or in which all of the officers and
Trustees of the Fund and its investment adviser, as a group, own more than
five percent of such securities. The Pennsylvania Tax-Free Fund does not
have such an investment restriction.
19
<PAGE>
15. Both Funds have a nonfundamental investment restriction stating that the
Fund may not hypothecate, mortgage or pledge any of its assets except to
secure permitted borrowings (and then, in the case of the Tax-Exempt Fund,
not in excess of ten percent of the Tax-Exempt Fund's assets). Under each
Fund's restriction, financial futures, options on financial futures and
similar arrangements are not deemed to involve a pledge of assets.
16. Both Funds have a nonfundamental investment restriction stating that the
Fund may not invest in companies for the purpose of exercising control
over the management of such companies.
17. Pursuant to substantially similar nonfundamental investment restrictions,
each Fund may not invest in securities of any other investment company,
except in connection with a merger, consolidation or similar
reorganization, if such investment would represent more than three percent
of the outstanding voting stock of such other company or more than five
percent of the value of the total assets of the Fund, or if such
investments in the aggregate would exceed ten percent of the value of the
total assets of the Fund.
18. The Pennsylvania Tax-Free Fund has a nonfundamental investment restriction
prohibiting the Fund from purchasing securities on margin or making short
sales of securities or maintaining a short position, except for short
sales "against the box" (as a matter of current operating, but not
fundamental policies, neither Fund will make short sales or maintain a
short position unless not more than five percent of the Fund's net assets
(taken at current value) is held as collateral for such sales at any
time). Similarly, the Tax-Exempt Fund is subject to a nonfundamental
investment restriction barring it from purchasing securities on margin,
making short sales of securities or purchasing or dealing in puts, calls,
straddles or spreads with respect to any security, except in connection
with the purchase or writing of options, including options on financial
futures, and futures contracts.
19. The Pennsylvania Tax-Free Fund is subject to a nonfundamental investment
restriction prohibiting the Fund from investing in warrants which would
comprise more than five percent of the value of its net assets, provided
that warrants not listed on the New York or American Stock Exchanges shall
be further limited to two percent of the Funds net assets. Warrants
initially attached to securities and acquired by the Fund upon original
issuance thereof shall be deemed to be without value. The Tax-Exempt Fund
is not subject to such a restriction.
COMPARATIVE INFORMATION ON DISTRIBUTION ARRANGEMENTS
Class A shares of each Fund 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 of each Fund 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
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and (ii) annual distribution and service fees of 1% of the average daily net
asset value of these 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 of each Fund are offered only to certain pension and other
employee benefit plans, large institutions and under sponsored arrangements. 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 of each Fund 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.
Because the Reorganization will be effected at net asset value without the
imposition of a sales charge, Tax-Exempt Fund Shares acquired by shareholders of
the Pennsylvania Tax-Free Fund pursuant to the proposed Reorganization would not
be subject to any initial sales charge or contingent deferred sales charge as a
result of the Reorganization. However, holders of the Tax-Exempt Fund Shares
acquired as a result of the Reorganization would continue to be subject to a
contingent deferred sales charge upon subsequent redemption to the same extent
as if they had continued to hold their shares of the Pennsylvania Tax-Free Fund.
Each Fund has adopted a Plan of Distribution Pursuant to Rule 12b-1 (the
"Distribution Plan") in accordance with the regulations promulgated under 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:
Class of Shares
of Each Fund Service Fee Distribution Fee
--------------- ----------- ----------------
A 0.25% None
B 0.25% 0.75%
C None None
D 0.25% 0.75%
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. In addition,
the Distributor generally pays an initial commission to dealers for the sale of
shares of each Fund with a portion of such commission representing payment for
personal services and/or the maintenance of shareholder accounts by such
dealers. Dealers who have sold Class A shares of each Fund are eligible for
further reimbursement commencing as of the time of such sale. Dealers who have
sold Class B and Class D shares of each Fund are eligible for further
reimbursement after the first year during which such shares have been held of
record by such dealer as nominee for its clients (or by such clients directly).
Any service fees received by the
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Distributor and not allocated to dealers may be applied by the Distributor in
reduction of expenses incurred by it directly for personal services and/or 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. 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.
Class A shares of the Funds may be purchased without a sales charge by
certain Trustees, directors, officers, employees, their relatives and other
persons directly or indirectly related to the Funds or affiliated entities.
Class A shares of the Funds may also be sold at a reduced sales charge or
without a sales charge pursuant to certain sponsored arrangements or managed
fee-based programs.
COMPARATIVE INFORMATION ON SHAREHOLDER SERVICES
Each Fund offers the same shareholder services, including the Open Account
System, reinvestment privileges, a systematic withdrawal plan, a dividend
allocation plan, telephone purchases, telephone exchanges, telephone redemptions
and access to the Investamatic Check Program, an automatic investment program.
Because each Fund currently offers the same shareholder services, after the
closing of the proposed Reorganization the same services will continue to be
available to the shareholders of the Pennsylvania Tax-Free Fund.
FISCAL YEAR
Both Funds operate on fiscal years ending December 31.
PERFORMANCE
Tax-Exempt Fund
The following is a discussion of the performance of the Tax-Exempt Fund
for the six months ended June 30, 1995 and the fiscal year ended December 31,
1994.
The six months ended June 30, 1995 were better than the year ended
December 31, 1994. The Fund had a positive return through the first half of
1995, although it trailed the average for its category because the portfolio was
conservatively positioned. The Fund had shortened its duration (a measure of a
fund's sensitivity to interest rate changes) to protect it if interest rates
increased, as had happened throughout 1994. When interest rates fell sharply
instead, the Fund did not enjoy the full benefit of the market rally.
The Fund has extended its duration slightly, which will help in an
environment of falling rates. In addition, the Fund has upgraded the quality of
bonds in the portfolio and increased the percentage of insured bonds. As of June
30, 1995, the bonds in the portfoio had an average credit quality of AA.
Average Annual Total Return for periods ended June 30, 1995:
Life of Fund
1 year 5 years (since 8/25/86)
- ------- ------ ------- ---------------
Class A +1.46% +6.21% +6.49%
Class B +0.32% +6.53% +6.84%
Class C +6.38% +7.25% +7.08%
Class D +4.32% +6.83% +6.84%
In 1994, the bond market was repeatedly buffeted by uncertainty over the
strength of the economy and the timing of the Fed's next rate increase. When the
municipal bond market declined sharply in February, March and April 1994, the
Fund attempted to reduce risk in the portfolio by replacing longer-term bonds
with less interest-rate-sensitive, shorter-term bonds. In some cases we sold
bonds for losses and replaced them with higher-yielding, more defensive bonds.
The Fund also increased the quality of the portfolio, because higher quality
bonds tend to perform better in weak markets.
The portfolio holds a number of bonds from so-called "specialty
states"--states where there are tax incentives to buy in-state bonds or where
bonds tend to be in short supply. Typically, demand is fairly consistent for
such bonds, which can be advantageous in a bad market. Specialty states include
Massachusetts, North Carolina (which also offers very high quality), New York,
Ohio and Connecticut.
Comparison Of Change In Value Of A $10,000 Investment In Tax-Exempt Fund And
The Lehman Municipal Bond Index
State Street Research Tax-Exempt Fund - Class A
LINE CHART DATA
(INCEPTION VALUE = $9,550)
VALUE OF
ACCOUNT OF
VALUE OF LEHMAN MUNI BOND
ACCOUNT AT INDEX AT
DATE YEAR END YEAR END
8/25/86 $ 9,550 $10,000
12/31/86 9,889 10,371
12/31/87 9,748 10,527
12/31/88 11,063 11,597
12/31/89 12,128 12,849
12/31/90 12,713 13,785
12/31/91 14,213 15,459
12/31/92 15,538 16,821
12/31/93 17,420 18,888
12/31/94 16,218 17,911
State Street Research Tax-Exempt Fund - Class B
LINE CHART DATA
(INCEPTION VALUE = $10,000)
VALUE OF
ACCOUNT OF
VALUE OF LEHMAN MUNI BOND
ACCOUNT AT INDEX AT
DATE YEAR END YEAR END
8/25/86 $10,000 $10,000
12/31/86 10,355 10,371
12/31/87 10,208 10,527
12/31/88 11,585 11,597
12/31/89 12,699 12,849
12/31/90 13,313 13,785
12/31/91 14,883 15,459
12/31/92 16,270 16,821
12/31/93 18,165 18,888
12/31/94 16,786 17,911
State Street Research Tax-Exempt Fund - Class C
LINE CHART DATA
(INCEPTION VALUE = $10,000)
VALUE OF
ACCOUNT OF
VALUE OF LEHMAN MUNI BOND
ACCOUNT AT INDEX AT
DATE YEAR END YEAR END
8/25/86 $10,000 $10,000
12/31/86 10,355 10,371
12/31/87 10,208 10,527
12/31/88 11,585 11,597
12/31/89 12,699 12,849
12/31/90 13,313 13,785
12/31/91 14,883 15,459
12/31/92 16,270 16,821
12/31/93 18,224 18,888
12/31/94 17,028 17,911
State Street Research Tax-Exempt Fund - Class D
LINE CHART DATA
(INCEPTION VALUE = $10,000)
VALUE OF
ACCOUNT OF
VALUE OF LEHMAN MUNI BOND
ACCOUNT AT INDEX AT
DATE YEAR END YEAR END
8/25/86 $10,000 $10,000
12/31/86 10,355 10,371
12/31/87 10,208 10,527
12/31/88 11,585 11,597
12/31/89 12,699 12,849
12/31/90 13,313 13,785
12/31/91 14,883 15,459
12/31/92 16,270 16,821
12/31/93 18,163 18,888
12/31/94 16,784 17,911
All returns represent past performance, which is no guarantee of future
results. The investment return and principal value of an investment made in the
Tax-Exempt Fund will fluctuate and shares, when redeemed, may be worth more or
less than their original cost. All returns assume reinvestment of capital gain
distributions and income dividends. In March 1992, the Tax-Exempt Fund changed
its investment objective to eliminate requirements that specify that a
percentage of the Tax-Exempt Fund be invested in certain rating categories.
Previously, it was required to invest 80% in securities rated A, BBB, BB or
better. Past performance, therefore, may not be indicative of future results.
Shares of the Tax-Exempt Fund had no class designations until June 7, 1993, when
designations were assigned based on the pricing and 12b-1 fees applicable to
shares sold thereafter. Performance data for a specified class include periods
prior to the adoption of class designations. "A" share returns for each of the
periods reflect the maximum 4.5% sales charge. "B" share returns for the 1- and
5-year periods reflect a 5% and a 2% contingent deferred sales charge,
respectively. "C" shares, offered without a sales charge, are available only to
certain employee benefit plans and large institutions. "D" share return for the
1-year period reflects a 1% contingent deferred sales charge. Performance for
"B" and "D" shares prior to June 7, 1993, reflects annual 12b-1 fees of .25% and
performance thereafter reflects annual 12b-1 fees of 1%, which will reduce
subsequent performance. The Lehman Muni Bond Index represents approximately
15,000 fixed-coupon, investment-grade municipal bonds. The index is unmanaged
and does not take sales charges into consideration. Direct investment in the
index is not possible; results are for illustrative purposes only.
Further information about each Fund's performance is contained in each
Fund's annual and semiannual reports, which may be obtained without charge by
writing to the Funds at One Financial Center, Boston, Massachusetts 02111, or
calling (800) 562-0032.
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COMPARATIVE INFORMATION ON SHAREHOLDER RIGHTS
General. The Pennsylvania Tax-Free Fund and the Tax-Exempt Fund are series
of the Trust which was established in 1985 under the laws of The Commonwealth of
Massachusetts. The Pennsylvania Tax-Free Fund commenced operations in 1993, and
the Tax-Exempt Fund commenced operations in 1986. Both Funds are governed by a
Second Amended and Restated Master Trust Agreement dated June 5, 1993, as
further amended thereafter. As a Massachusetts business trust, the Trust's
operations are governed by its Master Trust Agreement and applicable federal and
Massachusetts laws. The above-referenced Master Trust Agreement may hereinafter
be referred to as the "Master Trust Agreement."
Shares of the Pennsylvania Tax-Free Fund and the Tax-Exempt Fund. The
beneficial interests in each of the Pennsylvania Tax-Free Fund and the
Tax-Exempt Fund are represented by transferable shares, par value $.001 per
share. The Master Trust Agreement permits the Trustees to issue an unlimited
number of shares and to divide such shares into an unlimited number of series.
As of the date hereof, the Trust has five operating series: the Pennsylvania
Tax-Free Fund, the Tax-Exempt Fund, State Street Research New York Tax-Free
Fund, State Street Research Florida Tax-Free Fund and State Street Research
California Tax-Free Fund. Each share of any Trust series represents an equal
proportionate interest in the assets and liabilities, excluding differences in
class expenses, belonging to that series. As such, each share is entitled to
dividends and distributions out of the income (after expenses) belonging to that
series as declared by the Board of Trustees.
Voting Requirements. Generally, the provisions of the Master Trust
Agreement of the Trust may be amended at any time, so long as such amendment
does not adversely affect the rights of any shareholder with respect to which
such amendment is or purports to be applicable and so long as such amendment is
not in contravention of applicable law, by an instrument in writing signed by a
majority of the then Trustees (or by an officer of such Trust pursuant to the
vote of a majority of such Trustees). Generally, any amendment to the Trust's
Master Trust Agreement that adversely affects the rights of shareholders of one
or more series may be adopted by a majority of the then Trustees of the Trust
when authorized by shareholders holding a majority of the shares entitled to
vote.
Voting Rights. The Master Trust Agreement of the Trust provides that
special meetings of shareholders for any purpose requiring action by
shareholders under such Master Trust Agreement or the Trust's By-laws shall be
called upon the written request of holders of at least ten percent of the
outstanding shares of the Trust or, as the context may require, a series
thereof. The Master Trust Agreement of the Trust provides in general that
shareholders have the power to vote only on the following matters, each as more
fully described in such Master Trust Agreements: (i) the election or removal of
Trustees as provided in the Master Trust Agreement; (ii) with respect to certain
contracts, such as contracts for investment advisory or management services, to
the extent required as provided in the Master Trust Agreement as a whole; (iii)
with respect to any termination or reorganization of the Trust; (iv) an
amendment of the Master Trust Agreement as provided in the Master Trust
Agreement; (v) to the same extent as the stockholders of a Massachusetts
business corporation as to whether or not a court action, proceeding or claim
should or should not be brought or maintained derivatively or as a class action
on behalf of the Trust, any Sub-Trust thereof or its stockholders; and (vi) with
respect to such additional matters relating to the Trust as may be
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required by the 1940 Act, the Master Trust Agreement, the By-laws or any
registration of the Trust with the Securities and Exchange Commission (or any
successor agency) or any state, or as the Trustees may consider necessary or
desirable. Certain of the foregoing matters will involve separate votes of one
or more series of a Trust, while others will require a vote of the Trust's
shareholders as a whole.
Shareholder Liability. Under Massachusetts law, shareholders of a
Massachusetts business 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. The Master Trust Agreement of the Trust provides for
indemnification, under certain circumstances, out of Trust property for all
losses and expenses of any shareholder held personally liable by virtue of his
status as such, and not because of such shareholder's acts or omissions or for
some other reason, for the obligations of the Trust. Thus, the risk of a
shareholder incurring financial loss on account of shareholder liability is
considered by the Trust to be remote since it is limited to circumstances in
which a disclaimer is inoperative and the Trust itself would be unable to meet
its obligations.
Liability of Trustees and Officers. Under the Master Trust Agreement of
the Trust, Trustees and officers will be indemnified, under certain
circumstances, for all liabilities, including the expenses of litigation,
against them unless their conduct is determined to constitute willful
misfeasance, bad faith, gross negligence or reckless disregard of their duties,
such determination to be based upon the outcome of a court action or
administrative proceeding or a reasonable determination, following a review of
the facts, by (a) a vote of a majority of a quorum of the Trustees who are
neither "interested persons" of the Trust as defined in the 1940 Act nor parties
to the proceeding or (b) an independent legal counsel in a written opinion. The
Trust may also advance money for these expenses provided that the Trustee or
officer undertakes to repay the Trust if his or her conduct is later determined
to preclude indemnification and certain other conditions are met. It should be
noted that it is the view of the staff of the Securities and Exchange Commission
that to the extent that any provisions such as those described above are
inconsistent with the 1940 Act including Section 17 thereof, the provisions of
the 1940 Act are preemptive.
The foregoing is only a summary of certain of the provisions of the
Trust's Master Trust Agreement and By-laws. Shareholders should refer directly
to the provisions of the Master Trust Agreement and By-laws for their full text.
MANAGEMENT
The investment manager for each of the Funds 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. As of June 30, 1995, the
Investment Manager had assets of approximately $26.2 billion under management.
24
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The portfolio manager for the Tax-Exempt Fund is Susan W. Drake. Ms.
Drake has managed the Tax-Exempt Fund since 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.
The portfolio managers for the Pennsylvania Tax-Free Fund are Ms. Drake
and Paul J. Clifford. Ms. Drake and Mr. Clifford have managed the Pennsylvania
Tax-Free Fund since commencement of operation 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.
ADDITIONAL INFORMATION ABOUT THE FUNDS
Information about the Tax-Exempt Fund is included in its current
Prospectus dated May 1, 1995, a copy of which is included herewith and
incorporated by reference herein. Additional information about the Tax-Exempt
Fund is included in the Fund's Statement of Additional Information dated May 1,
1995. This Statement of Additional Information has been filed with the
Securities and Exchange Commission (the "SEC") and is incorporated by reference
herein. Copies of this Statement may be obtained without charge by writing to
State Street Research Tax-Exempt Fund, One Financial Center, Boston,
Massachusetts 02111, or by calling (800) 562-0032.
Information about the Pennsylvania Tax-Free Fund is included in its
current Prospectus dated May 1, 1995, which is incorporated by reference herein.
Additional information about the Pennsylvania Tax-Free Fund is included in the
Fund's Statement of Additional Information dated May 1, 1995. This Statement of
Additional Information has been filed with the SEC and is incorporated by
reference herein. Copies of this Statement may be obtained without charge by
writing to State Street Research Pennsylvania Tax-Free Fund, One Financial
Center, Boston, Massachusetts 02111 or by calling (800) 562-0032.
Each Fund is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended, and the 1940 Act, and in accordance therewith
files proxy material, reports and other information with the Securities and
Exchange Commission. These reports can be inspected and copied at the Public
Reference Facilities maintained by the Securities and Exchange Commission at
Judiciary Plaza, 450 Fifth Street, N.W., Washington, DC 20549, as well as at the
following regional offices: New York Regional Office, 75 Park Place, Room 1228,
New York, NY 10007; and Chicago Regional Office, Northwestern Atrium Center, 500
West Madison Street, Suite 1400, Chicago IL 60661. Copies of such material can
also be obtained from the Public Reference Branch, Office of Consumer Affairs
and Information Services, Securities and Exchange Commission, Judiciary Plaza,
450 Fifth Street, N.W., Washington DC 20549 at prescribed rates.
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VOTING INFORMATION
Any shareholder who has given a proxy has the right to revoke it at any
time prior to its exercise by attending the Meeting and voting his or her shares
in person or by submitting a written notice of revocation or a later-dated proxy
to the Trust at the address of the Trust set forth on the cover page of this
Joint Proxy Statement/Prospectus prior to the date of the Meeting. Shareholders
of record of the Pennsylvania Tax-Free Fund at the close of business on
[____________,] 1995 (the "Record Date") will be entitled to notice of, and to
vote at, the Meeting of the Fund or to vote at any adjournments thereof. This
Joint Proxy Statement/Prospectus, proxies and accompanying Notice of Meeting
were first sent or given to shareholders of the Funds on or about
[____________,] 1995.
As of the Record Date, there were approximately [_______], [______],
[_______] and [_____] issued and outstanding Class A, Class B, Class C and Class
D shares, respectively, of the Pennsylvania Tax-Free Fund. Each share of such
Fund is entitled to one vote, with a proportionate vote for each fractional
share.
If the enclosed proxy is properly executed and returned in time to be
voted at the Meeting, the shares represented thereby will be voted in accordance
with the instructions on the proxy. Unless instructions to the contrary are
marked thereon, the proxy will be voted for the proposal described herein and,
in the discretion of the persons named herein as proxies, to take such further
action as they may determine appropriate in connection with any other matter
which may properly come before the Meeting or any adjournments thereof. The
Board of Trustees does not currently know of any matter to be considered at the
Meeting other than the proposal to approve the Plan of Reorganization.
The affirmative vote of the holders of a majority of the outstanding
voting shares of the Pennsylvania Tax-Free Fund (within the meaning of the 1940
Act), voting together as a single class, is required to approve the Plan of
Reorganization on behalf of such Fund. Under the 1940 Act, the vote of a
majority of the outstanding voting shares means the vote of the lesser of (a)
67% or more of the voting shares of a Fund, voting together as a single class,
present at the Meeting, if the holders of more than 50% of the outstanding
voting shares are present or represented by proxy, or (b) more than 50% of the
outstanding voting shares of a Fund, voting together as a single class. Approval
of the Plan of Reorganization by the shareholders of the Pennsylvania Tax-Free
Fund is a condition of the consummation of the Reorganization. If the
Reorganization is not approved, the Trustees of the Trust will continue the
management of the Pennsylvania Tax-Free Fund and the Tax-Exempt Fund,
respectively, and may consider other alternatives in the best interests of each
Fund's shareholders.
The holders of a majority of the shares entitled to vote of the
Pennsylvania Tax-Free Fund outstanding at the close of business on the Record
Date present in person or represented by proxy constitute a quorum for the
Meeting; however, as noted above, the affirmative vote of a majority of the
voting shares of such Fund, voting together as a single class (within the
meaning of the 1940 Act) is required to approve the Reorganization. In the event
a quorum is not present at the Meeting or in the event a quorum is present at
the Meeting but sufficient votes to approve the Plan of Reorganization are not
received, the persons named as proxies may propose one or more adjournments
without further notice to shareholders of the Meeting
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to permit further solicitation of proxies provided such persons determine, after
consideration of all relevant factors, including the nature of the proposal, the
percentage of votes then cast, the percentage of negative votes then cast, the
nature of the proposed solicitation activities and the nature of the reasons for
such further solicitation, that an adjournment and additional solicitation is
reasonable and in the interests of shareholders.
For purposes of determining the presence of a quorum for transacting
business at the Meeting and for determining whether sufficient votes have been
received for approval of the proposal to be acted upon at the Meeting,
abstentions and broker "non-votes" (that is, proxies from brokers or nominees
indicating that such persons have not received instructions from the beneficial
owner or other persons entitled to vote shares on a particular matter with
respect to which the brokers or nominees do not have discretionary power) will
be treated as shares that are present at the Meeting, but which have not been
voted. For this reason, abstentions and broker non-votes will assist the
Pennsylvania Tax-Free Fund in obtaining a quorum, but both have the practical
effect of a "no" vote for purposes of obtaining the requisite vote for approval
of the proposals to be acted upon at the Meeting.
Expenses of the Reorganization will be apportioned between the Distributor
and the Funds in a fair and equitable manner. The Distributor will assume
one-half of the expenses and the other half will be allocated to the Tax-Exempt
Fund and the Pennsylvania Tax-Free Fund in an appropriate manner on the basis of
identifiable direct costs or otherwise on the basis of relative net assets. Such
expenses include costs of preparing, printing and mailing the enclosed proxy,
accompanying notice and Joint Proxy Statement/Prospectus and all other costs in
connection with solicitation of proxies, including any additional solicitation
by letter, telephone or telegraph. In addition to solicitation of proxies by
mail, officers of the Trust and officers and regular employees of the Investment
Manager, affiliates of the Investment Manager, or other representatives of the
Trust may also solicit proxies by telephone or telegram or in person. A proxy
solicitation firm may also be retained to assist in any special, personal
solicitation of proxies. The costs of retaining such a firm is not expected to
exceed [$____].
THE TRUSTEES OF THE TRUST, INCLUDING THE
INDEPENDENT TRUSTEES OF THE TRUST,
RECOMMEND APPROVAL OF THE PLAN OF REORGANIZATION.
DISSENTERS' RIGHTS
Neither the Master Trust Agreement of the Trust nor Massachusetts law
grants the shareholders of the Pennsylvania Tax-Free Fund any rights in the
nature of dissenters' rights of appraisal with respect to any action upon which
such shareholders may be entitled to vote; however, the normal right of mutual
fund shareholders to redeem their shares is not affected by the proposed
Reorganization.
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EXPERTS
The financial statements of the Tax-Exempt Fund and the Pennsylvania
Tax-Free Fund for the fiscal year ended December 31, 1994 included in each
Fund's Statement of Additional Information have been incorporated herein by
reference in reliance on the reports of Price Waterhouse LLP, independent
accountants, given on the authority of that firm as experts in accounting and
auditing. Certain legal matters with respect to the issuance of the shares of
the Trust will be passed upon by Goodwin, Procter & Hoar, Boston, Massachusetts.
OTHER MATTERS
The Board of Trustees does not intend to present any other business at the
Meeting, nor are they aware that any shareholder intends to do so. If, however,
any other matters are properly brought before the Meeting, the persons named in
the accompanying proxy will vote thereon in accordance with their judgment.
NO ANNUAL MEETING OF SHAREHOLDERS
There will be no annual or further special meetings of shareholders of the
Funds unless required by applicable law or called by the Trustees of such Fund
in their discretion. In accordance with the 1940 Act, or under the Trust's
Master Trust Agreement, as amended, any Trustee may be removed (i) by a written
instrument, signed by at least two-thirds of the number of Trustees in office
immediately prior to such removal, specifying the date upon which such removal
shall become effective; (ii) by a vote of shareholders holding not less than
two-thirds of the shares of the Trust then outstanding, cast in person or by
proxy at a meeting called for the purpose or (iii) by a written declaration
signed by shareholders holding not less than two-thirds of the shares then
outstanding and filed with the Trust's custodian. Shareholders holding 10% or
more of the shares of the Trust then outstanding can require that the Trustees
call a meeting of shareholders for the purpose of voting on the removal of one
or more Trustees. In addition, if ten or more shareholders who have been such
for at least six months and who hold in the aggregate shares with a net asset
value of at least $25,000 or at least 1% of the outstanding Fund shares, inform
the Trustees that they wish to communicate with other shareholders, the Trustees
will either give such shareholders access to the shareholder list or inform them
of the cost involved if the Funds forward material to shareholders on their
behalf. If the Trustees object to mailing such materials, they must inform the
Securities and Exchange Commission and thereafter comply with the requirements
of the 1940 Act.
Shareholders wishing to submit proposals for inclusion in a proxy
statement for a subsequent shareholder meeting should send their written
proposals to the Secretary of the State Street Research Tax-Exempt Trust, One
Financial Center, 31st Floor, Boston, Massachusetts 02111. Shareholder proposals
should be received in a reasonable time before the solicitation is made.
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WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING, PLEASE FILL IN, DATE AND
SIGN THE ENCLOSED PROXY AND RETURN IT PROMPTLY IN THE ENCLOSED ENVELOPE. NO
POSTAGE IS NECESSARY IF IT IS MAILED IN THE UNITED STATES.
202700.c1
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EXHIBIT A
AGREEMENT AND PLAN OF REORGANIZATION AND LIQUIDATION
AGREEMENT AND PLAN OF REORGANIZATION AND LIQUIDATION dated as of
_________, 1995 by and between State Street Research Tax-Exempt Trust, a
Massachusetts business trust (the "Tax-Exempt Trust"), on behalf of the State
Street Research Pennsylvania Tax-Free Fund series of the Tax-Exempt Trust (the
"Pennsylvania Tax-Free Fund") and the Tax-Exempt Trust on behalf of the State
Street Research Tax-Exempt Fund series of the Tax-Exempt Trust (the "Tax-Exempt
Fund").
W I T N E S S E T H:
WHEREAS, the Tax-Exempt Trust is a diversified, open-end management
investment company registered under the Investment Company Act of 1940, as
amended (the "1940 Act");
WHEREAS, this Agreement is intended to be and is adopted as a plan of
reorganization and liquidation within the meaning of Section 368(a)(1)(C) of the
Internal Revenue Code of 1986, as amended, such reorganization to consist of the
transfer of all of the assets of the Pennsylvania Tax-Free Fund in exchange
solely for Class A, Class B, Class C and Class D shares of common stock, $.001
par value per share, of the Tax-Exempt Fund ("Tax-Exempt Fund Shares") and the
assumption by the Tax-Exempt Fund of all of the liabilities of Pennsylvania
Tax-Free Fund and the distribution, after the Closing hereinafter referred to,
of Tax-Exempt Fund Shares to the shareholders of the Pennsylvania Tax-Free Fund
in liquidation of the Pennsylvania Tax-Free Fund, all upon the terms and
conditions hereinafter set forth in this Agreement (collectively, the
"Reorganization"); and
WHEREAS, the Trustees of the Tax-Exempt Trust, including a majority of the
Trustees and the Trustees who are not interested persons, have determined that
participating in the transactions contemplated by this Agreement is in the best
interests of each of the Funds.
NOW, THEREFORE, in consideration of the mutual promises herein contained,
the parties hereto agree as follows:
1. Transfer of Assets. Subject to the terms and conditions set forth
herein, at the closing provided for in Section 5 (herein referred to as the
"Closing") the Tax-Exempt Trust on behalf of the Pennsylvania Tax-Free Fund
shall transfer all of the assets of the Pennsylvania Tax-Free Fund, and assign
all Assumed Liabilities (as hereinafter defined) to the Tax-Exempt Fund, and the
Tax-Exempt Trust on behalf of the Tax-Exempt Fund shall acquire all such assets,
and shall assume all such Assumed Liabilities (as hereinafter defined), upon
delivery to the Tax-Exempt Trust on behalf of the Pennsylvania Tax-Free Fund of
Tax-Exempt Fund Shares having a net asset value equal to the value of the net
assets of the Pennsylvania Tax-Free Fund transferred (the "New Shares").
"Assumed Liabilities" shall mean all liabilities, including all expenses, costs,
charges and reserves reflected in an unaudited statement of assets and
liabilities of the Pennsylvania Tax-Free Fund as of the close of business on the
Valuation Date (as hereinafter defined), determined in accordance with generally
accepted accounting principles consistently applied from the prior audited
period. The net asset value of the New Shares and the value of the net assets of
the Pennsylvania Tax-Free Fund to be transferred shall be determined as of the
close of regular trading on the New York Stock Exchange on the business day next
<PAGE>
preceding the Closing (the "Valuation Date") using the valuation procedures set
forth in the then current prospectus and statement of additional information of
the Tax-Exempt Fund. All Assumed Liabilities of the Pennsylvania Tax-Free Fund,
to the extent that they exist at or after the Closing, shall after the Closing
attach to the Tax-Exempt Fund and may be enforced against Tax-Exempt Fund to the
same extent as if the same had been incurred by Tax-Exempt Fund.
2. Liquidation of the Pennsylvania Tax-Free Fund. At or as soon as
practicable after the Closing, the Pennsylvania Tax-Free Fund will be liquidated
and the New Shares delivered to the Tax-Exempt Trust on behalf of the
Pennsylvania Tax-Free Fund will be distributed to shareholders of the
Pennsylvania Tax-Free Fund, each shareholder to receive the number of New Shares
of the corresponding class and equal to the pro rata portion of shares of
beneficial interest of the Pennsylvania Tax-Free Fund held by such shareholder
as of the close of business on the Valuation Date. Such liquidation and
distribution will be accompanied by the establishment of an open account on the
share records of the Tax-Exempt Fund in the name of each shareholder of the
Pennsylvania Tax-Free Fund and representing the respective pro rata number of
New Shares due such shareholder. As soon as practicable after the Closing, the
Tax-Exempt Trust shall file on behalf of the Pennsylvania Tax-Free Fund such
instruments of dissolution, if any, as are necessary to effect the dissolution
of the Pennsylvania Tax-Free Fund and shall take all other steps necessary to
effect a complete liquidation and dissolution of the Pennsylvania Tax-Free Fund.
As of the Closing, each outstanding certificate which, prior to the Closing,
represented shares of the Pennsylvania Tax-Free Fund will be deemed for all
purposes to evidence ownership of the number of Tax-Exempt Fund Shares issuable
with respect thereto pursuant to the Reorganization. After the Closing,
certificates originally representing shares of Class A or Class C of the
Pennsylvania Tax-Free Fund will be rendered null and void and nonnegotiable;
upon special request and surrender of such certificates to State Street Bank and
Trust Company as transfer agent, holders of these nonnegotiable certificates
shall be entitled to receive certificates representing the number of Tax-Exempt
Fund Shares issuable with respect thereto. All Class B and Class D shares of the
Tax-Exempt Fund are held of record in book entry form and no certificates for
such shares will be issued.
3. Representations and Warranties.
(a) The Tax-Exempt Trust, on behalf of the Pennsylvania Tax-Free
Fund, hereby represents and warrants to the Tax-Exempt Fund as follows:
(i) the Tax-Exempt Trust is duly organized, validly
existing and in good standing under the laws of The Commonwealth of
Massachusetts and has full power and authority to conduct its business
as presently conducted;
(ii) the Tax-Exempt Trust has full power and authority to
execute, deliver and carry out the terms of this Agreement on behalf of
the Pennsylvania Tax-Free Fund;
(iii) the execution and delivery of this Agreement on behalf of
the Pennsylvania Tax-Free Fund and the consummation of the transactions
contemplated hereby are duly authorized and no other proceedings on the
part of the Tax-Exempt Trust or the shareholders of the Pennsylvania
Tax-Free Fund (other than as contemplated in Section 4(h)) are necessary
to authorize this Agreement and the transactions contemplated hereby;
2
<PAGE>
(iv) this Agreement has been duly executed by the Tax-Exempt
Trust on behalf of the Pennsylvania Tax-Free Fund and constitutes its
valid and binding obligation, enforceable in accordance with its terms,
subject to applicable bankruptcy, reorganization, insolvency, moratorium
and other rights affecting creditors' rights generally, and general
equitable principles;
(v) neither the execution and delivery of this Agreement by the
Tax-Exempt Trust on behalf of the Pennsylvania Tax-Free Fund, nor the
consummation by the Tax-Exempt Trust on behalf of the Pennsylvania
Tax-Free Fund of the transactions contemplated hereby will conflict with,
result in a breach or violation of or constitute (or with notice, lapse of
time or both constitute) a breach of or default under, the Master Trust
Agreement or By-Laws of the Tax-Exempt Trust, or any statute, regulation,
order, judgment or decree, or any instrument, contract or other agreement
to which the Tax-Exempt Trust is a party or by which the Tax-Exempt Trust
or any of its assets is subject or bound; and
(vi) no authorization, consent or approval of any governmental
or other public body or authority or any other party is necessary for the
execution and delivery of this Agreement by the Tax-Exempt Trust on behalf
of the Pennsylvania Tax-Free Fund or the consummation of any transactions
contemplated hereby by the Tax-Exempt Trust, other than as shall be
obtained at or prior to the Closing.
(b) The Tax-Exempt Trust, on behalf of the Tax-Exempt Fund, hereby
represents and warrants to the Pennsylvania Tax-Free Fund as follows:
(i) The Tax-Exempt Trust is duly organized, validly
existing and in good standing under the laws of The Commonwealth of
Massachusetts and has full power and authority to conduct its business
as presently conducted;
(ii) The Tax-Exempt Trust has full power and authority to
execute, deliver and carry out the terms of this Agreement on behalf of
the Tax-Exempt Fund;
(iii) the execution and delivery of this Agreement on behalf of
the Tax-Exempt Fund and the consummation of the transactions contemplated
hereby are duly authorized and no other proceedings on the part of the
Tax-Exempt Trust or the shareholders of the Tax-Exempt Fund are necessary
to authorize this Agreement and the transactions contemplated hereby;
(iv) this Agreement has been duly executed by the Tax-Exempt
Trust on behalf of the Tax-Exempt Fund and constitutes its valid and
binding obligation, enforceable in accordance with its terms, subject to
applicable bankruptcy, reorganization, insolvency, moratorium and other
rights affecting creditors' rights generally, and general equitable
principles;
(v) neither the execution and delivery of this Agreement by the
Tax-Exempt Trust on behalf of the Tax-Exempt Fund, nor the consummation by
the Tax-Exempt Trust on behalf of the Tax-Exempt Fund of the transaction
contemplated hereby will conflict with, result in a breach or violation of
or constitute (or with notice, lapse of time or both constitute) a breach
of or default under, the Master Trust Agreement or By-Laws of the
3
<PAGE>
Tax-Exempt Trust, or any statute, regulation, order, judgment or decree,
or any instrument, contract or other agreement to which the Tax-Exempt
Trust is a party or by which the Tax-Exempt Trust or any of its assets is
subject or bound; and
(vi) no authorization, consent or approval of any
governmental or other public body or authority or any other party is
necessary for the execution and delivery of this Agreement by the
Tax-Exempt Trust on behalf of the Tax-Exempt Fund or the consummation
of any transactions contemplated hereby by the Tax-Exempt Trust, other
than as shall be obtained at or prior to the Closing.
4. Conditions Precedent. The obligations of the Tax-Exempt Trust on
behalf of the Pennsylvania Tax-Free Fund and the Tax-Exempt Trust on behalf of
the Tax-Exempt Fund to effectuate the plan of reorganization and liquidation
hereunder shall be subject to the satisfaction of the following conditions:
(a) At or immediately prior to the Closing, the Tax-Exempt Trust
shall have declared and paid a dividend or dividends which, together with all
previous such dividends, shall have the effect of distributing to the
shareholders of the Pennsylvania Tax-Free Fund all of such Fund's investment
company taxable income for taxable years ending at or prior to the Closing
(computed without regard to any deduction for dividends paid) and all of its net
capital gain, if any, realized in taxable years ending at or prior to the
Closing (after reduction for any capital loss carry-forward).
(b) A registration statement of the Tax-Exempt Fund on Form N-14
under the Securities Act of 1933, as amended (the "Securities Act"), registering
the New Shares under the Securities Act, and such amendment or amendments
thereto as are determined by the Board of Trustees of the Tax-Exempt Trust to be
necessary and appropriate to effect such registration of the New Shares (the
"Registration Statement"), shall have been filed with the Commission and the
Registration Statement shall have become effective, and no stop-order suspending
the effectiveness of such Registration Statement shall have been issued, and no
proceeding for that purpose shall have been initiated or threatened by the
Commission (and not withdrawn or terminated);
(c) The New Shares shall have been duly qualified for offering
to the public in all states in which such qualification is required for
consummation of the transactions contemplated hereunder;
(d) All representations and warranties of the Tax-Exempt Trust on
behalf of the Pennsylvania Tax-Free Fund contained in this Agreement shall be
true and correct in all material respects as of the date hereof and as of the
Closing, with the same force and effect as if then made, and the Tax-Exempt
Trust on behalf of the Tax-Exempt Fund shall have received a certificate of an
officer of the Tax-Exempt Trust acting on behalf of the Pennsylvania Tax-Free
Fund to that effect in form and substance reasonably satisfactory to the
Tax-Exempt Trust on behalf of the Tax-Exempt Fund;
(e) All representations and warranties of the Tax-Exempt Trust on
behalf of the Tax-Exempt Fund contained in this Agreement shall be true and
correct in all material respects as of the date hereof and as of the Closing,
with the same force and effect as if then made, and the Tax-Exempt Trust on
behalf of the Pennsylvania Tax-Free Fund shall have received a certificate of an
officer of the Tax-Exempt Trust acting on behalf of the Tax-Exempt Fund to that
4
<PAGE>
effect in form and substance reasonably satisfactory to the Tax-Exempt Trust on
behalf of the Pennsylvania Tax-Free Fund;
(f) The Tax-Exempt Trust on behalf of the Pennsylvania Tax-Free Fund
and the Tax-Exempt Trust on behalf of the Tax-Exempt Fund shall have received an
opinion from Goodwin, Procter & Hoar regarding tax matters in connection with
the Reorganization;
(g) The Tax-Exempt Trust on behalf of the Tax-Exempt Fund shall have
received an agreed upon procedures report, in accordance with established
accounting standards for such reports, of Price Waterhouse LLP, auditors for the
Tax-Exempt Trust, as to the unaudited statement of assets and liabilities
described in Section 1 of this Agreement; and
(h) A vote approving this Agreement and the Reorganization
contemplated hereby shall have been adopted by at least a majority of the
outstanding Class A, Class B, Class C and Class D shares of beneficial interest
of the Pennsylvania Tax-Free Fund (within the meaning of the 1940 Act), voting
together as a single class, entitled to vote at the special meeting of
shareholders of the Pennsylvania Tax-Free Fund duly called for such purpose.
(i) The Funds shall have received from the Commission an order
approving the Funds' application pursuant to Section 17(b) of the 1940 Act for
an order exempting the Reorganization from Section 17(a) of the 1940 Act and
pursuant to Rule 17d-1 under the 1940 Act for an order exempting the
Reorganization from Section 17(d) of the1940 Act and Rule 17d-1 thereunder.
5. Closing. The Closing shall be held at the offices of the Tax-Exempt
Trust and shall occur (a) immediately prior to the opening of business on the
first Monday following receipt of all necessary regulatory approvals and the
final adjournment of the meeting of shareholders of the Pennsylvania Tax-Free
Fund at which this Agreement is considered or (b) such later time as the parties
may agree. All acts taking place at the Closing shall be deemed to take place
simultaneously unless otherwise provided. At, or as soon as may be practicable
following the Closing, the Tax-Exempt Fund shall distribute the New Shares to
the Pennsylvania Tax-Free Fund Record Holders (as herein defined) by instructing
the Tax-Exempt Fund to register the appropriate number of New Shares in the
names of the Pennsylvania Tax-Free Fund's shareholders and the Tax-Exempt Fund
agrees promptly to comply with said instruction. The shareholders of record of
the Pennsylvania Tax-Free Fund as of the close of business on the Valuation Date
shall be certified by the Tax-Exempt Trust's transfer agent (the "Pennsylvania
Tax-Free Fund Record Holders").
6. Expenses. The expenses incurred in connection with the transactions
contemplated by this Agreement, whether or not the transactions contemplated
hereby are consummated, will be apportioned between State Street Research
Investment Services, Inc.(the "Distributor"), the distributor for each of the
Funds, and the Funds in a fair and equitable manner. The Distributor will assume
one-half of the expenses and the other half will be allocated to the Tax-Exempt
Fund and the Pennsylvania Tax-Free Fund in an appropriate manner on the basis of
identifiable direct costs or otherwise on the basis of relative net assets. Such
expenses include, without limitation, (i) expenses incurred in connection with
the entering into and the carrying out of the provisions of this Agreement; (ii)
expenses associated with the preparation and filing of the registration
statement on Form N-14 contemplated hereby; (iii) registration or qualification
fees and expenses of preparing and filing such forms as are necessary to qualify
the New Shares under applicable blue sky laws; (iv) postage; (v) printing; (vi)
accounting fees; (vii) legal fees; and (viii) solicitation costs of the
transaction.
5
<PAGE>
7. Termination. This Agreement and the transactions contemplated hereby
may be terminated and abandoned by resolution of the Board of Trustees of the
Tax-Exempt Trust, at any time prior to the Closing, if circumstances should
develop that, in the opinion of the Board of Trustees, in its sole discretion,
make proceeding with this Agreement inadvisable. In the event of any such
termination, there shall be no liability for damages on the part of either the
Pennsylvania Tax-Free Fund or the Tax-Exempt Fund, or their respective trustees
or officers, to the other party or its trustees or officers.
8. Amendments. This Agreement may be amended, waived or
supplemented in such manner as may be mutually agreed upon in writing by the
authorized officers of the Tax-Exempt Trust acting on behalf of the
Pennsylvania Tax-Free Fund and by the authorized officers of the Tax-Exempt
Trust acting on behalf of the Tax-Exempt Fund; provided, however, that
following the meeting of the Pennsylvania Tax-Free Fund shareholders called
by the Tax-Exempt Trust pursuant to Section 4(h) of this Agreement, no such
amendment, waiver or supplement may have the effect of changing the
provisions for determining the number of Tax-Exempt Fund Shares to be issued
to the Pennsylvania Tax-Free Fund shareholders under this Agreement to the
detriment of such shareholders without their further approval.
9. Governing Law. This Agreement shall be governed and construed in
accordance with the laws of The Commonwealth of Massachusetts, except as to
matters of conflicts of laws.
10. Further Assurances. The Tax-Exempt Trust shall take such further
action, prior to, at, and after the Closing, as may be necessary or desirable
and proper to consummate the transactions contemplated hereby.
11. Limitations of Liability. The term "Tax-Exempt Trust" means and refers
to the trustees from time to time serving under the Master Trust Agreement of
the Tax-Exempt Trust, as the same may subsequently thereto have been, or
subsequently hereto be, amended. It is expressly agreed that the obligations of
the Tax-Exempt Trust hereunder shall not be binding upon any of the Trustees,
shareholders, nominees, officers, agents or employees of the Tax-Exempt Trust,
personally, but bind only the assets and property of the Pennsylvania Tax-Free
Fund series of the Tax-Exempt Trust and the Tax-Exempt Fund series of the
Tax-Exempt Trust, as the case may be, as provided in the Master Trust Agreement
of the Tax-Exempt Trust. The execution and delivery of this Agreement have been
authorized by the Trustees of the Tax-Exempt Trust and signed by an authorized
officer of the Tax-Exempt Trust, acting as such, and neither such authorization
nor such execution and delivery shall be deemed to have been made individually
or to impose any personal liability, but shall bind only the trust property of
the Tax-Exempt Trust as provided in its Master Trust Agreement. The Master Trust
Agreement of the Tax-Exempt Trust provides, and it is expressly agreed, that
each Sub-Trust of the Tax-Exempt Trust shall be charged with the liabilities in
respect of that Sub-Trust and all expenses, costs, charges or reserves belonging
to that Sub-Trust.
6
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the date first set forth above by their duly authorized
representatives.
STATE STREET RESEARCH TAX-EXEMPT TRUST, on
behalf of its State Street Research
Pennsylvania Tax-Free Fund series
Attest:
- --------------------- ---------------------------------
By:
ATTEST: STATE STREET RESEARCH TAX-EXEMPT TRUST,
on behalf of its State Street Research
Tax-Exempt Trust Fund series
- ---------------------- ---------------------------------
By:
197933.c1
7/24/95
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
Acquisition of the Assets of
STATE STREET RESEARCH CALIFORNIA TAX-FREE FUND
STATE STREET RESEARCH FLORIDA TAX-FREE FUND
STATE STREET RESEARCH PENNSYLVANIA TAX-FREE FUND
Each a Series of
State Street Research Tax-Exempt Trust
One Financial Center
Boston, Massachusetts 02111
(800) 562-0032
By and In Exchange For Shares of
STATE STREET RESEARCH TAX-EXEMPT FUND
A Series of
State Street Research Tax-Exempt Trust
One Financial Center
Boston, Massachusetts 02111
(800) 562-0032
This Statement of Additional Information, relating specifically to the
proposed transfer of the assets and liabilities of each of State Street Research
California Tax-Free Fund (the "California Tax-Free Fund), a series of State
Street Tax-Exempt Trust (the "Trust"), the State Street Research Florida
Tax-Free Fund (the "Florida Tax-Free Fund"), a series of the Trust, and the
State Street Research Pennsylvania Tax-Free Fund (the "Pennsylvania Tax-Free
Fund"), a series of the Trust, to the State Street Research Tax-Exempt Fund (the
"Tax-Exempt Fund"), a series of the Trust, in exchange for Class A, Class B,
Class C and Class D shares of beneficial interest, $.001 par value per share, of
the Tax-Exempt Fund, consists of this cover page and the following described
documents, each of which is attached hereto and incorporated by reference
herein:
(1) The Statement of Additional Information of the Tax-Exempt
Fund dated May 1, 1995;
(2) The Statement of Additional Information of the California
Tax-Free Fund dated May 1, 1995;
(3) The Statement of Additional Information of the Florida
Tax-Free Fund and the Pennsylvania Tax-Free Fund dated May 1,
1995;
(4) The Semiannual Report of the Tax-Exempt Fund dated June 30,
1995;
(5) The Semiannual Report of the California Tax-Free Fund dated
June 30, 1995;
(6) The Semiannual Report of the Florida Tax-Free Fund dated
June 30, 1995:
(7) The Semiannual Report of the Pennsylvania Tax-Free Fund
dated June 30, 1995; and
(8) Pro forma financials for the California Tax-Free Fund and
the Tax-Exempt Fund.
<PAGE>
This Statement of Additional Information, which is not a prospectus,
supplements and should be read in conjunction with (i) the Joint Proxy
Statement/Prospectus of the Tax-Exempt Fund and the California Tax-Free Fund
dated ___________, 1995; (ii) the Joint Proxy Statement/Prospectus of the
Tax-Exempt Fund and the Florida Tax-Free Fund dated ___________, 1995; and (iii)
the Joint Proxy Statement/Prospectus of the Tax-Exempt Fund and the Pennsylvania
Tax-Free Fund dated ___________, 1995. A copy of each Joint Proxy
Statement/Prospectus may be obtained without charge by calling or writing the
Tax-Exempt Fund, the California Tax-Free Fund, the Florida Tax-Free Fund or the
Pennsylvania Tax-Free Fund at the telephone numbers or addresses set forth
above.
The date of this Statement of Additional Information is ___________, 1995.
202910.c1
<PAGE>
STATE STREET RESEARCH TAX-EXEMPT FUND
A Series of
STATE STREET RESEARCH TAX-EXEMPT TRUST
STATEMENT OF ADDITIONAL INFORMATION
May 1, 1995
TABLE OF CONTENTS
Page
ADDITIONAL INVESTMENT POLICIES AND RESTRICTIONS ........................... 2
TAX-EXEMPT BONDS .......................................................... 5
ADDITIONAL INFORMATION CONCERNING CERTAIN INVESTMENT TECHNIQUES ........... 6
DEBT INSTRUMENTS AND PERMITTED CASH INVESTMENTS ........................... 14
TRUSTEES AND OFFICERS ..................................................... 18
INVESTMENT ADVISORY SERVICES .............................................. 23
PURCHASE AND REDEMPTION OF SHARES ......................................... 24
NET ASSET VALUE ........................................................... 26
PORTFOLIO TRANSACTIONS .................................................... 28
CERTAIN TAX MATTERS ....................................................... 30
DISTRIBUTION OF SHARES OF THE FUND ........................................ 33
CALCULATION OF PERFORMANCE DATA ........................................... 38
CUSTODIAN ................................................................. 43
INDEPENDENT ACCOUNTANTS ................................................... 43
FINANCIAL STATEMENTS ...................................................... 43
APPENDIX .................................................................. A-1
The following Statement of Additional Information is not a Prospectus. It
should be read in conjunction with the Prospectus of State Street Research
Tax-Exempt Fund (the "Fund") dated May 1, 1995 which may be obtained without
charge from the offices of State Street Research Tax-Exempt Trust (the "Trust")
or State Street Research Investment Services, Inc. (the "Distributor"), One
Financial Center, Boston, Massachusetts 02111-2690.
1285Q-950510 (0696) SSR-LD TE-879D-595
<PAGE>
ADDITIONAL INVESTMENT POLICIES AND RESTRICTIONS
In addition to the investment policies set forth under "The Fund's
Investments" and "Limiting Investment Risk" in the Fund's Prospectus, the Fund
has adopted certain investment restrictions.
The following restrictions are deemed fundamental and may not be changed
except by the affirmative vote of a majority of the Fund's outstanding voting
securities as defined in the Investment Company Act of 1940 (the "1940 Act").
(Under the 1940 Act, a "vote of the majority of the outstanding voting
securities" means the vote, at the annual or a special meeting of security
holders duly called, (i) of 67% or more of the voting securities present at a
meeting if the holders of more than 50% of the outstanding voting securities are
present or represented by proxy or (ii) of more than 50% of the outstanding
voting securities, whichever is less.) Under these restrictions, it is the
Fund's policy:
(1) not to issue senior securities;
(2) not to underwrite or participate in the marketing of securities of
other issuers, although the Fund may, acting alone or in syndicates
or groups, if determined by the Trust's Board of Trustees, purchase
or otherwise acquire securities of other issuers for investment,
either from the issuers or from persons in a control relationship
with the issuers or from underwriters of such securities;
(3) not to purchase or sell real estate in fee simple;
(4) not to invest in commodities or commodity contracts, except that the
Fund may make investments in financial futures and options on
financial futures to the extent set forth in its Prospectus and
Statement of Additional Information;
(5) not to make loans, except that the Fund may purchase bonds,
debentures, notes and similar obligations (including repurchase
agreements with respect thereto) in accordance with applicable
investment policies and objectives;
(6) not to 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;
(7) not to conduct arbitrage transactions (provided that investments in
futures and options for hedging purposes as provided herein and in
the Fund's Prospectus shall not be deemed arbitrage transactions);
2
<PAGE>
(8) not to invest in oil, gas or other mineral exploration programs
(provided that the Fund may invest in securities which are based,
directly or indirectly, on the credit of companies which invest in
or sponsor such programs);
(9) not to make any investment which would cause more than 25% of the
value of the Fund's total assets to be invested in securities of
issuers conducting their principal activities in the same state (for
purposes of this restriction securities issued or guaranteed by the
U.S. Government or its agencies or instrumentalities or backed by
the U.S. Government shall be excluded);
(10) not to borrow money (through reverse repurchase agreements or
otherwise) except for extraordinary and emergency purposes, such as
permitting redemption requests to be honored, and then not in an
amount in excess of 10% of the value of its total assets, provided
that reverse repurchase agreements shall not exceed 5% of its total
assets, and provided further that additional investments will be
suspended during any period when borrowing exceeds 5% of total
assets. Reverse repurchase agreements occur when the Fund sells
money market securities and agrees to repurchase such securities at
an agreed-upon price, date and interest payment. The Fund would use
the proceeds from the transaction to buy other money market
securities, which are either maturing or under the terms of a resale
agreement, on the same day as (or day prior to) the expiration of
the reverse repurchase agreement, and would employ a reverse
repurchase agreement when interest income from investing the
proceeds of the transaction is greater than the interest expense of
the reverse repurchase agreement;
(11) not to invest in a security if the transaction would result
in more than 5% of the Fund's total assets being invested in any
one issuer, except this restriction does not apply to investments
in securities issued or guaranteed by the U.S. Government or its
agencies or instrumentalities or backed by the U.S. Government;
(12) not to invest in a security if the transaction would result in
the Fund's owning more than 10% of any class of voting securities of
an issuer, except this restriction does not apply to investments in
securities issued or guaranteed by the U.S. Government or its
agencies or instrumentalities or backed by the U.S. Government; and
(13) not to invest in a security if the transaction would result in
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 Standard & Poor's Corporation ("S&P") or Ba or higher by Moody's
Investors Service, Inc. ("Moody's"), and except
3
<PAGE>
this restriction does not apply to investments in securities issued
or guaranteed by the U.S. Government or its agencies or
instrumentalities or backed by the U.S. Government.
The following investment restrictions may be changed by a vote of a
majority of the Trustees. Under these restrictions, it is the Fund's policy:
(1) not to purchase securities on margin, make a short sale of any
securities or purchase or deal in puts, calls, straddles or spreads
with respect to any security, except in connection with the purchase
or writing of options, including options on financial futures, and
futures contracts to the extent set forth in the Fund's Prospectus
and Statement of Additional Information;
(2) not to hypothecate, mortgage or pledge any of its assets except as
may be necessary in connection with permitted borrowings and then
not in excess of 15% of the Fund's total assets, taken at cost (for
the purpose of this restriction financial futures and options on
financial futures are not deemed to involve a pledge of assets);
(3) not to purchase a security issued by another investment company if,
immediately after such purchase, the Fund would own, in the
aggregate, (i) more than 3% of the total outstanding voting stock of
such other investment company; (ii) securities issued by such other
investment company having an aggregate value in excess of 5% of the
value of the Fund's total assets; or (iii) securities issued by such
other investment company and all other investment companies (other
than treasury stock of the Fund) having an aggregate value in excess
of 10% of the value of the Fund's total assets; provided, however,
that the Fund may purchase investment company securities without
limit for the purpose of completing a merger, consolidation or other
acquisition of assets;
(4) not to purchase for or retain any security of an issuer if, to the
knowledge of the Trust, those of its officers and Trustees and
officers and directors of its investment advisers who individually
own more than 1/2 of 1% of the securities of such issuer, when
combined, own more than 5% of the securities of such issuer taken at
market; and
(5) not to invest in companies for the purpose of exercising control
over their management, although the Fund may from time to time
present its views on various matters to the management of issuers in
which it holds investments.
4
<PAGE>
TAX-EXEMPT BONDS
As used in the Fund's Prospectus and this Statement of Additional
Information, the term "tax-exempt" refers to debt obligations the interest on
which was at the time of issuance, in the opinion of bond counsel to the issuer,
exempt from federal income tax. Tax-exempt bonds include debt obligations issued
by a state, the District of Columbia or a territory or possession of the United
States, or any political subdivision thereof, in order to obtain funds for
various public purposes, including the construction of such public facilities as
airports, bridges, highways, housing, mass transportation, roads, schools and
water and sewer works. Other public purposes for which tax-exempt bonds may be
issued include refunding outstanding obligations, obtaining funds for general
operating expenses and obtaining funds to lend to other public institutions and
facilities. In addition, certain debt obligations known as industrial
development bonds may be issued by or on behalf of public authorities to obtain
funds to provide privately-operated housing facilities, sports facilities,
conventions or trade show facilities, airports, mass transit, port or parking
facilities, air or water pollution control facilities and certain local
facilities for water supply, gas, electricity or sewage or solid waste disposal.
Such obligations are included within the term tax-exempt bonds if the interest
paid thereon is exempt from federal income tax. Interest on industrial
development bonds used to fund the acquisition, construction, equipment, repair
or improvement of privately operated industrial or commercial facilities may
also be exempt from federal income tax, but the size of such issues is limited
under current federal tax law.
The two principal classifications of tax-exempt bonds are general
obligation bonds and limited obligation (or revenue) bonds.
General obligation bonds are obligations involving the credit of an issuer
possessing taxing power and are payable from the issuer's general unrestricted
revenues and not from any particular fund or source. The characteristics and
method of enforcement of general obligation bonds vary according to the law
applicable to the particular issuer, and payment may be dependent upon
appropriation by the issuer's legislative body.
Limited obligation bonds are payable only from the revenues derived from a
particular facility or class of facilities or, in some cases, from the proceeds
of a special excise or other specific revenue source. Tax-exempt industrial
development bonds generally are revenue bonds and thus not payable from the
unrestricted revenues of the issuer. The credit and quality of industrial
development revenue bonds is usually directly related to the credit of the
corporate user of the facilities. Payment of principal of and interest on
industrial development revenue bonds is the responsibility of the corporate user
(and any guarantor).
Prices and yields on tax-exempt bonds are dependent on a variety of
factors, including general money market conditions, the financial condition of
the issuer, general conditions in the tax-exempt bond market, the size of a
particular offering, the maturity of the obligation and ratings of particular
issues, and are subject to change from time to time. Information
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about the financial condition of an issuer of tax-exempt bonds may not be as
extensive as that which is made available by corporations whose securities are
publicly traded.
The ratings of Moody's and S&P represent their opinions and are not
absolute standards of quality. Tax-exempt bonds with the same maturity, interest
rate and rating may have different yields while tax-exempt bonds of the same
maturity and interest rate with different ratings may have the same yield.
Obligations of issuers of tax-exempt bonds are subject to the provisions
of bankruptcy, insolvency and other laws, such as the Federal Bankruptcy Reform
Act of 1978, affecting the rights and remedies of creditors. Congress or state
legislators may seek to extend the time for payment of principal or interest, or
both, or to impose other constraints upon enforcement of such obligations. There
is also the possibility that, as a result of litigation or other conditions, the
power or ability of issuers to meet their obligations to pay interest on and
principal of their tax-exempt bonds may be materially impaired or their
obligations may be found to be invalid or unenforceable. Such litigation or
conditions may from time to time have the effect of introducing uncertainties in
the market for tax-exempt bonds or certain segments thereof, or materially
affecting the credit risk with respect to particular bonds. Adverse economic,
business, legal or political developments might affect all or a substantial
portion of the Fund's tax-exempt bonds in the same manner.
ADDITIONAL INFORMATION CONCERNING
CERTAIN INVESTMENT TECHNIQUES
Among other investments described below, the Fund may buy and sell
options, futures contracts, and options on futures contracts with respect to
securities and securities indices and may enter into closing transactions with
respect to each of the foregoing, and invest in other derivatives, under
circumstances in which the use of such techniques is expected by State Street
Research & Management Company (the "Investment Manager") to aid in achieving the
investment objective of the Fund. The Fund on occasion may also purchase
instruments with characteristics of both futures and securities (e.g., debt
instruments with interest and principal payments determined by reference to the
value of a commodity at a future time) and which, therefore, possess the risks
of both futures and securities investments.
Futures Contracts
Futures contracts are publicly traded contracts to buy or sell underlying
assets, such as certain securities or an index of securities, at a future time
at a specified price. A contract to buy establishes a "long" position while a
contract to sell establishes a "short" position.
The purchase of a futures contract on securities or an index of securities
normally enables a buyer to participate in the market movement of the underlying
asset or index after
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paying a transaction charge and posting margin in an amount equal to a small
percentage of the value of the underlying asset or index.
The Fund will initially be required to deposit with the Trust's custodian
or the broker effecting the transaction an amount of "initial margin" in cash or
U.S. Treasury obligations.
Initial margin in futures transactions is different from margin in
securities transactions in that the former does not involve the borrowing of
funds by the customer to finance the transaction. Rather, the initial margin is
like a performance bond or good faith deposit on the contract. Subsequent
payments (called "maintenance margin") to and from the broker will be made on a
daily basis as the price of the underlying asset fluctuates. This process is
known as "marking to market." For example, when the Fund has taken a long
position in a futures contract and the value of the underlying asset has risen,
that position will have increased in value and the Fund will receive from the
broker a maintenance margin payment equal to that increase in value of the
underlying asset. Conversely, when the Fund has taken a long position in a
futures contract and the value of the underlying asset has declined, the
position would be less valuable, and the Fund would be required to make a
maintenance margin payment to the broker.
At any time prior to expiration of the futures contract, the Fund may
elect to close the position by taking an opposite position which will terminate
its position in the futures contract. A final determination of maintenance
margin is then made, additional cash is required to be paid by or released to
the Fund, and the Fund realizes a loss or a gain. While futures contracts with
respect to securities do provide for the delivery and acceptance of securities,
such delivery and acceptance are seldom made.
Futures contracts will be executed primarily (a) to establish a short
position, and thus to protect the Fund from experiencing the full impact of an
expected decline in market value of portfolio holdings without requiring the
sale of holdings, or (b) to establish a long position, and thus to participate
in an expected rise in market value of securities which the Fund intends to
purchase. In transactions establishing a long position in a futures contract,
money market instruments equal to the face value of the futures contract will be
identified by the Fund to the Trust's custodian for maintenance in a separate
account to insure that the use of such futures contracts is unleveraged.
Similarly, a representative portfolio of securities having a value equal to the
aggregate face value of the futures contract will be identified with respect to
each short position. The Fund will employ any other appropriate method of cover
which is consistent with applicable regulatory and exchange requirements.
Options on Securities
The Fund may use options on securities to implement its investment
strategy. A call option on a security, for example, gives the purchaser of the
option the right to buy, and the writer the obligation to sell, the underlying
asset at the exercise price during the option period.
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Conversely, a put option on a security gives the purchaser the right to sell,
and the writer the obligation to buy, the underlying asset at the exercise price
during the option period.
Purchased options have defined risk, i.e., the premium paid for the
option, no matter how adversely the price of the underlying asset moves, while
affording an opportunity for gain corresponding to the increase or decrease in
the value of the optioned asset.
Written options have varying degrees of risk. An uncovered written call
option theoretically carries unlimited risk, as the market price of the
underlying asset could rise far above the exercise price before its expiration.
This risk is tempered when the call option is covered, i.e., when the option
writer owns the underlying asset. In this case, the writer runs the risk of the
lost opportunity to participate in the appreciation in value of the asset rather
than the risk of an out-of-pocket loss. A written put option has defined risk,
i.e., the difference between the agreed upon price that the Fund must pay to the
buyer upon exercise of the put and the value, which could be zero, of the asset
at the time of exercise.
The obligation of the writer of an option continues until the writer
effects a closing purchase transaction or until the option expires. To secure
his obligation to deliver the underlying asset in the case of a call option, or
to pay for the underlying asset in the case of a put option, a covered writer is
required to deposit in escrow the underlying security or other assets in
accordance with the rules of the applicable clearing corporation and exchanges.
Options on Securities Indices
The Fund may engage in transactions in call and put options on securities
indices. For example, the Fund may purchase put options on indices of fixed
income securities in anticipation of or during a market decline to attempt to
offset the decrease in market value of its securities that might otherwise
result.
Put options on indices of securities are similar to put options on the
securities themselves except that the delivery requirements are different.
Instead of giving the right to make delivery of a security at a specified price,
a put option on an index of securities gives the holder the right to receive an
amount of cash upon exercise of the option if the value of the underlying index
has fallen below the exercise price. The amount of cash received will be equal
to the difference between the closing price of the index and the exercise price
of the option expressed in dollars times a specified multiple. As with options
on securities, the Fund may offset its position in index options prior to
expiration by entering into a closing transaction on an exchange or it may let
the option expire unexercised.
A securities index assigns relative values to the securities included in
the index and the index options are based on a broad market index. Although
there are at present few available options on indices of fixed income
securities, other than tax-exempt securities, or futures and related options
based on such indices, such instruments may become available in the future. In
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connection with the use of such options, the Fund may cover its position by
identifying a representative portfolio of securities having a value equal to the
aggregate face value of the option position taken. However, the Fund may employ
and appropriate method to cover its position that is consistent with applicable
regulatory and exchange requirements.
Options on Futures Contracts
An option on a futures contract gives the purchaser the right, in return
for the premium paid, to assume a position in a futures contract (a long
position if the option is a call and a short position if the option is a put) at
a specified exercise price at any time during the period of the option.
Options Strategy
A basic option strategy for protecting the Fund against a decline in
securities prices could involve (a) the purchase of a put -- thus "locking in"
the selling price of the underlying security -- or (b) the writing of a call on
securities or securities indices held by the Fund -- thereby generating income
(the premium paid by the buyer) by giving the holder of such call the option to
buy the underlying asset at a fixed price. The premium will offset, in whole or
in part, a decline in portfolio value; however, if prices of the relevant
securities or securities indices rose instead of falling, the call might be
exercised, thereby resulting in a potential loss of appreciation in the
underlying securities or securities indices.
A basic option strategy when a rise in securities prices is anticipated is
the purchase of a call -- thus "locking in" the purchase price of the underlying
security or other asset. In transactions involving the purchase of call options
by the Fund, money market instruments equal to the aggregate exercise price of
the options will be identified by the Fund to the Trust's custodian to insure
that the use of such investments is unleveraged.
The Fund may write options in connection with buy-and-write transactions;
that is, the Fund may purchase a security and concurrently write a call option
against that security. If the call option is exercised in such a transaction,
the Fund's maximum gain will be the premium received by it for writing the
option, adjusted upward or downward by the difference between the Fund's
purchase price of the security and the exercise price of the option. If the
option is not exercised and the price of the underlying security declines, the
amount of such decline will be offset in part, or entirely, by the premium
received.
The writing of covered put options is similar in terms of risk/return
characteristics to buy-and-write transactions. If the market price of the
underlying security rises or otherwise is above the exercise price, the put
option will expire worthless and the Fund's gain will be limited to the premium
received. If the market price for the underlying security declines or otherwise
is below the exercise price, the Fund's return will be the premium received from
writing
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the put option minus the amount by which the market price of the security is
below the exercise price.
Limitations and Risks of Options and Futures Activity
The Fund will engage in transactions in futures contracts or options only
as a hedge against changes resulting from market conditions which produce
changes in the values of their securities or the securities which it intends to
purchase (e.g., to replace portfolio securities which will mature in the near
future) and, subject to the limitations described below, to enhance return. The
Fund will not purchase any futures contract or purchase any call option if,
immediately thereafter, more than one-third of the Fund's net assets would be
represented by long futures contracts or call options. In addition, the Fund may
not establish a position in a commodity futures contract or purchase or sell a
commodity option contract for other than bona fide hedging purposes if
immediately thereafter the sum of the amount of initial margin deposits and
premiums required to establish such positions for such nonhedging purposes would
exceed 5% of the market value of the Fund's net assets.
Although effective hedging can generally capture the bulk of a desired
risk adjustment, no hedge is completely effective. Moreover, the use of
financial futures, debt options and options on financial futures may involve
risks not associated with other types of investments which the Fund intends to
purchase. Most of the hedging anticipated for the Fund will be against the risk
characteristics of its portfolio and not against the risk characteristics of
specific debt securities. The Fund's ability to hedge effectively through
transactions in financial futures or options depends on the degree to which
price movements in its holdings correlate with price movements of the financial
futures and options. The prices of the assets being hedged may not move in the
same amount as the hedging instrument, or there may be a negative correlation
which would result in an ineffective hedge and a loss to the Fund.
Some positions in financial futures and options may be closed out only on
an exchange which provides a secondary market therefor. There can be no
assurance that a liquid secondary market will exist for any particular futures
contract or option at any specific time. Thus, it may not be possible to close
such an option or futures position prior to maturity. The inability to close
options and futures positions also could have an adverse impact on the Fund's
ability effectively to hedge its securities and might, in some cases, require
the Fund to deposit cash to meet applicable margin requirements. The Fund will
enter into an option or futures position only if it appears to be a liquid
investment.
Repurchase Agreements
The Fund may enter into repurchase agreements. Repurchase agreements occur
when the Fund acquires a security and the seller, which may be either (i) a
primary dealer in U.S. Government securities or (ii) an FDIC-insured bank having
gross assets in excess of $500 million, simultaneously commits to repurchase it
at an agreed-upon price on an agreed-upon
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date within a specified number of days (usually not more than seven) from the
date of purchase. The repurchase price reflects the purchase price plus an
agreed-upon market rate of interest which is unrelated to the coupon rate or
maturity of the acquired security. The Fund will only enter into repurchase
agreements involving U.S. Government securities. Repurchase agreements could
involve certain risks in the event of default or insolvency of the other party,
including possible delays or restrictions upon the Fund's ability to dispose of
the underlying securities. Repurchase agreements will be limited to 20% of the
Fund's total assets, except that repurchase agreements extending for more than
seven days when combined with any other illiquid assets held by the Fund will be
limited to 10% of the Fund's total assets. To the extent excludable under
relevant regulatory interpretations, repurchase agreements involving U.S.
Government securities are not subject to the Fund's investment restrictions
which otherwise limit the amount of the Fund's total assets which may be
invested to (a) not more than 5% in any one issuer; (b) not more than 5% in
issuers with less than three years continuous operations; and (c) not more than
25% in issuers conducting their principal activities in the same state.
High Yield Securities
Lower rated "high yield" securities (i.e., bonds rated BB or lower by S&P
or Ba or lower by Moody's) commonly known as "junk bonds," of the type in which
the Fund may invest generally involve more credit risk than higher rated
securities and are considered by S&P and Moody's to be predominantly speculative
with respect to capacity to pay interest and repay principal in accordance with
the terms of the obligation. Such securities may also be subject to greater
market price fluctuations than lower yielding, higher rated debt securities;
credit ratings do not reflect this market risk. In addition, these ratings may
not reflect the effect of recent developments on an issuer's ability to make
interest and principal payments.
Additional risks of "high yield" securities include (i) limited liquidity
and secondary market support, particularly in the case of securities that are
not rated or subject to restrictions on resale, which may limit the availability
of securities for purchase by the Fund, limit the ability of the Fund to sell
portfolio securities either to meet redemption requests or in response to
changes in the economy or the financial markets, heighten the effect of adverse
publicity and investor perceptions, and make selection and valuation of
portfolio securities more subjective and dependent upon the Investment Manager's
credit analysis; (ii) substantial market price volatility and/or the potential
for the insolvency of issuers during periods of changing interest rates and
economic difficulty, particularly with respect to high yield securities that do
not pay interest currently in cash; (iii) subordination to the prior claims of
banks and other senior lenders; (iv) the possibility that earnings of the issuer
may be insufficient to meet its debt service; (v) the realization of taxable
income for shareholders without the corresponding receipt of cash in connection
with investments in "zero coupon" or "pay-in-kind" securities. Growth in the
market for "high yield" securities has paralleled a general expansion in certain
sectors in the U.S. economy, and the effects of adverse economic
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changes (including a recession) are unclear. For further information concerning
the ratings of debt securities, see the Appendix.
When-Issued Securities
The Fund may purchase "when-issued" securities, which are traded on a
price or yield basis prior to actual issuance. Such purchases will be made only
to achieve the Fund's investment objective and not for leverage. The when-issued
trading period generally lasts from a few days to up to a month or more; during
this period dividends or interest on the securities are not payable. A frequent
form of when-issued trading occurs in the U.S. Treasury market when dealers
begin to trade a new issue of bonds or notes shortly after a Treasury financing
is announced, but prior to the actual sale of the securities. Similarly,
securities to be created by a merger of companies may also be traded prior to
the actual consummation of the merger. Such transactions may involve a risk of
loss if the value of the securities falls below the price committed to prior to
actual issuance. The Trust's custodian will establish a segregated account when
the Fund purchases securities on a when-issued basis consisting of cash or
liquid securities equal to the amount of the when-issued commitments.
Rule 144A Securities
Subject to the limitations on illiquid and restricted securities noted
above, the Fund may buy or sell restricted securities in accordance with Rule
144A under the Securities Act of 1933 ("Rule 144A Securities"). Securities may
be resold pursuant to Rule 144A under certain circumstances only to qualified
institutional buyers as defined in the rule, and the markets and trading
practices for such securities are relatively new and still developing; depending
on the development of such markets, such Rule 144A Securities may be deemed to
be liquid as determined by or in accordance with methods adopted by the
Trustees. Under such methods the following factors are considered, among others:
the frequency of trades and quotes for the security, the number of dealers and
potential purchasers in the market, market making activity, and the nature of
the security and marketplace trades. Investments in Rule 144A Securities could
have the effect of increasing the level of the Fund's illiquidity to the extent
that qualified institutional buyers become, for a time, uninterested in
purchasing such securities. Also, the Fund may be adversely impacted by the
subjective valuation of such securities in the absence of an active market for
them.
Other Derivative Securities
The Fund may invest in tax-exempt derivative products such as stripped
tax-exempt bonds, synthetic floating rate tax-exempt bonds, tax-exempt asset
backed securities including interests in trusts holding tax-exempt lease
receivables and may enter into various interest rate transactions such as swaps,
caps, floors or collars as described below. Many of these derivative products
are new and are still being developed. Some of these products may generate
taxable income or income which is believed to be non-taxable which may later be
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determined to be taxable. In making investments in any tax-exempt derivative,
the Fund will take into consideration the impact on the Fund of the potential
taxable nature of any income or gains, the effect of such taxable income or
gains on the taxable and non-taxable status of dividends and distributions by
the Fund to its shareholders, and the speculative nature of the products given
their development nature. Other risks which may arise with tax-exempt derivative
products include possible illiquidity because the market for such instruments is
still developing. The Fund will attempt to invest in products which appear to
have reasonable liquidity and to reduce the risks of nonperformance by
counterparties by dealing only with established and reputable institutions.
Swap Arrangements
The Fund may enter into various forms of swap arrangements with
counterparties with respect to interest rates or indices, including purchase of
caps, floors and collars. In an interest rate swap, the Fund could agree for a
specified period to pay a bank or investment banker the floating rate of
interest on a so-called notional principal amount (i.e. an assumed figure
selected by the parties for this purpose) in exchange for agreement by the bank
or investment banker to pay the Fund a fixed rate of interest on the notional
principal amount. In an index swap, the Fund would agree to exchange cash flows
on a notional amount based on changes in the values of the selected indices.
Purchase of a cap entitles the purchaser to receive payments from the seller on
a notional amount to the extent that the selected index exceeds an agreed upon
interest rate or amount whereas purchase of a floor entitles the purchaser to
receive such payments to the extent the selected index falls below an
agreed-upon interest rate or amount. A collar combines a cap and a floor.
Most swaps entered into by the Fund will be on a net basis; for example,
in an interest rate swap, amounts generated by application of the fixed rate and
the floating rate to the notional principal amount would first offset one
another, with the Fund either receiving or paying the difference between such
amounts. In order to be in a position to meet any obligations resulting from
swaps, the Fund will set up a segregated custodial account to hold appropriate
liquid assets, including cash; for swaps entered into on a net basis, assets
will be segregated having a daily net asset value equal to any excess of the
Fund's accrued obligations over the accrued obligations of the other party,
while for swaps on other than a net basis assets will be segregated having a
value equal to the total amount of the Fund's obligations.
These arrangements will be made primarily for hedging purposes, to
preserve the return on an investment or on a part of the Fund's portfolio.
However, the Fund may enter into such arrangements for income purposes to the
extent permitted by the Commodity Futures Trading Commission for entities which
are not commodity pool operators, such as the Fund. In entering a swap
arrangement, the Fund is dependent upon the creditworthiness and good faith of
the counterparty. The Fund attempts to reduce the risks of nonperformance by the
counterparty by dealing only with established, reputable institutions. The swap
market is still relatively new and emerging; positions in swap arrangements may
become illiquid to the extent
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that non-standard arrangements with one counterparty are not readily
transferable to another counterparty or if a market for the transfer of swap
positions does not develop. The use of interest rate swaps is a highly
specialized activity which involves investment techniques and risks different
from those associated with ordinary portfolio securities transactions. If the
Investment Manager is incorrect in its forecast of market values, interest rates
and other applicable factors, the investment performance of the Fund would
diminish compared with what it would have been if these investment techniques
were not used. Moreover, even if the Investment Manager is correct in its
forecast, there is a risk that the swap position may correlate imperfectly with
the price of the asset or liability being hedged.
DEBT INSTRUMENTS AND
PERMITTED CASH INVESTMENTS
As indicated in the Fund's Prospectus, the Fund may invest in long-term
and short-term debt securities. The Fund may invest in cash and short-term
securities for temporary defensive purposes when, in the opinion of the
Investment Manager, such investments are more likely to provide protection
against unfavorable market conditions than adherence to other investment
policies. Certain debt securities and money market instruments in which the Fund
may invest are described below.
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.
U.S. Government and Related Securities. U.S. Government securities are
securities which are issued or guaranteed as to principal or interest by the
U.S. Government, a U.S. Government agency or instrumentality, or certain
mixed-ownership Government corporations as described herein. The U.S.
Government securities in which the Fund invests include, among others:
* direct obligations of the U.S. Treasury, i.e., Treasury
bills, notes, certificates and bonds;
* obligations of U.S. Government agencies or
instrumentalities such as the Federal Home Loan Banks, the
Farmers Home Administration, the Federal Farm Credit Banks, the
Federal National Mortgage Association, the Government National
Mortgage Association and the Federal Home Loan Mortgage
Corporation; and
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* obligations of mixed-ownership Government corporations such as Resolution
Funding Corporation.
U.S. Government securities which the Fund may buy are backed in a variety
of ways by the U.S. Government, its agencies or instrumentalities. Some of these
obligations, such as Government National Mortgage Association mortgage-backed
securities and obligations of the Farmers Home Administration, are backed by the
full faith and credit of the U.S. Treasury. Other obligations, such as those of
the Federal National Mortgage Association, are backed by the discretionary
authority of the U.S. Government to purchase certain obligations of agencies or
instrumentalities, although the U.S. Government has no legal obligation to do
so. Obligations such as those of the Federal Home Loan Banks, the Farmers Home
Administration, the Federal Farm Credit Banks, the Federal National Mortgage
Association and the Federal Home Loan Mortgage Corporation are backed by the
credit of the agency or instrumentality issuing the obligations. Certain
obligations of Resolution Funding Corporation, a mixed-ownership Government
corporation, are backed with respect to interest payments by the U.S. Treasury,
and with respect to principal payments by U.S. Treasury obligations held in a
segregated account with a Federal Reserve Bank. Except for certain
mortgage-backed securities, the Fund will only invest in obligations issued by
mixed-ownership Government corporations where such securities are guaranteed as
to payment of principal or interest by the U.S. Government or a U.S. Government
agency or instrumentality, and any unguaranteed principal or interest is
otherwise supported by U.S. Government obligations held in a segregated account.
U.S. Government securities may be acquired by the Fund in the form of
separately traded principal and interest components of securities issued or
guaranteed by the U.S. Treasury. The principal and interest components of
selected securities are traded independently under the Separate Trading of
Registered Interest and Principal of Securities ("STRIPS") program. Under the
STRIPS program, the principal and interest components are individually numbered
and separately issued by the U.S. Treasury at the request of depository
financial institutions, which then trade the component parts independently.
Obligations of Resolution Funding Corporation are similarly divided into
principal and interest components and maintained as such on the book entry
records of the Federal Reserve Banks.
In addition, the Fund may invest in custodial receipts that evidence
ownership of future interest payments, principal payments or both on certain
U.S. Treasury notes or bonds in connection with programs sponsored by banks and
brokerage firms. Such notes and bonds are held in custody by a bank on behalf of
the owners of the receipts. These custodial receipts are known by various names,
including "Treasury Receipts" ("TRs"), "Treasury Investment Growth Receipts"
("TIGRs") and "Certificates of Accrual on Treasury Securities" ("CATS"), and may
not be deemed U.S. Government securities.
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The Fund may also invest from time to time in collective investment
vehicles, the assets of which consist principally of U.S. Government securities
or other assets substantially collateralized or supported by such securities,
such as Government trust certificates.
Bank Money Investments. Bank money investments include but are not limited
to certificates of deposit, bankers' acceptances and time deposits. Certificates
of deposit are generally short-term (i.e., less than one year), interest-bearing
negotiable certificates issued by commercial banks or savings and loan
associations against funds deposited in the issuing institution. A banker's
acceptance is a time draft drawn on a commercial bank by a borrower, usually in
connection with an international commercial transaction (to finance the import,
export, transfer or storage of goods). A banker's acceptance may be obtained
from a domestic or foreign bank including a U.S. branch or agency of a foreign
bank. The borrower is liable for payment as well as the bank, which
unconditionally guarantees to pay the draft at its face amount on the maturity
date. Most acceptances have maturities of six months or less and are traded in
secondary markets prior to maturity. Time deposits are nonnegotiable deposits
for a fixed period of time at a stated interest rate. The Fund will not invest
in any such bank money investment unless the investment is issued by a U.S. bank
that is a member of the Federal Deposit Insurance Corporation ("FDIC"),
including any foreign branch thereof, a U.S. branch or agency of a foreign bank,
a foreign branch of a foreign bank, or a savings bank or savings and loan
association that is a member of the FDIC and which at the date of investment has
capital, surplus and undivided profits (as of the date of its most recently
published financial statements) in excess of $50 million. The Fund will not
invest in time deposits maturing in more than seven days and will not invest
more than 10% of its total assets in time deposits maturing in two to seven
days.
U.S. branches and agencies of foreign banks are offices of foreign
banks and are not separately incorporated entities. They are chartered and
regulated either federally or under state law. U.S. federal branches or
agencies of foreign banks are chartered and regulated by the Comptroller of
the Currency, while state branches and agencies are chartered and regulated
by authorities of the respective states or the District of Columbia. U.S.
branches of foreign banks may accept deposits and thus are eligible for FDIC
insurance; however, not all such branches elect FDIC insurance. Unlike U.S.
branches of foreign banks, U.S. agencies of foreign banks may not accept
deposits and thus are not eligible for FDIC insurance. Both branches and
agencies can maintain credit balances, which are funds received by the office
incidental to or arising out of the exercise of their banking powers and can
exercise other commercial functions, such as lending activities.
Short-Term Corporate Debt Instruments. Short-term corporate debt
instruments include commercial paper to finance short-term credit needs (i.e.,
short-term, unsecured promissory notes) issued by corporations including but not
limited to (a) domestic or foreign bank holding companies or (b) their
subsidiaries or affiliates where the debt instrument is guaranteed by the bank
holding company or an affiliated bank or where the bank holding company or the
affiliated bank is unconditionally liable for the debt instrument. Commercial
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paper is usually sold on a discounted basis and has a maturity at the time of
issuance not exceeding nine months.
Commercial Paper Ratings. Commercial paper investments at the time of
purchase will be rated A by S&P or Prime by Moody's, or, if not rated, issued by
companies having an outstanding long-term unsecured debt issue rated at least A
by S&P or by Moody's. The money market investments in corporate bonds and
debentures (which must have maturities at the date of settlement of one year or
less) must be rated at the time of purchase at least A by S&P or by Moody's.
Commercial paper rated A (highest quality) by S&P is issued by entities
which have liquidity ratios which are adequate to meet cash requirements.
Long-term senior debt is rated A or better, although in some cases BBB credits
may be allowed. The issuer has access to at least two additional channels of
borrowing. Basic earnings and cash flow have an upward trend with allowance made
for unusual circumstances. Typically, the issuer's industry is well established
and the issuer has a strong position within the industry. The reliability and
quality of management are unquestioned. the relative strength or weakness of the
above factors determines whether the issuer's commercial paper is rated A-1, A-2
or A-3. (Those A-1 issues determined to possess overwhelming safety
characteristics are denoted with a plus (+) sign: A-1+.)
The rating Prime is the highest commercial paper rating assigned by
Moody's. Among the factors considered by Moody's in assigning ratings are the
following: evaluation of the management of the issuer; economic evaluation of
the issuer's industry or industries and an appraisal of speculative-type risks
which may be inherent in certain areas; evaluation of the issuer's products in
relation to competition and customer acceptance; liquidity; amount and quality
of long-term debt; trend of earnings over a period of 10 years; financial
management of obligations which may be present or may arise as a result of
public interest questions and preparations to meet such obligations. These
factors are all considered in determining whether the commercial paper is rated
Prime-1, Prime-2 or Prime-3.
Information concerning the ratings of S&P and Moody's for municipal debt
bonds appears in the Appendix hereto. In the event applicable rating agencies
lower the ratings of debt instruments held by the Fund, resulting in a material
decline in the overall quality of the Fund's portfolio, the situation will be
reviewed and necessary action, if any, will be taken, including changes in the
composition of the portfolio.
17
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TRUSTEES AND OFFICERS
The Trustees and officers of the Trust, their addresses, and their
principal occupations and positions with certain affiliates of the Investment
Manager are set forth below.
*Paul J. Clifford, Jr., One Financial Center, Boston, MA 02111, serves as
Vice President of the Trust. He is 32. His principal occupation 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.
*Susan W. Drake, One Financial Center, Boston, MA 02111, serves as
Vice President of the Trust. She is 42. Her principal occupation 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.
*+Constantine Hutchins, Jr., One Financial Center, Boston, MA 02111,
serves as Secretary and General Counsel of the Trust. He is 66. His principal
occupation during the past five years has been Senior Vice President, Secretary
and General Counsel of State Street Research & Management Company. Mr.
Hutchins's other principal business affiliations include Senior Vice President,
Clerk and General Counsel, State Street Research Investment Services, Inc.
*+John H. Kallis, One Financial Center, Boston, MA 02111, serves as Vice
President of the Trust. He is 54. Mr. Kallis's principal occupation is Senior
Vice President of State Street Research & Management Company. During the past
five years he has also served as portfolio manager for State Street Research &
Management Company.
+Edward M. Lamont, Box 1234, Moores Hill Road, Syosset, NY 11791,
serves as Trustee of the Trust. He is 68. He is engaged principally in
private investments and civic affairs. Previously, he was with Morgan
Guaranty Trust Company of New York.
+Robert A. Lawrence, Saltonstall & Co., 50 Congress Street, Boston, MA
02109, serves as Trustee of the Trust. He is 68. His principal occupation during
the past five years has been Partner, Saltonstall & Co., a private investment
firm.
*+Gerard P. Maus, One Financial Center, Boston, MA 02111, serves as
Treasurer of the Trust. He is 44. His principal occupation is Executive Vice
President, Treasurer and Director of State Street Research & Management Company.
During the past five years he also served as Executive Vice President and Chief
Financial Officer of New England Investment Companies and as Senior Vice
President and Vice President of New England Mutual Life Insurance Company. Mr.
Maus's other principal business affiliations include Executive Vice
- -------------------------------
* or + See footnotes on page 22.
18
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President, Treasurer, Chief Financial Officer and Director of State Street
Research Investment Services, Inc.
+Dean O. Morton, 3200 Hillview Avenue, Palo Alto, CA 94304, serves as
Trustee of the Trust. He is 63. He is retired, having served during the past
five years, until October 1992, as Executive Vice President, Chief Operating
Officer and Director of Hewlett-Packard Company.
+Thomas L. Phillips, 141 Spring Street, Lexington, MA 02173 serves as
Trustee of the Trust. He is 70. He is retired and was formerly Chairman of the
Board and Chief Executive Officer of Raytheon Company, of which he remains a
Director.
+Toby Rosenblatt, 3409 Pacific Avenue, San Francisco, CA 94118, serves as
Trustee of the Trust. He is 56. His principal occupations during the past five
years have been President of The Glen Ellen Company, a private investment
company, and Vice President of Founders Investment Ltd.
+Michael S. Scott Morton, Massachusetts Institute of Technology,
77 Massachusetts Avenue, Cambridge, MA 02139, serves as Trustee of the
Trust. He is 57. His principal occupation during the past five years has
been Jay W. Forrester Professor of Management at Sloan School of Management,
Massachusetts Institute of Technology.
*+Thomas A. Shively, One Financial Center, Boston, MA 02111, serves as
Vice President of the Trust. He is 40. His principal occupation is Senior Vice
President and Director of State Street Research & Management Company. During the
past five years he has also served as Vice President of State Street Research &
Management Company. Mr. Shively's other principal business affiliations include
Director of State Street Research Investment Services, Inc.
*+Ralph F. Verni, One Financial Center, Boston, MA 02111, serves as
Chairman of the Board, President, Chief Executive Officer and Trustee of the
Trust. He is 52. His principal occupation is Chairman of the Board, President,
Chief Executive Officer and Director of State Street Research & Management
Company. During the past five years he also served as President and Chief
Executive Officer of New England Investment Companies and as Chief Investment
Officer and Director of New England Mutual Life Insurance Company. Mr. Verni's
other principal business affiliations include Chairman of the Board, President,
Chief Executive Officer and Director of State Street Research Investment
Services, Inc.
+Jeptha H. Wade, 251 Old Billerica Road, Bedford, MA 01730, serves as
Trustee of the Trust. He is 70. He is retired and was formerly Of Counsel for
the law firm Choate, Hall & Stewart. He was a partner of that firm from 1960 to
1987.
- --------------------------------
* or + See footnotes on page 22.
19
<PAGE>
As of March 31, 1995, the following persons or entities were the record
and/or beneficial owners of the approximate amounts of each class of shares of
the Fund as set forth beside their names:
Shareholder %
Class C L.E. Holmes & J.P. Holmes, Joint Tenants 20.6
C.V. Duell & B.S. Duell, Joint Tenants 7.9
E.S. Metropol 5.4
A. Devincent 13.8
E.E. Markee, Custodian 7.5
R.M. Petruney 5.7
E.O. Anyanwu, Custodian 11.8
L.B. Colussi 12.7
Class D Metropolitan Life 48.4
Merrill Lynch 23.2
V.J. Beseau, Trustee 9.9
The full name and address of each of the above persons or
entities are as follows:
L.E. Holmes & J.P. Holmes, Joint Tenants
C.V. Duell & B.S. Duell, Joint Tenants
E.S. Metropol
A. Devincent
E.E. Markee, Custodian
R.M. Petruney
E.O. Anyanwu, Custodian
L.B. Colussi
V.J. Beseau, Trustee
c/o State Street Research Shareholder Services
One Financial Center
Boston, Massachusetts 02111
Metropolitan Life Insurance Company (a)
One Madison Avenue
New York, New York 10010
Merrill Lynch, Pierce, Fenner & Smith, Inc. (b)
One Liberty Plaza
165 Broadway
New York, New York 10080
- --------------------
20
<PAGE>
(a) Metropolitan Life Insurance Company ("Metropolitan"), a New York
corporation, was the record and/or beneficial owner, directly or indirectly
through its subsidiaries or affiliates, of such shares.
(b) The Fund believes that Merrill Lynch does not have beneficial
ownership of such shares.
As of March 31, 1995, the Trustees and officers of the Fund as a
group owned less than 1% of the Fund's outstanding Class A shares, and
owned no shares of the Fund's outstanding Class B, Class C or Class D
shares.
Ownership of 25% or more of a voting security is deemed "control" as
defined in the 1940 Act. So long as 25% of a class of shares is so owned, such
owners will be presumed to be in control of such class of shares for purposes of
voting on certain matters submitted to a vote of shareholders, such as any
Distribution Plan for a given class.
During the last fiscal year of the Fund, the Trustees were compensated as
follows:
Total
Compensation
Aggregate From Trust and
Name of Compensation Complex Paid
Trustee From Trust(a) to Trustees(b)
------- ------------ --------------
Edward M. Lamont $ 9,825 $49,326
Robert A. Lawrence $ 9,325 $72,475
Dean O. Morton $11,325 $87,925
Thomas L. Phillips $ 9,625 $56,825
Toby Rosenblatt $ 9,825 $49,326
Michael S. Scott Morton $11,325 $83,925
Ralph F. Verni $ 0 $ 0
Jeptha H. Wade $10,125 $58,525
(a) Includes compensation from multiple series of the Trust. See
"Distribution of Shares" for a listing of series.
(b) Includes compensation from Metropolitan Series Fund, Inc., for which the
Investment Manager serves as sub-adviser, State Street Research
Portfolios, Inc., for which State Street Research Investment Services,
Inc. serves as distributor, and all investment companies for which the
Investment Manager serves as primary investment adviser, comprising a
total of 30 series. The Trust does not provide any pension or retirement
benefits for the Trustees.
- ------------------
21
<PAGE>
* These Trustees and/or officers are or may be deemed to be "interested
persons" of the Trust under the 1940 Act because of their affiliations with
the Fund's investment adviser.
+ Serves as a Trustee and/or officer of one or more of the following
investment companies, each of which has an advisory or distribution
relationship with the Investment Manager or its affiliates:
MetLife - State Street Equity Trust, MetLife - State Street Financial
Trust, MetLife - State Street Income Trust, MetLife - State Street Money
Market Trust, State Street Research Tax-Exempt Trust, State Street
Research Capital Trust, State Street Research Exchange Trust, State
Street Research Growth Trust, State Street Research Master Investment
Trust, State Street Research Securities Trust, State Street Research
Portfolios, Inc. and Metropolitan Series Fund, Inc.
22
<PAGE>
INVESTMENT ADVISORY SERVICES
State Street Research & Management Company, the Investment Manager, a
Delaware corporation, with offices at One Financial Center, Boston,
Massachusetts 02111-2690, acts as investment adviser to the Fund. The Advisory
Agreement provides that the Investment Manager shall furnish the Fund with an
investment program, office facilities and such investment advisory, research and
administrative services as may be required from time to time. The Investment
Manager compensates all executive and clerical personnel and Trustees of the
Trust if such persons are employees of the Investment Manager or its affiliates.
The Investment Manager is an indirect wholly-owned subsidiary of Metropolitan.
State Street Research & Management Company assumed responsibility as Investment
Manager effective as of July 1, 1992; previously, it served as a sub-adviser and
the Distributor acted as investment manager.
The advisory fee payable monthly by the Fund to the Investment Manager is
computed as a percentage of the average of the value of the net assets of the
Fund as determined at the close of the New York Stock Exchange (the "NYSE") on
each day the NYSE is open for trading, at the annual rate of 0.55% of the net
assets of the Fund. Prior to May 1, 1994, the Fund paid 0.65% of average net
assets, on an annual basis, in investment advisory fees. The Fund has been
advised that the Distributor and its affiliates may from time to time and in
varying amounts voluntarily assume some portion of fees or expenses relating to
the Fund. For the fiscal years ended December 31, 1992, 1993 and 1994, the
Fund's investment advisory fees prior to the assumption of fees or expenses were
$1,006,287, $1,775,032 and $1,798,180, respectively. For the same periods,
voluntary reduction of fees or assumption of expenses amounted to$661, $0 and
$12,268, respectively.
Further, to the extent required under applicable state regulatory
requirements, the Investment Manager will reduce its management fee up to the
amount of any expenses (excluding permissible items, such as Rule 12b-1
Distribution Plan payments, brokerage commissions, interest, taxes and
litigation expenses) paid or incurred by the Fund in any fiscal year which
exceed specified percentages of the average daily net assets of the Fund for
such fiscal year. The most restrictive of such percentage limitations is
currently 2.5% of the first $30 million of average net assets, 2.0% of the next
$70 million of average net assets and 1.5% of the remaining average net assets.
These commitments may be amended or rescinded in response to changes in the
requirements of the various states by the Trustees without shareholder approval.
The Advisory Agreement provides that it shall continue in effect with
respect to the Fund from year to year as long as it is approved at least
annually both (i) by a vote of a majority of the outstanding voting securities
of the Fund (as defined in the 1940 Act) or by the Trustees of the Trust, and
(ii) in either event by a vote of a majority of the Trustees who are not parties
to the Advisory Agreement or "interested persons" of any party thereto, cast in
person at a meeting called for the purpose of voting on such approval. The
Advisory
23
<PAGE>
Agreement may be terminated on 60 days written notice by either party
and will terminate automatically in the event of its assignment, as defined
under the 1940 Act and regulations thereunder. Such regulations provide that a
transaction which does not result in a change of actual control or management of
an adviser is not deemed an assignment.
Under a Funds Administration Agreement between the Investment Manager and
the Distributor, the Distributor provides assistance to the Investment Manager
in performing certain fund administrative services for the Trust, such as
assistance in determining the daily net asset value of shares of series of the
Trust and in preparing various reports required by regulations.
Under a Shareholders' Administrative Services Agreement between the Trust
and the Distributor, the Distributor provides shareholders' administrative
services, such as responding to inquiries and instructions from investors
respecting the purchase and redemption of shares of the Fund, and is entitled to
reimbursements of its costs for providing such services. Under certain
arrangements for Metropolitan to provide subadministration services,
Metropolitan may receive a fee for the maintenance of certain share ownership
records for participants in sponsored arrangements, employee benefit plans, and
similar programs or plans, through or under which the Fund's shares may be
purchased.
Under the Code of Ethics of the Investment Manager, its employees are only
permitted to engage in personal securities transactions which do not involve
securities which the Investment Manager has recommended for purchase or sale, or
purchased or sold, on behalf of its clients. All employees must report their
personal securities transactions quarterly and supply broker confirmations of
such transactions to the Investment Manager.
PURCHASE AND REDEMPTION OF SHARES
Shares of the Fund are distributed by the Distributor. The Fund offers four
classes of shares which may be purchased at the next determined net asset value
per share plus, in the case of all classes except Class C shares, a sales charge
which, at the election of the investor, may be imposed (i) at the time of
purchase (the Class A shares) or (ii) on a deferred basis (the Class B and Class
D shares). General information on how to buy shares of the Fund, as well as
sales charges involved, is set forth under "Purchase of Shares" in the
Prospectus. The following supplements that information.
Public Offering Price. The public offering price for each class of shares
of the Fund is based on their net asset value determined as of the close of the
NYSE on the day the purchase order is received by State Street Research
Shareholder Services provided that the order is received prior to the close of
the NYSE on that day; otherwise the net asset value used is that determined as
of the close of the NYSE on the next day it is open for unrestricted trading.
When a purchase order is placed through a dealer, that dealer is responsible for
transmitting
24
<PAGE>
the order promptly to State Street Research Shareholder Services in
order to permit the investor to obtain the current price. Any loss suffered by
an investor which results from a dealer's failure to transmit an order promptly
is a matter for settlement between the investor and the dealer.
Reduced Sales Charges. For purposes of determining whether a purchase of
Class A shares qualifies for reduced sales charges, the term "person" includes:
(i) an individual, or an individual combining with his or her spouse and their
children and purchasing for his, her or their own account; (ii) a "company" as
defined in Section 2(a)(8) of the 1940 Act; (iii) a trustee or other fiduciary
purchasing for a single trust estate or single fiduciary account (including a
pension, profit sharing or other employee benefit trust created pursuant to a
plan qualified under Section 401 of the Internal Revenue Code); (iv) a
tax-exempt organization under Section 501(c)(3) or (13) of the Internal Revenue
Code; and (v) an employee benefit plan of a single employer or of affiliated
employers.
Investors may purchase Class A shares of the Fund at reduced sales charges
by executing a Letter of Intent to purchase no less than an aggregate of
$100,000 of the Fund or any combination of Class A shares of "Eligible Funds" as
designated by the Distributor within a 13-month period. The sales charge
applicable to each purchase made pursuant to a Letter of Intent will be that
which would apply if the total dollar amount set forth in the Letter of Intent
were being bought in a single transaction. Purchases made within a 90-day period
prior to the execution of a Letter of Intent may be included therein; in such
case the date of the earliest of such purchases marks the commencement of the
13-month period.
An investor may include toward completion of a Letter of Intent the value
(at the current public offering price) of all of his or her Class A shares of
the Fund and of any of the other Class A shares of Eligible Funds held of record
as of the date of his or her Letter of Intent, plus the value (at the current
offering price) as of such date of all of such shares held by any "person"
described herein as eligible to join with the investor in a single purchase.
Class B, Class C and Class D shares may also be included in the combination
under certain circumstances.
A Letter of Intent does not bind the investor to purchase the specified
amount. Shares equivalent to 5% of the specified amount will, however, be taken
from the initial purchase (or, if necessary, subsequent purchases) and held in
escrow in the investor's account as collateral against the higher sales charge
which would apply if the total purchase is not completed within the allotted
time. The escrowed shares will be released when the Letter of Intent is
completed or, if it is not completed, when the balance of the higher sales
charge is, upon notice, remitted by the investor. All dividends and capital
gains distributions with respect to the escrowed shares will be credited to the
investor's account.
Investors may purchase Class A shares of the Fund or a combination of
Eligible Funds at reduced sales charges pursuant to a Right of Accumulation. The
applicable sales charge under
25
<PAGE>
this right is determined on the amount arrived at by combining the dollar amount
of the purchase with the value (at the current public offering price) of all
Class A shares of the other Eligible Funds owned as of the purchase date by the
investor plus the value (at the current public offering price) of all such
shares owned as of such date by any "person" described herein as eligible to
join with the investor in a single purchase. Class B, Class C and Class D shares
may also be included in the combination certain circumstances. Investors must
submit to the Distributor sufficient information to show that they qualify for
this Right of Accumulation.
Class C Shares. Class C shares are currently available to (i) benefit plans
such as qualified retirement plans, other than individual retirement accounts
and self-employed retirement plans, which meet certain criteria relating to
minimum assets, minimum participants, service agreements, or similar factors;
(ii) tax-exempt retirement plans of the Investment Manager and its affiliates,
including the retirement plans of the Investment Manager's affiliated brokers;
(iii) unit investment trusts sponsored by the Investment Manager or its
affiliates; (iv) banks and insurance companies purchasing for their own
accounts; (v) investment companies not affiliated with the Investment Manager;
and (vi) endowment funds of nonprofit organizations with substantial minimum
assets. The entities included in categories (i), (iv) and (vi) may not be
affiliates of the Investment Manager.
Reorganizations. In the event of mergers or reorganizations with other
public or private collective investment entities, including investment companies
as defined in the 1940 Act, as amended, the Fund may issue its shares at net
asset value (or more) to such entities or to their security holders.
Redemptions. The Fund reserves the right to pay redemptions in kind with
portfolio securities in lieu of cash. In accordance with its election pursuant
to Rule 18f-1 under the 1940 Act, the Fund may limit the amount of redemption
proceeds paid in cash. Although it has no present intention to do so, the Fund
may, under unusual circumstances, limit redemptions in cash with respect to each
shareholder during any ninety-day period to the lesser of (i) $250,000, or (ii)
1% of the net asset value of the Fund at the beginning of such period. In
connection with any redemptions paid in kind with portfolio securities,
brokerage and other costs may be incurred by the redeeming shareholder in the
sale of the securities received.
NET ASSET VALUE
The net asset value of the shares of the Fund is determined once daily as
of the close of the NYSE, ordinarily 4 P.M. New York City time, Monday through
Friday, on each day during which the NYSE is open for unrestricted trading. The
NYSE is currently closed on New Year's Day, Presidents Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
26
<PAGE>
The net asset value per share of the Fund is computed by dividing the sum
of the value of the securities held by the Fund plus any cash or other assets
minus all liabilities by the total number of outstanding shares of the Fund at
such time. Any expenses, except for extraordinary or nonrecurring expenses,
borne by the Fund, including the investment management fee payable to the
Investment Manager, are accrued daily.
In determining the values of portfolio assets, the Trustees utilize one or
more pricing services to value debt securities for which market quotations are
not readily available on a daily basis. Most debt securities are valued on the
basis of data provided by such pricing services. Since the Fund is comprised
substantially of debt securities under normal circumstances, most of the Fund's
assets are therefore valued on the basis of such data from the pricing services.
The pricing services may provide prices determined as of times prior to the
close of the NYSE.
In general, securities are valued as follows. Securities which are listed
or traded on the NYSE or the American Stock Exchange are valued at the price of
the last quoted sale on the respective exchange for that day. Securities which
are listed or traded on a national securities exchange or exchanges, but not on
the NYSE or the American Stock Exchange, are valued at the price of the last
quoted sale on the exchange for that day prior to the close of the NYSE.
Securities not listed on any national securities exchange which are traded "over
the counter" and for which quotations are available on the National Association
of Securities Dealers' NASDAQ System, or other system, are valued at the closing
price supplied through such system for that day at the close of the NYSE. Other
securities are, in general, valued at the mean of the bid and asked quotations
last quoted prior to the close of the NYSE if there are market quotations
readily available, or in the absence of such market quotations, then at the fair
value thereof as determined by or under authority of the Trustees of the Trust
utilizing such pricing services as may be deemed appropriate as described above.
Securities deemed restricted as to resale are valued at the fair value thereof
as determined by or in accordance with methods adopted by the Trustees of the
Trust.
Short-term debt instruments issued with a maturity of one year or less
which have a remaining maturity of 60 days or less are valued using the
amortized cost method, provided that during any period in which more than 25% of
a Fund's total assets is invested in short-term debt securities the current
market value of such securities will be used in calculating net asset value per
share in lieu of the amortized cost method. The amortized cost method is used
when the value obtained is fair value. Under the amortized cost method of
valuation, the security is initially valued at cost on the date of purchase (or
in the case of short-term debt instruments purchased with more than 60 days
remaining to maturity, the market value on the 61st day prior to maturity), and
thereafter a constant amortization to maturity of any discount or premium is
assumed regardless of the impact of fluctuating interest rates on the market
value of the security.
27
<PAGE>
PORTFOLIO TRANSACTIONS
Portfolio Turnover
The Fund's portfolio turnover rate is determined by dividing the lesser of
securities purchases or sales for a year by the monthly average value of
securities held by the Fund (excluding, for purposes of this determination,
securities the maturities of which as of the time of their acquisition were one
year or less). The portfolio turnover rates for the fiscal years ended December
31, 1993 and 1994, were 36.16% and 78.63%, respectively. The Investment Manager
believes the portfolio turnover rate for the fiscal year ended December 31, 1994
was significantly higher than that for the previous fiscal year because of the
dramatic increase in interest rates during the year, which prompted the
Investment Manager to take a defensive position in the portfolio by selling
longer duration securities and purchasing shorter duration securities.
Brokerage Allocation
The Fund and the Investment Manager seek the best overall execution of
purchase or sale orders and the most favorable net price in securities
transactions consistent with their judgment as to the business qualifications of
the various broker or dealer firms with which the Fund may do business.
Decisions with respect to the market in which the transaction is to be
completed, and to the allocation of orders among brokers or dealers, are made in
accordance with this policy. In selecting brokers or dealers to effect portfolio
transactions, consideration is given to the performance, integrity and financial
responsibility of the various firms as well as to their demonstrated execution
experience and capability generally and in regard to particular markets or
securities and, in agency transactions, to the competitiveness of the commission
rates (or in principal transactions of the net prices) they charge. The
Investment Manager keeps current as to the range of rates or prices charged by
various firms and against this background evaluates the reasonableness of a
commission or price charged with respect to a particular transaction by
considering such factors as difficulty of execution or security positioning by
the executing firm.
When it appears that a number of firms can satisfy the required standards
in respect of a particular transaction, consideration may also be given to
services other than execution services which such firms have provided in the
past or may provide in the future. Among such other services are the supplying
of supplemental investment research, general economic and political information,
analytical and statistical data, relevant market information and daily market
quotations for computation of net asset value. In this connection it should be
noted that a substantial portion of brokerage commissions paid, or principal
transactions entered, by the Fund may be with brokers and investment banking
firms which, in the normal course of business, publish statistical, research and
other material which is received by the Investment
28
<PAGE>
Manager and which may or may not prove useful to the Investment Manager, the
Fund or other clients of the Investment Manager.
Neither the Fund nor the Investment Manager has any definite agreements
with any firm as to the amount of business which that firm may expect to receive
for services supplied or otherwise. There may be, however, understandings with
certain firms that in order for such firms to be able to continuously supply
certain services, they need to receive allocation of a specified amount of
business. These understandings are honored to the extent possible in accordance
with the policy set forth above. Neither the Fund nor the Investment Manager
intends to pay a firm in excess of that which another would charge for handling
the same transaction in recognition of services (other than execution services)
provided. However, the Fund and the Investment Manager are aware that this is an
area where differences of opinion as to fact and circumstances may exist, and in
such circumstances, if any, rely on the provisions of Section 28(e) of the
Securities Exchange Act of 1934, to the extent applicable. During the fiscal
years ended December 31, 1992, 1993 and 1994, the Fund paid no brokerage
commissions. During and at the end of its most recent fiscal year, the Fund held
in its portfolio no securities of any entity that might be deemed to be a
regular broker dealer of the Fund as defined under the 1940 Act.
Occasions may arise when the Investment Manager determines that an
investment in a particular security, or the disposition of a particular
security, is simultaneously a proper investment decision for the Fund as well as
for the portfolio of one or more of its other clients. In this event, a purchase
or sale, as the case may be, of any such security on any given day will be
normally averaged as to price and allocated as to amount among the several
clients in a manner deemed equitable to each client.
On occasions when the Investment Manager deems the purchase or sale of a
security to be in the best interests of the Fund, as well as other clients of
the Investment Manager, the Investment Manager, to the extent permitted by
applicable laws and regulations, may aggregate such securities to be sold or
purchased for the Fund with those to be sold or purchased for other customers in
order to obtain best execution and lower brokerage commissions, if any. In such
event, allocation of the securities so purchased or sold, as well as the
expenses incurred in the transaction, will be made by the Investment Manager in
the manner it considers to be most equitable and consistent with its fiduciary
obligations to all such customers, including the Fund. In some instances, this
procedure may affect the price and size of the positions obtainable for the
Fund.
29
<PAGE>
CERTAIN TAX MATTERS
Federal Income Taxation of the Fund -- In General
The Fund intends to qualify and elect to be treated each taxable year as a
"regulated investment company" under Subchapter M of the Internal Revenue Code
of 1986, as amended (the "Code"), although it cannot give complete assurance
that it will do so. Accordingly, the Fund must, among other things, (a) derive
at least 90% of its gross income in each taxable year from dividends, interest,
payments with respect to securities loans, gains from the sale or other
disposition of stock, securities or foreign currencies, or other income
(including, but not limited to, gains from options, futures, or forward
contracts) derived with respect to its business of investing in such stock,
securities or currencies (the "90% test"); (b) derive less than 30% of its gross
income in each taxable year from the sale or other disposition of any of the
following held for less than three months (the "30% test"): (i) stocks or
securities; (ii) options, futures, or forward contracts (other than options,
futures, or forward contracts on foreign currencies; or (iii) foreign currencies
(or options, futures, or forward contracts on foreign currencies) but only if
such currencies (or options, futures, or forward contracts) are not directly
related to the Fund's principal business of investing in stocks or securities
(or options and futures with respect to stocks or securities); and (c) satisfy
certain diversification requirements. Furthermore, in order to be entitled to
pay tax-exempt interest income dividends to its shareholders, the Fund must
satisfy the requirement that, at the close of each quarter of its taxable year,
at least 50% of the value of its total assets consist of obligations the
interest of which is exempt from federal income tax under Code section 103(d).
The 30% test will limit the extent to which the Fund may sell securities
held for less than three months, write options which expire in less than three
months, and effect closing transactions with respect to call or put options that
have been written or purchased within the preceding three months. (If the Fund
purchases a put option for the purpose of hedging an underlying portfolio
security, the acquisition of the option is treated as a short sale of the
underlying security unless, for purposes only of the 30% test, the option and
the security are acquired on the same date.) Finally, as discussed below, this
requirement may also limit investments by the Fund in options on stock indices,
listed options on nonconvertible debt securities, futures contracts, options on
interest rate futures contracts and certain foreign currency contracts.
If the Fund should fail to qualify as a regulated investment company in any
year, it would lose the beneficial tax treatment accorded regulated investment
companies under Subchapter M of the Code and all of its taxable income would be
subject to tax at regular corporate rates without any deduction for
distributions to shareholders, and such distributions will be taxable to
shareholders as ordinary income to the extent of the Fund's current accumulated
earnings and profits. Also, the shareholders, if they received a distribution in
excess of current or accumulated earnings and profits, would receive a return of
capital that would reduce the basis of their shares of the Fund.
30
<PAGE>
The Fund will be liable for a nondeductible 4% excise tax on amounts not
distributed on a timely basis in accordance with a calendar year distribution
requirement. To avoid the tax, during each calendar year the Fund must
distribute an amount equal to at least 98% of the sum of its ordinary income
(not taking into account any capital gains or losses) for the calendar year, and
its capital gain net income for the 12-month period ending on October 31, in
addition to any undistributed portion of the respective balances from the prior
year. Because the excise tax is based upon undistributed taxable income, it will
not apply to tax-exempt income received by the Fund. The Fund intends to make
sufficient distributions to avoid this 4% excise tax.
Federal Income Taxation of the Fund's Investments
Original Issue Discount. For federal income tax purposes, debt securities
purchased by the Fund may be treated as having original issue discount. Original
issue discount represents interest for federal income tax purposes and can
generally be defined as the excess of the stated redemption price at maturity of
a debt obligation over the issue price. Original issue discount is treated for
federal income tax purposes as income earned by the Fund, whether or not any
income is actually received, and therefore is subject to the distribution
requirements of the Code. Generally, the amount of original issue discount is
determined on the basis of a constant yield to maturity which takes into account
the compounding of accrued interest. Under section 1286 of the Code, an
investment in a stripped bond or stripped coupon will result in original issue
discount.
Debt securities may be purchased by the Fund at a discount that exceeds the
original issue discount plus previously accrued original issue discount
remaining on the securities, if any, at the time the Fund purchases the
securities. This additional discount represents market discount for income tax
purposes. In the case of any debt security (other than a tax-exempt obligation)
issued after July 18, 1984, having a fixed maturity date of more than one year
from the date of issue and having market discount, the gain realized on
disposition will be treated as interest income to the extent it does not exceed
the accrued market discount on the security (unless the Fund elects to include
such accrued market discount in income in the tax year to which it is
attributable). Generally, market discount is accrued on a daily basis. The Fund
may be required to capitalize, rather than deduct currently, part or all of any
direct interest expense incurred to purchase or carry any debt security having
market discount, unless the Fund makes the election to include market discount
currently. Because the Fund must include original issue discount in income, it
will be more difficult for the Fund to make the distributions required for the
Fund to maintain its status as a regulated investment company under Subchapter M
of the Code and, with respect to debt securities that are not tax-exempt, to
avoid the 4% excise tax described above.
Options and Futures Transactions. Certain of the Fund's investments may be
subject to provisions of the Code that (i) require inclusion of unrealized gains
or losses in the Fund's income for purposes of the 90% test, the 30% test, the
excise tax and the distribution
31
<PAGE>
requirements applicable to regulated investment companies; (ii) defer
recognition of realized losses; and (iii) characterize both realized and
unrealized gain or loss as short-term or long-term gain or loss. Such provisions
generally apply to, among other investments, options on debt securities, indices
on securities and futures contracts.
Federal Income Taxation of Shareholders
Distributions generally are taxable to shareholders at the time made unless
tax-exempt. However, dividends declared by the Fund in October, November or
December and made payable to shareholders of record on a specified date in such
a month are treated as received by such shareholders on December 31, provided
that the Fund pays the dividend during January of the following year. It is
expected that none of the Fund's distributions will qualify for the corporate
dividends-received deduction.
Distributions by the Fund can result in a reduction in the fair market
value of the Fund's shares. Should a distribution reduce the fair market value
below a shareholder's cost basis, such distribution nevertheless may be taxable
to the shareholder, to the extent that it is derived from other than tax-exempt
interest, as ordinary income or long-term capital gain, even though, from an
investment standpoint, it may constitute a partial return of capital. In
particular, investors should be careful to consider the tax implications of
buying shares just prior to a distribution. The price of shares purchased at
that time includes the amount of any forthcoming distribution. Those investors
purchasing shares just prior to a distribution will then receive a return of
investment upon distribution which will nevertheless be taxable to them.
To the extent that the Fund's dividends are derived from interest income
exempt from federal income tax and are designated as "exempt-interest dividends"
by the Fund, they will be excludable from a shareholder's gross income for
federal income tax purposes. "Exempt-interest dividends," however, must be taken
into account by shareholders in determining whether their total incomes are
large enough to result in taxation of up to one-half of their Social Security
benefit. Interest on indebtedness incurred or continued by a shareholder to
purchase or carry shares of the Fund is not deductible.
A shareholder should be aware that a redemption of shares (including any
exchange into another Eligible Fund) is a taxable event and, accordingly,
capital gain or loss may be recognized. A loss realized by a shareholder on the
redemption or exchange of shares of the Fund with respect to which
exempt-interest dividends have been paid will be disallowed to the extent of
such dividends if the shares have not been held by the shareholder for more than
six months. Similarly, if a shareholder receives a distribution taxable as
long-term capital gain and redeems or exchanges shares before he has held them
for more than six months, any loss on the redemption or exchange (not otherwise
disallowed as attributable to an exempt-interest dividend) will be treated as
long-term capital loss to the extent of such capital gains distribution.
32
<PAGE>
Opinions relating to the validity of tax-exempt securities and the
exemption of interest thereon from federal income tax are rendered by bond
counsel to the issuers. Neither the Investment Manager's nor the Fund's counsel
makes any review of proceedings relating to the issuance of tax-exempt
securities or the bases of such opinions.
Interest on "private activity" bonds issued after August 7, 1986 is subject
to the federal alternative minimum tax, although the interest continues to be
excludable from gross income for other purposes. The alternative minimum tax, or
AMT, is a supplemental tax designed to ensure that taxpayers pay at least a
minimum amount of tax on their income, even if they make substantial use of
certain tax deductions and exclusions. Interest from private activity bonds is a
"tax preference" item that is added into income from other sources for the
purpose of determining whether a taxpayer is subject to the AMT and the amount
of any tax to be paid. Corporate investors should note that for purposes of the
corporate AMT there is an upward adjustment equal to 75% of the amount by which
adjusted current earnings exceeds alternative minimum taxable income.
Prospective investors should consult their own tax advisors with respect to the
possible application of the AMT to their tax situation.
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. Shareholders of the Fund may be exempt from state and
local taxes on distributions of tax-exempt interest income derived from
obligations of the state and/or municipalities of the state in which they are
resident, but taxable generally on income derived from obligations of other
jurisdictions. Shareholders should consult their tax advisers about the status
of distributions from the Fund in their own states and localities.
DISTRIBUTION OF SHARES OF THE FUND
State Street Research Tax-Exempt Trust (formerly MetLife - State Street
Tax-Exempt Trust) is currently comprised of the following series: State Street
Research Tax-Exempt Fund (formerly MetLife - State Street Tax-Exempt Fund),
State Street Research New York Tax-Free Fund, State Street Research California
Tax-Free Fund, State Street Research Florida Tax-Free Fund and State Street
Research Pennsylvania Tax-Free Fund. 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 Trustees of the Trust have authority to issue an unlimited number of shares
of beneficial interest of separate series, $.001 par value per share. A "series"
is a separate pool of assets of the Trust which is separately managed and has a
different investment objective and different investment policies from those of
another series. The Trustees have authority, without the necessity of a
shareholder vote, to create any number of new series or classes or to commence
the public offering of shares of any previously established series or class.
The Trust has entered into a Distribution Agreement with State Street
Research Investment Services, Inc., as Distributor, whereby the Distributor acts
as agent to sell and
33
<PAGE>
distribute shares of the Fund. Shares of the Fund are sold through dealers who
have entered into sales agreements with the Distributor. The Distributor
distributes shares of the Fund on a continuous basis at an offering price which
is based on the net asset value per share of the Fund plus (subject to certain
exceptions) a sales charge which, at the election of the investor, may be
imposed (i) at the time of purchase (the Class A shares) or (ii) on a deferred
basis (Class B and Class D shares). The Distributor may reallow all or portions
of such sales charges as concessions to dealers. For the fiscal years ended
December 31, 1992, 1993 and 1994, total sales charges on Class A shares paid to
the Distributor amounted to approximately $3,861,000, $3,939,000 and $1,070,000
respectively. For the same periods, approximately $464,000, $472,000 and
$129,000, respectively, was retained by the Distributor after reallowance of
concessions to dealers.
The differences in the price at which the Fund's Class A shares are offered
due to scheduled variations in sales charges, as described in the Fund's
Prospectus, result from cost savings inherent in economies of scale. Management
believes that the cost of sales efforts of the Distributor and broker-dealers
tends to decrease as the size of purchases increases, or does not involve any
incremental sales expenses as in the case of, for example, exchanges,
reinvestments or dividend investments at net asset value. Similarly, no
significant sales effort is necessary for sales of shares at net asset value to
certain Directors, Trustees, officers, employees, their relatives and other
persons directly or indirectly related to the Funds or associated entities.
Where shares of the Fund are offered at a reduced sales charge or without a
sales charge pursuant to sponsored arrangements, the amount of the sales charge
reduction will similarly reflect the anticipated reduction in sales expenses
associated with such sponsored arrangements. The reductions in sales expenses,
and therefore the reduction in sales charge, will vary depending on factors such
as the size and stability of the organization, the term of the organization's
existence and certain characteristics of its members. The Fund reserves the
right to make variations in, or eliminate, sales charges at any time or to
revise the terms of or to suspend or discontinue sales pursuant to sponsored
arrangements at any time.
On any sale of Class A shares to a single investor in the amount of
$1,000,000 or more, the Distributor will pay the authorized securities dealer
making such sale a commission on the shares sold. Such commission also is
payable to authorized securities dealers upon sales of Class A shares made
pursuant to a Letter of Intent to purchase shares having a net asset value of
$1,000,000 or more. Shares sold with such commissions payable are subject to a
one-year contingent deferred sales charge of 1.00% on any portion of such shares
redeemed within one year following their sale. After a particular purchase of
Class A shares is made under the Letter of Intent, the commission will be paid
only in respect of that particular purchase of shares. If the Letter of Intent
is not completed, the commission paid will be deducted from any discounts or
commissions otherwise payable to such dealer in respect of shares actually sold.
If an investor is eligible to purchase shares at net asset value on account of
the Right of Accumulation, the commission will be paid only in respect of the
incremental purchase at net asset value.
34
<PAGE>
For the periods shown below, the Distributor received contingent deferred
sales charges upon redemption of Class B and Class D shares of the Fund and paid
initial commissions to securities dealers for sales of such Class B and Class D
shares as follows:
June 4, 1993
(Commencement of
Fiscal Year share class designations)
Ended December 31, 1994 to December 31, 1993
----------------------- ----------------------
Contingent Commissions Contingent Commissions
Deferred Paid to Deferred Paid to
Sales Charges Dealers Sales Charges Dealers
------------- ----------- ------------- -----------
Class B $157,341 $634,785 $10,888 $1,109,850
Class D $ 0 $ 2,216 $ 1,927 $ 6,855
The Fund has adopted a "Plan of Distribution Pursuant to Rule 12b-1" (the
"Distribution Plan") under which the Fund may engage, directly or indirectly, in
financing any activities primarily intended to result in the sale of Class A,
Class B and Class D shares, including, but not limited to, (1) the payment of
commissions and/or reimbursement to underwriters, securities dealers and others
engaged in the sale of shares, including payments to the Distributor to be used
to pay commissions and/or reimbursement to securities dealers (which securities
dealers may be affiliates of the Distributor) engaged in the distribution and
marketing of shares and furnishing ongoing assistance to investors, (2)
reimbursement of direct out-of-pocket expenditures incurred by the Distributor
in connection with the distribution and marketing of shares and the servicing of
investor accounts including special promotional fees and cash and noncash
incentives based upon sales by securities dealers, expenses relating to the
formulation and implementation of marketing strategies and promotional
activities such as direct mail promotions and television, radio, newspaper,
magazine and other mass media advertising, the preparation, printing and
distribution of Prospectuses of the Fund and reports for recipients other than
existing shareholders of the Fund, and obtaining such information, analyses and
reports with respect to marketing and promotional activities and investor
accounts as the Fund may, from time to time, deem advisable, and (3)
reimbursement of expenses incurred by the Distributor in connection with the
servicing of shareholder accounts including payments to securities dealers and
others in consideration of the provision of personal services to investors
and/or the maintenance of shareholder accounts and expenses associated with the
provision of personal services by the Distributor directly to investors. In
addition, the Distribution Plan is deemed to authorize the Distributor and the
Investment Manager to make payments out of general profits, revenues or other
sources to underwriters, securities dealers and others in connection with sales
of shares, to the extent, if any, that such payments may be deemed to be within
the scope of Rule 12b-1 under the 1940 Act.
35
<PAGE>
The expenditures to be made pursuant to the Distribution Plan may not
exceed (i) with respect to Class A shares, an annual rate of 0.25% of the
average daily value of net assets represented by such Class A shares, and (ii)
with respect to Class B and Class D shares, an annual rate of 0.75% of the
average daily value of the net assets represented by such Class B or Class D
shares (as the case may be) to finance sales or promotion expenses and an annual
rate of 0.25% of the average daily value of the net assets represented by such
Class B or Class D shares (as the case may be) to make payments for personal
services and/or the maintenance of shareholder accounts. Proceeds from the
service fee will be used by the Distributor to compensate securities dealers and
others selling shares of the Fund for rendering service to shareholders on an
ongoing basis. Such amounts are based on the net asset value of shares of the
Fund held by such dealers as nominee for their customers or which are owned
directly by such customers for so long as such shares are outstanding and the
Distribution Plan remains in effect with respect to the Fund. Any amounts
received by the Distributor and not so allocated may be applied by the
Distributor as reimbursement for expenses incurred in connection with the
servicing of investor accounts. The distribution and servicing expenses of a
particular class will be borne solely by that class.
During the fiscal year ended December 31, 1994, the Fund paid the
Distributor fees under the Distribution Plan and the Distributor used all of
such payments for expenses incurred on behalf of the Fund as follows:
Class A Class B Class D
Advertising $ 0 $ 0 $ 2,252
Printing and mailing of prospectuses 0 0 559
to other than current shareholders
Compensation to dealers 678,873 344,503 2,253
Compensation to sales personnel 0 0 3,515
Interest 0 0 0
Carrying or other financing charges 0 0 0
Other expenses 0 0 1,723
-------- --------- --------
Total Fees $678,873 $344,503 $10,302
======== ======== =======
The Distributor may have also used additional resources of its own for further
expenses on behalf of the Fund.
36
<PAGE>
No interested person of the Fund or independent Trustee of the Trust has
any direct or indirect financial interest in the operation of the
Distribution Plan or any related agreements thereunder. The Distributor's
interest in the Distribution Plan is described above.
To the extent that the Glass-Steagall Act may be interpreted as prohibiting
banks and other depository institutions from being paid for performing services
under the Distribution Plan, the Fund will make alternative arrangements for
such services for shareholders who acquired shares through such institutions.
37
<PAGE>
CALCULATION OF PERFORMANCE DATA
The average annual total return ("standard total return") and yield of the
Class A, Class B, Class C and Class D shares of the Fund will be calculated as
set forth below. Total return and yield are computed separately for each class
of shares of the Fund. Performance data for a specified class includes periods
prior to the adoption of class designations. Shares of the Fund had no class
designations until June 5, 1993 when designations were assigned based on the
pricing and 12b-1 fees applicable to shares sold thereafter.
All calculations of performance data in this section reflect the voluntary
measures by the Fund's affiliates to reduce fees or expenses relating to the
Fund; see "Accrued Expenses" later in this section.
The performance data reflects Rule 12b-1 fees and sales charges as set
forth below:
<TABLE>
<CAPTION>
Rule 12b-1 Fees Sales Charges
--------------------------------------------- -------------
Current
Class Amount Period
- ----- -------- -------
<S> <C> <C> <C>
A 0.25% Since commencement of Maximum 4.5% sales charge
operations to present reflected
0.25% until June 5, 1993; 1%
B 1.00% June 5, 1993 to present; fee will 1- and 5-year periods reflect a 5% and a
reduce performance for periods 2% contingent deferred
after June 5, 1993 sales charge, respectively
C None 0.25% until June 5, 1993; None
0% thereafter
D 1.00% 0.25% until June 5, 1993; 1% 1-year period reflects a 1% contingent
June 5, 1993 to present; fee will deferred sales charge
reduce performance for periods
after June 5, 1993
</TABLE>
Total Return
The Fund's average annual total return, ("standard total return") of each
class of the Fund's shares was as follows:
38
<PAGE>
Commencement of
Operations Five Years One Year
(August 25, 1986) Ended Ended
Fund to December 31, 1994 December 31, 1994 December 31, 1994
- ---- -------------------- ----------------- -----------------
Class A 5.96% 5.01% -11.09%
Class B 6.39% 5.42% -12.21%
Class C 6.58% 6.04% -6.56%
Class D 6.39% 5.74% -8.52%
Standard total return is computed by determining the average annual
compounded rates of return over the designated periods that, if applied to the
initial amount invested would produce the ending redeemable value in accordance
with the following formula:
P(1+T)n = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value at the end
of the designated period assuming a hypothetical
$1,000 payment made at the beginning of the
designated period
The calculation is based on the further assumptions that the maximum
initial or contingent deferred sales charge applicable to the investment is
deducted, and that all dividends and distributions by the Fund are reinvested at
net asset value on the reinvestment dates during the periods. All accrued
expenses and recurring charges are also taken into account as described later
herein.
Yield
The annualized yield of each class of shares of the Fund based on the
month of December 1994 was as follows:
Class A 5.36%
Class B 4.86%
Class C 5.87%
Class D 4.87%
39
<PAGE>
Yield for each of the Fund's Class A, Class B, Class C and Class D shares
is computed by dividing the net investment income per share earned during a
recent month or other specified 30-day period by the maximum offering price per
share on the last day of the period and annualizing the result, in accordance
with the following formula:
YIELD = 2[( a-b + 1)6 -1]
cd
Where: a = dividends and interest earned during the
period
b = expenses accrued for the period
(net of voluntary expense reductions by the
Investment Manager)
c = the average daily number of shares
outstanding during the period that were entitled to
receive dividends
d = the maximum offering price per
share on the last day of the period
To calculate interest earned (for the purpose of "a" above) on debt
obligations, the Fund computes the yield to maturity of each obligation held by
the Fund based on the market value of the obligation (including actual accrued
interest) at the close of the last business day of the preceding period, or,
with respect to obligations purchased during the period, the purchase price
(plus actual accrued interest). The yield to maturity is then divided by 360 and
the quotient is multiplied by the market value of the obligation (including
actual accrued interest) to determine the interest income on the obligation for
each day of the period that the obligation is in the portfolio. Dividend income
is recognized daily based on published rates.
In the case of a tax-exempt obligation issued without original issue
discount and having a current market discount, the coupon rate of interest is
used in lieu of the yield to maturity. Where, in the case of a tax-exempt
obligation with original issue discount, the discount based on the current
market value exceeds the then-remaining portion of original issue discount
(market discount), the yield to maturity is the imputed rate based on the
original issue discount calculation. Where, in the case of a tax-exempt
obligation with original issue discount, the discount based on the current
market value is less than the then-remaining portion of original issue discount
(market premium), the yield to maturity is based on the market value. Dividend
income is recognized daily based on published rates
With respect to the treatment of discount and premium on mortgage or other
receivables-backed obligations which are expected to be subject to monthly
payments of principal and interest ("paydowns"), the Fund accounts for gain or
loss attributable to actual monthly paydowns as a realized capital gain or loss
during the period. The Fund has elected not to amortize discount or premium on
such securities.
40
<PAGE>
Undeclared earned income, computed in accordance with generally accepted
accounting principles, may be subtracted from the maximum offering price.
Undeclared earned income is the net investment income which, at the end of the
base period, has not been declared as a dividend, but is reasonably expected to
be declared as a dividend shortly thereafter. The maximum offering price
includes a maximum sales charge of 4.5% with respect to the Class A shares.
All accrued expenses are taken into account as described later herein.
Yield information is useful in reviewing the Fund's performance, but
because yields fluctuate, such information cannot necessarily be used to compare
an investment in the Fund's shares with bank deposits, savings accounts and
similar investment alternatives which are insured and/or often provide an agreed
or guaranteed fixed yield for a stated period of time. Shareholders should
remember that yield is a function of the kind and quality of the instruments in
the Fund's portfolio, portfolio maturity and operating expenses and market
conditions.
Tax Equivalent Yield
The tax equivalent yield of each class of shares of the Fund for the month
ended December 31, 1994, assuming a federal income tax rate of 28% was as
follows:
Class A 7.44%
Class B 6.75%
Class C 8.15%
Class D 6.76%
The Fund's tax equivalent yield is computed by dividing that portion of
the Fund's yield (computed as described under "Yield" above) which is
tax-exempt, by the complement of the federal income tax rate of 28% (or other
relevant rate) and adding the result to that portion, if any, of the yield of
the Fund that is not tax-exempt. The complement, for example, of a tax rate of
28% is 72%, that is [1.00 - .28 = .72].
Accrued Expenses
Accrued expenses include all recurring expenses that are charged to all
shareholder accounts in proportion to the length of the base period, including
but not limited to expenses under the Fund's Distribution Plan. The standard
total return and yield results take sales charges, if applicable, into account,
although the results do not take into account recurring and nonrecurring charges
for optional services which only certain shareholders elect and which involve
nominal fees, such as the $7.50 fee for wire orders.
41
<PAGE>
Accrued expenses do not include the subsidization, if any, by
affiliates of fees or expenses during the subject period. In the absence of
such subsidization, the performance of the Fund would have been lower.
Nonstandardized Total Return
The Fund may provide the above described standard total return results for
Class A, Class B, Class C and Class D shares for periods which end no earlier
than the most recent calendar quarter end and which begin twelve months before,
five years before and at the time of commencement of the Fund's operations. In
addition, the Fund may provide nonstandardized total return results for
differing periods, such as for the most recent six months, and/or without taking
sales charges into account. Such nonstandardized total return is computed as
otherwise described under "Total Return" except the result may or may not be
annualized, and as noted any applicable sales charge, if any, may not be taken
into account and therefore not deducted from the hypothetical initial payment of
$1,000. For example, the Fund's nonstandardized total return for the six months
ended December 31, 1994, without taking sales charges into account were as
follows:
Class A -1.26%
Class B -1.63%
Class C -1.14%
Class D -1.63%
Distribution Rates
The Fund may also quote its distribution rate for each class of shares.
The distribution rate is calculated by annualizing the latest per-share
distribution from ordinary income and dividing the result by the maximum
offering price per share as of the end of the period to which the distribution
relates. A distribution can include gross investment income from debt
obligations purchased at a premium and in effect include a portion of the
premium paid. A distribution can also include nonrecurring, gross short-term
capital gains without recognition of any unrealized capital losses. Further, a
distribution can include income from the sale of options by the Fund even though
such option income is not considered investment income under generally accepted
accounting principles.
Because a distribution can include such premiums, capital gains and option
income, the amount of the distribution may be susceptible to control by the
Investment Manager through transactions designed to increase the amount of such
items. Also, because the distribution rate is calculated in part by dividing the
latest distribution by the offering price, which is based on net asset value
plus any applicable sales charge, the distribution rate will increase as the net
asset value declines. A distribution rate can be greater than the yield rate
calculated as described above.
42
<PAGE>
The distribution rates of the Fund on the month of December 1994 were as
follows:
Class A 4.92%
Class B 4.39%
Class C 5.41%
Class D 4.39%
CUSTODIAN
State Street Bank and Trust Company, 225 Franklin Street, Boston,
Massachusetts 02110, is the Trust's custodian. As custodian, State Street Bank
and Trust Company is responsible for, among other things, safeguarding and
controlling the Fund's cash and securities, handling the receipt and delivery of
securities and collecting interest and dividends on the Fund's investments.
State Street Bank and Trust Company is not an affiliate of the Investment
Manager or its affiliates.
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP, 160 Federal Street, Boston, Massachusetts 02110,
serves as the Trust's independent accountants, providing professional services
including (1) an audit of the Fund's annual financial statements, (2) assistance
and consultation in connection with Securities and Exchange Commission filings
and (3) review of the annual income tax returns filed on behalf of the Fund.
FINANCIAL STATEMENTS
In addition to the reports provided to holders of record on a semiannual
basis, other supplementary reports may be made available and holders of record
may request a copy of a current supplementary reports, if any, by calling State
Street Research Shareholder Services.
The following financial statements of MetLife - State Street Tax-Exempt
Fund are for the fiscal year ended December 31, 1994. MetLife - State Street
Tax-Exempt Fund changed its name to "State Street Research Tax-Exempt Fund" on
May 1, 1995.
43
<PAGE>
State Street Research Tax-Exempt Fund
Investment Portfolio
December 31, 1994
<TABLE>
<CAPTION>
Principal Amount Maturity Date Value (Note 1)
<S> <C> <C> <C> <C>
Municipal Bonds 96.3%
Alaska $3,450,000 Alaska Housing Finance Corporation, General
1.5% Housing Purpose Bonds, 1992 Series A, 6.375% 12/01/2012 $ 3,563,401
635,000 Alaska Housing Finance Corporation, Collateralized
Home Mortgage Bonds, 1987
Series B, 8.75% 12/01/2016 654,609
-----------------
4,218,010
-----------------
Arizona 1,600,000 Industrial Development Authority of Gila County,
0.6% Arizona, Pollution Control Revenue Refunding
Bonds, (Asarco Incorporated Project), Series 1985,
8.90% 7/01/2006 1,723,296
-----------------
California 3,410,000 California Pollution Control Financing Authority,
2.8% Pollution Control Revenue Bonds, (Southern
California Edison Company), 1988 Series A, Subject
to AMT, 6.90% 9/01/2006 3,433,802
1,750,000 City and County of San Francisco, General
Obligation Bonds, Series 1991 A, (Various Purpose
Projects), 6.70% 12/15/2007 1,781,500
3,000,000 San Joaquin Hills Transportation Corridor Agency,
(Orange County, California), Senior Lien Toll Road
Revenue Bonds, 7.00% 1/01/2030 2,584,260
-----------------
7,799,562
-----------------
Connecticut 1,000,000 State of Connecticut, Clean Water Fund Revenue
5.0% Bonds, 1991 Series, 7.00% 1/01/2011 1,033,230
1,500,000 State of Connecticut, Special Tax Obligation
Bonds, Transportation Infrastructure Purposes,
1991 Series A, 6.50% 10/01/2012 1,487,340
2,500,000 Connecticut Development Authority, Pollution
Control Refunding Bonds, (Pfizer Inc. Project--
1982 Series), 6.55% 2/15/2013 2,489,300
5,000,000 State of Connecticut Health and Educational
Facilities Authority, Revenue Bonds, Quinnipiac
College Issue, Series D, 6.00% 7/01/2013 4,182,150
5,000,000 Connecticut Housing Finance Authority,
Housing Mortgage Finance Program Bonds,
1993 Series A, 6.20% 5/15/2014 4,618,650
-----------------
13,810,670
-----------------
Florida 2,000,000 Lake County, Florida, Resource Recovery,
3.3% Industrial Development Refunding Revenue Bonds,
(NRG/Recovery Group Project),
Series 1993A, Subject to AMT, 5.40% 10/01/2003 1,805,500
The accompanying notes are an integral part of the financial statements
44
<PAGE>
Florida $2,365,000 Hillsborough County, Florida, Refunding Utility
(cont'd) Revenue Bonds, Series 1991A, 7.00% 8/01/2014 $ 2,369,352
485,000 Hillsborough County, Florida, Refunding Utility
Revenue Bonds, Series 1991A, Pre-Refunded to
8/1/2001 102, 7.00% 8/01/2014 523,024
1,867,000 St. Johns County Industrial Development Authority,
Industrial Development Revenue Bonds, (Vicar's
Landing Project), Series 1987A, Pre-Refunded to
2/1/97 103, 9.50% 2/01/2017 2,073,042
1,250,000 Martin County, Florida, Pollution Control Revenue
Refunding Bonds, (Florida Power & Light Company
Project), Series 1990, MBIA Insured, 7.30% 7/01/2020 1,305,450
1,000,000 Orlando Utilities Commission, Water and
Electric Subordinated Revenue Bonds, Series 1989C,
Pre-Refunded to 10/1/99 102, 7.00% 10/01/2023 1,077,060
-----------------
9,153,428
-----------------
Georgia 2,500,000 Metropolitan Atlanta Rapid Transit Authority,
3.3% (Georgia), Sales Tax Revenue Bonds, Refunding
Series M, 6.35% 7/01/2004 2,560,750
4,300,000 State of Georgia, General Obligation Bonds, 1992B,
6.25% 3/01/2011 4,277,941
2,115,000 Georgia Housing and Finance Authority, Home
Ownership Opportunity Program Bonds, 1992 Series
C, 6.50% 12/01/2011 2,078,685
-----------------
8,917,376
-----------------
Hawaii 2,000,000 State of Hawaii, General Obligation Bonds of 1991,
0.7% Series BT, 6.125% 2/01/2010 2,036,600
-----------------
Illinois 3,300,000 City of Chicago, Illinois, Gas Supply Revenue
1.5% Bonds, 1985 Series B (The Peoples Gas Light and
Coke Company Project), 7.50% 3/01/2015 3,430,647
500,000 Illinois Health Facilities Authority Revenue
Bonds, Series 1989, (Delnor Community Hospital
Project), Pre-Refunded to 5/15/99 102, 8.00% 5/15/2019 553,980
-----------------
3,984,627
-----------------
Indiana 2,500,000 City of Sullivan, Indiana, Pollution Control
1.8% Revenue Refunding Bonds, (Indiana Michigan Power
Company Project), Series C, 5.95% 5/01/2009 2,192,975
1,500,000 Hospital Authority of the City of Kokomo
(Indiana), Hospital Revenue Refunding Bonds,
(Saint Joseph Hospital and Health Center), Series
1988A, Pre-Refunded to 8/15/98 102, 8.75% 2/15/2013 1,680,225
The accompanying notes are an integral part of the financial statements
45
<PAGE>
Indiana $1,000,000 City of Mt. Vernon, Indiana, Pollution Control
(cont'd) Revenue Bonds, 1984 Series A, (Southern Indiana
Gas and Electric Company Project), 7.25% 3/01/2014 $ 1,044,970
-----------------
4,918,170
-----------------
Iowa 980,000 Iowa Finance Authority, Single Family Mortgage
0.3% Refunding Bonds, 1992 Series F, AMBAC
Insured, 6.50% 1/01/2025 922,366
-----------------
Kansas 1,000,000 State of Kansas, Department of Transportation,
0.4% Highway Revenue Bonds, Series 1992, Pre-Refunded
to 3/1/2002 102, 6.50% 3/01/2008 1,044,690
-----------------
Kentucky 5,125,000 City of Ashland, Kentucky, Pollution Control
2.4% Revenue Refunding Bonds, (Ashland Oil, Inc.
Project), Series 1988A, 7.375% 7/01/2009 5,264,656
1,500,000 Kentucky Housing Corporation, Housing Revenue
Bonds, 1991 Series D-1, (Federally Insured or
Guaranteed Mortgage Loans) Subject to AMT, 6.80% 1/01/2024 1,444,965
-----------------
6,709,621
-----------------
Louisiana 6,000,000
2.2% Lake Charles Harbor and Terminal District
(Louisiana), Port Facilities Revenue Refunding
Bonds, Series 1992, (Trunkline LNG Company
Project), 7.75% 8/15/2022 6,043,200
-----------------
Maryland 5,000,000 Howard County, Maryland, Multifamily Housing
1.9% Revenue Refunding Bonds, Series 1994, (Chase Glen
Project), Mandatory Put 7/1/2004 100, 7.00% 7/01/2024 5,117,900
-----------------
Massachusetts 4,500,000 Massachusetts Industrial Finance Agency, First
8.8% Mortgage Refunding Bonds, (Brookhaven Retirement
Community, Lexington--1994 Issue), Series A, 6.75% 1/01/2001 4,475,925
1,500,000 Massachusetts Industrial Finance Agency, First
Mortgage Revenue Bonds, (Berkshire Retirement
Community, Lenox--1994 Issue), Series A, 6.375% 7/01/2005 1,403,715
450,000 Massachusetts Industrial Finance Agency, Refunding
Revenue Bonds, Morton Hospital and Medical Center
Issue, Series 1989A, 8.75% 7/01/2011 506,943
2,000,000 Massachusetts Housing Finance Agency, Residential
Development Bonds, FNMA Collateralized, 1992
Series C, 6.875% 11/15/2011 2,025,160
3,000,000 Massachusetts Health and Educational Facilities
Authority, Refunding Bonds, Massachusetts General
Hospital Issue, Series F, AMBAC
Insured, 6.25% 7/01/2012 2,882,970
The accompanying notes are an integral part of the financial statements
46
<PAGE>
Massachusetts $1,000,000 Massachusetts Health and Educational Facilities
(cont'd) Authority, Refunding Bonds, New England Memorial
Hospital Issue, Series B, 6.125% 7/01/2013 $ 778,260
1,155,000 Massachusetts Industrial Finance Agency, Revenue
Bonds, New England Memorial Hospital Issue, Series
1988A, Pre-Refunded to 7/1/98 102, 8.875% 7/01/2013 1,300,669
5,500,000 Massachusetts Housing Finance Agency, Housing
Project Revenue Bonds, 1993 Series A, 6.30% 10/01/2013 5,155,260
3,385,000 Massachusetts Bay Transportation Authority,
General Transportation System Bonds, 1994 Series A
Refunding Bonds, 7.00% 3/01/2014 3,511,836
1,000,000 Massachusetts Health and Educational Facilities
Authority, Revenue Bonds, Harvard University
Issue, Series N Refunding, 6.25% 4/01/2020 964,270
1,000,000 Massachusetts Health and Educational Facilities
Authority, Revenue Bonds, Suffolk University
Issue, Series A, Pre-Refunded to 7/1/2000 101.5,
8.125% 7/01/2020 1,122,230
-----------------
24,127,238
-----------------
1,000,000
Michigan Board of Trustees of Michigan State University,
1.7% General Revenue Bonds, Series 1992 A, 6.125% 8/15/2007 968,830
3,525,000 State of Michigan, State Trunk Line Fund Bonds,
Series 1989A, Pre-Refunded to 8/15/99 102, 7.00% 8/15/2017 3,791,984
-----------------
4,760,814
-----------------
Minnesota 2,175,000 City of Minneapolis, Minnesota, General Obligation
1.3% Sales Tax Refunding Bonds, Series 1992, 6.25% 4/01/2012 2,129,869
1,410,000 Minnesota Housing Finance Agency, Single Family
Mortgage Bonds, 1991 Series A, Subject to AMT,
7.45% 7/01/2022 1,468,317
-----------------
3,598,186
-----------------
Mississippi 2,250,000 Claiborne County, Pollution Control Revenue Bonds,
0.9% (Middle South Energy, Inc. Project), Series E,
9.50% 4/01/2016 2,396,767
-----------------
Missouri 500,000 Missouri Housing Development Commission, Mortgage
0.8% Purchase Refunding Bonds,
Series B, 7.00% 9/01/2010 510,975
1,870,000 State of Missouri, State Water Pollution Control,
General Obligation Bonds, Series A 1992, 5.75% 8/01/2013 1,719,951
-----------------
2,230,926
-----------------
The accompanying notes are an integral part of the financial statements
47
<PAGE>
Nebraska $1,000,000 Omaha Public Power District (Nebraska), Electric
0.4% System Revenue Bonds, 1992, Series B, 6.20% 2/01/2017 $ 950,470
-----------------
Nevada 2,000,000 Clark County School District, Nevada, General
0.8% Obligation (Limited Tax) School Improvement Bonds,
MBIA Insured, Pre-Refunded to 6/1/2001 101, 7.00% 6/01/2009 2,145,940
-----------------
New Hampshire 7,000,000 New Hampshire Higher Educational and Health
2.5% Facilities Authority, First Mortgage Revenue
Bonds, RiverMead at Peterborough Issue, Series
1994, 7.375% 7/01/2000 6,844,950
-----------------
New Jersey 1,250,000 New Jersey Housing and Mortgage Finance Agency,
1.4% Housing Revenue Refunding Bonds, 1992 Series One,
6.45% 11/01/2007 1,256,150
2,000,000 New Jersey Health Care Facilities Financing
Authority, Revenue Bonds, Southern Ocean County
Hospital Issue, Series A, 6.125% 7/01/2013 1,642,860
1,000,000 New Jersey Educational Facilities Authority, Seton
Hall University Project Revenue Bonds, 1991 Series
D, 7.00% 7/01/2021 1,004,400
-----------------
3,903,410
-----------------
New Mexico 1,540,000 New Mexico Mortgage Finance Authority, Single
0.6% Family Mortgage, Purchase Refunding Senior Bonds,
1992 Series A, 6.85% 7/01/2010 1,538,506
-----------------
New York 1,000,000 The City of New York, General Obligation Bonds,
7.7% Fiscal 1992 Series H, 7.00% 2/01/2005 1,016,000
5,175,000 New York City Industrial Development Agency,
Special Facility Revenue Bonds, Series 1994,
(Terminal One Group Association, L.P. Project),
Subject to AMT, 6.00% 1/01/2008 4,813,268
4,000,000 State of New York, Serial Bonds, 5.50% 3/01/2011 3,498,240
3,000,000 County of Monroe, New York, General Obligations,
Public Improvement Bonds--1994, AMBAC Insured,
6.00% 6/01/2011 2,841,180
3,000,000 The City of New York, General Obligation Refunding
Bonds, Fiscal 1991 Series B, 7.75% 2/01/2012 3,134,580
2,000,000 State of New York, Serial Bonds, 5.625% 6/15/2012 1,778,820
1,000,000 Housing New York Corporation, Revenue Bonds, 1987
Series A, Pre-Refunded to 11/1/97 102, 9.00% 11/01/2017 1,113,140
The accompanying notes are an integral part of the financial statements
48
<PAGE>
New York $3,000,000 Dormitory Authority of the State of New York, The
(cont'd) Miriam Osborn Memorial Home Association, Revenue
Bonds, 1994B Issue, 6.00% 7/01/2024 $ 3,020,010
-----------------
21,215,238
-----------------
North 5,000,000 North Carolina Municipal Power Agency Number 1,
Carolina Catawba Electric Revenue Bonds, Series 1992, 7.25% 1/01/2007 5,287,300
8.6%
2,000,000 North Carolina Medical Care Commission, Hospital
Revenue Bonds, (Rex Hospital Project), Series
1993, 6.125% 6/01/2010 1,874,020
4,480,000 City of Charlotte, North Carolina, General
Obligation Bonds, Water and Sewer Bonds,
Series 1994, 5.80% 2/01/2012 4,225,267
1,850,000 County of Durham, North Carolina, Certificates of
Participation, (1991 Jail Facilities and Computer
Equipment Financing Project), 6.625% 5/01/2014 1,855,013
1,865,000 City of Charlotte, North Carolina, General
Obligation Refunding Bonds, Series 1993, 5.25% 2/01/2016 1,599,499
1,000,000 City of Charlotte, North Carolina, General
Obligation Bonds, Water and Sewer Bonds,
Series 1994, 5.90% 2/01/2017 930,150
1,000,000 City of Charlotte, North Carolina, General
Obligation Bonds, Water and Sewer Bonds,
Series 1994, 5.90% 2/01/2019 927,440
6,840,000 North Carolina Housing Finance Agency,
Multifamily Revenue Refunding Bonds, (1992
Refunding Bond Resolution), Series B, 6.90% 7/01/2024 6,849,234
-----------------
23,547,923
-----------------
Ohio 1,000,000 County of Erie, Ohio, Hospital Improvement and
6.8% Refunding Revenue Bonds, Series 1992, (Firelands
Community Hospital Project), 6.75% 1/01/2008 992,310
1,500,000 City of Hamilton, Ohio, Electric System Mortgage
Revenue Refunding Bonds, 1992 Series A, FGIC
Insured, 6.125% 10/15/2008 1,482,675
1,000,000 City of Columbus, Ohio, Water System Revenue
Refunding Bonds, Series 1991, 6.375% 11/01/2010 991,530
2,500,000 City of Cleveland, Ohio, General Obligation Bonds,
Series 1991C, MBIA Insured, 6.25% 10/01/2011 2,436,500
2,000,000 County of Franklin, Ohio, Hospital Facilities
Refunding Revenue Bonds, Series 1993A, (Riverside
United Methodist Hospital Project), 5.75% 5/15/2012 1,760,000
The accompanying notes are an integral part of the financial statements
49
<PAGE>
Ohio $2,000,000 Hamilton County, Ohio, Sewer System Improvement
(cont'd) and Refunding Revenue Bonds, 1991 Series A, (The
Metropolitan Sewer District of Greater
Cincinnati), Pre-Refunded to
6/1/2001 102, 6.70% 12/01/2013 $ 2,133,680
1,750,000 City of Cleveland, Ohio, Public Power System
Improvement First Mortgage Revenue Bonds, Series
1987, Pre-Refunded to 8/1/97 102, 8.375% 8/01/2017 1,910,895
7,000,000 City of Cleveland, Ohio, Public Power System
Improvement First Mortgage Revenue Refunding
Bonds, Series 1991 B, 7.00% 11/15/2017 6,912,710
-----------------
18,620,300
-----------------
Oregon 3,750,000 Portland Community College District, Multnomah,
1.7% Washington, Yamhill, Clackamas and Columbia
Counties, Oregon, General Obligation Bonds, Series
1992A, 6.00% 7/01/2012 3,525,975
1,000,000 State of Oregon, Housing, Educational and Cultural
Facilities Authority, Revenue Bonds, (Reed College
Project), 1991 Series A, 6.75% 7/01/2021 1,001,890
-----------------
4,527,865
-----------------
Pennsylvania 3,000,000 Pennsylvania Economic Development Financing
1.4% Authority, Resource Recovery Revenue Bonds,
(Colver Project), Series 1994D, 7.05% 12/01/2010 2,843,610
1,000,000 Montgomery County Industrial Development
Authority, Pollution Control Revenue Refunding
Bonds, 1991 Series A, (Philadelphia Electric Co.
Project), Subject to AMT, 7.60% 4/01/2021 1,009,540
-----------------
3,853,150
-----------------
South Carolina 1,000,000 City of Charleston, South Carolina, Waterworks and
1.1% Sewer System Revenue Bonds, Series 1988,
Pre-Refunded to 1/1/98 100, 7.20% 1/01/2019 1,051,680
1,310,000 South Carolina Public Service Authority, (Santee
Cooper), Electric System Expansion Revenue Bonds,
1988 Refunding Series A, 7.875% 7/01/2021 1,354,016
690,000 South Carolina Public Service Authority, (Santee
Cooper), Electric System Expansion Revenue Bonds,
1988 Refunding Series A, Pre-Refunded to 1/1/96
102, 7.875% 7/01/2021 722,851
-----------------
3,128,547
-----------------
The accompanying notes are an integral part of the financial statements
50
<PAGE>
Tennessee $2,250,000 City of Memphis, Tennessee, Electric System
3.3% Revenue Refunding Bonds, Series of 1992, 6.00% 1/01/2006 $ 2,237,468
500,000 City of Memphis, Tennessee, Electric System
Revenue Bonds, Series of 1991, 6.75% 1/01/2011 530,025
3,000,000 City of Memphis, Tennessee, Water Division Revenue
Refunding Bonds, Series of 1992-A, 6.00% 1/01/2012 2,797,500
1,250,000 City of Clarksville, Tennessee, Water, Sewer and
Gas Revenue Refunding and Improvement Bonds,
Series 1992, MBIA Insured, 6.125% 2/01/2012 1,210,775
2,500,000 Chattanooga--Hamilton County Hospital Authority,
Hospital Revenue and Refunding Bonds (Erlanger
Medical Center) Series 1993, FSA Insured, 5.50% 10/01/2013 2,187,100
-----------------
8,962,868
-----------------
Texas 2,000,000 City of Austin, Texas, Combined Utility Systems
8.0% Revenue Refunding Bonds, Series 1993, 5.80% 11/15/2006 1,888,500
2,000,000 Sam Rayburn Municipal Power Agency, (Texas), Power
Supply System Revenue Refunding Bonds, Series
1993A, 6.50% 10/01/2008 1,830,080
1,500,000 Houston Independent School District, Texas,
Limited Tax School House Bonds, Series 1991, PSFG
Guaranteed, Pre-Refunded to 8/15/2001 100, 6.375% 8/15/2011 1,550,775
850,000 Fort Worth Housing Finance Corporation, Home
Mortgage Revenue Refunding Bonds, Series 1991A,
8.50% 10/01/2011 909,611
1,000,000 Texas Municipal Power Agency, Refunding Revenue
Bonds, Series 1991A, AMBAC Insured, 6.75% 9/01/2012 1,032,220
5,750,000 Harris County, Texas, General Obligation,
Unlimited Tax, Refunding and Toll Road Subordinate
Lien Revenue Bonds, Series 1991, 6.75% 8/01/2014 5,790,422
1,660,000 Texas Housing Agency, Single Family Mortgage
Revenue Bonds, 1986 Series A, 8.25% 3/01/2017 1,720,673
2,750,000 Industrial Development Corporation of Port of
Corpus Christi, Refunding Revenue Bonds, (Valero
Refining and Marketing Company Project), Series
1987A, 10.25% 6/01/2017 3,019,885
1,000,000 Harris County, Texas, Toll Road Senior Lien
Revenue Bonds, Series 1987-E, Pre-Refunded to
8/15/97 103, 8.70% 8/15/2017 1,108,180
The accompanying notes are an integral part of the financial statements
51
<PAGE>
Texas $ 2,000,000 Harris County, Texas, Toll Road Senior Lien
(cont'd) Revenue Bonds, Series 1985-B, Pre-Refunded to
8/15/97 103, 8.70% 8/15/2017 $ 2,216,360
725,000 Texas Housing Agency, Residential Mortgage Revenue
Bonds, Series 1987D, Subject to AMT, 8.40% 7/01/2020 754,508
-----------------
21,821,214
-----------------
Utah 680,000 Utah Housing Finance Agency, Single Family
0.2% Mortgage Senior Bonds, 1992 Issue D, (Federally
Insured or Guaranteed Mortgage Loans), 6.70% 7/01/2012 677,906
-----------------
Vermont 5,000,000 City of Burlington, Vermont, Electric System
1.8% Revenue Bonds, 1992 Series A, MBIA Insured, 6.25% 7/01/2014 4,852,150
-----------------
Virginia 2,000,000 Virginia College Building Authority, Educational
6.1% Facilities Revenue Bonds, (Marymount University
Project), Series of 1992, 6.875% 7/01/2007 2,013,060
1,440,000 The Rectors and Visitors of the University of
Virginia, General Revenue Pledge Bonds, Series
1993B, 5.375% 6/01/2010 1,287,619
6,000,000 Commonwealth Transportation Board, Commonwealth of
Virginia, Transportation Revenue Bonds, Series
1993B, (U.S. Route 58 Corridor Development
Program), 5.625% 5/15/2013 5,300,880
3,250,000 The Rector and Visitors of the University of
Virginia, General Revenue Pledge Bonds, Series
1993B, 5.375% 6/01/2014 2,811,380
2,000,000 Prince William County Service Authority,
(Virginia), Water and Sewer System Revenue Bonds,
Series 1991, FGIC Insured, 6.50% 7/01/2021 2,113,400
3,000,000 Fairfax County Water Authority, Water Revenue
Bonds, Series 1989, Pre-Refunded to 1/1/2000 102,
7.25% 1/01/2027 3,257,970
-----------------
16,784,309
-----------------
Washington 2,250,000 Washington Public Power Supply System, Nuclear
0.9% Project No. 1, Refunding Revenue Bonds, Series
1990C, Pre-Refunded to 7/1/2000 102, 8.00% 7/01/2017 2,525,850
-----------------
Wisconsin 3,750,000 Wisconsin Housing and Economic Development
1.3% Authority, Home Ownership Revenue Bonds, 1992
Series 2, Subject to AMT, 6.875% 9/01/2024 3,691,275
-----------------
Wyoming 1,500,000 Wyoming Community Development Authority, Single
0.5% Family Mortgage Program, Series E, 5.70% 6/01/2013 1,308,270
-----------------
Total Municipal Bonds (Cost $268,967,207) 264,413,588
-----------------
The accompanying notes are an integral part of the financial statements
52
<PAGE>
Short-Term Obligations 1.2%
$1,100,000 New York Job Development Authority, Variable Rate
Daily Demand Special Purpose Bonds, Subject to
AMT, 4.70% 3/01/2002++ $ 1,100,000
100,000 Hapeville Development Authority, (Georgia),
Industrial Development Revenue Bonds, (Hapeville
Hotel Limited Partnership), Letter of Credit, The
Long-Term Credit Bank of Japan, 3.70% 11/01/2015++ 100,000
400,000 City of Indianapolis, Indiana, Resource Recovery
Revenue Bonds, Series 1987, (Ogden Martin Systems
of Indianapolis, Inc. Project), Letter of Credit,
Swiss Bank Corp., 3.40% 12/01/2016++ 400,000
1,100,000 The Wake County Industrial Facilities and
Pollution Control Financing Authority, Pollution
Control Revenue Bonds, (Carolina Power & Light Co.
Project), Series 1987 Subject to AMT, Letter of
Credit, The Sumitomo Bank, Ltd. 3.35% 3/01/2017++ 1,100,000
700,000 California Pollution Control Financing Authority,
Resource Recovery Revenue Bonds, (Burney Forest
Products Project), 1988 Series A, Letter of
Credit, National Westminster Bank, 3.65% 9/01/2020++ 700,000
-----------------
Total Short-Term Obligations (Cost $3,400,000) 3,400,000
-----------------
Total Investments (Cost $272,367,207)--97.5% 267,813,588
Other Assets, Less Liabilities--2.5% 6,913,799
-----------------
Net Assets--100.0% $274,727,387
=================
Federal Income Tax Information:
At December 31, 1994, the net unrealized
depreciation of investments based on
cost for Federal income tax purposes of $272,367,207 was as follows:
Aggregate gross unrealized appreciation for all investments in which there
is an excess of value over tax cost $4,562,695
Aggregate gross unrealized depreciation for all investments in which there
is an excess of tax cost over value (9,116,314)
--------------
$ (4,553,619)
==============
</TABLE>
++ Interest rates on these obligations may change daily.
The accompanying notes are an integral part of the financial statements
53
<PAGE>
State Street Research Tax-Exempt Fund
Statement of Assets and Liabilities
<TABLE>
<CAPTION>
December 31, 1994
<S> <C> <C> <C>
Assets Investments, at value (Cost $272,367,207) (Note 1) $267,813,588
Interest receivable 6,389,178
Receivable for securities sold 3,495,635
Receivable for fund shares sold 73,859
Other assets 26,913
-----------
277,799,173
Liabilities Payable for securities purchased $1,775,671
Dividends payable 310,293
Payable for fund shares redeemed 305,673
Accrued transfer agent and shareholder services (Note 2) 201,730
Accrued management fee (Note 2) 128,376
Accrued distribution fee (Note 5) 81,175
Capital gains distribution payable 72,877
Payable to custodian 58,586
Accrued trustees' fees (Note 2) 32,190
Other accrued expenses 105,215 3,071,786
------- -----------
Net Assets $274,727,387
===========
Net Assets consist of:
Undistributed net investment income $ 880,566
Unrealized depreciation of investments (4,553,619)
Accumulated net realized loss (9,780,411)
Shares of beneficial interest 288,180,851
-----------
$274,727,387
===========
Net Asset Value and redemption price per share of Class A shares
($238,097,445 / 31,905,134 shares of beneficial interest) $7.46
===========
Maximum Offering Price per share of Class A shares ($7.46 / .955) $ 7.81
===========
Net Asset Value and offering price per share of Class B shares
($35,337,902 / 4,737,867 shares of beneficial interest)* $7.46
===========
Net Asset Value, offering price and redemption price per share of Class C
shares ($333,631 / 44,788 shares of beneficial interest) $7.45
===========
Net Asset Value and offering price per share of Class D shares
($958,409 / 128,502 shares of beneficial interest)* $7.46
===========
</TABLE>
*Redemption price per share for Class B and Class D is equal to net asset
value less any applicable contingent deferred sales charge.
The accompanying notes are an integral part of the financial statements
54
<PAGE>
State Street Research Tax-Exempt Fund
Statement of Operations
For the year ended December 31, 1994
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Investment Interest $ 19,266,948
Income
Expenses Management fee (Note 2) $ 1,798,180
Transfer agent and shareholder services (Note 2) 727,213
Custodian fee 166,240
Registration fees 79,767
Reports to shareholders 68,192
Audit fee 36,539
Trustees' fees (Note 2) 24,749
Distribution fee--Class A (Note 5) 678,873
Distribution fee--Class B (Note 5) 344,503
Distribution fee--Class D (Note 5) 10,302
Legal fees 10,114
Miscellaneous 16,899
--------
3,961,571
Expenses borne by the Distributor (Note 3) (12,268) 3,949,303
-------- ----------
Net investment income 15,317,645
----------
Realized and Net realized loss on investments (Notes 1 and 4) (9,577,889)
Unrealized Net realized gain on futures contracts (Note 1) 30,011
Gain (Loss)on --------
Investments Total net realized loss (9,547,878)
and Futures Net unrealized depreciation of investments (28,974,700)
Contracts -----------
Net loss on investments and futures contracts (38,522,578)
-----------
Net decrease in net assets resulting from operations $(23,204,933)
===========
</TABLE>
The accompanying notes are an integral part of the financial statements
55
<PAGE>
State Street Research Tax-Exempt Fund
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Year ended December 31
----------------------------
1994 1993
<S> <C> <C> <C>
Increase Operations:
(Decrease) Net investment income $ 15,317,645 $ 13,164,430
in Net Assets Net realized gain (loss) on investments and
futures contracts* (9,547,878) 2,395,132
Net unrealized appreciation (depreciation) of
investments (28,974,700) 14,175,002
--------- -----------
Net increase (decrease) resulting from operations (23,204,933) 29,734,564
--------- -----------
Dividends from net investment income:
Class A (13,276,823) (12,527,220)
Class B (1,437,982) (333,508)
Class C (21,125) (7,800)
Class D (42,707) (17,608)
--------- -----------
(14,778,637) (12,886,136)
--------- -----------
Distributions from net realized gains:
Class A (379,796) (2,138,748)
Class B (58,307) (188,068)
Class C (535) (3,360)
Class D (1,436) (6,817)
--------- -----------
(440,074) (2,336,993)
--------- -----------
Net increase (decrease) from fund share
transactions (Note 6) (18,980,504) 114,308,195
--------- -----------
Total increase (decrease) in net assets (57,404,148) 128,819,630
Net Assets Beginning of year 332,131,535 203,311,905
--------- -----------
End of year (including undistributed net
investment income of $880,566 and $341,558,
respectively) $274,727,387 $332,131,535
========= ===========
* Net realized gain (loss) for Federal income
tax purposes (Note 1) $ (8,429,917) $ 2,395,063
========= ===========
</TABLE>
The accompanying notes are an integral part of the financial statements
56
<PAGE>
State Street Research Tax-Exempt Fund
Notes to Financial Statements
December 31, 1994
Note 1
State Street Research Tax-Exempt Fund (the "Fund") is a series of
State Street Research Tax-Exempt Trust (the "Trust"), which was organized as
a Massachusetts business trust in December, 1985 and is registered under the
Investment Company Act of 1940, as amended, as an open-end management
investment company. The Fund commenced operations in August, 1986. Five
series of the Trust are publicly offered: State Street Research Tax-Exempt
Fund, State Street Research California Tax-Free Fund, State Street Research
New York Tax-Free Fund, State Street Research Florida Tax-Free Fund and State
Street Research Pennsylvania Tax-Free Fund.
The Fund offers four classes of shares. Class A shares are subject to an
initial sales charge of up to 4.50% and pay a service fee equal to 0.25% of
average daily net assets. Class B shares are subject to a contingent deferred
sales charge on certain redemptions made within five years of purchase and
pay annual distribution and service fees of 1.00%. Class B shares
automatically convert into Class A shares (which pay lower ongoing expenses)
at the end of eight years after the issuance of the Class B shares. Class C
shares are only offered to certain employee benefit plans and large
institutions. No sales charge is imposed at the time of purchase or
redemption of Class C shares. Class C shares do not pay any distribution or
service fees. Class D shares are subject to a contingent deferred sales
charge of 1.00% on any shares redeemed within one year of their purchase.
Class D shares also pay annual distribution and service fees of 1.00%. The
Fund's expenses are borne pro-rata by each class, except that each class
bears expenses, and has exclusive voting rights with respect to provisions of
the Plan of Distribution, related specifically to that class. The Trustees
declare separate dividends on each class of shares.
The following significant accounting policies are consistently followed by
the Fund in preparing its financial statements, and such policies are in
conformity with generally accepted accounting principles for investment
companies.
A. Investment Valuation
Tax-exempt securities are valued by a pricing service, which utilizes market
transactions, quotations from dealers, and various relationships among
securities in determining value. Short-term obligations are valued at
amortized cost. Other securities, if any, are valued at their fair value as
determined in accordance with established methods consistently applied.
B. Security Transactions
Security transactions are accounted for on the trade date (date the order to
buy or sell is executed). Realized gains or losses are reported on the basis
of identified cost of securities delivered.
C. Net Investment Income
Net investment income is determined daily and consists of interest accrued
and discount earned, less amortization of premium and the estimated daily
expenses of the Fund. Interest income is accrued daily as earned. The Fund is
charged for expenses directly attributable to it, while indirect expenses are
allocated among all funds in the Trust.
D. Dividends
Dividends are declared daily by the Fund based upon projected net investment
income and paid or reinvested monthly. Net realized capital gains, if any,
are distributed annually, unless additional distributions are required for
compliance with applicable tax regulations.
Income dividends and capital gain distributions are determined in accordance
with Federal income tax regulations which may differ from generally accepted
accounting principles.
57
<PAGE>
E. Federal Income Taxes
No provision for Federal income taxes is necessary because the Fund has
elected to qualify under Subchapter M of the Internal Revenue Code and its
policy is to distribute all of its taxable income, including net realized
capital gains, within the prescribed time periods. At December 31, 1994, the
Fund had a capital loss carryforward of $8,429,917 available, to the extent
provided in regulations, to offset future capital gains, if any, which
expires on December 31, 2002.
Notes (cont'd)In order to meet certain excise tax distribution requirements
under Section 4982 of the Internal Revenue Code, the Fund is required to
measure and distribute annually, if necessary, net capital gains realized
during a twelve-month period ending October 31. In this connection, the Fund
is permitted to defer into its next fiscal year any net capital losses
incurred between each November 1 and the end of its fiscal year. From
November 1, 1994 through December 31, 1994 the Fund incurred net capital
losses of $882,002 and intends to defer and treat such losses as arising in
the fiscal year ending December 31, 1995.
F. Futures Contracts
The Fund may enter into futures contracts as a hedge against unfavorable
market conditions and to enhance income. The Fund will not purchase any
futures contract if, after such purchase, more than one-third of net assets
would be represented by long futures contracts. The Fund will limit its risks
by entering into a futures position only if it appears to be a liquid
investment.
Upon entering into a futures contract, the Fund deposits with the selling
broker sufficient cash or U.S. Government securities to meet the minimum
"initial margin" requirements. Thereafter, the Fund receives from or pays to
the broker cash or U.S. Government securities equal to the daily fluctuation
in value of the contract ("variation margin"), which is recorded as
unrealized gain or loss. When the contract is closed, the Fund records a
realized gain or loss equal to the difference between the value of the
contract at the time it was opened and the value at the time it was closed.
Note 2
The Trust and State Street Research & Management Company (the "Adviser"), an
indirect wholly-owned subsidiary of Metropolitan Life Insurance Company
("Metropolitan"), have entered into an agreement under which the Adviser
earns monthly fees at an annual rate of 0.55% of the Fund's average daily net
assets. Prior to May 1, 1994, the management fee was 0.65% of the Fund's
average daily net assets. In consideration of these fees, the Adviser
furnishes the Fund with management, investment advisory, statistical and
research facilities and services. The Adviser also pays all salaries, rent
and certain other expenses of management. During the year ended December 31,
1994, the fees pursuant to such agreement amounted to $1,798,180.
State Street Research Shareholder Services, a division of State Street
Research Investment
Services, Inc., the Trust's principal underwriter (the "Distributor"), an
indirect wholly-owned subsidiary of Metropolitan, provides certain
shareholder services to the Fund such as responding to inquiries and
instructions from investors with respect to the purchase and redemption of
shares of the Fund. During the year ended December 31, 1994, the amount of
such expenses was $136,643.
The fees of the Trustees not currently affiliated with the Adviser amounted
to $24,749 during the year ended December 31, 1994. The Trust has an optional
deferred compensation plan for its Trustees. The Fund invests the fees of
participating Trustees in shares of a State Street Research fund
58
<PAGE>
instead of paying those fees in cash. Participating Trustees receive deferred
amounts equal to the market value of such shares including any reinvested
income and capital gains distributions.
Note 3
The Distributor and its affiliates may from time to time and in varying
amounts voluntarily assume some portion of fees or expenses relating to the
Fund. During the year ended December 31, 1994, the amount of such expenses
assumed by the Distributor and its affiliates was $12,268.
Note 4
For the year ended December 31, 1994, purchases and sales of securities,
exclusive of short-term obligations, aggregated $234,572,558 and
$259,882,685, respectively.
Note 5
The Trust has adopted a Plan of Distribution Pursuant to Rule 12b-1 (the
"Plan") under the Investment Company Act of 1940, as amended. Under the Plan,
the Fund pays annual service fees to the Distributor at a rate of 0.25% of
average daily net assets for Class A, Class B and Class D shares. In
addition, the Fund pays annual distribution fees of 0.75% of average daily
net assets for Class B and Class D shares. The Distributor uses such payments
for personal services and/or the maintenance of shareholder accounts, to
reimburse securities dealers for distribution and marketing services, to
furnish ongoing assistance to investors and to defray a portion of its
distribution and marketing expenses. For the year ended December 31, 1994,
fees pursuant to such plan amounted to $678,873, $344,503 and $10,302 for
Class A, Class B and Class D, respectively.
The Fund has been informed that the Distributor and MetLife Securities, Inc.,
a wholly-owned subsidiary of Metropolitan, earned initial sales charges
aggregating $128,722 and $908,296, respectively, on sales of Class A shares
of the Fund during the year ended December 31, 1994, and that MetLife
Securities, Inc. earned commissions aggregating $565,361 on sales of Class B
shares, and the Distributor collected contingent deferred sales charges
aggregating $157,341 on redemptions of Class B shares during the same period.
59
<PAGE>
Notes (cont'd)
Note 6
The Trustees have the authority to issue an unlimited number of shares of
beneficial interest, $.001 par value per share. At December 31, 1994,
Metropolitan owned 122 Class C shares and 61,135 Class D shares and the
Distributor owned 13,825 Class A shares of the Fund.
Share transactions were as follows:
<TABLE>
<CAPTION>
Year ended December 31
----------------------------------------------------------------------------
1994 1993
----------------------------------- -------------------------------------
Class A Shares Amount Shares Amount
- -------------------------------------- ---------------- ---------------- ---------------- -----------------
<S> <C> <C> <C> <C>
Shares sold 4,795,156 $38,277,992 14,862,515 $123,297,213
Issued upon reinvestment of:
Dividends from net investment income 1,261,918 9,851,273 1,191,028 9,888,016
Distributions from net realized
gains 43,200 322,270 216,292 1,823,254
Shares repurchased (10,125,093) (79,111,629) (5,953,961) (49,864,145)
-------------- -------------- -------------- ----------------
Net increase (decrease) (4,024,819) $(30,660,094) 10,315,874 $85,144,338
============== ============== ============== ================
</TABLE>
<TABLE>
<CAPTION>
June 7, 1993
(Commencement of
Share Class
Designations) to
December 31, 1993
-------------------------------------
Class B Shares Amount Shares Amount
- -------------------------------------- ---------------- ---------------- ---------------- -----------------
<S> <C> <C> <C> <C>
Shares sold 2,332,039 $18,581,303 3,418,099 $ 28,692,720
Issued upon reinvestment of:
Dividends from net investment income 148,150 1,150,376 31,892 268,562
Distribution from net realized gains 6,731 50,145 21,257 178,986
Shares repurchased (1,035,950) (7,990,693) (184,351) (1,549,632)
-------------- -------------- -------------- ----------------
Net increase 1,450,970 $11,791,131 3,286,897 $27,590,636
============== ============== ============== ================
Class C Shares Amount Shares Amount
- -------------------------------------- ---------------- ---------------- ---------------- -----------------
Shares sold 10,183 $81,311 61,077 $ 511,498
Issued upon reinvestment of:
Dividends from net investment income 2,602 20,345 910 7,660
Distribution from net realized gains 72 535 400 3,360
Shares repurchased (24,703) (192,917) (5,753) (48,335)
-------------- -------------- -------------- ----------------
Net increase (decrease) (11,846) $ (90,726) 56,634 $474,183
============== ============== ============== ================
Class D Shares Amount Shares Amount
- -------------------------------------- ---------------- ---------------- ---------------- -----------------
Shares sold 36,875 $296,347 143,482 $1,193,733
Issued upon reinvestment of:
Dividends from net investment income 1,725 13,235 314 2,648
Distribution from net realized gains 180 1,341 942 7,922
Shares repurchased (42,597) (331,738) (12,419) (105,265)
-------------- -------------- -------------- ----------------
Net increase (decrease) (3,817) $ (20,815) 132,319 $1,099,038
============== ============== ============== ================
</TABLE>
60
<PAGE>
State Street Research Tax-Exempt Fund
Financial Highlights
For a share outstanding throughout each year.
<TABLE>
<CAPTION>
Class A
-------------------------------------------------------------
Year ended December 31
-------------------------------------------------------------
1994 1993 1992 1991 1990
-----------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of year $ 8.43 $ 7.94 $ 7.69 $ 7.30 $ 7.42
Net investment income* .40 .40 .43 .44 .46
Net realized and unrealized gain
(loss) on investments (.98) .54 .27 .39 (.12)
Dividends from net investment
income (.38) (.39) (.43) (.44) (.46)
Distribution from net realized
gains (.01) (.06) (.02) -- --
------- ------- ------- ------- --------
Net asset value, end of year $ 7.46 $ 8.43 $ 7.94 $ 7.69 $ 7.30
======= ======= ======= ======= ========
Total return (6.90)%+ 12.11%+ 9.34%+ 11.81%+ 4.84%+
Net assets at end of year (000s) $238,097 $302,845 $203,312 $118,157 $84,925
Ratio of operating expenses to
average net assets* 1.20% 1.20% 1.20% 1.25% 1.25%
Ratio of net investment income to
average net assets* 5.07% 4.85% 5.48% 6.00% 6.43%
Portfolio turnover rate 78.63% 36.16% 27.44% 81.75% 84.12%
* Reflects voluntary assumption
of fees or expenses per share
in each year (Note 3) $ .00 -- $ .00 $ .00 $ .01
</TABLE>
+Total return figures do not reflect any front-end or contingent deferred
sales charges.
61
<PAGE>
Financial Highlights (cont'd)
<TABLE>
<CAPTION>
Class B Class C Class D
------------------------ ------------------------ --------------------------
Year ended Year ended Year ended
December 31, December 31, December 31,
1994 1993** 1994 1993** 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 (Note 3) $.00 -- $.00 -- $.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 charges.
62
<PAGE>
Report of Independent Accountants
To the Trustees of State Street Research
Tax-Exempt Trust and the Shareholders of
State Street Research Tax-Exempt Fund
In our opinion, the accompanying statement of assets and liabilities,
including the investment portfolio, and the related statements of operations
and of changes in net assets and the financial highlights present fairly, in
all material respects, the financial position of State Street Research
Tax-Exempt Fund (a series of State Street Research Tax-Exempt Trust,
hereafter referred to as the "Trust") at December 31, 1994, and the results
of its operations, the changes in its net assets and the financial highlights
for the periods indicated, in conformity with generally accepted accounting
principles. These financial statements and financial highlights (hereafter
referred to as "financial statements") are the responsibility of the Trust's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these financial
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, and evaluating
the overall financial statement presentation. We believe that our audits,
which included confirmation of securities owned at December 31, 1994 by
correspondence with the custodian and brokers and the application of
alternative auditing procedures where confirmations from brokers were not
received, provide a reasonable basis for the opinion expressed above.
Price Waterhouse LLP
Boston, Massachusetts
February 10, 1995
63
<PAGE>
Management's Discussion of Fund Performance
In 1994, the bond market was repeatedly buffeted by uncertainty over the
strength of the economy and the timing of the Fed's next rate increase. When
the municipal bond market declined sharply in February, March and April, we
attempted to reduce risk in the portfolio by replacing longer-term bonds with
less interest-rate-sensitive, shorter-term bonds. In some cases we sold
bonds for losses and replaced them with higher-yielding, more defensive
bonds. We also increased the quality of the portfolio, because higher quality
bonds tend to perform better in weak markets.
The portfolio holds a number of bonds from so-called "specialty
states"--states where there are tax incentives to buy in-state bonds or where
bonds tend to be in short supply. Typically, demand is fairly consistent for
such bonds, which can be advantageous in a bad market. Specialty states
include Massachusetts, North Carolina (which also offers very high quality),
New York, Ohio and Connecticut.
In this volatile and uncertain bond market, we have targeted bonds offering
high quality and shorter maturities. The bonds in the Fund's portfolio have
an average credit quality rating of AA, as measured by Standard and Poor's
Corporation.
Comparison Of Change In Value Of A $10,000 Investment In Tax-Exempt Fund And
The Lehman Municipal Bond Index
State Street Research Tax-Exempt Fund - Class A
LINE CHART DATA
(INCEPTION VALUE = $9,550)
VALUE OF
ACCOUNT OF
VALUE OF LEHMAN MUNI BOND
ACCOUNT AT INDEX AT
DATE YEAR END YEAR END
8/25/86 $ 9,550 $10,000
12/31/86 9,889 10,371
12/31/87 9,748 10,527
12/31/88 11,063 11,597
12/31/89 12,128 12,849
12/31/90 12,713 13,785
12/31/91 14,213 15,459
12/31/92 15,538 16,821
12/31/93 17,420 18,888
12/31/94 16,218 17,911
State Street Research Tax-Exempt Fund - Class B
LINE CHART DATA
(INCEPTION VALUE = $10,000)
VALUE OF
ACCOUNT OF
VALUE OF LEHMAN MUNI BOND
ACCOUNT AT INDEX AT
DATE YEAR END YEAR END
8/25/86 $10,000 $10,000
12/31/86 10,355 10,371
12/31/87 10,208 10,527
12/31/88 11,585 11,597
12/31/89 12,699 12,849
12/31/90 13,313 13,785
12/31/91 14,883 15,459
12/31/92 16,270 16,821
12/31/93 18,165 18,888
12/31/94 16,786 17,911
State Street Research Tax-Exempt Fund - Class C
LINE CHART DATA
(INCEPTION VALUE = $10,000)
VALUE OF
ACCOUNT OF
VALUE OF LEHMAN MUNI BOND
ACCOUNT AT INDEX AT
DATE YEAR END YEAR END
8/25/86 $10,000 $10,000
12/31/86 10,355 10,371
12/31/87 10,208 10,527
12/31/88 11,585 11,597
12/31/89 12,699 12,849
12/31/90 13,313 13,785
12/31/91 14,883 15,459
12/31/92 16,270 16,821
12/31/93 18,224 18,888
12/31/94 17,028 17,911
State Street Research Tax-Exempt Fund - Class D
LINE CHART DATA
(INCEPTION VALUE = $10,000)
VALUE OF
ACCOUNT OF
VALUE OF LEHMAN MUNI BOND
ACCOUNT AT INDEX AT
DATE YEAR END YEAR END
8/25/86 $10,000 $10,000
12/31/86 10,355 10,371
12/31/87 10,208 10,527
12/31/88 11,585 11,597
12/31/89 12,699 12,849
12/31/90 13,313 13,785
12/31/91 14,883 15,459
12/31/92 16,270 16,821
12/31/93 18,163 18,888
12/31/94 16,784 17,911
All returns represent past performance, which is no guarantee of future
results. The investment return and principal value of an investment made in
the Fund will fluctuate and shares, when redeemed, may be worth more or less
than their original cost. All returns assume reinvestment of capital gain
distributions and income dividends. In March 1992, the Fund changed its
investment objective to eliminate requirements that specify that a percentage
of the Fund be invested in certain rating categories. Previously, it was
required to invest 80% in securities rated A, BBB, BB or better. Past
performance, therefore, may not be indicative of future results. Shares of
the Fund had no class designations until June 7, 1993, when designations were
assigned based on the pricing and 12b-1 fees applicable to shares sold
thereafter. Performance data for a specified class include periods prior to
the adoption of class designations. "A" share returns for each of the
periods reflect the maximum 4.5% sales charge. "B" share returns for the 1-
and 5-year periods reflect a 5% and a 2% contingent deferred sales charge,
respectively. "C" shares, offered without a sales charge, are available only
to certain employee benefit plans and large institutions. "D" share return
for the 1-year period reflects a 1% contingent deferred sales charge.
Performance for "B" and "D" shares prior to June 7, 1993, reflects annual
12b-1 fees of .25% and performance thereafter reflects annual 12b-1 fees of
1%, which will reduce subsequent performance. The Lehman Muni Bond Index
represents approximately 15,000 fixed-coupon, investment-grade municipal
bonds. The index is unmanaged and does not take sales charges into
consideration. Direct investment in the index is not possible; results are
for illustrative purposes only.
64
<PAGE>
APPENDIX
Description of Municipal Debt Ratings
Standard & Poor's Corporation
AAA: Debt rated AAA has the highest rating assigned by S&P. Capacity
to pay interest and repay principal is extremely strong.
AA: Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in small degree.
A: Debt rated A has a strong capacity to pay interest and repay principal,
although it is more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB: Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
Debt rated BB, B, CCC, CC and C is regarded as having speculative
characteristics with respect to capacity to pay interest and repay principal. BB
indicates the least degree of speculation and C the highest. While such debt
will likely have some quality and protective characteristics, these are
outweighed by large uncertainties or major risk exposures to adverse conditions.
BB: Debt rated BB has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The BB
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied BBB- rating.
B: Debt rated B has a greater vulnerability to default but currently has
the capacity to meet interest payments and principal repayments. Adverse
business, financial or economic conditions will likely impair capacity or
willingness to pay interest and repay principal. The B rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
BB or BB- rating.
CCC: Debt rated CCC has a currently identifiable vulnerability to default,
and is dependent upon favorable business, financial and economic
A-1
<PAGE>
conditions to meet timely payment of interest and repayment of principal. In the
event of adverse business, financial or economic conditions, it is not likely to
have the capacity to pay interest and repay principal. The CCC rating category
is also used for debt subordinated to senior debt that is assigned an actual or
implied B or B- rating.
CC: The rating CC is typically applied to debt subordinated to senior
debt which is assigned an actual or implied CCC debt rating.
C: The rating C is typically applied to debt subordinated to senior debt
which is assigned an actual or implied CCC debt rating. The C rating may be used
to cover a situation where a bankruptcy petition has been filed, but debt
service payments are continued.
CI: The rating CI is reserved for income bonds on which no interest is
being paid.
D: Debt rated D is in payment default. The D rating category is used when
interest payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grace period. The D rating also will be used upon the
filing of a bankruptcy petition if debt service payments are jeopardized.
Plus (+) or Minus (-): The rating from AA to CCC may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
S&P may attach the "r" symbol to derivative, hybrid, and certain other
obligations that S&P believes may experience high volatility or high variability
in expected returns due to noncredit risks created by the terms of the
obligation, such as securities whose principal or interest return is indexed to
equities, commodities, or currencies; certain swaps and options; and interest
only (IO) and principal only (PO) mortgage securities.
SP-1: Notes rated SP-1 are of the highest quality with very strong or
strong capacity to pay principal and interest. Issues determined to possess
overwhelming safety characteristics are given a plus (+) designation.
SP-2: Notes rated SP-2 are of high quality with satisfactory capacity to
pay principal and interest.
Moody's Investors Service, Inc.
Aaa: Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective
A-2
<PAGE>
elements are likely to change, such changes as can be visualized are most
unlikely to impair the fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in Aaa securities.
A: Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate but elements may be
present which suggest a susceptibility to impairment sometime in the future.
Baa: Bonds which are rated Baa are considered as medium grade obligations;
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present, but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba: Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate, and thereby not well
safeguarded during other good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance or
other terms of the contract over any long period of time may be small.
Caa: Bonds which are rated Caa are of poor standing. Such issues may
be in default or there may be present elements of danger with respect to
principal or interest.
Ca: Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or have other
marked shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds, and issues
so rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
1, 2 or 3: The ratings from Aa through B may be modified by the addition
of a numeral indicating a bond's rank within its rating category.
A-3
<PAGE>
MIG-1: Notes bearing this designation are the best quality, enjoying
strong protection from established cash flows of funds for their servicing or
from established and broad-based access to the market for refinancing, or both.
MIG-2: Notes bearing this designation are of high quality, with margins of
protection ample although not so large as in the preceding group.
70075.c5
A-4
<PAGE>
STATE STREET RESEARCH CALIFORNIA TAX-FREE FUND
A Series of
STATE STREET RESEARCH TAX-EXEMPT TRUST
STATEMENT OF ADDITIONAL INFORMATION
May 1, 1995
TABLE OF CONTENTS
Page
ADDITIONAL INVESTMENT POLICIES AND RESTRICTIONS ........................... 1
CALIFORNIA MUNICIPAL OBLIGATIONS .......................................... 5
ADDITIONAL INFORMATION CONCERNING CERTAIN INVESTMENT TECHNIQUES ........... 13
DEBT INSTRUMENTS AND PERMITTED CASH INVESTMENTS ........................... 20
TRUSTEES AND OFFICERS ..................................................... 22
INVESTMENT ADVISORY SERVICES .............................................. 27
PURCHASE AND REDEMPTION OF SHARES ......................................... 29
NET ASSET VALUE ........................................................... 31
PORTFOLIO TRANSACTIONS .................................................... 32
CERTAIN TAX MATTERS ....................................................... 34
DISTRIBUTION OF SHARES OF THE FUND ........................................ 39
CALCULATION OF PERFORMANCE DATA ........................................... 43
CUSTODIAN ................................................................. 47
INDEPENDENT ACCOUNTANTS ................................................... 48
FINANCIAL STATEMENTS ...................................................... 48
APPENDIX .................................................................. A-1
The following Statement of Additional Information is not a Prospectus.
It should be read in conjunction with the Prospectus of State Street Research
California Tax-Free Fund (the "Fund") dated May 1, 1995 which may be obtained
without charge from the offices of State Street Research Tax-Exempt Trust (the
"Trust") or State Street Research Investment Services, Inc. (the "Distributor"),
One Financial Center, Boston, Massachusetts 02111-2690.
1285A - 950510 (0696) SSR - LD CTF - 879D - 595
<PAGE>
ADDITIONAL INVESTMENT POLICIES AND RESTRICTIONS
In addition to the investment policies set forth under "The Fund's
Investments" and "Limiting Investment Risk" in the Fund's Prospectus, the Fund
has adopted certain investment restrictions.
The following restrictions are deemed fundamental and may not be
changed except by the affirmative vote of a majority of the Fund's outstanding
voting securities as defined in the Investment Company Act of 1940 (the "1940
Act"). (Under the 1940 Act, a "vote of the majority of the outstanding voting
securities" means the vote, at the annual or a special meeting of security
holders duly called, (i) of 67% or more of the voting securities present at a
meeting if the holders of more than 50% of the outstanding voting securities are
present or represented by proxy or (ii) of more than 50% of the outstanding
voting securities, whichever is less.) Under these restrictions, it is the
Fund's policy:
(1) not to issue senior securities;
(2) not to underwrite or participate in the marketing of
securities of other issuers, except (a) the Fund may, acting
alone or in syndicates or groups, if determined by the Trust's
Board of Trustees, purchase or otherwise acquire securities of
other issuers for investment, either from the issuers or from
persons in a control relationship with the issuers or from
underwriters of such securities; and (b) to the extent that,
in connection with the disposition of the Fund's securities,
the Fund may be deemed to be an underwriter under certain
federal securities laws;
(3) not to purchase or sell fee simple interests in real estate,
although the Fund may purchase and sell other interests in
real estate including securities which are secured by real
estate, or securities of companies which own or invest or deal
in real estate;
(4) not to invest in commodities or commodity contracts in excess
of 10% of the Fund's total assets, except that investments in
futures contracts and options on futures contracts on
securities or securities indices shall not be deemed an
investment in commodities or commodities contracts;
(5) not to make loans, except that the Fund may lend portfolio
securities and purchase bonds, debentures, notes and similar
obligations (including repurchase agreements with respect
thereto);
(6) not to invest more than 10% of its total assets in illiquid
securities, which may include, to the extent any are not
readily marketable under the circumstances, securities
restricted as to resale, repurchase agreements extending for
more than seven days, and options not listed and traded on any
national securities exchange (as a current nonfundamental
policy, restricted securities are limited to 5% of total
assets);
(7) not to conduct arbitrage transactions (provided that
investments in futures and options shall not be deemed
arbitrage transactions);
1
<PAGE>
(8) not to invest in oil, gas or other mineral exploration or
development programs (provided that the Fund may invest in
securities issued by companies which invest in or sponsor such
programs and in securities indexed to the price of oil, gas or
other minerals);
(9) not to make any investment which would cause more than 25% of
the value of the Fund's total assets to be invested in
securities of issuers principally engaged in any one industry
[for purposes of this restriction, (a) utilities will be
divided according to their services so that, for example, gas,
gas transmission, electric and telephone companies will each
be deemed in a separate industry, (b) oil and oil related
companies will be divided by type so that, for example, oil
production companies, oil service companies and refining and
marketing companies will each be deemed in a separate
industry, (c) finance companies will be classified according
to the industries of their parent companies, (d) securities
issued or guaranteed by the U.S. Government or its agencies or
instrumentalities (including repurchase agreements involving
such U.S. Government securities to the extent excludable under
relevant regulatory interpretations) shall be excluded; (e)
industrial development revenue bonds which are based, directly
or indirectly, on the credit of private issuers will be
classified according to the industry of the issuer, and (f)
California State and other jurisdictions and each of their
separate political subdivisions, agencies, authorities or
instrumentalities, are treated as separate issuers and are not
regarded as members of any industry];
(10) not to borrow money except for borrowings from banks for
extraordinary and emergency purposes, such as permitting
redemption requests to be honored, and then not in an amount
in excess of 25% of the value of its total assets, and except
insofar as reverse repurchase agreements may be regarded as
borrowing. As a matter of current operating, but not
fundamental, policy, the Fund will not purchase additional
portfolio securities at any time when it has outstanding money
borrowings in excess of 5% of the Fund's total assets (taken
at current value);
(11) not to invest in a security if the transaction would
result in, with respect to 75% of its total assets, more than
5% of the Fund's total assets being invested in any one
issuer, except this restriction does not apply to investments
in securities issued or guaranteed by the U.S. Government or
its agencies or instrumentalities or backed by the U.S.
Government or to repurchase agreements involving U.S.
Government securities to the extent excludable under relevant
regulatory interpretations;
(12) not to invest in a security if the transaction would result in
the Fund's owning more than 10% of the outstanding voting
securities of an issuer, except that this restriction does not
apply to investments in securities issued or guaranteed by the
U.S. Government or its agencies or instrumentalities or backed
by the U.S. Government or to repurchase agreements involving
U.S. Government securities to the extent excludable under
relevant regulatory interpretations;
(13) not to invest in a security if the transaction would
result in 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 except in
the case of debt securities rated BBB or higher by Standard &
Poor's Corporation ("S&P") or Ba or higher by Moody's
Investors Service, Inc. ("Moody's "), and except this
restriction does not apply to investments in securities issued
or guaranteed by the U.S. Government or its agencies and
instrumentalities or backed by the U.S. Government or to
repurchase agreements involving U.S. Government securities to
the extent excludable under relevant regulatory
interpretations; and
2
<PAGE>
(14) not to invest in a security if the transaction would
result in 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, except that this restriction does not apply to
investments in securities issued or guaranteed by the U.S.
Government or its agencies and instrumentalities or backed by
the U.S. Government or to repurchase agreements involving U.S.
Government securities to the extent excludable under relevant
regulatory interpretations.
The following investment restrictions may be changed by a vote of a
majority of the Trustees. Under these restrictions, it is the Fund's policy:
(1) not to engage in transactions in options except in connection
with options on securities and securities indices and
options on futures on securities and securities indices;
(2) not to purchase securities on margin or make short sales of
securities or maintain a short position except for short sales
"against the box" (as a matter of current operating, but not
fundamental policy, the Fund will not make short sales or
maintain a short position unless not more than 5% of the
Fund's net assets (taken at current value) is held as
collateral for such sales at any time);
(3) not to hypothecate, mortgage or pledge any of its assets
except as may be necessary in connection with permitted
borrowings (for the purpose of this restriction, futures and
options, and related escrow or custodian receipts or letters,
margin or safekeeping accounts, or similar arrangements used
in the industry in connection with the trading of futures and
options, are not deemed to involve a hypothecation, mortgage
or pledge of assets);
(4) not to purchase a security issued by another investment
company if, immediately after such purchase, the Fund would
own, in the aggregate, (i) more than 3% of the total
outstanding voting stock of such other investment company;
(ii) securities issued by such other investment company having
an aggregate value in excess of 5% of the value of the Fund's
total assets; or (iii) securities issued by such other
investment company and all other investment companies (other
than treasury stock of the Fund) having an aggregate value in
excess of 10% of the value of the Fund's total assets;
provided, however, that the Fund may purchase investment
company securities without limit for the purpose of completing
a merger, consolidation or other acquisition of assets;
(5) not to purchase or retain any security of an issuer if, to the
knowledge of the Trust, those of its officers and Trustees and
officers and directors of its investment advisers who
individually own more than 1/2 of 1% of the securities of such
issuer, when combined, own more than 5% of the securities of
such issuer taken at market;
3
<PAGE>
(6) not to invest in warrants more than 5% of the value of its
total assets (warrants initially attached to securities and
acquired by the Fund upon original issuance thereof shall be
deemed to be without value); and
(7) not to invest in companies for the purpose of exercising
control over their management, although the Fund may from time
to time present its views on various matters to the management
of issuers in which it holds investments.
4
<PAGE>
CALIFORNIA MUNICIPAL OBLIGATIONS
As used in the Prospectus and this Statement, the term "California
Municipal Obligations" refers to debt obligations, including bonds and notes,
issued by the State of California and its political subdivisions, the interest
on which was at the time of issuance, in the opinion of bond counsel, exempt
from both federal income taxes and California State personal income taxes. Like
other tax-exempt bonds, California Municipal Obligations are issued to obtain
funds for various public purposes, including the construction of a wide range of
public facilities such as airports, bridges, highways, housing, mass
transportation, roads, schools, and water and sewer works. Other public purposes
for which California Municipal Obligations, like other tax-exempt bonds, may be
issued include refunding outstanding obligations, obtaining funds for general
operating expenses and obtaining funds to lend to other public institutions and
facilities. In addition, certain debt obligations known as industrial
development revenue bonds may be issued by or on behalf of public authorities to
obtain funds to provide privately-operated housing facilities, sports
facilities, conventions or trade show facilities, airport, mass transit, port or
parking facilities, air or water pollution control facilities and certain local
facilities for water supply, gas, electricity or sewage or solid waste disposal.
Such obligations are included within the term California Municipal Obligations
if the interest paid thereon is, in the opinion of bond counsel at the time of
issuance, exempt from both federal income taxes and California State personal
income taxes. Other industrial development bonds used to fund the construction,
equipment, repair or improvement of privately-operated industrial or commercial
facilities may also be California Municipal Obligations, but the size of such
issues is limited under current federal tax law. The Fund may not be a desirable
investment for "substantial users" of facilities financed by industrial
development revenue bonds or for "related persons" of substantial users.
The two principal classifications for tax-exempt bonds are general
obligation bonds and limited obligation (or revenue) bonds. General obligation
bonds are obligations involving the credit of an issuer possessing taxing power
and are payable from the issuer's general unrestricted revenues and not from any
particular fund or source. The characteristics and method of enforcement of
general obligation bonds vary according to the law applicable to the particular
issuer, and payment may be dependent upon appropriation by the issuer's
legislative body. Limited obligation bonds are payable only from the revenues
derived from a particular facility or class of facilities or, in some cases,
from the proceeds of a special excise or other specific revenue source.
Tax-exempt industrial development revenue bonds generally are revenue bonds and
thus not payable from the unrestricted revenues of the issuer. The credit and
quality of industrial development revenue bonds is usually directly related to
the credit of the corporate user of the facilities. Payment of principal of and
interest on industrial development revenue bonds is the responsibility of the
corporate user (and any guarantor).
Prices and yields on California Municipal Obligations and other
tax-exempt obligations are dependent on a variety of factors, including general
money market conditions, the financial condition of the issuer, general
conditions in the market for tax-exempt obligations, the size of a particular
offering, the maturity of the obligation and ratings of particular issues, and
are subject to change from time to time. Information about the financial
condition of an issuer of tax-exempt bonds or notes may not be as extensive as
that which is made available by corporations whose securities are publicly
traded.
5
<PAGE>
The ratings of S&P and Moody's represent their opinions and are not
absolute standards of quality. Tax-exempt obligations with the same maturity,
interest rate and rating may have different yields while on the other hand
tax-exempt obligations with the same maturity and interest rate but with
different ratings may have the same yield.
Obligations of issuers of tax-exempt securities are subject to the
provisions of bankruptcy, insolvency and other laws, such as the Federal
Bankruptcy Reform Act of 1978, affecting the rights and remedies of creditors.
Congress or state legislatures may seek to extend the time for payment of
principal or interest, or both, or to impose other constraints upon enforcement
of such obligations. There is also the possibility that, as a result of
litigation or other conditions, the power or ability of issuers to meet their
obligations to pay interest on and principal of their tax-exempt securities may
be materially impaired or their obligations may be found to be invalid or
unenforceable. Such litigation or conditions may from time to time have the
effect of introducing uncertainties in the market for tax-exempt obligations or
certain segments thereof, or may materially affect the credit risk with respect
to particular bonds or notes. Adverse economic, business, legal or political
developments might affect all or a substantial portion of the Fund's tax-exempt
bonds or notes in the same manner.
From time to time, proposals have been introduced before Congress to
restrict or eliminate the federal income tax exemption for interest on debt
obligations issued by states and their political subdivisions, and similar
proposals may well be introduced in the future. If such a proposal were enacted,
the availability of California Municipal Obligations for investment by the Fund
and the value of the Fund's portfolio could be materially affected, in which
event the Fund would reevaluate its investment objectives and policies and
consider changes in the structure of the Fund or dissolution.
Special Considerations Regarding Investments in California Municipal Obligations
Certain California constitutional amendments, legislative measures,
executive orders, administrative regulations and voter initiatives could result
in the adverse effects described below. The following information constitutes
only a brief summary, does not purport to be a complete description, and is
based on information drawn from official statements and prospectuses relating to
securities offerings of the State of California (the "State") and various local
agencies in the State, available as of March 31, 1995. While the Fund has not
independently verified such information, it has no reason to believe that such
information is not correct in all material respects.
Certain of the California Municipal Obligations in which the Fund may
invest may be obligations of issuers which rely in whole or in part on State
revenues for payment of these obligations. Property tax revenues and a portion
of the State's General Fund surplus are distributed to counties, cities and
their various taxing entities and the State assumes certain obligations
theretofore paid out of local funds. Whether and to what extent a portion of the
State's General Fund will be distributed in the future to counties, cities and
their various entities, is unclear.
6
<PAGE>
Certain of the California Municipal Obligations may be obligations of
issuers who rely in whole or in part on ad valorem real property taxes as a
source of revenue. On June 6, 1978, California voters approved an amendment to
the California Constitution known as Proposition 13, which added Article XIIIA
to the California Constitution. The effect of Article XIIIA is to limit ad
valorem taxes on real property, and to restrict the ability of taxing entities
to increase real property tax revenues. On November 7, 1978, State voters
approved Proposition 8, and on June 3, 1986, State voters approved Proposition
46, both of which amended Article XIIIA.
Section 1 of Article XIIIA limits the maximum ad valorem property tax
on real property to 1% of full cash value (as defined in Section 2), to be
collected by the counties and apportioned according to law; provided that the 1%
limitation does not apply to ad valorem taxes or special assessments to pay the
interest and redemption charges or (i) any indebtedness approved by the voters
prior to July 1, 1978, or (ii) any bonded indebtedness for the acquisition or
improvement of real property approved on or after July 1, 1978, by two-thirds of
the votes cast by the voters voting on the proposition. Section 2 of Article
XIIIA defines "full cash value" to mean "the County Assessor's valuation of real
property as shown on the 1975/76 tax bill under 'full cash value' or,
thereafter, the appraised value of real property when purchased, newly
constructed, or a change in ownership has occurred after the 1975 assessment."
The "full cash value" may be adjusted annually to reflect inflation at a rate
not to exceed 2% per year, or a reduction in the Consumer Price Index or
comparable local data, or reduced in the event of declining property value
caused by damage, destruction or other factors. The California State Board of
Equalization has adopted regulations, binding on county assessors, interpreting
the meaning of "change in ownership" and "new construction" for purposes of
determining full cash value of property under Article XIIIA.
Legislation enacted by the State Legislature to implement Article XIIIA
(Statutes of 1978, Chapter 292, as amended) provides that notwithstanding any
other law, local agencies may not levy any ad valorem property tax except to pay
debt service on indebtedness approved by the voters prior to July 1, 1978, and
that each county will levy the maximum tax permitted by Article XIIIA of $4.00
per $100 assessed valuation (based on the former practice of using 25%, instead
of 100%, of full cash value as the assessed value for tax purposes). The
legislation further provided that, for the 1978/79 fiscal year only, the tax
levied by each county was to be apportioned among all taxing agencies within the
county in proportion to their average share of taxes levied in certain previous
years. The apportionment of property taxes for fiscal years after 1978/79 has
been revised pursuant to Statutes of 1979, Chapter 282, which provides relief
funds from state attorneys beginning in fiscal year 1979/80 and is designed to
provide a permanent system for sharing state taxes and budget funds with local
agencies. Under Chapter 282, cities and counties receive more of the remaining
property tax revenues collected under Proposition 13 instead of direct State
aid. School districts receive a correspondingly reduced amount of property
taxes, but receive compensation directly from the state and are given additional
relief. Chapter 282 does not affect the derivation of the base levy ($4.00 per
$100 of assessed valuation) and the bonded debt tax rate.
7
<PAGE>
In Nordlinger v. Hahn, 60 U.S.L.W. 4563 (1992), the United States
Supreme Court upheld certain provisions of Proposition 13 against claims that it
violated the equal protection clause of the Constitution. However, there can be
no assurance that any particular level of State aid to local governments will be
maintained in future years.
On November 6, 1979, another initiative known as "Proposition 4" or the
"Gann Initiative" was approved by State voters, which added Article XIIIB to the
State Constitution. Under Article XIIIB, state and local governmental entities
have an annual "appropriations limit" and are not able to spend certain moneys
called "appropriations subject to limitation" in an amount higher than the
"appropriations limit." Article XIIIB does not affect the appropriation of
moneys which are excluded from the definition of "appropriations subject to
limitation," including debt service on indebtedness existing or authorized as of
January 1, 1979, or bonded indebtedness subsequently approved by the voters. In
general terms, the "appropriations limit" is to be based on certain 1978/79
expenditures, and is to be adjusted annually to reflect changes in consumer
prices, population and certain services provided by these entities. Article
XIIIB also provides that if these entities' revenues in any year exceed the
amounts permitted to be spent, the excess would have to be returned by revising
tax rates or fee schedules over the subsequent two years.
In June 1982, the voters of the State passed two initiative measures to
repeal the State gift and inheritance tax laws and to enact, in lieu thereof, a
State death tax. The State voters also passed an initiative measure to increase,
for taxable years commencing on or after January 1, 1982, the amount by which
personal income tax brackets will be adjusted annually in an effort to index
such tax brackets to account for the effects of inflation. Decreases in State
and local revenues in future fiscal years as a consequence of these initiatives
may result in reductions in allocations of state revenues to State issuers or in
the ability of State issuers to pay their obligations.
At the November 8, 1988 general election, State voters approved an
initiative known as Proposition 98. This initiative amends Article XIIIB to
require that (i) the State Legislature establish a prudent state reserve fund in
an amount as shall be reasonable and necessary and (ii) revenues in excess of
amounts permitted to be spent and which would otherwise be returned pursuant to
Article XIIIB by revision of tax rates or fee schedules, be transferred and
allocated (up to a maximum of 40%) to the State School Fund and be expended
solely for purposes of instructional improvement and accountability. No such
transfer or allocation of funds will be required if certain designated state
officials determine that annual student expenditures and class size meet certain
criteria as set forth in Proposition 98. Any funds allocated to the State School
Fund shall cause the appropriation limits established in Article XIIIB to be
annually increased for any such allocation made in the prior year.
8
<PAGE>
Proposition 98 also amends Article XVI to require that the State
provide a minimum level of funding for public schools and community colleges.
Commencing with the 1988-89 fiscal year, moneys to be applied by the State for
the support of school districts and community college districts shall not be
less than the greater of: (i) the amount which, as a percentage of the State
general fund revenues which may be appropriated pursuant to Article XIIIB,
equals the percentage of such State general fund revenues appropriated for
school districts and community college districts, respectively, in fiscal year
1986-87 or (ii) the amount required to ensure that the total allocations to
school districts and community college districts from the State general fund
proceeds of taxes appropriated pursuant to Article XIIIB and allocated local
proceeds of taxes shall not be less than the total amount from these sources in
the prior year, adjusted for increases in enrollment and adjusted for changes in
the cost of living pursuant to the provisions of Article XIIIB. The initiative
permits the enactment of legislation, by a two-thirds vote, to suspend the
minimum funding requirements for one year.
In June 1989, the State Legislature enacted Senate Constitutional
Amendment number one ("SCA 1"), a proposed modification of the State
Constitution to alter the spending limit in the educational funding provisions
of Proposition 98. SCA 1 was approved by the voters on the June 1990 ballot and
took effect on July 1, 1990. SCA 1 permits the annual adjustments to the
spending limit to be more closely linked to the rate of economic growth in the
State. Instead of being tied to the consumer price index, the change in "cost of
living" is measured by the change in State per capita personal income. In
addition, if certain kinds of emergencies are declared by the Governor, an
appropriation enacted by a two-thirds vote of the Legislature will be excluded
from the State's appropriations limit.
SCA 1 also provides two new exceptions to the calculation of
appropriations which are subject to the spending limit. First there will be
excluded all appropriations for "qualified capital outlay projects" as defined
by the Legislature. Second, there will be excluded any increase in gasoline
taxes above their current 9% per gallon level. In addition, SCA 1 recalculates
the appropriation limits for each unit in government, beginning in the 1990-91
fiscal year, based upon a two-year cycle. The Proposition 98 provision regarding
excess taxes will also be modified. After a two-year period if there are any
excess state tax revenues, 50% (instead of 100%) of the excess will be
transferred to schools with the balance returned to taxpayers. SCA 1 also
modifies in certain respects the complex adjustment in the Proposition 98
formula which guarantees schools a certain amount of the General Fund revenues.
In 1992-93 and 1993-94, the State budget met part of its Proposition 98
commitment to education through $1.8 billion in off-book loans. The legality of
these loans was challenged in a lawsuit by the California Teachers Association.
A lower court in the State has ruled against the state, and under this decision
the schools would not be required to repay these loans. If upheld on appeal, the
ruling would increase the State's officially recognized 1994-95 year-end deficit
by $1.8 billion.
In September 1980, the legislature enacted a measure (Chapter 1342,
Statutes of 1980) declaring that tax increment revenues are not "proceeds of
taxes" within the meaning of Article XIIIB and that the allocation and
expenditure of such moneys are not appropriations subject to the limitations
under Article XIIIB, if used for repayment of indebtedness incurred for
redevelopment activity. While the California Supreme Court expressly declined to
rule on the validity of Chapter 1342 and the applicability of Article XIIIB to
redevelopment agencies, Huntington Park Redevelopment Agency v. Martin, 38 Cal.
3d 100, 211 Cal. Rptr. 133, 695 P.2d 220 (1985), two subsequent decisions of the
California Court of Appeal have upheld the validity of Chapter 1342 and have
concluded that redevelopment agencies are not subject to the appropriations
limit of Article XIIIB. Bell Community Redevelopment Agency v. Woosley, 169 Cal.
App. 3d 24, 214 Cal. Rptr. 788 (Cal. Ct. App. 1985); Brown v. Community
Redevelopment Agency of the City of Santa Ana, 168 Cal. App. 3d 1014, 214 Cal.
Rptr. 626 (Cal. Ct. App. 1985). Proposition 87 was approved by the California
voters on November 8, 1988. Proposition 87 amends Article XVI, Section 16, of
the State Constitution by authorizing the State Legislature to prohibit
redevelopment agencies from receiving any of the property tax revenue raised by
increased property tax rates levied to repay bonded indebtedness of local
governments which is approved by voters on or after January 1, 1989. It is not
possible to predict whether the State Legislature will enact such a prohibition
nor is it possible to predict the impact of Proposition 87 on redevelopment
agencies and their ability to make payments on outstanding debt obligations.
9
<PAGE>
Article XIIIB, like Article XIIIA, may require interpretation by both
the legislature and the courts to determine its applicability to specific
situations involving the state and local taxing authorities. Depending upon such
interpretation, Article XIIIB may limit significantly a governmental entity's
ability to budget sufficient funds to meet debt service on bonds and other
obligations.
On November 4, 1986, State voters approved an initiative statute known
as Proposition 62. This initiative (i) requires that any tax for general
governmental purposes imposed by local governments be approved by resolution or
ordinance adopted by a two-thirds vote of the governmental entity's legislative
body and by a majority vote of the electorate of the governmental entity, (ii)
requires that any special tax (defined as taxes levied for other than general
governmental purposes) imposed by a local governmental entity be approved by a
two-thirds vote of the voters within the jurisdiction, (iii) restricts the use
of revenues from a special tax to the purposes or for the service for which the
special tax was imposed, (iv) prohibits the imposition of ad valorem taxes on
real property by local governmental entities except as permitted by Article
XIIIA, (v) prohibits the imposition of transaction taxes and sales taxes on the
sale of real property by local governments, (vi) requires that any tax imposed
by a local government on or after August 1, 1985 be ratified by a majority vote
of the electorate within two years of the adoption of the initiative or be
terminated by November 15, 1988, (vii) requires that, in the event a local
government fails to comply with the provisions of this measure, a reduction in
the amount of property tax revenue allocated to such local government occurs in
an amount equal to the revenues received by such entity attributable to the tax
levied in violation of the initiative, and (viii) permits these provisions to be
amended exclusively by the voters of the State.
In September 1988, the California Court of Appeal in City of
Westminster v. County of Orange, 204 Cal. App. 3d 633 (1988), held that
Proposition 62 is unconstitutional to the extent that it requires a general tax
by a general law city, enacted on or after August 1, 1985 and prior to the
effective date of Proposition 62, to be subject to approval by a majority of
voters. The Court held that the State Constitution prohibits the imposition of a
requirement that local tax measures be submitted to the electorate by either
referendum or initiative. It is not possible to predict the impact of this
decision on charter cities, on special taxes or on new taxes imposed after the
effective date of Proposition 62.
In July, 1991, the State increased taxes by adding two new marginal
personal income taxes rates, at 10% and 11%, effective for tax years 1991
through 1995. The rate increase is scheduled to return to 9.3%. The alternative
minimum tax rate was increased to 8.5% and is scheduled to return to 7% after
1995. In addition, the sales tax was increased by 1.25%. 0.5% was a permanent
addition to counties, but with the money earmarked to trust funds to pay for
health and welfare programs whose administration was transferred to counties.
This tax increase will be canceled if a court rules that such transfer and tax
increase violate any constitutional requirements. An additional 0.5% of the
sales tax rate was scheduled for termination on June 30, 1993, but was extended
by legislation through December 31, 1993. The approval of Proposition 172 on the
November 1993 ballot by the voters extended this increase permanently. The
1994-95 Governor's Budget does not propose any additional increase in the sales
tax rate.
California is the most populous state in the nation with a total
population at the 1990 Census of 29,976,000. Growth has been incessant since
World War II, with population gains in each decade since 1950 of between 18% and
49%. During the last decade, population rose 20%. The State now comprises 12.3%
of the nation's population and 12.9% of its total personal income. Its economy
is broad and diversified with major concentrations in high technology research
and manufacturing, aerospace and defense-related manufacturing, trade, real
estate, and financial services. After experiencing strong growth throughout much
of the 1980's, the State was adversely affected by both the national recession
and the cutbacks in aerospace and defense spending which have a severe impact on
the economy in Southern California. Although the national economic recovery is
continuing at a strong pace, California is still experiencing the effects of a
recession. Unemployment has remained above the national average since 1990.
Substantial contraction in California's defense related industries, overbuilding
in commercial real estate and consolidation and decline in the State's financial
services industry will likely produce slower overall growth for several years.
Economists predict that the State's economy will experience modest growth in
1995 and 1996. The earthquake which struck Northridge, California on January 17,
1994 is not expected to derail the State's economic recovery, although it may
carry long-term implications for the City of Los Angeles.
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These economic difficulties have exacerbated the structural budget
imbalance which has been evident since fiscal year 1985-1986. Since that time,
budget shortfalls have become increasingly more difficult to solve and the State
has recorded General Fund operating deficits in five of the past six fiscal
years. Many of these problems have been attributable to the fact that the great
population influx has produced increased demand for education and social
services at a far greater pace than the growth in the State's tax revenues.
Despite substantial tax increases, expenditure reductions and the shift of some
expenditure responsibilities to local government, the budget condition has
remained problematic in recent years. In addition, the accumulated budget
deficits over the past several years had exhausted the State's available cash
reserves and resources. In July and August, 1994, the State was required to
issue a total of $7 billion of short-term revenue anticipation warrants to fund,
in part, the State's cash flow management needs for the 1994-95 fiscal year.
On July 8, 1994, the Governor signed into law a $57.5 billion budget
which, among other things, (a) reduces welfare grants and aid to families and to
the aged, blind and disabled, and (b) relies on the State's ability to obtain
$2.8 billion in new reimbursement from the federal government for the State's
cost of serving illegal immigrants. Although the State legislature has passed a
standby measure which could trigger automatic budget reductions if the State's
fiscal condition worsens over the next two years, the stability of the budget
would be jeopardized if the State is unable to obtain the hoped-for federal
funds.
The current budget includes General Fund spending of $40.9 billion, up
4.2% from the level of spending during the 1993-94 fiscal year. The budget also
envisions General Fund spending climbing another 8.4% in the 1995-96 fiscal
year. The budget forecasts revenues and expenditures which will result in
operating surpluses in both 1994-95 and 1995-96, leading to the elimination of
an estimated $2.0 billion accumulated budgeted deficit by June 30, 1996.
Although an improving economy and healthier tax revenues are
anticipated, the political environment and voter initiatives may constrain the
State's financial flexibility. For example, according to the Legislative
Analyst's Office, the passage of Proposition 187 in the November 1994 election,
which in part denies certain social services to illegal immigrants, could
jeopardize $15 billion in federal funding. In addition, the passage of
Proposition 184 in the November 1994 election, which imposes mandatory, lengthy
prison sentences on individuals convicted of three felonies, is expected to
increase prison operating costs by $3 billion annually and increase prison
construction costs by $20 billion.
Because of the State of California's continuing budget problems, the
rating on the State's general obligation bonds was downgraded in July 1994 from
Aa to A1 by Moody's, from A+ to A by S&P and from AA to A by Fitch Investors
Services, Inc. All three rating agencies expressed uncertainty in the State's
ability to balance the budget by 1996.
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On December 6, 1994, Orange County became the largest municipality in
the United States to file for protection under the federal bankruptcy laws. The
filing stemmed from approximately $1.7 billion in losses suffered by the
County's investment pool due to investments in high risk "derivative"
securities. Over 185 public agencies had funds invested in the pool, and these
funds may be accessed only with permission of the bankruptcy court. It is
unclear whether the State will lend financial or other assistance to Orange
County to prevent the County from defaulting on its other obligations.
Certain State Municipal obligations in which the Fund may invest may be
obligations payable solely from the revenues of specific institutions, or may be
secured by specific properties, which are subject to provisions of State law
that could adversely affect the holders of such obligations. For example, the
revenues of health care institutions may be subject to State laws, and State
laws limit the remedies of a creditor secured by a mortgage or deed of trust on
real property.
Additional Considerations. With respect to Municipal Obligations issued
by the State and its political subdivisions, the Fund cannot predict what
legislation, if any, may be proposed in the State Legislature as regards the
California State personal income tax status of interest on such obligations, or
which proposals, if any, might be enacted. Such proposals, if enacted, might
materially adversely affect the availability of California Municipal Obligations
for investment by the Fund and the value of the Fund's portfolio. In such an
event, the Trustees would reevaluate the Fund's investment objective and
policies and consider changes in its structure or possible dissolution.
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ADDITIONAL INFORMATION CONCERNING
CERTAIN INVESTMENT TECHNIQUES
Among other investments described below, the Fund may buy and sell
options, futures contracts, and options on futures contracts with respect to
securities and securities indices and may enter into closing transactions with
respect to each of the foregoing, and invest in other derivatives, under
circumstances in which the use of such techniques is expected by State Street
Research & Management Company (the "Investment Manager") to aid in achieving the
investment objective of the Fund. The Fund on occasion may also purchase
instruments with characteristics of both futures and securities (e.g., debt
instruments with interest and principal payments determined by reference to the
value of a commodity at a future time) and which, therefore, possess the risks
of both futures and securities investments.
Futures Contracts
Futures contracts are publicly traded contracts to buy or sell
underlying assets, such as certain securities or an index of securities, at a
future time at a specified price. A contract to buy establishes a "long"
position while a contract to sell establishes a "short" position.
The purchase of a futures contract on securities or an index of
securities normally enables a buyer to participate in the market movement of the
underlying asset or index after paying a transaction charge and posting margin
in an amount equal to a small percentage of the value of the underlying asset or
index. This characteristic makes futures useful for hedging purposes.
The Fund will initially be required to deposit with the Trust's
custodian or the broker effecting the transaction an amount of "initial margin"
in cash or U.S. Treasury obligations.
Initial margin in futures transactions is different from margin in
securities transactions in that the former does not involve the borrowing of
funds by the customer to finance the transaction. Rather, the initial margin is
like a performance bond or good faith deposit on the contract. Subsequent
payments (called "maintenance margin") to and from the broker will be made on a
daily basis as the price of the underlying asset fluctuates. This process is
known as "marking to market." For example, when the Fund has taken a long
position in a futures contract and the value of the underlying asset has risen,
that position will have increased in value and the Fund will receive from the
broker a maintenance margin payment equal to the increase in value of the
underlying asset. Conversely, when the Fund has taken a long position in a
futures contract and the value of the underlying asset has declined, the
position would be less valuable, and the Fund would be required to make a
maintenance margin payment to the broker.
At any time prior to expiration of the futures contract, the Fund may
elect to close the position by taking an opposite position which will terminate
its position in the futures contract. A final determination of maintenance
margin is then made, additional cash is required to be paid by or released to
the Fund, and the Fund realizes a loss or a gain. While futures contracts with
respect to securities do provide for the delivery and acceptance of such
securities, such delivery and acceptance are seldom made.
Futures contracts will be executed primarily (a) to establish a short
position, and thus protect the Fund from experiencing the full impact of an
expected decline in market value of portfolio holdings without requiring the
sale of holdings, or (b) to establish a long position, and thus to participate
in an expected rise in market value of securities which the Fund intends to
purchase. Subject to the limitations described below, the Fund may also enter
into futures contracts for purposes of enhancing return. In transactions
establishing a long position in a futures contract, money market instruments
equal to the face value of the futures contract will be identified by the Fund
to the Trust's custodian for maintenance in a separate account to insure that
the use of such futures contracts is unleveraged. Similarly, a representative
portfolio of securities having a value equal to the aggregate face value of the
futures contract will be identified with respect to each short position. The
Fund will employ any other appropriate method of cover which is consistent with
applicable regulatory and exchange requirements.
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Options on Securities
The Fund may use options on securities to implement its investment
strategy. A call option on a security, for example, gives the purchaser of the
option the right to buy, and the writer the obligation to sell, the underlying
asset at the exercise price during the option period. Conversely, a put option
on a security gives the purchaser the right to sell, and the writer the
obligation to buy, the underlying asset at the exercise price during the option
period.
Purchased options have defined risk, i.e., the premium paid for the
option, no matter how adversely the price of the underlying asset moves, while
affording an opportunity for gain corresponding to the increase or decrease in
the value of the optioned asset.
Written options have varying degrees of risk. An uncovered written call
option theoretically carries unlimited risk, as the market price of the
underlying asset could rise far above the exercise price before its expiration.
This risk is tempered when the call option is covered, i.e., when the option
writer owns the underlying asset. In this case, the writer runs the risk of the
lost opportunity to participate in the appreciation in value of the asset rather
than the risk of an out-of-pocket loss. A written put option has defined risk,
i.e., the difference between the agreed upon price that the Fund must pay to the
buyer upon exercise of the put and the value, which could be zero, of the asset
at the time of exercise.
The obligation of the writer of an option continues until the writer
effects a closing purchase transaction or until the option expires. To secure
his obligation to deliver the underlying asset in the case of a call option, or
to pay for the underlying asset in the case of a put option, a covered writer is
required to deposit in escrow the underlying security or other assets in
accordance with the rules of the applicable clearing corporation and exchanges.
Options on Securities Indices
The Fund may engage in transactions in call and put options on
securities indices. For example, the Fund may purchase put options on indices of
fixed income securities in anticipation of or during a market decline to attempt
to offset the decrease in market value of its securities that might otherwise
result.
Put options on indices of securities are similar to put options on the
securities themselves except that the delivery requirements are different.
Instead of giving the right to make delivery of a security at a specified price,
a put option on an index of securities gives the holder the right to receive an
amount of cash upon exercise of the option if the value of the underlying index
has fallen below the exercise price. The amount of cash received will be equal
to the difference between the closing price of the index and the exercise price
of the option expressed in dollars times a specified multiple. Gain or loss to
the Fund on transactions in index options will depend on price movements in the
relevant securities market generally (or in a particular industry or segment of
the market) rather than price movements of individual securities. As with
options on equity or fixed income securities, futures contracts or commodities,
the Fund may offset its position in index options prior to expiration by
entering into a closing transaction on an exchange or it may let the option
expire unexercised.
A securities index assigns relative values to the securities included
in the index and the index options are based on a broad market index. Although
there are at present few available options on indices of fixed income
securities, other than tax-exempt securities, or futures and related options
based on such indices, such instruments may become available in the future. When
available, the Fund might employ such devices to hedge its positions in fixed
income securities in the same manner that it currently uses futures and related
options or, subject to receiving any necessary regulatory approval, to seek a
higher level of return. In connection with the use of such options, the Fund may
cover its position by identifying a representative portfolio of securities
having a value equal to the aggregate face value of the option position taken.
However, the Fund may employ any appropriate method to cover its positions that
is consistent with applicable regulatory and exchange requirements.
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Options on Futures Contracts
An option on a futures contract gives the purchaser the right, in
return for the premium paid, to assume a position in a futures contract (a long
position if the option is a call and a short position if the option is a put) at
a specified exercise price at any time during the period of the option.
Options Strategy
A basic option strategy for protecting the Fund against a decline in
securities prices could involve (a) the purchase of a put -- thus "locking in"
the selling price of the underlying securities or securities indices -- or (b)
the writing of a call on securities or securities indices held by the Fund
- -thereby generating income (the premium paid by the buyer) by giving the holder
of such call the option to buy the underlying asset at a fixed price. The
premium will offset, in whole or in part, a decline in portfolio value; however,
if prices of the relevant securities or securities indices rose instead of
falling, the call might be exercised, thereby resulting in a potential loss of
appreciation in the underlying securities or securities indices.
A basic option strategy when a rise in securities prices is anticipated
is the purchase of a call -- thus "locking in" the purchase price of the
underlying security or other asset. In transactions involving the purchase of
call options by the Fund, money market instruments equal to the aggregate
exercise price of the options will be identified by the Fund to the Trust's
custodian to insure that the use of such investments is unleveraged.
The Fund may write options in connection with buy-and-write
transactions; that is, the Fund may purchase a security and concurrently write a
call option against that security. If the call option is exercised in such a
transaction, the Fund's maximum gain will be the premium received by it for
writing the option, adjusted upward or downward by the difference between the
Fund's purchase price of the security and the exercise price of the option. If
the option is not exercised and the price of the underlying security declines,
the amount of such decline will be offset in part, or entirely, by the premium
received.
The writing of covered put options is similar in terms of risk/return
characteristics to buy-and-write transactions. If the market price of the
underlying security rises or otherwise is above the exercise price, the put
option will expire worthless and the Fund's gain will be limited to the premium
received. If the market price of the underlying security declines or otherwise
is below the exercise price, the Fund's return will be the premium received from
writing the put option minus the amount by which the market price of the
security is below the exercise price.
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Limitations and Risks of Options and Futures Activity
The Fund will engage in transactions in futures contracts or options
only as a hedge against changes resulting from market conditions which produce
changes in the values of their securities or the securities which it intends to
purchase (e.g., to replace portfolio securities which will mature in the near
future) and, subject to the limitations described below, to enhance return. The
Fund will not purchase any futures contract or purchase any call option if,
immediately thereafter, more than one-third of the Fund's net assets would be
represented by long futures contracts or call options. The Fund will not write a
covered call or put option if, immediately thereafter, the aggregate value of
the assets (securities in the case of written calls and cash or cash equivalents
in the case of written puts) underlying all such options, determined as of the
dates such options were written, would exceed 25% of the Fund's net assets. In
addition, the Fund may not establish a position in a commodity futures contract
or purchase or sell a commodity option contract for other than bona fide hedging
purposes if immediately thereafter the sum of the amount of initial margin
deposits and premiums required to establish such positions for such nonhedging
purposes would exceed 5% of the market value of the Fund's net assets.
Although effective hedging can generally capture the bulk of a desired
risk adjustment, no hedge is completely effective. Moreover, the use of options,
futures and options on futures may involve risks not associated with the other
types of instruments which the Fund intends to purchase. Most of the hedging
anticipated for the Fund will be against the risk characteristics of its
portfolio and not against the risk characteristics of specific debt securities.
The Fund's ability to hedge effectively through transactions in futures or
options depends on the degree to which price movements in its holdings correlate
with price movements of the futures and options. The prices of the assets being
hedged may not move in the same amount as the hedging instrument, or there may
be a negative correlation which would result in an ineffective hedge and a loss
to the Fund.
Some positions in futures and options may be closed out only on an
exchange which provides a secondary market therefor. There can be no assurance
that a liquid secondary market will exist for any particular futures contract or
option at any specific time. Thus, it may not be possible to close such an
option or futures position prior to maturity. The inability to close options and
futures positions also could have an adverse impact on the Fund's ability
effectively to hedge its securities and might in some cases require the Fund to
deposit cash to meet applicable margin requirements. The Fund will enter into an
option or futures position only if it appears to be a liquid investment.
When-Issued Securities
The Fund may purchase "when-issued" securities, which are traded on a
price or yield basis prior to actual issuance. Such purchases will be made only
to achieve the Fund's investment objective and not for leverage. The when-issued
trading period generally lasts from a few days to up to a month or more; during
this period dividends or interest on the securities are not payable. A frequent
form of when-issued trading occurs in the U.S. Treasury market when dealers
begin to trade a new issue of bonds or notes shortly after a Treasury financing
is announced, but prior to the actual sale of the securities. Similarly,
securities to be created by a merger of companies may also be traded prior to
the actual consummation of the merger. Such transactions may involve a risk of
loss if the value of the securities falls below the price committed to prior to
actual issuance. The Trust's custodian will establish a segregated account when
the Fund purchases securities on a when-issued basis consisting of cash or
liquid securities equal to the amount of the when-issued commitments.
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Repurchase Agreements
The Fund may enter into repurchase agreements. Repurchase agreements
occur when the Fund acquires a security and the seller which may be either (i) a
primary dealer in U.S. Government securities or (ii) an FDIC-insured bank having
gross assets in excess of $500 million, simultaneously commits to repurchase it
at an agreed-upon price on an agreed-upon date within a specified number of days
(usually not more than seven) from the date of purchase. The repurchase price
reflects the purchase price plus an agreed-upon market rate of interest which is
unrelated to the coupon rate or maturity of the acquired security. The Fund will
only enter into repurchase agreements involving U.S. Government securities.
Repurchase agreements could involve certain risks in the event of default or
insolvency of the other party, including possible delays or restrictions upon
the Fund's ability to dispose of the underlying securities. Repurchase
agreements will be limited to 30% of the Fund's total assets, except that
repurchase agreements extending for more than seven days when combined with any
other illiquid assets held by the Fund will be limited to 10% of the Fund's
total assets.
Reverse Repurchase Agreements
The Fund may enter into reverse repurchase agreements. In a reverse
repurchase agreement the Fund transfers possession of a portfolio instrument to
another person, such as a financial institution, broker or dealer, in return for
a percentage of the instrument's market value in cash, and agrees that on a
stipulated date in the future the Fund will repurchase the portfolio instrument
by remitting the original consideration plus interest at an agreed-upon rate.
The ability to use reverse repurchase agreements may enable, but does not ensure
the ability of, the Fund to avoid selling portfolio instruments at a time when a
sale may be deemed to be disadvantageous.
When effecting reverse repurchase agreements, assets of the Fund in a
dollar amount sufficient to make payment of the obligations to be purchased are
segregated on the Fund's records at the trade date and maintained until the
transaction is settled.
Securities Lending
The Fund may lend portfolio securities with a value of up to 33 % of
its total assets. The Fund will receive cash or cash equivalents (e.g., U.S.
Government obligations) as collateral in an amount equal to at least 100% of the
current market value of the loaned securities plus accrued interest. Collateral
received by the Fund will generally be held in the form tendered, although cash
may be invested in securities issued or guaranteed by the U.S. Government or its
agencies or instrumentalities, irrevocable stand-by letters of credit issued by
a bank, or any combination thereof. The investing of cash collateral received
from loaning portfolio securities involves leverage which magnifies the
potential for gain or loss on monies invested and, therefore, results in an
increase in the volatility of the Fund's outstanding securities. Such loans may
be terminated at any time. The Fund will retain most rights of ownership of the
loaned securities including rights to dividends, interest or other distributions
on the loaned securities. Voting rights pass with the lending, although the Fund
may call loans to vote proxies if desired. Should the borrower of the securities
fail financially, there is a risk of delay in recovery of the securities or loss
of rights in the collateral. Loans are made only to borrowers which are deemed
by the Investment Manager to be of good financial standing.
Short Sales Against the Box
The Fund may effect short sales, but only if such transactions are
short sale transactions known as short sales "against the box." A short sale is
a transaction in which the Fund sells a security it does not own by borrowing it
from a broker, and consequently becomes obligated to replace that security. A
short sale against the box is a short sale where the Fund owns the security sold
short or has an immediate and unconditional right to acquire that security
without additional cash consideration upon conversion, exercise or exchange of
options with respect to securities held in its portfolio. The effect of selling
a security short against the box is to insulate that security against any future
gain or loss.
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Other Investment Limitations
The Fund may invest up to 10% of its total assets in shares of other
investment companies on a temporary basis. Such investments may involve the
payment of duplicative management or other fees. To mitigate such duplication,
however, the Investment Manager has agreed to waive up to the full amount of its
investment advisory fee with respect to investments, if any, in other open-end
investment companies; the amount of such waived fee will be deemed to be a
reduction in management fees or an assumption of expenses relating to the Fund
as described under "Table of Expenses" in the Prospectus.
High Yield Securities
Lower rated "high yield" securities (i.e., bonds rated BB or lower by
S&P or Ba or lower by Moody's) commonly known as "junk bonds," of the type in
which the Fund may invest generally involve more credit risk than higher rated
securities and are considered by S&P and Moody's to be predominantly speculative
with respect to capacity to pay interest and repay principal in accordance with
the terms of the obligation. Such securities may also be subject to greater
market price fluctuations than lower yielding, higher rated debt securities;
credit ratings do not reflect this market risk. In addition, these ratings may
not reflect the effect of recent developments on an issuer's ability to make
interest and principal payments.
Additional risks of "high yield" securities include (i) limited
liquidity and secondary market support, particularly in the case of securities
that are not rated or subject to restrictions on resale, which may limit the
availability of securities for purchase by the Fund, limit the ability of the
Fund to sell portfolio securities either to meet redemption requests or in
response to changes in the economy or the financial markets, heighten the effect
of adverse publicity and investor perceptions, and make selection and valuation
of portfolio securities more subjective and dependent upon the Investment
Manager's credit analysis; (ii) substantial market price volatility and/or the
potential for the insolvency of issuers during periods of changing interest
rates and economic difficulty, particularly with respect to high yield
securities that do not pay interest currently in cash; (iii) subordination to
the prior claims of banks and other senior lenders; and (iv) the possibility
that revenues or earnings of the issuer may be insufficient to meet its debt
service. Growth in the market for "high yield" securities has paralleled a
general expansion in certain sectors in the U.S. economy, and the effects of
adverse economic changes (including a recession) are unclear. For further
information concerning the rates of debt securities, see the Appendix.
In the event the rating of a security is downgraded, the Investment
Manager will determine whether the security should be retained or sold depending
on an assessment of all facts and circumstances at that time.
Rule 144A Securities
Subject to the limitations on illiquid and restricted securities noted
above, the Fund may buy or sell restricted securities in accordance with Rule
144A under the Securities Act of 1933 ("Rule 144A Securities"). Securities may
be resold pursuant to Rule 144A under certain circumstances only to qualified
institutional buyers as defined in the rule, and the markets and trading
practices for such securities are relatively new and still developing. Depending
on the development of such markets, such Rule 144A Securities may be deemed to
be liquid as determined by or in accordance with methods adopted by the
Trustees. Under such methods, the following factors are considered, among
others: the frequency of trades and quotes for the security, the number of
dealers and potential purchasers in the market, marketmaking activity, and the
nature of the security and marketplace trades. Investments in Rule 144A
Securities could have the effect of increasing the level of the Fund's
illiquidity to the extent that qualified institutional buyers become, for a
time, uninterested in purchasing such securities. Also, the Fund may be
adversely impacted by the subjective valuation of such securities in the absence
of an active market for them.
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Other Derivative Securities
The Fund may invest in tax-exempt derivative products such as stripped
tax-exempt bonds, synthetic floating rate tax-exempt bonds, tax-exempt asset
backed securities including interests in trusts holding tax-exempt lease
receivables, and may enter into various interest rate transactions such as
swaps, caps, floors or collars as described below. Many of these derivative
products are new and are still being developed. Some of these products may
generate taxable income or income which is believed to be non-taxable which may
later be determined to be taxable. In making investments in any tax-exempt
derivative, the Fund will take into consideration the impact on the Fund of the
potential taxable nature of any income or gains, the effect of such taxable
income or gains on the taxable and non-taxable status of dividends and
distributions by the Fund to its shareholders, and the speculative nature of the
products given their development nature. Other risks which may arise with
tax-exempt derivative products include possible illiquidity because the market
for such instruments is still developing. The Fund will attempt to invest in
products which appear to have reasonable liquidity and to reduce the risks of
nonperformance by counterparties by dealing only with established and reputable
institutions.
Swap Arrangements
The Fund may enter into various forms of swap arrangements with
counterparties with respect to interest rates or indices, including purchase of
caps, floors and collars as described below. In an interest rate swap, the Fund
could agree for a specified period to pay a bank or investment banker the
floating rate of interest on a so-called notional principal amount (i.e., an
assumed figure selected by the parties for this purpose) in exchange for
agreement by the bank or investment banker to pay the Fund a fixed rate of
interest on the notional principal amount. In an index swap, the Fund would
agree to exchange cash flows on a notional amount based on changes in the values
of the selected indices. Purchase of a cap entitles the purchaser to receive
payments from the seller on a notional amount to the extent that the selected
index exceeds an agreed upon interest rate or amount whereas purchase of a floor
entitles the purchaser to receive such payments to the extent the selected index
falls below an agreed-upon interest rate or amount. A collar combines a cap and
a floor.
Most swaps entered into by the Fund will be on a net basis; for
example, in an interest rate swap, amounts generated by application of the fixed
rate and the floating rate to the notional principal amount would first offset
one another, with the Fund either receiving or paying the difference between
such amounts. In order to be in a position to meet any obligations resulting
from swaps, the Fund will set up a segregated custodial account to hold
appropriate liquid assets, including cash; for swaps entered into on a net
basis, assets will be segregated having a daily net asset value equal to any
excess of the Fund's accrued obligations over the accrued obligations of the
other party, while for swaps on other than a net basis assets will be segregated
having a value equal to the total amount of the Fund's obligations.
These arrangements will be made primarily for hedging purposes, to
preserve the return on an investment or on a part of the Fund's portfolio.
However, the Fund may enter into such arrangements for income purposes to the
extent permitted by the Commodity Futures Trading Commission for entities which
are not commodity pool operators, such as the Fund. In entering a swap
arrangement, the Fund is dependent upon the creditworthiness and good faith of
the counterparty. The Fund attempts to reduce the risks of nonperformance by the
counterparty by dealing only with established, reputable institutions. The swap
market is still relatively new and emerging; positions in swap arrangements may
become illiquid to the extent that non-standard arrangements with one
counterparty are not readily transferable to another counterparty or if a market
for the transfer of swap positions does not develop. The use of interest rate
swaps is a highly specialized activity which involves investment techniques and
risks different from those associated with ordinary portfolio securities
transactions. If the Investment Manager is incorrect in its forecast of market
values, interest rates and other applicable factors, the investment performance
of the Fund would diminish compared with what it would have been if these
investment techniques were not used. Moreover, even if the Investment Manager is
correct in its forecast, there is a risk that the swap position may correlate
imperfectly with the price of the asset or liability being hedged.
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DEBT INSTRUMENTS AND
PERMITTED CASH INVESTMENTS
As indicated in the Fund's Prospectus, the Fund may invest in long-term
and short-term debt securities. The Fund may invest in cash and short-term
securities for temporary defensive purposes when, in the opinion of the
Investment Manager, such investments are more likely to provide protection
against unfavorable market conditions than adherence to other investment
policies. Certain debt securities and money market instruments in which the Fund
may invest are described below.
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 such 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 100% of its total assets in
short-term securities the interest on which is not exempt from federal income
taxes or California State personal income taxes.
U.S. Government and Related Securities. U.S. Government securities
are securities which are issued or guaranteed as to principal or interest by the
U.S. Government, a U.S. Government agency or instrumentality, or certain
mixed-ownership Government corporations as described herein. The U.S. Government
securities in which the Fund invests include, among others:
* direct obligations of the U.S. Treasury, i.e., Treasury
bills, notes, certificates and bonds;
* obligations of U.S. Government agencies or instrumentalities
such as the Federal Home Loan Banks, the Farmers Home
Administration, the Federal Farm Credit Banks, the Federal
National Mortgage Association, the Government National
Mortgage Association and the Federal Home Loan Mortgage
Corporation; and
* obligations of mixed-ownership Government corporations such
as Resolution Funding Corporation.
U.S. Government securities which the Fund may buy are backed in a
variety of ways by the U.S. Government, its agencies or instrumentalities. Some
of these obligations, such as Government National Mortgage Association
mortgage-backed securities and obligations of the Farmers Home Administration,
are backed by the full faith and credit of the U.S. Treasury. Other obligations,
such as those of the Federal National Mortgage Association, are backed by the
discretionary authority of the U.S. Government to purchase certain obligations
of agencies or instrumentalities, although the U.S. Government has no legal
obligation to do so. Obligations such as those of the Federal Home Loan Banks,
the Farmers Home Administration, the Federal Farm Credit Banks, the Federal
National Mortgage Association and the Federal Home Loan Mortgage Corporation are
backed by the credit of the agency or instrumentality issuing the obligations.
Certain obligations of Resolution Funding Corporation, a mixed-ownership
Government corporation, are backed with respect to interest payments by the U.S.
Treasury, and with respect to principal payments by U.S. Treasury obligations
held in a segregated account with a Federal Reserve Bank. Except for certain
mortgage-backed securities, the Fund will only invest in obligations issued by
mixed-ownership Government corporations where such securities are guaranteed as
to payment of principal or interest by the U.S. Government or a U.S. Government
agency or instrumentality, and any unguaranteed principal or interest is
otherwise supported by U.S. Government obligations held in a segregated account.
U.S. Government securities may be acquired by the Fund in the form of
separately traded principal and interest components of securities issued or
guaranteed by the U.S. Treasury. The principal and interest components of
selected securities are traded independently under the Separate Trading of
Registered Interest and Principal of Securities ("STRIPS") program. Under the
STRIPS program, the principal and interest components are individually numbered
and separately issued by the U.S. Treasury at the request of depository
financial institutions, which then trade the component parts independently.
Obligations of Resolution Funding Corporation are similarly divided into
principal and interest components and maintained as such on the book entry
records of the Federal Reserve Banks.
In addition, the Fund may invest in custodial receipts that evidence
ownership of future interest payments, principal payments or both on certain
U.S. Treasury notes or bonds in connection with programs sponsored by banks and
brokerage firms. Such notes and bonds are held in custody by a bank on behalf of
the owners of the receipts. These custodial receipts are known by various names,
including "Treasury Receipts" ("TRs"), "Treasury Investment Growth Receipts"
("TIGRs") and "Certificates of Accrual on Treasury Securities" ("CATS"), and may
not be deemed U.S. Government securities.
The Fund may also invest from time to time in collective investment
vehicles, the assets of which consist principally of U.S. Government securities
or other assets substantially collateralized or supported by such securities,
such as Government trust certificates.
<PAGE>
Bank Money Investments. Bank money investments include but are not
limited to certificates of deposit, bankers' acceptances and time deposits.
Certificates of deposit are generally short-term (i.e., less than one year),
interest-bearing negotiable certificates issued by commercial banks or savings
and loan associations against funds deposited in the issuing institution. A
banker's acceptance is a time draft drawn on a commercial bank by a borrower,
usually in connection with an international commercial transaction (to finance
the import, export, transfer or storage of goods). A banker's acceptance may be
obtained from a domestic or foreign bank including a U.S. branch or agency of a
foreign bank. The borrower is liable for payment as well as the bank, which
unconditionally guarantees to pay the draft at its face amount on the maturity
date. Most acceptances have maturities of six months or less and are traded in
secondary markets prior to maturity. Time deposits are nonnegotiable deposits
for a fixed period of time at a stated interest rate. The Fund will not invest
in any such bank money investment unless the investment is issued by a U.S. bank
that is a member of the Federal Deposit Insurance Corporation ("FDIC"),
including any foreign branch thereof, a U.S. branch or agency of a foreign bank,
a foreign branch of a foreign bank, or a savings bank or savings and loan
association that is a member of the FDIC and which at the date of investment has
capital, surplus and undivided profits (as of the date of its most recently
published financial statements) in excess of $50 million. The Fund will not
invest in time deposits maturing in more than seven days and will not invest
more than 10% of its total assets in time deposits maturing in two to seven
days.
20
<PAGE>
U.S. branches and agencies of foreign banks are offices of foreign
banks and are not separately incorporated entities. They are chartered and
regulated either federally or under state law. U.S. federal branches or agencies
of foreign banks are chartered and regulated by the Comptroller of the Currency,
while state branches and agencies are chartered and regulated by authorities of
the respective states or the District of Columbia. U.S. branches of foreign
banks may accept deposits and thus are eligible for FDIC insurance; however, not
all such branches elect FDIC insurance. Unlike U.S. branches of foreign banks,
U.S. agencies of foreign banks may not accept deposits and thus are not eligible
for FDIC insurance. Both branches and agencies can maintain credit balances,
which are funds received by the office incidental to or arising out of the
exercise of their banking powers and can exercise other commercial functions,
such as lending activities.
Short-Term Corporate Debt Instruments. Short-term corporate debt
instruments include commercial paper to finance short-term credit needs (i.e.,
short-term, unsecured promissory notes) issued by corporations including but not
limited to (a) domestic or foreign bank holding companies or (b) their
subsidiaries or affiliates where the debt instrument is guaranteed by the bank
holding company or an affiliated bank or where the bank holding company or the
affiliated bank is unconditionally liable for the debt instrument. Commercial
paper is usually sold on a discounted basis and has a maturity at the time of
issuance not exceeding nine months.
Commercial Paper Ratings. Commercial paper investments at the time of
purchase will be rated A by S&P or Prime by Moody's, or, if not rated, issued by
companies having an outstanding long-term unsecured debt issue rated at least A
by S&P or by Moody's. The money market investments in corporate bonds and
debentures (which must have maturities at the date of settlement of one year or
less) must be rated at the time of purchase at least A by S&P or by Moody's.
Commercial paper rated A (highest quality) by S&P is issued by entities
which have liquidity ratios which are adequate to meet cash requirements.
Long-term senior debt is rated A or better, although in some cases BBB credits
may be allowed. The issuer has access to at least two additional channels of
borrowing. Basic earnings and cash flow have an upward trend with allowance made
for unusual circumstances. Typically, the issuer's industry is well established
and the issuer has a strong position within the industry. The reliability and
quality of management are unquestioned. The relative strength or weakness of the
above factors determines whether the issuer's commercial paper is rated A-1, A-2
or A-3. (Those A-1 issues determined to possess overwhelming safety
characteristics are denoted with a plus (+) sign: A-1+.)
The rating Prime is the highest commercial paper rating assigned by
Moody's. Among the factors considered by Moody's in assigning ratings are the
following: evaluation of the management of the issuer; economic evaluation of
the issuer's industry or industries and an appraisal of speculative-type risks
which may be inherent in certain areas; evaluation of the issuer's products in
relation to competition and customer acceptance; liquidity; amount and quality
of long-term debt; trend of earnings over a period of 10 years; financial
management of obligations which may be present or may arise as a result of
public interest questions and preparations to meet such obligations. These
factors are all considered in determining whether the commercial paper is rated
Prime-1, Prime-2 or Prime-3.
Information concerning the ratings of S&P and Moody's for municipal
debt appears in the Appendix hereto. In the event applicable rating agencies
lower the ratings of debt instruments held by the Fund, resulting in a material
decline in the overall quality of the Fund's portfolio, the situation will be
reviewed and necessary action, if any, will be taken, including changes in the
composition of the portfolio.
21
<PAGE>
TRUSTEES AND OFFICERS
The Trustees and officers of the Trust, their addresses, and their
principal occupations and positions with certain affiliates of the Investment
Manager are set forth below.
*Paul J. Clifford, Jr., One Financial Center, Boston, MA 02111, serves
as Vice President of the Trust. He is 32. His principal occupation 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.
*Susan W. Drake, One Financial Center, Boston, MA 02111, serves as Vice
President of the Trust. She is 42. Her principal occupation 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.
*+Constantine Hutchins, Jr., One Financial Center, Boston, MA 02111,
serves as Secretary and General Counsel of the Trust. He is 66. His principal
occupation during the past five years has been Senior Vice President, Secretary
and General Counsel of State Street Research & Management Company. Mr.
Hutchins's other principal business affiliations include Senior Vice President,
Clerk and General Counsel, State Street Research Investment Services, Inc.
*+John H. Kallis, One Financial Center, Boston, MA 02111, serves as
Vice President of the Trust. He is 54. Mr. Kallis's principal occupation is
Senior Vice President of State Street Research & Management Company. During the
past five years he has also served as portfolio manager for State Street
Research & Management Company.
+Edward M. Lamont, Box 1234, Moores Hill Road, Syosset, NY 11791,
serves as Trustee of the Trust. He is 68. He is engaged principally in private
investments and civic affairs. Previously, he was with Morgan Guaranty Trust
Company of New York.
+Robert A. Lawrence, Saltonstall & Co., 50 Congress Street, Boston, MA
02109, serves as Trustee of the Trust. He is 68. His principal occupation during
the past five years has been Partner, Saltonstall & Co., a private investment
firm.
*+Gerard P. Maus, One Financial Center, Boston, MA 02111, serves as
Treasurer of the Trust. He is 44. His principal occupation is Executive Vice
President, Treasurer and Director of State Street Research & Management Company.
During the past five years he also served as Executive Vice President and Chief
Financial Officer of New England Investment Companies and as Senior Vice
President and Vice President of New England Mutual Life Insurance Company. Mr.
Maus's other principal business affiliations include Executive Vice President,
Treasurer, Chief Financial Officer and Director of State Street Research
Investment Services, Inc.
+Dean O. Morton, 3200 Hillview Avenue, Palo Alto, CA 94304, serves as
Trustee of the Trust. He is 63. He is retired, having served during the past
five years, until October 1992, as Executive Vice President, Chief Operating
Officer and Director of Hewlett-Packard Company.
* or + See footnotes on page 26.
22
<PAGE>
+Thomas L. Phillips, 141 Spring Street, Lexington, MA 02173 serves as
Trustee of the Trust. He is 70. He is retired and was formerly Chairman of the
Board and Chief Executive Officer of Raytheon Company, of which he remains a
Director.
+Toby Rosenblatt, 3409 Pacific Avenue, San Francisco, CA 94118, serves
as Trustee of the Trust. He is 56. His principal occupations during the past
five years have been President of The Glen Ellen Company, a private investment
company, and Vice President of Founders Investment Ltd.
+Michael S. Scott Morton, Massachusetts Institute of Technology, 77
Massachusetts Avenue, Cambridge, MA 02139, serves as Trustee of the Trust. He is
57. His principal occupation during the past five years has been Jay W.
Forrester Professor of Management at Sloan School of Management, Massachusetts
Institute of Technology.
*+Thomas A. Shively, One Financial Center, Boston, MA 02111, serves as
Vice President of the Trust. He is 40. His principal occupation is Senior Vice
President and Director of State Street Research & Management Company. During the
past five years he has also served as Vice President of State Street Research &
Management Company. Mr. Shively's other principal business affiliations include
Director of State Street Research Investment Services, Inc.
*+Ralph F. Verni, One Financial Center, Boston, MA 02111, serves as
Chairman of the Board, President, Chief Executive Officer and Trustee of the
Trust. He is 52. His principal occupation is Chairman of the Board, President,
Chief Executive Officer and Director of State Street Research & Management
Company. During the past five years he also served as President and Chief
Executive Officer of New England Investment Companies and as Chief Investment
Officer and Director of New England Mutual Life Insurance Company. Mr. Verni's
other principal business affiliations include Chairman of the Board, President,
Chief Executive Officer and Director of State Street Research Investment
Services, Inc.
+Jeptha H. Wade, 251 Old Billerica Road, Bedford, MA 01730, serves as
Trustee of the Trust. He is 70. He is retired and was formerly Of Counsel for
the law firm Choate, Hall & Stewart. He was a partner of that firm from 1960 to
1987.
- --------------
* or + See footnotes on page 26.
23
<PAGE>
As of March 31, 1995, the following persons or entities were the record
and/or beneficial owners of the approximate amounts of each class of shares of
the Fund as set forth beside their names:
Shareholder %
----------- --
Class A Metropolitan Life 6.4
Merrill Lynch 5.2
R.G. King 8.3
Class B M.E. Pluth, Trustee 5.5
Merrill Lynch 5.5
R.C. Burgee, Trustee 6.2
Class C Metropolitan Life 12.4
K.J. Rivera, Trustee 6.7
Class D Metropolitan Life 68.4
Merrill Lynch 10.6
W.R. Johnson & A.S. Johnson 6.6
The full name and address of each of the above persons or entities are
as follows:
R.G. King
M.E. Pluth, Trustee
R.C. Burgee, Trustee
K.J. Rivera, Trustee
W.R. Johnson & A.S. Johnson
c/o State Street Research Shareholder Services
One Financial Center
Boston, MA 02111
Metropolitan Life Insurance Company (a)
One Madison Avenue
New York, New York 10010
Merrill Lynch, Pierce, Fenner & Smith, Inc. (b)
One Liberty Plaza
165 Broadway
New York, New York 10080
24
<PAGE>
(a) Metropolitan Life Insurance Company ("Metropolitan"), a New York
corporation, was the record and/or beneficial owner, directly or
indirectly through its subsidiaries or affiliates, of such shares.
(b) The Fund believes that Merrill Lynch does not have beneficial
ownership of such shares.
As of March 31, 1995, the Trustees and officers of the Fund as a group
owned no 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 is so owned, such
owners will be presumed to be in control of such class of shares for purposes of
voting on certain matters submitted to a vote of shareholders, such as any
Distribution Plan for a given class.
During the last fiscal year of the Fund, the Trustees were compensated
as follows:
<TABLE>
<CAPTION>
Total Compensation
Aggregate From Trust and
Compensation Complex Paid
Name of Trustee From Trust(a) to Trustee(b)
<S> <C> <C>
Edward M. Lamont $ 9,825 $ 49,236
Robert A. Lawrence $ 9,325 $ 72,475
Dean O. Morton $ 11,325 $ 87,925
Thomas L. Phillips $ 9,625 $ 56,825
Toby Rosenblatt $ 9,825 $ 49,236
Michael S. Scott Morton $ 11,325 $ 83,925
Ralph F. Verni $ 0 $ 0
Jephtha H. Wade $ 10,125 $ 58,525
</TABLE>
(a) Includes compensation from multiple series of the Trust. See
"Distribution of Shares" for a listing of series.
(b) Includes compensation from Metropolitan Series Fund, Inc., for which
the Investment Manager serves as a sub-investment adviser, State Street
Research Portfolios, Inc., for which State Street Research Investment
Services, Inc. serves as distributor, and all investment companies for
which the Investment Manager serves as primary investment adviser,
comprising a total of 30 series. The Trust does not provide any pension
or retirement benefits for the Trustees.
25
<PAGE>
* These Trustees and/or officers are or may be deemed to be "interested
persons" of the Trust under the 1940 Act because of their affiliations
with the Fund's investment adviser.
+ Serves as a Trustee and/or officer of one or more of the following
investment companies, each of which has an advisory or distribution
relationship with the Investment Manager or its affiliates: MetLife -
State Street Equity Trust, MetLife - State Street Financial Trust,
MetLife - State Street Income Trust, MetLife - State Street Money Market
Trust, State Street Research Tax-Exempt Trust, State Street Research
Capital Trust, State Street Research Exchange Trust, State Street
Research Growth Trust, State Street Research Master Investment Trust,
State Street Research Securities Trust, State Street Research
Portfolios, Inc. and Metropolitan Series Fund, Inc.
26
<PAGE>
INVESTMENT ADVISORY SERVICES
State Street Research & Management Company, the Investment Manager, a
Delaware corporation, with offices at One Financial Center, Boston,
Massachusetts 02111-2690, acts as investment adviser to the Fund. The Advisory
Agreement provides that the Investment Manager shall furnish the Fund with an
investment program, office facilities and such investment advisory, research and
administrative services as may be required from time to time. The Investment
Manager compensates all executive and clerical personnel and Trustees of the
Trust if such persons are employees of the Investment Manager or its affiliates.
The Investment Manager is an indirect wholly-owned subsidiary of Metropolitan.
State Street Research & Management Company assumed responsibility as Investment
Manager effective as of July 1, 1992; previously, it served as a sub-adviser and
the Distributor acted as investment manager.
The advisory fee payable monthly by the Fund to the Investment Manager
is computed as a percentage of the average of the value of the net assets of the
Fund as determined at the close of the New York Stock Exchange (the "NYSE") on
each day the NYSE is open for trading, at the annual rate of 0.55% of the net
assets of the Fund. The Fund has been advised that the Distributor and its
affiliates may from time to time and in varying amounts voluntarily assume some
portion of fees or expenses relating to the Fund. For the fiscal years ended
December 31, 1992, 1993 and 1994, the Fund's investment advisory fees prior to
the assumption of fees or expenses were $97,465, $179,641 and $183,173,
respectively. For the same periods, the voluntary reduction of fees or
assumption of expenses amounted to $107,950, $136,124 and $200,636,
respectively.
Further, to the extent required under applicable state regulatory
requirements, the Investment Manager will reduce its management fee up to the
amount of any expenses (excluding permissible items, such as brokerage
commissions, Rule 12b-1 payments, interest, taxes and litigation expenses) paid
or incurred by the Fund in any fiscal year which exceed specified percentages of
the average daily net assets of the Fund for such fiscal year. The most
restrictive of such percentage limitations is currently 2.5% of the first $30
million of average net assets, 2.0% of the next $70 million of average net
assets and 1.5% of the remaining average net assets. These commitments may be
amended or rescinded in response to changes in the requirements of the various
states by the Trustees without shareholder approval.
The Advisory Agreement provides that it shall continue in effect with
respect to the Fund from year to year as long as it is approved at least
annually both (i) by a vote of a majority of the outstanding voting securities
of the Fund (as defined in the 1940 Act) or by the Trustees of the Trust, and
(ii) in either event by a vote of a majority of the Trustees who are not parties
to the Advisory Agreement or "interested persons" of any party thereto, cast in
person at a meeting called for the purpose of voting on such approval. The
Advisory Agreement may be terminated on 60 days written notice by either party
and will terminate automatically in the event of its assignment, as defined
under the 1940 Act and regulations thereunder. Such regulations provide that a
transaction which does not result in a change of actual control or management of
an adviser is not deemed an assignment.
27
<PAGE>
Under a Funds Administration Agreement between the Investment Manager
and the Distributor, the Distributor provides assistance to the Investment
Manager in performing certain fund administrative services for the Trust, such
as assistance in determining the daily net asset value of shares of series of
the Trust and in preparing various reports required by regulations.
Under a Shareholders' Administrative Services Agreement between the
Trust and the Distributor, the Distributor provides shareholders' administrative
services, such as responding to inquiries and instructions from investors
respecting the purchase and redemption of shares of the Fund, and is entitled to
reimbursements of its costs for providing such services. Under certain
arrangements for Metropolitan to provide subadministration services,
Metropolitan may receive a fee for the maintenance of certain share ownership
records for participants in sponsored arrangements, employee benefit plans, and
similar programs or plans, through or under which the Fund's shares may be
purchased.
Under the Code of Ethics of the Investment Manager, its employees are
only permitted to engage in personal securities transactions which do not
involve securities which the Investment Manager has recommended for purchase or
sale, or purchased or sold, on behalf of its clients. All employees must report
their personal securities transactions quarterly and supply broker confirmations
of such transactions to the Investment Manager.
28
<PAGE>
PURCHASE AND REDEMPTION OF SHARES
Shares of the Fund are distributed by the Distributor. The Fund offers
four classes of shares which may be purchased at the next determined net asset
value per share plus, in the case of all classes except Class C shares, a sales
charge which, at the election of the investor, may be imposed (i) at the time of
purchase (the Class A shares) or (ii) on a deferred basis (the Class B and Class
D shares). General information on how to buy shares of the Fund, as well as
sales charges involved, is set forth under "Purchase of Shares" in the
Prospectus. The following supplements that information.
Public Offering Price. The public offering price for each class of
shares of the Fund is based on their net asset value determined as of the close
of the NYSE on the day the purchase order is received by State Street Research
Shareholder Services provided that the order is received prior to the close of
the NYSE on that day; otherwise the net asset value used is that determined as
of the close of the NYSE on the next day it is open for unrestricted trading.
When a purchase order is placed through a dealer, that dealer is responsible for
transmitting the order promptly to State Street Research Shareholder Services in
order to permit the investor to obtain the current price. Any loss suffered by
an investor which results from a dealer's failure to transmit an order promptly
is a matter for settlement between the investor and the dealer.
Reduced Sales Charges. For purposes of determining whether a purchase of
Class A shares qualifies for reduced sales charges, the term "person" includes:
(i) an individual, or an individual combining with his or her spouse and their
children and purchasing for his, her or their own account; (ii) a "company" as
defined in Section 2(a)(8) of the 1940 Act; (iii) a trustee or other fiduciary
purchasing for a single trust estate or single fiduciary account (including a
pension, profit sharing or other employee benefit trust created pursuant to a
plan qualified under Section 401 of the Internal Revenue Code); (iv) a
tax-exempt organization under Section 501(c)(3) or (13) of the Internal Revenue
Code; and (v) an employee benefit plan of a single employer or of affiliated
employers.
Investors may purchase Class A shares of the Fund at reduced sales
charges by executing a Letter of Intent to purchase no less than an aggregate of
$100,000 of the Fund or any combination of Class A shares of "Eligible Funds" as
designated by the Distributor within a 13-month period. The sales charge
applicable to each purchase made pursuant to a Letter of Intent will be that
which would apply if the total dollar amount set forth in the Letter of Intent
were being bought in a single transaction. Purchases made within a 90-day period
prior to the execution of a Letter of Intent may be included therein; in such
case the date of the earliest of such purchases marks the commencement of the
13-month period.
29
<PAGE>
An investor may include toward completion of a Letter of Intent the
value (at the current public offering price) of all of his or her Class A shares
of the Fund and of any of the other Class A shares of Eligible Funds held of
record as of the date of his or her Letter of Intent, plus the value (at the
current offering price) as of such date of all of such shares held by any
"person" described herein as eligible to join with the investor in a single
purchase. Class B, Class C and Class D shares may also be included in the
combination under certain circumstances.
A Letter of Intent does not bind the investor to purchase the specified
amount. Shares equivalent to 5% of the specified amount will, however, be taken
from the initial purchase (or, if necessary, subsequent purchases) and held in
escrow in the investor's account as collateral against the higher sales charge
which would apply if the total purchase is not completed within the allotted
time. The escrowed shares will be released when the Letter of Intent is
completed or, if it is not completed, when the balance of the higher sales
charge is, upon notice, remitted by the investor. All dividends and capital
gains distributions with respect to the escrowed shares will be credited to the
investor's account.
Investors may purchase Class A shares of the Fund or a combination of
Eligible Funds at reduced sales charges pursuant to a Right of Accumulation. The
applicable sales charge under this right is determined on the amount arrived at
by combining the dollar amount of the purchase with the value (at the current
public offering price) of all Class A shares of the other Eligible Funds owned
as of the purchase date by the investor plus the value (at the current public
offering price) of all such shares owned as of such date by any "person"
described herein as eligible to join with the investor in a single purchase.
Class B, Class C and Class D shares may also be included in the combination
under certain circumstances. Investors must submit to the Distributor sufficient
information to show that they qualify for this Right of Accumulation.
Class C Shares. Class C shares are currently available to (i) benefit
plans such as qualified retirement plans, other than individual retirement
accounts and self-employed retirement plans, which meet certain criteria
relating to minimum assets, minimum participants, service agreements, or similar
factors; (ii) tax-exempt retirement plans of the Investment Manager and its
affiliates, including the retirement plans of the Investment Manager's
affiliated brokers; (iii) unit investment trusts sponsored by the Investment
Manager or its affiliates; (iv) banks and insurance companies purchasing for
their own accounts; (v) investment companies not affiliated with the Investment
Manager; and (vi) endowment funds of nonprofit organizations with substantial
minimum assets. The entities included in categories (i), (iv) and (vi) may not
be affiliates of the Investment Manager.
Reorganizations. In the event of mergers or reorganizations with other
public or private collective investment entities, including investment companies
as defined in the 1940 Act, as amended, the Fund may issue its shares at net
asset value (or more) to such entities or to their security holders.
Redemptions. The Fund reserves the right to pay redemptions in kind with
portfolio securities in lieu of cash. In accordance with its election pursuant
to Rule 18f-1 under the 1940 Act, the Fund may limit the amount of redemption
proceeds paid in cash. Although it has no present intention to do so, the Fund
may, under unusual circumstances, limit redemptions in cash with respect to each
shareholder during any ninety-day period to the lesser of (i) $250,000, or (ii)
1% of the net asset value of the Fund at the beginning of such period. In
connection with any redemptions paid in kind with portfolio securities,
brokerage and other costs may be incurred by the redeeming shareholder in the
sale of the securities received.
30
<PAGE>
NET ASSET VALUE
The net asset value of the shares of the Fund is determined once daily
as of the close of the NYSE, ordinarily 4 P.M. New York City time, Monday
through Friday, on each day during which the NYSE is open for unrestricted
trading. The NYSE is currently closed on New Year's Day, Presidents Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day.
The net asset value per share of the Fund is computed by dividing the
sum of the value of the securities held by the Fund plus any cash or other
assets minus all liabilities by the total number of outstanding shares of the
Fund at such time. Any expenses, except for extraordinary or nonrecurring
expenses, borne by the Fund, including the investment management fee payable to
the Investment Manager, are accrued daily.
In determining the values of portfolio assets, the Trustees utilize one
or more pricing services to value debt securities for which market quotations
are not readily available on a daily basis. Most debt securities are valued on
the basis of data provided by such pricing services. Since the Fund is comprised
substantially of debt securities under normal circumstances, most of the Fund's
assets are therefore valued on the basis of such data from the pricing Services.
The pricing services may provide prices determined as of times prior to the
close of the NYSE.
In general, securities are valued as follows. Securities which are
listed or traded on the NYSE or the American Stock Exchange are valued at the
price of the last quoted sale on the respective exchange for that day.
Securities which are listed or traded on a national securities exchange or
exchanges, but not on the NYSE or the American Stock Exchange, are valued at the
price of the last quoted sale on the exchange for that day prior to the close of
the NYSE. Securities not listed on any national securities exchange which are
traded "over the counter" and for which quotations are available on the National
Association of Securities Dealers' NASDAQ System, or other system, are valued at
the closing price supplied through such system for that day at the close of the
NYSE. Other securities are, in general, valued at the mean of the bid and asked
quotations last quoted prior to the close of the NYSE if there are market
quotations readily available, or in the absence of such market quotations, then
at the fair value thereof as determined by or under authority of the Trustees of
the Trust utilizing such pricing services as may be deemed appropriate as
described above. Securities deemed restricted as to resale are valued at the
fair value thereof as determined by or in accordance with methods adopted by the
Trustees of the Trust.
Short-term debt instruments issued with a maturity of one year or less
which have a remaining maturity of 60 days or less are valued using the
amortized cost method, provided that during any period in which more than 25% of
the Fund's total assets is invested in short-term debt securities the current
market value of such securities will be used in calculating net asset value per
share in lieu of the amortized cost method. The amortized cost method is used
when the value obtained is fair value. Under the amortized cost method of
valuation, the security is initially valued at cost on the date of purchase (or
in the case of short-term debt instruments purchased with more than 60 days
remaining to maturity, the market value on the 61st day prior to maturity), and
thereafter a constant amortization to maturity of any discount or premium is
assumed regardless of the impact of fluctuating interest rates on the market
value of the security.
31
<PAGE>
PORTFOLIO TRANSACTIONS
Portfolio Turnover
The Fund's portfolio turnover rate is determined by dividing the lesser
of securities purchases or sales for a year by the monthly average value of
securities held by the Fund (excluding, for purposes of this determination,
securities the maturities of which as of the time of their acquisition were one
year or less). The portfolio turnover rates for the fiscal years ended December
31, 1993 and 1994 were 56.62% and 59.22%, respectively.
Brokerage Allocation
The Fund and the Investment Manager seek the best overall execution of
purchase or sale orders and the most favorable net price in securities
transactions consistent with their judgment as to the business qualifications of
the various broker or dealer firms with which the Fund may do business.
Decisions with respect to the market in which the transaction is to be
completed, and to the allocation of orders among brokers or dealers, are made in
accordance with this policy. In selecting brokers or dealers to effect portfolio
transactions, consideration is given to the performance, integrity and financial
responsibility of the various firms as well as to their demonstrated execution
experience and capability generally and in regard to particular markets or
securities and, in agency transactions, to the competitiveness of the commission
rates (or in principal transactions of the net prices) they charge. The
Investment Manager keeps current as to the range of rates or prices charged by
various firms and against this background evaluates the reasonableness of a
commission or price charged with respect to a particular transaction by
considering such factors as difficulty of execution or security positioning by
the executing firm.
When it appears that a number of firms can satisfy the required
standards in respect of a particular transaction, consideration may also be
given to services other than execution services which such firms have provided
in the past or may provide in the future. Among such other services are the
supplying of supplemental investment research, general and economic and
political information, analytical and statistical data, relevant market
information and daily market quotations for computation of net asset value. In
this connection it should be noted that a substantial portion of brokerage
commissions paid, or principal transactions entered, by the Fund may be with
brokers and investment banking firms which, in the normal course of business,
publish statistical, research and other material which is received by the
Investment Manager and which may or may not prove useful to the Investment
Manager, or the Fund, or other clients of the Investment Manager.
Neither the Fund nor the Investment Manager has any definite agreements
with any firm as to the amount of business which that firm may expect to receive
for services supplied or otherwise. There may be, however, understandings with
certain firms that in order for such firms to be able to continuously supply
certain services, they need to receive allocation of a specified amount of
business. These understandings are honored to the extent possible in accordance
with the policy set forth above. Neither the Fund nor the Investment Manager
intends to pay a firm in excess of that which another would charge for handling
the same transaction in recognition of services (other than execution services)
provided. However, the Fund and the Investment Manager are aware that this is an
area where differences of opinion as to fact and circumstances may exist, and in
such circumstances, if any, rely on the provisions of Section 28(e) of the
Securities Exchange Act of 1934, to the extent applicable. For the fiscal years
ended December 31, 1992, 1993 and 1994, the Fund paid no brokerage commissions.
During and at the end of its most recent fiscal year, the Fund held in its
portfolio no securities of any entity that might be deemed to be a regular
broker dealer of the Fund as defined under the 1940 Act.
32
<PAGE>
Occasions may arise when the Investment Manager determines that an
investment in a particular security, or the disposition of a particular
security, is simultaneously a proper investment decision for the Fund as well as
for the portfolio of one or more of its other clients. In this event, a purchase
or sale, as the case may be, of any such security on any given day will be
normally averaged as to price and allocated as to amount among the several
clients in a manner deemed equitable to each client.
On occasions when the Investment Manager deems the purchase or sale of a
security to be in the best interests of the Fund, as well as other clients of
the Investment Manager, the Investment Manager, to the extent permitted by
applicable laws and regulations, may aggregate such securities to be sold or
purchased for the Fund with those to be sold or purchased for other customers in
order to obtain best execution and lower brokerage commissions, if any. In such
event, allocation of the securities so purchased or sold, as well as the
expenses incurred in the transaction, will be made by the Investment Manager in
the manner it considers to be most equitable and consistent with its fiduciary
obligations to all such customers, including the Fund. In some instances, this
procedure may affect the price and size of the positions obtainable for the
Fund.
33
<PAGE>
CERTAIN TAX MATTERS
Federal Income Taxation of the Fund -- In General
The Fund intends to qualify and elect to be treated each taxable year as
a "regulated investment company" under Subchapter M of the Internal Revenue Code
of 1986, as amended (the "Code"), although it cannot give complete assurance
that it will do so. Accordingly, the Fund must, among other things, (a) derive
at least 90% of its gross income in each taxable year from dividends, interest,
payments with respect to securities loans, gains from the sale or other
disposition of stock, securities or foreign currencies, or other income
(including, but not limited to, gains from options, futures or forward
contracts) derived with respect to its business of investing in such stock,
securities or currencies (the "90% test"); (b) derive less than 30% of its gross
income in each taxable year from the sale or other disposition of any of the
following held for less than three months (the "30% test"): (i) stocks or
securities; (ii) options, futures or forward contracts (other than options,
futures, or forward contracts on foreign currencies) or (iii) foreign currencies
(or options, futures, or forward contracts on foreign currencies) but only if
such currencies (or options, futures, or forward contracts) are not directly
related to the Fund's principal business of investing in stocks or securities
(or options and futures with respect to stocks or securities); and (c) satisfy
certain diversification requirements. Furthermore, in order to be entitled to
pay tax-exempt interest income dividends to its shareholders, the Fund must
satisfy the requirement that, at the close of each quarter of its taxable year,
at least 50% of the value of its total assets consist of obligations the
interest of which is exempt from federal income tax under Code section 103(a).
The 30% test will limit the extent to which the Fund may sell securities
held for less than three months, write options which expire in less than three
months and effect closing transactions with respect to call or put options that
have been written or purchased within the preceding three months. (If the Fund
purchases a put option for the purpose of hedging an underlying portfolio
security, the acquisition of the option is treated as a short sale of the
underlying securities unless, for purposes only of the 30% test, the option and
the security are acquired on the same date.) Finally, as discussed below, this
requirement may also limit investments by the Fund in options on stock indices,
listed options on nonconvertible debt securities, futures contracts, options on
interest rate futures contracts and certain foreign currency contracts.
If the Fund should fail to qualify as a regulated investment company in
any year, it would lose the beneficial tax treatment accorded regulated
investment companies under Subchapter M of the Code and all of its taxable
income would be subject to tax at regular corporate rates without any deduction
for distributions to shareholders, and such distributions will be taxable to
shareholders as ordinary income to the extent of the Fund's current accumulated
earnings and profits. Also, the shareholders, if they received a distribution in
excess of current or accumulated earnings and profits, would receive a return of
capital that would reduce the basis of their shares of the Fund.
34
<PAGE>
The Fund will be liable for a nondeductible 4% excise tax on amounts not
distributed on a timely basis in accordance with a calendar year distribution
requirement. To avoid the tax, during each calendar year the Fund must
distribute an amount equal to at least 98% of the sum of its ordinary income
(not taking into account any capital gains or losses) for the calendar year, and
its capital gain net income for the 12-month period ending on October 31 in
addition to any undistributed portion of the respective balances from the prior
year. Because the excise tax is based upon undistributed taxable income, it will
not apply to tax-exempt income received by the Fund. The Fund intends to make
sufficient distributions to avoid this 4% excise tax.
Federal Income Taxation of the Fund's Investments
Original Issue Discount. For federal income tax purposes, debt
securities purchased by the Fund may be treated as having original issue
discount. Original issue discount represents interest for federal income tax
purposes and can generally be defined as the excess of the stated redemption
price at maturity of a debt obligation over the issue price. Original issue
discount is treated for federal income tax purposes as income earned by the
Fund, whether or not any income is actually received, and therefore is subject
to the distribution requirements of the Code. Generally, the amount of original
issue discount is determined on the basis of a constant yield to maturity which
takes into account the compounding of accrued interest. Under section 1286 of
the Code, an investment in a stripped bond or stripped coupon will result in
original issue discount.
Debt securities may be purchased by the Fund at a discount that exceeds
the original issue discount plus previously accrued original issue discount
remaining on the securities, if any, at the time the Fund purchases the
securities. This additional discount represents market discount for income tax
purposes. In the case of any debt security (other than a tax-exempt obligation)
issued after July 18, 1984, having a fixed maturity date of more than one year
from the date of issue and having market discount, the gain realized on
disposition will be treated as interest income to the extent it does not exceed
the accrued market discount on the security (unless the Fund elects to include
such accrued market discount in income in the tax year to which it is
attributable). Generally, market discount is accrued on a daily basis. The Fund
may be required to capitalize, rather than deduct currently, part or all of any
direct interest expense incurred to purchase or carry any debt security having
market discount, unless the Fund makes the election to include market discount
currently. Because the Fund must include original issue discount in income, it
will be more difficult for the Fund to make the distributions required for the
Fund to maintain its status as a regulated investment company under Subchapter M
of the Code and, with respect to debt securities that are not tax-exempt, to
avoid the 4% excise tax described above.
Options and Futures Transactions. Certain of the Fund's investments may
be subject to provisions of the Code that (i) require inclusion of unrealized
gains or losses in the Fund's income for purposes of the 90% test, the 30% test,
the excise tax and the distribution requirements applicable to regulated
investment companies; (ii) defer recognition of realized losses; and (iii)
characterize both realized and unrealized gain or loss as short-term or
long-term gain or loss. Such provisions generally apply to, among other
investments, options on debt securities, indices on securities and futures
contracts.
35
<PAGE>
Federal Income Taxation of the Shareholders
Distributions generally are taxable to shareholders at the time made
unless tax-exempt. However, dividends declared by the Fund in October, November
or December and made payable to shareholders of record on a specified date in
such a month are treated as received by such shareholders on December 31,
provided that the Fund pays the dividend during the following January of the
following year. It is expected that none of the Fund's distributions will
qualify for the corporate dividends-received deduction.
Distributions by the Fund can result in a reduction in the fair market
value of the Fund's shares. Should a distribution reduce the fair market value
below a shareholder's cost basis, such distribution nevertheless may be taxable
to the shareholder, to the extent that it is derived from other than tax-exempt
interest, as ordinary income or long-term capital gain, even though, from an
investment standpoint, it may constitute a partial return of capital. In
particular, investors should be careful to consider the tax implications of
buying shares just prior to a distribution. The price of shares purchased at
that time includes the amount of any forthcoming distribution. Those investors
purchasing shares just prior to a distribution will then receive a return of
investment upon distribution which will nevertheless be taxable to them.
To the extent that the Fund's dividends are derived from interest income
exempt from federal income tax and are designated as "exempt-interest dividends"
by the Fund, they will be excludable from a shareholder's gross income for
federal income tax purposes. "Exempt-interest dividends," however, must be taken
into account by shareholders in determining whether their total incomes are
large enough to result in taxation of up to one-half of their Social Security
benefit. Interest on indebtedness incurred or continued by a shareholder to
purchase or carry shares of the Fund is not deductible.
A shareholder should be aware that a redemption of shares (including any
exchange into another Eligible Fund) is a taxable event and, accordingly,
capital gain or loss may be recognized. A loss realized by a shareholder on the
redemption or exchange of shares of the Fund with respect to which
exempt-interest dividends have been paid will be disallowed to the extent of
such dividends if the shares have not been held by the shareholder for more than
six months. Similarly, if a shareholder receives a distribution taxable as
long-term capital gain and redeems or exchanges shares before he has held them
for more than six months, any loss on the redemption or exchange (not otherwise
disallowed as attributable to an exempt-interest dividend) will be treated as
long-term capital loss to the extent of such capital gains distribution.
36
<PAGE>
Opinions relating to the validity of tax-exempt securities and the
exemption of interest thereon from federal income tax are rendered by bond
counsel to the issuers. Neither the Investment Manager's nor the Fund's counsel
makes any review of proceedings relating to the issuance of tax-exempt
securities or the bases of such opinions.
Interest on "private activity" bonds issued after August 7, 1986 are
subject to the federal alternative minimum tax, although the interest continues
to be excludable from gross income for other purposes. The alternative minimum
tax, or AMT, is a supplemental tax designed to ensure that taxpayers pay at
least a minimum amount of tax on their income, even if they make substantial use
of certain tax deductions and exclusions. Interest from private activity bonds
is a "tax preference" item that is added into income from other sources for the
purpose of determining whether a taxpayer is subject to the AMT and the amount
of any tax to be paid. Corporate investors should note that for purposes of the
corporate AMT there is an upward adjustment equal to 75% of the amount by which
adjusted current earnings exceeds alternative minimum taxable income.
Prospective investors should consult their own tax advisors with respect to the
possible application of the AMT to their tax situation.
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. Shareholders of the Fund may be exempt from
state and local taxes on distributions of tax-exempt interest income derived
from obligations of the state and/or municipalities of the state in which they
are resident, but taxable generally on income derived from obligations of other
jurisdictions. Shareholders should consult their tax advisers about the status
of distributions from the Fund in their own states and localities.
37
<PAGE>
California Taxation
In any year in which the Fund qualifies as a "regulated investment
company" under the Code and is exempt from federal income tax, (i) the Fund will
also be exempt from the California corporate income and franchise taxes to the
extent it distributes its income and (ii), provided 50% or more of the value of
the total assets of the Fund at the close of each quarter of its taxable year
consists of obligations, the interest on which (when held by an individual) is
exempt from personal income taxation under the laws of California, the Fund will
be qualified under California law to pay "exempt-interest" dividends which will
be exempt from the California personal income tax.
Individual shareholders of the Fund who reside in California will not be
subject to the California personal income tax on distributions received from the
Fund which are exempt-interest dividends. The portion of any distribution
constituting exempt-interest dividends is that (i) portion derived from
California Municipal Obligations the interest on which (when held by an
individual) is excludable from California personal income under the laws of
California and (ii) designated as such by the Fund. Distributions from the Fund
that are attributable to sources other than those described in the preceding
sentence generally will be taxable to such shareholders as ordinary income. In
addition, distributions other than exempt-interest dividends to such
shareholders are includable in income that may be subject to the California
alternative minimum tax. Any dividends paid to corporate shareholders subject to
the California franchise or corporate income tax will be taxed to such
shareholders. The total amount of California exempt-interest dividends paid by
the Fund to its shareholders with respect to any taxable year cannot exceed the
amount of interest received by the Fund during such year on California Municipal
Obligations less any expenses and expenditures deemed to have been paid from
such interest.
Interest on indebtedness incurred or continued by shareholders to
purchase or carry shares of the Fund will not be deductible for California
personal income tax purposes. In addition, as a result of California's
incorporation of certain provisions of the Code, a loss realized by a
shareholder upon the sale of shares held for six months or less may be
disallowed to the extent of any exempt-interest dividends received with respect
to such shares. Any loss realized upon the redemption of shares within 30 days
before or after the acquisition of other shares of the same series may be
disallowed under the "wash sale" rules.
38
<PAGE>
DISTRIBUTION OF SHARES OF THE FUND
State Street Research Tax-Exempt Trust (formerly MetLife - State Street
Tax-Exempt Trust) is currently comprised of the following series: State Street
Research Tax-Exempt Fund (formerly MetLife - State Street Tax-Exempt Fund),
State Street Research New York Tax-Free Fund, State Street Research California
Tax-Free Fund, State Street Research Florida Tax-Free Fund and State Street
Research Pennsylvania Tax-Free Fund. 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 Trustees of the Trust have authority to issue an unlimited number of shares
of beneficial interest of separate series, $.001 par value per share. A "series"
is a separate pool of assets of the Trust which is separately managed and has a
different investment objective and different investment policies from those of
another series. The Trustees have authority, without the necessity of a
shareholder vote, to create any number of new series or classes or to commence
the public offering of shares of any previously established series or class.
The Trust has entered into a Distribution Agreement with State Street
Research Investment Services, Inc., as Distributor, whereby the Distributor acts
as agent to sell and distribute shares of the Fund. Shares of the Fund are sold
through dealers who have entered into sales agreements with the Distributor. The
Distributor distributes shares of the Fund on a continuous basis at an offering
price which is based on the net asset value per share of the Fund plus (subject
to certain exceptions) a sales charge which, at the election of the investor,
may be imposed (i) at the time of purchase (the Class A shares), or (ii) on a
deferred basis (Class B and Class D shares). The Distributor may reallow all or
a portions of such sales charges as concessions to dealers. For the fiscal year
ended December 31, 1992, total sales charges amounted to approximately $476,000.
For the same period, approximately $58,000 was retained by the Distributor after
reallowance of concessions to dealers. Prior to the adoption of multiple classes
of shares during the fiscal year ended December 31, 1993, sales charges amounted
to approximately $133,000 for the period January 1, 1993 through June 4, 1993,
of which approximately $16,000 was retained by the Distributor after reallowance
of concessions to dealers. Following the adoption of multiple classes of shares,
total sales charges on Class A shares paid to the Distributor for the period
June 5, 1993 through December 31, 1993, and for the fiscal year ended December
31, 1994, amounted to approximately $150,000 and $140,000, respectively, of
which approximately $5,000 and $16,000, respectively, was retained by the
Distributor after reallowance of concessions to dealers.
The differences in the price at which the Fund's Class A shares are
offered due to scheduled variations in sales charges, as described in the Fund's
Prospectus, result from cost savings inherent in economies of scale. Management
believes that the cost of sales efforts of the Distributor and broker-dealers
tends to decrease as the size of purchases increases, or does not involve any
incremental sales expenses as in the case of, for example, exchanges,
reinvestments or dividend investments at net asset value. Similarly, no
significant sales effort is necessary for sales of shares at net asset value to
certain Directors, Trustees, officers, employees, their relatives and other
persons directly or indirectly related to the Fund or associated entities. Where
shares of the Fund are offered at a reduced sales charge or without a sales
charge pursuant to sponsored arrangements, the amount of the sales charge
reduction will similarly reflect the anticipated reduction in sales expenses
associated with such sponsored arrangements. The reductions in sales expenses,
and therefore the reduction in sales charge, will vary depending on factors such
as the size and stability of the organization, the term of the organization's
existence and certain characteristics of its members. The Fund reserves the
right to make variations in, or eliminate, sales charges at any time or to
revise the terms of or to suspend or discontinue sales pursuant to sponsored
arrangements at any time.
On any sale of Class A shares to a single investor in the amount of
$1,000,000 or more, the Distributor will pay the authorized securities dealer
making such sale a commission on the shares sold. Such commission also is
payable to authorized securities dealers upon sales of Class A shares made
pursuant to a Letter of Intent to purchase shares having a net asset value of
$1,000,000 or more. Shares sold with such commissions payable are subject to a
one-year contingent deferred sales charge of 1.00% on any portion of such shares
redeemed within one year following their sale. After a particular purchase of
Class A shares is made under the Letter of Intent, the commission will be paid
only in respect of that particular purchase of shares. If the Letter of Intent
is not completed, the commission paid will be deducted from any discounts or
commissions otherwise payable to such dealer in respect of shares actually sold.
If an investor is eligible to purchase shares at net asset value on account of
the Right of Accumulation, the commission will be paid only in respect of the
incremental purchase at net asset value.
39
<PAGE>
For the periods shown below, the Distributor received contingent
deferred sales charges upon redemption of Class B and Class D shares of the Fund
and paid initial commissions to securities dealers for sales of such Class B and
Class D shares as follows:
<TABLE>
<CAPTION>
June 4, 1993
(commencement
of share class
Fiscal Year class designations) to
Ended December 31, 1994 December 31, 1993
----------------------- -----------------
Contingent Commissions Contingent Commissions
Deferred Paid to Deferred Paid to
Sales Charges Dealers Sales Charges Dealers
------------- ----------- ------------- -----------
<S> <C> <C> <C> <C>
Class B $ 0 $ 66,734 $ 1,222 $ 85,430
Class D $ 89 $ 612 $ 0 $ 6,702
</TABLE>
The Fund has adopted a "Plan of Distribution Pursuant to Rule 12b-1"
(the "Distribution Plan") under which the Fund may engage, directly or
indirectly, in financing any activities primarily intended to result in the sale
of Class A, Class B and Class D shares, including, but not limited to, (1) the
payment of commissions and/or reimbursement to underwriters, securities dealers
and others engaged in the sale of shares, including payments to the Distributor
to be used to pay commissions and/or reimbursement to securities dealers (which
securities dealers may be affiliates of the Distributor) engaged in the
distribution and marketing of shares and furnishing ongoing assistance to
investors, (2) reimbursement of direct out-of-pocket expenditures incurred by
the Distributor in connection with the distribution and marketing of shares and
the servicing of investor accounts including special promotional fees and cash
and noncash incentives based upon sales by securities dealers, expenses relating
to the formulation and implementation of marketing strategies and promotional
activities such as direct mail promotions and television, radio, newspaper,
magazine and other mass media advertising, the preparation, printing and
distribution of Prospectuses of the Fund and reports for recipients other than
existing shareholders of the Fund, and obtaining such information, analyses and
reports with respect to marketing and promotional activities and investor
accounts as the Fund may, from time to time, deem advisable, and (3)
reimbursement of expenses incurred by the Distributor in connection with the
servicing of shareholder accounts including payments to securities dealers and
others in consideration of the provision of personal services to investors
and/or the maintenance of shareholder accounts and expenses associated with the
provision of personal services by the Distributor directly to investors. In
addition, the Distribution Plan is deemed to authorize the Distributor and the
Investment Manager to make payments out of general profits, revenues or other
sources to underwriters, securities dealers and others in connection with sales
of shares, to the extent, if any, that such payments may be deemed to be within
the scope of Rule 12b-1 under the 1940 Act.
40
<PAGE>
The expenditures to be made pursuant to the Distribution Plan may not
exceed (i) with respect to Class A shares, an annual rate of 0.25% of the
average daily value of net assets represented by such Class A shares, and (ii)
with respect to Class B and Class D shares, an annual rate of 0.75% of the
average daily value of the net assets represented by such Class B or Class D
shares (as the case may be) to finance sales or promotion expenses and an annual
rate of 0.25% of the average daily value of the net assets represented by such
Class B or Class D shares (as the case may be) to make payments for personal
services and/or the maintenance of shareholder accounts. Proceeds from the
service fee will be used by the Distributor to compensate securities dealers and
others selling shares of the Fund for rendering service to shareholders on an
ongoing basis. Such amounts are based on the net asset value of shares of the
Fund held by such dealers as nominee for their customers or which are owned
directly by such customers for so long as such shares are outstanding and the
Distribution Plan remains in effect with respect to the Fund. Any amounts
received by the Distributor and not so allocated may be applied by the
Distributor as reimbursement for expenses incurred in connection with the
servicing of investor accounts. The distribution and servicing expenses of a
particular class will be borne solely by that class.
During the fiscal year ended December 31, 1994, the Fund paid the
Distributor fees under the Distribution Plan and the Distributor used all of
such payments for expenses incurred on behalf of the Fund as follows:
Class A Class B Class D
Advertising $ 0 $ 0 $ 1,717
Printing and mailing of
prospectuses to other
than current shareholders 0 0 426
Compensation to dealers 16,299 28,020 1,310
Compensation to sales personnel 0 0 2,682
Interest 0 0 0
Carrying or other financing charges 0 0 0
Other expenses 0 0 1,314
- - -----
------- -------
Total fees $16,299 $28,020 $ 7,449
======= ======= =======
The Distributor may have also used additional resources of its own for further
expenses on behalf of the Trust.
41
<PAGE>
No interested Trustee of the Trust has any direct or indirect financial
interest in the operation of the Distribution Plan or any related agreements
thereunder. The Distributor's interest in the Distribution Plan is described
above.
To the extent that the Glass-Steagall Act may be interpreted as
prohibiting banks and other depository institutions from being paid for
performing services under the Distribution Plan, the Fund will make alternative
arrangements for such services for shareholders who acquired shares through such
institutions.
42
<PAGE>
CALCULATION OF PERFORMANCE DATA
The average annual total return ("standard total return") and yield of
the Class A, Class B, Class C and Class D shares of the Fund will be calculated
as set forth below. Total return and yield are computed separately for each
class of shares of the Fund. Performance data for a specified class includes
periods prior to the adoption of class designations. Shares of the Fund had no
class designations until June 5, 1993 when designations were assigned based on
the pricing and 12b-1 fees applicable to shares sold thereafter.
All calculations of performance data in this section reflect the
voluntary measures by the Fund's affiliates to reduce fees or expenses relating
to the Fund; see "Accrued Expenses" later in this section.
The performance data reflects Rule 12b-1 fees and sales charges as set
forth below:
<TABLE>
<CAPTION>
Rule 12b-1 Fees Sales Charges
--------------------------------------------------- ----------------
Current
Class Amount Period
- ----- ------- ------
<S> <C> <C> <C>
A 0.25% June 5, 1993 to present; fee will Maximum 4.5% sales charge reflected
reduce performance for periods
after June 5, 1993
B 1.00% June 5, 1993 to present; fee will 1- and 5-year periods reflect a 5% and a
reduce performance for periods 2% contingent deferred sales charge,
after June 5, 1993 respectively
C None Since commencement of None
operations to present
D 1.00% June 5, 1993 to present; fee will 1-year period reflects a 1% contingent
reduce performance for periods deferred sales charge
after June 5, 1993
</TABLE>
Total Return
The Fund's average annual total return ("standard total return") of
each class of shares was as follows:
43
<PAGE>
<TABLE>
<CAPTION>
Commencement of
Operations Five Years One year
(July 5, 1989) to Ended Ended
Fund December 31, 1994 December 31, 1994 December 31, 1994
- ---- ----------------- ----------------- -----------------
With Without With Without With Without
Subsidy Subsidy Subsidy Subsidy Subsidy Subsidy
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Class A 4.96% 3.90% 5.02% 4.03% -11.44% -11.89%
Class B 5.62% 4.55% 5.41% 4.41% -12.67% -13.11%
Class C 5.94% 4.91% 6.10% 5.15% -7.02% -7.50%
Class D 5.64% 4.61% 5.76% 4.82% -8.87% -9.34%
</TABLE>
Standard total return is computed by determining the average annual
compounded rates of return over the designated periods that, if applied to the
initial amount invested would produce the ending redeemable value, according to
the following formula:
P(1+T)n = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value at the end of the designated
period assuming a hypothetical $1,000 payment made at
the beginning of the designated period
The calculation is based on the further assumptions that the maximum
initial or contingent deferred sales charge applicable to the investment is
deducted, and that all dividends and distributions by the Fund are reinvested at
net asset value on the reinvestment dates during the periods. All accrued
expenses and recurring charges are also taken into account as described later
herein.
Yield
The annualized yield of each class of shares of the Fund based on the
month of December 1994 was as follows:
With Without
Subsidy Subsidy
Class A 5.40% 4.36%
Class B 4.91% 3.82%
Class C 5.90% 4.81%
Class D 4.89% 3.80%
44
<PAGE>
Yield for each of the Fund's Class A, Class B, Class C and Class D
shares is computed by dividing the net investment income per share earned during
a recent month or other specified 30-day period by the applicable maximum
offering price per share on the last day of the period and annualizing the
result, according to the following formula:
YIELD = 2[( a-b + 1)6 -1]
cd
Where: a = dividends and interest earned during the period
b = expenses accrued for the period (net of voluntary
expense reductions by the Investment Manager)
c = the average daily number of shares outstanding during
the period that were entitled to receive dividends
d = the maximum offering price per share on the last day
of the period
To calculate interest earned (for the purpose of "a" above) on debt
obligations, the Fund computes the yield to maturity of each obligation held by
the Fund based on the market value of the obligation (including actual accrued
interest) at the close of the last business day of the preceding period, or,
with respect to obligations purchased during the period, the purchase price
(plus actual accrued interest). The yield to maturity is then divided by 360 and
the quotient is multiplied by the market value of the obligation (including
actual accrued interest) to determine the interest income on the obligation for
each day of the period that the obligation is in the portfolio. Dividend income
is recognized daily based on published rates.
In the case of a tax-exempt obligation issued without original issue
discount and having a current market discount, the coupon rate of interest is
used in lieu of the yield to maturity. Where, in the case of a tax-exempt
obligation with original issue discount, the discount based on the current
market value exceeds the then-remaining portion of original issue discount
(market discount), the yield to maturity is the imputed rate based on the
original issue discount calculation. Where, in the case of a tax-exempt
obligation with original issue discount, the discount based on the current
market value is less than the then-remaining portion of original issue discount
(market premium), the yield to maturity is based on the market value. Dividend
income is recognized daily based on published rates.
With respect to the treatment of discount and premium on mortgage or
other receivables-backed obligations which are expected to be subject to monthly
payments of principal and interest ("paydowns"), the Fund accounts for gain or
loss attributable to actual monthly paydowns as a realized capital gain or loss
during the period. The Fund has elected not to amortize discount or premium on
such securities.
45
<PAGE>
Undeclared earned income, computed in accordance with generally
accepted accounting principles, may be subtracted from the maximum offering
price. Undeclared earned income is the net investment income which, at the end
of the base period, has not been declared as a dividend, but is reasonably
expected to be declared as a dividend shortly thereafter. The maximum offering
price includes a maximum sales charge of 4.5% with respect to the Class A
shares.
All accrued expenses are taken into account as described later herein.
Yield information is useful in reviewing the Fund's performance, but
because yields fluctuate, such information cannot necessarily be used to compare
an investment in the Fund's shares with bank deposits, savings accounts and
similar investment alternatives which are insured and/or often provide an agreed
or guaranteed fixed yield for a stated period of time. Shareholders should
remember that yield is a function of the kind and quality of the instruments in
the Fund's portfolio, portfolio maturity and operating expenses and market
conditions.
Tax Equivalent Yield
The tax equivalent yield of each class of shares of the Fund for the
month ended December 31, 1994, assuming a combined federal and state maximum
effective marginal income tax rate of 46.24% was as follows:
With Without
Subsidy Subsidy
------- -------
Class A 10.04% 8.11%
Class B 9.13% 7.11%
Class C 10.97% 8.95%
Class D 9.10% 7.07%
The Fund's tax equivalent yield is computed by dividing that portion of
the Fund's yield (computed as described under "Yield" above) which is
tax-exempt, by the complement of the combined federal and state maximum
effective marginal rate of 46.24% (or other relevant rate) and adding the result
to that portion, if any, of the yield of the Fund that is not tax-exempt. The
complement, for example, of a tax rate of 46.24% is 53.76%, that is [1.00 -
.4624 = .5376].
Accrued Expenses
Accrued expenses include all recurring expenses that are charged to all
shareholder accounts in proportion to the length of the base period. The
standard total return and yield results take sales charges, if applicable, into
account, although the results do not take into account recurring and
nonrecurring charges for optional services which only certain shareholders elect
and which involve nominal fees, such as the $7.50 fee for wire orders.
Accrued expenses do not include the subsidization, if any, by
affiliates of fees or expenses during the subject period. In the absence of such
subsidization, the performance of the Fund would have been lower.
Nonstandardized Total Return
The Fund may provide the above described standard total return results
for Class A, Class B, Class C and Class D shares for periods which end no
earlier than the most recent calendar quarter end and which begin twelve months
before and at the time of commencement of the Fund's operations. In addition,
the Fund may provide nonstandardized total return results for differing periods,
such as for the most recent six months, and/or without taking sales charges into
account. Such nonstandardized total return is computed as otherwise described
under "Total Return" except that the result may or may not be annualized, and as
noted any applicable sales charge may not be taken into account and therefore
not deducted from the hypothetical initial payment of $1,000. For example, the
Fund's nonstandardized total return for the six months ended December 31, 1994
without taking sales charges into account were as follows:
46
<PAGE>
With Without
Subsidy Subsidy
------- -------
Class A -1.63% -1.95%
Class B -2.00% -2.32%
Class C -1.50% -1.82%
Class D -2.00% -2.32%
Distribution Rates
The Fund may also quote its distribution rate for each class of shares.
The distribution rate is calculated by annualizing the latest per-share
distribution from ordinary income and dividing the result by the maximum
offering price per share as of the end of the period. A distribution can include
gross investment income from debt obligations purchased at a premium and in
effect include a portion of the premium paid. A distribution can also include
nonrecurring, gross short-term capital gains without recognition of any
unrealized capital losses. Further, a distribution can include income from the
sale of options by the Fund even though such option income is not considered
investment income under generally accepted accounting principles.
Because a distribution can include such premiums, capital gains and
option income, the amount of the distribution may be susceptible to control by
the Investment Manager through transactions designed to increase the amount of
such items. Also, because the distribution rate is calculated in part by
dividing the latest distribution by the offering price, which is based on net
asset value plus any applicable sales charge, the distribution rate will
increase as the net asset value declines. A distribution rate can be greater
than the yield rate calculated as described above.
The distribution rates of the Fund, based on the month of December 1994
were as follows:
Class A 5.51%
Class B 5.01%
Class C 6.01%
Class D 5.00%
CUSTODIAN
State Street Bank and Trust Company, 225 Franklin Street, Boston,
Massachusetts 02110, is the Trust's custodian. As custodian, State Street Bank
and Trust Company is responsible for, among other things, safeguarding and
controlling the Fund's cash and securities, handling the receipt and delivery of
securities and collecting interest and dividends on the Fund's investments.
State Street Bank and Trust Company is not an affiliate of the Investment
Manager or its affiliates.
47
<PAGE>
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP, 160 Federal Street, Boston, Massachusetts 02110,
serves as the Trust's independent accountants, providing professional services
including (1) an audit of the Fund's annual financial statements, (2) assistance
and consultation in connection with Securities and Exchange Commission filings
and (3) review of the annual income tax returns filed on behalf of the Fund.
FINANCIAL STATEMENTS
In addition to the reports provided to holders of record on a
semiannual basis, other supplementary reports may be made available and holders
of record may request a copy of a current supplementary report, if any, by
calling State Street Research Shareholder Services.
The following financial statements are for the Fund's fiscal year ended
December 31, 1994:
48
<PAGE>
State Street Research California Tax-Free Fund
Investment Portfolio
December 31, 1994
<TABLE>
<CAPTION>
Maturity
Principal Amount Date Value (Note 1)
<S> <C> <C> <C> <C>
Municipal Bonds 99.6%
General $ 300,000 State of California, Various Purpose, General Obligation
Obligation Bonds, 7.00% 8/01/2008 $ 308,997
7.8% 500,000 City and County of San Francisco, General Obligation
Bonds, Series 1991 A, (Various Purpose Projects), 6.50% 12/15/2010 498,495
1,000,000 Puerto Rico Municipal Finance Agency, 1994 Series A
Bonds, FSA Insured, 6.00% 7/01/2014 940,980
500,000 Redevelopment Agency of the City of West Sacramento,
West Sacramento Redevelopment Project, Tax Allocation
Bonds, Series 1991,
MBIA Insured, 6.25% 9/01/2021 466,310
-----------------
2,214,782
-----------------
Airport 1,000,000 Airports Commission, City and County of San Francisco,
Revenue California, San Francisco International Airport, Second
3.4% Series Revenue Bonds, Issue 5, (Subject to AMT), FGIC
Insured, 6.25% 5/01/2010 961,820
-----------------
Certificates of 500,000 San Diego County Water Authority, Water Revenue
Participation Refunding Certificates of Participation, Series 1993 A,
10.2% FGIC Insured, 5.50% 5/01/2005 468,505
1,000,000 County of Los Angeles, Certificates of Participation,
Series A (Marina Del Ray), Los Angeles County Capital
Asset Leasing Corporation, 6.50% 7/01/2008 934,510
500,000 County of Marin, Certificates of Participation, (1991
Capital Improvements Project), 6.375% 8/01/2011 493,690
1,000,000 City of Stockton, Revenue Certificates of Participation,
1995 Series A, (Wastewater Treatment Plant Expansion),
FGIC Insured, 6.70% 9/01/2014 999,880
-----------------
2,896,585
-----------------
College & 1,355,000 California Educational Facilities Authority, Revenue
University Bonds (Pomona College) Series 1992, 6.125%
12.5% 2/15/2008 1,316,342
300,000 The Trustees of the California State University Housing
System, 1991 Housing System Refunding Revenue Bonds,
AMBAC Insured, 7.00% 11/01/2011 307,743
1,000,000 California Educational Facilities Authority, Series 1994
Revenue Bonds (Southwestern University Project), 6.60% 11/01/2014 959,400
1,050,000 California Educational Facilities Authority, Revenue 11/01/2016 975,292
Bonds (Stanford University) Series J, 6.00%
----------------
3,558,777
----------------
The accompanying notes are an integral part of the financial statements.
49
<PAGE>
Hospital/Health Care $ 500,000 City of Duarte, California, Certificates of
5.5% Participation, (Hope National Medical Center), 6.00% 4/01/2008 $ 443,825
1,000,000 Santa Clara County Financing Authority, (VMC Facility
Replacement Project), 1994 Series A Bonds, AMBAC
Insured, 7.75% 11/15/2008 1,128,570
-----------------
1,572,395
-----------------
Industrial Development/ 750,000 Puerto Rico Industrial, Medical and Environmental
Pollution Pollution Control Facilities Financing Authority,
Control Revenue Bonds, Series A, 6.25% 11/15/2013 721,838
4.6%
600,000 California Pollution Control Financing Authority,
Pollution Control Revenue Bonds, (San Diego Gas &
Electric Company), 1991 Series A, Subject to AMT, 6.80% 6/01/2015 580,698
-----------------
1,302,536
-----------------
Power 1,100,000 Sacramento Municipal Utility District, Electric Revenue
8.8% Refunding Bonds, 1991 Series Z, FGIC Insured, 6.35% 7/01/2005 1,113,618
1,000,000 Kings River Conservation District, Pine Flat Power
Revenue Refunding Bonds, Series D, 6.00% 1/01/2017 913,630
500,000 M-S-R Public Power Agency, (California), San Juan
Project Revenue Bonds, Series E, MBIA Insured, 6.50% 7/01/2017 486,195
-----------------
2,513,443
-----------------
Prefunded 250,000 Northern California Power Agency, Geothermal Project
Bonds Number 3, Revenue Bonds, 1987 Refunding, Series A,
11.6% Pre-Refunded to 7/1/96 101.5, 7.00% 7/01/2007 259,322
250,000 City of San Diego/MTDB Authority, 1989 Lease Revenue
Bonds, (San Diego Bayside Light Rail Transit Extension),
Pre-Refunded to 6/1/97
102, 6.90% 6/01/2009 263,278
200,000 Fresno, California Water Systems, Revenue Bonds, 1990
Series A, Pre-Refunded to 6/1/98 102, 7.25% 6/01/2010 214,336
The accompanying notes are an integral part of the financial statements.
50
<PAGE>
Pre-Refunded $250,000 San Francisco State Building Authority, California,
Bonds Refunding Certificates of Participation, Pre-Refunded
(cont'd) to 7/1/96 102, 7.375% 7/01/2013 $ 262,818
250,000 City of Riverside, California, Electric Revenue Bonds,
1986 Refunding Series A, Pre-Refunded to 10/1/96 102,
7.00% 10/01/2013 262,105
250,000 Alameda Unified School District, Unlimited Tax, Alameda
County, California, General Obligation Bonds, Series
1989, Subject to Crossover Refunding 7/1/99 102, 7.00% 7/01/2014 267,592
250,000 California Educational Facilities Authority, Revenue
Bonds (Pepperdine University) Series 1990, MBIA Insured,
Pre-Refunded to 10/1/2000 102, 7.20% 11/01/2015 273,208
300,000 Commonwealth of Puerto Rico, Public Improvement Bonds of
1989, Series A, General Obligation Bonds, Pre-Refunded
to 7/1/99 101.5, 7.75% 7/01/2017 331,248
250,000 California Educational Facilities Authority, Revenue
Bonds (St. Mary's College of California Project) Series
1990, Pre-Refunded to 10/1/2000 102, 7.50% 10/01/2020 276,612
95,000 The Metropolitan Water District of Southern California,
Waterworks Refunding Revenue Bonds, Issue of 1986,
Pre-Refunded to 6/1/96 102, 6.75% 6/01/2022 98,914
250,000 The Regents of the University of California, Revenue
Bonds (1989 Multiple Purpose Projects), MBIA Insured,
Series A, Pre-Refunded to 9/1/97 102, 7.00% 9/01/2023 265,328
500,000 Transmission Agency of Northern California,
California-Oregon Transmission Project, Revenue Bonds,
MBIA Insured, 1990 Series A, Pre-Refunded to 5/1/2000
101.5, 7.00% 5/01/2024 537,310
-----------------
3,312,071
-----------------
Resource 775,000 Stanislaus Waste-to-Energy Financing Agency, Solid Waste
Recovery/ Facility Refunding Revenue Certificates, (Ogden Martin
Solid Waste Systems of Stanislaus, Inc. Project), Series 1990,
2.7% Subject to AMT, 7.625% 1/01/2010 783,231
----------------
The accompanying notes are an integral part of the financial statements.
51
<PAGE>
Single-Family $ 260,000
Housing California Housing Finance Agency, Home Mortgage Revenue
6.4% Bonds, 1991 Series G, Subject to AMT, 6.95% 8/01/2011 $ 257,215
1,500,000 California Housing Finance Agency, Home Mortgage Revenue
Bonds, 1994 Series G, 7.20% 8/01/2014 1,529,355
35,000 California Housing Finance Agency, Home Mortgage Revenue
Bonds, 1990 Series D, Subject to AMT, 7.875% 8/01/2031 36,212
-----------------
1,822,782
-----------------
Special/Sales 500,000 Orange County Transportation Authority, Orange County,
Tax Revenue California, Measure M Sales Tax Revenue Bonds (Limited
13.2% Tax Bonds), Second Senior Bonds, Series 1992, FGIC
Insured, 6.00% 2/15/2007 473,230
500,000 South Orange County Public Financing Authority, Special
Tax Revenue Bonds, 1994 Series B (Junior Lien Bonds),
7.00% 9/01/2007 480,130
1,000,000 Redevelopment Agency of the City of San Diego,
California, Centre City Redevelopment Project, Tax
Allocation Refunding Bonds, Series 1992, AMBAC Insured,
6.00% 9/01/2008 951,640
1,000,000 South Orange County Public Financing Authority, Special
Tax Revenue Bonds, 1994 Series B (Junior Lien Bonds),
7.00% 9/01/2009 952,470
1,000,000 City of Cypress, California, Community Facilities
District No. 1, (Sorrento Homes), 1994 Special Tax
Refunding Bonds, 6.375% 9/01/2016 898,310
-----------------
3,755,780
-----------------
Toll Roads/ 1,000,000 San Joaquin Hills Transportation Corridor Agency, Orange
Turnpike County, California, Senior Lien Toll Road Revenue Bonds,
Authorities 7.00% 1/01/2030 861,420
3.0% -----------------
Transit Highway 750,000 San Francisco Bay Area Rapid Transit District, Sales Tax
6.1% Revenue Bonds, Series 1991, FGIC Insured, 6.40% 7/01/2005 757,792
250,000 City of Sacramento, 1991 Refunding Certificates of
Participation, Sacramento Light Rail Transit Project,
6.75% 7/01/2007 258,123
750,000 Government of Guam, Limited Obligation Highway Bonds,
1992 Series A, Capital Guaranty Insurance Co. Insured,
6.30% 5/01/2012 727,643
-----------------
1,743,558
-----------------
The accompanying notes are an integral part of the financial statements.
52
<PAGE>
Water & Sewer $1,000,000 City and County of San Francisco, Sewer Revenue
3.8% Refunding Bonds, Series 1992, AMBAC Insured, 6.00% 10/01/2011 $ 943,510
155,000 The Metropolitan Water District of Southern California,
Waterworks Refunding Revenue Bonds, Issue of 1986, 6.75% 6/01/2022 152,890
-----------------
1,096,400
-----------------
Total Municipal Bonds (Cost $28,683,106) 28,395,580
-----------------
Short-Term Obligations 2.5%
300,000 California Pollution Control Financing Authority,
Resource Recovery Revenue Bonds, (Burney Forest Products
Project), 1988 Series A, Letter of Credit, National
Westminster Bank, 4.85% 9/01/2020++ 300,000
400,000 Economic Development Corp. of Delta County, Michigan,
Environmental Improvement Revenue Refunding Bonds,
(Mead-Escanaba Paper Co. Project), Letter of Credit,
Bank of Nova Scotia, 4.40% 12/01/2023++ 400,000
-----------------
Total Short-Term Obligations (Cost $700,000) 700,000
-----------------
Total Investments (Cost $29,383,106)--102.1% 29,095,580
Cash and Other Assets, Less Liabilities--(2.1)% (601,983)
-----------------
Net Assets--100.0% $28,493,597
================
Federal Income Tax Information:
At December 31, 1994, the net unrealized
depreciation of investments based on
cost for Federal income tax purposes
of $29,383,106 was as follows:
Aggregate gross unrealized appreciation
for all investments in which there is an
excess of value over tax cost $ 408,990
Aggregate gross unrealized depreciation
for all investments in which there is an
excess of tax cost over value (696,516)
-----------------
$ (287,526)
=================
</TABLE>
++Interest rates on these obligations may change daily.
The accompanying notes are an integral part of the financial statements.
53
<PAGE>
State Street Research California Tax-Free Fund
Statement of Assets and Liabilities
December 31, 1994
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Assets Investments, at value (Cost $29,383,106) (Note 1) $29,095,580
Cash 29,466
Interest receivable 568,367
Receivable from Distributor (Note 3) 26,098
Receivable for fund shares sold 4,156
Other assets 7,401
------------
29,731,068
Liabilities Payable for securities purchased $997,851
Payable for fund shares redeemed 76,779
Dividends payable 49,299
Accrued transfer agent and shareholder services (Note 2) 21,542
Accrued management fee (Note 2) 13,431
Accrued trustees' fees (Note 2) 11,956
Accrued distribution fee (Note 5) 4,817
Other accrued expenses 61,796 1,237,471
------- ------------
Net Assets $28,493,597
============
Net Assets consist of:
Undistributed net investment income $ 81,439
Unrealized depreciation of investments (287,526)
Accumulated net realized loss (1,311,224)
Shares of beneficial interest 30,010,908
------------
$28,493,597
============
Net Asset Value and redemption price per share of Class A shares
($8,043,653 / 1,089,993 shares of beneficial interest) $7.38
============
Maximum Offering Price per share of Class A shares ($7.38 /
.955) $7.73
============
Net Asset Value and offering price per share of Class B shares
($3,122,278 / 422,817 shares of beneficial interest)* $7.38
============
Net Asset Value, offering price and redemption price per share of Class
C
shares ($16,785,773 / 2,271,994 shares of beneficial interest) $7.39
============
Net Asset Value and offering price per share of Class D shares
($541,893 / 73,326 shares of beneficial interest)* $7.39
============
</TABLE>
* Redemption price per share for Class B and Class D is equal to net asset
value less any
applicable contingent deferred sales charge.
The accompanying notes are an integral part of the financial statements.
54
<PAGE>
State Street Research California Tax-Free Fund
Statement of Operations
For the year ended December 31, 1994
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Investment Interest $ 2,069,564
Income
Expenses Management fee (Note 2) $ 183,173
Custodian fee 96,212
Transfer agent and shareholder services (Note 2) 79,396
Legal fees 35,331
Reports to shareholders 31,483
Audit fee 24,450
Registration fees 13,876
Trustees' fees (Note 2) 9,532
Distribution fee--Class A (Note 5) 16,299
Distribution fee--Class B (Note 5) 28,020
Distribution fee--Class D (Note 5) 7,449
Amortization of organization costs (Note 1) 4,840
Miscellaneous 6,698
--------
536,759
Expenses borne by the Distributor (Note 3) (200,636) 336,123
-------- ------------
Net investment income 1,733,441
------------
Realized and Net realized loss on investments (Notes 1 and 4) (1,166,695)
Unrealized Net unrealized depreciation of investments (3,114,285)
Loss on ------------
Investments Net loss on investments (4,280,980)
------------
Net decrease in net assets resulting from
operations $(2,547,539)
============
</TABLE>
The accompanying notes are an integral part of the financial statements.
55
<PAGE>
State Street Research California Tax-Free Fund
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Year ended December 31
--------------------------
1994 1993
<S> <C> <C> <C>
Increase Operations:
(Decrease) Net investment income $ 1,733,441 $ 1,636,213
in Net Assets Net realized gain (loss) on investments* (1,166,695) 162,152
Net unrealized appreciation (depreciation) of
investments (3,114,285) 1,885,919
---------- ------------
Net increase (decrease) resulting from operations (2,547,539) 3,684,284
---------- ------------
Dividends from net investment income:
Class A (332,285) (61,971)
Class B (120,570) (27,023)
Class C (1,215,189) (1,504,589)
Class D (31,740) (14,291)
---------- ------------
(1,699,784) (1,607,874)
---------- ------------
Distribution from net realized gains:
Class A -- (36,721)
Class B -- (18,336)
Class C -- (278,803)
Class D -- (6,474)
---------- ------------
-- (340,334)
---------- ------------
Net increase (decrease) from fund share
transactions (Note 7) (4,011,134) 9,458,338
---------- ------------
Total increase (decrease) in net assets (8,258,457) 11,194,414
Net Assets Beginning of period 36,752,054 25,557,640
---------- ------------
End of period (including undistributed net
investment income of $81,439 and $47,782,
respectively) $28,493,597 $36,752,054
========== ============
*Net realized gain (loss) for Federal income
tax purposes (Note 1) $ (830,250) $ 301,297
========== ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
56
<PAGE>
State Street Research California Tax-Free Fund
Notes to Financial Statements
December 31, 1994
Note 1
State Street Research California Tax-Free Fund (the "Fund"), is a series of
State Street Research Tax-Exempt Trust (the "Trust"), which was organized as a
Massachusetts business trust in December, 1985 and is registered under the
Investment Company Act of 1940, as amended, as an open-end management
investment company. The Fund commenced operations in July, 1989. Five series
of the Trust are publicly offered: State Street Research California Tax-Free
Fund, State Street Research Tax-Exempt Fund, State Street Research New York
Tax-Free Fund, State Street Research Florida Tax-Free Fund and State Street
Research Pennsylvania Tax-Free Fund.
The Fund offers four classes of shares. Class A shares are subject to an
initial sales charge of up to 4.50% and pay a service fee equal to 0.25% of
average daily net assets. Class B shares are subject to a contingent deferred
sales charge on certain redemptions made within five years of purchase and
pay annual distribution and service fees of 1.00%. Class B shares
automatically convert into Class A shares (which pay lower ongoing expenses)
at the end of eight years after the issuance of the Class B shares. Class C
shares are only offered to certain employee benefit plans and large
institutions. No sales charge is imposed at the time of purchase or
redemption of Class C shares. Class C shares do not pay any distribution or
service fees. Class D shares are subject to a contingent deferred sales
charge of 1.00% on any shares redeemed within one year of their purchase.
Class D shares also pay annual distribution and service fees of 1.00%. The
Fund's expenses are borne pro rata by each class, except that each class
bears expenses, and has exclusive voting rights with respect to provisions of
the Plan of Distribution, related specifically to that class. The Trustees
declare separate dividends on each class of shares.
The following significant policies are consistently followed by the Fund in
preparing its financial statements, and such policies are in conformity with
generally accepted accounting principles for investment companies.
A. Investment Valuation
Tax-exempt securities are valued by a pricing service, which utilizes market
transactions, quotations from dealers, and various relationships among
securities in determining value. Short-term obligations are valued at
amortized cost. Other securities, if any, are valued at their fair value as
determined in accordance with established methods consistently applied.
B. Security Transactions
Security transactions are accounted for on the trade date (date the order to
buy or sell is executed). Realized gains or losses are reported on the basis
of identified cost of securities delivered.
C. Net Investment Income
Net investment income is determined daily and consists of interest accrued
and discount earned, less amortization of premium and the estimated daily
expenses of the Fund. Interest income is accrued daily as earned. The Fund is
charged for expenses directly attributable to it, while indirect expenses are
allocated among all funds in the Trust.
D. Dividends
Dividends are declared daily by the Fund based upon projected net investment
income and paid or reinvested monthly. Net realized capital gains, if any,
are distributed annually, unless additional distributions are required for
compliance with applicable tax regulations.
Income dividends and capital gain distributions are determined in accordance
with Federal income tax regulations which may differ from generally accepted
accounting principles.
57
<PAGE>
Notes (cont'd)
E. Federal Income Taxes
No provision for Federal income taxes is necessary because the Fund has
elected to qualify under Subchapter M of the Internal Revenue Code and its
policy is to distribute all of its taxable income, including net realized
capital gains, within the prescribed time periods. At December 31, 1994, the
Fund had a capital loss carryforward of $830,250 available, to the extent
provided in regulations, to offset future capital gains, if any, which
expires on December 31, 2002.
In order to meet certain excise tax distribution requirements under Section
4982 of the Internal Revenue Code, the Fund is required to measure and
distribute annually, if necessary, net capital gains realized during a
twelve-month period ending October 31. In this connection, the Fund is
permitted to defer into its next fiscal year any net capital losses incurred
between each November 1 and the end of its fiscal year. From November 1, 1993
through December 31, 1993 the Fund incurred net capital losses of $139,145
and has deferred and treated such losses as arising in the fiscal year ending
December 31, 1994. From November 1, 1994 through December 31, 1994 the Fund
incurred net capital losses of $475,590 and intends to defer and treat such
losses as arising in the fiscal year ending December 31, 1995.
F. Deferred Organization Costs
Certain costs incurred in the organization and registration of the Fund were
capitalized and amortized under the straight-line method over a period of
five years.
Note 2
The Trust and State Street Research & Management Company (the "Adviser"), an
indirect wholly-owned subsidiary of Metropolitan Life Insurance Company
("Metropolitan"), have entered into an agreement under which the Adviser
earns monthly fees at an annual rate of 0.55% of the Fund's average daily net
assets. In consideration of these fees, the Adviser furnishes the Fund with
management, investment advisory, statistical and research facilities and
services. The Adviser also pays all salaries, rent and certain other expenses
of management. During the year ended December 31, 1994, the fees pursuant to
such agreement amounted to $183,173.
State Street Research Shareholder Services, a division of State Street
Research Investment Services, Inc., the Trust's principal underwriter (the
"Distributor"), an indirect wholly-owned subsidiary of Metropolitan, provides
certain shareholder services to the Fund such as responding to inquiries and
instructions from investors with respect to the purchase and redemption of
shares of the Fund. During the year ended December 31, 1994, the amount of
such expenses was $16,815.
The fees of the Trustees not currently affiliated with the Adviser amounted
to $9,532 during the year ended December 31, 1994. The Trust has an optional
deferred compensation plan for its Trustees. The Fund invests the fees of
participating Trustees in shares of a State Street Research fund instead of
paying those fees in cash. Participating Trustees receive deferred amounts
equal to the market value of such shares including any reinvested income and
capital gains distributions.
Note 3
The Distributor and its affiliates may from time to time and in varying
amounts voluntarily assume some portion of fees or expenses relating to the
Fund. During the year ended December 31, 1994, the amount of such expenses
assumed by the Distributor and its affiliates was $200,636.
58
<PAGE>
Note 4
For the year ended December 31, 1994, purchases and sales of securities,
exclusive of short-term obligations, aggregated $19,272,475 and $22,121,413,
respectively.
Note 5
The Trust has adopted a Plan of Distribution Pursuant to Rule 12b-1 (the
"Plan") under the Investment Company Act of 1940, as amended. Under the Plan,
the Fund pays annual service fees to the Distributor at a rate of 0.25% of
average daily net assets for Class A, Class B and Class D shares. In
addition, the Fund pays annual distribution fees of 0.75% of average daily
net assets for Class B and Class D shares. The Distributor uses such payments
for personal services and/or the maintenance of shareholder accounts, to
reimburse securities dealers for distribution and marketing services, to
furnish ongoing assistance to investors and to defray a portion of its
distribution and marketing expenses. For the year ended December 31, 1994,
fees pursuant to such plan amounted to $16,299, $28,020 and $7,449, for Class
A, Class B and Class D, respectively.
The Fund has been informed that the Distributor and MetLife Securities, Inc.,
a wholly-owned subsidiary of Metropolitan, earned initial sales charges
aggregating $16,392 and $112,940, respectively, on sales of Class A shares of
the Fund during the year ended December 31, 1994, and that MetLife
Securities, Inc. earned commissions aggregating $50,481 and $39 on sales of
Class B and D shares, respectively, and that the Distributor collected
contingent deferred sales charges of $89 on redemptions of Class D shares
during the same period.
Note 6
Under normal circumstances at least 80% of the Fund's net assets will be
invested in California Municipal Obligations. Certain proposed California
constitutional amendments, legislative measures, executive orders,
administrative regulations and voter initiatives could result in adverse
consequences affecting California Municipal Obligations. Also, the Fund is
able to invest up to 25% of total assets in a single industry. Accordingly,
the Fund's investments may be subject to greater risk than those in a fund
with more restrictive concentration limits.
At December 31, 1994, investments totalling 11.7% and 16.8% of the Fund's net
assets were insured as to the timely payment of principal and interest by
AMBAC Indemnity Corp. (AMBAC), and Financial Guaranty Insurance Co. (FGIC),
respectively.
59
<PAGE>
Note 7
The Trustees have the authority to issue an unlimited number of shares of
beneficial interest, $.001 par value per share. At December 31, 1994,
Metropolitan owned 61,260 Class A shares, 269,839 Class C shares and 61,259
Class D shares of the Fund and the Distributor owned one Class C share of the
Fund.
Share transactions were as follows:
<TABLE>
<CAPTION>
June 7, 1993
(Commencement of
Year ended Share Class Designations) to
December 31, 1994 December 31, 1993
----------------------------- -----------------------------
Class A Shares Amount Shares Amount
- ------------------------------------- ------------ ------------- ------------ --------------
<S> <C> <C> <C> <C>
Shares sold 843,050 $ 6,591,849 546,860 $ 4,570,879
Issued upon reinvestment of:
Distribution from net realized gains -- -- 4,316 36,122
Dividends from net investment income 34,127 262,217 4,832 40,548
Shares repurchased (311,716) (2,398,869) (31,476) (266,749)
------------ ------------- ------------ --------------
Net increase 565,461 $ 4,455,197 524,532 $ 4,380,800
============ ============= ============ ==============
Class B Shares Amount Shares Amount
- ------------------------------------- ------------ ------------- ------------ --------------
Shares sold 267,768 $ 2,088,623 317,543 $ 2,650,471
Issued upon reinvestment of:
Distribution from net realized gains -- -- 1,973 16,537
Dividends from net investment income 11,199 86,347 1,607 13,477
Shares repurchased (103,916) (797,596) (73,357) (610,740)
------------ ------------- ------------ --------------
Net increase 175,051 $ 1,377,374 247,766 $ 2,069,745
============ ============= ============ ==============
Year ended
December 31, 1993
-----------------------------
Class C Shares Amount Shares Amount
- ------------------------------------- ------------ ------------- ------------ --------------
Shares sold 18,896 $ 146,037 787,219 $ 6,404,951
Issued upon reinvestment of:
Distributions from net realized
gains -- -- 29,700 248,890
Dividends from net investment income 91,990 716,444 124,908 1,031,439
Shares repurchased (1,346,147) (10,458,308) (670,005) (5,553,931)
------------ ------------- ------------ --------------
Net increase (decrease) (1,235,261) $ (9,595,827) 271,822 $ 2,131,349
============ ============= ============ ==============
June 7, 1993
(Commencement of
Share Class Designations) to
December 31, 1993
-----------------------------
Class D Shares Amount Shares Amount
- ------------------------------------- ------------ ------------- ------------ --------------
Shares sold 28,255 $ 219,339 140,710 $ 1,169,435
Issued upon reinvestment of:
Distribution from net realized gains -- -- 852 7,133
Dividends from net investment income 686 5,282 27 226
Shares repurchased (61,234) (472,499) (35,970) (300,350)
------------ ------------- ------------ --------------
Net increase (decrease) (32,293) $ (247,878) 105,619 $ 876,444
============ ============= ============ ==============
</TABLE>
60
<PAGE>
State Street Research California Tax-Free Fund
Financial Highlights
For a share outstanding throughout each year.
<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 $ 8.37 $ 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 voluntary assumption of fees or expenses per share
in each year (Note 3). $ .05 $ .03 $ .05 $ .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 charges. Total return
would be lower if the Distributor and its affiliates had not voluntarily
assumed a portion of the Fund's expenses.
61
<PAGE>
<TABLE>
<CAPTION>
Class C Class D
------------------------------------------------------- --------------------------
Year ended December 31
-------------------------------------------------------
Year ended
December 31,
1994 1993 1992 1991 1990 1994 1993**
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of year $8.38 $7.90 $7.73 $7.30 $7.35 $8.38 $8.24
Net investment income* .43 .42 .42 .44 .45 .34 .19
Net realized and unrealized
gain (loss) on investments (1.01) .55 .22 .42 (.05) (1.00) .21
Dividends from net investment
income (.41) (.41) (.43) (.43) (.44) (.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 $7.39 $8.38
========= ======== ======== ======== ======= ============== ========
Total return (7.02)%+ 12.53%+ 8.51%+ 12.19%+ 5.59%+ (7.95)%+ 4.93%+++
Net assets at end of
year (000s) $16,786 $29,398 $25,558 $12,757 $8,131 $542 $885
Ratio of operating expenses
to average net assets* 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% 4.35% 3.91%++
Portfolio turnover rate 59.22% 56.62% 31.55% 42.24% 34.62% 59.22% 56.62%
*Reflects voluntary assumption
of fees or expenses per share
in each year (Note 3). $.05 $.03 $.05 $.09 $.13 $.05 $.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 charges. Total return
would be lower if the Distributor and its affiliates had not voluntarily
assumed a portion of the Fund's expenses.
62
<PAGE>
Report of Independent Accountants
To the Trustees of State Street Research
Tax-Exempt Trust and the Shareholders of
State Street Research California Tax-Free Fund
In our opinion, the accompanying statement of assets and liabilities,
including the investment portfolio, and the related statements of operations
and of changes in net assets and the financial highlights present fairly, in
all material respects, the financial position of State Street Research
California Tax-Free Fund (a series of State Street Research Tax-Exempt Trust,
hereafter referred to as the "Trust") at December 31, 1994, and the results
of its operations, the changes in its net assets and the financial highlights
for the periods indicated, in conformity with generally accepted accounting
principles. These financial statements and financial highlights (hereafter
referred to as "financial statements") are the responsibility of the Trust's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these financial
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, and evaluating
the overall financial statement presentation. We believe that our audits,
which included confirmation of securities owned at December 31, 1994 by
correspondence with the custodian and brokers and the application of
alternative auditing procedures where confirmations from brokers were not
received, provide a reasonable basis for the opinion expressed above.
Price Waterhouse LLP
Boston, Massachusetts
February 10, 1995
63
<PAGE>
Management's Discussion of Fund Performance
The bond market was repeatedly buffeted in 1994 by uncertainty over the
strength of the economy and the timing of the Fed's next rate increase.
We began to shorten California Tax-Free Fund's duration and maturity in late
1993, which meant the Fund fell less than average in February, March and
April when interest rates rose and the municipal bond market dropped sharply.
After the market's sharp decline, we attempted to reduce risk further in the
portfolio by replacing longer-term bonds with less interest-rate-sensitive,
shorter-term bonds. In some cases we sold bonds for losses and replaced them
with higher-yielding, more defensive bonds. We also increased our position in
insured bonds to more than 35% of the portfolio, because higher-quality,
more-liquid bonds tend to perform better in weak markets.
We have targeted high-quality bonds--the bonds in the Fund's portfolio have
an average credit rating of AA, as measured by Standard & Poor's Corporation.
In general, high-quality bonds are more "liquid," which means they are easier
to buy and sell.
Comparison Of Change In Value Of A $10,000 Investment In California Tax-Free
Fund And
The Lehman Municipal Bond Index
State Street Research California Tax-Free Fund - Class A
LINE CHART DATA
(INCEPTION VALUE = $9,550)
VALUE OF
ACCOUNT OF
VALUE OF LEHMAN MUNI BOND
ACCOUNT AT INDEX AT
DATE YEAR END YEAR END
7/05/89 $ 9,550 $10,000
12/31/89 9,758 10,391
12/31/90 10,302 11,148
12/31/91 11,556 12,502
12/31/92 12,538 13,604
12/31/93 14,072 15,275
12/31/94 13,050 14,485
State Street Research California Tax-Free Fund - Class B
LINE CHART DATA
(INCEPTION VALUE = $10,000)
VALUE OF
ACCOUNT OF
VALUE OF LEHMAN MUNI BOND
ACCOUNT AT INDEX AT
DATE YEAR END YEAR END
7/05/89 $10,000 $10,000
12/31/89 10,218 10,391
12/31/90 10,787 11,148
12/31/91 12,101 12,502
12/31/92 13,128 13,604
12/31/93 14,490 15,275
12/31/94 13,505 14,485
State Street Research California Tax-Free Fund - Class C
LINE CHART DATA
(INCEPTION VALUE = $10,000)
VALUE OF
ACCOUNT OF
VALUE OF LEHMAN MUNI BOND
ACCOUNT AT INDEX AT
DATE YEAR END YEAR END
7/05/89 $10,000 $10,000
12/31/89 10,218 10,391
12/31/90 10,787 11,148
12/31/91 12,101 12,502
12/31/92 13,128 13,604
12/31/93 14,773 15,275
12/31/94 13,735 14,485
State Street Research California Tax-Free Fund - Class D
LINE CHART DATA
(INCEPTION VALUE = $10,000)
VALUE OF
ACCOUNT OF
VALUE OF LEHMAN MUNI BOND
ACCOUNT AT INDEX AT
DATE YEAR END YEAR END
7/05/89 $10,000 $10,000
12/31/89 10,218 10,391
12/31/90 10,787 11,148
12/31/91 12,101 12,502
12/31/92 13,128 13,604
12/31/93 14,689 15,275
12/31/94 13,521 14,485
All returns represent past performance, which is no guarantee of future
results. The investment return and principal value of an investment made in
the Fund will fluctuate and shares, when redeemed, may be worth more or less
than their original cost. All returns assume reinvestment of capital gain
distributions and income dividends. Returns reflect voluntary reduction by
the Distributor or its affiliates of fees and expenses related to the Fund.
The second number shown is what performance would have been without a
reduction of Fund fees and expenses. Shares of the Fund had no class
designations until June 7, 1993, when designations were assigned based on the
pricing and 12b-1 fees applicable to shares sold thereafter. Performance data
for a specified class include periods prior to the adoption of class
designations. "A" share returns for each of the periods reflect the maximum
4.5% sales charge. Performance prior to June 7, 1993 does not reflect annual
12b-1 fees of .25%, which will reduce subsequent performance. "B" share
returns for the 1- and 5-year periods reflect a 5% and a 2% contingent
deferred sales charge, respectively. "C" shares, offered without a sales
charge, are available only to certain employee benefit plans and large
institutions. "D" share return for the 1-year period reflects a 1% contingent
deferred sales charge. Performance for "B" and "D" shares prior to June 7,
1993, does not reflect annual 12b-1 fees of 1%, which will reduce subsequent
performance. The Lehman Muni Bond Index is an index of approximately 15,000
fixed-coupon, investment-grade municipal bonds. The index is unmanaged and
does not take sales charges into consideration. Direct investment in the
index is not possible; results are for illustrative purposes only.
64
<PAGE>
APPENDIX
Description of Municipal Debt Ratings
Standard & Poor's Corporation
AAA: Debt rated AAA has the highest rating assigned by S&P. Capacity
to pay interest and repay principal is extremely strong.
AA: Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in small degree.
A: Debt rated A has a strong capacity to pay interest and repay
principal, although it is more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB: Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
Debt rated BB, B, CCC, CC and C is regarded as having speculative
characteristics with respect to capacity to pay interest and repay principal. BB
indicates the least degree of speculation and C the highest. While such debt
will likely have some quality and protective characteristics, these are
outweighed by large uncertainties or major risk exposure to adverse conditions.
BB: Debt rated BB has less near-term vulnerability to default than
other speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial or economic conditions which could lead
to inadequate capacity to meet timely interest and principal payments. The BB
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied BBB- rating.
B: Debt rate B has a greater vulnerability to default but currently has
the capacity to meet interest payments and principal repayments. Adverse
business, financial or economic conditions will likely impair capacity or
willingness to pay interest and repay principal. The B rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
BB or BB- rating.
CCC: Debt rated CCC has a currently identifiable vulnerability to
default, and is dependent upon favorable business, financial and economic
A-1
<PAGE>
conditions to meet timely payment of interest and repayment of principal. In the
event of adverse business, financial or economic conditions, it is not likely to
have the capacity to pay interest and repay principal. The CCC rating category
is also used for debt subordinated to senior debt that is assigned an actual or
implied B or B- rating.
CC: The rating CC is typically applied to debt subordinated to senior
debt which is assigned an actual or implied CCC debt rating.
C: The rating C is typically applied to debt subordinated to senior
debt which is assigned an actual or implied CCC debt rating. The C rating may be
used to cover a situation where a bankruptcy petition has been filed, but debt
service payments are continued.
CI: The rating CI is reserved for income bonds on which no interest
is being paid.
D: Debt rated D is in payment default. The D rating category is used
when interest payments or principal payments are not made on the date due even
if the applicable grace period has not expired, unless S&P believes that such
payments will be made during such grace period. The D rating also will be used
upon the filing of a bankruptcy petition if debt service payments are
jeopardized.
Plus (+) or Minus (-): the ratings from AA to CCC may be modified by
the addition of a plus or minus sign to show relative standing within the major
rating categories.
S&P may attach the "r" symbol to derivative, hybrid, and certain other
obligations that S&P believes may experience high volatility or high variability
in expected returns due to noncredit risks created by the terms of the
obligation, such as securities whose principal or interest return is indexed to
equities, commodities, or currencies; certain swaps and options; and interest
only (IO) and principal only (PO) mortgage securities.
SP-1: Notes rated SP-1 are of the highest quality with very strong or
strong capacity to pay principal and interest. Issues determined to possess
overwhelming safety characteristics are given a plus (+) designation.
SP-2: Notes rated SP-2 are of high quality with satisfactory capacity
to pay principal and interest.
A-2
<PAGE>
Moody's Investors Service, Inc.
Aaa: Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred to
as "gilt edge." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in Aaa securities.
A: Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate but elements may be
present which suggest a susceptibility to impairment sometime in the future.
Baa: Bonds which are rated Baa are considered as medium grade
obligations; i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present, but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
Ba: Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate, and thereby not well
safeguarded during other good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance or other terms of the contract over any long period of time may be
small.
Caa: Bonds which are rated Caa are of poor standing. Such issues may
be in default or there may be present elements of danger with respect to
principal or interest.
Ca: Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or have other
marked shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds, and
issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
MIG-1: Notes bearing this designation are the best quality, enjoying
strong protection from established cash flows of funds for their servicing or
from established and broad-based access to the market for refinancing, or both.
MIG-2: Notes bearing this designation are of high quality, with margins
or protection ample although not so large as in the preceding group.
1, 2 or 3: The ratings from Aa through B may be modified by the
addition of a numeral indicating a bond's rank within its rating category.
A-3
71450.c6
5/3/95
<PAGE>
STATE STREET RESEARCH FLORIDA TAX-FREE FUND
STATE STREET RESEARCH PENNSYLVANIA TAX-FREE FUND
Series of
STATE STREET RESEARCH TAX-EXEMPT TRUST
STATEMENT OF ADDITIONAL INFORMATION
MAY 1, 1995
TABLE OF CONTENTS
Page
ADDITIONAL INVESTMENT POLICIES AND RESTRICTIONS ........................... 2
MUNICIPAL OBLIGATIONS ..................................................... 5
ADDITIONAL INFORMATION CONCERNING CERTAIN INVESTMENT TECHNIQUES ........... 6
DEBT INSTRUMENTS AND PERMITTED CASH INVESTMENTS ........................... 15
TRUSTEES AND OFFICERS ..................................................... 19
INVESTMENT ADVISORY SERVICES .............................................. 24
PURCHASE AND REDEMPTION OF SHARES ......................................... 26
NET ASSET VALUE ........................................................... 28
PORTFOLIO TRANSACTIONS .................................................... 29
CERTAIN TAX MATTERS ....................................................... 31
DISTRIBUTION OF SHARES OF THE FUNDS ....................................... 35
CALCULATION OF PERFORMANCE DATA ........................................... 40
CUSTODIAN ................................................................. 46
INDEPENDENT ACCOUNTANTS ................................................... 46
FINANCIAL STATEMENTS ...................................................... 47
APPENDIX A - STATE TAXATION AND SPECIAL CONSIDERATIONS RELATING TO THE
FUNDS .................................................................... A-1
APPENDIX B - DESCRIPTION OF MUNICIPAL DEBT RATINGS ........................ B-1
The following Statement of Additional Information is not a Prospectus. It should
be read in conjunction with the Prospectus of State Street Research Florida
Tax-Free Fund (the "Florida Tax-Free Fund") and State Street Research
Pennsylvania Tax-Free Fund (the "Pennsylvania Tax-Free Fund") (individually, a
"Fund" and collectively, the "Funds") dated May 1, 1995 which may be obtained
without charge from the offices of State Street Research Tax-Exempt Trust (the
"Trust") or State Street Research Investment Services, Inc. (the "Distributor"),
One Financial Center, Boston, Massachusetts 02111-2690.
1285D-950510 (0696) SSR-LD STF-879D-595
<PAGE>
ADDITIONAL INVESTMENT POLICIES AND RESTRICTIONS
As set forth in part under "The Funds' Investments" and "Limiting
Investment Risk" in the Funds' Prospectus, the Funds have adopted certain
fundamental and nonfundamental investment policies. The fundamental and
nonfundamental policies of the Funds do not restrict the ability of the Funds to
issue multiple classes of shares or prohibit the creation of a structure
allowing a Fund to invest substantially all its assets in a related collective
investment vehicle for similar funds or allowing a Fund to serve as such a
collective investment vehicle for other similar funds, to the extent permitted
by law and regulatory authorities.
All of the fundamental investment restrictions for each Fund are set forth
below. These fundamental investment restrictions may not be changed by a Fund
except by the affirmative vote of a majority of the outstanding voting
securities of that Fund as defined in the Investment Company Act of 1940, as
amended (the "1940 Act"). (Under the 1940 Act, a "vote of the majority of the
outstanding voting securities" means the vote, at a meeting of security holders
duly called, (i) of 67% or more of the voting securities present at a meeting if
the holders of more than 50% of the outstanding voting securities are present or
represented by proxy or (ii) of more than 50% of the outstanding voting
securities, whichever is less.) Under these restrictions, it is each Fund's
policy:
(1) not to issue senior securities, as defined in the 1940 Act, except
as permitted by Section 18(f)(2) of that Act and the rules
thereunder or as permitted by an order of the Securities and
Exchange Commission;
(2) not to underwrite or participate in the marketing of securities of
other issuers, except (a) the Fund may, acting alone or in
syndicates or groups, purchase or otherwise acquire securities of
other issuers for investment, either from the issuers or from
persons in a control relationship with the issuers or from
underwriters of such securities; and (b) to the extent that, in
connection with the disposition of the Fund's securities, the Fund
may be deemed to be an underwriter under certain federal securities
laws;
(3) not to purchase or sell fee simple interests in real estate,
although the Fund may purchase and sell other interests in real
estate including securities which are secured by real estate, or
securities of companies which own or invest or deal in real estate;
(4) not to invest in commodities or commodity contracts in excess of 10%
of the Fund's total assets, except that investments in currencies,
forward contracts or, futures contracts and options on futures
contracts on, securities, securities indices and currencies, shall
not be deemed an investment in commodities or commodities contracts;
2
<PAGE>
(5) not to make loans, except that the Fund may lend portfolio
securities and purchase bonds, debentures, notes and similar
obligations (and enter into repurchase agreements with respect
thereto);
(6) not to make any investment which would cause more than 25% of the
value of the Fund's total assets to be invested in securities 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
revenue bonds which are based, directly or indirectly, on the credit
of private entities in any one industry [for purposes of this
restriction, (a) utilities will be divided according to their
services so that, for example, gas, gas transmission, electric and
telephone companies will each be deemed in a separate industry, (b)
oil and oil related companies will be divided by type so that, for
example, oil production companies, oil service companies and
refining and marketing companies will each be deemed in a separate
industry, (c) finance companies will be classified according to the
industries of their parent companies, (d) securities issued or
guaranteed by the U.S. Government or its agencies or
instrumentalities (including repurchase agreements involving such
U.S. Government securities to the extent excludable under relevant
regulatory interpretations) shall be excluded; (e) industrial
development revenue bonds which are based, directly or indirectly,
on the credit of private issuers will be classified according to the
industry of the issuer, and (f) State and other jurisdictions and
each of their separate political subdivisions, agencies, authorities
or instrumentalities are treated as separate issuers and are not
regarded as members of any industry]; and
(7) not to borrow money except for borrowings from banks for
extraordinary and emergency purposes, such as permitting redemption
requests to be honored, and then not in an amount in excess of 25%
of the value of its total assets, and except insofar as reverse
repurchase agreements and the use of funds in the clearance of
portfolio transactions may be regarded as borrowing.
The following nonfundamental investment restrictions may be changed
without shareholder approval. Under these restrictions, it is each Fund's
policy:
(1) not to purchase any securities or enter into a repurchase agreement
if as a result more than 15% of its total assets would be invested
in securities that are not readily marketable and repurchase
agreements not entitling the holder to payment of principal and
interest within seven days; subject to such higher percentage limits
or other modifications as may be allowed or required under
applicable regulatory policies in the future.
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(2) not to engage in transactions in options except in connection with
options on securities, securities indices and currencies, and
options on futures on securities, securities indices and currencies;
(3) not to purchase securities on margin or make short sales of
securities or maintain a short position except for short sales
"against the box" [as a matter of current operating policy, the Fund
will not make short sales or maintain a short position unless not
more than 5% of the Fund's net assets (taken at current value) is
held as collateral for such sales at any time];
(4) not to hypothecate, mortgage or pledge any of its assets except as
may be necessary in connection with permitted borrowings (for the
purpose of this restriction, futures, options and forward
commitments, and related escrow or custodian receipts or letters,
margin or safekeeping accounts, or similar arrangements used in the
industry in connection with the trading of such investments, are not
deemed to involve a hypothecation, mortgage or pledge of assets);
(5) not to purchase a security issued by another investment company if,
immediately after such purchase, the Fund would own, in the
aggregate, (i) more than 3% of the total outstanding voting stock of
such other investment company; (ii) securities issued by such other
investment company having an aggregate value in excess of 5% of the
value of the Fund's total assets; or (iii) securities issued by such
other investment company and all other investment companies (other
than treasury stock of the Fund) having an aggregate value in excess
of 10% of the value of the Fund's total assets; provided, however,
that the Fund may purchase investment company securities without
limit for the purpose of completing a merger, consolidation or other
acquisition of assets;
(6) not to invest directly as a joint venturer or general partner in
oil, gas or other mineral exploration or development joint ventures
or general partnerships (provided that the Fund may invest in
securities issued by companies which invest in or sponsor such
programs and in securities indexed to the price of oil, gas or other
minerals);
(7) not to invest in warrants more than 5% of the value, at the lower of
cost or market, of its net assets, provided that warrants not listed
on the New York or American Stock Exchange shall be further limited
to 2% of the Fund's net assets (warrants initially attached to
securities and acquired by the Fund upon original issuance thereof
shall be deemed to be without value); and
(8) not to invest in companies for the purpose of exercising control
over their management, although the Fund may from time to time
present its views on various matters to the management of issuers in
which it holds investments.
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MUNICIPAL OBLIGATIONS
As used in the Prospectus and this Statement, the term "Municipal
Obligations" refers to debt obligations, including bonds and notes, 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 a Fund. Like other tax-exempt bonds, Municipal Obligations
are issued to obtain funds for various public purposes, including the
construction of a wide range of public facilities such as airports, bridges,
highways, housing, mass transportation, roads, schools, and water and sewer
works. Other public purposes for which Municipal Obligations, like other
tax-exempt bonds, may be issued include refunding outstanding obligations,
obtaining funds for general operating expenses and obtaining funds to lend to
other public institutions and facilities. In addition, certain debt obligations
known as industrial development revenue bonds may be issued by or on behalf of
public authorities to obtain funds to provide privately-operated housing
facilities, sports facilities, conventions or trade show facilities, airport,
mass transit, port or parking facilities, air or water pollution control
facilities and certain local facilities for water supply, gas, electricity or
sewage or solid waste disposal. Such obligations are included within the term
Municipal Obligations if the interest paid thereon is, in the opinion of bond
counsel at the time of issuance, exempt from both federal income taxes and the
personal income taxes, if any, of the State referred to in the name of the Fund.
Other industrial development bonds used to fund the construction, equipment,
repair or improvement of privately-operated industrial or commercial facilities
may also be Municipal Obligations, but the size of such issues is limited under
current federal tax law. The Funds may not be a desirable investment for
"substantial users" of facilities financed by industrial development revenue
bonds or for "related persons" of substantial users.
The two principal classifications for tax-exempt bonds are general
obligation bonds and limited obligation (or revenue) bonds. General obligation
bonds are obligations involving the credit of an issuer possessing taxing power
and are payable from the issuer's general unrestricted revenues and not from any
particular fund or source. The characteristics and method of enforcement of
general obligation bonds vary according to the law applicable to the particular
issuer, and payment may be dependent upon appropriation by the issuer's
legislative body. Limited obligation bonds are payable only from the revenues
derived from a particular facility or class of facilities or, in some cases,
from the proceeds of a special excise or other specific revenue source.
Tax-exempt industrial development revenue bonds generally are revenue bonds and
thus not payable from the unrestricted revenues of the issuer. The credit and
quality of industrial development revenue bonds is usually directly related to
the credit of the corporate user of the facilities. Payment of principal of and
interest on industrial development revenue bonds is the responsibility of the
corporate user (and any guarantor).
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Prices and yields on Municipal Obligations and other tax-exempt
obligations are dependent on a variety of factors, including general money
market conditions, the financial condition of the issuer, general conditions in
the market for tax-exempt obligations, the size of a particular offering, the
maturity of the obligation and ratings of particular issues, and are subject to
change from time to time. Information about the financial condition of an issuer
of tax-exempt bonds or notes may not be as extensive as that which is made
available by corporations whose securities are publicly traded.
The ratings of Standard & Poor's Corporation ("S&P") and Moody's Investors
Service, Inc. ("Moody's") represent their opinions and are not absolute
standards of quality. Tax-exempt obligations with the same maturity, interest
rate and rating may have different yields while on the other hand tax-exempt
obligations with the same maturity and interest rate but with different ratings
may have the same yield.
Obligations of issuers of tax-exempt securities are subject to the
provisions of bankruptcy, insolvency and other laws, such as the Federal
Bankruptcy Reform Act of 1978, affecting the rights and remedies of creditors.
Congress or state legislatures may seek to extend the time for payment of
principal or interest, or both, or to impose other constraints upon enforcement
of such obligations. There is also the possibility that, as a result of
litigation or other conditions, the power or ability of issuers to meet their
obligations to pay interest on and principal of their tax-exempt securities may
be materially impaired or their obligations may be found to be invalid or
unenforceable. Such litigation or conditions may from time to time have the
effect of introducing uncertainties in the market for tax-exempt obligations or
certain segments thereof, or may materially affect the credit risk with respect
to particular bonds or notes. Adverse economic, business, legal or political
developments might affect all or a substantial portion of a Fund's tax-exempt
bonds or notes in the same manner.
From time to time, proposals have been introduced before Congress to
restrict or eliminate the federal income tax exemption for interest on debt
obligations issued by states and their political subdivisions, and similar
proposals may well be introduced in the future. If such a proposal were enacted,
the availability of Municipal Obligations for investment by a Fund and the value
of the Fund's portfolio could be materially affected, in which event the Fund
would reevaluate its investment objectives and policies and consider changes in
the structure of the Fund or dissolution.
For special factors affecting each Fund, see Appendix A to this Statement
of Additional Information.
ADDITIONAL INFORMATION CONCERNING
CERTAIN INVESTMENT TECHNIQUES
Among other investments described below, each Fund may buy and sell
options, futures contracts and options on futures contracts with respect to
securities and securities
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indices and may enter into closing transactions with respect to each of the
foregoing, and invest in other derivatives, under circumstances in which the use
of such techniques is expected is by State Street Research & Management Company
(the "Investment Manager") to aid in achieving the investment objective of a
Fund. Each Fund on occasion may also purchase instruments with characteristics
of both futures and securities (e.g., debt instruments with interest and
principal payments determined by reference to the value of a commodity at a
future time) and which, therefore, possess the risks of both futures and
securities investments.
Futures Contracts
Futures contracts are publicly traded contracts to buy or sell underlying
assets, such as certain securities or an index of securities, at a future time
at a specified price. A contract to buy establishes a "long" position while a
contract to sell establishes a "short" position.
The purchase of a futures contract on securities or an index of securities
normally enables a buyer to participate in the market movement of the underlying
asset or index after paying a transaction charge and posting margin in an amount
equal to a small percentage of the value of the underlying asset or index. Each
Fund will initially be required to deposit with the Trust's custodian or the
broker effecting the futures transaction an amount of "initial margin" in cash
or U.S. Treasury obligations.
Initial margin in futures transactions is different from margin in
securities transactions in that the former does not involve the borrowing of
funds by the customer to finance the transaction. Rather, the initial margin is
like a performance bond or good faith deposit on the contract. Subsequent
payments (called "maintenance margin") to and from the broker will be made on a
daily basis as the price of the underlying asset fluctuates. This process is
known as "marking to market." For example, when a Fund has taken a long position
in a futures contract and the value of the underlying asset has risen, that
position will have increased in value and the Fund will receive from the broker
a maintenance margin payment equal to the increase in value of the underlying
asset. Conversely, when a Fund has taken a long position in a futures contract
and the value of the underlying asset has declined, the position would be less
valuable, and the Fund would be required to make a maintenance margin payment to
the broker.
At any time prior to expiration of the futures contract, a Fund may elect
to close the position by taking an opposite position which will terminate its
position in the futures contract. A final determination of maintenance margin is
then made, additional cash is required to be paid by or released to the Fund,
and the Fund realizes a loss or a gain. While futures contracts with respect to
securities do provide for the delivery and acceptance of such securities, such
delivery and acceptance are seldom made.
Futures contracts will be executed primarily (a) to establish a short
position, and thus protect a Fund from experiencing the full impact of an
expected decline in market value of portfolio holdings without requiring the
sale of holdings, or (b) to establish a long position,
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and thus to participate in an expected rise in market value of securities which
the Fund intends to purchase. Subject to the limitations described below, a Fund
may also enter into futures contracts for purposes of enhancing return. In
transactions establishing a long position in a futures contract, money market
instruments equal to the face value of the futures contract will be identified
by the Fund to the Trust's custodian for maintenance in a separate account to
insure that the use of such futures contracts is unleveraged. Similarly, a
representative portfolio of securities having a value equal to the aggregate
face value of the futures contract will be identified with respect to each short
position. Each Fund will employ any other appropriate method of cover which is
consistent with applicable regulatory and exchange requirements.
Options on Securities
Each Fund may use options on securities to implement its investment
strategy. A call option on a security, for example, gives the purchaser of the
option the right to buy, and the writer the obligation to sell, the underlying
asset at the exercise price during the option period. Conversely, a put option
on a security gives the purchaser the right to sell, and the writer the
obligation to buy, the underlying asset at the exercise price during the option
period.
Purchased options have defined risk, i.e., the premium paid for the
option, no matter how adversely the price of the underlying asset moves, while
affording an opportunity for gain corresponding to the increase or decrease in
the value of the optioned asset.
Written options have varying degrees of risk. An uncovered written call
option theoretically carries unlimited risk, as the market price of the
underlying asset could rise far above the exercise price before its expiration.
This risk is tempered when the call option is covered, i.e., when the option
writer owns the underlying asset. In this case, the writer runs the risk of the
lost opportunity to participate in the appreciation in value of the asset rather
than the risk of an out-of-pocket loss. A written put option has defined risk,
i.e., the difference between the agreed upon price that the Fund must pay to the
buyer upon exercise of the put and the value, which could be zero, of the asset
at the time of exercise.
The obligation of the writer of an option continues until the writer
effects a closing purchase transaction or until the option expires. To secure
his obligation to deliver the underlying asset in the case of a call option, or
to pay for the underlying asset in the case of a put option, a covered writer is
required to deposit in escrow the underlying security or other assets in
accordance with the rules of the applicable clearing corporation and exchanges.
Options on Securities Indices
Each Fund may engage in transactions in call and put options on securities
indices. For example, a Fund may purchase put options on indices of fixed income
securities in anticipation of or during a market decline to attempt to offset
the decrease in market value of its securities that might otherwise result.
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Put options on indices of securities are similar to put options on the
securities themselves except that the delivery requirements are different.
Instead of giving the right to make delivery of a security at a specified price,
a put option on an index of securities gives the holder the right to receive an
amount of cash upon exercise of the option if the value of the underlying index
has fallen below the exercise price. The amount of cash received will be equal
to the difference between the closing price of the index and the exercise price
of the option expressed in dollars times a specified multiple. As with options
on securities, a Fund may offset its position in index options prior to
expiration by entering into a closing transaction on an exchange or it may let
the option expire unexercised.
A securities index assigns relative values to the securities included in
the index and the index options are based on a broad market index. Although
there are at present few available options on indices of fixed income
securities, other than tax-exempt securities, or futures and related options
based on such indices, such instruments may become available in the future. In
connection with the use of such options, a Fund may cover its position by
identifying a representative portfolio of securities having a value equal to the
aggregate face value of the option position taken. However, a Fund may employ
any appropriate method to cover its positions that is consistent with applicable
regulatory and exchange requirements.
Options on Futures Contracts
An option on a futures contract gives the purchaser the right, in return
for the premium paid, to assume a position in a futures contract (a long
position if the option is a call and a short position if the option is a put) at
a specified exercise price at any time during the period of the option.
Options Strategy
A basic option strategy for protecting a Fund against a decline in
securities prices could involve (a) the purchase of a put -- thus "locking in"
the selling price of the underlying securities or securities indices -or (b) the
writing of a call on securities or securities indices held by a Fund -- thereby
generating income (the premium paid by the buyer) by giving the holder of such
call the option to buy the underlying asset at a fixed price. The premium will
offset, in whole or in part, a decline in portfolio value; however, if prices of
the relevant securities or securities indices rose instead of falling, the call
might be exercised, thereby resulting in a potential loss of appreciation in the
underlying securities or securities indices.
A basic option strategy when a rise in securities prices is anticipated is
the purchase of a call -- thus "locking in" the purchase price of the underlying
security or other asset. In transactions involving the purchase of call options
by a Fund, money market instruments equal to the aggregate exercise price of the
options will be identified by that Fund to the Trust's custodian to insure that
the use of such investments is unleveraged.
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A Fund may write options in connection with buy-and-write transactions;
that is, a Fund may purchase a security and concurrently write a call option
against that security. If the call option is exercised in such a transaction,
the Fund's maximum gain will be the premium received by it for writing the
option, adjusted upward or downward by the difference between the Fund's
purchase price of the security and the exercise price of the option. If the
option is not exercised and the price of the underlying security declines, the
amount of such decline will be offset in part, or entirely, by the premium
received.
The writing of covered put options is similar in terms of risk/return
characteristics to buy-and-write transactions. If the market price of the
underlying security rises or otherwise is above the exercise price, the put
option will expire worthless and the Fund's gain will be limited to the premium
received. If the market price of the underlying security declines or otherwise
is below the exercise price, the Fund's return will be the premium received from
writing the put option minus the amount by which the market price of the
security is below the exercise price.
Limitations and Risks of Options and Futures Activity
The Funds will engage in transactions in futures contracts or options only
as a hedge against changes resulting from market conditions which produce
changes in the values of their securities or the securities which they intend to
purchase (e.g., to replace portfolio securities which will mature in the near
future) and, subject to the limitations described below, to enhance return. The
Funds will not purchase any futures contract or purchase any call option if,
immediately thereafter, more than one-third of the Fund's net assets would be
represented by long futures contracts or call options. A Fund will not write a
covered call or put option if, immediately thereafter, the aggregate value of
the assets (securities in the case of written calls and cash or cash equivalents
in the case of written puts) underlying all such options, determined as of the
dates such options were written, would exceed 25% of a Fund's net assets. In
addition, 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 nonhedging
purposes would exceed 5% of the market value of the Fund's net assets.
Although effective hedging can generally capture the bulk of a desired
risk adjustment, no hedge is completely effective. Moreover, the use of options,
futures and options on futures may involve risks not associated with the other
types of instruments which a Fund intends to purchase. Most of the hedging
anticipated for the Funds will be against the risk characteristics of the Funds'
portfolios and not against the risk characteristics of specific debt securities.
Each Fund's ability to hedge effectively through transactions in futures or
options depends on the degree to which price movements in its holdings correlate
with price movements of the futures and options.
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Some positions in futures and options may be closed out only on an
exchange which provides a secondary market therefor. There can be no assurance
that a liquid secondary market will exist for any particular futures contract or
option at any specific time. Thus, it may not be possible to close such an
option or futures position prior to maturity. The inability to close options and
futures positions also could have an adverse impact on the Funds' ability
effectively to hedge its securities and might in some cases require a Fund to
deposit cash to meet applicable margin requirements. Each Fund will enter into
an option or futures position only if it appears to be a liquid investment.
When-Issued Securities
Each Fund may purchase "when-issued" securities, which are traded on a
price or yield basis prior to actual issuance. Such purchases will be made only
to achieve a Fund's investment objective and not for leverage. The when-issued
trading period generally lasts from a few days to up to a month or more; during
this period dividends or interest on the securities are not payable. A frequent
form of when-issued trading occurs in the U.S. Treasury market when dealers
begin to trade a new issue of bonds or notes shortly after a Treasury financing
is announced, but prior to the actual sale of the securities. Similarly,
securities to be created by a merger of companies may also be traded prior to
the actual consummation of the merger. Such transactions may involve a risk of
loss if the value of the securities falls below the price committed to prior to
actual issuance. The Trust's custodian will establish a segregated account when
a Fund purchases securities on a when-issued basis consisting of cash or liquid
securities equal to the amount of the when-issued commitments.
Repurchase Agreements
The Funds may enter into repurchase agreements. Repurchase agreements
occur when a Fund acquires a security and the seller which may be either (i) a
primary dealer in U.S. Government securities or (ii) an FDIC-insured bank having
gross assets in excess of $500 million, simultaneously commits to repurchase it
at an agreed-upon price on an agreed-upon date within a specified number of days
(usually not more than seven) from the date of purchase. The repurchase price
reflects the purchase price plus an agreed-upon market rate of interest which is
unrelated to the coupon rate or maturity of the acquired security. The Funds
will only enter into repurchase agreements involving U.S. Government securities.
Repurchase agreements could involve certain risks in the event of default or
insolvency of the other party, including possible delays or restrictions upon a
Fund's ability to dispose of the underlying securities. Repurchase agreements
will be limited to 30% of a Fund's total assets, except that repurchase
agreements extending for more than seven days when combined with any other
illiquid assets held by a Fund will be limited to 10% of a Fund's total assets.
Reverse Repurchase Agreements
The Funds may enter into reverse repurchase agreements. In a reverse
repurchase agreement a Fund transfers possession of a portfolio instrument to
another person, such as a
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financial institution, broker or dealer, in return for a percentage of the
instrument's market value in cash, and agrees that on a stipulated date in the
future the Fund will repurchase the portfolio instrument by remitting the
original consideration plus interest at an agreed-upon rate. The ability to use
reverse repurchase agreements may enable, but does not ensure the ability of, a
Fund to avoid selling portfolio instruments at a time when a sale may be deemed
to be disadvantageous.
When effecting reverse repurchase agreements, assets of the Fund in a
dollar amount sufficient to make payment of the obligations to be purchased
are segregated on a Fund's records at the trade date and maintained until the
transaction is settled.
Securities Lending
A Fund may lend portfolio securities with a value of up to 33-1/3% of its
total assets. A Fund will receive cash or cash equivalents (e.g., U.S.
Government obligations) as collateral in an amount equal to at least 100% of the
current market value of the loaned securities plus accrued interest. Collateral
received by a Fund will generally be held in the form tendered, although cash
may be invested in securities issued or guaranteed by the U.S. Government or its
agencies or instrumentalities, irrevocable letters of credit issued by a bank,
or any combination thereof. The investing of cash collateral received from
loaning portfolio securities involves leverage which magnifies the potential for
gain or loss on monies invested, and, therefore, results in an increase in the
volatility of a Fund's outstanding securities. Such loans may be terminated at
any time. A Fund will retain most rights of ownership on the loaned securities
including rights to dividends, interest or other distributions. Voting rights
pass with the lending, although a Fund may call loans to vote proxies if
desired. Should the borrower of the securities fail financially, there is a risk
of delay in recovery of the securities or loss of rights in the collateral.
Loans are made only to borrowers which are deemed by the Investment Manager to
be of good financial standing.
Short Sales Against the Box
The Funds may effect short sales, but only if such transactions are short
sale transactions known as short sales "against the box." A short sale is a
transaction in which a Fund sells a security it does not own by borrowing it
from a broker, and consequently becomes obligated to replace that security. A
short sale against the box is a short sale where a Fund owns the security sold
short or has an immediate and unconditional right to acquire that security
without additional cash consideration upon conversion, exercise or exchange of
options with respect to securities held in its portfolio. The effect of selling
a security short against the box is to insulate that security against any future
gain or loss.
High Yield Securities
Lower rated "high yield" securities (i.e., bonds rated BB or lower by S&P
or Ba or lower by Moody's) commonly known as "junk bonds," of the type in which
the Funds may
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invest generally involve more credit risk than higher rated securities and are
considered by S&P and Moody's to be predominantly speculative with respect to
capacity to pay interest and repay principal in accordance with the terms of the
obligation. Such securities may also be subject to greater market price
fluctuations than lower yielding, higher rated debt securities; credit ratings
do not reflect this market risk. In addition, these ratings may not reflect the
effect of recent developments on an issuer's ability to make interest and
principal payments.
Additional risks of "high yield" securities include (i) limited liquidity
and secondary market support, particularly in the case of securities that are
not rated or subject to restrictions on resale, which may limit the availability
of securities for purchase by a Fund, limit the ability of a Fund to sell
portfolio securities either to meet redemption requests or in response to
changes in the economy or the financial markets, heighten the effect of adverse
publicity and investor perceptions, and make selection and valuation of
portfolio securities more subjective and dependent upon the Investment Manager's
credit analysis; (ii) substantial market price volatility and/or the potential
for the insolvency of issuers during periods of changing interest rates and
economic difficulty, particularly with respect to high yield securities that do
not pay interest currently in cash; (iii) subordination to the prior claims of
banks and other senior lenders; and (iv) the possibility that revenues or
earnings of the issuer may be insufficient to meet its debt service. Growth in
the market for "high yield" securities has paralleled a general expansion in
certain sectors in the U.S. economy, and the effects of adverse economic changes
(including a recession) are unclear. For further information concerning the
rates of debt securities, see the Appendix.
In the event the rating of a security is downgraded, the Investment
Manager will determine whether the security should be retained or sold depending
on an assessment of all facts and circumstances at that time.
Restricted Securities
Subject to the limitations on illiquid securities noted above, the Funds
may buy or sell restricted securities in accordance with Rule 144A under the
Securities Act of 1933 ("Rule 144A Securities"). Securities may be resold
pursuant to Rule 144A under certain circumstances only to qualified
institutional buyers as defined in the rule, and the markets and trading
practices for such securities are relatively new and still developing; depending
on the development of such markets, such Rule 144A Securities may be deemed to
be liquid as determined by or in accordance with methods adopted by the
Trustees. Under such methods the following factors are considered, among others:
the frequency of trades and quotes for the security, the number of dealers and
potential purchasers in the market, marketmaking activity, and the nature of the
security and marketplace trades. Investments in Rule 144A Securities could have
the effect of increasing the level of a Fund's illiquidity to the extent that
qualified institutional buyers become, for a time, uninterested in purchasing
such securities. Also, a Fund may be adversely impacted by the subjective
valuation of such securities in the absence of an active market for them.
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Other Derivative Securities
The Funds may invest in tax-exempt derivative products such as stripped
tax-exempt bonds, synthetic floating rate tax-exempt bonds, tax-exempt asset
backed securities including interests in trusts holding tax-exempt lease
receivables, and may enter into various interest rate transactions such as
swaps, caps, floors or collars as described below. Many of these derivative
products are new and are still being developed. Some of these products may
generate taxable income or income which is believed to be non-taxable which may
later be determined to be taxable. In making investments in any tax-exempt
derivative, a Fund will take into consideration the impact on a Fund of the
potential taxable nature of any income or gains, the effect of such taxable
income or gains on the taxable and non-taxable status of dividends and
distributions by a Fund to its shareholders, and the speculative nature of the
products given their development nature. Other risks which may arise with
tax-exempt derivative products include possible illiquidity because the market
for such instruments is still developing. A Fund will attempt to invest in
products which appear to have reasonable liquidity and to reduce the risks of
nonperformance by counterparties by dealing only with established and reputable
institutions.
Swap Arrangements
Each Fund may enter into various forms of swap arrangements with
counterparties with respect to interest rates or indices, including purchase of
caps, floors and collars as described below. In an interest rate swap, a Fund
could agree for a specified period to pay a bank or investment banker the
floating rate of interest on a so-called notional principal amount (i.e., an
assumed figure selected by the parties for this purpose) in exchange for
agreement by the bank or investment banker to pay a Fund a fixed rate of
interest on the notional principal amount. In an index swap, a Fund would agree
to exchange cash flows on a notional amount based on changes in the values of
the selected indices. Purchase of a cap entitles the purchaser to receive
payments from the seller on a notional amount to the extent that the selected
index exceeds an agreed upon interest rate or amount whereas purchase of a floor
entitles the purchaser to receive such payments to the extent the selected index
falls below an agreed-upon interest rate or amount. A collar combines a cap and
a floor.
Most swaps entered into by a Fund will be on a net basis; for example, in
an interest rate swap, amounts generated by application of the fixed rate and
the floating rate to the notional principal amount would first offset one
another, with a fund either receiving or paying the difference between such
amounts. In order to be in a position to meet any obligations resulting from
swaps, a Fund will set up a segregated custodial account to hold appropriate
liquid assets, including cash; for swaps entered into on a net basis, assets
will be segregated having a daily net asset value equal to any excess of a
Fund's accrued obligations over the accrued obligations of the other party,
while for swaps on other than a net basis assets will be segregated having a
value equal to the total amount of a Fund's obligations.
14
<PAGE>
These arrangements will be made primarily for hedging purposes, to
preserve the return on an investment or on a part of a Fund's portfolio.
However, a Fund may enter into such arrangements for income purposes to the
extent permitted by the Commodities Futures Trading Commission for entities
which are not commodity pool operators, such as a Fund. In entering a swap
arrangement, a Fund is dependent upon the creditworthiness and good faith for
the counterparty. A Fund attempts to reduce the risks of nonperformance by the
counterparty by dealing only with the established, reputable institutions. The
swap market is still relatively new and emerging; positions in swap arrangements
may become illiquid to the extent that nonstandard arrangements with one
counterparty are not readily transferable to another counterparty or if a market
for the transfer of swap positions does not develop. The use of interest rate
swaps is a highly specialized activity which involves investment techniques and
risks different from those associated with ordinary portfolio securities
transactions. If the Investment Manager is incorrect in its forecasts of market
values, interest rates and other applicable factors, the investment performance
of a Fund would diminish compared with what it would have been if these
investment techniques were not used. Moreover, even if the Investment Manager is
correct in its forecasts, there is a risk that the swap position may correlate
imperfectly with the price of the asset or liability being hedged.
DEBT INSTRUMENTS AND
PERMITTED CASH INVESTMENTS
As indicated in the Funds' Prospectus, the Funds may invest in long-term
and short-term debt securities. The Funds may invest in cash and short-term
securities for temporary defensive purposes when, in the opinion of the
Investment Manager, such investments are more likely to provide protection
against unfavorable market conditions than adherence to other investment
policies. Certain debt securities and money market instruments in which the
Funds may invest are described below.
The Funds intend that short-term securities acquired for temporary or
defensive purposes will be exempt from federal income taxes and the personal
income taxes, if any, of the State referred to in the name of the Fund. However,
if such suitable short-term tax-exempt securities are not available or if such
securities are available only on a when-issued basis, each Fund may invest up to
100% of its total assets in short-term securities, the interest on which is not
exempt from federal income taxes or such personal income taxes.
U.S. Government and Related Securities
U.S. Government securities are securities which are issued or
guaranteed as to principal or interest by the U.S. Government, a U.S.
Government agency or instrumentality, or certain mixed-ownership Government
Corporations as described herein. The U.S. Government securities in which
the Funds invest include, among others:
15
<PAGE>
* direct obligations of the U.S. Treasury, i.e., U.S. Treasury
bills, notes, certificates and bonds;
* obligations of U.S. Government agencies or instrumentalities
such as the Federal Home Loan Banks, the Farmers Home
Administration, the Federal Farm Credit Banks, the Federal
National Mortgage Association, the Government National Mortgage
Association and the Federal Home Loan Mortgage Corporation; and
* obligations of mixed-ownership Government corporations such as
Resolution Funding Corporation.
U.S. Government securities which the Funds may buy are backed in a variety
of ways by the U.S. Government, its agencies or instrumentalities. Some of these
obligations, such as Government National Mortgage Association mortgage-backed
securities and obligations of the Farmers Home Administration, are backed by the
full faith and credit of the U.S. Treasury. Other obligations, such as those of
the Federal National Mortgage Association, are backed by the discretionary
authority of the U.S. Government to purchase certain obligations of agencies or
instrumentalities. Obligations such as those of the Federal Home Loan Banks, the
Farmers Home Administration, the Federal Farm Credit Banks, the Federal National
Mortgage Association and the Federal Home Loan Mortgage Corporation are backed
by the credit of the agency or instrumentality issuing the obligations. Certain
obligations of Resolution Funding Corporation, a mixed-ownership Government
corporation, are backed with respect to interest payments by the U.S. Treasury,
and with respect to principal payments by U.S. Treasury obligations held in a
segregated account with a Federal Reserve Bank. Except for certain
mortgage-related securities, a Fund will only interest in obligations issued by
mixed-ownership Government corporations where such securities are guaranteed as
to payment of principal or interest by the U.S. Government or a U.S. Government
agency or instrumentality, and any unguaranteed principal or interest is
otherwise supported by U.S. Government obligations held in a segregated account.
U.S. Government securities may be acquired by a Fund in the form of
separately traded principal and interest components of securities issued or
guaranteed by the U.S. Treasury. The principal and interest components of
selected securities are traded independently under the Separate Trading of
Registered Interest and Principal of Securities ("STRIPS") program. Under the
STRIPS program, the principal and interest components are individually numbered
and separately issued by the U.S. Treasury at the request of depository
financial institutions, which then trade the component parts independently.
Obligations of Resolution Funding Corporation are similarly divided into
principal and interest components and maintained as such on the book entry
records of the Federal Reserve Banks.
In addition, each Fund may invest in custodial receipts that evidence
ownership of future interest payments, principal payments or both on certain
U.S. Treasury notes or bonds in connection with programs sponsored by banks and
brokerage firms. Such notes and bonds
16
<PAGE>
are held in custody by a bank on behalf of their owners of the receipts. These
custodial receipts are known by various names, including "Treasury Receipts"
("TRs"), "Treasury Investment Growth Receipts" ("TIGRs") and "Certificates of
Accrual on Treasury Securities" ("CATS"), and may not be deemed U.S. Government
securities.
The Funds may also invest from time to time in collective investment
vehicles, the assets of which consist principally of U.S. Government securities
or other assets substantially collateralized or supported by such securities,
such as Government trust certificates.
Bank Money Investments
Bank money investments include but are not limited to certificates of
deposit, bankers' acceptances and time deposits. Certificates of deposit are
generally short-term (i.e., less than one year), interest-bearing negotiable
certificates issued by commercial banks or savings and loan associations against
funds deposited in the issuing institution. A banker's acceptance is a time
draft drawn on a commercial bank by a borrower, usually in connection with an
international commercial transaction (to finance the import, export, transfer or
storage of goods). A banker's acceptance may be obtained from a domestic or
foreign bank including a U.S. branch or agency of a foreign bank. The borrower
is liable for payment as well as the bank, which unconditionally guarantees to
pay the draft at its face amount on the maturity date. Most acceptances have
maturities of six months or less and are traded in secondary markets prior to
maturity. Time deposits are nonnegotiable deposits for a fixed period of time at
a stated interest rate. A Fund will not invest in any such bank money investment
unless the investment is issued by a U.S. bank that is a member of the Federal
Deposit Insurance Corporation ("FDIC"), including any foreign branch thereof, a
U.S. branch or agency of a foreign bank, a foreign branch of a foreign bank, or
a savings bank or savings and loan association that is a member of the FDIC and
which at the date of investment has capital, surplus and undivided profits (as
of the date of its most recently published financial statements) in excess of
$50 million. A Fund will not invest in time deposits maturing in more than seven
days and will not invest more than 10% of its total assets in time deposits
maturing in two to seven days.
U.S. branches and agencies of foreign banks are offices of foreign
banks and are not separately incorporated entities. They are chartered and
regulated either federally or under state law. U.S. federal branches or
agencies of foreign banks are chartered and regulated by the Comptroller of
the Currency, while state branches and agencies are chartered and regulated
by authorities of the respective states or the District of Columbia. U.S.
branches of foreign banks may accept deposits and thus are eligible for FDIC
insurance; however, not all such branches elect FDIC insurance. Unlike U.S.
branches of foreign banks, U.S. agencies of foreign banks may not accept
deposits and thus are not eligible for FDIC insurance. Both branches and
agencies can maintain credit balances, which are funds received by the office
incidental to or arising out of the exercise of their banking powers and can
exercise other commercial functions, such as lending activities.
17
<PAGE>
Short-Term Corporate Debt Instruments
Short-term corporate debt instruments include commercial paper to finance
short-term credit needs (i.e., short-term, unsecured promissory notes) issued by
corporations including but not limited to (a) domestic or foreign bank holding
companies or (b) their subsidiaries or affiliates where the debt instrument is
guaranteed by the bank holding company or an affiliated bank or where the bank
holding company or the affiliated bank is unconditionally liable for the debt
instrument. Commercial paper is usually sold on a discounted basis and has a
maturity at the time of issuance not exceeding nine months.
Commercial Paper Ratings
Commercial paper investments at the time of purchase will be rated A by
S&P or Prime by Moody's, or, if not rated, issued by companies having an
outstanding long-term unsecured debt issue rated at least A by S&P or by
Moody's. The money market investments in corporate bonds and debentures (which
must have maturities at the date of settlement of one year or less) must be
rated at the time of purchase at least A by S&P or by Moody's. Commercial paper
rated A (highest quality) by S&P is issued by entities which have liquidity
ratios which are adequate to meet cash requirements. Long-term senior debt is
rated A or better, although in some cases BBB credits may be allowed. The issuer
has access to at least two additional channels of borrowing. Basic earnings and
cash flow have an upward trend with allowance made for unusual circumstances.
Typically, the issuer's industry is well established and the issuer has a strong
position within the industry. The reliability and quality of management are
unquestioned. The relative strength or weakness of the above factors determines
whether the issuer's commercial paper is rated A-1, A-2 or A-3. (Those A-1
issues determined to possess overwhelming safety characteristics are denoted
with a plus (+) sign: A-1+.)
The rating Prime is the highest commercial paper rating assigned by
Moody's. Among the factors considered by Moody's in assigning ratings are the
following: evaluation of the management of the issuer; economic evaluation of
the issuer's industry or industries and an appraisal of speculative-type risks
which may be inherent in certain areas; evaluation of the issuer's products in
relation to competition and customer acceptance; liquidity; amount and quality
of long-term debt; trend of earnings over a period of 10 years; financial
management of obligations which may be present or may arise as a result of
public interest questions and preparations to meet such obligations. These
factors are all considered in determining whether the commercial paper is rated
Prime-1, Prime-2 or Prime-3.
Information concerning the ratings of S&P and Moody's for municipal debt
appears in the Appendix hereto. In the event applicable rating agencies lower
the ratings of debt instruments held by a Fund, resulting in a material decline
in the overall quality of the applicable Fund's portfolio, the situation will be
reviewed and necessary action, if any, will be taken, including changes in the
composition of the portfolio.
18
<PAGE>
TRUSTEES ANS OFFICERS
The Trustees and officers of the Trust, their addresses, and their
principal occupations and positions with certain affiliates of the Investment
Manager are set forth below.
*Paul J. Clifford, Jr., One Financial Center, Boston, MA 02111, serves as
Vice President of the Trust. He is 32. His principal occupation 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.
*Susan W. Drake, One Financial Center, Boston, MA 02111, serves as Vice
President of the Trust. She is 42. Her principal occupation 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.
*+Constantine Hutchins, Jr., One Financial Center, Boston, MA 02111,
serves as Secretary and General Counsel of the Trust. He is 66. His principal
occupation during the past five years has been Senior Vice President, Secretary
and General Counsel of State Street Research & Management Company. Mr.
Hutchins's other principal business affiliations include Senior Vice President,
Clerk and General Counsel of State Street Research Investment Services, Inc.
*+John H. Kallis, One Financial Center, Boston, MA 02111, serves as Vice
President of the Trust. He is 54. His principal occupation is Senior Vice
President of State Street Research & Management Company. During the past five
years he has also served as portfolio manager for State Street Research &
Management Company.
+Edward M. Lamont, Box 1234, Moores Hill Road, Syosset, NY 11791,
serves as Trustee of the Trust. He is 68. He is engaged principally in
private investments and civic affairs. Previously, he was with Morgan
Guaranty Trust Company of New York.
+Robert A. Lawrence, Saltonstall & Co., 50 Congress Street, Boston, MA
02109, serves as Trustee of the Trust. He is 68. His principal occupation during
the past five years has been Partner, Saltonstall & Co., a private investment
firm.
*+Gerard P. Maus, One Financial Center, Boston, MA 02111, serves as
Treasurer of the Trust. He is 44. His principal occupation is Executive Vice
President, Treasurer and Director of State Street Research & Management Company.
During the past five years he also served as Executive Vice President and Chief
Financial Officer of New England Investment Companies and as Senior Vice
President and Vice President of The New England. Mr. Maus's other business
affiliations include Treasurer, Chief Financial Officer and Director of State
Street Research Investment Services, Inc.
- -------------------------
* or + See footnotes on page 20.
19
<PAGE>
+Dean O. Morton, 3200 Hillview Avenue, Palo Alto, CA 94304, serves as
Trustee of the Trust. He is 63. He is retired, having served during the past
five years, until October 1992, as Executive Vice President, Chief Operating
Officer and Director of Hewlett-Packard Company.
+Thomas L. Phillips, 141 Spring Street, Lexington, MA 02173, serves as
Trustee of the Trust. He is 70. He is retired and was formerly Chairman of the
Board and Chief Executive Officer, Raytheon Company, of which he remains a
Director.
+Toby Rosenblatt, 3409 Pacific Avenue, San Francisco, CA 94118, serves as
Trustee of the Trust. He is 56. His principal occupations during the past five
years have been President of The Glen Ellen Company, a private investment
company, and Vice President of Founders Investment Ltd.
+Michael S. Scott Morton, Massachusetts Institute of Technology,
77 Massachusetts Avenue, Cambridge, MA 02139, serves as Trustee of the Trust.
He is 57. His principal occupation during the past five years has been
Jay W. Forrester Professor of Management at Sloan School of Management,
Massachusetts Institute of Technology.
*+Thomas A. Shively, One Financial Center, Boston, MA 02111, serves as
Vice President of the Trust. He is 40. His principal occupation is Senior Vice
President and Director of State Street Research & Management Company. During the
past five years he has also served as Vice President of State Street Research &
Management Company.
*+Ralph F. Verni, One Financial Center, Boston, MA 02111, serves as
Chairman of the Board, President, Chief Executive Officer and Trustee of the
Trust. He is 52. His principal occupation is Chairman of the Board, President,
Chief Executive Officer and Director of State Street Research & Management
Company. During the past five years he also served as President and Chief
Executive Officer of New England Investment Companies and Chief Investment
Officer and Director, The New England. Mr. Verni's other business affiliations
include Chairman of the Board and Director of State Street Research Investment
Services, Inc.
+Jeptha H. Wade, 251 Old Billerica Road, Bedford, MA 01730, serves as
Trustee of the Trust. He is 70. He is retired and was formerly Of Counsel for
the law firm Choate, Hall & Stewart. He was a partner of that firm from 1960 to
1987.
- ---------------------------
* These Trustees and/or officers are or may be deemed to be "interested
persons" of the Trust under the 1940 Act because of their affiliations
with the Funds' investment adviser.
+ Serves as a Trustee and/or officer of one or more of the following
investment companies, each of which has an advisory or distribution
relationship with the Investment Manager or its affiliates: MetLife -
State Street Equity Trust, MetLife - State Street Financial Trust,
MetLife - State Street Income Trust, MetLife - State Street Money
Market Trust, State Street Research Tax-Exempt Trust, State Street
Research Capital Trust, State Street Research Exchange Trust, State
Street Research Growth Trust, State Street Research Master Investment
Trust, State Street Research Securities Trust, State Street Research
Portfolios, Inc. and Metropolitan Series Fund, Inc.
20
<PAGE>
As of March 31, 1995, the following persons or entities were the record
and/or beneficial owners of the approximate amounts of each class of shares of
the Florida Tax-Free Fund as set forth beside their names.
Shareholder %
Class A Metropolitan Life 13.8
Merrill Lynch 10.3
M.V. Schoenrock, Trustee 5.6
Smith Barney Shearson 18.5
Advest Inc. 7.8
Class B Metropolitan Life 14.5
Merrill Lynch 37.3
L.P. McKeon & G.A. Lofton, Joint Tenants 8.0
Class C Metropolitan Life 99.9
Class D Metropolitan Life 34.9
Merrill Lynch 51.2
Advest Inc. 7.7
The full name and address of each of the above persons or entities are as
follows:
M.V. Schoenrock, Trustee
c/o State Street Research Shareholder Services
One Financial Center
Boston, Massachusetts 02111
Smith Barney Shearson (a)
388 Greenwich Street
New York, New York 10013
Advest Inc. (a)
280 Trumbull Street
Hartford, Connecticut 06103
Metropolitan Life Insurance Company (b)
One Madison Avenue
New York, New York 10010
21
<PAGE>
Merrill Lynch, Pierce, Fenner & Smith, Inc. (a)
One Liberty Plaza
165 Broadway
New York, New York 10080
L.P. McKeon & G. A. Lofton, Joint Tenants
c/o State Street Research Shareholder Services
One Financial Center
Boston, Massachusetts 02111
- -----------------------
(a) The Fund believes that such entity does not have beneficial ownership of
such shares.
(b) Metropolitan Life Insurance Company ("Metropolitan"), a New York
corporation, was the record and/or beneficial owners, directly or
indirectly through its subsidiaries or affiliates, of such shares.
As of March 31, 1995, the Trustees and officers of the Fund as a group
owned no shares of the Florida Tax-Free Fund.
As of March 31, 1995, the following persons or entities were the record
and/or beneficial owners of the approximate amounts of each class of shares of
the Pennsylvania Tax-Free Fund as set forth beside their names:
Shareholder %
Class A Metropolitan Life 7.0
Class B Metropolitan Life 10.4
Merrill Lynch 8.0
Class C Metropolitan Life 99.6
Class D Metropolitan Life 43.7
Merrill Lynch 40.6
Dr. W. F. Saponaro & M.G. Saponaro 5.5
The full name and address of each of the above persons or entities are as
follows:
Dr. W. F. Saponaro & M.G. Saponaro
c/o State Street Research Shareholder Services
One Financial Center
Boston, Massachusetts 02111
22
<PAGE>
Metropolitan Life Insurance Company (a)
One Madison Avenue
New York, New York 10010
Merrill Lynch, Pierce, Fenner & Smith, Inc. (b)
One Liberty Plaza
165 Broadway
New York, New York 10080
- -----------------------
(a) Metropolitan Life Insurance Company, a New York corporation, was the
record and/or beneficial owner, directly or indirectly through its
subsidiaries or affiliates, of such shares.
(b) The Fund believes that Merrill Lynch does not have beneficial ownership of
such shares.
As of March 31, 1995, the Trustees and officers of the Fund as a group
owned no shares of the Pennsylvania Tax-Free 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 submitted to a vote of shareholders, such as any
Distribution Plan for a given class.
During the last fiscal year of the Funds, the Trustees were compensated as
follows:
- -----------------------------------------------------------------------------
Name of Aggregate Total
Trustee Compensation Compensation
From Trust(a) From Trust and
Complex Paid
to Trustees(b)
- -----------------------------------------------------------------------------
Edward M. Lamont $ 9,825 $49,236
Robert A. Lawrence $ 9,325 $72,475
Dean O. Morton $11,325 $87,925
Thomas L. Phillips $ 9,625 $56,825
Toby Rosenblatt $ 9,825 $49,236
Michael S. Scott Morton $11,325 $83,925
Ralph F. Verni $ 0 $ 0
Jeptha H. Wade $10,125 $58,525
(a) Includes compensation from multiple series of the Trust. See
"Distribution of Shares" for a listing of series.
23
<PAGE>
(b) Includes compensation from Metropolitan Series Fund, Inc., for which the
Investment Manager serves as sub-investment adviser, State Street Research
Portfolios, Inc., for which State Street Research Investment Services,
Inc. serves as distributor, and all investment companies for which the
Investment Manager serves as primary investment adviser, comprising a
total of 30 series. The Trust does not provide any pension or retirement
benefits for the Trustees.
INVESTMENT ADVISORY SERVICES
State Street Research and Management Company, the Investment Manager, a
Delaware corporation, with offices at One Financial Center, Boston,
Massachusetts 02111-2690, acts as investment adviser to each Fund. The Advisory
Agreement provides that the Investment Manager shall furnish each Fund with an
investment program, office facilities and such investment advisory, research and
administrative services as may be required from time to time. The Investment
Manager compensates all executive and clerical personnel and Trustees of the
Trust if such persons are employees of the Investment Manager or its affiliates.
The Investment Manager is an indirect, wholly-owned subsidiary of Metropolitan.
The advisory fee payable monthly by each Fund to the Investment Manager is
computed as a percentage of the average daily net asset value of such Fund as
determined at the close of the New York Stock Exchange (the "NYSE") on each day
the NYSE is open for trading, at the annual rate of 0.55% of the net assets of
the Fund. 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 or expenses relating to each Fund.
The advisory fees paid by each Fund for the periods shown below, prior to
the assumption of fees or expenses, were as follows:
August 10, 1993
(commencement
Year ended of operations) to
December 31, 1994 December 31, 1993
----------------- -----------------
Florida Tax-Free Fund $61,932 $16,642
Pennsylvania Tax-Free Fund $83,275 $16,519
24
<PAGE>
For the same periods, the voluntary reduction of fees or assumption of
expenses were as follows:
August 10, 1993
(commencement
Year ended of operations) to
December 31, 1994 December 31, 1993
----------------- -----------------
Florida Tax-Free Fund $206,064 $76,581
Pennsylvania Tax-Free Fund $255,470 $85,253
Further, to the extent required under applicable state regulatory
requirements, the Investment Manager will reduce its management fee for a Fund
up to the amount of any expenses (excluding permissible items, such as Rule
12b-1 Distribution Plan payments, brokerage commissions, interest, taxes and
litigation expenses) paid or incurred by such Fund in any fiscal year which
exceed specified percentages of the average daily net assets of such Fund for
such fiscal year. The most restrictive of such percentage limitations is (which
does not presently apply to the Funds) currently 2.5% of the first $30 million
of average net assets, 2.0% of the next $70 million of average net assets and
1.5% of the remaining average net assets. These commitments may be amended or
rescinded in response to changes in the requirements of the various states by
the Trustees without shareholder approval.
The Advisory Agreement provides that it shall continue in effect with
respect to each Fund from year to year as long as it is approved at least
annually both (i) by a vote of a majority of the outstanding voting securities
of such Fund (as defined in the 1940 Act) or by the Trustees of the Trust, and
(ii) in either event by a vote of a majority of the Trustees who are not parties
to the Advisory Agreement or "interested persons" of any party thereto, cast in
person at a meeting called for the purpose of voting on such approval. The
Advisory Agreement may be terminated on 60 days' written notice by either party
and will terminate automatically in the event of its assignment, as defined
under the 1940 Act and regulations thereunder. Such regulations provide that a
transaction which does not result in a change of actual control or management of
an adviser is not deemed an assignment.
Under a Funds Administration Agreement between the Investment Manager and
the Distributor, the Distributor provides assistance to the Investment Manager
in performing certain fund administration services for the Trust, such as
assistance in determining the daily net asset value of shares of series of the
Trust and in preparing various reports required by regulations.
Under a Shareholders' Administrative Services Agreement between the Trust
and the Distributor, the Distributor provides shareholders' administrative
services, such as responding to inquiries and instructions from investors
respecting the purchase and redemption of shares of the Funds, and is entitled
to reimbursement of its costs for providing such services subject to the
limitations described below. Under certain arrangements for Metropolitan to
provide
25
<PAGE>
subadministration services, Metropolitan may receive a fee for the maintenance
of certain share ownership records for participants in sponsored arrangements,
employee benefit plans, and similar programs or plans, through or under which a
Fund's shares may be purchased.
Under the Code of Ethics of the Investment Manager, its employees are only
permitted to engage in personal securities transactions which do not involve
securities which the Investment Manager has recommended for purchase or sale, or
purchased or sold, on behalf of its clients. All employees must report their
personal securities transactions quarterly and supply broker confirmations of
such transactions to the Investment Manager.
PURCHASE AND REDEMPTION OF SHARES
Shares of the Funds are distributed by the Distributor. 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). General information on how to buy shares of the Funds, as well as
sales charges involved, are set forth under "Purchase of Shares" in the
Prospectus. The following supplements that information.
Public Offering Price
The public offering price for each class of shares of a Fund is based on
their net asset value determined as of the close of the NYSE on the day the
purchase order is received by State Street Research Shareholder Services
provided that the order is received prior to the close of the NYSE on that day;
otherwise the net asset value used is that determined as of the close of the
NYSE on the next day it is open for unrestricted trading. When a purchase order
is placed through a dealer, that dealer is responsible for transmitting the
order promptly to State Street Research Shareholder Services in order to permit
the investor to obtain the current price. Any loss suffered by an investor which
results from a dealer's failure to transmit an order promptly is a matter for
settlement between the investor and the dealer.
Reduced Sales Charges
For purposes of determining whether a purchase qualifies for reduced sales
charges, the term "person" includes: (i) an individual, or an individual
combining with his or her spouse and their children and purchasing for his, her
or their own account; (ii) a "company" as defined in Section 2(a)(8) of the 1940
Act; (iii) a trustee or other fiduciary purchasing for a single trust estate or
single fiduciary account (including a pension, profit sharing or other employee
benefit trust created pursuant to a plan qualified under Section 401 of the
Internal Revenue Code); (iv) a tax-exempt organization under Section 501(c)(3)
or (13) of the Internal Revenue Code; and (v) an employee benefit plan of a
single employer or of affiliated employers.
26
<PAGE>
Investors may purchase Class A shares of the Funds at reduced sales
charges by executing a Letter of Intent to purchase no less than an aggregate of
$100,000 of a Fund or any combination of Class A shares of "Eligible Funds" as
designated by the Distributor within a 13-month period. The sales charge
applicable to each purchase made pursuant to a Letter of Intent will be that
which would apply if the total dollar amount set forth in the Letter of Intent
were being bought in a single transaction. Purchases made within a 90-day period
prior to the execution of a Letter of Intent may be included therein; in such
case the date of the earliest of such purchases marks the commencement of the
13-month period.
An investor may include toward completion of a Letter of Intent the value
(at the current public offering price) of all of his or her Class A shares of
the Funds and of any of the other Class A shares of Eligible Funds held of
record as of the date of his or her Letter of Intent, plus the value (at the
current offering price) as of such date of all of such shares held by any
"person" described herein as eligible to join with the investor in a single
purchase. Class B, Class C and Class D shares may also be included in the
combination under certain circumstances.
A Letter of Intent does not bind the investor to purchase the specified
amount. Shares equivalent to 5% of the specified amount will, however, be taken
from the initial purchase (or, if necessary, subsequent purchases) and held in
escrow in the investor's account as collateral against the higher sales charge
which would apply if the total purchase is not completed within the allotted
time. The escrowed shares will be released when the Letter of Intent is
completed or, if it is not completed, when the balance of the higher sales
charge is, upon notice, remitted by the investor. All dividends and capital
gains distributions with respect to the escrowed shares will be credited to the
investor's account.
Investors may purchase Class A shares of the Funds or a combination of
Eligible Funds at reduced sales charges pursuant to a Right of Accumulation. The
applicable sales charge under this right is determined on the amount arrived at
by combining the dollar amount of the purchase with the value (at the current
public offering price) of all Class A shares of the Fund and Class A shares of
other Eligible Funds owned as of the purchase date by the investor plus the
value (at the current public offering price) of all such shares owned as of such
date by any "person" described herein as eligible to join with the investor in a
single purchase. Class B, Class C, and Class D shares may also be included in
the combination under certain circumstances. Investors must submit to the
Distributor sufficient information to show that they qualify for this Right of
Accumulation.
Class C Shares
Class C shares are currently available to (i) benefit plans such as
qualified retirement plans, other than individual retirement accounts and
self-employed retirement plans, which meet certain criteria relating to minimum
assets, minimum participants, service agreements, or similar factors; (ii)
tax-exempt retirement plans of the Investment Manager and its affiliates,
including the retirement plans of the Investment Manager's affiliated brokers;
(iii) unit
27
<PAGE>
investment trusts sponsored by the Investment Manager or its affiliates; (iv)
banks and insurance companies purchasing for their own accounts; (v) investment
companies not affiliated with the Investment Manager; and (vi) endowment funds
of nonprofit organizations with substantial minimum assets. The entities
included in categories (i), (iv) and (vi) may not be affiliates of the
Investment Manager.
Reorganizations
In the event of mergers or reorganizations with other public or private
collective investment entities, including investment companies as defined in the
1940 Act, each Fund may issue its shares at net asset value (or more) to such
entities or to their security holders.
Redemptions
The Funds reserve the right to pay redemptions in kind with portfolio
securities in lieu of cash. In accordance with its election pursuant to Rule
18f-1 under the 1940 Act, a Fund may limit the amount of redemption proceeds
paid in cash. Although it has no present intention to do so, a Fund may, under
unusual circumstances, limit redemptions in cash with respect to each
shareholder during any ninety-day period to the lesser of (i) $250,000, or (ii)
1% of the net asset value of a Fund at the beginning of such period. In
connection with any redemptions paid in kind with portfolio securities,
brokerage and other costs may be incurred by the redeeming shareholder in the
sale of the securities received.
NET ASSET VALUE
The net asset values of the shares of the Funds are determined once daily
as of the close of the NYSE, ordinarily 4 P.M. New York City time, Monday
through Friday, on each day during which the NYSE is open for unrestricted
trading. The NYSE is currently closed on New Year's Day, Presidents Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day.
The net asset value per share of each Fund is computed by dividing the sum
of the value of the securities held by the Fund plus any cash or other assets
minus all liabilities by the total number of outstanding shares of the Fund at
such time. Any expenses, except for extraordinary or nonrecurring expenses,
borne by the Fund, including the investment management fee payable to the
Investment Manager, are accrued daily.
In determining the values of portfolio assets, the Trustees utilize one or
more pricing services to value certain securities for which market quotations
are not readily available on a daily basis. Most debt securities are valued on
the basis of data provided by such pricing services. Since the Funds are
comprised substantially of debt securities under normal circumstances, most of a
Fund's assets are therefore valued on the basis of such data from the
28
<PAGE>
pricing services. The pricing services may provide prices determined as of times
prior to the close of the NYSE.
In general, securities are valued as follows. Securities which are listed
or traded on the New York or American Stock Exchange are valued at the price of
the last quoted sale on the respective exchange for that day. Securities which
are listed or traded on a national securities exchange or exchanges, but not on
the New York or American Stock Exchange, are valued at the price of the last
quoted sale on the exchange for that day prior to the close of the NYSE.
Securities not listed on any national securities exchange which are traded "over
the counter" and for which quotations are available on the National Association
of Securities Dealers' NASDAQ System, or other system, are valued at the closing
price supplied through such system for that day at the close of the NYSE. Other
securities are, in general, valued at the mean of the bid and asked quotations
last quoted prior to the close of the NYSE if there are market quotations
readily available, or in the absence of such market quotations, then at the fair
value thereof as determined by or under authority of the Trustees of the Trust
utilizing such pricing services as may be deemed appropriate as described above.
Securities deemed restricted as to resale are valued at the fair value thereof
as determined by or in accordance with methods adopted by the Trustees of the
Trust.
Short-term debt instruments issued with a maturity of one year or less
which have a remaining maturity of 60 days or less are valued using the
amortized cost method, provided that during any period in which more than 25% of
a Fund's total assets is invested in short-term debt securities the current
market value of such securities will be used in calculating net asset value per
share in lieu of the amortized cost method. The amortized cost method is used
when the value obtained reflects fair value. Under the amortized cost method of
valuation, the security is initially valued at cost on the date of purchase (or
in the case of short-term debt instruments purchased with more than 60 days
remaining to maturity, the market value on the 61st day prior to maturity), and
thereafter a constant amortization to maturity of any discount or premium is
assumed regardless of the impact of fluctuating interest rates on the market
value of the security.
PORTFOLIO TRANSACTIONS
Portfolio Turnover
A Fund's portfolio turnover rate is determined by dividing the lesser of
securities purchases or sales for a year by the monthly average value of
securities held by the fund (excluding, for purposes of this determination,
securities the maturities of which as of the time of their acquisition were one
year or less). The Funds reserve full freedom with respect to portfolio
turnover, as described in the Prospectus.
The Fund's portfolio turnover rates for the periods shown below were as
follows:
29
<PAGE>
August 10, 1993
(commencement
Year ended of operations) to
December 31, 1994 December 31, 1993
----------------- -----------------
Florida Tax-Free Fund 119.46% 49.38%
Pennsylvania Tax-Free Fund 80.90% 26.18%
The Investment Manager believes that each Fund's portfolio turnover rate
for the fiscal year ended December 31, 1994 was significantly higher than that
for the previous year because of the dramatic rise in interest rates during the
year, which increased incentive to shorten the duration and become more
defensive in portfolio holdings. The rise in interest rates also led the
Investment Manager to book losses for tax purposes to improve the Fund's
dividend position. Additionally, lesser quality securities underperformed
throughout the year, leading the Investment Manager to sell such securities.
Brokerage Allocation
The Funds and the Investment Manager seek the best overall execution of
purchase or sale orders and the most favorable net price in securities
transactions consistent with their judgment as to the business qualifications of
the various broker or dealer firms with which the Funds may do business.
Decisions with respect to the market in which the transaction is to be
completed, and to the allocation of orders among brokers or dealers, are made in
accordance with this policy. In selecting brokers or dealers to effect portfolio
transactions, consideration is given to the performance, integrity and financial
responsibility of the various firms as well as to their demonstrated execution
experience and capability generally and in regard to particular markets or
securities and, in agency transactions, to the competitiveness of the commission
rates (or in principal transactions of the net prices) they charge. The
Investment Manager keeps current as to the range of rates or prices charged by
various firms and against this background evaluates the reasonableness of a
commission or price charged with respect to a particular transaction by
considering such factors as difficulty of execution or security positioning by
the executing firm.
When it appears that a number of firms can satisfy the required standards
in respect of a particular transaction, consideration may also be given to
services other than execution services which such firms have provided in the
past or may provide in the future. Among such other services are the supplying
of supplemental investment research, general and economic and political
information, analytical and statistical data, relevant market information and
daily market quotations for computation of net asset value. In this connection
it should be noted that a substantial portion of brokerage commissions paid, or
principal transactions entered, by the Funds may be with brokers and investment
banking firms which, in the normal course of business, publish statistical,
research and other material which is received by the Investment Manager and
which may or may not prove useful to the Investment Manager, the Funds, or other
clients of the Investment Manager.
30
<PAGE>
Neither the Funds nor the Investment Manager has any definite agreements
with any firm as to the amount of business which that firm may expect to receive
for services supplied or otherwise. There may be, however, understandings with
certain firms that in order for such firms to be able to continuously supply
certain services, they need to receive allocation of a specified amount of
business. These understandings are honored to the extent possible in accordance
with the policy set forth above. Neither the Funds nor the Investment Manager
intends to pay a firm in excess of that which another would charge for handling
the same transaction in recognition of services (other than execution services)
provided. However, the Funds and the Investment Manager are aware that this is
an area where differences of opinion as to fact and circumstances may exist, and
in such circumstances, if any, rely on the provisions of Section 28(e) of the
Securities Exchange Act of 1934, to the extent applicable. For the fiscal year
ended December 31, 1994 and for the period August 10, 1993 (commencement of
operations) to December 31, 1993, the Funds paid no brokerage commissions.
During and at the end of its most recent fiscal year, a Fund held in its
portfolio no securities of any entity that might be deemed to be a regular
broker dealer of a Fund as defined under the 1940 Act.
Occasions may arise when the Investment Manager determines that an
investment in a particular security, or the disposition of a particular
security, is simultaneously a proper investment decision for one or more of the
Funds as well as for the portfolio of one or more of its other clients. In this
event, a purchase or sale, as the case may be, of any such security on any given
day will be normally averaged as to price and allocated as to amount among the
several clients in a manner deemed equitable to each client.
On occasions when the Investment Manager deems the purchase or sale of a
security to be in the best interests of a Fund, as well as other clients of the
Investment Manager, the Investment Manager, to the extent permitted by
applicable laws and regulations, may aggregate such securities to be sold or
purchased for the Fund with those to be sold or purchased for other customers in
order to obtain best execution and lower brokerage commissions, if any. In such
event, allocation of the securities so purchased or sold, as well as the
expenses incurred in the transaction, will be made by the Investment Manager in
the manner it considers to be most equitable and consistent with its fiduciary
obligations to all such customers, including the Funds. In some instances, this
procedure may affect the price and size of the positions obtainable for the
Funds.
CERTAIN TAX MATTERS
Federal Income Taxation of the Fund -- In General
Each Fund intends to qualify and elect to be treated each taxable year as
a "regulated investment company" under Subchapter M of the Internal Revenue Code
of 1986, as amended (the "Code"), although no Fund can give complete assurance
that it will do so. Accordingly, a
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<PAGE>
Fund must, among other things, (a) derive at least 90% of its gross income in
each taxable year from dividends, interest, payments with respect to securities
loans, gains from the sale or other disposition of stock, securities or foreign
currencies, or other income (including, but not limited to, gains from options,
futures or forward contracts) derived with respect to its business of investing
in such stock, securities or currencies (the "90% test"); (b) derive less than
30% of its gross income in each taxable year from the sale or other disposition
of any of the following held for less than three months (the "30% test"): (i)
stock or securities; (ii) options, futures or forward contracts (other than
options, futures, or forward contracts on foreign currencies) or (iii) foreign
currencies (or options, futures, or forward contracts on foreign currencies) but
only if such currencies (or options, futures, or forward contracts) are not
directly related to the Fund's principal business of investing in stocks or
securities (or options and futures with respect to stocks or securities); (c)
satisfy certain diversification requirements; and (d) in order to be entitled to
utilize the dividends-paid deduction, distribute annually at least the sum of
90% of its investment company taxable income (determined without regard to the
deduction for dividends paid) and 90% of the excess of its (i) interest income
excludable from gross income under Code section 103(a) over (ii) deductions
disallowed under Code sections 171(a)(2) and 265. Furthermore, in order to be
entitled to pay tax-exempt interest income dividends to its shareholders, a Fund
must satisfy the requirement that, at the close of each quarter of its taxable
year, at least 50% of the value of its total assets consist of obligations the
interest of which is exempt from federal income tax under Code section 103(a).
The 30% test will limit the extent to which a Fund may sell securities
held for less than three months, write options which expire in less than three
months and effect closing transactions with respect to call or put options that
have been written or purchased within the preceding three months. (If a Fund
purchases a put option for the purpose of hedging an underlying portfolio
security, the acquisition of the option is treated as a short sale of the
underlying securities unless, for purposes only of the 30% test, the option and
the securities are acquired on the same date.) Finally, as discussed below, this
requirement may also limit investments by the Funds in options on stock indices,
listed options on nonconvertible debt securities, futures contracts, options on
interest rate futures contracts and certain foreign currency contracts.
If a Fund should fail to qualify as a regulated investment company in any
year, it would lose the beneficial tax treatment accorded regulated investment
companies under Subchapter M of the Code and all of its taxable income would be
subject to tax at regular corporate rates without any deduction for
distributions to shareholders, and such distributions will be taxable to
shareholders as ordinary income to the extent of such Fund's current or
accumulated earnings and profits. Also, the shareholders, if they received a
distribution in excess of current or accumulated earnings and profits, would
receive a return of capital that would reduce the basis of their shares of such
Fund.
A Fund will be liable for a nondeductible 4% excise tax on amounts not
distributed on a timely basis in accordance with a calendar year distribution
requirement. To avoid the tax, during each calendar year a Fund must distribute
an amount equal to at least 98% of the sum of
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<PAGE>
its ordinary income (not taking into account any capital gains or losses) for
the calendar year, and its capital gain net income for the 12-month period
ending on October 31 in addition to any undistributed portion of the respective
balances from the prior year. Because the excise tax is based upon undistributed
taxable income, it will not apply to tax-exempt income received by a Fund. Each
Fund intends to make sufficient distributions to avoid this 4% excise tax.
Federal Income Taxation of the Funds' Investments
Original Issue Discount. For federal income tax purposes, debt securities
purchased by a Fund may be treated as having original issue discount. Original
issue discount represents interest for federal income tax purposes and can
generally be defined as the excess of the stated redemption price at maturity of
a debt obligation over the issue price. Original issue discount is treated for
federal income tax purposes as income earned by a Fund, whether or not any
income is actually received, and therefore is subject to the distribution
requirements of the Code. Generally, the amount of original issue discount is
determined on the basis of a constant yield to maturity which takes into account
the compounding of accrued interest. Under section 1286 of the Code, an
investment in a stripped bond or stripped coupon may result in original issue
discount.
Debt securities may be purchased by a Fund at a discount that exceeds the
original issue discount plus previously accrued original issue discount
remaining on the securities, if any, at the time a Fund purchases the
securities. This additional discount represents market discount for federal
income tax purposes. In the case of any debt security (other than a tax-exempt
obligation) issued after July 18, 1984, having a fixed maturity date of more
than one year from the date of issue and having market discount, the gain
realized on disposition will be treated as interest income to the extent it does
not exceed the accrued market discount on the security (unless a Fund elects to
include such accrued market discount in income in the tax year to which it is
attributable). Generally, market discount is accrued on a daily basis. A Fund
may be required to capitalize, rather than deduct currently, part or all of any
direct interest expense incurred to purchase or carry any debt security having
market discount, unless a Fund makes the election to include market discount
currently. Because each Fund must include original issue discount in income, it
will be more difficult for such Fund to make the distributions required for such
Fund to maintain its status as a regulated investment company under Subchapter M
of the Code and, with respect to debt securities that are not tax-exempt, to
avoid the 4% excise tax described above.
Options and Futures Transactions. Certain of a Fund's investments may be
subject to provisions of the Code that (i) require inclusion of unrealized gains
or losses in a Fund's income for purposes of the 90% test, the 30% test, the
excise tax and the distribution requirements applicable to regulated investment
companies; (ii) defer recognition of realized losses; and (iii) characterize
both realized and unrealized gain or loss as short-term or long-term gain or
loss. Such provisions generally apply to, among other investments, options on
debt securities, indices on securities and futures contracts.
33
<PAGE>
Federal Income Taxation of Shareholders
Distributions generally are taxable to shareholders at the time made
unless tax-exempt. However, dividends declared by a Fund in October, November or
December and made payable to shareholders of record on a specified date in such
a month are treated as received by such shareholders on December 31, provided
that the Fund pays the dividend during the following January of the following
year. It is expected that none of the Funds' distributions will qualify for the
corporate dividends-received deduction.
Distributions by a Fund can result in a reduction in the fair market value
of such Fund's shares. Should a distribution reduce the fair market value below
a shareholder's cost basis, such distribution nevertheless may be taxable to the
shareholder, to the extent that it is derived from other than tax-exempt
interest, as ordinary income or long-term capital gain, even though, from an
investment standpoint, it may constitute a partial return of capital. In
particular, investors should be careful to consider the tax implications of
buying shares just prior to a taxable distribution. The price of shares
purchased at that time includes the amount of any forthcoming distribution.
Those investors purchasing shares just prior to a distribution will then receive
a return of investment upon distribution which will nevertheless be taxable to
them.
To the extent that a Fund's dividends are derived from interest income
exempt from federal income tax and are designated as "exempt-interest dividends"
by a Fund, they will be excludable from a shareholder's gross income for federal
income tax purposes. "Exempt-interest dividends," however, must be taken into
account by shareholders in determining whether their total incomes are large
enough to result in taxation of up to one-half of their Social Security benefit.
Interest on indebtedness incurred or continued by a shareholder to purchase or
carry shares of a Fund is not deductible.
A shareholder should be aware that a redemption of shares (including any
exchange into another Eligible Fund) is a taxable event and, accordingly,
capital gain or loss may be recognized. A loss realized by a shareholder on the
redemption or exchange of shares of a Fund with respect to which exempt-interest
dividends have been paid will be disallowed to the extent of such dividends if
the shares have not been held by the shareholder for more than six months.
Similarly, if a shareholder receives a distribution taxable as long-term capital
gain and redeems or exchanges shares before he has held them for more than six
months, any loss on the redemption or exchange (not otherwise disallowed as
attributable to an exempt-interest dividend) will be treated as long-term
capital loss to the extent of such capital gains distribution.
Opinions relating to the validity of tax-exempt securities and the
exemption of interest thereon from federal income tax are rendered by bond
counsel to the issuers. Neither the Investment Manager's nor the Funds' counsel
makes any review of proceedings relating to the issuance of tax-exempt
securities or the bases of such opinions.
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<PAGE>
Interest on "private activity" bonds issued after August 7, 1986 are
subject to the federal alternative minimum tax, although the interest continues
to be excludable from gross income for other purposes. The alternative minimum
tax, or AMT, is a supplemental tax designed to ensure that taxpayers pay at
least a minimum amount of tax on their income, even if they make substantial use
of certain tax deductions and exclusions. Interest from private activity bonds
is a "tax preference" item that is added into income from other sources for the
purpose of determining whether a taxpayer is subject to the AMT and the amount
of any tax to be paid. Corporate investors should note that for purposes of the
corporate AMT there is an upward adjustment equal to 75% of the amount by which
adjusted current earnings exceeds alternative minimum taxable income.
Prospective investors should consult their own tax advisers with respect to the
possible application of the AMT to their tax situation.
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. Shareholders of a Fund may be exempt from state and
local taxes on distributions of tax-exempt interest income derived from
obligations of the state and/or municipalities of the state in which they are
resident but taxable generally on income derived from obligations of other
jurisdictions. Shareholders should consult their tax advisers about the status
of distributions from a Fund in their own states and localities.
DISTRIBUTION OF SHARES OF THE FUNDS
State Street Research Tax-Exempt Trust (formerly MetLife - State Street
Tax-Exempt Trust) is currently comprised of the following series: State Street
Research Tax-Exempt Fund (formerly MetLife - State Street Tax-Exempt Fund),
State Street Research New York Tax-Free Fund, State Street Research California
Tax-Free Fund, State Street Research Florida Tax-Free Fund and State Street
Research Pennsylvania Tax-Free Fund. 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 Trustees of the Trust have authority to issue an unlimited number of
shares of beneficial interest of separate series, $.001 par value per share. A
"series" is a separate pool of assets of the Trust which is separately managed
and has a different investment objective and different investment policies from
those of another series. The Trustees have authority, without the necessity of a
shareholder vote, to create any number of new series or to commence the public
offering of shares of any previously established series.
The Trust has entered into a Distribution Agreement with State Street
Research Investment Services, Inc., as Distributor, whereby the Distributor acts
as agent to sell and distribute shares of the Funds. Shares of the Funds are
sold through dealers who have entered into sales agreements with the
Distributor. The Distributor distributes shares of the Funds on a continuous
basis at an offering price which is based on the net asset value per share of a
Fund plus (subject to certain exceptions) a sales charge which, at the election
of the investor, may be imposed (i) at the time of purchase (the Class A shares)
or (ii) on a deferred basis (the Class B
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<PAGE>
and Class D shares). The Distributor may reallow all or a portions of such sales
charges as concessions to dealers.
Total sales charges on Class A shares paid to the Distributor for the
periods shown below were as follows:
August 10, 1993
(commencement
Year ended of operations) to
December 31, 1994 December 31, 1993
----------------- -----------------
Florida Tax-Free Fund $ 57,206 $67,147
Pennsylvania Tax-Free Fund $170,276 $96,998
For the same periods, the Distributor retained the following amounts after
reallowance of concessions to dealers:
August 10, 1993
(commencement
Year ended of operations) to
December 31, 1994 December 31, 1993
----------------- -----------------
Florida Tax-Free Fund $ 7,259 $1,059
Pennsylvania Tax-Free Fund $21,100 $2,344
The differences in the price at which a Fund's Class A shares are offered
due to scheduled variations in sales charges, as described in the Funds'
Prospectus, result from cost savings inherent in economies of scale. Management
believes that the cost of sales efforts of the Distributor and broker-dealers
tends to decrease as the size of purchases increases, or does not involve any
incremental sales expenses as in the case of, for example, exchanges,
reinvestments or dividend investments at net asset value. Similarly, no
significant sales effort is necessary for sales of shares at net asset value to
certain Directors, Trustees, officers, employees, their relatives and other
persons directly or indirectly related to the Funds or associated entities.
Where shares of a Fund are offered at a reduced sales charge or without a sales
charge pursuant to sponsored arrangements, the amount of the sales charge
reduction will similarly reflect the anticipated reduction in sales expenses
associated with such sponsored arrangements. The reductions in sales expenses,
and therefore the reduction in sales charge, will vary depending on factors such
as the size and stability of the organization, the term of the organization's
existence and certain characteristics of its members. The Funds reserve the
right to make variations in, or eliminate, sales charges at any time or to
revise the terms of or to suspend or discontinue sales pursuant to sponsored
arrangements at any time.
On any sale of Class A shares to a single investor in the amount of
$1,000,000 or more, the Distributor will pay the authorized securities dealer
making such sale, a commission on the
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<PAGE>
shares sold as described in the Prospectus. Such commission also is payable to
authorized securities dealers upon sales of Class A shares made pursuant to a
Letter of Intent to purchase shares having a net asset value of $1,000,000 or
more. Shares sold with such commissions payable are subject to a one-year
contingent deferred sales charge of 1.00% on any portion of such shares redeemed
within one year following their sale. After a particular purchase of Class A
shares is made under the Letter of Intent, the commission will be paid only in
respect of that particular purchase of shares. If the Letter of Intent is not
completed, the commission paid will be deducted from any discounts or
commissions otherwise payable to such dealer in respect of shares actually sold.
If an investor is eligible to purchase shares at net asset value on account of
the Right of Accumulation, the commission will be paid only in respect of the
incremental purchase at net asset value.
For the periods shown below, the Distributor received contingent deferred
sales charges upon redemption of Class B and Class D shares of the Funds and
paid initial commissions to securities dealers for sales of such Class B and
Class D shares as follows:
August 10, 1993
(commencement
Year ended of operations) to
December 31, 1994 December 31, 1993
----------------- -----------------
Contingent Commissions Contingent Commissions
Deferred Paid to Deferred Paid to
Sales Charges Dealers Sales Charges Dealers
------------- ----------- ------------- -----------
Florida Tax-Free Fund
Class B $ 8,390 $60,759 $ 0 $ 46,589
Class D $ 0 $ 2,930 $ 0 $ 8,069
Pennsylvania Tax-Free Fund
Class B $ 11,374 $51,021 $ 0 $118,098
Class D $ 25 $ 4,082 $ 0 $ 3,854
Each Fund has adopted a "Plan of Distribution Pursuant to Rule 12b-1" (the
"Distribution Plan") under which the Funds may engage, directly or indirectly,
in financing any activities primarily intended to result in the sale of Class A,
Class B and Class D shares, including, but not limited to, (1) the payment of
commissions and/or reimbursement to underwriters, securities dealers and others
engaged in the sale of shares, including payments to the Distributor to be used
to pay commissions and/or reimbursement to securities dealers (which securities
dealers may be affiliates of the Distributor) engaged in the distribution and
marketing of shares and furnishing ongoing assistance to investors, (2)
reimbursement of direct out-of-pocket expenditures incurred by the Distributor
in connection with the distribution and marketing of shares and the servicing of
investor accounts including expenses relating to the formulation and
implementation of marketing strategies and promotional activities such as
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<PAGE>
direct mail promotions and television, radio, newspaper, magazine and other mass
media advertising, the preparation, printing and distribution of Prospectuses of
the Funds and reports for recipients other than existing shareholders of the
Funds, and obtaining such information, analyses and reports with respect to
marketing and promotional activities and investor accounts as the Funds may,
from time to time, deem advisable, and (3) the reimbursement of expenses
incurred by the Distributor in connection with the servicing of shareholder
accounts including payments to securities dealers and others in consideration of
the provision of personal services to investors and/or the maintenance of
shareholder accounts and expenses associated with the provision of personal
services by the Distributor directly to investors. In addition, the Distribution
Plan is deemed to authorize the Distributor to make payments out of its general
profits, revenues or other sources to underwriters, securities dealers and
others in connection with sales of shares, to the extent, if any, that such
payments may be deemed to be within the scope of Rule 12b-1 under the 1940 Act.
The expenditures to be made pursuant to the Distribution Plan may not
exceed (i) with respect to Class A shares, an annual rate of 0.25% of the
average daily value of net assets represented by such Class A shares, and (ii)
with respect to Class B and Class D shares, an annual rate of 0.75% of the
average daily value of the net assets represented by such Class B or Class D
shares (as the case may be) to finance sales or promotion expenses and an annual
rate of 0.25% of the average daily value of the net assets represented by such
Class B or Class D shares (as the case may be) to make payments for personal
services and/or the maintenance of shareholder accounts. Proceeds from the
service fee will be used by the Distributor to compensate securities dealers and
others selling shares of the Funds for rendering service to shareholders on an
ongoing basis. Such amounts are based on the net asset value of shares of the
Funds held by such dealers as nominee for their customers or which are owned
directly by such customers for so long as such shares are outstanding and the
Distribution Plan remains in effect with respect to the Funds. Any amounts
received by the Distributor and not so allocated may be applied by the
Distributor as reimbursement for expenses incurred in connection with the
servicing of investor accounts. The distribution and servicing expenses of a
particular class will be borne solely by that class.
For the fiscal year ended December 31, 1994, the Funds paid the
Distributor fees under the Distribution Plan and the Distributor used all of
such payments for expenses incurred on behalf of those Funds as follows:
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<PAGE>
Florida Tax-Free Fund
Class A Class B Class D
------- -------- --------
Advertising $ 372 $ 0 $ 2,858
Printing and mailing of 0 709
prospectuses to
other than current
shareholders 92
Compensation to dealers 8,543 25,909 2,930
Compensation to sales 0 4,460
personnel
Interest 581 0 0
Carrying or other finance 0 0 0
charges
Other expenses 286 0 2,187
------- ---------- --------
Total Fees $9,874 $25,909 $13,144
====== ======= =======
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<PAGE>
Pennsylvania Tax-Free Fund
Class A Class B Class D
------- ------- -------
Advertising $ 407 $ 0 $ 2,128
Printing and mailing of 101 $0 528
prospectuses to
other than current
shareholders
Compensation to dealers 14,229 43,762 3,124
Compensation to sales 635 0 3,321
personnel
Interest 0 0 0
Carrying or other finance 0 0 0
charges
Other expenses 312 0 1,628
--------- ---------- --------
Total Fees $15,684 $43,762 $10,729
======= ======= =======
The Distributor may have also used additional resources of its own for further
expenses on behalf of the Trust.
No interested Trustee of the Trust has any direct or indirect financial
interest in the operation of the Distribution Plan or any related agreements
thereunder. The Distributor's interest in the Distribution Plan is described
above.
To the extent that the Glass-Steagall Act may be interpreted as
prohibiting banks and other depository institutions from being paid for
performing services under the Distribution Plan, the Funds will attempt to make
alternative arrangements for such services for shareholders who acquired shares
through such institutions.
CALCULATION OF PERFORMANCE DATA
The average annual total return ("standard total return") and yield of the
Class A, Class B, Class C and Class D shares of a Fund will be calculated as set
forth below. Total return and yield are computed separately for each class of
shares of a Fund.
40
<PAGE>
All calculations of performance data in this section would reflect the
voluntary measures by the Funds' affiliates to reduce fees or expenses relating
to the Funds; see "Accrued Expenses" later in this section.
Total Return
The total returns ("standard total return") of each class of the Funds'
shares were as follows:
Commencement
of Operations One Year
(August 10, 1993) Ended
to December 31, 1994 December 31, 1994
-------------------- -----------------
With Without With Without
Subsidy Subsidy Subsidy Subsidy
------- ------- ------- -------
Florida Tax-Free Fund
Class A -3.73% -5.77% -8.34% -10.29%
Class B -4.05% -6.10% -9.49% -11.35%
Class C -0.18% -2.44% -3.67% -5.72%
Class D -1.20% -3.37% -5.69% -7.70%
Pennsylvania Tax-Free Fund
Class A -3.40% -5.22% -7.94% -9.52%
Class B -3.80% -5.55% -9.15% -10.90%
Class C 0.08% -2.10% -3.37% -5.23%
Class D -0.87% -2.96% -5.28% -7.11%
Standard total return is computed separately for each class of shares by
determining the average annual compounded rates of return over the designated
periods that, if applied to the initial amount invested would produce the ending
redeemable value in accordance with the following formula:
P(1+T)n = ERV
Where: P = a hypothetical initial payment of
$1,000
T = average annual total return
n = number of years
41
<PAGE>
ERV = ending redeemable value at the end of the
designated period assuming a hypothetical
$1,000 payment made at the beginning of the
designated period
The calculation is based on the further assumptions that the maximum
initial or contingent deferred sales charge applicable to the investment is
deducted, and that all dividends and distributions by the Fund are reinvested at
net asset value on the reinvestment dates during the periods. All accrued
expenses are also taken into account as described later herein.
Yield
The annualized yield of each class of shares of the Funds based on the
month of December 1994 was as follows:
Florida Tax-Free Fund With Subsidy Without Subsidy
------------ ---------------
Class A 5.09% 3.09%
Class B 4.58% 2.49%
Class C 5.58% 3.48%
Class D 4.57% 2.49%
Pennsylvania Tax-Free Fund
Class A 5.28% 3.28%
Class B 4.78% 2.68%
Class C 5.78% 3.68%
Class D 4.78% 2.68%
Yield is computed separately for each class of shares by dividing the net
investment income per share earned during a recent month or other specified
30-day period by the applicable maximum offering price per share on the last day
of the period and annualizing the result, in accordance with the following
formula:
YIELD = 2[( a-b + 1)6 -1]
cd
Where: a = dividends and interest earned during the period
b = expenses accrued for the period
(net of voluntary expense reductions by the
Investment Manager)
c = the average daily number of shares
outstanding during the period that were entitled to
receive dividends
42
<PAGE>
d = the maximum offering price per
share on the last day of the period
To calculate interest earned (for the purpose of "a" above) on debt
obligations, a Fund computes the yield to maturity of each obligation held by a
Fund based on the market value of the obligation (including actual accrued
interest) at the close of the last business day of the preceding period, or,
with respect to obligations purchased during the period, the purchase price
(plus actual accrued interest). The yield to maturity is then divided by 360 and
the quotient is multiplied by the market value of the obligation (including
actual accrued interest) to determine the interest income on the obligation for
each day of the period that the obligation is in the portfolio. Dividend income
is recognized daily based on published rates.
In the case of a tax-exempt obligation issued without original issue
discount and having a current market discount, the coupon rate of interest is
used in lieu of the yield to maturity. Where, in the case of a tax-exempt
obligation with original issue discount, the discount based on the current
market value exceeds the then-remaining portion of original issue discount
(market discount), the yield to maturity is the imputed rate based on the
original issue discount calculation. Where, in the case of a tax-exempt
obligation with original issue discount, the discount based on the current
market value is less than the then-remaining portion of original issue discount
(market premium), the yield to maturity is based on the market value. Dividend
income is recognized daily based on published rates.
With respect to the treatment of discount and premium on mortgage or other
receivables-backed obligations which are expected to be subject to monthly
payments of principal and interest ("paydowns"), a Fund accounts for gain or
loss attributable to actual monthly paydowns as a realized capital gain or loss
during the period. Each Fund has elected not to amortize discount or premium on
such securities.
Undeclared earned income, computed in accordance with generally accepted
accounting principles, may be subtracted from the maximum offering price.
Undeclared earned income is the net investment income which, at the end of the
base period, has not been declared as a dividend, but is reasonably expected to
be declared as a dividend shortly thereafter. The maximum offering price
includes, as applicable, a maximum sales charge of 4.5%.
All accrued expenses are taken into account as described later herein.
Yield information is useful in reviewing a Fund's performance, but because
yields fluctuate, such information cannot necessarily be used to compare an
investment in a Fund's shares with bank deposits, savings accounts and similar
investment alternatives which are insured and/or often provide an agreed or
guaranteed fixed yield for a stated period of time. Shareholders should remember
that yield is a function of the kind and quality of the instruments in the
Fund's portfolio, portfolio maturity and operating expenses and market
conditions.
43
<PAGE>
Tax Equivalent Yield
The annualized tax equivalent yield of each class of shares of the Funds
based on the month of December 1994 was as follows, assuming a combined federal
and state maximum effective marginal income tax rate of 39.6% and 41.29% for
Florida Tax-Free Fund and Pennsylvania Tax-Free Fund, respectively:
Florida Tax-Free Fund With Subsidy Without Subsidy
------------ ---------------
Class A 8.43% 5.12%
Class B 7.58% 4.12%
Class C 9.24% 5.76%
Class D 7.57% 4.12%
Pennsylvania Tax-Free Fund
Class A 8.99% 5.59%
Class B 8.14% 4.56%
Class C 9.85% 6.27%
Class D 8.14% 4.56%
A Fund's tax equivalent yield is computed by dividing that portion of such
Fund's yield (computed as described under "Yield" above) which is tax-exempt, by
the complement of the combined federal and state maximum effective marginal rate
and adding the result to that portion, if any, of the yield of such Fund that is
not tax-exempt. The complement, for example, of a tax rate of 39.6% is 60.4%,
that is 1.00 - 0.396 = 0.604.
Accrued Expenses
Accrued expenses include all recurring expenses that are charged to all
shareholder accounts in proportion to the length of the base period. The
standard total return and yield results take sales charges, if applicable, into
account, although the results do not take into account recurring and
nonrecurring charges for optional services which only certain shareholders elect
and which involve nominal fees such as the $7.50 fee for wire orders.
Accrued expenses do not include the subsidization, if any, by affiliates
of fees or expenses during the subject period. In the absence of such
subsidization, the performance of the Fund would be lower.
Nonstandardized Total Return
A Fund may provide the above described standard total return results for
Class A, Class B, Class C and Class D shares for periods which end no earlier
than the most recent calendar quarter end and which begin twelve months before
and at the time of commencement of such Fund's operations. In addition, a Fund
may provide nonstandardized total return results for differing periods, such as
for the most recent six months, and/or without taking sales
44
<PAGE>
charges into account. Such nonstandardized total return is computed as otherwise
described under "Total Return" except that the result may or may not be
annualized and as noted, any applicable sales charge may not be taken into
account and therefore not deducted from the hypothetical initial payment of
$1,000. For example, the Funds' nonstandardized total returns for the six months
ended December 31, 1994, without taking sales charges into account, were as
follows:
Florida Tax-Free Fund With Subsidy Without Subsidy
------------ ---------------
Class A -0.86% -1.78%
Class B -1.23% -2.14%
Class C -0.62% -1.54%
Class D -1.23% -2.14%
Pennsylvania Tax-Free Fund
Class A -0.23% -1.05%
Class B -0.72% -1.53%
Class C -0.22% -1.03%
Class D -0.61% -1.64%
Distribution Rates
A Fund may also quote its distribution rate for each class of shares. The
distribution rate is calculated by annualizing the latest per-share distribution
from ordinary income and dividing the result by the maximum offering price per
share as of the end of the period. A distribution can include gross investment
income from debt obligations purchased at a premium and in effect include a
portion of the premium paid. A distribution can also include nonrecurring, gross
short-term capital gains without recognition of any unrealized capital losses.
Further, a distribution can include income from the sale of options by a Fund
even though such option income is not considered investment income under
generally accepted accounting principles.
Because a distribution can include such premiums, capital gains and option
income, the amount of the distribution may be susceptible to control by the
Investment Manager through transactions designed to increase the amount of such
items. Also, because the distribution rate is calculated in part by dividing the
latest distribution by the offering price, which is based on net asset value
plus a sales charge, the distribution rate will increase as the net asset value
declines. A distribution rate can be greater than the yield rate calculated as
described above.
45
<PAGE>
The distribution rate of each class of shares of the Funds, based on the
month of December 1994, were as follows:
Florida Tax-Free Fund
Class A 5.14%
Class B 4.63%
Class C 5.63%
Class D 4.63%
Pennsylvania Tax-Free Fund
Class A 5.24%
Class B 4.73%
Class C 5.74%
Class D 4.72%
CUSTODIAN
State Street Bank and Trust Company, 225 Franklin Street, Boston,
Massachusetts 02110, is the Trust's custodian. As custodian, State Street Bank
and Trust Company is responsible for, among other things, safeguarding and
controlling the Funds' cash and securities, handling the receipt and delivery of
securities and collecting interest and dividends on the Fund's investments.
State Street Bank and Trust Company is not an affiliate of the Investment
Manager or its affiliates.
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP, 160 Federal Street, Boston, Massachusetts 02110,
serves as the Trust's independent accountants, providing professional services
including (1) audits of the Funds' annual financial statements, (2) assistance
and consultation in connection with Securities and Exchange Commission filings
and (3) review of the annual income tax returns filed on behalf of the Funds.
46
<PAGE>
FINANCIAL STATEMENTS
In addition to the reports provided to holders of record on a semiannual
basis, other supplementary reports may be made available and holders of record
may request a copy of a current supplementary report, if any, by calling State
Street Research Shareholder Services.
The following financial statements are for the Funds' fiscal year ended
December 31, 1994.
50844.c7
47
<PAGE>
State Street Research Florida Tax-Free Fund
Investment Portfolio
December 31, 1994
<TABLE>
<CAPTION>
Principal Amount Maturity Date Value (Note 1)
<S> <C> <C> <C> <C>
Municipal Bonds 97.0%
General $ 500,000 The School Board of Dade County, Florida,
Obligation Certificates of Participation, Series 1994 A,
15.5% MBIA Insured, 5.00% 5/01/2001 $479,065
500,000 The School District of Dade County, Florida,
General Obligation School Bonds, Series 1994A,
MBIA Insured, 5.15% 6/01/2001 483,585
500,000 Puerto Rico Municipal Finance Agency, 1994
Series A Bonds, FSA Insured, 5.30% 7/01/2002 487,655
250,000 Palm Beach County, Florida General Obligation
Bonds, Series 1994, 7.00% 12/01/2004 270,757
-----------------
1,721,062
-----------------
Airport 500,000 Dade County, Florida, Aviation Revenue
4.6% Refunding Bonds, Series 1994 B (Non-AMT),
6.00% 10/01/2002 507,655
-----------------
Certificates of 500,000 Certificates of Participation, (School Board
Participation of Hillsborough County, Florida, Master Lease
13.1% Program), Series 1994, MBIA Insured, 5.30% 7/01/2002 482,350
500,000 Certificates of Participation, Series 1994B,
The School Board of Seminole County, Florida,
MBIA Insured, 6.00% 7/01/2003 500,315
500,000 Certificates of Participation, Series 1994A,
The School Board of Seminole County, Florida,
MBIA Insured, 5.50% 7/01/2003 479,085
-----------------
1,461,750
-----------------
Hospital/ 140,000 Escambia County Health Facilities Authority,
Health Care Health Facilities Revenue Refunding Bonds,
5.4% (Baptist Hospital, Inc.), Series 1993 B, 5.60% 10/01/1999 134,322
500,000 City of Venice, Florida, Health Facilities
Revenue Bonds, Series 1994, (Venice Hospital,
Inc. Project), 5.40% 12/01/2003 464,845
-----------------
599,167
-----------------
Life Care 1,145,000 St. Johns County Industrial Development
13.9% Authority, Industrial Development Revenue
Bonds, Series 1993A, (Vicar's Landing
Project), 6.20% 2/15/2003 1,084,258
500,000 Collier County Health Facilities Authority,
Health Facility Refunding Revenue Bonds, (The
Moorings Inc. Project), Series 1994, 6.00% 12/01/2005 460,495
-----------------
1,544,753
-----------------
The accompanying notes are an integral part of the financial statements
48
<PAGE>
Principal Amount Maturity Date Value (Note 1)
Single-Family $525,000 Florida Housing Finance Agency, Single Family
Housing Mortgage Revenue Refunding Bonds, 1994 Series
4.5% A (Non-AMT), 5.75% 1/01/2005 $505,339
-----------------
Special/Sales 745,000 Dade County, Florida, Special Obligation
Tax Revenue Bonds, (Courthouse Center Project), Series
11.0% 1994, 5.75% 4/01/2003 719,379
500,000 Hillsborough County, Florida, Capital
Improvement Bonds, FGIC Insured, 6.00% 8/01/2005 498,045
-----------------
1,217,424
-----------------
Toll Roads/ 750,000 Escambia County, Florida, Road Improvement
Turnpike Revenue Bonds, Series 1993A, 5.00% 1/01/2000 713,168
-----------------
Authorities
6.4%
Water & Sewer 500,000 Jacksonville, Florida, Water and Sewer
19.7% District, Water and Sewer Revenue Bonds, MBIA
Insured, 5.00% 10/01/2000 479,520
500,000 East County Water Control District, Water
Management Consolidated Refunding Bonds,
Series 1994, (Lee and Hendry Counties,
Florida), AGIC Insured, 5.375% 11/01/2001 486,765
750,000 City of Titusville, Florida, Water and Sewer
Revenue Bonds, Series 1994, MBIA Insured,
5.20% 10/01/2002 717,270
500,000 Charlotte County, Florida, Utility System
Revenue Bonds, Series 1994, FGIC Insured,
6.00% 10/01/2003 507,400
-----------------
2,190,955
-----------------
Pre-Refunded 300,000 Jacksonville Electric Authority,
Bonds (Jacksonville, Florida), Bulk Power Supply
2.9% System Revenue Bonds, (Scherer 4 Project,
Issue One, Series 1991 A), Pre-Refunded to
10/1/2000 101.5, 6.75% 10/01/2021 319,950
-----------------
Total Municipal Bonds and Investments
(Cost $11,068,325)--97.0% 10,781,223
Cash and Other Assets, Less Liabilities--3.0% 335,573
-----------------
Net Assets--100.0% $11,116,796
=================
The accompanying notes are an integral part of the financial statements
49
<PAGE>
Investment Federal Income Tax Information:
Portfolio (cont'd) At December 31, 1994, the net unrealized
depreciation of investments based on
cost for Federal income tax purposes
of $11,068,325 was as follows:
Aggregate gross unrealized appreciation
for all investments in which there is an
excess of value over tax cost $26,649
Aggregate gross unrealized depreciation
for all investments in which there is an
excess of tax cost over value (313,751)
-----------------
$(287,102)
=================
</TABLE>
The accompanying notes are an integral part of the financial statements
50
<PAGE>
State Street Research Florida Tax-Free Fund
Statement of Assets and Liabilities
December 31, 1994
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Assets Investments, at value (Cost $11,068,325) (Note 1) $10,781,223
Cash 175,146
Interest receivable 174,601
Receivable for fund shares sold 25,974
Receivable from Distributor (Note 3) 18,869
Receivable for securities sold 15,000
Deferred organization costs and other assets (Note 1) 24,750
----------
11,215,563
Liabilities Dividends payable $28,922
Capital gains distribution payable 10,976
Accrued trustees' fees (Note 2) 7,991
Accrued management fee (Note 2) 5,114
Accrued distribution fee (Note 5) 4,280
Other accrued expenses 41,484 98,767
---- ----------
Net Assets $11,116,796
==========
Net Assets consist of:
Undistributed net investment income $ 40,510
Unrealized depreciation of investments (287,102)
Accumulated net realized loss (595,940)
Shares of beneficial interest 11,959,328
----------
$11,116,796
==========
Net Asset Value and redemption price per share of Class A shares
($3,617,650 / 405,524 shares of beneficial interest) $8.92
==========
Maximum Offering Price per share of Class A shares ($8.92 /
.955) $9.34
==========
Net Asset Value and offering price per share of Class B shares
($2,878,867 / 322,805 shares of beneficial interest)* $8.92
==========
Net Asset Value, offering price and redemption price per share of Class C
shares ($3,282,960 / 367,834 shares of beneficial interest) $8.93
==========
Net Asset Value and offering price per share of Class D shares
($1,337,319 / 149,962 shares of beneficial interest)* $8.92
==========
</TABLE>
* Redemption price per share for Class B and Class D is equal to net asset
value less any applicable contingent deferred sales charge.
The accompanying notes are an integral part of the financial statements.
51
<PAGE>
State Street Research Florida Tax-Free Fund
Statement of Operations
For the year ended December 31, 1994
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Investment Interest $ 599,021
Income
Expenses Custodian fee $ 86,207
Management fee (Note 2) 61,932
Audit fee 20,843
Trustees' fees (Note 2) 15,233
Legal fees 12,940
Transfer agent and shareholder services (Note 2) 12,456
Reports to shareholders 11,519
Distribution fee--Class A (Note 5) 9,874
Distribution fee--Class B (Note 5) 25,909
Distribution fee--Class D (Note 5) 13,144
Amortization of organization costs (Note 1) 6,318
Registration fees 1,302
Miscellaneous 5,465
--------
283,142
Expenses borne by the Distributor (Note 3) (206,064) 77,078
-------- ----------
Net investment income 521,943
----------
Realized and Net realized loss on investments (Notes 1 and 4) (595,926)
Unrealized Net unrealized depreciation of investments (385,696)
Loss on ----------
Investments Net loss on investments (981,622)
----------
Net decrease in net assets resulting from operations $(459,679)
==========
</TABLE>
The accompanying notes are an integral part of the financial statements
52
<PAGE>
State Street Research Florida Tax-Free Fund
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
August 10, 1993
(Commencement
of Operations)
Year ended to
December 31, December 31,
1994 1993
<S> <C> <C> <C>
Increase Operations:
(Decrease) Net investment income $ 521,943 $ 113,502
in Net Assets Net realized gain (loss) on investments* (595,926) 27,188
Net unrealized appreciation (depreciation) of
investments (385,696) 98,594
-------------- ----------------
Net increase (decrease) resulting from operations (459,679) 239,284
-------------- ----------------
Dividends from net investment income:
Class A (177,518) (33,138)
Class B (97,739) (12,716)
Class C (161,153) (52,037)
Class D (49,113) (11,521)
-------------- ----------------
(485,523) (109,412)
-------------- ----------------
Distributions from net realized gains:
Class A (7,179) (1,822)
Class B (5,693) (866)
Class C (6,498) (1,833)
Class D (2,648) (663)
-------------- ----------------
(22,018) (5,184)
-------------- ----------------
Net increase from fund share transactions (Note 7) 1,975,558 9,983,770
-------------- ----------------
Total increase in net assets 1,008,338 10,108,458
Net Assets Beginning of year 10,108,458 --
-------------- ----------------
End of year (including undistributed net
investment income of $40,510 and $4,090, respectively) $11,116,796 $10,108,458
============== ================
*Net realized gain (loss) for Federal income
tax purposes (Note 1) $ (492,473) $ 27,188
============== ================
</TABLE>
The accompanying notes are an integral part of the financial statements
53
<PAGE>
State Street Research Florida Tax-Free Fund
Notes to Financial Statements
December 31, 1994
Note 1
State Street Research Florida Tax-Free Fund (the "Fund"), is a series of
State Street Research Tax-Exempt Trust (the "Trust"), which was organized as a
Massachusetts business trust in December, 1985 and is registered under the
Investment Company Act of 1940, as amended, as an open-end management
investment company. The Fund commenced operations in August, 1993. Five
series of the Trust are publicly offered: State Street Research Florida Tax-
Free Fund, State Street Research California Tax-Free Fund, State
Street Research Tax-Exempt Fund, State Street Research New York Tax-Free Fund
and State Street Research Pennsylvania Tax-Free Fund.
The Fund offers four classes of shares. Class A shares are subject to an
initial sales charge of up to 4.50% and pay a service fee equal to 0.25% of
average daily net assets. Class B shares are subject to a contingent deferred
sales charge on certain redemptions made within five years of purchase and
pay annual distribution and service fees of 1.00%. Class B shares
automatically convert into Class A shares (which pay lower ongoing expenses)
at the end of eight years after the issuance of the Class B shares. Class C
shares are only offered to certain employee benefit plans and large
institutions. No sales charge is imposed at the time of purchase or
redemption of Class C shares. Class C shares do not pay any distribution or
service fees. Class D shares are subject to a contingent deferred sales
charge of 1.00% on any shares redeemed within one year of their purchase.
Class D shares also pay annual distribution and service fees of 1.00%. The
Fund's expenses are borne pro rata by each class, except that each class
bears expenses, and has exclusive voting rights with respect to provisions of
the Plan of Distribution, related specifically to that class. The Trustees
declare separate dividends on each class of shares.
The following significant policies are consistently followed by the Fund in
preparing its financial statements, and such policies are in conformity with
generally accepted accounting principles for investment companies.
A. Investment Valuation
Tax-exempt securities are valued by a pricing service, which utilizes market
transactions, quotations from dealers, and various relationships among
securities in determining value. Short-term obligations are valued at
amortized cost. Other securities, if any, are valued at their fair value as
determined in accordance with established methods consistently applied.
B. Security Transactions
Security transactions are accounted for on the trade date (date the order to
buy or sell is executed). Realized gains or losses are reported on the basis
of identified cost of securities delivered.
C. Net Investment Income
Net investment income is determined daily and consists of interest accrued
and discount earned, less amortization of premium and the estimated daily
expenses of the Fund. Interest income is accrued daily as earned. The Fund is
charged for expenses directly attributable to it, while indirect expenses are
allocated among all funds in the Trust.
D. Dividends
Dividends are declared daily by the Fund based upon projected net investment
income and paid or reinvested monthly. Net realized capital gains, if any,
are distributed annually, unless additional distributions are required for
compliance with applicable tax regulations.
Income dividends and capital gain distributions are determined in accordance
with Federal income tax regulations which may differ from generally accepted
accounting principles.
54
<PAGE>
E. Federal Income Taxes
No provision for Federal income taxes is necessary because the Fund intends
to qualify under Subchapter M of the Internal Revenue Code and its policy is
to distribute all of its taxable income, including net realized capital
gains, within the prescribed time periods. At December 31, 1994, the Fund had
a capital loss carryforward of $492,473 available, to the extent provided in
regulations, to offset future capital gains, if any, which expires on
December 31, 2002.
In order to meet certain excise tax distribution requirements under Section
4982 of the Internal Revenue Code, the Fund is required to measure and
distribute annually, if necessary, net capital gains realized during a
twelve-month period ending October 31. In this connection, the Fund is
permitted to defer into its next fiscal year any net capital losses incurred
between each November 1 and the end of its fiscal year. From November 1, 1994
through December 31, 1994 the Fund incurred net capital losses of $103,453
and intends to defer and treat such losses as arising in the fiscal year
ending December 31, 1995.
F. Deferred Organization Costs
Certain costs incurred in the organization and registration of the Fund were
capitalized and are being amortized under the straight-line method over a
period of five years.
Note 2
The Trust and State Street Research & Management Company (the "Adviser"), an
indirect wholly-owned subsidiary of Metropolitan Life Insurance Company
("Metropolitan"), have entered into an agreement under which the Adviser
earns monthly fees at an annual rate of 0.55% of the Fund's average daily net
assets. In consideration of these fees, the Adviser furnishes the Fund with
management, investment advisory, statistical and research facilities and
services. The Adviser also pays all salaries, rent and certain other expenses
of management. During the year ended December 31, 1994, the fees pursuant to
such agreement amounted to $61,932.
State Street Research Shareholder Services, a division of State Street
Research Investment Services, Inc., the Trust's principal underwriter (the
"Distributor"), an indirect wholly-owned subsidiary of Metropolitan, provides
certain shareholder services to the Fund such as responding to inquiries and
instructions from investors with respect to the purchase and redemption of
shares of the Fund. During the year ended December 31, 1994, the amount of
such expenses was $6,948.
The fees of the Trustees not currently affiliated with the Adviser amounted
to $15,233 during the year ended December 31, 1994. The Trust has an optional
deferred compensation plan for its Trustees. The fees of participating
Trustees are invested in shares of a State Street Research fund instead of
paying those fees in cash. Participating Trustees receive deferred amounts
equal to the market value of such shares including any reinvested income and
capital gains distributions.
Note 3
The Distributor and its affiliates may from time to time and in varying
amounts voluntarily assume some portion of fees or expenses relating to the
Fund. During the year ended December 31, 1994, the amount of such expenses
assumed by the Distributor and its affiliates was $206,064.
Note 4
For the year ended December 31, 1994, purchases and sales of securities,
exclusive of short-term obligations, aggregated $14,896,319 and $12,857,121,
respectively.
55
<PAGE>
Notes (cont'd)
Note 5
The Trust has adopted a Plan of Distribution Pursuant to Rule 12b-1 (the
"Plan") under the Investment Company Act of 1940, as amended. Under the Plan,
the Fund pays annual service fees to the Distributor at a rate of 0.25% of
average daily net assets for Class A, Class B and Class D shares. In
addition, the Fund pays annual distribution fees of 0.75% of average daily
net assets for Class B and Class D shares. The Distributor uses such payments
for personal services and/or the maintenance of shareholder accounts, to
reimburse securities dealers for distribution and marketing services, to
furnish ongoing assistance to investors and to defray a portion of its
distribution and marketing expenses. For the year ended December 31, 1994,
fees pursuant to such plan amounted to $9,874, $25,909 and $13,144, for Class
A, Class B and Class D, respectively.
The Fund has been informed that the Distributor and MetLife
Securities, Inc., a wholly-owned subsidiary of Metropolitan, earned initial
sales charges aggregating $7,259 and $18,384, respectively on sales of Class
A shares of the Fund during the year ended December 31, 1994, and that
MetLife Securities, Inc. earned commissions aggregating $37,025 on sales of
Class B shares and that the Distributor collected contingent deferred sales
charges of $8,390 on redemptions of Class B shares during the same period.
Note 6
Under normal circumstances at least 80% of the Fund's net assets will be
invested in Florida Municipal Obligations. Certain proposed Florida
constitutional amendments, legislative measures, executive orders,
administrative regulations and voter initiatives could result in adverse
consequences affecting Florida Municipal Obligations. Also, the Fund is able
to invest up to 25% of total assets in a single industry. Accordingly, the
Fund's investments may be subject to greater risk than those in a fund with
more restrictive concentration limits.
At December 31, 1994, investments totalling 32.6% of the Fund's net assets
were insured as to the timely payment of principal and interest by Municipal
Bond Investors Assurance Corp. (MBIA).
56
<PAGE>
Note 7
The Trustees have the authority to issue an unlimited number of shares of
beneficial interest, $.001 par value per share. At December 31, 1994,
Metropolitan owned 52,486 Class A shares, 52,486 Class B shares, 367,407
Class C shares and 52,486 Class D shares of the Fund and the Adviser owned
one share of each of Class A, Class B, Class C and Class D of the Fund.
Share transactions were as follows:
<TABLE>
<CAPTION>
August 10, 1993
(Commencement of
Year ended Operations) to
December 31, 1994 December 31, 1993
---------------------------- -------------------------
Class A Shares Amount Shares Amount
- ------------------------------------ ------------ ------------ -------- -------------
<S> <C> <C> <C> <C>
Shares sold 189,827 $ 1,764,291 372,668 $3,605,960
Issued upon reinvestment of:
Distribution from net realized
gains 170 1,513 126 1,229
Dividends from net investment
income 9,370 86,293 1,644 15,869
Shares repurchased (158,734) (1,446,156) (9,547) (92,291)
------------ ------------ -------- -------------
Net increase 40,633 $ 405,941 364,891 $3,530,767
============ ============ ======== =============
Class B Shares Amount Shares Amount
- ------------------------------------ ------------ ------------ -------- -------------
Shares sold 197,912 $ 1,841,260 173,156 $1,669,314
Issued upon reinvestment of:
Distribution from net realized
gains 236 2,104 53 517
Dividends from net investment
income 5,265 48,194 257 2,475
Shares repurchased (54,070) (493,819) (4) (39)
------------ ------------ -------- -------------
Net increase 149,343 $ 1,397,739 173,462 $1,672,267
============ ============ ======== =============
Class C Shares Amount Shares Amount
- ------------------------------------ ------------ ------------ -------- -------------
Shares sold 393 $ 3,651 366,518 $3,500,250
Issued upon reinvestment of:
Distribution from net realized
gains 728 6,490 188 1,833
Dividends from net investment
income 11 96 -- --
Shares repurchased -- -- (4) (38)
------------ ------------ -------- -------------
Net increase 1,132 $ 10,237 366,702 $3,502,045
============ ============ ======== =============
Class D Shares Amount Shares Amount
- ------------------------------------ ------------ ------------ -------- -------------
Shares sold 31,855 $ 293,877 135,461 $1,306,148
Issued upon reinvestment of:
Distribution from net realized
gains 174 1,547 41 398
Dividends from net investment
income 1,169 10,741 232 2,238
Shares repurchased (15,874) (144,524) (3,096) (30,093)
------------ ------------ -------- -------------
Net increase 17,324 $ 161,641 132,638 $1,278,691
============ ============ ======== =============
</TABLE>
57
<PAGE>
State Street Research Florida Tax-Free Fund
Financial Highlights
For a share outstanding throughout each year.
<TABLE>
<CAPTION>
Class A Class B Class C Class D
----------------------- ----------------------- ------------------------ -------------------------
Year ended Year ended Year ended Year ended
December 31, December 31, December 31, December 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 Note 3). $.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.
58
<PAGE>
Report of Independent Accountants
To the Trustees of State Street Research
Tax-Exempt Trust and the Shareholders of
State Street Research Florida Tax-Free Fund
In our opinion, the accompanying statement of assets and liabilities, including
the investment portfolio, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of State Street Research Florida
Tax-Free Fund (a series of State Street Research Tax-Exempt Trust, hereafter
referred to as the "Trust") at December 31, 1994, and the results of its
operations, the changes in its net assets and the financial highlights for the
periods indicated, in conformity with generally accepted accounting principles.
These financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Trust's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of securities owned at
December 31, 1994 by correspondence with the custodian, provide a reasonable
basis for the opinion expressed above.
Price Waterhouse LLP
Boston, Massachusetts
February 10, 1995
59
<PAGE>
Management's Discussion of Fund Performance
The bond market was repeatedly buffeted in 1994 by uncertainty over the
strength of the economy and the timing of the Fed's next rate increase.
Florida Tax-Free Fund was hit hard during the market's sharp decline in
February, March and April. In order to reduce the portfolio's sensitivity to
interest rates, we continued our efforts to shorten the portfolio's duration and
maturity. In some cases we sold bonds for losses and replaced them with
higher-yielding, more defensive bonds. We also increased our position in insured
bonds to more than 50% of the portfolio, as higher-quality, more-liquid bonds
tend to perform better in weak markets.
We have targeted high-quality bonds--the bonds in the Fund's portfolio have
an average credit rating of AA, as measured by Standard & Poor's Corporation.
In general, high-quality bonds are more "liquid," which means they are easier
to buy and sell.
Comparison Of Change In Value Of A $10,000 Investment In Florida Tax-Free
Fund And
The Lehman Municipal Bond Index
State Street Research Florida Tax-Free Fund - Class A
LINE CHART DATA
(INCEPTION VALUE = $9,550)
VALUE OF
ACCOUNT OF
VALUE OF LEHMAN MUNI BOND
ACCOUNT AT INDEX AT
DATE YEAR END YEAR END
8/10/93 $ 9,550 $10,000
12/31/93 9,881 10,470
12/31/94 9,484 9,929
State Street Research Florida Tax-Free Fund - Class B
LINE CHART DATA
(INCEPTION VALUE = $10,000)
VALUE OF
ACCOUNT OF
VALUE OF LEHMAN MUNI BOND
ACCOUNT AT INDEX AT
DATE YEAR END YEAR END
8/10/93 $10,000 $10,000
12/31/93 10,321 10,470
12/31/94 9,440 9,929
State Street Research Florida Tax-Free Fund - Class C
LINE CHART DATA
(INCEPTION VALUE = $10,000)
VALUE OF
ACCOUNT OF
VALUE OF LEHMAN MUNI BOND
ACCOUNT AT INDEX AT
DATE YEAR END YEAR END
8/10/93 $10,000 $10,000
12/31/93 10,355 10,470
12/31/94 9,975 9,929
State Street Research Florida Tax-Free Fund - Class D
LINE CHART DATA
(INCEPTION VALUE = $10,000)
VALUE OF
ACCOUNT OF
VALUE OF LEHMAN MUNI BOND
ACCOUNT AT INDEX AT
DATE YEAR END YEAR END
8/10/93 $10,000 $10,000
12/31/93 10,321 10,470
12/31/94 9,832 9,929
All returns represent past performance, which is no guarantee of future
results. The investment return and principal value of an investment made in
the Fund will fluctuate and shares, when redeemed, may be worth more or less
than their original cost. All returns assume reinvestment of capital gain
distributions and income dividends. Returns reflect voluntary reduction by
the Distributor or its affiliates of fees and expenses related to the Fund.
The second number shown is what performance would have been without a
reduction of Fund fees and expenses. "A" share returns for each of the
periods reflect the maximum 4.5% sales charge. "B" share returns for the
1-year and Life of Fund periods reflect a 5% and a 4% contingent deferred
sales charge, respectively. "C" shares, offered without a sales charge, are
available only to certain employee benefit plans and large institutions. "D"
share return for the 1-year period reflects a 1% contingent deferred sales
charge. The Lehman Muni Bond Index is an index of approximately 15,000
fixed-coupon, investment-grade municipal bonds. The index is unmanaged and
does not take sales charges into consideration. Direct investment in the
index is not possible; results are for illustrative purposes only.
60
<PAGE>
State Street Research Pennsylvania Tax-Free Fund
Investment Portfolio
December 31, 1994
<TABLE>
<CAPTION>
Maturity
Principal Amount Date Value (Note 1)
<S> <C> <C> <C> <C>
Municipal Bonds 97.5%
General $ 600,000 City of Bethlehem, Lehigh and Northampton Counties,
Obligation Pennsylvania, General Obligation Bonds, Series A of
15.5% 1992, MBIA Insured, 6.00% 6/01/2001 $ 610,452
500,000 Commonwealth of Pennsylvania, General Obligation
Bonds, Second Series of 1994, (Refunding and
Projects), MBIA Insured, 5.00% 6/15/2002 476,390
500,000 Puerto Rico Municipal Finance Agency, 1994 Series A
Bonds, FSA Insured, 5.30% 7/01/2002 487,655
250,000 Government of Guam, General Obligation Bonds, 1993
Series A, 4.80% 11/15/2003 223,035
500,000 Bradford Area School District, McKean County,
Pennsylvania, General Obligation Bonds, Series of
1994, FGIC Insured, 6.00% 10/01/2004 503,240
250,000 Dauphin County General Authority, Revenue Bonds,
(School District Pooled Financing Program), 4.85% 6/01/2026 230,752
-----------------
2,531,524
-----------------
College & 250,000 Pennsylvania Higher Educational Facilities
University Authority, (Commonwealth of Pennsylvania), (Widener
1.4% University), Revenue Bonds, 1993 Series A, Connie
Lee Insured, 4.50% 7/15/2002 235,082
-----------------
Hospital/ 500,000 Scranton-Lackawanna Health and Welfare Authority,
Health Care Revenue Bonds, Series A of 1994, (Allied Services
23.7% Rehabilitation Hospitals Project), 6.60% 7/15/2000 484,370
350,000 The Lebanon County Good Samaritan Hospital
Authority, Lebanon County, Pennsylvania, Hospital
Revenue Bonds, Series of 1993, (The Good Samaritan
Hospital Project), 5.00% 11/15/2000 322,672
750,000 The Hospitals and Higher Education Facilities
Authority of Philadelphia, Hospital Revenue Bonds,
Series A of 1993, (Graduate Health System Obligated
Group), 5.75% 7/01/2002 691,193
1,140,000 Montgomery County Higher Education and Health
Authority, Pennsylvania, Northwestern Corp., 6.50% 6/01/2004 1,118,750
The accompanying notes are an integral part of the financial statements
61
<PAGE>
Hospital/ $ 350,000 The Lebanon County Good Samaritan Hospital
Health Care Authority, Lebanon County, Pennsylvania, Hospital
(cont'd) Revenue Bonds, Series of 1993, (The Good Samaritan
Hospital Project), 5.55% 11/15/2004 $ 313,127
500,000 Lancaster County Hospital Authority, Lancaster,
Pennsylvania, Health Center Revenue Bonds, Series of
1994, (Masonic Homes Project), AMBAC Insured, 5.00% 11/15/2004 458,290
475,000 The Hospitals and Higher Education Facilities
Authority of Philadelphia, (Pennsylvania), Hospital
Revenue Bonds, Series of 1985, (Nazareth Hospital
Project), 9.375% 7/01/2005 486,804
-----------------
3,875,206
-----------------
Industrial 935,000 Montgomery County Industrial Development Authority,
Development Health Facilities Revenue Bonds, Series of 1993,
5.6% (ECRI Project), 6.40% 6/01/2003 906,651
-----------------
Lease Revenue 250,000 Puerto Rico Public Buildings Authority, Revenue
7.4% Refunding Bonds, Series J, 6.60% 7/01/2004 254,750
1,000,000 Pennsylvania Convention Center Authority, Refunding
Revenue Bonds, 1994 Series A, 6.25% 9/01/2004 953,300
-----------------
1,208,050
-----------------
Life Care 790,000 Delaware County Industrial Development Authority,
4.5% Revenue Bonds, Series of 1994, (Martins Run), 5.75% 12/15/2003 733,594
-----------------
Power 350,000 Puerto Rico Electric Power Authority, Power Revenue
7.7% Bonds, Series T, 5.75% 7/01/2001 344,985
1,000,000 City of Philadelphia, Pennsylvania, Gas Works
Revenue Bonds, Fifteenth Series, 5.00% 8/01/2003 906,920
-----------------
1,251,905
-----------------
Single-Family 410,000
Housing Pennsylvania Housing Finance Agency, Single Family
10.3% Mortgage Revenue Bonds, Series 1994-41B (AMT), 5.50% 4/01/2001 400,886
255,000 Pennsylvania Housing Finance Agency, Single Family
Mortgage Revenue Bonds, FNMA Insured, 5.05% 7/01/2002 242,632
360,000 Pennsylvania Housing Finance Agency, Single Family
Mortgage Revenue Bonds, Series 1994-39B (AMT), 6.00% 4/01/2003 356,969
The accompanying notes are an integral part of the financial statements
62
<PAGE>
Single-Family $ 375,000
Housing Pennsylvania Housing Finance Agency, Single Family
(cont'd) Mortgage Revenue Bonds, Series 1994-39B (AMT), 6.00% 10/01/2003 $ 371,700
330,000 Pennsylvania Housing Finance Agency, Single Family
Mortgage Revenue Bonds, Series 1994-38 (Non-AMT),
5.50% 4/01/2005 313,137
-----------------
1,685,324
-----------------
Special/Sales 195,000 Allegheny County, Pennsylvania, Redevelopment
Tax Revenue Authority Refunding Bonds, Home Improvement Loan,
5.9% 5.20% 2/01/2003 183,236
270,000 Allegheny County, Pennsylvania, Redevelopment
Authority Refunding Bonds, Home Improvement Loan,
5.20% 8/01/2003 252,941
500,000 Pennsylvania Intergovernmental Cooperation
Authority, Special Tax Revenue Refunding Bonds,
(City of Philadelphia Funding Program), Series of
1994, MBIA Insured, 7.00% 6/15/2004 531,150
-----------------
967,327
-----------------
Structured 1,000,000 Pennsylvania Economic Development Financing
Financings Authority, Resource Recovery Revenue Bonds, (Colver
5.8% Project), Series 1994D, 7.05% 12/01/2010 947,870
-----------------
Water & Sewer 500,000 Allegheny County Sanitary Authority, Allegheny
9.7% County, Pennsylvania, Sewer Revenue Bonds, Series B
of 1994, MBIA Insured, 5.25% 12/01/2001 488,955
500,000 Wyoming Valley Sanitary Authority, (Luzerne County,
Pennsylvania), Sewer Revenue Bonds, Series of 1993,
FSA Insured, 4.40% 11/15/2002 450,460
210,000 Wilkinsburg-Penn Joint Water Authority, Allegheny
County, Pennsylvania, Water Revenue Refunding Bonds,
Series A of 1993, FGIC Insured, 4.65% 3/15/2004 188,950
455,000 Bucks County Water and Sewer Authority, Bucks
County, Pennsylvania, Collection Sewer System Sewer
Revenue Bonds, Series of 1994, FGIC Insured, 6.15% 12/01/2005 455,246
-----------------
1,583,611
-----------------
Total Municipal Bonds (Cost $16,598,894) 15,926,144
-----------------
The accompanying notes are an integral part of the financial statements
63
<PAGE>
Short-Term Obligations 1.2%
$100,000 North Central, Texas, Health Facilities Development
Corp. Hospital Revenue Bonds, (Presbyterian Medical
Center Project), Series 1985C, 3.70% 12/01/2015++ $ 100,000
100,000 The Wake County Industrial Facilities and Pollution
Control Financing Authority, Pollution Control
Revenue Bonds, (Carolina Power & Light Co. Project),
Subject to AMT, Series 1987, 3.35% 3/01/2017++ 100,000
-----------------
Total Short-Term Obligations (Cost $200,000) 200,000
-----------------
Total Investments (Cost $16,798,894)--98.7% 16,126,144
Cash and Other Assets, Less Liabilities--1.3% 204,903
-----------------
Net Assets--100.0% $16,331,047
=================
Federal Income Tax Information:
At December 31, 1994, the net unrealized
depreciation of investments based on
cost for Federal income tax purposes
of $16,798,894 was as follows:
Aggregate gross unrealized appreciation
for all investments in which there is an
excess of value over tax cost $ 15,406
Aggregate gross unrealized depreciation
for all investments in which there is an
excess of tax cost over value (688,156)
-----------------
$ (672,750)
</TABLE>
++ Interest rates on these obligations may change daily.
The accompanying notes are an integral part of the financial statements
64
<PAGE>
State Street Research Pennsylvania Tax-Free Fund
Statement of Assets and Liabilities
December 31, 1994
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Assets Investments, at value (Cost $16,798,894) (Note 1) $16,126,144
Cash 35,145
Interest receivable 219,522
Receivable from Distributor (Note 3) 28,022
Receivable for fund shares sold 3,090
Deferred organization costs and other assets (Note 1) 19,067
------------
16,430,990
Liabilities Dividends payable $33,665
Accrued management fee (Note 2) 7,582
Accrued distribution fee (Note 5) 6,376
Accrued trustees' fees (Note 2) 4,851
Accrued transfer agent and shareholder services (Note 2) 4,472
Other accrued expenses 42,997 99,943
------ ------------
Net Assets $16,331,047
============
Net Assets consist of:
Undistributed net investment income $ 61,003
Unrealized depreciation of investments (672,750)
Accumulated net realized loss (482,868)
Shares of beneficial interest 17,425,662
------------
$16,331,047
============
Net Asset Value and redemption price per share of Class A shares
($7,330,202 / 817,559 shares of beneficial interest) $8.97
============
Maximum Offering Price per share of Class A shares ($8.97 / .955) $9.39
============
Net Asset Value and offering price per share of Class B shares
($4,602,799 / 513,552 shares of beneficial interest)* $8.96
============
Net Asset Value, offering price and redemption price per share of Class C
shares ($3,303,534 / 368,244 shares of beneficial interest) $8.97
============
Net Asset Value and offering price per share of Class D shares
($1,094,512 / 122,070 shares of beneficial interest)* $8.97
============
</TABLE>
* Redemption price per share for Class B and Class D is equal to net asset
value less any
applicable contingent deferred sales charge.
The accompanying notes are an integral part of the financial statements
65
<PAGE>
State Street Research Pennsylvania Tax-Free Fund
Statement of Operations
For the year ended December 31, 1994
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Investment Interest $ 817,194
Income
Expenses Custodian fee $ 86,067
Management fee (Note 2) 83,275
Transfer agent and shareholder services (Note 2) 26,990
Legal fees 22,276
Audit fee 21,061
Reports to shareholders 18,839
Trustees' fees (Note 2) 15,048
Distribution fee--Class A (Note 5) 15,684
Distribution fee--Class B (Note 5) 43,762
Distribution fee--Class D (Note 5) 10,729
Registration fees 8,645
Amortization of organization costs (Note 1) 5,449
Miscellaneous 5,690
--------
363,515
Expenses borne by the Distributor (Note 3) (255,470) 108,045
-------- ------------
Net investment income 709,149
------------
Realized and Net realized loss on investments (Notes 1 and 4) (482,830)
Unrealized Net unrealized depreciation of investments (783,954)
Loss on ------------
Investments Net loss on investments (1,266,784)
------------
Net decrease in net assets resulting from
operations $ (557,635)
===========
</TABLE>
The accompanying notes are an integral part of the financial statements
66
<PAGE>
State Street Research Pennsylvania Tax-Free Fund
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
August 10, 1993
(Commencement
Year ended of Operations) to
December 31, 1994 December 31, 1993
<S> <C> <C> <C>
Increase Operations:
(Decrease) Net investment income $ 709,149 $ 124,045
in Net Assets Net realized gain (loss) on investments* (482,830) 10,888
Net unrealized appreciation (depreciation) of
investments (783,954) 111,204
------------ ------------
Net increase (decrease) resulting from operations (557,635) 246,137
------------ ------------
Dividends from net investment income:
Class A (289,886) (28,627)
Class B (167,608) (20,516)
Class C (163,900) (52,472)
Class D (40,841) (8,341)
------------ ------------
(662,235) (109,956)
------------- ------------
Distribution from net realized gains:
Class A -- (3,389)
Class B -- (3,306)
Class C -- (3,382)
Class D -- (849)
-------------- -----------
-- (10,926)
-------------- -----------
Net increase from fund share transactions (Note 7) 5,961,498 11,464,164
-------------- ----------
Total increase in net assets 4,741,628 11,589,419
Net Assets Beginning of year 11,589,419 --
-------------- ----------
End of year (including undistributed net
investment income of $61,003 and $14,089,
respectively) $16,331,047 $11,589,419
============== ===========
*Net realized gain (loss) for Federal income
tax purposes (Note 1) $ (367,760) $ 10,888
============== ============
</TABLE>
The accompanying notes are an integral part of the financial statements
67
<PAGE>
State Street Research Pennsylvania Tax-Free Fund
Notes to Financial Statements
Note 1
State Street Research Pennsylvania Tax-Free Fund (the "Fund"), is a series of
State Street Research Tax-Exempt Trust (the "Trust"), which was organized as a
Massachusetts business trust in December, 1985 and is registered under
the Investment Company Act of 1940, as amended, as an open-end management
investment company. The Fund commenced operations in August, 1993. Five
series of the Trust are publicly offered: State Street Research Pennsylvania
Tax-Free Fund, State Street Research California Tax-Free Fund, State Street
Research Tax-Exempt Fund, State Street Research New York Tax-Free Fund and
State Street Research Florida Tax-Free Fund.
The Fund offers four classes of shares. Class A shares are subject to an
initial sales charge of up to 4.50% and pay a service fee equal to 0.25% of
average daily net assets. Class B shares are subject to a contingent deferred
sales charge on certain redemptions made within five years of purchase and
pay annual distribution and service fees of 1.00%. Class B shares
automatically convert into Class A shares (which pay lower ongoing expenses)
at the end of eight years after the issuance of the Class B shares. Class C
shares are only offered to certain employee benefit plans and large
institutions. No sales charge is imposed at the time of purchase or
redemption of Class C shares. Class C shares do not pay any distribution or
service fees. Class D shares are subject to a contingent deferred sales
charge of 1.00% on any shares redeemed within one year of their purchase.
Class D shares also pay annual distribution and service fees of 1.00%. The
Fund's expenses are borne pro rata by each class, except that each class
bears expenses, and has exclusive voting rights with respect to provisions of
the Plan of Distribution, relating specifically to that class. The Trustees
declare separate dividends on each class of shares.
The following significant policies are consistently followed by the Fund in
preparing its financial statements, and such policies are in conformity with
generally accepted accounting principles for investment companies.
A. Investment Valuation
Tax-exempt securities are valued by a pricing service, which utilizes market
transactions, quotations from dealers, and various relationships among
securities in determining value. Short- term obligations are valued at
amortized cost. Other securities, if any, are valued at their fair value as
determined in accordance with established methods consistently applied.
B. Security Transactions
Security transactions are accounted for on the trade date (date the order to
buy or sell is executed). Realized gains or losses are reported on the basis
of identified cost of securities delivered.
C. Net Investment Income
Net investment income is determined daily and consists of interest accrued
and discount earned, less amortization of premium and the estimated daily
expenses of the Fund. Interest income is accrued daily as earned. The Fund is
charged for expenses directly attributable to it, while indirect expenses are
allocated among all funds in the Trust.
D. Dividends
Dividends are declared daily by the Fund based upon projected net investment
income and paid or reinvested monthly. Net realized capital gains, if any,
are distributed annually, unless additional distributions are required for
compliance with applicable tax regulations.
Income dividends and capital gain distributions are determined in accordance
with Federal income tax regulations which may differ from generally accepted
accounting principles.
68
<PAGE>
E. Federal Income Taxes
No provision for Federal income taxes is necessary because the Fund intends
to qualify under Subchapter M of the Internal Revenue Code and its policy is
to distribute all of its taxable income, including net realized capital
gains, within the prescribed time periods. At December 31, 1994, the Fund had
a capital loss carryforward of $367,760 available, to the extent provided in
regulations, to offset future capital gains, if any, which expires on
December 31, 2002.
In order to meet certain excise tax distribution requirements under Section
4982 of the Internal Revenue Code, the Fund is required to measure and
distribute annually, if necessary, net capital gains realized during a
twelve-month period ending October 31. In this connection, the Fund is
permitted to defer into its next fiscal year any net capital losses incurred
between each November 1 and the end of its fiscal year. From November 1, 1994
through December 31, 1994 the Fund incurred net capital losses of $115,070
and intends to defer and treat such losses as arising in the fiscal year
ending December 31, 1995.
F. Deferred Organization Costs
Certain costs incurred in the organization and registration of the Fund were
capitalized and are being amortized under the straight-line method over a
period of five years.
Note 2
The Trust and State Street Research & Management Company (the "Adviser"), an
indirect wholly-owned subsidiary of Metropolitan Life Insurance Company
("Metropolitan"), have entered into an agreement under which the Adviser
earns monthly fees at an annual rate of 0.55% of the Fund's average daily net
assets. In consideration of these fees, the Adviser furnishes the Fund with
management, investment advisory, statistical and research facilities and
services. The Adviser also pays all salaries, rent and certain other expenses
of management. During the year ended December 31, 1994, the fees pursuant to
such agreement amounted to $83,275.
State Street Research Shareholder Services, a division of State Street
Research Investment Services, Inc., the Trust's principal underwriter (the
"Distributor"), an indirect wholly-owned subsidiary of Metropolitan, provides
certain shareholder services to the Fund such as responding to inquiries and
instructions from investors with respect to the purchase and redemption of
shares of the Fund. During the year ended December 31, 1994, the amount of
such expenses was $8,400.
The fees of the Trustees not currently affiliated with the Adviser amounted
to $15,048 during the year ended December 31, 1994. The Trust has an optional
deferred compensation plan for its Trustees. The fees of participating
Trustees are invested in shares of a State Street Research fund instead of
paying those fees in cash. Participating Trustees receive deferred amounts
equal to the market value of such shares including any reinvested income and
capital gains distributions.
Note 3
The Distributor and its affiliates may from time to time and in varying
amounts voluntarily assume some portion of fees or expenses relating to the
Fund. During the year ended December 31, 1994, the amount of such expenses
assumed by the Distributor and its affiliates was $255,470.
Note 4
For the year ended December 31, 1994, purchases and sales of securities,
exclusive of short-term obligations, aggregated $18,153,326 and $11,719,338,
respectively.
69
<PAGE>
Note 5
The Trust has adopted a Plan of Distribution Pursuant to Rule 12b-1 (the
"Plan") under the Investment Company Act of 1940, as amended. Under the Plan,
the Fund pays annual service fees to the Distributor at a rate of 0.25% of
average daily net assets for Class A, Class B
and Class D shares. In addition, the Fund pays annual distribution fees of
0.75% of average daily net assets for Class B and Class D shares. The
Distributor uses such payments for personal services and/or the maintenance
of shareholder accounts, to reimburse securities dealers for distribution and
marketing services, to furnish ongoing assistance to investors and to defray
a portion of its distribution and marketing expenses. For the year ended
December 31, 1994, fees pursuant to such plan amounted to $15,684, $43,762
and $10,729, for Class A, Class B and Class D, respectively.
The Fund has been informed that the Distributor and MetLife Securities, Inc.,
a wholly-owned subsidiary of Metropolitan, earned initial sales charges
aggregating $21,100 and $148,726, respectively, on sales of Class A shares of
the Fund during the year ended December 31, 1994, and that MetLife
Securities, Inc. earned commissions aggregating $42,955 on sales of Class B
shares and that the Distributor collected contingent deferred sales charges
aggregating $11,374 and $25 on redemptions of Class B and Class D shares,
respectively, during the same period.
Note 6
Under normal circumstances at least 80% of the Fund's net assets will be
invested in Pennsylvania Municipal Obligations. Certain proposed Pennsylvania
constitutional amendments, legislative measures, executive orders,
administrative regulations and voter initiatives could result in adverse
consequences affecting Pennsylvania Municipal Obligations. Also, the Fund is
able to invest up to 25% of total assets in a single industry. Accordingly,
the Fund's investments may be subject to greater risk than those in a fund
with more restrictive concentration limits.
At December 31, 1994, investments totalling 12.9% of the Fund's net assets
were insured as to the timely payment of principal and interest by Municipal
Bond Investors Assurance Corp. (MBIA).
70
<PAGE>
Notes (cont'd)
Note 7
The Trustees have the authority to issue an unlimited number of shares of
beneficial interest, $.001 par value per share. At December 31, 1994,
Metropolitan owned 52,405 Class A shares, 52,405 Class B shares, 366,838
Class C shares and 52,405 Class D shares of the Fund and the Adviser owned
one share of each of Class A, Class B, Class C and Class D of the Fund.
<TABLE>
<CAPTION>
August 10, 1993
(Commencement of
Year ended Operations) to
December 31, 1994 December 31, 1993
-------------------------- -------------------------
Class A Shares Amount Shares Amount
- ------------------------------------ ---------- ------------ -------- -------------
<S> <C> <C> <C> <C>
Shares sold 587,081 $ 5,508,772 370,155 $3,582,769
Issued upon reinvestment of:
Distribution from net realized
gains -- -- 319 3,102
Dividends from net investment
income 20,093 184,678 1,658 16,053
Shares repurchased (159,050) (1,460,714) (2,697) (26,060)
-------- ---------- -------- -----------
Net increase 448,124 $ 4,232,736 369,435 $3,575,864
======== =========== ======== ===========
Class B Shares Amount Shares Amount
- ------------------------------------ ---------- ------------ -------- -------------
Shares sold 209,557 $ 1,964,524 359,828 $3,482,724
Issued upon reinvestment of:
Distribution from net realized
gains -- -- 333 3,244
Dividends from net investment
income 12,037 110,843 1,332 12,899
Shares repurchased (68,255) (631,498) (1,280) (12,330)
---------- ------------ -------- -----------
Net increase 153,339 $ 1,443,869 360,213 $3,486,537
========== ============ ======== ===========
Class C Shares Amount Shares Amount
- ------------------------------------ ---------- ------------ -------- -------------
Shares sold -- -- 367,614 $3,510,761
Issued upon reinvestment of:
Distribution from net realized
gains -- -- 348 3,384
Dividends from net investment
income 279 2,581 7 71
Shares repurchased -- -- (4) (38)
---------- ------------ -------- -----------
Net increase 279 $ 2,581 367,965 $3,514,178
========== ============ ======== ===========
Class D Shares Amount Shares Amount
- ------------------------------------ ---------- ------------ -------- -----------
Shares sold 43,441 $ 409,646 92,066 $ 884,922
Issued upon reinvestment of:
Distribution from net realized
gains -- -- 79 766
Dividends from net investment
income 2,057 18,919 201 1,936
Shares repurchased (15,770) (146,253) (4) (39)
---------- ------------ -------- -----------
Net increase 29,728 $ 282,312 92,342 $ 887,585
========== ============ ======== ===========
</TABLE>
71
<PAGE>
State Street Research Pennsylvania Tax-Free Fund
Financial Highlights
For a share outstanding throughout each year.
<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 $ 9.74 $ 9.55 $ 9.73 $ 9.55
Net investment income* .44 .14 .38 .11
Net realized and
unrealized gain (loss)
on investments (.79) .20 (.80) .19
Dividends from
net investment income (.42) (.14) (.35) (.11)
Distribution from net
realized gains -- (.01) -- (.01)
-------- ------- ---------- ------
Net asset value,
end of year $ 8.97 $ 9.74 $ 8.96 $ 9.73
======== ======= ========== ======
Total return (3.60)%+ 3.52%+++ (4.36)%+ 3.19%+++
Net assets at
end of year (000s) $7,330 $3,598 $4,603 $3,506
Ratio of operating
expenses to average
net assets* 0.50% 0.50%++ 1.25% 1.25%++
Ratio of net
investment income to
average net assets* 4.93% 4.21%++ 4.14% 3.45%++
Portfolio turnover rate 80.90% 26.18% 80.90% 26.18%
*Reflects voluntary
assumption of fees or
expenses per share in
each year (Note 3). $.15 $.09 $.15 $.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.
72
<PAGE>
Financial Highlights (cont.)
<TABLE>
<CAPTION>
Class C Class D
------------------------------ ------------------------------
Year ended Year ended
December 31, 1994 1993** December 31, 1994 1993**
-------------------- ------ -------------------- ------
<S> <C> <C> <C> <C>
Net asset value,
beginning of year $ 9.74 $ 9.55 $ 9.74 $ 9.55
Net investment income* .47 .17 .38 .12
Net realized and
unrealized gain (loss) on
investments (.79) .17 (.80) .19
Dividends from net
investment income (.45) (.14) (.35) (.11)
Distribution from net
realized gains -- (.01) -- (.01)
--------- ------ --------- ------
Net asset value,
end of year $ 8.97 $ 9.74 $ 8.97 $ 9.74
========= ====== ========= ======
Total return (3.37)%+ 3.60%+++ (4.33)%+ 3.26%+++
Net assets at
end of year (000s) $3,304 $3,585 $1,095 $ 899
Ratio of operating
expenses to average net
assets* 0.25% 0.25%++ 1.25% 1.25%++
Ratio of net investment
income to average
net assets* 5.10% 4.52%++ 4.13% 3.49%++
Portfolio turnover rate 80.90% 26.18% 80.90% 26.18%
*Reflects voluntary
assumption of fees or
expenses per share in
each year (Note 3). $ .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.
73
<PAGE>
Report of Independent Accountants
To the Trustees of State Street Research
Tax-Exempt Trust and the Shareholders of
State Street Research Pennsylvania Tax-Free Fund
In our opinion, the accompanying statement of assets and liabilities,
including the investment portfolio, and the related statements of operations
and of changes in net assets and the financial highlights present fairly, in
all material respects, the financial position of State Street Research
Pennsylvania Tax-Free Fund (a series of State Street Research Tax-Exempt
Trust, hereafter referred to as the "Trust") at December 31, 1994, and the
results of its operations, the changes in its net assets and the financial
highlights for the periods indicated, in conformity with generally accepted
accounting principles. These financial statements and financial highlights
(hereafter referred to as "financial statements") are the responsibility of
the Trust's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
financial statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits, which included confirmation of securities owned at December 31,
1994 by correspondence with the custodian, provide a reasonable basis for the
opinion expressed above.
Price Waterhouse LLP
Boston, Massachusetts
February 10, 1995
74
<PAGE>
Management's Discussion of Fund Performance
The bond market was repeatedly buffeted in 1994 by uncertainty over the
strength of the economy and the timing of the Fed's next rate increase.
Pennsylvania Tax-Free Fund was hit hard during the market's sharp decline in
February, March and April. In order to reduce the portfolio's sensitivity to
interest rates, we continued our efforts to shorten the portfolio's duration
and maturity. In some cases, we sold bonds for losses and replaced them with
higher-yielding, more defensive bonds. We also increased our position in
insured bonds to more than 25% of the portfolio, as higher-quality,
more-liquid bonds tend to perform better in weak markets.
We have targeted high-quality bonds--the bonds in the Fund's portfolio have
an average credit rating of A, as measured by Standard & Poor's Corporation.
In general, high-quality bonds are more "liquid," which means they are easier
to buy and sell.
Comparison Of Change In Value Of A $10,000 Investment In Pennsylvania
Tax-Free Fund And
The Lehman Municipal Bond Index
State Street Research Pennsylvania Tax-Free Fund - Class A
LINE CHART DATA
(INCEPTION VALUE = $9,550)
VALUE OF
ACCOUNT OF
VALUE OF LEHMAN MUNI BOND
ACCOUNT AT INDEX AT
DATE YEAR END YEAR END
8/10/93 $ 9,550 $10,000
12/31/93 9,886 10,470
12/31/94 9,530 9,929
State Street Research Pennsylvania Tax-Free Fund - Class B
LINE CHART DATA
(INCEPTION VALUE = $10,000)
VALUE OF
ACCOUNT OF
VALUE OF LEHMAN MUNI BOND
ACCOUNT AT INDEX AT
DATE YEAR END YEAR END
8/10/93 $10,000 $10,000
12/31/93 10,319 10,470
12/31/94 9,474 9,929
State Street Research Pennsylvania Tax-Free Fund - Class C
LINE CHART DATA
(INCEPTION VALUE = $10,000)
VALUE OF
ACCOUNT OF
VALUE OF LEHMAN MUNI BOND
ACCOUNT AT INDEX AT
DATE YEAR END YEAR END
8/10/93 $10,000 $10,000
12/31/93 10,360 10,470
12/31/94 10,011 9,929
State Street Research Pennsylvania Tax-Free Fund - Class D
LINE CHART DATA
(INCEPTION VALUE = $10,000)
VALUE OF
ACCOUNT OF
VALUE OF LEHMAN MUNI BOND
ACCOUNT AT INDEX AT
DATE YEAR END YEAR END
8/10/93 $10,000 $10,000
12/31/93 10,326 10,470
12/31/94 9,879 9,929
All returns represent past performance, which is no guarantee of future
results. The investment return and principal value of an investment made in
the Fund will fluctuate and shares, when redeemed, may be worth more or less
than their original cost. All returns assume reinvestment of capital gain
distributions and income dividends. Returns reflect voluntary reduction by
the Distributor or its affiliates of fees and expenses related to the Fund.
The second number shown is what performance would have been without a
reduction of Fund fees and expenses. "A" share returns for each of the
periods reflect the maximum 4.5% sales charge. "B" share returns for the
1-year and Life of Fund periods reflect a 5% and a 4% contingent deferred
sales charge, respectively. "C" shares, offered without a sales charge, are
available only to certain employee benefit plans and large institutions. "D"
share return for the 1-year period reflects a 1% contingent deferred sales
charge. The Lehman Muni Bond Index is an index of approximately 15,000
fixed-coupon, investment-grade municipal bonds. The index is unmanaged and
does not take sales charges into consideration. Direct investment in the
index is not possible; results are for illustrative purposes only.
75
<PAGE>
APPENDIX A
TO STATEMENT OF ADDITIONAL INFORMATION
STATE STREET RESEARCH FLORIDA TAX-FREE FUND
Florida Taxes
Taxation of Fund Shares. Florida does not impose an income tax on
individuals. Thus, dividends and distributions paid by State Street Research
Florida Tax-Free Fund (the "Fund") to individuals who are residents of Florida
are not taxable by Florida. Florida imposes an income tax on corporations and
similar entities at a rate of 5.5%. Distributions of investment income and
capital gains by the Fund will be subject to Florida corporate income tax.
Accordingly, investors in the Fund, including, in particular, 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. Shares in the Fund constitute intangible personal property for
purposes of the Florida intangible personal property tax. Thus, unless an
exemption applies, shares in the Fund will be subject to the Florida intangible
personal property tax. Florida provides an exemption for shares in an investment
fund if the fund's portfolio of assets consists solely of assets exempt from the
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.
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 assets consist
solely of assets exempt from the Florida intangible personal property tax,
shares of the Fund will be exempt from the Florida intangible personal property
tax in the following year. Based on the ruling, if the Fund receives the ruling
and the Fund's assets consist, on the last business day of the calendar year,
solely of assets exempt from the Florida intangible personal property tax,
shares of the Fund owned by Florida residents will be exempt from the Florida
intangible personal property tax. If shares of the Fund are subject to the
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 the 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 anticipates that, on the last
business day of each calendar year, the Fund's assets will consist solely of
assets exempt from the Florida intangible personal property tax.
A-1
<PAGE>
Taxation of the Fund. If the Fund does not have a taxable nexus to
Florida, such as through the location of the Fund's activities or those of its
advisers within the state, under present Florida law, the Fund is not subject to
the Florida corporate income taxation. Additionally, if the Fund's assets do not
have a taxable situs in Florida as of January 1 of each calendar year, the Fund
will not be subject to the Florida intangible personal property tax. If the Fund
has a taxable nexus to Florida or the Fund's assets have a taxable situs in
Florida, the Fund will be subject to Florida taxation. The Fund intends to
operate so as not to be subject to Florida taxation.
Special Considerations Relating to Florida Municipal Obligations
The information set forth below is derived from official statements
prepared in connection with the issuance of bonds of the State of Florida and
other sources that are generally available to investors. The information is
provided as general information intended to give a brief and historical
description and is not intended to indicate future or continuing trends in the
financial or other positions of Florida or of local governmental units located
in Florida. The Fund has not independently verified this information.
The Florida Economy. In 1980, Florida was ranked seventh among the fifty
states with a population of 9.7 million. Florida has grown dramatically since
then and as of April 1, 1993 ranks fourth with an estimated population of 13.6
million. Florida's strong population growth is one fundamental reason why its
economy is performing better than the nation as a whole. Since 1983, the United
States has had an average population increase of about 1.0% annually, while
Florida's average annual rate of increase has been around 2.5%.
Over the years, Florida's personal income has been growing at a strong
pace and has generally outperformed both the U.S. as a whole and the southeast
in particular. From 1984 through 1993, Florida's per capita income rose an
average of 5.4% per year, while the national per capita income increased an
average of 5.5%. Per capita personal income in Florida has tracked closely with
the national average. Real personal income in Florida is expected to increase
4.5% in 1994-95 and is projected to increase 4.2% in 1995-96. Income and
employment growth rates are expected to reflect the slowdown in economic growth
caused by rising interest rates.
Throughout the 1980's, Florida's unemployment rate tracked below that of
the nation's. In recent years, however, Florida's jobless rate has moved ahead
of the national average. The average rate of unemployment for Florida since 1980
is 6.5%, while the national average is 7.1%. Florida's unemployment rate,
forecasted at 6.0% in 1994-95 and 6.1% in 1995-96, is projected to track above
the national rate.
Until recently, Florida has had a dynamic construction industry, with
single and multi-family housing starts accounting for 8.5% of total U.S. housing
starts in 1993, while Florida's population was only 5.3% of the nation's
population. A driving force behind Florida's
A-2
<PAGE>
construction industry is of course its rapid growth in population. While annual
growth in the state's population is projected to slow somewhat, it is still
expected to hover close to the 250,000 range throughout the 1990's. Hurricane
Andrew left some parts of South Florida devastated. Post-hurricane cleanup and
rebuilding have changed the outlook for Florida's economy. In Florida, single
and multi-family housing starts in 1994-95 are projected to reach a combined
level of 118,700, decreasing to 121,500 in 1995-96. Housing starts in Florida
have been, and will be, adversely affected by the Federal Reserve's raising of
interest rates. These housing starts figures may include, over the two year
period, remaining additional starts as a result of destruction by Hurricane
Andrew.
Tourism is one of Florida's most important industries. Approximately 41
million people visited the state in 1993 as reported by the Florida Department
of Commerce. Florida tourism still appears to be suffering from the effects of
negative publicity regarding crime against tourists in the state. Also, factors
such as "product maturity" of a Florida vacation package, higher prices, and
more aggressive marketing by competing vacation destinations, could be
contributory causes of the tourism slowdown. However, unlike in fiscal year
1993-94 which experienced a 4.0% drop in the number of tourists, zero growth in
the number of tourists is expected over the current fiscal year. A 1.7% growth
in the number of tourists is expected in 1995-96.
Florida Revenues and Expenditures. Financial operations in Florida
covering all receipts and expenditures are maintained through the use of three
funds - the General Revenue Fund, Trust Funds, and the Working Capital Trust
Fund. In fiscal year 1993-94, Florida derived an estimated 66% of its total
direct revenues to these funds from state taxes. Federal funds and other special
revenues account for the remaining revenues. Major sources of tax revenues to
the General Revenue Fund are the sales and use tax, corporate income tax,
intangible personal property tax and beverage tax, which amounted to 66%, 8% and
4%, respectively, of total General Revenue Fund receipts. State expenditures are
categorized for budget and appropriation purposes by type of fund and spending
unit, which are further subdivided by line item. In fiscal year 1993-94,
appropriations from the General Revenue Fund for education, health and welfare
and public safety amounted to approximately 49%, 32% and 12%, respectively, of
total General Revenues.
The greatest single source of tax receipts in Florida is the sales and use
tax. For the fiscal year which ended June 30, 1994, receipts from this source
were $10,012.50 million, an increase of 6.9% from fiscal year 1992-93. The
second largest source of state tax receipts is the tax on motor fuels.
Preliminary data shows collections from this source in fiscal year ended June
30, 1994, were $1,733.4 million. For the fiscal year which ended June 30, 1994,
receipts from Florida's corporate income tax were $1,047.4 million, an increase
of 23.7% from the previous fiscal year. Documentary stamp tax collections in
Florida totaled $775.0 million during fiscal year ended June 30, 1994, posting a
21.3% increase from the previous fiscal year. Florida's alcoholic beverage
wholesale tax is one of the major tax sources, with revenues totaling $439.8
million in fiscal year ended June 30, 1994, down 0.50% from
A-3
<PAGE>
the previous fiscal year. Effective July 1, 1992 the gross receipts utilities
tax rate was increased from 2.25% to 2.5% of the gross receipts of electric,
natural gas, and telecommunications services. In fiscal year ended June 30,
1994, gross receipts utilities tax collections totaled $459.4 million, an
increase of 2.6% over the previous fiscal year. The intangible personal property
tax is a tax on stocks, bonds, notes, governmental leaseholds, certain limited
partnership interests, mortgages and other obligations secured by liens on
Florida realty, and other intangible personal property. Total collections from
intangible personal property taxes were $836.0 million during fiscal year ended
June 30, 1994, up 6.7% from the previous fiscal year.
In November 1986, the voters of the State of Florida approved a
constitutional amendment which allows state operated lotteries. Of the revenues
generated by the Lottery, 50% is to be returned to the public as prizes, at
least 38% is to be deposited in the Educational Enhancement Trust Fund (for
public education) and no more than 12% can be spent on the administrative cost
of operating the Lottery. Fiscal year ended June 30, 1994 produced ticket sales
of $2.15 billion of which education received approximately $816.2 million.
An amendment to the Florida Constitution was approved by statewide ballot
in the November 3, 1992 general election, limiting changes in the assessed value
of homestead properties for ad valorem tax purposes to the lesser of (a) 3% of
the assessed value for the preceding calendar year or (b) the percentage change
in the Consumer Price Index for the preceding calendar year and providing for
reassessment of market values upon changes in ownership. Although the impact of
such constitutional amendment cannot be determined, it may have the effect of
causing local government units in Florida to rely more on non-ad valorem
revenues to meet operating and other requirements normally funded with ad
valorem tax revenues.
Limitation on State Revenues Amendment. An amendment to the Florida
Constitution was approved by statewide ballot in the November 8, 1994 general
election which is commonly referred to as the "Limitation on State Revenues
Amendment." This amendment provides that state revenues collected for any fiscal
year shall be limited to state revenues allowed under the amendment for the
prior fiscal year plus an adjustment for growth. Growth is defined as an amount
equal to the average annual rate of growth in Florida personal income over the
most recent twenty quarters times the state revenues allowed under the amendment
for the prior fiscal year. State revenue collected for any fiscal year in excess
of this limitation are required to be transferred to the budget stabilization
fund until the fund reaches the maximum balance specified in Section 19(g) of
Article III of the Florida Constitution, and thereafter is required to be
refunded to taxpayers as provided by general law. The limitation on state
revenues imposed by the amendment may be increased by the Legislature, by a
two-thirds vote of each house.
The term "state revenues," as used in the amendment, means taxes, fees,
licences, and charges for services imposed by the Legislature on individuals,
businesses, or agencies outside
A-4
<PAGE>
state government. However, the term "state revenues" does not include (i)
revenues that are necessary to meet the requirements set forth in documents
authorizing the issuance of bonds by the state; (ii) revenues that are used to
provide matching funds for the federal Medicaid program with the exception of
the revenues used to support the Public Medical Assistance Trust Fund or its
successor program and with the exception of state matching funds used to fund
elective expansions made after July 1, 1994; (iii) proceeds from the state
lottery returned as prizes; (iv) receipts of the Florida Hurricane Catastrophe
Fund; (v) balances carried forward from prior fiscal years; (vi) taxes,
licenses, fees and charges for services imposed by local, regional, or school
district governing bodies; or (vii) revenue from taxes, licenses, fees and
charges for services required to be imposed by any amendment or revision to the
Florida Constitution after July 1, 1994. The amendment took effect on January 1,
1995 and will be first applicable to state fiscal year 1995-96.
It should be noted that many of the provisions of the amendment are
ambiguous, and likely will not be clarified until Florida courts have ruled on
their meanings. Further, it is unclear how the Legislature will implement the
language of the amendment and whether such implementing legislation itself will
be the subject of further court interpretation.
The Fund cannot predict the impact of the amendment on state finances. To
the extent local governments traditionally receive revenues from the state which
are subject to, and limited by, the amendment, the future distribution of such
state revenues may be adversely affected by the amendment.
State Vehicle Impact Fee Held Unconstitutional. The Florida Supreme court
recently determined in Kuhnlein v. Florida Department of Revenue, 19 Fla.I.,
Weekly 467, 1994 WL 525900 (1994) that the $295 vehicle impact fee imposed by
the state on certificates of title issued for vehicles previously titled outside
Florida violated the U.S. Constitution. In making this determination, the Court
approved the trial court's order that the state refund the taxes collected.
According to the Department of Highway Safety and Motor Vehicles, the state has
not decided from what source the refunds will be made. The state's refund
exposure may be in excess of $188 million. The Fund cannot predict the impact of
this ruling on state finances.
Hurricane Andrew. On August 23, 1992, Hurricane Andrew swept across
southern Florida causing extensive property damage. It is not possible to
determine what effect, if any, such damage had or will have on Florida's growth
rate, unemployment, tourism, general revenues or other vital statistics.
A-5
<PAGE>
STATE STREET RESEARCH PENNSYLVANIA TAX-FREE FUND
Special Considerations Relating to Pennsylvania Municipal Obligations
The following highlights only some of the more significant financial
trends and problems affecting Pennsylvania, and is based on information drawn
from official statements relating to securities offerings of the Commonwealth of
Pennsylvania, its agencies and instrumentalities, as available on the date of
this Statement of Additional Information. The State Street Research Pennsylvania
Tax-Free Fund (the "Pennsylvania Tax-Free Fund" or the "Fund") has not
independently verified any of the information contained in such official
statements and other publicly available documents, but is not aware of any fact
which would render such information inaccurate.
Overview. Because the Fund concentrates its investments in Pennsylvania,
there are risks associated with the Fund that would not exist if the Fund's
investments were more widely diversified. These risks include the possible
enactment of new legislation in Pennsylvania that could affect obligations of
the state or its political subdivisions, municipalities or agencies, economic
factors that could affect such obligations, and varying levels of supply and
demand for obligations of the Commonwealth and its political subdivisions,
municipalities, and agencies. In addition, a portion of Pennsylvania obligations
might be issued in the form of municipal leases which are subject to risks
distinct from other municipal obligations.
All of the foregoing factors could affect the outstanding obligations of
the Commonwealth and its municipalities and political subdivisions, including
obligations held by the Fund.
There can be no assurance that the same factors that adversely affect the
economy of the Commonwealth generally will not also adversely affect the market
value or marketability of obligations issued by local units of government or
local authorities in the Commonwealth, or the ability of the obligors to pay the
principal of or interest on such obligations. In August 1993, Pennsylvania
General Obligation Bonds were rated A1 and AA- by Moody's and S&P, respectively.
General. Pennsylvania has historically been dependent on heavy industry
although recent declines in the coal, steel and railroad industries have led to
diversification of the Commonwealth's economy. Recent sources of economic growth
in Pennsylvania are in the service sector, including trade, medical and health
services, education and financial institutions. Agriculture continues to be an
important component of the Commonwealth's economic structure, with one-fourth of
the Commonwealth's total land area devoted to cropland, pasture and farm
woodlands.
In 1994, the population of Pennsylvania was 12.1 million people. According
to the U.S. Bureau of Census, Pennsylvania experienced a slight increase from
the 1984 estimate
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<PAGE>
of 11.8 million. Pennsylvania has a high proportion of persons 65 or older. The
Commonwealth is highly urbanized, with almost 85% of the 1990 census population
residing in metropolitan statistical areas. The Cities of Philadelphia and
Pittsburgh, the Commonwealth's largest metropolitan statistical areas, together
comprise approximately 50% of the Commonwealth's total population.
Pennsylvania's average annual unemployment rate remained below the
national average between 1986 and 1990. Slower economic growth caused the rate
to rise to 6.9% in 1991 and 7.5% in 1992. The resumption of faster economic
growth resulted in a decrease in the Commonwealth's unemployment rate to 7.1% in
1993. Seasonally adjusted data for October 1994 shows an unemployment rate of
6.0% compared to an unemployment rate of 5.8% for the United States as a whole.
Pennsylvania Taxes. Distributions paid by 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 Pennsylvania Tax-Free 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 Pennsylvania Tax-Free 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 Pennsylvania Tax-Free 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 in some counties in Pennsylvania to the extent
that the Fund invests in Pennsylvania Municipal Obligations.
Financial Accounting. Pennsylvania utilizes the fund method of accounting
and over 150 funds have been established for purposes of recording receipts and
disbursements, of
A-7
<PAGE>
which the General Fund is the largest. Most of the operating and administrative
expenses are payable from the General Fund. The Motor License Fund is a special
revenue fund that receives tax and fee revenues relating to motor fuels and
vehicles (except the one-half cent per gallon of liquid fuels tax which is
deposited in the Liquid Fuels Tax Fund for distribution to local municipalities)
and all such revenues are required to be used only for highway purposes. Other
special revenue funds have been established to receive specified revenues
appropriated to specific departments, boards and/or commissions. Such funds
include the Game, Fish, Boat, Banking Department, Milk Marketing, State Farm
Products Show, State Racing, and State Lottery Funds. The General Fund, all
special revenue funds, the Debt Service Funds and the Capital Project Funds
combine to form the Governmental Fund Types.
Enterprise funds are maintained for departments or programs operated like
private enterprises. The largest of the Enterprise funds is the State Stores
Fund, which is used for the receipts and disbursements of the Commonwealth's
liquor store system. Sale and distribution of all liquor within Pennsylvania is
a government enterprise.
Financial information for the funds is maintained on a budgetary basis of
accounting ("Budgetary"). Since 1984, the Commonwealth has also prepared
financial statements in accordance with generally accepted accounting principles
("GAAP"). The GAAP statements have been audited jointly by the Auditor General
of the Commonwealth and an independent public accounting firm. The Budgetary
information is adjusted at fiscal year end to reflect appropriate accruals for
financial reporting in conformity with GAAP. The Commonwealth maintains a June
30th fiscal year end.
The Constitution of Pennsylvania provides that operating budget
appropriations may not exceed the actual and estimated revenues and available
surplus in the fiscal year for which funds are appropriated. Annual budgets are
enacted for the General Fund and for certain special revenue funds which
together represent the majority of expenditures of the Commonwealth.
Revenues and Expenditures. Pennsylvania's Governmental Fund Types receive
over 57% of their revenues from taxes levied by the Commonwealth. Interest
earnings, licenses and fees, lottery ticket sales, liquor store profits,
miscellaneous revenues, augmentations and federal government grants supply the
balance of the receipts of these funds. Revenues not required to be deposited in
another fund are deposited in the General Fund. The major tax sources for the
General Fund are the 6% sales and use tax (33.7% of General Fund revenues in
fiscal 1994), the 2.8% personal income tax (32.0% of General Fund revenues in
fiscal 1994) and the 10.99% corporate net income tax (10.2% of General Fund
revenues in fiscal 1994). Tax and fee proceeds relating to motor fuels and
vehicles are constitutionally dedicated to highway purposes and are deposited
into the Motor License Fund. The major sources of revenue for the Motor License
Fund include the liquid fuels tax, the oil company franchise tax, aviation taxes
and revenues from fees levied on heavy trucks. These revenues are restricted to
the repair and construction of highway bridges and aviation programs. Revenues
A-8
<PAGE>
from lottery ticket sales are deposited in the State Lottery Fund and are
reserved by statute for programs to benefit senior citizens.
Pennsylvania's major expenditures include funding for education ($6.2
billion of fiscal 1993 expenditures, $6.4 billion of the fiscal 1994 budget and
$6.7 billion of the fiscal 1995 budget) and public health and human services
($11.1 billion of fiscal 1993 expenditures, $11.7 billion of the fiscal 1994
budget and $12.6 billion of the fiscal 1995 budget).
Governmental Fund Types: Financial Condition/Results of Operations (GAAP
Basis). Reduced revenue growth and increased expenses contributed to negative
unreserved-undesignated fund balances of the Governmental Fund Types at the end
of the 1990 and 1991 fiscal years, largely due to operating deficits in the
General Fund and State Lottery Fund during those years. Actions taken during
fiscal 1992 to bring the General Fund back into balance, including tax increases
and expenditure restraints, resulted in a $1.1 billion reduction to the
unreserved-undesignated fund deficit for combined Governmental Fund Types and a
return to a positive fund balance. Financial performance continued to improve
during fiscal 1993, resulting in a positive unreserved-undesignated balance for
combined Governmental Fund types at June 30, 1993, as a result of $420.4 million
in the balance. At the end of fiscal 1993, the total fund balance and other
credits for the total Governmental Fund Types was $1,959.9 million, a $732.1
million increase from the balance at June 30, 1992. During fiscal 1993, total
assets increased by $1,296.7 million to $7,096.4 million, while liabilities
increased $564.6 million to $5,136.5 million.
General Fund: Financial Condition/Results of Operations
Five Year Overview (GAAP Basis). The five year period from fiscal 1989
through fiscal 1993 was marked by public health and welfare costs growing at a
rate double the growth rate for all the state expenditures. Rising caseloads,
increased utilization of services and rising prices joined to produce the rapid
rise of public health and welfare costs at a time when a national recession
caused tax revenues to stagnate and even decline. During the period from fiscal
1989 through fiscal 1993, public health and welfare costs rose by an average
annual rate of 10.9% while tax revenues were growing at an average annual rate
of 5.5%. Consequently, spending on other budget programs was restrained to a
growth rate below 5.0% and sources of revenues other than taxes became larger
components of fund revenues. Among those sources are transfers from other funds
and hospital and nursing home pooling of contributions to use as federal
matching funds.
Tax revenues declined in fiscal 1991 as a result of the recession in the
economy. A $2.7 billion tax increase enacted for fiscal 1992 brought financial
stability to the General Fund. That tax increase included several taxes with
retroactive effective dates which generated some one-time revenues during fiscal
1992. The absence of those revenues in fiscal 1993 contributed to the decline in
tax revenues for fiscal 1993.
A-9
<PAGE>
During fiscal 1992 enactment of over $2.7 billion in General Fund tax
increases and implementation of expenditure control initiatives helped the
General Fund balance return to a surplus at June 30, 1992, of $87.5 million. The
actions taken to increase revenues and restrain expenditure growth were
necessary to offset the effects on General Fund finances of a period of slow
economic growth including a national economic recession. The recession caused
tax revenues during fiscal 1991 to be below the amount received during fiscal
1990 while spending, particularly for public health and welfare programs to
support needy individuals, increased.
Fiscal 1993 Financial Results (GAAP Basis). The fund balance of the
General Fund increased by $611.4 million during the fiscal year, led by an
increase in the unreserved balance of the $576.8 million over the prior fiscal
year balance. At June 30, 1993, the fund balance totaled $698.9 million and the
unreserved-undesignated balance totaled $64.4 million. A continuing recovery of
the Commonwealth's financial condition from the effects of the national economic
recession of 1990 and 1991 is demonstrated by this increase in the balance and a
return to a positive unreserved-undesignated balance. The previous positive
unreserve-undesignated balance was recorded in fiscal 1987. For the second
consecutive fiscal year the increase in the unreserved-undesignated balance
exceeded the increase recorded in the budgetary basis unappropriated surplus
during the fiscal year.
Fiscal 1994 Financial Results (Budgetary Basis). Commonwealth revenues
during the 1994 fiscal year totaled $15,210.7 million, $38.6 million above the
fiscal year estimate, and 3.9% over Commonwealth revenues during the previous
fiscal year. The sales tax was an important contributor to the higher than
estimated revenues. The strength of collections from the sales tax offset the
lower than budgeted performance of the personal income tax which ended the
fiscal year $74.4 million below estimate. The shortfall in the personal income
tax was largely due to shortfalls in income not subject to withholding such as
interest, dividends and other income. Tax refunds in fiscal 1994 were reduced
substantially below the amount provided in fiscal 1993. Expenditures, excluding
pooled financing expenditures, increased by 7.2% over fiscal 1993 expenditures.
Medical assistance and corrections spending contributed to the rate of spending
growth for the fiscal year. The Commonwealth maintained an operating balance on
a budgetary basis for fiscal 1994 producing a fiscal year ending unappropriated
surplus of $335.8 million. By state statute, 10% ($33.6 million) of that surplus
transferred to the Tax Stabilization Reserve Fund and the remaining balance was
carried over into the 1995 fiscal year. The balance in the Tax Stabilization
Reserve Fund as of October 31, 1994, was $63.9 million.
Fiscal 1994 Budget: The fiscal 1994-95 budget was approved by the Governor
in June 1994 and provided for $15,652.9 million of appropriations from
Commonwealth funds, an increase of 3.9% over appropriations, including
supplemental appropriations, for fiscal 1994. Medical assistance expenditures
represent the largest single increase in the budget ($221 million) representing
a 9% increase over the prior fiscal year. Education subsidies to local
A-10
<PAGE>
school districts were increased by $132.2 million to continue the increased
funding for the poorest school districts in the state.
The budget also includes tax reductions totaling an estimated $166.4
million. A reduction to the corporate net income tax rate from 12.5% to 9.99% to
be phased in over a period of four years was enacted. Several other tax changes
to the sales tax, the inheritance tax and the capital stock and franchise tax
were also enacted.
The fiscal 1995 budget projects a $4 million fiscal year-end
unappropriated surplus based on estimates for fiscal 1994 and the adopted
budget. As of March 1995, the General Fund had a surplus of $262.7 million, or
2.9% above the official estimate. The fiscal 1995-96 budget is currently the
subject of discussion and negotiations between the Governor and the General
Assembly.
Commonwealth Debt. Current constitutional provisions permit Pennsylvania
to issue the following types of debt: (i) debt to suppress insurrection or
rehabilitate areas affected by disaster, (ii) electorate approved debt, (iii)
debt for capital projects subject to an aggregate debt limit of 1.75 times the
annual average tax revenues of the preceding five fiscal years, and (iv) tax
anticipation notes payable in the fiscal year of issuance. All debt except tax
anticipation notes must be amortized in substantial and regular amounts.
General obligation debt totaled $5,075.8 million at June 30, 1994. Over
the 10-year period ended June 30, 1994, total outstanding general obligation
debt increased at an annual rate of 1.3% and for the five years ended June 30,
1994, at an annual rate of 1.5%. All outstanding general obligation bonds of the
Commonwealth are rated AA- by S&P, A1 by Moody's, and AA- by Fitch Investors
Service. The ratings reflect only the views of the rating agencies.
Pennsylvania engages in short-term borrowing to fund expenses within a
fiscal year through the sale of tax anticipation notes which must mature within
the fiscal year of issuance. The principal amount issued, when added to that
already outstanding, may not exceed in aggregate 20% of the revenues estimated
to accrue to the appropriate fund in the fiscal year. The Commonwealth is not
permitted to fund deficits between fiscal years with any form of debt. All
year-end deficit balances must be funded within the succeeding fiscal year's
budget. Pennsylvania issued a total of $600.0 million of tax anticipation notes
for the account of the General Fund in fiscal 1995, all of will mature on June
30, 1995, and will be paid from fiscal 1995 General Fund receipts.
Pending the issuance of bonds, Pennsylvania may issue bond anticipation
notes subject to the applicable statutory and constitutional limitations
generally imposed on bonds. The term of such borrowings may not exceed three
years. Currently, there are no bond anticipation notes outstanding.
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<PAGE>
State-related Obligations. Certain state-created agencies have statutory
authorization to incur debt for which no legislation providing for state
appropriations to pay debt service thereon is required. The debt of these
agencies is supported by assets of, or revenues derived from, the various
projects financed and the debt of such agencies is not an obligation of
Pennsylvania although some of the agencies are indirectly dependent on
Commonwealth appropriations. The following agencies had debt currently
outstanding as of June 30, 1994: Delaware River Joint Toll Bridge Commission
($57.4 million), Delaware River Port Authority ($233.8 million), Pennsylvania
Economic Development Financing Authority ($380.8 million), Pennsylvania Energy
Development Authority ($163.7 million), Pennsylvania Higher Education Assistance
Agency ($1,158.8 million), Pennsylvania Higher Educational Facilities Authority
($1,933.7 million), Pennsylvania Industrial Development Authority ($357.3
million), Pennsylvania Infrastructure Investment Authority ($107.5 million),
Pennsylvania Turnpike Commission ($1,268.3 million), Philadelphia Regional Port
Authority ($53.1 million) and the State Public School Building Authority ($280.9
million). In addition, the Governor is statutorily required to place in the
budget of the Commonwealth an amount sufficient to make up any deficiency in the
capital reserve fund created for, or to avoid default on, bonds issued by the
Pennsylvania Housing Finance Agency ($1,972.0 million of revenue bonds and $13.0
million notes outstanding as of June 30, 1994), and an amount of funds
sufficient to alleviate any deficiency that may arise in the debt service
reserve fund for bonds issued by The Hospitals and Higher Education Facilities
Authority of Philadelphia ($1.64 million of the loan principal was outstanding
as of June 30, 1994.)
Litigation. Certain litigation is pending against the Commonwealth that
could adversely affect the ability of the Commonwealth to pay debt service on
its obligations including suits relating to the following matters: (a)
approximately 3,500 tort suits are pending against the Commonwealth pursuant to
the General Assembly's 1978 approval of a limited waiver of sovereign immunity
which permits recovery of damages for any loss up to $250,000 per person and
$1,000,000 per accident ($27 million was appropriated from the Motor License
Fund for fiscal 1995); (b) the ACLU filed suit in April 1990 in federal court
demanding additional funding for child welfare services (no available estimates
of potential liability), which the Commonwealth is seeking to have dismissed
based on, among other things, the settlement in a similar Commonwealth court
action that provided for more funding in fiscal 1991 as well as the commitment
to pay to counties $30.0 million over 5 years. In January 1992, the district
court denied the ACLU's motion for class certification, and the parties have
stipulated to a judgment against the plaintiffs in order for plaintiffs to
appeal the denial of class certification to the Third Circuit; (c) in 1987, the
Supreme Court of Pennsylvania held that the statutory scheme for county funding
of the judicial system was in conflict with the Pennsylvania Constitution but
stayed judgment pending enactment by the legislature of funding consistent with
the opinion. The legislature has yet to consider legislation implementing the
judgment; (d) several banks have filed suit against the Commonwealth contesting
the constitutionality of a 1989 law imposing a bank shares tax on banking
institutions. In July 1994, the Commonwealth Court en banc ruled the tax is
constitutional and the matter now is pending at the Pennsylvania Supreme Court
on appeal;
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<PAGE>
(e) in November 1990, the ACLU brought a class action suit on behalf
of the inmates in thirteen correctional institutions challenging confinement
conditions and including a variety of other allegations. Although no damages are
sought, if injunctive relief is granted, the cost to the Commonwealth in capital
and personnel expenses may be substantial. The parties have reached a tentative
settlement; (f) in 1991, a consortium of public interest law firms filed suit
alleging that the Commonwealth had failed to comply with the 1989 federal
mandate with respect to certain services for Medicaid-eligible children under
the age of 21. The parties have reached a tentative settlement; (g) actions have
been filed in both state and federal court by an association of rural and small
schools and several individual school districts and parents challenging the
constitutionality of the Commonwealth's system for funding local school
districts. The federal case has been stayed pending resolution of the state case
and the state case is in the pre-trial discovery stage. The trial has not yet
been scheduled, and there is no available estimate of potential liability; and
(h) the Pennsylvania Medical Society has challenged the state's reimbursement
rates for outpatient services provided to needy citizens under the Medical
Assistance Program. The favorable District Court decision received by the
Commonwealth was reversed by the U.S. Third Circuit Court and an appeal is under
consideration. Estimated potential costs to the Commonwealth approximate $50
million per year.
Philadelphia. The City of Philadelphia is the largest city in the
Commonwealth, with an estimated population of 1,585,577 people according to the
1990 Census. Philadelphia functions both as a city of the first class and a
county for the purpose of administering various governmental programs.
Legislation providing of the establishment of the Pennsylvania
Intergovernmental Cooperation Authority ("PICA") to assist first class cities in
remedying fiscal emergencies was enacted by the General Assembly and approved by
the Governor in June 1991. PICA is designed to provide assistance through the
issuance of funding debt to liquidate budget deficits and to make factual
findings and recommendations to the assisted city concerning its budgetary and
fiscal affairs. An intergovernmental cooperation agreement between Philadelphia
and PICA was approved by City Council on January 3, 1992. At this time,
Philadelphia is operating under a five year fiscal plan approved by PICA on
April 6, 1992. The most recent amended five year plan was approved in May 1994.
As of November 1, 1994, PICA had issued $1,296,660,000 of its Special Tax
Revenue Bonds. This financial assistance has included the refunding of certain
general obligation bonds to fund capital projects and to liquidate the
Cumulative General Fund balance deficit as of June 30, 1992, of $224.9 million.
The audited General Fund balance as of June 30, 1993, showed a surplus of
approximately $3 million. The unaudited preliminary General Fund balance as of
June 30, 1994, estimates a surplus of approximately $15.4 million.
A-13
50843.c6
<PAGE>
APPENDIX B
TO STATEMENT OF ADDITIONAL INFORMATION
Description of Municipal Debt Ratings
Standard & Poor's Corporation
AAA: Debt rated AAA has the highest rating assigned by S&P. Capacity
to pay interest and repay principal is extremely strong.
AA: Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in small degree.
A: Debt rated A has a strong capacity to pay interest and repay principal,
although it is more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB: Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
Debt rated BB, B, CCC, CC and C is regarded as having speculative
characteristics with respect to capacity to pay interest and repay principal. BB
indicates the least degree of speculation and C the highest. While such debt
will likely have some quality and protective characteristics, these are
outweighed by large uncertainties or major risk exposure to adverse conditions.
BB: Debt rated BB has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The BB
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied BBB- rating.
B: Debt rate B has a greater vulnerability to default but currently has
the capacity to meet interest payments and principal repayments. Adverse
business, financial or economic conditions will likely impair capacity or
willingness to pay interest and repay principal. The B rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
BB or BB- rating.
CCC: Debt rated CCC has a currently identifiable vulnerability to default,
and is dependent upon favorable business, financial and economic conditions to
meet timely payment of interest and repayment of principal. In the event of
adverse business, financial or economic conditions, it is not likely to have the
capacity to pay interest and repay principal. The CCC
B-1
<PAGE>
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied B or B- rating.
CC: The rating CC is typically applied to debt subordinated to senior
debt which is assigned an actual or implied CCC debt rating.
C: The rating C is typically applied to debt subordinated to senior debt
which is assigned an actual or implied CCCdebt rating. The C rating may be used
to cover a situation where a bankruptcy petition has been filed, but debt
service payments are continued.
CI: The rating CI is reserved for income bonds on which no interest is
being paid.
D: Debt rated D is in payment default. The D rating category is used when
interest payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grace period. The D rating also will be used upon the
filing of a bankruptcy petition if debt service payments are jeopardized.
Plus (+) or Minus (-): the ratings from AA to CCC May be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
S&P may attach the "r" symbol to derivative, hybrid, and certain other
obligations that S&P believes may experience high volatility or high variability
in expected returns due to noncredit risks created by the terms of the
obligation, such as securities whose principal or interest return is indexed to
equities, commodities, or currencies; certain swaps or options; and interest
only (IO) and principal only (PO) mortgage securities.
SP-1: Notes rated SP-1 are of the highest quality with very strong or
strong capacity to pay principal and interest. Issues determined to possess
overwhelming safety characteristics are given a plus (+) designation.
SP-2: Notes rated SP-2 are of high quality with satisfactory capacity to
pay principal and interest.
B-2
<PAGE>
Moody's Investors Service, Inc.
Aaa: Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in Aaa securities.
A: Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving security
to principal and interest are considered adequate but elements may be present
which suggest a susceptibility to impairment sometime in the future.
Baa: Bonds which are rated Baa are considered as medium grade obligations;
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present, but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba: Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate, and thereby not well safeguarded
during other good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance or
other terms of the contract over any long period of time may be small.
Caa: Bonds which are rated Caa are of poor standing. Such issues may
be in default or there may be present elements of danger with respect to
principal or interest.
Ca: Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or have other
marked shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds, and issues
so rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
B-3
<PAGE>
MIG-1: Notes bearing this designation are the best quality, enjoying strong
protection from established cash flows of funds for their servicing or from
established and broad-based access to the market for refinancing, or both.
MIG-2: Notes bearing this designation are of high quality, with margins or
protection ample although not so large as in the preceding group.
1, 2 or 3: The ratings from Aa through B may be modified by the addition of
a numeral indicating a bond's rank within its rating category.
50845.c5
B-4
[State Street logo] State Street Research
State Street Research
Tax-Exempt Fund
Semiannual Report [picture of child playing with
June 30, 1995 building blocks, building a town]
WHAT'S INSIDE
New and Improved:
A new design that's
easier to read
Investment Update:
About the Fund,
economy and markets
Fund Information:
Facts and figures
Plus, Complete Portfolio Holdings
and Financial Statements
<PAGE>
STATE STREET RESEARCH TAX-EXEMPT FUND
Investment Update
Investment Environment
The Economy
(bullet) Most signs point to a slowing economy. Consumer spending has fallen,
home and auto sales are down, and job growth has eased.
(bullet) The Federal Reserve cut interest rates by one-quarter point on July
6, 1995.
(bullet) Inflation remains low, and a slower economy actually reduces the
risk of rising inflation.
The Markets
(bullet) Through June, municipal bonds have had an outstanding 1995, although
they trailed other bond sectors. The Lehman Brothers Municipal Bond Index
provided a return of 9.65% through the first six months of 1995.(1)
(bullet) So far, 1995 has been the best year for stocks since 1991. The S&P
500 was up 20.19% through the first six months of 1995.(1)
The Fund
Over the past six months
(bullet) Class A shares of the Fund provided a total return of +7.60% (not
including sales charge) for the 6 months ended June 30, 1995.(2) The average
total return for 236 funds in Lipper Analytical Services' general municipal
bond fund category was +9.01% over the same time period (does not reflect
sales charges).
(bullet) Although the Fund had a positive return through the first half of
1995, it trailed the average for its category because the portfolio was
conservatively positioned. We shortened the Fund's duration (a measure of a
fund's sensitivity to interest rate changes) to protect it if interest rates
increased, as happened throughout 1994. When interest rates fell sharply
instead, the Fund did not enjoy the full benefit of the market rally.
Current strategy
(bullet) We have extended the Fund's duration slightly, which will help in an
environment of falling rates.
(bullet) We have also upgraded the quality of bonds in the portfolio and
increased the percentage of insured bonds. As of June 30, 1995, the bonds in
the portfolio had an average credit quality of AA.
(bullet) The outlook for municipal bonds is positive. Supply is low, as fewer
new bonds have been issued. Municipal bonds also currently offer attractive
value relative to U.S. Treasury bonds.
1 The Lehman Brothers Municipal Bond Index is a commonly used measure of bond
market performance. The Standard & Poor's 500 Composite Index (S&P 500)
includes 500 widely traded common stocks and is a commonly used measure of
U.S. stock market performance. The indices are unmanaged and do not take
sales charges into account. Direct investment in the indices is not possible;
results are for illustrative purposes only.
2 +7.07% for Class B shares; +7.61% for Class C shares; +7.07% for Class D
shares.
3 All returns represent past performance, which is no guarantee of future
results. The investment return and principal value of an investment made in
the Fund will fluctuate, and shares, when redeemed, may be worth more or less
than their original cost. All returns assume reinvestment of capital gain
distributions and income dividends.
4 Performance for a class includes periods prior to the adoption of class
designations in 1993. Performance reflects up to a maximum 4.5% front-end or
5% contingent deferred sales charge. "C" shares, offered without a sales
charge, are available only to certain employee benefit plans and
institutions. Performance for "B" and "D" shares prior to class designations
in 1993 reflects annual 12b-1 fees of .25% and thereafter reflects annual
12b-1 fees of 1%, which will reduce subsequent performance.
Fund Information (all data are for periods ended June 30, 1995)
SEC Average Annual Compound Rates of Return
(at maximum applicable sales charge)(3),(4)
<TABLE>
<CAPTION>
Life of Fund
(since 5
8/25/86) years 1 year
- -------- ------------ ------ -------
<S> <C> <C> <C>
Class A +6.49% +6.21% +1.46%
- -------- ------------ ------ -------
Class B +6.84% +6.53% +0.32%
- -------- ------------ ------ -------
Class C +7.08% +7.25% +6.38%
- -------- ------------ ------ -------
Class D +6.84% +6.83% +4.32%
- -------- ------------ ------ -------
</TABLE>
Cumulative Total Returns
(do not reflect sales charge)(3)
<TABLE>
<CAPTION>
Life of Fund
(since 5
8/25/86) years 1 year
- -------- ------------ ------ -------
<S> <C> <C> <C>
Class A +82.81% +41.55% +6.24%
- -------- ------------ ------ -------
Class B +79.81% +39.23% +5.32%
- -------- ------------ ------ -------
Class C +83.32% +41.94% +6.38%
- -------- ------------ ------ -------
Class D +79.78% +39.21% +5.32%
- -------- ------------ ------ -------
</TABLE>
SEC Yield
<TABLE>
<S> <C>
Class A 4.84%
- -------- ------
Class B 4.31%
- -------- ------
Class C 5.34%
- -------- ------
Class D 4.33%
- -------- ------
</TABLE>
SEC yield is calculated according to Securities and Exchange Commission
requirements and is based on the net investment income produced for the 30
days ended June 30, 1995.
Bond Quality
(by percentage of net assets)
AAA 38%
AA 30%
A 12%
BBB 12%
BB/Not rated 8%
As rated by Standard & Poor's Corporation or Moody's Investors Service, Inc.,
or unrated but equivalent.
<PAGE>
STATE STREET RESEARCH TAX-EXEMPT FUND
Investment Portfolio
June 30, 1995 (Unaudited)
<TABLE>
<CAPTION>
Principal Maturity Value
Amount Date (Note 1)
---------------------------------------------------------- --------- ---------- -------------
<S> <C> <C> <C>
Municipal Bonds 95.4%
California 12.2%
California Pollution Control Financing Authority,
Pollution Control Revenue Bonds, (Southern California
Edison Company) 1988 Series A, Subject to AMT, 6.90% $3,410,000 9/01/2006 $ 3,603,995
Southern California Public Power Authority, San Juan
Project, Series A, 5.375% 4,790,000 1/01/2011 4,518,359
Rancho California Water District Financing Authority,
Revenue Refunding Bonds, AMBAC Insured, Series 1994,
5.00% 4,000,000 8/15/2014 3,531,920
San Francisco Bay Area Rapid Transit District, Sales Tax
Revenue Bonds FGIC Insured, Series 1995, 5.50% 1,500,000 7/01/2015 1,406,700
East Bay Municipal Utility District Water System, Revenue
Refunding Bonds, Series 1993, 5.00% 2,000,000 6/01/2021 1,717,580
Los Angeles County Metropolitan Transit Authority, Sales
Tax Revenue Refunding Bonds, Series A, 5.00% 6,100,000 7/01/2021 5,237,765
San Francisco City & County Sewer and Water Revenue
Refunding Bonds, FGIC Insured, 5.375% 2,395,000 10/01/2022 2,168,433
University of California, Board of Regents, Refunding
Revenue Bonds, (Multiple Purpose Projects), Series C,
AMBAC Insured, 5.00% 5,000,000 9/01/2023 4,269,950
San Joaquin Hills Transportation Corridor Agency, (Orange
County, California), Senior Lien Toll Road Revenue Bonds,
7.00% 3,000,000 1/01/2030 3,045,570
Foothill/Eastern Transportation Corridor Agency,
Convertible Toll Road Revenue Bonds, 5.00% 5,000,000 1/01/2035 3,818,750
-------------
33,319,022
-------------
Connecticut 5.5%
State of Connecticut, Clean Water Fund Revenue Bonds, 1991
Series, 7.00% 1,000,000 1/01/2011 1,095,010
State of Connecticut, Special Tax Obligation Bonds,
Transportation Infrastructure Purposes, 1991 Series A,
6.50% 1,500,000 10/01/2012 1,608,180
Connecticut Development Authority, Pollution Control
Refunding Bonds, (Pfizer Inc. Project--1982 Series),
6.55% 2,500,000 2/15/2013 2,667,175
State of Connecticut Health and Educational Facilities
Authority, Revenue Bonds, Quinnipiac College Issue,
Series D, 6.00% 5,000,000 7/01/2013 4,598,050
Connecticut Housing Finance Authority, Housing Mortgage
Finance Program Bonds, 1993 Series A, 6.20% 5,000,000 5/15/2014 4,999,500
-------------
14,967,915
The accompanying notes are an integral part of the financial statements.
2
<PAGE>
Principal Maturity Value
Amount Date (Note 1)
- ---------------------------------------------------------- --------- ---------- -------------
Florida 9.1%
Dade County, Florida, Water & Sewer System, Revenue
Refunding Bonds, FGIC Insured, 5.00% $5,000,000 10/01/2013 $ 4,511,300
Hillsborough County, Florida, Refunding Utility Revenue
Bonds, Series 1991A, Pre-Refunded to 8/1/2001 @ 102,
7.00% 485,000 8/01/2014 550,606
Orlando Utilities Commission, Water and Electric
Subordinated Revenue Bonds, Series C, 6.75% 8,950,000 10/01/2017 9,991,691
Martin County, Florida, Pollution Control Revenue
Refunding Bonds, (Florida Power & Light Company Project),
Series 1990, MBIA Insured, 7.30% 1,250,000 7/01/2020 1,370,612
Vero Beach, Florida, Electric Power & Light, Revenue
Refunding Bonds, Series A, 5.375% 5,000,000 12/01/2021 4,663,250
Florida State Board of Education, Public Education
Refunding Bonds, Series D, 5.125% 2,750,000 6/01/2022 2,443,897
Orlando Utilities Commission, Water and Electric
Subordinated Revenue Bonds, Series 1989C, Pre-Refunded to
10/1/99 @ 102, 7.00% 1,000,000 10/01/2023 1,113,970
-------------
24,645,326
-------------
Georgia 9.0%
State of Georgia, General Obligation Bonds, Series 1992B,
6.25% 4,300,000 3/01/2011 4,611,707
Georgia Housing and Finance Authority, Home Ownership
Opportunity Program Bonds, Series 1992C, 6.50% 1,690,000 12/01/2011 1,726,791
State of Georgia, General Obligation Bonds, Series 94E,
6.75% 1,000,000 12/01/2012 1,126,740
Cherokee County, Georgia, School System, General
Obligation Bonds, AMBAC Insured, 5.325% 4,000,000 2/01/2014 3,812,440
Metro Atlanta Rapid Transit Authority, 2nd Indenture,
Series A, AMBAC Insured, 5.125% 2,000,000 7/01/2018 1,785,540
Metro Atlanta Rapid Transit Authority, 2nd Indenture,
Series A, AMBAC Insured, 5.125% 3,000,000 7/01/2019 2,671,890
City of Atlanta, Georgia, General Obligation Bonds, Series
1994A, 6.10% 1,650,000 12/01/2019 1,667,441
DeKalb County, Georgia, General Obligation Refunding
Bonds, 5.25% 5,000,000 1/01/2020 4,557,650
Fulton County, Georgia, School District, General
Obligation School Bonds, Series 1993, 5.625% 1,350,000 1/01/2021 1,299,632
DeKalb County, Georgia, Water & Sewer Revenue Refunding
Bonds, Series 1993, 5.25% 1,305,000 10/01/2023 1,188,933
-------------
24,448,764
-------------
Hawaii 0.8%
State of Hawaii, General Obligation Bonds of 1991, Series
BT, 6.125% 2,000,000 2/01/2010 2,153,580
-------------
The accompanying notes are an integral part of the financial statements.
3
<PAGE>
Principal Maturity Value
Amount Date (Note 1)
- ---------------------------------------------------------- --------- ---------- -------------
Illinois 1.3%
City of Chigago, Illinois, Gas Supply Revenue Bonds, 1985
Series B (The Peoples Gas Light and Coke Company
Project), 7.50% $3,300,000 3/01/2015 $ 3,632,937
-------------
Iowa 0.4%
Iowa Finance Authority, Single Family Mortgage Refunding
Bonds, 1992 Series F, AMBAC Insured, 6.50% 970,000 1/01/2025 976,800
-------------
Kansas 0.4%
State of Kansas, Department of Transportation, Highway
Revenue Bonds, Series 1992, Pre-Refunded to 3/1/2002
@ 102, 6.50% 1,000,000 3/01/2008 1,107,320
-------------
Kentucky 1.5%
Owensboro, Kentucky, Electric Light & Power Revenue Bonds,
Series B, AMBAC Insured, 0.00% 5,300,000 1/01/2018 1,369,361
Owensboro, Kentucky, Electric Light & Power Revenue Bonds,
Series B, AMBAC Insured, 0.00% 4,400,000 1/01/2019 1,070,432
Kentucky Housing Corporation, Housing Revenue Bonds, 1991
Series D-1, (Federally Insured or Guaranteed Mortgage
Loans) Subject to AMT, 6.80% 1,500,000 1/01/2024 1,530,405
-------------
3,970,198
-------------
Louisiana 2.4%
Lake Charles Harbor and Terminal District (Louisiana),
Port Facilities Revenue Refunding Bonds, Series 1992,
(Trunkline LNG Company Project), 7.75% 6,000,000 8/15/2022 6,611,220
-------------
Maryland 1.9%
Howard County, Maryland, Multifamily Housing Revenue
Refunding Bonds, Series 1994, (Chase Glen Project),
Mandatory Put 7/1/2004 @ 100, 7.00% 5,000,000 7/01/2024 5,261,800
-------------
Massachusetts 8.7%
Massachusetts Industrial Finance Agency, First Mortgage
Refunding Bonds, (Brookhaven Retirement Community,
Lexington--1994 Issue), Series A, 6.75% 4,500,000 1/01/2001 4,586,355
Massachusetts Industrial Finance Agency, First Mortgage
Revenue Bonds, (Berkshire Retirement Community,
Lenox--1994 Issue), Series A, 6.375% 1,500,000 7/01/2005 1,461,705
Massachusetts Housing Finance Agency, Residential
Development Bonds, FNMA Collateralized, 1992 Series C,
6.875% 2,000,000 11/15/2011 2,097,680
Massachusetts State Water Resource Authority, General
Revenue Bonds, 1993 Series C, 6.00% 4,480,000 12/01/2011 4,526,368
The accompanying notes are an integral part of the financial statements.
4
<PAGE>
Principal Maturity Value
Amount Date (Note 1)
- ---------------------------------------------------------- --------- ---------- -------------
Massachusetts Health and Educational Facilities Authority,
Refunding Bonds, Massachusetts General Hospital Issue,
Series F, AMBAC Insured, 6.25% $3,000,000 7/01/2012 $ 3,118,170
Massachusetts Bay Transportation Authority, General
Transportation System Bonds, 1994 Series A Refunding
Bonds, 7.00% 3,385,000 3/01/2014 3,798,275
Massachusetts State General Obligation Bonds, Series A,
5.75% 3,000,000 2/01/2015 2,937,780
Massachusetts Health and Educational Facilities Authority,
Revenue Bonds, Harvard University Issue,
Series N Refunding, 6.25% 1,000,000 4/01/2020 1,053,180
-------------
23,579,513
-------------
Michigan 3.0%
State of Michigan, State Trunk Line Fund Bonds, Series
1989A, Pre-Refunded to 8/15/99 @ 102, 7.00% 3,525,000 8/15/2017 3,910,670
Michigan Public Power Agency, Revenue Refunding Bonds,
(Belle River Project), Series B, 5.00% 5,000,000 1/01/2019 4,301,450
-------------
8,212,120
-------------
Minnesota 0.5%
Minnesota Housing Finance Agency, Single Family Mortgage
Bonds, 1991 Series A, Subject to AMT, 7.45% 1,410,000 7/01/2022 1,504,949
-------------
Nebraska 0.4%
Omaha Public Power District (Nebraska), Electric System
Revenue Bonds, 1992, Series B, 6.20% 1,000,000 2/01/2017 1,045,030
-------------
Nevada 0.8%
Clark County School District, Nevada, General Obligation
(Limited Tax) School Improvement Bonds, MBIA Insured,
Pre-Refunded to 6/1/2001 @ 101, 7.00% 2,000,000 6/01/2009 2,244,300
-------------
New Hampshire 2.6%
New Hampshire Higher Educational and Health Facilities
Authority, First Mortgage Revenue Bonds, RiverMead at
Peterborough Issue, Series 1994, 7.375% 7,000,000 7/01/2000 7,044,030
-------------
New Jersey 0.4%
New Jersey Educational Facilities Authority, Seton Hall
University Project Revenue Bonds, 1991 Series D, 7.00% 1,000,000 7/01/2021 1,056,860
-------------
New York 5.8%
The City of New York, General Obligation Bonds, Fiscal
1992 Series H, 7.00% 1,000,000 2/01/2005 1,060,950
State of New York, Serial Bonds, 5.50% 4,000,000 3/01/2011 3,849,440
The City of New York, General Obligation Refunding Bonds,
Fiscal 1991 Series B, 7.75% 3,000,000 2/01/2012 3,260,790
State of New York, Serial Bonds, 5.625% 2,000,000 6/15/2012 1,937,340
The accompanying notes are an integral part of the financial statements.
5
<PAGE>
Principal Maturity Value
Amount Date (Note 1)
- ---------------------------------------------------------- --------- ---------- -------------
Niagara Falls, New York, Bridge & Toll Commission, FGIC
Insured, 5.25% $3,400,000 10/01/2015 $ 3,151,936
Grand Central District Management Association, Capital
Improvement Refunding Bonds, Series 1994, 5.25% 2,750,000 1/01/2022 2,425,170
-------------
15,685,626
-------------
North Carolina 6.3%
North Carolina Municipal Power Agency Number 1, Catawba
Electric Revenue Bonds, Series 1992, 7.25% 5,000,000 1/01/2007 5,760,800
County of Durham, North Carolina, Certificates of
Participation, (1991 Jail Facilities and Computer
Equipment Financing Project), 6.625% 1,850,000 5/01/2014 1,948,216
City of Charlotte, North Carolina, General Obligation
Refunding Bonds, Series 1993, 5.25% 1,865,000 2/01/2016 1,742,619
North Carolina Housing Finance Agency, Multifamily Revenue
Refunding Bonds, (1992 Refunding Bond Resolution),
Series B, 6.90% 7,470,000 7/01/2024 7,753,113
-------------
17,204,748
-------------
Ohio 3.9%
County of Erie, Ohio, Hospital Improvement and Refunding
Revenue Bonds, Series 1992, (Firelands Community Hospital
Project), 6.75% 1,000,000 1/01/2008 1,052,690
Hamilton County, Ohio, Sewer System Improvement and
Refunding Revenue Bonds, 1991 Series A, (The Metropolitan
Sewer District of Greater Cincinnati), Pre-Refunded to
6/1/2001 @ 102, 6.70% 2,000,000 12/01/2013 2,234,400
City of Cleveland, Ohio, Public Power System Improvement
First Mortgage Revenue Refunding Bonds, Series 1991 B,
7.00% 7,000,000 11/15/2017 7,276,990
-------------
10,564,080
-------------
Oregon 0.4%
State of Oregon, Housing, Educational and Cultural
Facilities Authority, Revenue Bonds, (Reed College
Project), 1991 Series A, 6.75% 1,000,000 7/01/2021 1,051,550
-------------
Pennsylvania 1.5%
Pennsylvania Economic Development Financing Authority,
Resource Recovery Revenue Bonds, (Colver Project),
Series 1994D, 7.05% 3,000,000 12/01/2010 3,155,850
Montgomery County Industrial Development Authority,
Pollution Control Revenue Refunding Bonds, 1991 Series A,
(Philadelphia Electric Co. Project), Subject to AMT,
7.60% 1,000,000 4/01/2021 1,063,400
-------------
4,219,250
-------------
The accompanying notes are an integral part of the financial statements.
6
<PAGE>
Principal Maturity Value
Amount Date (Note 1)
- ---------------------------------------------------------- --------- ---------- -------------
South Carolina 0.9%
City of Charleston, South Carolina, Waterworks and Sewer
System Revenue Bonds, Series 1988, Pre-Refunded to 1/1/98
@ 100, 7.20% $1,000,000 1/01/2019 $ 1,068,890
South Carolina Public Service Authority, (Santee Cooper),
Electric System Expansion Revenue Bonds, 1988 Refunding
Series A, 7.875% 1,310,000 7/01/2021 1,360,527
-------------
2,429,417
-------------
Tennessee 3.5%
City of Memphis, Tennessee, Electric System Revenue
Refunding Bonds, Series of 1992, 6.00% 2,250,000 1/01/2006 2,405,318
City of Memphis, Tennessee, Electric System Revenue Bonds,
Series of 1991, 6.75% 500,000 1/01/2011 550,205
City of Memphis, Tennessee, Water Division Revenue
Refunding Bonds, Series of 1992-A, 6.00% 3,000,000 1/01/2012 3,072,720
Chattanooga--Hamilton County Hospital Authority, Hospital
Revenue and Refunding Bonds (Erlanger Medical Center)
Series 1993, FSA Insured, 5.50% 2,500,000 10/01/2013 2,367,575
The Health and Educational Facilities Board of the
Metropolitan Government of Nashville and Davidson County,
Tennessee, Vanderbilt University, 1992 Series A, 6.00% 1,000,000 10/01/2022 1,004,810
-------------
9,400,628
-------------
Texas 5.1%
City of Austin, Texas, Combined Utility Systems Revenue
Refunding Bonds, Series 1993, 5.80% 2,000,000 11/15/2006 2,053,420
Houston Independent School District, Texas, Limited Tax
School House Bonds, Series 1991, PSFG Guaranteed,
Pre-Refunded to 8/15/2001 @ 100, 6.375% 1,500,000 8/15/2011 1,627,830
Texas Municipal Power Agency, Refunding Revenue Bonds,
Series 1991A, AMBAC Insured, 6.75% 1,000,000 9/01/2012 1,080,910
Harris County, Texas, General Obligation, Unlimited Tax,
Refunding and Toll Road Subordinate Lien Revenue Bonds,
Series 1991, 6.75% 5,750,000 8/01/2014 6,146,750
Harris County, Texas, General Obligation, Unlimited Tax,
Refunding and Toll Road Subordinate Lien Revenue Bonds,
6.125% 2,975,000 6/15/2020 3,011,801
-------------
13,920,711
-------------
Vermont 1.9%
City of Burlington, Vermont, Electric System Revenue
Bonds, 1992 Series A, MBIA Insured, 6.25% 5,000,000 7/01/2014 5,169,900
-------------
Virginia 3.6%
Commonwealth of Virginia, General Obligation, Unlimited
Tax Refunding Bonds, Series B, 5.00% 1,500,000 6/01/2011 1,401,480
The accompanying notes are an integral part of the financial statements.
7
<PAGE>
Principal Maturity Value
Amount Date (Note 1)
- ---------------------------------------------------------- --------- ---------- -------------
The Rector and Visitors of the University of Virginia,
General Revenue Pledge Bonds, Series 1993B, 5.375% $3,250,000 6/01/2014 $ 3,117,660
State of Virginia Transportation Board, Northern Virginia
Transportation District, Series C, 5.25% 1,715,000 5/15/2019 1,554,819
City of Roanoke, Virginia, General Obligation Public
Improvement Bonds, Series 1994, 5.25% 1,750,000 8/01/2019 1,594,232
Prince William County Service Authority, (Virginia), Water
and Sewer System Revenue Bonds, Series 1991, FGIC
Insured, 6.50% 2,000,000 7/01/2021 2,216,220
-------------
9,884,411
-------------
Wisconsin 1.6%
Wisconsin Housing and Economic Development Authority, Home
Ownership Revenue Bonds, 1992 Series 2, Subject to AMT,
6.875% 4,250,000 9/01/2024 4,371,677
-------------
Total Municipal Bonds (Cost $254,539,105) 259,683,682
-------------
Short-Term Obligations 1.8%
Massachusetts General Obligation Bonds, Series B, 4.40% 1,600,000 12/01/1997++ 1,600,000
The Wake County Industrial Facilities and Pollution
Control Financing Authority, Pollution Control Revenue
Bonds, (Carolina Power & Light Co. Project), Series 1987,
3.00% 1,000,000 3/01/2017++ 1,000,000
California Pollution Control Financing Authority, Resource
Recovery Revenue Bonds, (Burney Forest Products Project),
1988 Series A, Letter of Credit, National Westminster
Bank, 4.01% 500,000 9/01/2020++ 500,000
Los Angeles, California, Airports, Series E, 3.20% 500,000 12/01/2024++ 500,000
State of New York, Energy Resource & Development, 3.95% 600,000 6/01/2029++ 600,000
State of Delaware, Delmarva Power & Light Co., 4.50% 800,000 10/01/2029++ 800,000
-------------
Total Short-Term Obligations (Cost $5,000,000) 5,000,000
-------------
Total Investments (Cost $259,539,105)--97.2% 264,683,682
Cash and Other Assets, Less Liabilities--2.8% 7,570,873
-------------
Net Assets--100.0% $272,254,555
=============
</TABLE>
Federal Income Tax Information:
At June 30, 1995, the net unrealized appreciation
of investments based on cost for Federal income
tax purposes of $259,539,105 was as follows:
Aggregate gross unrealized appreciation for all
investments in which there is an excess of value
over tax cost $ 8,069,228
Aggregate gross unrealized depreciation for all
investments in which there is an excess of tax
cost over value (2,924,651)
-------------
$ 5,144,577
=============
++Interest rates on these obligations may change daily.
Futures contracts open at June 30, 1995 are as follows:
<TABLE>
<CAPTION>
Expiration Unrealized
Type Par Value Month Depreciation
- ----------------------- --------- ------------------ -------------
<S> <C> <C> <C>
Municipal Bond Index $5,000,000 September, 1995 $(206,219)
</TABLE>
The accompanying notes are an integral part of the financial statements.
8
<PAGE>
STATE STREET RESEARCH TAX-EXEMPT FUND
Statement of Assets and Liabilities
June 30, 1995 (Unaudited)
Assets
Investments, at value (Cost $259,539,105) (Note 1) $264,683,682
Cash 36,548
Interest receivable 5,569,254
Receivable for securities sold 3,988,196
Initial margin deposits (Note 1) 75,000
Receivable for fund shares sold 65,358
Receivable for variation margin (Note 1) 12,031
Other assets 6,267
-------------
274,436,336
Liabilities
Payable for securities purchased 1,113,989
Dividends payable 312,505
Accrued transfer agent and shareholder services (Note 2) 233,535
Payable for fund shares redeemed 221,767
Accrued management fee (Note 2) 125,656
Accrued distribution fee (Note 4) 81,204
Accrued trustees' fees (Note 2) 9,128
Other accrued expenses 83,997
-------------
2,181,781
-------------
Net Assets $272,254,555
=============
Net Assets consist of:
Undistributed net investment income $ 793,577
Unrealized appreciation of investments 5,144,577
Unrealized depreciation of futures contracts (206,219)
Accumulated net realized loss (6,235,092)
Shares of beneficial interest 272,757,712
-------------
$272,254,555
=============
Net Asset Value and redemption price per share of Class A
shares ($233,411,230 / 29,860,742 shares of beneficial
interest) $7.82
=============
Maximum Offering Price per share of Class A shares
($7.82 / .955) $8.19
=============
Net Asset Value and offering price per share of
Class B shares ($37,346,620 / 4,779,340 shares of
beneficial interest)* $7.81
=============
Net Asset Value, offering price and redemption price per
share of Class C shares ($365,380 / 46,835 shares of
beneficial interest) $7.80
=============
Net Asset Value and offering price per share of
Class D shares ($1,131,325 / 144,825 shares of
beneficial interest)* $7.81
=============
*Redemption price per share for Class B and Class D is equal to net asset
value less any applicable contingent deferred sales charge.
Statement of Operations
For the six months ended June 30, 1995 (Unaudited)
Investment Income
Interest $ 8,781,083
Expenses
Management fee (Note 2) 757,953
Transfer agent and shareholder services (Note 2) 320,336
Custodian fee 76,165
Registration fees 27,300
Reports to shareholders 27,025
Audit fee 16,193
Trustees' fees (Note 2) 14,248
Legal fees 5,440
Distribution fee--Class A (Note 4) 297,172
Distribution fee--Class B (Note 4) 182,363
Distribution fee--Class D (Note 4) 5,193
Miscellaneous 7,815
-----------
1,737,203
-----------
Net investment income 7,043,880
-----------
Realized and Unrealized Gain (Loss) on
Investments and Futures Contracts
Net realized gain on investments (Notes 1 and 3) 3,548,858
Net realized loss on futures contracts (Note 1) (3,539)
-----------
Total net realized gain 3,545,319
-----------
Net unrealized appreciation of investments 9,698,196
Net unrealized depreciation of futures contracts (206,219)
-----------
Total net unrealized appreciation 9,491,977
-----------
Net gain on investments and futures contracts 13,037,296
-----------
Net increase in net assets resulting from operations $20,081,176
===========
The accompanying notes are an integral part of the financial statements.
9
<PAGE>
STATE STREET RESEARCH TAX-EXEMPT FUND
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Six months ended Year ended
June 30, 1995 December 31,
(Unaudited) 1994
- ------------------------------------------------------------------------ ---------------- ----------------
<S> <C> <C>
Increase (Decrease) in Net Assets
Operations:
Net investment income $ 7,043,880 $ 15,317,645
Net realized gain (loss) on investments and futures contracts* 3,545,319 (9,547,878)
Net unrealized appreciation (depreciation) of investments and futures
contracts 9,491,977 (28,974,700)
---------------- ----------------
Net increase (decrease) resulting from operations 20,081,176 (23,204,933)
---------------- ----------------
Dividends from net investment income:
Class A (6,279,255) (13,276,823)
Class B (817,879) (1,437,982)
Class C (10,270) (21,125)
Class D (23,465) (42,707)
---------------- ----------------
(7,130,869) (14,778,637)
---------------- ----------------
Distribution from net realized gains:
Class A -- (379,796)
Class B -- (58,307)
Class C -- (535)
Class D -- (1,436)
---------------- ----------------
-- (440,074)
---------------- ----------------
Net decrease from fund share transactions (Note 5) (15,423,139) (18,980,504)
---------------- ----------------
Total decrease in net assets (2,472,832) (57,404,148)
Net Assets
Beginning of period 274,727,387 332,131,535
---------------- ----------------
End of period (including undistributed net investment income of $793,577
and $880,566, respectively) $272,254,555 $274,727,387
================ ================
*Net realized gain (loss) for Federal income tax purposes (Note 1) $ 2,663,317 $ (8,429,917)
================ ================
</TABLE>
The accompanying notes are an integral part of the financial statements.
Notes to Unaudited Financial Statements
June 30, 1995
Note 1
State Street Research Tax-Exempt Fund (the "Fund"), formerly MetLife-State
Street Tax-Exempt Fund, is a series of State Street Research Tax-Exempt Trust
(the "Trust"), formerly MetLife-State Street Tax-Exempt Trust, which was
organized as a Massachusetts business trust in December, 1985 and is
registered under the Investment Company Act of 1940, as amended, as an
open-end management investment company. The Fund commenced operations in
August, 1986. Five series of the Trust are publicly offered: State Street
Research Tax-Exempt Fund, State Street Research California Tax-Free Fund,
State Street Research New York Tax-Free Fund, State Street Research Florida
Tax-Free Fund and State Street Research Pennsylvania Tax-Free Fund.
The Fund offers four classes of shares. Class A shares are subject to an
initial sales charge of up to 4.50% and pay a service fee equal to 0.25% of
average daily net assets. Class B shares are subject to a contingent deferred
sales charge on certain redemptions made within five years of purchase and
pay annual distribution and service fees of 1.00%. Class B shares
automatically convert into Class A shares (which pay lower ongoing expenses)
at the end of eight years after the issuance of the Class B shares. Class C
shares are only offered to certain employee benefit plans and large
institutions. No sales charge is imposed at the time of purchase or
redemption of Class C shares. Class C shares do not pay any distribution or
service fees. Class D shares are subject to a contingent deferred sales
charge of 1.00% on any shares redeemed within one year of their purchase.
Class D shares also pay annual distribution and service fees of 1.00%. The
Fund's expenses are borne pro-rata by each class, except that each class
bears expenses, and has exclusive voting rights with respect to provisions of
the Plan of Distribution, related specifically to that class. The Trustees
declare separate dividends on each class of shares.
The following significant accounting policies are consistently followed by
the Fund in preparing its financial statements, and such policies are in
conformity with generally accepted accounting principles for investment
companies.
A. Investment Valuation
Tax-exempt securities are valued by a pricing service, which utilizes market
transactions, quotations from dealers, and various relationships among
securities in determining value. Short-term obligations are valued at
amortized cost. Other securities, if any, are valued at their fair value as
determined in accordance with established methods consistently applied.
B. Security Transactions
Security transactions are accounted for on the trade date (date the order to
buy or sell is executed). Realized gains or losses are reported on the basis
of identified cost of securities delivered.
C. Net Investment Income
Net investment income is determined daily and consists of interest accrued
and discount earned, less amortization of premium and the estimated daily
expenses of the Fund. Interest income is accrued daily as earned. The Fund is
charged for expenses directly attributable to it, while indirect expenses are
allocated among all funds in the Trust.
10
<PAGE>
STATE STREET RESEARCH TAX-EXEMPT FUND
D. Dividends
Dividends are declared daily by the Fund based upon projected net investment
income and paid or reinvested monthly. Net realized capital gains, if any,
are distributed annually, unless additional distributions are required for
compliance with applicable tax regulations.
Income dividends and capital gain distributions are determined in accordance
with Federal income tax regulations which may differ from generally accepted
accounting principles.
E. Federal Income Taxes
No provision for Federal income taxes is necessary because the Fund has
elected to qualify under Subchapter M of the Internal Revenue Code and its
policy is to distribute all of its taxable income, including net realized
capital gains, within the prescribed time periods. At December 31, 1994, the
Fund had a capital loss carryforward of $8,429,917 available, to the extent
provided in regulations, to offset future capital gains, if any, which
expires on December 31, 2002.
In order to meet certain excise tax distribution requirements under Section
4982 of the Internal Revenue Code, the Fund is required to measure and
distribute annually, if necessary, net capital gains realized during a
twelve-month period ending October 31. In this connection, the Fund is
permitted to defer into its next fiscal year any net capital losses incurred
between each November 1 and the end of its fiscal year. From November 1, 1994
through December 31, 1994 the Fund incurred net capital losses of $882,002
and intends to defer and treat such losses as arising in the fiscal year
ending December 31, 1995.
F. Futures Contracts
The Fund may enter into futures contracts as a hedge against unfavorable
market conditions and to enhance income. The Fund will not purchase any
futures contract if, after such purchase, more than one-third of net assets
would be represented by long futures contracts. The Fund will limit its risks
by entering into a futures position only if it appears to be a liquid
investment.
Upon entering into a futures contract, the Fund deposits with the selling
broker sufficient cash or U.S. Government securities to meet the minimum
"initial margin" requirements. Thereafter, the Fund receives from or pays to
the broker cash or U.S. Government securities equal to the daily fluctuation
in value of the contract ("variation margin"), which is recorded as
unrealized gain or loss. When the contract is closed, the Fund records a
realized gain or loss equal to the difference between the value of the
contract at the time it was opened and the value at the time it was closed.
Note 2
The Trust and State Street Research & Management Company (the "Adviser"), an
indirect wholly-owned subsidiary of Metropolitan Life Insurance Company
("Metropolitan"), have entered into an agreement under which the Adviser
earns monthly fees at an annual rate of 0.55% of the Fund's average daily net
assets. In consideration of these fees, the Adviser furnishes the Fund with
management, investment advisory, statistical and research facilities and
services. The Adviser also pays all salaries, rent and certain other expenses
of management. During the six months ended June 30, 1995, the fees pursuant
to such agreement amounted to $757,953.
State Street Research Shareholder Services, a division of State Street
Research Investment Services, Inc., the Trust's principal underwriter (the
"Distributor"), an indirect wholly-owned subsidiary of Metropolitan, provides
certain shareholder services to the Fund such as responding to inquiries and
instructions from investors with respect to the purchase and redemption of
shares of the Fund. During the six months ended June 30, 1995, the amount of
such expenses was $54,525.
The fees of the Trustees not currently affiliated with the Adviser amounted
to $14,248 during the six months ended June 30, 1995.
Note 3
For the six months ended June 30, 1995, purchases and sales of securities,
exclusive of short-term obligations, aggregated $118,263,499 and
$136,175,160, respectively.
Note 4
The Trust has adopted a Plan of Distribution Pursuant to Rule 12b-1 (the
"Plan") under the Investment Company Act of 1940, as amended. Under the Plan,
the Fund pays annual service fees to the Distributor at a rate of 0.25% of
average daily net assets for Class A, Class B and Class D shares. In
addition, the Fund pays annual distribution fees of 0.75% of average daily
net assets for Class B and Class D shares. The Distributor uses such payments
for personal services and/or the maintenance of shareholder accounts, to
reimburse securities dealers for distribution and marketing services, to
furnish ongoing assistance to investors and to defray a portion of its
distribution and marketing expenses. For the six months ended June 30, 1995,
fees pursuant to such plan amounted to $297,172, $182,363 and $5,193 for
Class A, Class B and Class D, respectively.
The Fund has been informed that the Distributor and MetLife Securities, Inc.,
a wholly-owned subsidiary of Metropolitan, earned initial sales charges
aggregating $32,608 and $223,626, respectively, on sales of Class A shares of
the Fund during the six months ended June 30, 1995, and that MetLife
Securities, Inc. earned commissions aggregating $109,448 on sales of Class B
shares, and the Distributor collected contingent deferred sales charges 11
aggregating $110,058 on redemptions of Class B shares during the same period.
11
<PAGE>
STATE STREET RESEARCH TAX-EXEMPT FUND
Note 5
The Trustees have the authority to issue an unlimited number of shares of
beneficial interest, $.001 par value per share. At June 30, 1995,
Metropolitan owned 122 Class C shares and 61,135 Class D shares and the
Distributor owned 13,825 Class A shares of the Fund.
Share transactions were as follows:
<TABLE>
<CAPTION>
Six months ended
June 30, 1995 Year ended
(Unaudited) December 31, 1994
-------------------------- -----------------------------
Class A Shares Amount Shares Amount
--------------------------------------------- ---------- ------------ ----------- --------------
<S> <C> <C> <C> <C>
Shares sold 1,176,844 $ 9,177,822 4,795,156 $ 38,277,992
Issued upon reinvestment of:
Dividends from net investment income 588,004 4,583,638 1,261,918 9,851,273
Distribution from net realized gains -- -- 43,200 322,270
Shares repurchased (3,809,240) (29,665,918) (10,125,093) (79,111,629)
---------- ------------ ----------- --------------
Net increase (decrease) (2,044,392) $(15,904,458) 4,024,819 $(30,660,094)
========== ============ =========== ==============
Class B Shares Amount Shares Amount
--------------------------------------------- ---------- ------------ ----------- --------------
Shares sold 409,139 $ 3,185,246 2,332,039 $ 18,581,303
Issued upon reinvestment of:
Dividends from net investment income 82,618 643,860 148,150 1,150,376
Distribution from net realized gains -- -- 6,731 50,145
Shares repurchased (450,284) (3,490,594) (1,035,950) (7,990,693)
---------- ------------ ----------- --------------
Net increase 41,473 $ 338,512 1,450,970 $ 11,791,131
========== ============ =========== ==============
Class C Shares Amount Shares Amount
--------------------------------------------- ---------- ------------ ----------- --------------
Shares sold 9,373 $ 73,335 10,183 $ 81,311
Issued upon reinvestment of:
Dividends from net investment income 1,184 9,225 2,602 20,345
Distribution from net realized gains -- -- 72 535
Shares repurchased (8,510) (66,723) (24,703) (192,917)
---------- ------------ ----------- --------------
Net increase (decrease) 2,047 $ 15,837 (11,846) $ (90,726)
========== ============ =========== ==============
Class D Shares Amount Shares Amount
--------------------------------------------- ---------- ------------ ----------- --------------
Shares sold 35,566 $ 280,457 36,875 $ 296,347
Issued upon reinvestment of:
Dividends from net investment income 1,196 9,327 1,725 13,235
Distribution from net realized gains -- -- 180 1,341
Shares repurchased (20,439) (162,814) (42,597) (331,738)
---------- ------------ ----------- --------------
Net increase (decrease) 16,323 $ 126,970 (3,817) $ (20,815)
========== ============ =========== ==============
</TABLE>
12
<PAGE>
STATE STREET RESEARCH TAX-EXEMPT FUND
Financial Highlights
For a share outstanding throughout each period:
<TABLE>
<CAPTION>
Class A
-------------------------------------------------------------------
Six months
ended Year ended December 31
June 30, 1995
(Unaudited) --------------------------------------------------
1994 1993 1992 1991 1990
- ----------------------------------- ------------- ------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
period $7.46 $8.43 $7.94 $7.69 $7.30 $7.42
Net investment income* .20 .40 .40 .43 .44 .46
Net realized and unrealized gain
(loss) on investments .36 (.98) .54 .27 .39 (.12)
Dividends from net investment
income (.20) (.38) (.39) (.43) (.44) (.46)
Distributions from net realized
gains -- (.01) (.06) (.02) -- --
------------- ------- ------- ------- ------- --------
Net asset value, end of period $7.82 $7.46 $8.43 $7.94 $7.69 $7.30
============= ======= ======= ======= ======= ========
Total return 7.60%+++ (6.90)%+ 12.11%+ 9.34%+ 11.81%+ 4.84%+
Net assets at end of period (000s) $233,411 $238,097 $302,845 $203,312 $118,157 $84,925
Ratio of operating expenses to
average net assets* 1.16%++ 1.20% 1.20% 1.20% 1.25% 1.25%
Ratio of net investment income to
average net assets* 5.21%++ 5.07% 4.85% 5.48% 6.00% 6.43%
Portfolio turnover rate 44.22% 78.63% 36.16% 27.44% 81.75% 84.12%
*Reflects voluntary assumption of
fees or expenses per share in each
period. -- $ .00 -- $ .00 $ .00 $ .01
</TABLE>
<TABLE>
<CAPTION>
Class B Class C Class D
--------------------------- --------------------------- ----------------------------
Six Six Six
months months months
ended ended ended
June Year June Year June Year
30, ended 30, ended 30, ended
1995 December 1995 December 1995 December
(Unaudited) 31, 1994 1993** (Unaudited) 31, 1994 1993** (Unaudited) 31, 1994 1993**
---------------- ------- --------- -- ------- --------- -- ------- --------- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of
period $7.46 $8.43 $8.25 $7.45 $8.41 $8.25 $7.46 $8.43 $8.25
Net investment
income* .17 .34 .19 .21 .42 .23 .17 .34 .19
Net realized and
unrealized gain
(loss) on
investments .36 (.97) .24 .35 (.96) .22 .36 (.97) .23
Dividends from
net investment
income (.18) (.33) (.19) (.21) (.41) (.23) (.18) (.33) (.18)
Distributions
from net
realized gains -- (.01) (.06) -- (.01) (.06) -- (.01) (.06)
------- --------- -- ------- --------- -- ------- --------- ----
Net asset value,
end of period $7.81 $7.46 $8.43 $7.80 $7.45 $8.41 $7.81 $7.46 $8.43
======= ========= == ======= ========= == ======= ========= ====
Total return 7.07%+++ (7.59)%+ 5.20%+++ 7.61%+++ (6.56)% +5.54%+++ 7.07%+++ (7.59)%+ 5.19%+++
Net assets at
end of period
(000s) $37,347 $35,338 $27,695 $365 $334 $477 $1,131 $958 $1,115
Ratio of
operating
expenses to
average net
assets* 1.91%++ 1.95% 1.95%++ 0.91%++ 0.95% 0.96%++ 1.91%++ 1.95% 1.99%++
Ratio of net
investment
income to
average net
assets* 4.45%++ 4.35% 3.93%++ 5.45%++ 5.26% 4.92%++ 4.44%++ 4.31% 3.92%++
Portfolio
turnover rate 44.22% 78.63% 36.16% 44.22% 78.63% 36.16% 44.22% 78.63% 36.16%
*Reflects
voluntary
assumption of
fees or
expenses per
share in each
period. -- $.00 -- -- $.00 -- -- $.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 charges.
13
<PAGE>
STATE STREET RESEARCH TAX-EXEMPT FUND
Fund Information, Officers and Trustees of State Street Research Tax-Exempt
Trust
Fund Information
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 02266-8408
1-800-562-0032
Custodian
State Street Bank and
Trust Company
225 Franklin Street
Boston, MA 02110
Legal Counsel
Goodwin, Procter & Hoar
Exchange Place
Boston, MA 02109
Officers
Ralph F. Verni
Chairman of the Board,
President and Chief
Executive Officer
Paul J. Clifford, Jr.
Vice President
Susan W. Drake
Vice President
John H. Kallis
Vice President
Thomas A. Shively
Vice President
Gerard P. Maus
Treasurer
Joseph W. Canavan
Assistant Treasurer
Douglas A. Romich
Assistant Treasurer
Francis J. McNamara, III
Secretary and General Counsel
Darman A.Wing
Assistant Secretary and
Assistant General Counsel
Trustees
Ralph F. Verni
Chairman of the Board,
President, Chief Executive
Officer and Director,
State Street Research &
Management Company
Edward M. Lamont
Formerly in banking
(Morgan Guaranty Trust Company of
New York); presently engaged
in private investments and
civic affairs
Robert A. Lawrence
Partner, Saltonstall & Co.
Dean O. Morton
Retired; formerly Executive
Vice President, Chief
Operating Officer and Director,
Hewlett-Packard Company
Thomas L. Phillips
Retired; formerly Chairman of the Board
and Chief Executive Officer, Raytheon Company
Toby Rosenblatt
President,
The Glen Ellen Company
Vice President,
Founders Investments Ltd.
Michael S. Scott Morton
Jay W. Forrester Professor of
Management, Sloan School
of Management, Massachusetts Institute of Technology
Jeptha H. Wade
Retired; formerly Of Counsel, Choate, Hall & Stewart
14
<PAGE>
State Street Research Tax-Exempt Fund Bulk Rate
One Financial Center U.S. Postage
Boston, MA 02111 PAID
Brockton, MA
Permit No. 600
Questions? Comments?
Call us at 1-800-562-0032,
or write us at:
State Street Research
Shareholder Services
P.O. Box 8408
Boston, MA 02266-8408
[State Street logo] State Streeet Research
This report is prepared for the general information of current shareholders
only. It is not authorized for use as sales material with prospective
investors.
CONTROL NUMBER: 2520-950822(0996)SSR-LD
Cover Illustration by Dorothy Cullinan
TE-393D-895
<PAGE>
[Graphic: State Street Logo] State Street Research
STATE STREET RESEARCH
CALIFORNIA TAX-FREE FUND
SEMIANNUAL REPORT
June 30, 1995
[Graphic: Building Blocks]
WHAT'S INSIDE
New and Improved:
A new design that's easier to read
Investment Update:
About theFund,
economy and markets
Fund Information:
Facts and figures
Plus, Complete Portfolio Holdings
and Financial Statements
<PAGE>
STATE STREET RESEARCH CALIFORNIA TAX-FREE FUND
Investment Update
INVESTMENT ENVIRONMENT
The Economy
(bullet) Most signs point to a slowing national economy. Consumer spending
has fallen, home and auto sales are down, and job growth has eased. The
California economy remains weak.
(bullet) The Federal Reserve cut interest rates by one-quarter point on July 6,
1995.
(bullet) Inflation remains low, and a slower economy actually reduces the risk
of rising inflation.
The Markets
(bullet) Through June, municipal bonds have had an outstanding 1995, although
they have trailed other bond sectors. The Lehman Brothers Municipal Bond
Index provided a return of 9.65% through the first six months of 1995.(1)
(bullet) The California municipal bond market rebounded as well, despite the
bankruptcy of Orange County in December 1994.
(bullet) So far, 1995 has been the best year for stocks since 1991. The S&P 500
was up 20.19% through the first six months of 1995.(1)
The Fund
Over the past six months
(bullet) Class A shares of the Fund provided a total return of +8.88% (not
including sales charge) for the 6 months ended June 30, 1995.(2) The average
total return for 104 funds in Lipper Analytical Services' California
municipal debt fund category was +9.70% over the same time period (does not
reflect sales charge).
(bullet) Although the Fund has a positive return through the first half of
1995, it trailed the average for its category because the portfolio was
conservatively positioned. We shortened the Fund's duration (a measure of a
fund's sensitivity to interest rate changes) to protect it if interest rates
increased, as happened throughout 1994. When interest rates fell sharply
instead, the Fund did not enjoy the full benefit of the market rally.
Current strategy
(bullet) We extended the Fund's duration slightly, which will help performance
in an environment of stable or falling rates.
(bullet) We upgraded the quality of bonds in the portfolio and increased the
percentage of insured bonds. As of June 30, 1995, the bonds in the portfolio
had an average credit quality of AA.
(bullet) The outlook for municipal bonds is positive. Supply is low, as fewer
new bonds have been issued. Municipal bonds also currently offer attractiv
value relative to U.S. Treasury bonds.
(1) The Lehman Brothers Municipal Bond Index is a commonly used measure of bond
market performance. The Standard & Poor's 500 Composite Index (S&P 500) includes
500 widely traded common stocks and is a commonly used measure of U.S. stock
market performance. The indices are unmanaged and do not take sales charges into
account. Direct investment in the indices is not possible; results are for
illustrative purposes only.
(2) +8.62% for Class B shares; +9.01% for Class C shares; +8.47% for Class D
shares.
(3) All returns represent past performance, which is no guarantee of
future results. The investment return and principal value of an investment
made in the Fund will fluctuate, and shares, when redeemed,
may be worth more or less than their original cost. All returns assume
reinvestment of capital gain distributions and income dividends.
(4) Performance for a class includes periods prior to the adoption of class
designations in 1993. Performance reflects up to a maximum 4.5% front-end or
5% contingent deferred sales charge. "C" shares, offered without a sales
charge, are available only to certain employee benefit plans and
institutions. Performance prior to class designations in 1993 does not
reflect annual 12b-1 fees of .25% for "A" shares and 1% for "B" and "D"
shares, which will reduce subsequent performance.
FUND INFORMATION (all data are for periods ended June 30, 1995)
SEC Average Annual Compound Rates of Return
(at maximum applicable sales charge)(3),(4)
<TABLE>
<CAPTION>
Life of Fund
(since 7/5/89) 5 years 1 year
<S> <C> <C> <C>
Class A +6.04%/+4.98% +6.37%/+5.48% +2.29%/+1.63%
Class B +6.60%/+5.54% +6.74%/+5.84% +1.45%/+0.76%
Class C +6.97%/+5.93% +7.49%/+6.62% +7.37%/+6.68%
Class D +6.60%/+5.56% +7.04%/+6.18% +5.31%/+4.62%
</TABLE>
Cumulative Total Returns
(do not reflect sales charge)(3)
<TABLE>
<CAPTION>
Life of Fund
(since /5/89) 5 years 1 year
<S> <C> <C> <C>
Class A +48.86%/+40.12% +42.63%/+36.75% +7.11%/+6.42%
Class B +46.75%/+38.14% +40.61%/+34.81% +6.45%/+5.76%
Class C +49.79%/+41.21% +43.52%/+37.81% +7.37%/+6.68%
Class D +46.73%/+38.29% +40.59%/+34.96% +6.31%/+5.62%
</TABLE>
SEC Yield
<TABLE>
<CAPTION>
<S> <C>
Class A 4.72%/4.18%
Class B 4.17%/3.61%
Class C 5.19%/4.63%
Class D 4.17%/3.61%
</TABLE>
SEC yield is calculated according to Securities and Exchange Commission
requirements and is based on the net investment income produced for the 30 days
ended June 30, 1995. A small portion of the Fund's income may be subject to
federal, state and local income tax, and/or alternative minimum tax. Investors
should consult their tax adviser.
Performance results for the Fund are increased by the Distributor's voluntary
reduction of Fund fees and expenses. The first figure reflects expense
reduction; the second shows what results would have been without
subsidization.
Bond Quality
(by percentage of net assets)
[Graphic: Pie Chart]
A 17%
AA 9%
AAA 48%
BBB 13%
Not rated 13%
As rated by Standard & Poor's Corporation or Moody's
Investors Services, Inc., or unrated by equivalent.
<PAGE>
STATE STREET RESEARCH CALIFORNIA TAX-FREE FUND
INVESTMENT PORTFOLIO
June 30, 1995 (Unaudited)
<TABLE>
<CAPTION>
Principal Maturity Value
Amount Date (Note 1)
- ------------------------------------------- --------- --------- -------------
<S> <C> <C> <C>
MUNICIPAL BONDS 99.7%
General Obligation 10.9%
State of California, Various Purpose,
General Obligation Bonds, 7.00% $ 300,000 8/01/2008 $ 335,874
City and County of San Francisco, General
Obligation Bonds, Series 1991 A, (Various
Purpose Projects), 6.50% 500,000 12/15/2010 515,405
Santa Monica-Malibu Unified School
District, Los Angeles County, California,
General Obligation Bonds, Series 1993,
5.50% 500,000 8/1/2013 471,050
Puerto Rico Municipal Finance Agency, 1994
Series A Bonds, FSA Insured, 6.00% 1,000,000 7/01/2014 1,009,590
Commonwealth of
Puerto Rico, Public Improvement Refunding
Bonds, (General Obligation Bonds) Series
1995, MBIA Insured 5.65% 500,000 7/01/2015 492,345
Roseville Joint Union High School District,
1992 General Obligation Bonds, Series B,
FGIC Insured, 0.00% 1,000,000 8/01/2015 289,100
-------------
3,113,364
-------------
Certificates of Participation 9.0%
County of Los Angeles, Certificates of
Participation, Series A (Marina Del Ray),
Los Angeles County Capital Asset Leasing
Corporation, 6.50% 1,000,000 7/01/2008 979,430
County of Marin, Certificates of
Participation, (1991 Capital Improvements
Project), 6.375% 500,000 8/01/2011 518,290
City of Stockton, Revenue Certificates of
Participation, 1995 Series A, (Wastewater
Treatment Plant Expansion), FGIC Insured,
6.70% $1,000,000 9/01/2014 $1,069,660
-------------
2,567,380
-------------
College & University 6.3%
The Trustees of the California State
University Housing System, 1991 Housing
System Refunding Revenue Bonds, AMBAC
Insured, 7.00% 300,000 11/01/2011 325,119
University of California, Board of Regents,
Refunding Revenue, (Multiple Purpose
Projects), Series C, Ambac Insured, 5.00% 500,000 9/01/2012 447,350
California Educational Facilities
Authority, Series 1994 Revenue Bonds
(Southwestern University Project), 6.60% 1,000,000 11/01/2014 1,032,890
-------------
1,805,359
-------------
Hospital/Health Care 5.9%
City of Duarte, California, Certificates of
Participation, (Hope National Medical
Center), 6.00% 500,000 4/01/2008 480,175
Santa Clara County Financing Authority,
(VMC Facility Replacement Project), 1994
Series A Bonds, AMBAC Insured, 7.75% 1,000,000 11/15/2008 1,198,130
-------------
1,678,305
-------------
Industrial Development/Pollution Control 5.0%
Puerto Rico Industrial, Medical and
Environmental Pollution Control Facilities
Financing Authority, Revenue Bonds, Series
A, 6.25% 750,000 11/15/2013 787,425
The accompanying notes are an integral part of the financial statements.
</TABLE>
2
<PAGE>
STATE STREET RESEARCH CALIFORNIA TAX-FREE FUND
INVESTMENT PORTFOLIO (con't)
<TABLE>
<CAPTION>
Principal Maturity Value
Amount Date (Note 1)
- ------------------------------------------- --------- --------- -------------
<S> <C> <C> <C>
Industrial Development/Pollution Control (cont'd)
California Pollution Control Financing
Authority, Pollution Control Revenue Bonds,
(San Diego Gas & Electric Company), 1991
Series A, Subject to AMT, 6.80% $ 600,000 6/01/2015 $ 661,212
-------------
1,448,637
-------------
Lease Revenue 4.9%
State Public Works Board of the State of
California, Lease Revenue Bonds,
(Department of Justice Building), 1995
Series A, 5.625% 1,500,000 5/01/2020 1,393,080
-------------
Power 3.7%
Sacramento Municipal Utility District,
Electric Revenue Refunding Bonds, 1991
Series Z, FGIC Insured, 6.35% 1,100,000 7/01/2005 1,062,950
-------------
Pre-Refunded Bonds 7.8%
Northern California Power Agency,
Geothermal Project Number 3, Revenue Bonds,
1987 Refunding, Series A, Pre-Refunded to
7/1/96 @ 101.5, 7.00% 250,000 7/01/2007 259,425
Fresno, California Water Systems, Revenue
Bonds, 1990 Series A, Pre-Refunded to
6/1/98 @ 102, 7.25% 200,000 6/01/2010 219,752
Alameda Unified School District, Unlimited
Tax, Alameda County, California, General
Obligation Bonds, Series 1989, Subject to
Crossover Refunding 7/1/99 @ 102, 7.00% 250,000 7/01/2014 277,242
California Educational Facilities
Authority,
Revenue Bonds
(Pepperdine University) Series 1990, MBIA
Insured, Pre-Refunded to
10/1/2000 @ 102, 7.20% $ 250,000 11/01/2015 $ 285,540
Commonwealth of
Puerto Rico, Public Improvement Bonds of
1989, Series A, General Obligation Bonds,
Pre-Refunded to 7/1/99 @ 101.5, 7.75% 300,000 7/01/2017 341,340
California Educational Facilities
Authority, Revenue Bonds (St. Mary's
College of California Project) Series 1990,
Pre-Refunded to 10/1/2000 @ 102, 7.50% 250,000 10/01/2020 288,578
Transmission Agency of Northern California,
California-Oregon Transmission Project,
Revenue Bonds, MBIA Insured, 1990 Series A,
Pre-Refunded to
5/1/2000 @ 101.5, 7.00% 500,000 5/01/2024 559,625
-------------
2,231,502
-------------
Public Facilities 3.3%
Puerto Rico Public Buildings Authority,
Government Facilities Revenue Bonds, Series
A, 5.50% 1,000,000 7/01/2021 942,090
-------------
Resource Recovery/Solid Waste 2.8%
Stanislaus Waste-to-Energy Financing
Agency, Solid Waste Facility Refunding
Revenue Certificates, (Ogden Martin Systems
of Stanislaus, Inc. Project), Series 1990,
Subject to AMT, 7.625% 760,000 1/01/2010 808,480
-------------
The accompanying notes are an integral part of the financial statements.
3
</TABLE>
<PAGE>
STATE STREET RESEARCH CALIFORNIA TAX-FREE FUND
<TABLE>
<CAPTION>
Principal Maturity Value
Amount Date (Note 1)
- ------------------------------------------- --------- --------- -------------
<S> <C> <C> <C>
Single-Family Housing 6.6%
California Housing Finance Agency, Home
Mortgage Revenue Bonds, 1991 Series G,
Subject to AMT, 6.95% $ 260,000 8/01/2011 $ 267,569
California Housing Finance Agency, Home
Mortgage Revenue Bonds, 1994 Series G,
7.20% 1,500,000 8/01/2014 1,601,400
California Housing Finance Agency, Home
Mortgage Revenue Bonds, 1990 Series D,
Subject to AMT, 7.875% 35,000 8/01/2031 37,101
-------------
1,906,070
-------------
Special/Sales Tax Revenue 15.9%
Orange County Transportation Authority,
Orange County, California, Measure M Sales
Tax Revenue Bonds (Limited Tax Bonds),
Second Senior Bonds, Series 1992, FGIC
Insured, 6.00% 500,000 2/15/2007 507,480
Redevelopment Agency of the City of San
Jose, Merged Area Redevelopment Project,
Tax Allocation Bonds, MBIA Insured, Series
1993, 6.00% 1,000,000 8/01/2007 1,041,830
South Orange County Public Financing
Authority, Special Tax Revenue Bonds, 1994
Series B (Junior Lien Bonds), 7.00% 500,000 9/01/2007 502,500
Redevelopment Agency of the City of San
Diego, California, Centre City
Redevelopment Project, Tax Allocation
Refunding Bonds, Series 1992, AMBAC
Insured, 6.00% 1,000,000 9/01/2008 1,019,640
South Orange County Public Financing
Authority, Special Tax Revenue Bonds, 1994
Series B (Junior Lien Bonds), 7.00% $1,000,000 9/01/2009 $ 1,002,860
San Francisco Bay Area Rapid Transit
District, Sales Tax Revenue Bonds, FGIC
Insured, Series 1995, 5.50% 500,000 7/01/2015 468,900
-------------
4,543,210
-------------
Structured Financing 4.5%
Sacramento Cogeneration Authority,
(Cogeneration Authority Project), Revenue
Bonds, Series 1995, 6.50% 1,300,000 7/01/2014 1,284,634
-------------
Toll Roads/Turnpike Authorities 6.7%
Foothill/Eastern Transportation Corridor
Agency, Toll Road Revenue Bonds, 0.00% 1,695,000 1/1/2008 899,774
San Joaquin Hills Transportation Corridor
Agency, Orange County, California, Senior
Lien Toll Road Revenue Bonds, 7.00% 1,000,000 1/01/2030 1,015,190
-------------
1,914,964
-------------
Transit/Highway 6.4%
San Francisco Bay Area Rapid Transit
District, Sales Tax Revenue Bonds, Series
1991, FGIC Insured, 6.40% 500,000 7/01/2005 536,000
City of Sacramento, 1991 Refunding
Certificates of Participation, Sacramento
Light Rail Transit Project, 6.75% 250,000 7/01/2007 270,033
Government of Guam, Limited Obligation
Highway Bonds, 1992 Series A, Capital
Guaranty Insurance Co. Insured, 6.30% 1,000,000 5/01/2012 1,036,130
-------------
1,842,163
-------------
Total Municipal Bonds (Cost $27,436,238) 28,542,188
-------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
4
<PAGE>
STATE STREET RESEARCH CALIFORNIA TAX-FREE FUND
INVESTMENT PORTFOLIO (cont'd)
<TABLE>
<CAPTION>
Principal Maturity Value
Amount Date (Note 1)
- --------------------------- ------- --------- ------------
<S> <C> <C> <C>
Short-Term Obligations 3.2%
California Pollution
Control Financing Authority
(Burney Forest Products
Project), Revenue Bonds,
3.65% $400,000 9/01/2020++ $ 400,000
Georgia Power Company,
Pollution Control Revenue
Bonds, 3.30% 200,000 7/01/2024++ 200,000
New York State Energy
Research and Development
Authority, Pollution
Control Refunding Revenue
Bonds, (New York State
Electric and Gas
Corporation Project), 1994
Series C, 3.95% 300,000 6/01/2029++ 300,000
------------
Total Short-Term Obligations (Cost $900,000) 900,000
------------
Total Investments (Cost $28,336,238)--102.9% 29,442,188
Cash and Other Assets, Less Liabilities--(2.9)% (818,888)
------------
Net Assets--100.0% $28,623,300
============
Federal Income Tax Information:
At June 30, 1995, the net unrealized appreciation
of investments based on cost for Federal income tax
purposes of $28,336,238 was as follows:
Aggregate gross unrealized appreciation for all
investments in which there is an excess of value
over tax cost $ 1,282,119
Aggregate gross unrealized depreciation for all
investments in which there is an excess of tax cost
over value (176,169)
------------
$ 1,105,950
============
</TABLE>
++ Interest rates on these obligations may change daily.
STATEMENT OF ASSETS AND LIABILITIES
June 30, 1995 (Unaudited)
<TABLE>
<CAPTION>
<S> <C>
Assets
Investments, at value (Cost $28,336,238) (Note 1) $29,442,188
Cash 32,447
Receivable for securities sold 883,409
Interest receivable 544,827
Receivable from Distributor (Note 3) 13,547
Receivable for fund shares sold 2,621
Other assets 1,483
------------
30,920,522
Liabilities
Payable for securities purchased 2,045,262
Payable for fund shares redeemed 98,682
Dividends payable 50,614
Accrued transfer agent and shareholder services
(Note 2) 25,206
Accrued management fee (Note 2) 13,168
Accrued distribution fee (Note 5) 5,146
Other accrued expenses 59,144
------------
2,297,222
------------
$28,623,300
============
Net Assets
Net Assets consist of:
Undistributed net investment income $ 45,652
Unrealized appreciation of investments 1,105,950
Accumulated net realized loss (1,012,260)
Shares of beneficial interest 28,483,958
------------
$28,623,300
============
Net Asset Value and redemption price per share of
Class A shares ($8,079,494 (divided by) 1,032,698
shares of beneficial interest) $7.82
============
Maximum Offering Price per share of Class A shares
($7.82 (divided by) .955) $8.19
============
Net Asset Value and offering price per share of
Class B shares ($3,479,279 (divided by) 444,447
shares of beneficial interest)* $7.83
============
Net Asset Value, offering price and redemption
price per share of Class C shares ($16,361,322
(divided by) 2,088,885 shares of beneficial
interest) $7.83
============
Net Asset Value and offering price per share of
Class D shares ($703,205 (divided by)
89,776 shares of beneficial interest)* $7.83
============
</TABLE>
* Redemption price per share for Class B and Class D is equal to net
asset value less any applicable contingent deferred sales charge.
The accompanying notes are an integral part of the financial statements.
5
<PAGE>
STATE STREET RESEARCH CALIFORNIA TAX-FREE FUND
STATEMENT OF OPERATIONS
For the six months ended June 30, 1995 (Unaudited)
<TABLE>
<CAPTION>
<S> <C>
Investment Income
Interest $ 902,158
Expenses
Management fee (Note 2) 78,266
Custodian fee 45,859
Transfer agent and shareholder services (Note 2) 45,461
Reports to shareholders 12,856
Audit fee 12,275
Trustees' fees (Note 2) 6,013
Registration fees 4,585
Distribution fee--Class A (Note 5) 9,455
Distribution fee--Class B (Note 5) 16,930
Distribution fee--Class D (Note 5) 3,394
Legal fees 930
Miscellaneous 1,893
----------
237,917
Expenses borne by the Distributor (Note 3) (87,181)
----------
150,736
----------
Net investment income 751,422
----------
Realized and Unrealized Gain on Investments
Net realized gain on investments (Notes 1 and 4) 298,964
Net unrealized appreciation of investments 1,393,476
----------
Net gain on investments 1,692,440
----------
Net increase in net assets resulting from operations $2,443,862
==========
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Six months
ended
June 30, Year Ended
1995 December 31,
(Unaudited) 1994
- ------------------------------------ ------------ ----------------
<S> <C> <C>
Increase (Decrease) in Net Assets
Operations:
Net investment income $ 751,422 $ 1,733,441
Net realized gain (loss) on
investments* 298,964 (1,166,695)
Net unrealized appreciation
(depreciation) of investments 1,393,476 (3,114,285)
------------ ----------------
Net increase (decrease) resulting
from operations 2,443,862 (2,547,539)
------------ ----------------
Dividends from net investment
income:
Class A (207,189) (332,285)
Class B (80,430) (120,570)
Class C (483,485) (1,215,189)
Class D (16,105) (31,740)
------------ ----------------
(787,209) (1,669,784)
------------ ----------------
Net decrease from fund share
transactions (Note 7) (1,526,950) (4,011,134)
------------ ----------------
Total increase (decrease) in net
assets 129,703 (8,258,457)
Net Assets
Beginning of period 28,493,597 36,752,054
------------ ----------------
End of period (including
undistributed net investment income
of $45,652 and $81,439,
respectively) $28,623,300 $28,493,597
============ ================
*Net realized loss for Federal
income tax purposes
(Note 1) $ (176,626) $ (830,250)
============ ================
</TABLE>
The accompanying notes are an integral part of the financial statements.
6
<PAGE>
STATE STREET RESEARCH CALIFORNIA TAX-FREE FUND
NOTES TO UNAUDITED FINANCIAL STATEMENTS
June 30, 1995
Note 1
State Street Research California Tax-Free Fund (the "Fund"), is a series of
State Street Research Tax-Exempt Trust (the "Trust"), formerly MetLife-State
Street Tax-Exempt Trust, which was organized as a Massachusetts business
trust in December, 1985 and is registered under the Investment Company Act of
1940, as amended, as an open-end management investment company. The Fund
commenced operations in July, 1989. Five series of the Trust are publicly
offered: State Street Research California Tax-Free Fund, State Street
Research Tax-Exempt Fund, State Street Research New York Tax-Free Fund,
State Street Research Florida Tax-Free Fund and State Street Research
Pennsylvania Tax-Free Fund.
The Fund offers four classes of shares. Class A shares are subject to an
initial sales charge of up to 4.50% and pay a service fee equal to 0.25% of
average daily net assets. Class B shares are subject to a contingent deferred
sales charge on certain redemptions made within five years of purchase and
pay annual distribution and service fees of 1.00%. Class B shares
automatically convert into Class A shares (which pay lower ongoing expenses)
at the end of eight years after the issuance of the Class B shares. Class C
shares are only offered to certain employee benefit plans and large
institutions. No sales charge is imposed at the time of purchase or
redemption of Class C shares. Class C shares do not pay any distribution or
service fees. Class D shares are subject to a contingent deferred sales
charge of 1.00% on any shares redeemed within one year of their purchase.
Class D shares also pay annual distribution and service fees of 1.00%. The
Fund's expenses are borne pro rata by each class, except that each class
bears expenses, and has exclusive voting rights with respect to provisions of
the Plan of Distribution, related specifically to that class. The Trustees
declare separate dividends on each class of shares.
The following significant policies are consistently followed by the Fund in
preparing its financial statements, and such policies are in conformity with
generally accepted accounting principles for investment companies.
A. Investment Valuation
Tax-exempt securities are valued by a pricing service, which utilizes market
transactions, quotations from dealers, and various relationships among
securities in determining value. Short-term obligations are valued at
amortized cost. Other securities, if any, are valued at their fair value as
determined in accordance with established methods consistently applied.
B. Security Transactions
Security transactions are accounted for on the trade date (date the order to
buy or sell is executed). Realized gains or losses are reported on the basis
of identified cost of securities delivered.
C. Net Investment Income
Net investment income is determined daily and consists of interest accrued
and discount earned, less amortization of premium and the estimated daily
expenses of the Fund. Interest income is accrued daily as earned. The Fund is
charged for expenses directly attributable to it, while indirect expenses are
allocated among all funds in the Trust.
D. Dividends
Dividends are declared daily by the Fund based upon projected net investment
income and paid or reinvested monthly. Net realized capital gains, if any,
are distributed annually, unless additional distributions are required for
compliance with applicable tax regulations.
Income dividends and capital gain distributions are determined in accordance
with Federal income tax regulations which may differ from generally accepted
accounting principles.
E. Federal Income Taxes
No provision for Federal income taxes is necessary because the Fund has
elected to qualify under Subchapter M of the Internal Revenue Code and its
policy is to distribute all of its taxable income, including net realized
capital gains, within the prescribed time periods. At December 31, 1994, the
Fund had a capital loss carryforward of $830,250 available, to the extent
provided in regulations, to offset future capital gains, if any, which expire
on December 31, 2002.
In order to meet certain excise tax distribution requirements under Section
4982 of the Internal Revenue Code, the Fund is required to measure and
distribute annually, if necessary, net capital gains realized during a
twelve-month period ending October 31. In this connection, the Fund is
permitted to defer into its next fiscal year any net capital losses incurred
between each November 1 and the end of its fiscal year. From November 1, 1993
through December 31, 1993 the Fund incurred net capital losses of $139,145
and has deferred and treated such losses as arising in the fiscal year ending
December 31, 1994. From November 1, 1994 through December 31, 1994 the Fund
incurred net capital losses of $475,590 and intends to defer and treat such
losses as arising in the fiscal year ending December 31, 1995.
Note 2
The Trust and State Street Research & Management Company (the "Adviser"), an
indirect wholly-owned subsidiary of Metropolitan Life Insurance Company 7
("Metropolitan"), have entered into an agreement under which the Adviser
earns monthly fees at an annual rate of 0.55% of the Fund's average daily net
assets. In consideration of these fees, the Adviser furnishes the Fund with
management, investment advisory, statistical and research facilities and
services. The Adviser also pays all salaries, rent and certain other expenses
of management. During the six months ended June 30, 1995, the fees pursuant
to such agreement amounted to $78,266.
State Street Research Shareholder Services, a division of State Street
Research Investment Services, Inc., the Trust's principal underwriter (the
"Distributor"), an indirect wholly-owned subsidiary of Metropolitan, provides
certain shareholder services to the Fund such as responding to inquiries and
instructions from investors with respect to the purchase and redemption of
shares of the Fund. During the six months ended June 30, 1995, the amount of
such expenses was $8,155.
The fees of the Trustees not currently affiliated with the Adviser amounted
to $6,013 during the six months months ended June 30, 1995.
7
<PAGE>
STATE STREET RESEARCH CALIFORNIA TAX-FREE FUND
Note 3
The Distributor and its affiliates may from time to time and in varying
amounts voluntarily assume some portion of fees or expenses relating to the
Fund. During the six months ended June 30, 1995, the amount of such expenses
assumed by the Distributor and its affiliates was $87,181.
Note 4
For the six months ended June 30, 1995, purchases and sales of securities,
exclusive of short-term obligations, aggregated $10,225,279 and $11,773,378,
respectively.
Note 5
The Trust has adopted a Plan of Distribution Pursuant to Rule 12b-1 (the
"Plan") under the Investment Company Act of 1940, as amended. Under the Plan,
the Fund pays annual service fees to the Distributor at a rate of 0.25% of
average daily net assets for Class A, Class B and Class D. In addition, the
Fund pays annual distribution fees of 0.75% of average daily net assets for
Class B and Class D shares. The Distributor uses such payments for personal
services and/or the maintenance of shareholder accounts, to reimburse
securities dealers for distribution and marketing services, to furnish
ongoing assistance to investors and to defray a portion of its distribution
and marketing expenses. For the six months ended June 30, 1995, fees pursuant
to such plan amounted to $9,455, $16,930 and $3,394, for Class A, Class B and
Class C, respectively.
The Fund has been informed that the Distributor and MetLife Securities, Inc.,
a wholly-owned subsidiary of Metropolitan, earned initial sales charges
aggregating $4,676 and $32,318, respectively, on sales of Class A shares of
the Fund during the six months ended June 30, 1995, and that MetLife
Securities, Inc. earned commissions aggregating $7,852 on sales of Class B
shares, and that the Distributor collected contingent deferred sales charges
of $7,675 on redemptions of Class B shares during the same period.
Note 6
Under normal circumstances at least 80% of the Fund's net assets will be
invested in California Municipal Obligations. Certain proposed California
constitutional amendments, legislative measures, executive orders,
administrative regulations and voter initiatives could result in adverse
consequences affecting California Municipal Obligations. Also, the Fund is
able to invest up to 25% of total assets in a single industry. Accordingly,
the Fund's investments may be subject to greater risk than those in a fund
with more restrictive concentration limits.
At June 30, 1995, investments totalling 12.0% and 10.5% of the Fund's net
assets were insured as to the timely payment of principal and interest by
Financial Guaranty Insurance Co. (FGIC) and AMBAC Indemnity Corp. (AMBAC),
respectively.
8
<PAGE>
STATE STREET RESEARCH CALIFORNIA TAX-FREE FUND
NOTES (cont'd)
Note 7
The Trustees have the authority to issue an unlimited number of shares of
beneficial interest, $.001 par value per share. At June 30, 1995,
Metropolitan owned 61,260 Class A shares, 269,839 Class C shares and 61,259
Class D shares of the Fund and the Distributor owned one Class C share of the
Fund.
Share transactions were as follows:
<TABLE>
<CAPTION>
Six months ended
June 30, 1995 Year ended
(Unaudited) December 31, 1994
----------------------- ---------------------------
Class A Shares Amount Shares Amount
- ------------------------------------- -------- ----------- ---------- -------------
<S> <C> <C> <C> <C>
Shares sold 178,894 $ 1,402,926 843,050 $ 6,591,849
Issued upon reinvestment of dividends 20,104 156,605 34,127 262,217
Shares repurchased (256,293) (1,947,242) (311,716) (2,398,869)
-------- ----------- ---------- -------------
Net increase (decrease) (57,295) $ (387,711) 565,461 $ 4,455,197
======== =========== ========== =============
Class B Shares Amount Shares Amount
- ------------------------------------- -------- ----------- ---------- -------------
Shares sold 48,464 $ 374,117 267,768 $ 2,088,623
Issued upon reinvestment of dividends 7,190 56,064 11,199 86,347
Shares repurchased (34,024) (265,389) (103,916) (797,596)
-------- ----------- ---------- -------------
Net increase 21,630 $ 164,792 175,051 $ 1,377,374
======== =========== ========== =============
Class C Shares Amount Shares Amount
- ------------------------------------- -------- ----------- ---------- -------------
Shares sold 6,554 $ 50,981 18,896 $ 146,037
Issued upon reinvestment of dividends 34,876 271,918 91,990 716,444
Shares repurchased (224,539) (1,750,595) (1,346,147) (10,458,308)
-------- ----------- ---------- -------------
Net decrease (183,109) $(1,427,696) (1,235,261) $ (9,595,827)
======== =========== ========== =============
Class D Shares Amount Shares Amount
- ------------------------------------- -------- ----------- ---------- -------------
Shares sold 22,369 $ 168,293 28,255 $ 219,339
Issued upon reinvestment of dividends 415 3,242 686 5,282
Shares repurchased (6,334) (47,870) (61,234) (472,499)
-------- ----------- ---------- -------------
Net increase (decrease) 16,450 $ 123,665 (32,293) $ (247,878)
======== =========== ========== =============
</TABLE>
9
<PAGE>
STATE STREET RESEARCH CALIFORNIA TAX-FREE FUND
FINANCIAL HIGHLIGHTS
For a share outstanding throughout each period.
<TABLE>
<CAPTION>
Class A Class B
-------------------------------------- ----------------------------------------
Six months Six months
ended ended
June 30, Year ended June 30, Year ended
1995 December 31, 1995 December 31,
(Unaudited) 1994 1993** (Unaudited) 1994 1993**
------------------------ ------------ ------------ ------ ------------ ------------ --------
<S> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $7.38 $8.37 $8.24 $7.38 $8.38 $8.24
Net investment income* .21 .40 .22 .18 .34 .19
Net realized and
unrealized gain (loss)
on investments .44 (1.00) .21 .45 (1.01) .21
Dividends from net
investment income (.21) (.39) (.22) (.18) (.33) (.18)
Distributions from net
realized gains -- -- (.08) -- -- (.08)
------------ ------------ ------ ------------ ------------ --------
Net asset value, end of
period $7.82 $7.38 $8.37 $7.83 $7.38 $8.38
============ ============ ====== ============ ============ ========
Total return 8.88%+++ (7.26)%+ 5.26%+++ 8.62%+++ (8.07)%+ 4.94%+++
Net assets at end of
period (000s) $8,079 $8,044 $4,392 $3,479 $3,122 $2,076
Ratio of operating
expenses to average net
assets* 1.10%++ 1.10% 1.10%++ 1.85%++ 1.85% 1.85%++
Ratio of net investment
income to average net
assets* 5.24%++ 5.16% 4.66%++ 4.49%++ 4.40% 3.91%++
Portfolio turnover rate 36.36% 59.22% 56.62% 36.36% 59.22% 56.62%
*Reflects voluntary
assumption of fees or
expenses per share in
each period (Note 3) $.05 $.05 $.03 $.04 $.05 $.03
</TABLE>
<TABLE>
<CAPTION>
Class C Class D
--------------------------------------------------- -------------------------------
Six Six
months months
ended ended
June 30, Year ended December 31 June 30, Year ended
1995 ------------------------------------- 1995 December 31,
(Unaudited) 1994 1993 1992 1991 1990 (Unaudited) 1994 1993**
- ------------------- --------- ----- ----- ----- ----- ----- -------- ----------- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $7.39 $8.38 $7.90 $7.73 $7.30 $7.35 $7.39 $8.38 $8.24
Net investment
income* .22 .43 .42 .42 .44 .45 .17 .34 .19
Net realized and
unrealized gain
(loss) on
investments .44 (1.01) .55 .22 .42 (.05) .45 (1.00) .21
Dividends from net
investment income (.22) (.41) (.41) (.43) (.43) (.44) (.18) (.33) (.18)
Distributions from
net realized gains -- -- (.08) (.04) -- (.01) -- -- (.08)
--------- ----- ----- ----- ----- ----- -------- ----------- ----
Net asset value,
end of period $7.83 $7.39 $8.38 $7.90 $7.73 $7.30 $7.83 $7.39 $8.38
========= ===== ===== ===== ===== ===== ======== =========== ====
Total return 9.01%+++ (7.02)%+ 12.53%+ 8.51%+ 12.19%+ 5.59%+ 8.47%+++ (7.95)%+ 4.93%+++
Net assets at end
of period (000s) $16,361 $16,786 $29,398 $25,558 $12,757 $8,131 $703 $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% 1.85%++
Ratio of net
investment income
to average net
assets* 5.49%++ 5.34% 5.06% 5.51% 5.94% 6.22% 4.48%++ 4.35% 3.91%++
Portfolio turnover
rate 36.36% 59.22% 56.62% 31.55% 42.24% 34.62% 36.36% 59.22% 56.62%
*Reflects voluntary
assumption of fees
or expenses per
share in each
period (Note 3) $.05 $.05 $.03 $.05 $.09 $.13 $.04 $.05 $.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 charges. Total return
would be lower if the Distributor and its affiliates had not voluntarily
assumed a portion of the Fund's expenses.
10
<PAGE>
STATE STREET RESEARCH CALIFORNIA TAX-FREE FUND
FUND INFORMATION, OFFICERS AND TRUSTEES OF STATE STREET RESEARCH TAX-EXEMPT
TRUST
Fund Information
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 02266-8408
1-800-562-0032
Custodian
State Street Bank and
Trust Company
225 Franklin Street
Boston, MA 02110
Legal Counsel
Goodwin, Procter & Hoar
Exchange Place
Boston, MA 02109
Officers
Ralph F. Verni
Chairman of the Board,
President and
Chief Executive Officer
Paul J. Clifford, Jr.
Vice President
Susan W. Drake
Vice President
John H. Kallis
Vice President
Thomas A. Shively
Vice President
Gerard P. Maus
Treasurer
Joseph W. Canavan
Assistant Treasurer
Douglas A. Romich
Assistant Treasurer
Francis J. McNamara, III
Secretary and General Counsel
Darman A. Wing
Assistant Secretary and
Assistant General Counsel
Trustees
Ralph F. Verni
Chairman of the Board,
President, Chief Executive
Officer and Director,
State Street Research & Management Company
Edward M. Lamont
Formerly in banking (Morgan
Guaranty Trust Company of New
York); presently
engaged in private investments and civic affairs
Robert A. Lawrence
Partner, Saltonstall & Co.
Dean O. Morton
Retired; formerly Executive
Vice President, Chief
Operating Officer and Director,
Hewlett-Packard Company
Thomas L. Phillips
Retired; formerly Chairman of the Board and Chief Executive Officer, Raytheon
Company
Toby Rosenblatt
President,
The Glen Ellen Company
Vice President,
Founders Investments Ltd.
Michael S. Scott Morton
Jay W. Forrester Professor of
Management, Sloan School
of Management, Massachusetts
Institute of Technology
Jeptha H. Wade
Retired; formerly Of Counsel, Choate, Hall & Stewart
11
<PAGE>
State Street Research California Tax-Free Fund Bulk Rate
One Financial Center U.S. Postage
Boston, MA 02111 PAID
Brockton, MA
Permit No. 600
Questions? Comments?
Call us at 1-800-562-0032,
or write us at:
State Street Research
Shareholder Services
P.O. Box 8408
Boston, MA 02266-8408
[Graphic: State Street Logo] State Street Research
This report is prepared for the general information of current shareholders
only. It is not authorized for use as sales material with prospective investors.
CONTROL NUMBER: 2521-950822(0996) SSR-LD
Cover Illustration by Dorothy Cullinan CTF-071E-895
<PAGE>
[cover]
[State Street logo] STATE STREET RESEARCH
STATE STREET RESEARCH
FLORIDA TAX-FREE FUND
SEMIANNUAL REPORT [picture of boy playing with blocks
June 30, 1995 and building a house]
WHAT'S INSIDE
New and Improved:
A new design that's
easier to read
Investment Update:
About the Fund,
economy and markets
Fund Information:
Facts and figures
Plus, Complete Portfolio Holdings
and Financial Statements
<PAGE>
STATE STREET RESEARCH FLORIDA TAX-FREE FUND
Investment Update
Investment Environment
The Economy
(bullet) Most signs point to a slowing economy. Consumer spending has fallen,
home and auto sales are down, and job growth has eased.
(bullet) The Federal Reserve cut interest rates by one-quarter point on July
6, 1995.
(bullet) Inflation remains low, and a slower economy actually reduces the
risk of rising inflation.
The Markets
(bullet) Through June, municipal bonds have had an outstanding 1995, although
they have trailed other bond sectors. The Lehman Brothers Municipal Bond
Index provided a return of 9.65% through the first six months of 1995.(1)
(bullet) So far, 1995 has been the best year for stocks since 1991. The S&P
500 was up 20.19% through the first six months of 1995.(1)
The Fund
Over the past six months
(bullet) Class A shares of the Fund provided a total return of +8.13% (not
including sales charge) for the 6 months ended June 30, 1995.(2) The average
total return for 28 funds in Lipper Analytical Services' Florida intermediate
municipal fund category was +7.61% over the same time period (does not
reflect sales charge).
(bullet) The Fund's duration (a measure of sensitivity to interest rate
changes) was slightly longer than average. As a result, the Fund performed
particularly well when interest rates fell sharply in 1995. Bond prices
typically rise when interest rates fall.
Current strategy
(bullet) We have upgraded the quality of the bonds in the portfolio and
increased the percentage of insured bonds. As of June 30, 1995, the bonds in
the portfolio had an average credit quality of AA.
(bullet) The outlook for municipal bonds is positive. Supply is low, as fewer
new bonds have been issued. Municipal bonds also currently offer attractive
value relative to U.S. Treasury bonds.
1 The Lehman Brothers Municipal Bond index is a commonly used measure of
bond market performance. The Standard & Poor's 500 Composite Index (S&P 500)
includes 500 widely traded common stocks and is a commonly used measure of
U.S. stock market performance. The indices are unmanaged and do not take
sales charges into account. Direct investment in the indices is not possible;
results are for illustrative purposes only.
2 +7.62% for Class B shares; +8.14% for Class C shares; +7.74% for Class D
shares.
3 All returns represent past performance, which is no guarantee of future
results. The investment return and principal value of an investment made in
the Fund will fluctuate, and shares, when redeemed, may be worth more or less
than their original cost. All returns assume reinvestment of capital gain
distributions and income dividends.
4 "A" share returns for each of the periods reflect the maximum 4.5% sales
charge. "B" share returns for the 1-year and Life of Fund periods reflect a 5%
and a 4% contingent deferred sales charge, respectively. "C" shares, offered
without a sales charge, are available only to certain employee benefit plans
and large institutions. "D" share return for the 1-year period reflects a 1%
contingent deferred sales charge.
Fund Information (all data are for periods ended June 30, 1995)
SEC Average Annual Compound Rates
of Return
(at maximum applicable sales charge)3,4
<TABLE>
<CAPTION>
Life of Fund
(since 8/10/93) 1 year
<S> <C> <C>
Class A +1.34%/-0.53% +2.38%/+0.51%
Class B +1.00%/-0.89% +1.30%/-0.64%
Class C +4.09%/+2.06% +7.47%/+5.51%
Class D +3.09%/+1.24% +5.41%/+3.47%
</TABLE>
Cumulative Total Returns
(do not reflect sales charge)3
<TABLE>
<CAPTION>
Life of Fund
(since 8/10/93) 1 year
<S> <C> <C>
Class A +7.38%/+3.67% +7.20%/+5.25%
Class B +5.82%/+2.26% +6.30%/+4.36%
Class C +7.87%/+3.94% +7.47%/+5.51%
Class D +5.93%/+2.36% +6.41%/+4.47%
</TABLE>
SEC Yield
<TABLE>
<S> <C>
Class A 4.47%/1.94%
Class B 3.92%/1.30%
Class C 4.93%/2.29%
Class D 3.92%/1.29%
</TABLE>
SEC yield is calculated according to Securities and Exchange Commission
requirements and is based on the net investment income produced for the 30
days ended June 30, 1995. A small portion of the Fund's income may be subject
to federal, state and local income tax, and/or alternative minimum tax.
Investors should consult their tax adviser.
Performance results for the Fund are increased by the Distributor's voluntary
reduction of Fund fees and expenses. The first figure reflects expense
reduction; the second shows what results would have been without
subsidization.
Bond Quality
(by percentage of net assets)
[representation of pie chart]
AAA-56%; AA-17%; A-9%; BBB-13%; Not rated-5%
As rated by Standard & Poor's Corporation or Moody's Investors Service, Inc.,
or unrated but equivalent.
<PAGE>
STATE STREET RESEARCH FLORIDA TAX-FREE FUND
Investment Portfolio
June 30, 1995 (Unaudited)
<TABLE>
<CAPTION>
Principal Maturity Value
Amount Date (Note 1)
- ------------------------------- ------- ---------- ------------
<S> <C> <C> <C>
Municipal Bonds 96.3%
General Obligation 11.6%
The School Board of Dade
County, Florida, Certificates
of Participation, Series 1994
A, MBIA Insured, 5.00% $500,000 5/01/2001 $ 502,970
The School District of Dade
County, Florida, General
Obligation School Bonds, Series
1994A, MBIA Insured, 5.15% 500,000 6/01/2001 508,105
Palm Beach County, Florida
General Obligation Bonds,
Series 1994, 7.00% 250,000 12/01/2004 287,128
------------
1,298,203
------------
Airport 4.7%
Dade County, Florida, Aviation
Revenue Refunding Bonds, Series
1994 B (Non-AMT), 6.00% 500,000 10/01/2002 530,000
------------
Certificates of Participation 16.3%
Certificates of Participation,
(School Board of Hillsborough
County, Florida, Master Lease
Program), Series 1994, MBIA
Insured, 5.30% 500,000 7/01/2002 509,040
Certificates of Participation,
Series 1994B, The School Board
of Seminole County, Florida,
MBIA Insured, 6.00% 500,000 7/01/2003 534,620
Certificates of Participation,
Series 1994A, The School Board
of Seminole County, Florida,
MBIA Insured, 5.50% 500,000 7/01/2003 519,625
Certificates of Participation,
Series 1995, The State of
Florida, Department of
Corrections, (Okeechobee
Correctional Institution
Project), AMBAC Insured, 6.25% 250,000 3/01/2015 257,697
------------
1,820,982
------------
Education/Student Loan 4.6%
State of Florida, State Board
of Education, Public Education
Capital Outlay Bonds, 1994
Series B, 5.625% $500,000 6/01/2005 $ 519,000
------------
Lease Revenue 4.4%
Puerto Rico Public Buildings
Authority, Public Education and
Health Facilities Refunding
Bonds, Series M, 5.60% 500,000 7/01/2008 492,300
------------
Life Care 8.9%
St. Johns County Industrial
Development Authority,
Industrial Development Revenue
Bonds, Series 1993A, (Vicar's
Landing Project), 6.20% 500,000 2/15/2003 501,460
Collier County Health
Facilities Authority, Health
Facility Refunding Revenue
Bonds, (The Moorings Inc.
Project), Series 1994, 6.00% 500,000 12/01/2005 498,055
------------
999,515
------------
Public Facilities 4.8%
Puerto Rico Public Buildings
Authority, Government
Facilities Revenue Bonds,
Series A, 6.25% 500,000 7/01/2010 533,185
------------
Single-Family Housing 4.7%
Florida Housing Finance Agency,
Single Family Mortgage Revenue
Refunding Bonds, 1994 Series A
(Non-AMT), 5.75% 525,000 1/01/2005 528,040
------------
Special/Sales Tax Revenue 13.8%
Dade County, Florida, Special
Obligation Bonds, (Courthouse
Center Project), Series 1994,
5.75% 500,000 4/01/2003 511,215
Hillsborough County, Florida,
Capital Improvement Bonds, FGIC
Insured, 6.00% 500,000 8/01/2005 528,215
The accompanying notes are an integral part of the financial statements.
2
<PAGE>
STATE STREET RESEARCH FLORIDA TAX-FREE FUND
Investment Portfolio (cont'd)
Special/Sales Tax Revenue (cont'd)
Orange County, Florida, Public
Service Tax Revenue Bonds
Series 1995, FGIC Insured,
5.90% $500,000 10/01/2012 $ 504,720
------------
1,544,150
------------
Toll Roads/Turnpike Authorities 4.4%
Escambia County, Florida, Road
Improvement Revenue Bonds,
Series 1993A, 5.00% 500,000 1/01/2000 492,900
------------
Water & Sewer 18.1%
East County Water Control
District, Water Management
Consolidated Refunding Bonds,
Series 1994, (Lee and Hendry
Counties, Florida), AGIC
Insured, 5.375% 500,000 11/01/2001 511,915
City of Titusville, Florida,
Water and Sewer Revenue Bonds,
Series 1994, MBIA Insured,
5.20% 500,000 10/01/2002 511,755
Charlotte County, Florida,
Utility System Revenue Bonds,
Series 1994, FGIC Insured,
6.00% 500,000 10/01/2003 534,065
City of Miami Beach, Florida,
Water and Sewer Revenue Bonds,
Series 1995, FSA Insured,
5.375% 500,000 9/01/2015 468,130
------------
2,025,865
------------
Total Municipal Bonds (Cost $10,497,594) 10,784,140
------------
SHORT-TERM OBLIGATIONS 1.8%
The State of Massachusetts,
General Obligation Bonds,
Series B, 3.20% 200,000 12/01/1997++ 200,000
------------
Total Short-Term Obligations (Cost $200,000) 200,000
------------
Total Investments (Cost $10,697,594)--98.1% 10,984,140
Cash and Other Assets, Less Liabilities--1.9% 210,158
------------
Net Assets--100.0% $11,194,298
============
++Interest rate on this obligation may change daily.
</TABLE>
<TABLE>
<S> <C>
Federal Income Tax Information:
At June 30, 1995, the net unrealized appreciation of
investments based on cost for Federal income tax
purposes of $10,697,594 was as follows:
Aggregate gross unrealized appreciation for all
investments in which there is an excess of value
over tax cost $304,581
Aggregate gross unrealized depreciation for all
investments in which there is an excess of tax cost
over value (18,035)
---------
$286,546
=========
- ------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
3
<PAGE>
STATE STREET RESEARCH FLORIDA TAX-FREE FUND
Statement of Assets and Liabilities
June 30, 1995 (Unaudited)
<TABLE>
<S> <C>
Assets
Investments, at value (Cost $10,697,594) (Note 1) $10,984,140
Cash 71,733
Receivable for securities sold 516,347
Interest receivable 199,788
Receivable from Distributor (Note 3) 24,218
Receivable for fund shares sold 2,133
Deferred organization costs and other assets (Note
1) 22,065
------------
11,820,424
Liabilities
Payable for securities purchased 542,423
Dividends payable 36,025
Accrued trustees' fees (Note 2) 6,701
Accrued management fee (Note 2) 5,088
Accrued distribution fee (Note 5) 4,309
Other accrued expenses 31,580
------------
626,126
------------
$11,194,298
============
Net Assets
Net Assets consist of:
Undistributed net investment income $ 38,342
Unrealized appreciation of investments 286,546
Accumulated net realized loss (566,379)
Shares of beneficial interest 11,435,789
------------
$11,194,298
============
Net Asset Value and redemption price per share of
Class A shares ($3,325,108 / 353,718 shares of
beneficial interest) $9.40
=====
Maximum Offering Price per share of Class A shares
($9.40 / .955) $9.84
=====
Net Asset Value and offering price per share of
Class B shares ($3,104,897 / 330,494 shares of
beneficial interest)* $9.39
=====
Net Asset Value, offering price and redemption
price per share of Class C shares ($3,461,967 /
368,120 shares of beneficial interest) $9.40
=====
Net Asset Value and offering price per share of
Class D shares ($1,302,326 / 138,585 shares of
beneficial interest)* $9.40
=====
</TABLE>
*Redemption price per share for Class B and Class D is equal to net asset
value less any applicable contingent deferred sales charge.
Statement of Operations
For the six months ended June 30, 1995 (Unaudited)
<TABLE>
<S> <C>
Investment Income
Interest $ 315,440
Expenses
Custodian fee 49,800
Transfer agent and shareholder services (Note 2) 31,651
Management fee (Note 2) 31,034
Reports to shareholders 8,344
Audit fee 7,861
Trustees' fees (Note 2) 6,860
Legal fees 4,983
Distribution fee--Class A (Note 5) 4,372
Distribution fee--Class B (Note 5) 15,362
Distribution fee--Class D (Note 5) 6,649
Amortization of organization costs (Note 1) 3,133
Miscellaneous 1,935
----------
171,984
Expenses borne by the Distributor (Note 3) (131,495)
----------
40,489
----------
Net investment income 274,951
----------
Realized and Unrealized Gain on Investments
Net realized gain on investments (Notes 1 and 4) 29,561
Net unrealized appreciation of investments 573,648
----------
Net gain on investments 603,209
----------
Net increase in net assets resulting from
operations $ 878,160
==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
4
<PAGE>
STATE STREET RESEARCH FLORIDA TAX-FREE FUND
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Six months
ended
June 30, Year ended
1995 December 31,
(Unaudited) 1994
- ------------------------------------ ------------ ----------------
<S> <C> <C>
Increase (Decrease) in Net Assets
Operations:
Net investment income $ 274,951 $ 521,943
Net realized gain (loss) on
investments* 29,561 (595,926)
Net unrealized appreciation
(depreciation) of investments 573,648 (385,696)
------------ ----------------
Net increase (decrease) resulting
from operations 878,160 (459,679)
------------ ----------------
Dividends from net investment
income:
Class A (91,516) (177,518)
Class B (63,209) (97,739)
Class C (92,580) (161,153)
Class D (29,814) (49,113)
------------ ----------------
(277,119) (485,523)
------------ ----------------
Distribution from net realized
gains:
Class A -- (7,179)
Class B -- (5,693)
Class C -- (6,498)
Class D -- (2,648)
------------ ----------------
-- (22,018)
------------ ----------------
Net increase (decrease) from fund
share transactions (Note 7) (523,539) 1,975,558
------------ ----------------
Total increase in net assets 77,502 1,008,338
Net Assets
Beginning of period 11,116,796 10,108,458
------------ ----------------
End of period (including
undistributed net investment income
of $38,342 and $40,510,
respectively) $11,194,298 $11,116,796
============ ================
*Net realized loss for Federal
income tax purposes
(Note 1) $ (73,892) $ (492,473)
============ ================
</TABLE>
The accompanying notes are an integral part of the financial statements.
Notes to Unaudited Financial Statements
June 30, 1995
Note 1
State Street Research Florida Tax-Free Fund (the "Fund"), is a series of
State Street Research Tax-Exempt Trust (the "Trust"), formerly MetLife-State
Street Tax-Exempt Trust, which was organized as a Massachusetts business
trust in December, 1985 and is registered under the Investment Company Act of
1940, as amended, as an open-end management investment company. The Fund
commenced operations in August, 1993. Five series of the Trust are publicly
offered: State Street Research Florida Tax-Free Fund, State Street Research
California Tax-Free Fund, State Street Research Tax-Exempt Fund, State Street
Research New York Tax-Free Fund and State Street Research Pennsylvania
Tax-Free Fund.
The Fund offers four classes of shares. Class A shares are subject to an
initial sales charge of up to 4.50% and pay a service fee equal to 0.25% of
average daily net assets. Class B shares are subject to a contingent deferred
sales charge on certain redemptions made within five years of purchase and
pay annual distribution and service fees of 1.00%. Class B shares
automatically convert into Class A shares (which pay lower ongoing expenses)
at the end of eight years after the issuance of the Class B shares. Class C
shares are only offered to certain employee benefit plans and large
institutions. No sales charge is imposed at the time of purchase or
redemption of Class C shares. Class C shares do not pay any distribution or
service fees. Class D shares are subject to a contingent deferred sales
charge of 1.00% on any shares redeemed within one year of their purchase.
Class D shares also pay annual distribution and service fees of 1.00%. The
Fund's expenses are borne pro rata by each class, except that each class
bears expenses, and has exclusive voting rights with respect to provisions of
the Plan of Distribution, related specifically to that class. The Trustees
declare separate dividends on each class of shares.
The following significant accounting policies are consistently followed by
the Fund in preparing its financial statements, and such policies are in
conformity with generally accepted accounting principles for investment
companies.
A. Investment Valuation
Tax-exempt securities are valued by a pricing service, which utilizes market
transactions, quotations from dealers, and various relationships among
securities in determining value. Short-term obligations are valued at
amortized cost. Other securities, if any, are valued at their fair value as
determined in accordance with established methods consistently applied.
B. Security Transactions
Security transactions are accounted for on the trade date (date the order to
buy or sell is executed). Realized gains or losses are reported on the basis
of identified cost of securities delivered.
C. Net Investment Income
Net investment income is determined daily and consists of interest accrued
and discount earned, less amortization of premium and the estimated daily
expenses of the Fund. Interest income is accrued daily as earned. The Fund is
charged for expenses directly attributable to it, while indirect expenses are
allocated among all funds in the Trust.
5
<PAGE>
STATE STREET RESEARCH FLORIDA TAX-FREE FUND
D. Dividends
Dividends are declared daily by the Fund based upon projected net investment
income and paid or reinvested monthly. Net realized capital gains, if any,
are distributed annually, unless additional distributions are required for
compliance with applicable tax regulations.
Income dividends and capital gain distributions are determined in
accordance with Federal income tax regulations which may differ from
generally accepted accounting principles.
E. Federal Income Taxes
No provision for Federal income taxes is necessary because the Fund intends
to qualify under Subchapter M of the Internal Revenue Code and its policy is
to distribute all of its taxable income, including net realized capital
gains, within the prescribed time periods. At December 31, 1994, the Fund had
a capital loss carryforward of $492,473 available, to the extent provided in
regulations, to offset future capital gains, if any, which expires on
December 31, 2002.
In order to meet certain excise tax distribution requirements under Section
4982 of the Internal Revenue Code, the Fund is required to measure and
distribute annually, if necessary, net capital gains realized during a
twelve-month period ending October 31. In this connection, the Fund is
permitted to defer into its next fiscal year any net capital losses incurred
between each November 1 and the end of its fiscal year. From November 1, 1994
through December 31, 1994 the Fund incurred net capital losses of $103,453
and intends to defer and treat such losses as arising in the fiscal year
ending December 31, 1995.
F. Deferred Organization Costs
Certain costs incurred in the organization and registration of the Fund were
capitalized and are being amortized under the straight-line method over a
period of five years.
Note 2
The Trust and State Street Research & Management Company (the "Adviser"), an
indirect wholly-owned subsidiary of Metropolitan Life Insurance Company
("Metropolitan"), have entered into an agreement under which the Adviser
earns monthly fees at an annual rate of 0.55% of the Fund's average daily net
assets. In consideration of these fees, the Adviser furnishes the Fund with
management, investment advisory, statistical and research facilities and
services. The Adviser also pays all salaries, rent and certain other expenses
of management. During the six months ended June 30, 1995, the fees pursuant
to such agreement amounted to $31,034.
State Street Research Shareholder Services, a division of State Street
Research Investment Services, Inc., the Trust's principal underwriter (the
"Distributor"), an indirect wholly-owned subsidiary of Metropolitan, provides
certain shareholder services to the Fund such as responding to inquiries and
instructions from investors with respect to the purchase and redemption of
shares of the Fund. During the six months ended June 30, 1995, the amount of
such expenses was $7,192.
The fees of the Trustees not currently affiliated with the Adviser amounted
to $6,860 during the six months ended June 30, 1995.
Note 3
The Distributor and its affiliates may from time to time and in varying
amounts voluntarily assume some portion of fees or expenses relating to the
Fund. During the six months ended April 30, 1995, the amount of such expenses
assumed by the Distributor and its affiliates was $131,495.
Note 4
For the six months ended June 30, 1995, purchases and sales of securities,
exclusive of short-term obligations, aggregated $2,753,030 and $3,356,932,
respectively.
Note 5
The Trust has adopted a Plan of Distribution Pursuant to Rule 12b-1 (the
"Plan") under the Investment Company Act of 1940, as amended. Under the Plan,
the Fund pays annual service fees to the Distributor at a rate of 0.25% of
average daily net assets for Class A, Class B and Class D shares. In
addition, the Fund pays annual distribution fees of 0.75% of average daily
net assets for Class B and Class D shares. The Distributor uses such payments
for personal services and/or the maintenance of shareholder accounts, to
reimburse securities dealers for distribution and marketing services, to
furnish ongoing assistance to investors and to defray a portion of its
distribution and marketing expenses. For the six months ended June 30, 1995,
fees pursuant to such plan amounted to $4,372, $15,362 and $6,649 for Class
A, Class B and Class D, respectively.
The Fund has been informed that the Distributor and MetLife Securities, Inc.,
a wholly-owned subsidiary of Metropolitan, earned initial sales charges
aggregating $215 and $273, respectively, on sales of Class A shares of the
Fund during the six months ended June 30, 1995, and that MetLife Securities,
Inc. earned commissions aggregating $3,016 on sales of Class B shares and
that the Distributor collected contingent deferred sales charges of $11,075
and $996 on redemptions of Class B and Class D shares, respectively, during
the same period.
Note 6
Under normal circumstances at least 80% of the Fund's net assets will be
invested in Florida Municipal Obligations. Certain proposed Florida
constitutional amendments, legislative measures, executive orders,
administrative regulations and voter initiatives could result in adverse
consequences affecting Florida Municipal Obligations. Also, the Fund is able
to invest up to 25% of total assets in a single industry. Accordingly, the
Fund's investments may be subject to greater risk than those in a fund with
more restrictive concentration limits.
At June 30, 1995, investments totalling 27.6% and 14.0% of the Fund's net
assets were insured as to the timely payment of principal and interest by
Municipal Bond Investors Assurance Corp. (MBIA) and Financial Guaranty
Insurance Co. (FGIC), respectively.
6
<PAGE>
STATE STREET RESEARCH FLORIDA TAX-FREE FUND
Notes (cont'd)
Note 7
The Trustees have the authority to issue an unlimited number of shares of
beneficial interest, $.001 par value per share. At June 30, 1995,
Metropolitan owned 52,486 Class A shares, 52,486 Class B shares, 367,407
Class C shares and 52,486 Class D shares of the Fund and the Adviser owned
one share of each of Class A, Class B, Class C and Class D of the Fund.
Share transactions were as follows:
<TABLE>
<CAPTION>
Six months ended
June 30, 1995 Year ended
(Unaudited) December 31, 1994
-------------------- ------------------------
Class A Shares Amount Shares Amount
- ------------------------------------- ------- --------- -------- ------------
<S> <C> <C> <C> <C>
Shares sold 11,229 $ 105,358 189,827 $ 1,764,291
Issued upon reinvestment of:
Distribution from net realized gains -- -- 170 1,513
Dividends from net investment income 3,488 31,441 9,370 86,293
Shares repurchased (66,523) (617,909) (158,734) (1,446,156)
------- --------- -------- ------------
Net increase (decrease) (51,806) $(481,110) 40,633 $ 405,941
======= ========= ======== ============
Class B Shares Amount Shares Amount
- ------------------------------------- ------- --------- -------- ------------
Shares sold 35,784 $ 325,567 197,912 $ 1,841,260
Issued upon reinvestment of:
Distribution from net realized gains -- -- 236 2,104
Dividends from net investment income 2,699 24,126 5,265 48,194
Shares repurchased (30,794) (288,816) (54,070) (493,819)
------- --------- -------- ------------
Net increase 7,689 $ 60,877 149,343 $ 1,397,739
======= ========= ======== ============
Class C Shares Amount Shares Amount
- ------------------------------------- ------- --------- -------- ------------
Shares sold 274 $ 2,549 393 $ 3,651
Issued upon reinvestment of:
Distribution from net realized gains -- -- 728 6,490
Dividends from net investment income 12 109 11 96
------- --------- -------- ------------
Net increase 286 $ 2,658 1,132 $ 10,237
======= ========= ======== ============
Class D Shares Amount Shares Amount
- ------------------------------------- ------- --------- -------- ------------
Shares sold 113 $ 1,032 31,855 $ 293,877
Issued upon reinvestment of:
Distribution from net realized gains -- -- 174 1,547
Dividends from net investment income 681 6,322 1,169 10,741
Shares repurchased (12,171) (113,318) (15,874) (144,524)
------- --------- -------- ------------
Net increase (decrease) (11,377) $(105,964) 17,324 $ 161,641
======= ========= ======== ============
</TABLE>
7
<PAGE>
STATE STREET RESEARCH FLORIDA TAX-FREE FUND
Financial Highlights
For a share outstanding throughout each period.
<TABLE>
<CAPTION>
Class A Class B
---------------------------------------- ------------------------------------------
Six months Six months
ended ended
June 30, Year ended June 30, Year ended
1995 December 31, 1995 December 31,
(Unaudited) 1994 1993** (Unaudited) 1994 1993**
-------------------- ------------ -------------- ------ ------------ -------------- --------
<S> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $8.92 $9.74 $9.55 $8.92 $9.74 $9.55
Net investment
income* .24 .45 .13 .21 .37 .11
Net realized and
unrealized gain
(loss) on
investments .48 (.83) .20 .47 (.82) .20
Dividends from net
investment income (.24) (.42) (.13) (.21) (.35) (.11)
Distribution from
net realized gains -- (.02) (.01) -- (.02) (.01)
------------ -------------- ------ ------------ -------------- --------
Net asset value, end
of period $9.40 $8.92 $9.74 $9.39 $8.92 $9.74
============ ============== ====== ============ ============== ========
Total return 8.13%+++ (4.02)%+ 3.46%+++ 7.62%+++ (4.73)%+ 3.21%+++
Net assets at end of
period (000s) $3,325 $3,618 $3,554 $3,105 $2,879 $1,689
Ratio of operating
expenses to average
net assets* 0.50%++ 0.50% 0.50%++ 1.25%++ 1.25% 1.25%++
Ratio of net
investment income to
average net assets* 5.09%++ 4.81% 3.98%++ 4.33%++ 4.11% 3.14%++
Portfolio turnover
rate 25.14% 119.46% 49.38% 25.14% 119.46% 49.38%
*Reflects voluntary
assumption of fees
or expenses per
share in each period
(Note 3). $.11 $ .17 $ .08 $ .11 $ .17 $ .09
</TABLE>
<TABLE>
<CAPTION>
Class C Class D
---------------------------------------- ------------------------------------------
Six months Six months
ended ended
June 30, Year ended June 30, Year ended
1995 December 31, 1995 December 31,
(Unaudited) 1994 1993** (Unaudited) 1994 1993**
-------------------- ------------ -------------- ------ ------------ -------------- --------
<S> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $8.93 $9.74 $9.55 $8.92 $9.74 $9.55
Net investment
income* .25 .47 .15 .20 .37 .11
Net realized and
unrealized gain
(loss) on
investments .47 (.82) .19 .49 (.82) .20
Dividends from net
investment income (.25) (.44) (.14) (.21) (.35) (.11)
Distribution from
net realized gains -- (.02) (.01) -- (.02) (.01)
------------ -------------- ------ ------------ -------------- --------
Net asset value, end
of period $9.40 $8.93 $9.74 $9.40 $8.92 $9.74
============ ============== ====== ============ ============== ========
Total return 8.14%+++ (3.67)%+ 3.55%+++ 7.74%+++ (4.73)%+ 3.21%+++
Net assets at end of
period (000s) $3,462 $3,283 $3,573 $1,302 $1,337 $1,292
Ratio of operating
expenses to average
net assets* 0.25%++ 0.25% 0.25%++ 1.25%++ 1.25% 1.25%++
Ratio of net
investment income to
average net assets* 5.34%++ 5.05% 3.97%++ 4.35%++ 4.06% 3.12%++
Portfolio turnover
rate 25.14% 119.46% 49.38% 25.14% 119.46% 49.38%
*Reflects voluntary
assumption of fees
or expenses per
share in each period
(Note 3). $.11 $.17 $.10 $.11 $.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.
8
<PAGE>
STATE STREET RESEARCH FLORIDA TAX-FREE FUND
Fund Information, Officers and Trustees of State Street Research Tax-Exempt
Trust
Fund Information
State Street Research
Florida 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 02266-8408
1-800-562-0032
Custodian
State Street Bank and
Trust Company
225 Franklin Street
Boston, MA 02110
Legal Counsel
Goodwin, Procter & Hoar
Exchange Place
Boston, MA 02109
Officers
Ralph F. Verni
Chairman of the Board,
President and
Chief Executive Officer
Paul J. Clifford, Jr.
Vice President
Susan W. Drake
Vice President
John H. Kallis
Vice President
Thomas A. Shively
Vice President
Gerard P. Maus
Treasurer
Joseph W. Canavan
Assistant Treasurer
Douglas A. Romich
Assistant Treasurer
Francis J. McNamara, III
Secretary and General Counsel
Darman A. Wing
Assistant Secretary and
Assistant General Counsel
Trustees
Ralph F. Verni
Chairman of the Board,
President, Chief Executive
Officer and Director,
State Street Research &
Management Company
Edward M. Lamont
Formerly in banking (Morgan Guaranty Trust Company of New York); presently
engaged in private investments and civic affairs
Robert A. Lawrence
Partner, Saltonstall & Co.
Dean O. Morton
Retired; formerly Executive
Vice President, Chief
Operating Officer and Director,
Hewlett-Packard Company
Thomas L. Phillips
Retired; formerly Chairman of the Board and Chief Executive Officer, Raytheon
Company
Toby Rosenblatt
President,
The Glen Ellen Company
Vice President,
Founders Investments Ltd.
Michael S. Scott Morton
Jay W. Forrester Professor of
Management, Sloan School
of Management, Massachusetts
Institute of Technology
Jeptha H. Wade
Retired; formerly Of Counsel, Choate, Hall & Stewart
9
<PAGE>
[back cover]
State Street Research Florida Tax-Free Fund Bulk Rate
One Financial Center U.S. Postage
Boston, MA 02111 PAID
Brockton, MA
Permit No. 600
Questions? Comments?
Call us at 1-800-562-0032,
or write us at:
State Street Research
Shareholder Services
P.O. Box 8408
Boston, MA 02266-8408
[State Street logo] State Street Research
This report is prepared for the general information of current shareholders
only. It is not authorized for use as sales material with prospective
investors.
CONTROL NUMBER: 2519-950822(0996)SSR-LD
Cover illustration by Dorothy Cullinan
FTF-046E-895
<PAGE>
COVER
[STATE STREET RESEARCH LOGO] State Street Research
STATE STREET RESEARCH
PENNSYLVANIA TAX-FREE FUND
SEMIANNUAL REPORT
June 30, 1995
[Picture of person building house with blocks]
WHAT'S INSIDE
New and Improved:
A new design that's easier to read
Investment Update:
About the Fund, economy and markets
Fund Information:
Facts and figures
Plus, Complete Portfolio Holdings and Financial Statements
<PAGE>
State Street Research Pennsylvania Tax-Free Fund
Investment Update
Investment Environment
The Economy
(bullet) Most signs point to a slowing economy. Consumer spending has fallen,
home and auto sales are down, and job growth has eased.
(bullet) The Federal Reserve cut interest rates by one-quarter point on July
6, 1995.
(bullet) Inflation remains low, and a slower economy actually reduces the
risk of rising inflation.
The Markets
(bullet) Through June, municipal bonds have had an outstanding 1995, although
they have trailed other bond sectors. The Lehman Brothers Municipal Bond
Index provided a return of 9.65% through the first six months of 1995.(1)
(bullet) So far, 1995 has been the best year for stocks since 1991. The S&P
500 was up 20.19% through the first six months of 1995.(1)
The Fund
Over the past six months
(bullet) Class A shares of the Fund provided a total return of +7.37% (not
including sales charge) for the 6 months ended June 30, 1995.(2) The average
total return for 14 funds in Lipper Analytical Services' Pennsylvania
intermediate municipal fund category was +7.17% over the same time period
(does not reflect sales charge).
(bullet) The Fund's duration (a measure of sensitivity to interest rate
changes) was slightly longer than average. As a result, the Fund performed
particularly well when interest rates fell sharply in 1995. Bond prices
typcially rise when interest rates fall.
Current strategy
(bullet) We have upgraded the quality of the bonds in the portfolio and
increased the percentage of insured bonds. As of June 30, 1995, the bonds in
the portfolio had an average credit quality of AA-.
(bullet) The outlook for municipal bonds is positive. Supply is low, as fewer
new bonds have been issued. Municipal bonds also currently offer attractive
value relative to U.S. Treasury bonds.
(1) The Lehman Brothers Municipal Bond index is a commonly used measure of bond
market performance. The Standard & Poor's 500 Composite Index (S&P 500)
includes 500 widely traded common stocks and is a commonly used measure of
U.S. stock market performance. The indices are unmanaged and do not take
sales charges into account. Direct investment in the indices is not possible;
results are for illustrative purposes only.
(2) +7.10% for Class B shares; +7.62% for Class C shares; +6.98% for Class D
shares.
(3) All returns represent past performance, which is no guarantee of future
results. The investment return and principal value of an investment made in
the Fund will fluctuate, and shares, when redeemed, may be worth more or less
than their original cost. All returns assume reinvestment of capital gain
distributions and income dividends.
(4) "A" share returns for each of the periods reflect the maximum 4.5% sales
charge. "B" share returns for the 1-year and Life of Fund periods reflect a
5% and 4% contingent deferred sales charge, respectively. "C" shares, offered
without a sales charge, are available only to certain employee benefit plans
and large institutions. "D" share return for the 1-year period reflects a 1%
contingent deferred sales charge.
Fund Information (all data are for periods ended June 30, 1995)
SEC Average Annual Compound Rates of Return
(at maximum applicable sales charge)(3),(4)
<TABLE>
<CAPTION>
Life of Fund
(since 8/10/93) 1 year
<S> <C> <C>
Class A +1.22%/-0.53% +2.30%/+0.65%
Class B +0.93%/-1.05% +1.33%/-0.61%
Class C +4.02%/+2.12% +7.38%/+5.65%
Class D +2.97%/+1.14% +5.33%/+3.61%
</TABLE>
Cumulative Total Returns
(do not reflect sales charge)(3)
<TABLE>
<CAPTION>
Life of Fund
(since 8/10/93) 1 year
<S> <C> <C>
Class A +7.14%/+3.67% +7.12%/+5.40%
Class B +5.69%/+1.95% +6.33%/+4.39%
Class C +7.74%/+4.04% +7.38%/+5.65%
Class D +5.68%/+2.16% +6.33%/+4.61%
</TABLE>
SEC Yield
<TABLE>
<CAPTION>
<S> <C>
Class A 4.80%/3.00%
Class B 4.26%/2.39%
Class C 5.27%/3.33%
Class D 4.27%/2.38%
</TABLE>
SEC yield is calculated according to Securities and Exchange Commission
requirements and is based on the net investment income produced for the 30
days ended June 30, 1995. A small portion of the Fund's income may be subject
to federal, state and local income tax, and/or alternative minimum tax.
Investors should consult their tax adviser.
Performance results for the Fund are increased by the Distributor's voluntary
reduction of Fund fees and expenses. The first figure reflects expense
reduction; the second shows what results would have been without
subsidization.
[PIE CHART GOES HERE]
Bond Quality
(by percentage of net assets)
A 5%
AA 14%
AAA 48%
BBB 22%
Not rated 11%
As rated by Standard & Poor's Corporation or Moody's Investors Service, Inc.,
or unrated but equivalent.
<PAGE>
State Street Research Pennsylvania Tax-Free Fund
Investment Portfolio
June 30, 1995 (Unaudited)
<TABLE>
<CAPTION>
Principal Maturity Value
Amount Date (Note 1)
-------- --------- --------------
<S> <C> <C> <C>
MUNICIPAL BONDS 95.3%
General Obligation 27.8%
City of Bethlehem, Lehigh and Northampton Counties,
Pennsylvania, General Obligation Bonds, Series A of
1992, MBIA Insured, 6.00% $ 600,000 6/01/2001 $ 632,184
Commonwealth of Pennsylvania, General Obligation
Bonds, Second Series of 1994, (Refunding and
Projects), MBIA Insured, 5.00% 500,000 6/15/2002 501,725
Puerto Rico Municipal Finance Agency, 1994 Series A
Bonds, FSA Insured, 5.30% 500,000 7/01/2002 513,790
Bradford Area School District, McKean County,
Pennsylvania, General Obligation Bonds, Series of
1994, FGIC Insured, 6.00% 500,000 10/01/2004 523,730
County of Bucks, Pennsylvania, General Obligation
Bonds, Series of 1995, 7.00% 500,000 5/01/2005 565,595
Bradford Area School District, McKean County,
Pennsylvania, General Obligation Bonds, Series of
1995, FGIC Insured, 5.00% 500,000 10/01/2005 492,095
County of Cambria, Pennsylvania, General Obligation
Bonds, Series of 1994, FGIC Insured, 5.875% 500,000 8/15/2008 512,885
County of Allegheny, Pennsylvania, General Obligation
Bonds, Series C-44, FGIC Insured, 5.30% 435,000 6/01/2010 419,349
Fox Chapel Area School District, Allegheny County,
Pennsylvania, General Obligation Bonds, Refunding
Series of 1993, 5.50% 500,000 8/15/2010 482,565
--------------
4,643,918
--------------
College & University 4.4%
Delaware County Authority, (Commonwealth of
Pennsylvania), (Villanova University), Revenue Bonds,
Series of 1995, AMBAC Insured, 5.25% 500,000 8/01/2006 494,610
Pennsylvania Higher Educational Facilities Authority,
(Commonwealth of Pennsylvania), (University of
Pennsylvania), Revenue Bonds, Series A, 5.60% 250,000 9/01/2010 244,983
--------------
739,593
--------------
Highway & Transportation Revenue 4.5%
Southeastern Pennsylvania Transportation Authority,
Special Revenue Bonds, Series of 1995A, 6.50% 200,000 3/01/2005 217,776
Puerto Rico Highway and Transportation Authority,
Highway Revenue Refunding Bonds, Series V, 6.375% 500,000 7/01/2008 535,935
--------------
753,711
--------------
Hospital/Health Care 12.1%
Scranton-Lackawanna Health and Welfare Authority,
Revenue Bonds, Series A of 1994, (Allied Services
Rehabilitation Hospitals Project), 6.60% 500,000 7/15/2000 504,055
Montgomery County Higher Education and Health
Authority, Pennsylvania, Northwestern Corp., 6.50% 1,140,000 6/01/2004 1,184,357
The Lebanon County Good Samaritan Hospital Authority,
Lebanon County, Pennsylvania, Hospital Revenue Bonds,
Series of 1993, (The Good Samaritan Hospital
Project), 5.55% 350,000 11/15/2004 336,396
--------------
2,024,808
--------------
The accompanying notes are an integral part of the financial statements.
2
<PAGE>
State Street Research Pennsylvania Tax-Free Fund
Investment Portfolio (cont'd)
Principal Maturity Value
Amount Date (Note 1)
-------- --------- --------------
Industrial Development 5.2%
Montgomery County Industrial Development Authority,
Health Facilities Revenue Bonds, Series of 1993,
(ECRI Project), 6.40% $ 855,000 6/01/2003 $ 872,433
--------------
Lease Revenue 6.2%
Pennsylvania Convention Center Authority, Refunding
Revenue Bonds, 1994 Series A, 6.25% 1,000,000 9/01/2004 1,037,980
--------------
Life Care 2.9%
Delaware County Industrial Development Authority,
Revenue Bonds, Series of 1994, (Martins Run), 5.75% 500,000 12/15/2003 487,920
--------------
Public Facilities 3.2%
Puerto Rico Public Facilities, Government Facilities
Revenue Bonds, Series A, 6.25% 500,000 7/01/2010 533,185
--------------
Single-Family Housing 8.9%
Pennsylvania Housing Finance Agency, Single Family
Mortgage Revenue Bonds, Series 1994-41B (AMT), 5.50% 410,000 4/01/2001 409,561
Pennsylvania Housing Finance Agency, Single Family
Mortgage Revenue Bonds, Series 1994-39B (AMT), 6.00% 360,000 4/01/2003 366,192
Pennsylvania Housing Finance Agency, Single Family
Mortgage Revenue Bonds, Series 1994-39B (AMT), 6.00% 375,000 10/01/2003 381,780
Pennsylvania Housing Finance Agency, Single Family
Mortgage Revenue Bonds, Series 1994-38 (Non-AMT),
5.50% 330,000 4/01/2005 321,483
--------------
1,479,016
--------------
Special/Sales Tax Revenue 5.0%
Allegheny County, Pennsylvania, Redevelopment
Authority Refunding Bonds, Home Improvement Loan,
5.20% 270,000 8/01/2003 263,563
Pennsylvania Intergovernmental Cooperation Authority,
Special Tax Revenue Refunding Bonds, (City of
Philadelphia Funding Program), Series of 1994, MBIA
Insured, 7.00% 500,000 6/15/2004 563,685
--------------
827,248
--------------
Structured Financings 6.3%
Pennsylvania Economic Development Financing
Authority, Resource Recovery Revenue Bonds, (Colver
Project), Series 1994D, 7.05% 1,000,000 12/01/2010 1,051,950
--------------
Water & Sewer 8.8%
Allegheny County Sanitary Authority, Allegheny
County, Pennsylvania, Sewer Revenue Bonds, Series B
of 1994, MBIA Insured, 5.25% 500,000 12/01/2001 511,695
Wyoming Valley Sanitary Authority, (Luzerne County,
Pennsylvania), Sewer Revenue Bonds, Series of 1993,
FSA Insured, 4.40% 500,000 11/15/2002 474,890
Bucks County Water and Sewer Authority, Bucks County,
Pennsylvania, Collection Sewer System Sewer Revenue
Bonds, Series of 1994, FGIC Insured, 6.15% 455,000 12/01/2005 478,683
--------------
1,465,268
--------------
Total Municipal Bonds (Cost $15,633,549) 15,917,030
--------------
The accompanying notes are an integral part of the financial statements.
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
State Street Research Pennsylvania Tax-Free Fund
Principal Maturity Value
Amount Date (Note 1)
------- ---------- ------------
<S> <C> <C> <C>
SHORT-TERM OBLIGATIONS 3.0%
Delaware State Economic Development Authority, (Delmarva Power
and Light Company Project), Revenue Bonds, 3.65% $100,000 10/01/2017++ $ 100,000
California Pollution Control Financing Authority, (Burney
Forest Products Project), Revenue Bonds, 3.65% 100,000 9/01/2020++ 100,000
Los Angeles, California, Regional Airports, Corporate Lease
Revenue Bonds, Series E, 4.25% 300,000 12/01/2024++ 300,000
------------
Total Short-Term Obligations (Cost $500,000) 500,000
------------
Total Investments (Cost $16,133,549)--98.3% 16,417,030
Cash and Other Assets, Less Liabilities--1.7% 275,968
------------
Net Assets--100.0% $16,692,998
============
Federal Income Tax Information:
At June 30, 1995, the net unrealized appreciation of investments based on cost for
Federal income tax purposes of $16,133,549 was as follows:
Aggregate gross unrealized appreciation for all investments in which there is an excess
of value over tax cost $ 364,230
Aggregate gross unrealized depreciation for all
investments in which there is an excess of tax
cost over value (80,749)
------------
$ 283,481
============
</TABLE>
++Interest rates on these obligations may change daily.
Statement of Assets and Liabilities
June 30,1995 (Unaudited)
<TABLE>
<CAPTION>
<S> <C>
Assets
Investments, at value (Cost $16,133,549) (Note 1) $16,417,030
Cash 32,395
Receivable for securities sold 1,130,507
Interest receivable 217,566
Receivable from Distributor (Note 3) 24,871
Receivable for fund shares sold 2,961
Deferred organization costs and other assets (Note 1) 15,673
------------
17,841,003
Liabilities
Payable for securities purchased 1,039,569
Dividends payable 33,677
Payable for fund shares redeemed 10,068
Accrued management fee (Note 2) 7,583
Accrued distribution fee (Note 5) 6,478
Accrued trustees' fees (Note 2) 6,275
Accrued transfer agent and shareholder services (Note 2) 978
Other accrued expenses 43,377
------------
1,148,005
------------
$16,692,998
============
Net Assets
Net Assets consist of:
Undistributed net investment income $ 60,642
Unrealized appreciation of investments 283,481
Accumulated net realized loss (696,820)
Shares of beneficial interest 17,045,695
------------
$16,692,998
============
Net Asset Value and redemption price per share of Class A shares ($7,149,719 / 762,257
shares of beneficial interest) $9.38
============
Maximum Offering Price per share of Class A shares ($9.38 / .955) $9.82
============
Net Asset Value and offering price per share of Class B shares ($4,951,222 / 528,091
shares of beneficial interest)* $9.38
============
Net Asset Value, offering price and redemption price per share of Class C shares
($3,456,392 / 368,283 shares of beneficial interest) $9.39
============
Net Asset Value and offering price per share of Class D shares ($1,135,665 / 121,100
shares of beneficial interest)* $9.38
============
</TABLE>
*Redemption price per share for Class B and Class D is equal to net asset
value less any applicable contingent deferred sales charge.
The accompanying notes are an integral part of the financial statements.
4
<PAGE>
State Street Research Pennsylvania Tax-Free Fund
<TABLE>
<CAPTION>
<S> <C>
Statement of Operations
For the six months ended June 30, 1995 (Unaudited)
Investment Income
Interest $ 479,701
Expenses
Custodian fee 49,024
Management fee (Note 2) 44,959
Transfer agent and shareholder services (Note 2) 31,004
Reports to shareholders 9,560
Audit fee 7,414
Trustees' fees (Note 2) 6,649
Distribution fee--Class A (Note 5) 8,896
Distribution fee--Class B (Note 5) 23,672
Distribution fee--Class D (Note 5) 5,555
Legal fees 4,690
Amortization of organization costs (Note 1) 2,702
Registration fees 2,095
Miscellaneous 4,599
----------
200,819
Expenses borne by the Distributor (Note 3) (141,299)
----------
59,520
----------
Net investment income 420,181
----------
Realized and Unrealized Gain (Loss) on Investments
Net realized loss on investments (Notes 1 and 4) (213,952)
Net unrealized appreciation of investments 956,231
----------
Net gain on investments 742,279
----------
Net increase in net assets resulting from operations $1,162,460
==========
</TABLE>
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Six months
ended
June 30, 1995 Year ended
(Unaudited) December 31, 1994
--------------- --------------------
<S> <C> <C>
Increase (Decrease) in Net Assets
Operations:
Net investment income $ 420,181 $ 709,149
Net realized loss on investments* (213,952) (482,830)
Net unrealized appreciation (depreciation) of
investments 956,231 (783,954)
--------------- --------------------
Net increase (decrease) resulting from operations 1,162,460 (557,635)
--------------- --------------------
Dividends from net investment income:
Class A (190,574) (289,886)
Class B (109,239) (167,608)
Class C (94,872) (163,900)
Class D (25,857) (40,841)
--------------- --------------------
(420,542) (662,235)
--------------- --------------------
Net increase (decrease) from fund share transactions
(Note 7) (379,967) 5,961,498
--------------- --------------------
Total increase in net assets 361,951 4,741,628
Net Assets
Beginning of period 16,331,047 11,589,419
--------------- --------------------
End of period (including undistributed net investment
income of $60,642 and $61,003 respectively) $16,692,998 $16,331,047
=============== ====================
*Net realized loss for Federal income tax purposes
(Note 1) $ (329,022) $ (367,760)
=============== ====================
The accompanying notes are an integral part of the financial statements.
</TABLE>
5
<PAGE>
State Street Research Pennsylvania Tax-Free Fund
Notes to Unaudited Financial Statements
June 30, 1995
Note 1
State Street Research Pennsylvania Tax-Free Fund (the "Fund"), is a series of
State Street Research Tax-Exempt Trust (the "Trust), formerly MetLife-State
Street Tax-Exempt Trust, which was organized as a Massachusetts business
trust in December, 1985 and is registered under the Investment Company Act of
1940, as amended, as an open-end management investment company. The Fund
commenced operations in August, 1993. Five series of the Trust are publicly
offered: State Street Research Pennsylvania Tax-Free Fund, State Street
Research California Tax-Free Fund, State Street Research Tax-Exempt Fund,
State Street Research New York Tax-Free Fund and State Street Research
Florida Tax-Free Fund.
The Fund offers four classes of shares. Class A shares are subject to an
initial sales charge of up to 4.50% and pay a service fee equal to 0.25% of
average daily net assets. Class B shares are subject to a contingent deferred
sales charge on certain redemptions made within five years of purchase and
pay annual distribution and service fees of 1.00%. Class B shares
automatically convert into Class A shares (which pay lower ongoing expenses)
at the end of eight years after the issuance of the Class B shares. Class C
shares are only offered to certain employee benefit plans and large
institutions. No sales charge is imposed at the time of purchase or
redemption of Class C shares. Class C shares do not pay any distribution or
service fees. Class D shares are subject to a contingent deferred sales
charge of 1.00% on any shares redeemed within one year of their purchase.
Class D shares also pay annual distribution and service fees of 1.00%. The
Fund's expenses are borne pro rata by each class, except that each class
bears expenses, and has exclusive voting rights with respect to provisions of
the Plan of Distribution, relating specifically to that class. The Trustees
declare separate dividends on each class of shares.
The following significant policies are consistently followed by the Fund in
preparing its financial statements, and such policies are in conformity with
generallly accepted accounting principles for investment companies.
A. Investment Valuation
Tax-exempt securities are valued by a pricing service, which utilizes market
transactions, quotations from dealers, and various relationships among
securities in determining value. Short-term obligations are valued at
amortized cost. Other securities, if any, are valued at their fair value as
determined in accordance with established methods consistently applied.
B. Security Transactions
Security transactions are accounted for on the trade date (date the order to
buy or sell is executed). Realized gains or losses are reported on the basis
of identified cost of securities delivered.
C. Net Investment Income
Net investment income is determined daily and consists of interest accrued
and discount earned, less amortization of premium and the estimated daily
expenses of the Fund. Interest income is accrued daily as earned. The Fund is
charged for expenses directly attributable to it, while indirect expenses are
allocated among all funds in the Trust.
D. Dividends
Dividends are declared daily by the Fund based upon projected net investment
income and paid or reinvested monthly. Net realized capital gains, if any,
are distributed annually, unless additional distributions are required for
compliance with applicable tax regulations.
Income dividends and capital gain distributions are determined in accordance
with Federal income tax regulations which may differ from generally accepted
accounting principles.
E. Federal Income Taxes
No provision for Federal income taxes is necessary because the Fund intends
to qualify under Subchapter M of the Internal Revenue Code and its policy is
to distribute all of its taxable income, including net realized capital
gains, within the prescribed time periods. At December 31, 1994, the Fund had
a capital loss carryforward of $367,760 available, to the extent provided in
regulations, to offset future capital gains, if any, which expires on
December 31, 2002.
In order to meet certain excise tax distribution requirements under Section
4982 of the Internal Revenue Code, the Fund is required to measure and
distribute annually, if necessary, net capital gains realized during a
twelve-month period ending October 31. In this connection, the Fund is
permitted to defer into its next fiscal year any net capital losses incurred
between each November 1 and the end of its fiscal year. From November 1, 1994
through December 31, 1994 the Fund incurred net capital losses of $115,070
and intends to defer and treat such losses as arising in the fiscal year
ending December 31, 1995.
F. Deferred Organization Costs
Certain costs incurred in the organization and registration of the Fund were
capitalized and are being amortized under the straight-line method over a
period of five years.
Note 2
The Trust and State Street Research & Management Company (the "Adviser"), an
indirect wholly-owned subsidiary of Metropolitan Life Insurance Company
("Metropolitan"), have entered into an agreement under which the Adviser 7
earns monthly fees at an annual rate of 0.55% of the Fund's average daily net
assets. In consideration of these fees, the Adviser furnishes the Fund with
management, investment advisory, statistical and research facilities and
services. The Adviser also pays all salaries, rent and certain other expenses
of management. During the six months ended June 30, 1995, the fees pursuant
to such agreement amounted to $44,959.
State Street Research Shareholder Services, a division of State Street
Research Investment Services, Inc., the Trust's principal underwriter (the
"Distributor"), an indirect wholly-owned subsidiary of Metropolitan, provides
certain shareholder services to the Fund such as responding to inquiries and
instructions from investors with respect to the purchase and redemption of
shares of the Fund. During the six months ended June 30, 1995, the amount of
such expenses was $7,149.
The fees of the Trustees not currently affiliated with the Adviser amounted
to $6,649 during the six months ended June 30, 1995.
6
<PAGE>
State Street Research Pennsylvania Tax-Free Fund
Notes (cont'd)
Note 3
The Distributor and its affiliates may from time to time and in varying
amounts voluntarily assume some portion of fees or expenses relating to the
Fund. During the six months ended June 30, 1995, the amount of such expenses
assumed by the Distributor and its affiliates was $141,299.
Note 4
For the six months ended June 30, 1995, purchases and sales of securities,
exclusive of short-term obligations, aggregated $5,961,118 and $6,705,323,
respectively.
Note 5
The Trust has adopted a Plan of Distribution Pursuant to Rule 12b-1 (the
"Plan") under the Investment Company Act of 1940, as amended. Under the Plan,
the Fund pays annual service fees to the Distributor at a rate of 0.25% of
average daily net assets for Class A, Class B and Class D shares. In
addition, the Fund pays annual distribution fees of 0.75% of average-daily
net assets for Class B and Class D shares. The Distributor uses such payments
for personal services and/or the maintenance of shareholder accounts, to
reimburse securities dealers for distribution and marketing services, to
furnish ongoing assistance to investors and to defray a portion of its
distribution and marketing expenses. For the six months ended June 30, 1995,
fees pursuant to such plan amounted to $8,896, $23,672 and $5,555, for Class
A, Class B and Class D, respectively.
The Fund has been informed that the Distributor and MetLife Securities, Inc.,
a wholly-owned subsidiary of Metropolitan, earned initial sales charges
aggregating $2,452 and $17,160, respectively, on sales of Class A shares of
the Fund during the six months ended June 30, 1995, and that MetLife
Securities, Inc. earned commissions aggregating $11,780 on sales of Class B
shares and that the Distributor collected contingent deferred sales charges
aggregating $12,505 and $101 on redemptions of Class B and Class D shares,
respectively, during the same period.
Note 6
Under normal circumstances at least 80% of the Fund's net assets will be
invested in Pennsylvania Municipal Obligations. Certain proposed Pennsylvania
constitutional amendments, legislative measures, executive orders,
administrative regulations and voter initiatives could result in adverse
consequences affecting Pennsylvania Municipal Obligations. Also, the Fund is
able to invest up to 25% of total assets in a single industry. Accordingly,
the Fund's investments may be subject to greater risk than those in a fund
with more restrictive concentration limits.
At June 30, 1995, investments totalling 14.5% and 13.2% of the Fund's net
assets were insured as to the timely payment of principal and interest by
Financial Guaranty Insurance Co. (FGIC) and Municipal Bond Investors
Assurance Corp. (MBIA), respectively.
7
<PAGE>
State Street Research Pennsylvania Tax-Free Fund
Note 7
The Trustees have the authority to issue an unlimited number of shares of
beneficial interest, $.001 par value per share. At June 30, 1995,
Metropolitan owned 52,405 Class A shares, 52,405 Class B shares, 366,838
Class C shares and 52,405 Class D shares of the Fund and the Adviser owned
one share of each of Class A, Class B, Class C and Class D of the Fund.
Share transactions were as follows:
<TABLE>
<CAPTION>
Six months ended
June 30, 1995 Year ended
(Unaudited) December 31, 1994
---------------------- ------------------------
Class A Shares Amount Shares Amount
- ------------------------------------- -------- ---------- -------- ------------
<S> <C> <C> <C> <C>
Shares sold 96,398 $ 856,161 587,081 $ 5,508,772
Issued upon reinvestment of dividends 9,891 92,290 20,093 184,678
Shares repurchased (161,591) (1,454,409) (159,050) (1,460,714)
-------- ---------- -------- ------------
Net increase (decrease) (55,302) $ (505,958) 448,124 $ 4,232,736
======== ========== ======== ============
Class B Shares Amount Shares Amount
- ------------------------------------- -------- ---------- -------- ------------
Shares sold 47,104 $ 437,179 209,557 $ 1,964,524
Issued upon reinvestment of dividends 5,991 55,832 12,037 110,843
Shares repurchased (38,556) (358,217) (68,255) (631,498)
-------- ---------- -------- ------------
Net increase 14,539 $ 134,794 153,339 $ 1,443,869
======== ========== ======== ============
Class C Shares Amount Shares Amount
- ------------------------------------- -------- ---------- -------- ------------
Shares sold 227 $ 2,086 -- $ --
Issued upon reinvestment of dividends 29 271 279 2,581
Shares repurchased (217) (2,067) -- --
-------- ---------- -------- ------------
Net increase 39 $ 290 279 $ 2,581
======== ========== ======== ============
Class D Shares Amount Shares Amount
- ------------------------------------- -------- ---------- -------- ------------
Shares sold 85 $ 754 43,441 $ 409,646
Issued upon reinvestment of dividends 1,264 11,548 2,057 18,919
Shares repurchased (2,319) (21,395) (15,770) (146,253)
-------- ---------- -------- ------------
Net increase (decrease) (970) $ (9,093) 29,728 $ 282,312
======== ========== ======== ============
</TABLE>
8
<PAGE>
State Street Research Pennsylvania Tax-Free Fund
Financial Highlights
For a share outstanding throughout each period:
<TABLE>
<CAPTION>
Class A Class B
---------------------------------- ------------------------------------
Six
months Six months
ended ended
June 30, Year ended June 30, Year ended
1995 December 31, 1995 December
(Unaudited) 1994 1993** (Unaudited) 31, 1994 1993**
-------- ------------- ----- ----------- ----------- ------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
period $8.97 $9.74 $9.55 $8.96 $9.73 $9.55
Net investment income* .25 .44 .14 .21 .38 .11
Net realized and unrealized
gain (loss) on investments .41 (.79) .20 .42 (.80) .19
Dividends from net investment
income (.25) (.42) (.14) (.21) (.35) (.11)
Distribution from net realized
gains -- -- (.01) -- -- (.01)
-------- ------------- ----- ----------- ----------- ------
Net asset value, end of period $9.38 $8.97 $9.74 $9.38 $8.96 $9.73
======== ============= ===== =========== =========== ======
Total return 7.37%+++ (3.60)%+ 3.52%+++ 7.10%+++ (4.36)%+ 3.19%+++
Net assets at end of period
(000s) $7,150 $7,330 $3,598 $4,951 $4,603 $3,506
Ratio of operating expenses to
average net assets* 0.50%++ 0.50% 0.50%++ 1.25%++ 1.25% 1.25%++
Ratio of net investment income
to average net assets* 5.36%++ 4.93% 4.21%++ 4.61%++ 4.14% 3.45%++
Portfolio turnover rate 37.02% 80.90% 26.18% 37.02% 80.90% 26.18%
*Reflects voluntary assumption
of fees or expenses per share
in each period (Note 3). $.08 $.15 $.09 $.08 $.15 $.09
</TABLE>
<TABLE>
<CAPTION>
Class C Class D
---------------------------------- ------------------------------------
Six
months Six months
ended ended
June 30, Year ended June 30, Year ended
1995 December 31, 1995 December
(Unaudited) 1994 1993** (Unaudited) 31, 1994 1993**
------------------------------ -------- ------------- ----- ----------- ----------- ------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
period $8.97 $9.74 $9.55 $8.97 $9.74 $9.55
Net investment income* .26 .47 .17 .21 .38 .12
Net realized and unrealized
gain (loss) on investments .42 (.79) .17 .41 (.80) .19
Dividends from net investment
income (.26) (.45) (.14) (.21) (.35) (.11)
Distribution from net realized
gains -- -- (.01) -- -- (.01)
-------- ------------- ----- ----------- ----------- ------
Net asset value, end of period $9.39 $8.97 $9.74 $9.38 $8.97 $9.74
======== ============= ===== =========== =========== ======
Total return 7.62%+++ (3.37)%+ 3.60%+++ 6.98%+++ (4.33)%+ 3.26%+++
Net assets at end of period
(000s) $3,456 $3,304 $3,585 $1,136 $1,095 $899
Ratio of operating expenses to
average net assets* 0.25%++ 0.25% 0.25%++ 1.25%++ 1.25% 1.25%++
Ratio of net investment income
to average net assets* 5.60%++ 5.10% 4.52%++ 4.61%++ 4.13% 3.49%++
Portfolio turnover rate 37.02% 80.90% 26.18% 37.02% 80.90% 26.18%
*Reflects voluntary assumption
of fees or expenses per share
in each period (Note 3). $.08 $.15 $.11 $.08 $.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.
9
<PAGE>
State Street Research Pennsylvania Tax-Free Fund
Fund Information, Officers and Trustees of State Street Research Tax-Exempt
Trust
Fund Information
State Street Research 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 02266-8408
1-800-562-0032
Custodian
State Street Bank and Trust Company
225 Franklin Street
Boston, MA 02110
Legal Counsel
Goodwin, Procter & Hoar
Exchange Place
Boston, MA 02109
Officers
Ralph F. Verni
Chairman of the Board,
President and Chief Executive Officer
Paul J. Clifford, Jr.
Vice President
Susan W. Drake
Vice President
John H. Kallis
Vice President
Thomas A. Shively
Vice President
Gerard P. Maus
Treasurer
Joseph W. Canavan
Assistant Treasurer
Douglas A. Romich
Assistant Treasurer
Francis J. McNamara, III
Secretary and General Counsel
Darman A. Wing
Assistant Secretary and
Assistant General Counsel
Trustees
Ralph F. Verni
Chairman of the Board, President, Chief Executive Officer and Director,
State Street Research & Management Company
Edward M. Lamont
Formerly in banking (Morgan Guaranty Trust Company of New York); presently
engaged in private investments and civic affairs
Robert A. Lawrence
Partner, Saltonstall & Co.
Dean O. Morton
Retired; formerly Executive Vice President,
Chief Operating Officer and Director,
Hewlett-Packard Company
Thomas L. Phillips
Retired; formerly Chairman of the Board and
Chief Executive Officer, Raytheon Company
Toby Rosenblatt
President,
The Glen Ellen Company
Vice President,
Founders Investments Ltd.
Michael S. Scott Morton
Jay W. Forrester Professor of Management, Sloan School of Management,
Massachusetts Institute of Technology
Jeptha H. Wade
Retired; formerly Of Counsel, Choate, Hall & Stewart
10
<PAGE>
BACK COVER
State Street Research Pennsylvania Tax-Free Fund
One Financial Center
Boston, MA 02111
Bulk Rate
U.S. Postage
PAID
Brockton, MA
Permit No. 600
Questions? Comments?
Call us at 1-800-562-0032, or write us at:
State Street Research
Shareholder Services
P.O. Box 8408
Boston, MA 02266-8408
[STATE STREET LOGO] State Street Research
This report is prepared for the general information of current shareholders
only. It is not authorized for use as sales material with prospective
investors.
CONTROL NUMBER: 2517-950822(0995) SSR-LD
Cover Illustration by Doroty Cullinan
PTF-047E-895
<PAGE>
State Street Research Tax-Exempt Fund
Pro Forma Combining Portfolio of Investments
June 30, 1995
(Unaudited)
<TABLE>
<CAPTION>
Principal Amount Description Value
----------------------------------- ----------------------------------------- -------------------------------------
California Pro Forma California Pro Forma
Tax-Exempt Tax-Free Combined Tax-Exempt Tax-Free Combined
--------- --------- --------- ----------------------------------------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Municipal Bonds 95.8%
California 20.6%
$3,410,000 $ 0 $3,410,000 California Pollution Control Financing
Authority, Pollution Control Revenue
Bonds, (Southern California Edison
Company) 1988 Series A, Subject to AMT,
6.90%, 9/01/2006 $3,603,995 $ 0 $3,603,995
4,790,000 0 4,790,000 Southern California Public Power
Authority, San Juan Project, Series A,
5.375%, 1/01/2011 4,518,359 0 4,518,359
4,000,000 0 4,000,000 Rancho California Water District
Financing Authority, Revenue Refunding
Bonds, AMBAC Insured, Series 1994, 5.00%,
8/15/2014 3,531,920 0 3,531,920
1,500,000 500,000 2,000,000 San Francisco Bay Area Rapid Transit
District, Sales Tax Revenue Bonds FGIC
Insured, Series 1995, 5.50%, 7/01/2015 1,406,700 468,900 1,875,600
2,000,000 0 2,000,000 East Bay Municipal Utility District Water
System, Revenue Refunding Bonds, Series
1993, 5.00%, 6/01/2021 1,717,580 0 1,717,580
6,100,000 0 6,100,000 Los Angeles County Metropolitan Transit
Authority, Sales Tax Revenue Refunding
Bonds, Series A, 5.00%, 7/01/2021 5,237,765 0 5,237,765
2,395,000 0 2,395,000 San Francisco City & County Sewer and
Water Revenue Refunding Bonds, FGIC
Insured, 5.375%, 10/01/2022 2,168,433 0 2,168,433
5,000,000 0 5,000,000 University of California, Board of
Regents, Refunding Revenue Bonds,
(Multiple Purpose Projects), Series C,
AMBAC Insured, 5.00% 9/01/2023 4,269,950 0 4,269,950
3,000,000 1,000,000 4,000,000 San Joaquin Hills Transportation Corridor
Agency, (Orange County, California),
Senior Lien Toll Road Revenue Bonds,
7.00%, 1/01/2030 3,045,570 1,015,190 4,060,760
5,000,000 0 5,000,000 Foothill/Eastern Transportation Corridor
Agency, Convertible Toll Road Revenue
Bonds, 5.00%, 1/01/2035 3,818,750 0 3,818,750
0 300,000 300,000 State of California, Various Purpose,
General Obligation Bonds, 7.00%,
8/01/2008 0 335,874 335,874
0 500,000 500,000 City and County of San Francisco, General
Obligation Bonds, Series 1991 A, (Various
Purpose Projects), 6.50%, 12/15/2010 0 515,405 515,405
1
<PAGE>
State Street Research Tax-Exempt Fund
Pro Forma Combining Portfolio of Investments
June 30, 1995
(Unaudited)
Principal Amount Description Value
----------------------------------- ----------------------------------------- -------------------------------------
California Pro Forma California Pro Forma
Tax-Exempt Tax-Free Combined Tax-Exempt Tax-Free Combined
--------- --------- --------- ----------------------------------------- --------- --------- -----------
California (cont'd)
$0 $ 500,000 $ 500,000 Santa Monica-Malibu Unified School
District, Los Angeles County, California,
General Obligation Bonds, Series 1993,
5.50%, 8/01/2013 $0 $ 471,050 $ 471,050
0 1,000,000 1,000,000 Puerto Rico Municipal Finance Agency,
1994 Series A Bonds, FSA Insured, 6.00%,
7/01/2014 0 1,009,590 1,009,590
0 500,000 500,000 Commonwealth of Puerto Rico, Public
Improvement Refunding Bonds, (General
Obligation Bonds) Series 1995, MBIA
Insured, 5.65%, 7/01/2015 0 492,345 492,345
0 1,000,000 1,000,000 Roseville Joint Union High School
District, 1992 General Obligation Bonds,
Series B, FGIC Insured, 0.00%, 8/01/2015 0 289,100 289,100
0 1,000,000 1,000,000 County of Los Angeles, Certificates of
Participation, Series A (Marina Del Ray),
Los Angeles County Capital Asset Leasing
Corporation, 6.50%, 7/01/2008 0 979,430 979,430
0 500,000 500,000 County of Marin, Certificates of
Participation, (1991 Capital Improvements
Project), 6.375%, 8/01/2011 0 518,290 518,290
0 1,000,000 1,000,000 City of Stockton, Revenue Certificates of
Participation, 1995 Series A, (Wastewater
Treatment Plant Expansion), FGIC Insured,
6.70%, 9/01/2014 0 1,069,660 1,069,660
0 300,000 300,000 The Trustees of the California State
University Housing System, 1991 Housing
System Refunding Revenue Bonds, AMBAC
Insured, 7.00%, 11/01/2011 0 325,119 325,119
0 500,000 500,000 University of California, Board of
Regents, Refunding Revenue, (Multiple
Purpose Projects), Series C, AMBAC
Insured, 5.00%, 9/01/2012 0 447,350 447,350
0 1,000,000 1,000,000 California Educational Facilities
Authority, Series 1994 Revenue Bonds
(Southwestern University Project), 6.60%,
11/01/2014 0 1,032,890 1,032,890
0 500,000 500,000 City of Duarte, California, Certificates
of Participation, (Hope National Medical
Center), 6.00%, 4/01/2008 0 480,175 480,175
0 1,000,000 1,000,000 Santa Clara County Financing Authority,
(VMC Facility Replacement Project), 1994
Series A Bonds, AMBAC Insured, 7.75%,
11/15/2008 0 1,198,130 1,198,130
0 750,000 750,000 Puerto Rico Industrial, Medical and
Environmental Pollution Control
Facilities Financing Authority, Revenue
Bonds, Series A, 6.25%, 11/15/2013 0 787,425 787,425
2
<PAGE>
State Street Research Tax-Exempt Fund
Pro Forma Combining Portfolio of Investments
June 30, 1995
(Unaudited)
Principal Amount Description Value
----------------------------------- ----------------------------------------- -------------------------------------
California Pro Forma California Pro Forma
Tax-Exempt Tax-Free Combined Tax-Exempt Tax-Free Combined
--------- --------- --------- ----------------------------------------- --------- --------- -----------
California (cont'd)
$0 $ 600,000 $ 600,000 California Pollution Control Financing
Authority, Pollution Control Revenue
Bonds, (San Diego Gas & Electric
Company), 1991 Series A, Subject to AMT,
6.80%, 6/01/2015 $0 $ 661,212 $ 661,212
0 1,500,000 1,500,000 State Public Works Board of the State of
California, Lease Revenue Bonds,
(Department of Justice Building), 1995
Series A, 5.625%, 5/01/2020 0 1,393,080 1,393,080
0 1,100,000 1,100,000 Sacramento Municipal Utility District,
Electric Revenue Refunding Bonds, 1991
Series Z, FGIC Insured, 6.35%, 7/01/2005 0 1,062,950 1,062,950
0 250,000 250,000 Northern California Power Agency,
Geothermal Project Number 3, Revenue
Bonds, 1987 Refunding, Series A,
Pre-Refunded to 7/1/96 @ 101.5, 7.00%,
7/01/2007 0 259,425 259,425
0 200,000 200,000 Fresno, California Water Systems, Revenue
Bonds, 1990 Series A, Pre-Refunded to
6/1/98 @ 102, 7.25%, 6/01/2010 0 219,752 219,752
0 250,000 250,000 Alameda Unified School District,
Unlimited Tax, Alameda County,
California, General Obligation Bonds,
Series 1989, Subject to Crossover
Refunding 7/1/99 @ 102, 7.00%, 7/01/2014 0 277,242 277,242
0 250,000 250,000 California Educational Facilities
Authority, Revenue Bonds (Pepperdine
University) Series 1990, MBIA Insured,
Pre-Refunded to 10/1/2000 @ 102, 7.20%,
11/01/2015 0 285,540 285,540
0 300,000 300,000 Commonwealth of Puerto Rico, Public
Improvement Bonds of 1989, Series A,
General Obligation Bonds, Pre-Refunded to
7/1/99 @ 101.5, 7.75%, 7/01/2017 0 341,340 341,340
0 250,000 250,000 California Educational Facilities
Authority, Revenue Bonds (St. Mary's
College of California Project) Series
1990, Pre-Refunded to 10/1/2000 @ 102,
7.50%, 10/01/2020 0 288,578 288,578
0 500,000 500,000 Transmission Agency of Northern
California, California-Oregon
Transmission Project, Revenue Bonds, MBIA
Insured, 1990 Series A, Pre-Refunded to
5/1/2000 @ 101.5, 7.00%, 5/01/2024 0 559,625 559,625
0 1,000,000 1,000,000 Puerto Rico Public Buildings Authority,
Government Facilities Revenue Bonds,
Series A, 5.50%, 7/01/2021 0 942,090 942,090
3
<PAGE>
State Street Research Tax-Exempt Fund
Pro Forma Combining Portfolio of Investments
June 30, 1995
(Unaudited)
Principal Amount Description Value
----------------------------------- ----------------------------------------- -------------------------------------
California Pro Forma California Pro Forma
Tax-Exempt Tax-Free Combined Tax-Exempt Tax-Free Combined
--------- --------- --------- ----------------------------------------- --------- --------- -----------
California (cont'd)
$0 $ 760,000 $ 760,000 Stanislaus Waste-to-Energy Financing
Agency, Solid Waste Facility Refunding
Revenue Certificates, (Ogden Martin
Systems of Stanislaus, Inc. Project),
Series 1990, Subject to AMT, 7.625%,
1/01/2010 $0 $ 808,480 $ 808,480
0 260,000 260,000 California Housing Finance Agency, Home
Mortgage Revenue Bonds, 1991 Series G,
Subject to AMT, 6.95%, 8/01/2011 0 267,569 267,569
0 1,500,000 1,500,000 California Housing Finance Agency, Home
Mortgage Revenue Bonds, 1994 Series G,
7.20%, 8/01/2014 0 1,601,400 1,601,400
0 35,000 35,000 California Housing Finance Agency, Home
Mortgage Revenue Bonds, 1990 Series D,
Subject to AMT, 7.875%, 8/01/2031 0 37,101 37,101
0 500,000 500,000 Orange County Transportation Authority,
Orange County, California, Measure M
Sales Tax Revenue Bonds (Limited Tax
Bonds), Second Senior Bonds, Series 1992,
FGIC Insured, 6.00%, 2/15/2007 0 507,480 507,480
0 1,000,000 1,000,000 Redevelopment Agency of the City of San
Jose, Merged Area Redevelopment Project,
Tax Allocation Bonds, MBIA Insured,
Series 1993, 6.00%, 8/01/2007 0 1,041,830 1,041,830
0 500,000 500,000 South Orange County Public Financing
Authority, Special Tax Revenue Bonds,
1994 Series B (Junior Lien Bonds), 7.00%,
9/01/2007 0 502,500 502,500
0 1,000,000 1,000,000 Redevelopment Agency of the City of San
Diego, California, Centre City
Redevelopment Project, Tax Allocation
Refunding Bonds, Series 1992, AMBAC
Insured, 6.00%, 9/01/2008 0 1,019,640 1,019,640
0 1,000,000 1,000,000 South Orange County Public Financing
Authority, Special Tax Revenue Bonds,
1994 Series B (Junior Lien Bonds), 7.00%,
9/01/2009 0 1,002,860 1,002,860
0 1,300,000 1,300,000 Sacramento Cogeneration Authority,
(Cogeneration Authority Project), Revenue
Bonds, Series 1995, 6.50%, 7/01/2014 0 1,284,634 1,284,634
0 1,695,000 1,695,000 Foothill/Eastern Transportation Corridor
Agency, Toll Road Revenue Bonds, 0.00%,
1/01/2008 0 899,774 899,774
0 500,000 500,000 San Francisco Bay Area Rapid Transit
District, Sales Tax Revenue Bonds, Series
1991, FGIC Insured, 6.40%, 7/01/2005 0 536,000 536,000
4
<PAGE>
State Street Research Tax-Exempt Fund
Pro Forma Combining Portfolio of Investments
June 30, 1995
(Unaudited)
Principal Amount Description Value
----------------------------------- ----------------------------------------- -------------------------------------
California Pro Forma California Pro Forma
Tax-Exempt Tax-Free Combined Tax-Exempt Tax-Free Combined
--------- --------- --------- ----------------------------------------- --------- --------- -----------
California (cont'd)
$ 0 $ 250,000 $ 250,000 City of Sacramento, 1991 Refunding
Certificates of Participation, Sacramento
Light Rail Transit Project, 6.75%,
7/01/2007 $ 0 $ 270,033 $ 270,033
0 1,000,000 1,000,000 Government of Guam, Limited Obligation
Highway Bonds, 1992 Series A, Capital
Guaranty Insurance Co. Insured, 6.30%,
5/01/2012 0 1,036,130 1,036,130
--------- --------- -----------
33,319,022 28,542,188 61,861,210
--------- --------- -----------
Connecticut 5.0%
1,000,000 0 1,000,000 State of Connecticut, Clean Water Fund
Revenue Bonds, 1991 Series, 7.00%,
1/01/2011 1,095,010 0 1,095,010
1,500,000 0 1,500,000 State of Connecticut, Special Tax
Obligation Bonds, Transportation
Infrastructure Purposes, 1991 Series A,
6.50%, 10/01/2012 1,608,180 0 1,608,180
2,500,000 0 2,500,000 Connecticut Development Authority,
Pollution Control Refunding Bonds,
(Pfizer Inc. Project--1982 Series),
6.55%, 2/15/2013 2,667,175 0 2,667,175
5,000,000 0 5,000,000 State of Connecticut Health and
Educational Facilities Authority, Revenue
Bonds, Quinnipiac College Issue, Series
D, 6.00%, 7/01/2013 4,598,050 0 4,598,050
5,000,000 0 5,000,000 Connecticut Housing Finance Authority,
Housing Mortgage Finance Program Bonds,
1993 Series A, 6.20%, 5/15/2014 4,999,500 0 4,999,500
--------- --------- -----------
14,967,915 0 14,967,915
--------- --------- -----------
Florida 8.2%
5,000,000 0 5,000,000 Dade County, Florida, Water & Sewer
System, Revenue Refunding Bonds, FGIC
Insured, 5.00%, 10/01/2013 4,511,300 0 4,511,300
485,000 0 485,000 Hillsborough County, Florida, Refunding
Utility Revenue Bonds, Series 1991A,
Pre-Refunded to 8/1/2001 @ 102, 7.00%,
8/01/2014 550,606 0 550,606
8,950,000 0 8,950,000 Orlando Utilities Commission Water and
Electric Subordinated Revenue Bonds,
Series C, 6.75%, 10/01/2017 9,991,691 0 9,991,691
5
<PAGE>
State Street Research Tax-Exempt Fund
Pro Forma Combining Portfolio of Investments
June 30, 1995
(Unaudited)
Principal Amount Description Value
----------------------------------- ----------------------------------------- -------------------------------------
California Pro Forma California Pro Forma
Tax-Exempt Tax-Free Combined Tax-Exempt Tax-Free Combined
--------- --------- --------- ----------------------------------------- --------- --------- -----------
Florida (cont'd)
$1,250,000 $0 $1,250,000 Martin County, Florida, Pollution Control
Revenue Refunding Bonds, (Florida Power &
Light Company Project), Series 1990, MBIA
Insured, 7.30%, 7/01/2020 $ 1,370,612 $0 $ 1,370,612
5,000,000 0 5,000,000 Vero Beach, Florida, Electric Power &
Light, Revenue Refunding Bonds, Series A,
5.375%, 12/01/2021 4,663,250 0 4,663,250
2,750,000 0 2,750,000 Florida State Board of Education, Public
Education Refunding Bonds, Series D,
5.125%, 6/01/2022 2,443,897 0 2,443,897
1,000,000 0 1,000,000 Orlando Utilities Commission, Water and
Electric Subordinated Revenue Bonds,
Series 1989C, Pre-Refunded to 10/1/99 @
102, 7.00%, 10/01/2023 1,113,970 0 1,113,970
--------- --------- -----------
24,645,326 0 24,645,326
--------- --------- -----------
Georgia 8.1%
4,300,000 0 4,300,000 State of Georgia, General Obligation
Bonds, Series 1992B, 6.25%, 3/01/2011 4,611,707 0 4,611,707
1,690,000 0 1,690,000 Georgia Housing and Finance Authority,
Home Ownership Opportunity Program Bonds,
Series 1992C, 6.50%, 12/01/2011 1,726,791 0 1,726,791
1,000,000 0 1,000,000 State of Georgia, General Obligation
Bonds, Series 94E, 6.75%, 12/01/2012 1,126,740 0 1,126,740
4,000,000 0 4,000,000 Cherokee County, Georgia, School System,
General Obligation Bonds, AMBAC Insured,
5.325%, 2/01/2014 3,812,440 0 3,812,440
2,000,000 0 2,000,000 Metro Atlanta Rapid Transit Authority,
2nd Indenture, Series A, AMBAC Insured,
5.125%, 7/01/2018 1,785,540 0 1,785,540
3,000,000 0 3,000,000 Metro Atlanta Rapid Transit Authority,
2nd Indenture, Series A, AMBAC Insured,
5.125%, 7/01/2019 2,671,890 0 2,671,890
1,650,000 0 1,650,000 City of Atlanta, Georgia, General
Obligation Bonds, Series 1994A, 6.10%,
12/01/2019 1,667,441 0 1,667,441
5,000,000 0 5,000,000 DeKalb County, Georgia, General
Obligation Refunding Bonds, 5.25%,
1/01/2020 4,557,650 0 4,557,650
1,350,000 0 1,350,000 Fulton County, Georgia, School District,
General Obligation School Bonds, Series
1993, 5.625%, 1/01/2021 1,299,632 0 1,299,632
6
<PAGE>
State Street Research Tax-Exempt Fund
Pro Forma Combining Portfolio of Investments
June 30, 1995
(Unaudited)
Principal Amount Description Value
----------------------------------- ----------------------------------------- -------------------------------------
California Pro Forma California Pro Forma
Tax-Exempt Tax-Free Combined Tax-Exempt Tax-Free Combined
--------- --------- --------- ----------------------------------------- --------- --------- -----------
Georgia (cont'd)
$1,305,000 $0 $1,305,000 DeKalb County, Georgia, Water & Sewer
Revenue Refunding Bonds, Series 1993,
5.25%, 10/01/2023 $ 1,188,933 $0 $ 1,188,933
--------- --------- -----------
24,448,764 0 24,448,764
--------- --------- -----------
Hawaii 0.7%
2,000,000 0 2,000,000 State of Hawaii, General Obligation Bonds
of 1991, Series BT, 6.125%, 2/01/2010 2,153,580 0 2,153,580
--------- --------- -----------
Illinois 1.2%
3,300,000 0 3,300,000 City of Chicago, Illinois, Gas Supply
Revenue Bonds, 1985 Series B (The Peoples
Gas Light and Coke Company Project),
7.50%, 3/01/2015 3,632,937 0 3,632,937
--------- --------- -----------
Iowa 0.3%
970,000 0 970,000 Iowa Finance Authority, Single Family
Mortgage Refunding Bonds, 1992 Series F,
AMBAC Insured, 6.50%, 1/01/2025 976,800 0 976,800
--------- --------- -----------
Kansas 0.4%
1,000,000 0 1,000,000 State of Kansas, Department of
Transportation, Highway Revenue Bonds,
Series 1992, Pre-Refunded to 3/1/2002 @
102, 6.50%, 3/01/2008 1,107,320 0 1,107,320
--------- --------- -----------
Kentucky 1.3%
5,300,000 0 5,300,000 Owensboro, Kentucky, Electric Light &
Power Revenue Bonds, Series B, AMBAC
Insured, 0.00%, 1/01/2018 1,369,361 0 1,369,361
4,400,000 0 4,400,000 Owensboro, Kentucky, Electric Light &
Power Revenue Bonds, Series B, AMBAC
Insured, 0.00%, 1/01/2019 1,070,432 0 1,070,432
1,500,000 0 1,500,000 Kentucky Housing Corporation, Housing
Revenue Bonds, 1991 Series D-1,
(Federally Insured or Guaranteed Mortgage
Loans) Subject to AMT, 6.80%, 1/01/2024 1,530,405 0 1,530,405
--------- --------- -----------
3,970,198 0 3,970,198
--------- --------- -----------
7
<PAGE>
State Street Research Tax-Exempt Fund
Pro Forma Combining Portfolio of Investments
June 30, 1995
(Unaudited)
Principal Amount Description Value
----------------------------------- ----------------------------------------- -------------------------------------
California Pro Forma California Pro Forma
Tax-Exempt Tax-Free Combined Tax-Exempt Tax-Free Combined
--------- --------- --------- ----------------------------------------- --------- --------- -----------
Louisiana 2.2%
$6,000,000 $0 $6,000,000 Lake Charles Harbor and Terminal District
(Louisiana), Port Facilities Revenue
Refunding Bonds, Series 1992, (Trunkline
LNG Company Project), 7.75%, 8/15/2022 $ 6,611,220 $0 $ 6,611,220
--------- --------- -----------
Maryland 1.8%
5,000,000 0 5,000,000 Howard County, Maryland, Multifamily
Housing Revenue Refunding Bonds, Series
1994, (Chase Glen Project), Mandatory Put
7/1/2004 @ 100, 7.00%, 7/01/2024 5,261,800 0 5,261,800
--------- --------- -----------
Massachusetts 7.8%
4,500,000 0 4,500,000 Massachusetts Industrial Finance Agency,
First Mortgage Refunding Bonds,
(Brookhaven Retirement Community,
Lexington--1994 Issue), Series A, 6.75%,
1/01/2001 4,586,355 0 4,586,355
1,500,000 0 1,500,000 Massachusetts Industrial Finance Agency,
First Mortgage Revenue Bonds, (Berkshire
Retirement Community, Lenox--1994 Issue),
Series A, 6.375%, 7/01/2005 1,461,705 0 1,461,705
2,000,000 0 2,000,000 Massachusetts Housing Finance Agency,
Residential Development Bonds, FNMA
Collateralized, 1992 Series C, 6.875%,
11/15/2011 2,097,680 0 2,097,680
4,480,000 0 4,480,000 Massachusetts State Water Resource
Authority, General Revenue Bonds, 1993
Series C, 6.00%, 12/01/2011 4,526,368 0 4,526,368
3,000,000 0 3,000,000 Massachusetts Health and Educational
Facilities Authority, Refunding Bonds,
Massachusetts General Hospital Issue,
Series F, AMBAC Insured, 6.25%, 7/01/2012 3,118,170 0 3,118,170
3,385,000 0 3,385,000 Massachusetts Bay Transportation
Authority, General Transportation System
Bonds, 1994 Series A Refunding Bonds,
7.00%, 3/01/2014 3,798,275 0 3,798,275
3,000,000 0 3,000,000 Massachusetts State General Obligation
Bonds, Series A, 5.75%, 2/01/2015 2,937,780 0 2,937,780
1,000,000 0 1,000,000 Massachusetts Health and Educational
Facilities Authority, Revenue Bonds,
Harvard University Issue, Series N
Refunding, 6.25%, 4/01/2020 1,053,180 0 1,053,180
--------- --------- -----------
23,579,513 0 23,579,513
--------- --------- -----------
8
<PAGE>
State Street Research Tax-Exempt Fund
Pro Forma Combining Portfolio of Investments
June 30, 1995
(Unaudited)
Principal Amount Description Value
----------------------------------- ----------------------------------------- -------------------------------------
California Pro Forma California Pro Forma
Tax-Exempt Tax-Free Combined Tax-Exempt Tax-Free Combined
--------- --------- --------- ----------------------------------------- --------- --------- -----------
Michigan 2.7%
$3,525,000 $0 $3,525,000 State of Michigan, State Trunk Line Fund
Bonds, Series 1989A, Pre-Refunded to
8/15/99 @ 102, 7.00%, 8/15/2017 $3,910,670 $0 $3,910,670
5,000,000 0 5,000,000 Michigan Public Power Agency, Revenue
Refunding Bonds, (Belle River Project),
Series B, 5.00%, 1/01/2019 4,301,450 0 4,301,450
--------- --------- -----------
8,212,120 0 8,212,120
--------- --------- -----------
Minnesota 0.5%
1,410,000 0 1,410,000 Minnesota Housing Finance Agency, Single
Family Mortgage Bonds, 1991 Series A,
Subject to AMT, 7.45%, 7/01/2022 1,504,949 0 1,504,949
--------- --------- -----------
Nebraska 0.4%
1,000,000 0 1,000,000 Omaha Public Power District (Nebraska),
Electric System Revenue Bonds, 1992,
Series B, 6.20%, 2/01/2017 1,045,030 0 1,045,030
--------- --------- -----------
Nevada 0.7%
2,000,000 0 2,000,000 Clark County School District, Nevada,
General Obligation (Limited Tax) School
Improvement Bonds, MBIA Insured,
Pre-Refunded to 6/1/2001 @ 101, 7.00%,
6/01/2009 2,244,300 0 2,244,300
--------- --------- -----------
New Hampshire 2.3%
7,000,000 0 7,000,000 New Hampshire Higher Educational and
Health Facilities Authority, First
Mortgage Revenue Bonds, RiverMead at
Peterborough Issue, Series 1994, 7.375%,
7/01/2000 7,044,030 0 7,044,030
--------- --------- -----------
New Jersey 0.4%
1,000,000 0 1,000,000 New Jersey Educational Facilities
Authority, Seton Hall University Project
Revenue Bonds, 1991 Series D, 7.00%,
7/01/2021 1,056,860 0 1,056,860
--------- --------- -----------
New York 5.2%
1,000,000 0 1,000,000 The City of New York, General Obligation
Bonds, Fiscal 1992 Series H, 7.00%,
2/01/2005 1,060,950 0 1,060,950
9
<PAGE>
State Street Research Tax-Exempt Fund
Pro Forma Combining Portfolio of Investments
June 30, 1995
(Unaudited)
Principal Amount Description Value
----------------------------------- ----------------------------------------- -------------------------------------
California Pro Forma California Pro Forma
Tax-Exempt Tax-Free Combined Tax-Exempt Tax-Free Combined
--------- --------- --------- ----------------------------------------- --------- --------- -----------
New York (cont'd)
$4,000,000 $0 $4,000,000 State of New York, Serial Bonds, 5.50%,
3/01/2011 $ 3,849,440 $0 $ 3,849,440
3,000,000 0 3,000,000 The City of New York, General Obligation
Refunding Bonds, Fiscal 1991 Series B,
7.75%, 2/01/2012 3,260,790 0 3,260,790
2,000,000 0 2,000,000 State of New York, Serial Bonds, 5.625%,
6/15/2012 1,937,340 0 1,937,340
3,400,000 0 3,400,000 Niagara Falls, New York, Bridge & Toll
Commission, FGIC Insured, 5.25%,
10/01/2015 3,151,936 0 3,151,936
2,750,000 0 2,750,000 Grand Central District Management
Association, Capital Improvement
Refunding Bonds, Series 1994, 5.25%,
1/01/2022 2,425,170 0 2,425,170
--------- --------- -----------
15,685,626 0 15,685,626
--------- --------- -----------
North Carolina 5.7%
5,000,000 0 5,000,000 North Carolina Municipal Power Agency
Number 1, Catawba Electric Revenue Bonds,
Series 1992, 7.25%, 1/01/2007 5,760,800 0 5,760,800
1,850,000 0 1,850,000 County of Durham, North Carolina,
Certificates of Participation, (1991 Jail
Facilities and Computer Equipment
Financing Project), 6.625%, 5/01/2014 1,948,216 0 1,948,216
1,865,000 0 1,865,000 City of Charlotte, North Carolina,
General Obligation Refunding Bonds,
Series 1993, 5.25%, 2/01/2016 1,742,619 0 1,742,619
7,470,000 0 7,470,000 North Carolina Housing Finance Agency,
Multifamily Revenue Refunding Bonds,
(1992 Refunding Bond Resolution), Series
B, 6.90%, 7/01/2024 7,753,113 0 7,753,113
--------- --------- -----------
17,204,748 0 17,204,748
--------- --------- -----------
Ohio 3.5%
1,000,000 0 1,000,000 County of Erie, Ohio, Hospital
Improvement and Refunding Revenue Bonds,
Series 1992, (Firelands Community
Hospital Project), 6.75%, 1/01/2008 1,052,690 0 1,052,690
2,000,000 0 2,000,000 Hamilton County, Ohio, Sewer System
Improvement and Refunding Revenue Bonds,
1991 Series A, (The Metropolitan Sewer
District of Greater Cincinnati),
Pre-Refunded to 6/1/2001 @ 102, 6.70%,
12/01/2013 2,234,400 0 2,234,400
10
<PAGE>
State Street Research Tax-Exempt Fund
Pro Forma Combining Portfolio of Investments
June 30, 1995
(Unaudited)
Principal Amount Description Value
----------------------------------- ----------------------------------------- -------------------------------------
California Pro Forma California Pro Forma
Tax-Exempt Tax-Free Combined Tax-Exempt Tax-Free Combined
--------- --------- --------- ----------------------------------------- --------- --------- -----------
Ohio (cont'd)
$7,000,000 $0 $7,000,000 City of Cleveland, Ohio, Public Power
System Improvement First Mortgage Revenue
Refunding Bonds, Series 1991 B, 7.00%,
11/15/2017 $ 7,276,990 $0 $ 7,276,990
--------- --------- -----------
10,564,080 0 10,564,080
--------- --------- -----------
Oregon 0.4%
1,000,000 0 1,000,000 State of Oregon, Housing, Educational and
Cultural Facilities Authority, Revenue
Bonds, (Reed College Project), 1991
Series A, 6.75%, 7/01/2021 1,051,550 0 1,051,550
--------- --------- -----------
Pennsylvania 1.4%
3,000,000 0 3,000,000 Pennsylvania Economic Development
Financing Authority, Resource Recovery
Revenue Bonds, (Colver Project), Series
1994D, 7.05%, 12/01/2010 3,155,850 0 3,155,850
1,000,000 0 1,000,000 Montgomery County Industrial Development
Authority, Pollution Control Revenue
Refunding Bonds, 1991 Series A,
(Philadelphia Electric Co. Project),
Subject to AMT, 7.60%, 4/01/2021 1,063,400 0 1,063,400
--------- --------- -----------
4,219,250 0 4,219,250
--------- --------- -----------
South Carolina 0.8%
1,000,000 0 1,000,000 City of Charleston, South Carolina,
Waterworks and Sewer System Revenue
Bonds, Series 1988, Pre-Refunded to
1/1/98 @ 100, 7.20%, 1/01/2019 1,068,890 0 1,068,890
1,310,000 0 1,310,000 South Carolina Public Service Authority,
(Santee Cooper), Electric System
Expansion Revenue Bonds, 1988 Refunding
Series A, 7.875%, 7/01/2021 1,360,527 0 1,360,527
--------- --------- -----------
2,429,417 0 2,429,417
--------- --------- -----------
Tennessee 3.1%
2,250,000 0 2,250,000 City of Memphis, Tennessee, Electric
System Revenue Refunding Bonds, Series of
1992, 6.00%, 1/01/2006 2,405,318 0 2,405,318
500,000 0 500,000 City of Memphis, Tennessee, Electric
System Revenue Bonds, Series of 1991,
6.75%, 1/01/2011 550,205 0 550,205
11
<PAGE>
State Street Research Tax-Exempt Fund
Pro Forma Combining Portfolio of Investments
June 30, 1995
(Unaudited)
Principal Amount Description Value
----------------------------------- ----------------------------------------- -------------------------------------
California Pro Forma California Pro Forma
Tax-Exempt Tax-Free Combined Tax-Exempt Tax-Free Combined
--------- --------- --------- ----------------------------------------- --------- --------- -----------
Tennessee (cont'd)
$3,000,000 $0 $3,000,000 City of Memphis, Tennessee, Water
Division Revenue Refunding Bonds, Series
of 1992-A, 6.00%, 1/01/2012 $ 3,072,720 $0 $ 3,072,720
2,500,000 0 2,500,000 Chattanooga--Hamilton County Hospital
Authority, Hospital Revenue and Refunding
Bonds (Erlanger Medical Center) Series
1993, FSA Insured, 5.50%, 10/01/2013 2,367,575 0 2,367,575
1,000,000 0 1,000,000 The Health and Educational Facilities
Board of the Metropolitan Government of
Nashville and Davidson County, Tennessee,
Vanderbilt University, 1992 Series A,
6.00%, 10/01/2022 1,004,810 0 1,004,810
--------- --------- -----------
9,400,628 0 9,400,628
--------- --------- -----------
Texas 4.6%
2,000,000 0 2,000,000 City of Austin, Texas, Combined Utility
Systems Revenue Refunding Bonds, Series
1993, 5.80%, 11/15/2006 2,053,420 0 2,053,420
1,500,000 0 1,500,000 Houston Independent School District,
Texas, Limited Tax School House Bonds,
Series 1991, PSFG Guaranteed,
Pre-Refunded to 8/15/2001 @ 100, 6.375%,
8/15/2011 1,627,830 0 1,627,830
1,000,000 0 1,000,000 Texas Municipal Power Agency, Refunding
Revenue Bonds, Series 1991A, AMBAC
Insured, 6.75%, 9/01/2012 1,080,910 0 1,080,910
5,750,000 0 5,750,000 Harris County, Texas, General Obligation,
Unlimited Tax, Refunding and Toll Road
Subordinate Lien Revenue Bonds, Series
1991, 6.75%, 8/01/2014 6,146,750 0 6,146,750
2,975,000 0 2,975,000 Harris County, Texas, General Obligation,
Unlimited Tax, Refunding and Toll Road
Subordinate Lien Revenue Bonds, 6.125%,
6/15/2020 3,011,801 0 3,011,801
--------- --------- -----------
13,920,711 0 13,920,711
--------- --------- -----------
Vermont 1.7%
5,000,000 0 5,000,000 City of Burlington, Vermont, Electric
System Revenue Bonds, 1992 Series A, MBIA
Insured, 6.25%, 7/01/2014 5,169,900 0 5,169,900
--------- --------- -----------
12
<PAGE>
State Street Research Tax-Exempt Fund
Pro Forma Combining Portfolio of Investments
June 30, 1995
(Unaudited)
Principal Amount Description Value
----------------------------------- ----------------------------------------- -------------------------------------
California Pro Forma California Pro Forma
Tax-Exempt Tax-Free Combined Tax-Exempt Tax-Free Combined
--------- --------- --------- ----------------------------------------- --------- --------- -----------
Virginia 3.3%
$1,500,000 $ 0 $1,500,000 Commonwealth of Virginia, General
Obligation, Unlimited Tax Refunding
Bonds, Series B, 5.00%, 6/01/2011 $ 1,401,480 $ 0 $ 1,401,480
3,250,000 0 3,250,000 The Rector and Visitors of the University
of Virginia, General Revenue Pledge
Bonds, Series 1993B, 5.375%, 6/01/2014 3,117,660 0 3,117,660
1,715,000 0 1,715,000 State of Virginia Transportation Board,
Northern Virginia Transportation
District, Series C, 5.25%, 5/15/2019 1,554,819 0 1,554,819
1,750,000 0 1,750,000 City of Roanoke, Virginia, General
Obligation Public Improvement Bonds,
Series 1994, 5.25%, 8/01/2019 1,594,232 0 1,594,232
2,000,000 0 2,000,000 Prince William County Service Authority,
(Virginia), Water and Sewer System
Revenue Bonds, Series 1991, FGIC Insured,
6.50%, 7/01/2021 2,216,220 0 2,216,220
--------- --------- -----------
9,884,411 0 9,884,411
--------- --------- -----------
Wisconsin 1.5%
4,250,000 0 4,250,000 Wisconsin Housing and Economic
Development Authority, Home Ownership
Revenue Bonds, 1992 Series 2, Subject to
AMT, 6.875%, 9/01/2024 4,371,677 0 4,371,677
--------- --------- -----------
Total Municipal Bonds (Cost $254,539,105,
$27,436,238 and $281,975,343) 259,683,682 28,542,188 288,225,870
--------- --------- -----------
Short-Term Obligations
2.0%
1,600,000 0 1,600,000 Massachusetts General Obligation Bonds,
Series B, 4.40%, 12/01/1997++ 1,600,000 0 1,600,000
1,000,000 0 1,000,000 The Wake County Industrial Facilities and
Pollution Control Financing Authority,
Pollution Control Revenue Bonds,
(Carolina Power & Light Co. Project),
Series 1987, 3.00%, 3/01/2017++ 1,000,000 0 1,000,000
500,000 0 500,000 California Pollution Control Financing
Authority, Resource Recovery Revenue
Bonds, (Burney Forest Products Project),
1988 Series A, Letter of Credit, National
Westminster Bank, 4.01%, 9/01/2020++ 500,000 0 500,000
0 400,000 400,000 California Pollution Control Financing
Authority (Burney Forest Products
Project), Revenue Bonds, 3.65%,
9/01/2020++ 0 400,000 400,000
13
<PAGE>
State Street Research Tax-Exempt Fund
Pro Forma Combining Portfolio of Investments
June 30, 1995
(Unaudited)
Principal Amount Description Value
----------------------------------- ----------------------------------------- -------------------------------------
California Pro Forma California Pro Forma
Tax-Exempt Tax-Free Combined Tax-Exempt Tax-Free Combined
--------- --------- --------- ----------------------------------------- --------- --------- -----------
Short-Term Obligations (cont'd)
$ 0 $200,000 $200,000 Georgia Power Company, Pollution Control
Revenue Bonds, 3.30%, 7/01/2024++ $ 0 $ 200,000 $ 200,000
500,000 0 500,000 Los Angeles, California, Airports, Series
E, 3.20%, 12/01/2024++ 500,000 0 500,000
600,000 300,000 900,000 New York State Energy Research and
Development Authority, Pollution Control
Refunding Revenue Bonds, (New York State
Electric and Gas Corporation Project),
1994 Series C, 3.95%, 6/01/2029++ 600,000 300,000 900,000
800,000 0 800,000 State of Delaware, Delmarva Power & Light
Co., 4.50%, 10/01/2029++ 800,000 0 800,000
--------- --------- -----------
Total Short-Term Obligations (Cost
$5,000,000, $900,000 and $5,900,000) 5,000,000 900,000 5,900,000
--------- --------- -----------
Total Investments (Cost $259,539,105,
$28,336,238 and $287,875,343) 264,683,682 29,442,188 294,125,870
Cash and Other Assets, Less Liabilities 7,570,873 (818,888) 6,751,985
--------- --------- -----------
Net Assets $272,254,555 $28,623,300 $300,877,855
========= ========= ===========
</TABLE>
++Interest rates on these obligations may change daily
Futures contracts open at June 30, 1995 are as follows:
<TABLE>
<CAPTION>
Expiration Unrealized
Type Par Value Month Depreciation
-------------------------- --------- --------------- -------------
<S> <C> <C> <C>
Municipal Bond Index $5,000,000 September, 1995 $(206,219)
</TABLE>
14
<PAGE>
State Street Research Tax-Exempt Fund
Pro Forma Combining Statement of Assets and Liabilities
June 30, 1995
(Unaudited)
<TABLE>
<CAPTION>
California Pro Forma
Tax-Exempt Tax-Free Combined
------------ ------------ --------------
<S> <C> <C> <C>
Assets
Investments, at value (Cost $259,539,105, $28,336,238 and $287,875,343) $264,683,682 $29,442,188 $294,125,870
Cash 36,548 32,447 68,995
Interest receivable 5,569,254 544,827 6,114,081
Receivable for securities sold 3,988,196 883,409 4,871,605
Receivable for fund shares sold 65,358 2,621 67,979
Receivable from Distributor 0 13,547 13,547
Other assets 93,298 1,483 94,781
------------ ------------ --------------
Total assets 274,436,336 30,920,522 305,356,858
Liabilities
Payable for securities purchased 1,113,989 2,045,262 3,159,251
Dividends payable 312,505 50,614 363,119
Accrued transfer agent and shareholder services 233,535 25,206 258,741
Payable for fund shares redeemed 221,767 98,682 320,449
Accrued management fee 125,656 13,168 138,824
Accrued distribution fee 81,204 5,146 86,350
Accrued trustees' fees 9,128 0 9,128
Other accrued expenses 83,997 59,144 143,141
------------ ------------ --------------
Total liabilities 2,181,781 2,297,222 4,479,003
------------ ------------ --------------
Net Assets $272,254,555 $28,623,300 $300,877,855
============ ============ ==============
Net Assets consist of:
Undistributed net investment income $ 793,577 $ 45,652 $ 839,229
Unrealized appreciation of investments 5,144,577 1,105,950 6,250,527
Unrealized depreciation of futures contracts (206,219) 0 (206,219)
Accumulated net realized loss (6,235,092) (1,012,260) (7,247,352)
Shares of beneficial interest 272,757,712 28,483,958 301,241,670
------------ ------------ --------------
$272,254,555 $28,623,300 $300,877,855
============ ============ ==============
Net Asset Value and redemption price per share of Class A shares $7.82 $7.82 $7.82
($233,411,230/ 29,860,742, $8,079,494/1,032,698 and $241,490,724/
30,893,925)
============ ============ ==============
Maximum Offering Price per share of Class A shares ($7.82/ .955, $7.82/ $8.19 $8.19 $8.19
.955 and $7.82/ .955 )
============ ============ ==============
Net Asset Value and offering price per share of Class B shares* $7.81 $7.83 $7.81
($37,346,620/4,779,340, $3,479,279/ 444,447 and $40,825,899/5,224,830)
============ ============ ==============
Net Asset Value, offering price and redemption price per share of Class C $7.80 $7.83 $7.80
shares ($365,380/46,835, $16,361,322/2,088,885 and $16,726,702/ 2,144,440)
============ ============ ==============
Net Asset Value and offering price per share of Class D shares* $7.81 $7.83 $7.81
($1,131,325/144,825, $703,205/89,776 and $1,834,530/234,864
============ ============ ==============
</TABLE>
* Redemption price per share for Class B and Class D is equal to net asset
value less any applicable contingent deferred sales charge.
15
<PAGE>
State Street Research Tax-Exempt Fund
Pro Forma Combining Statement of Operations
For the year ended June 30, 1995
(Unaudited)
<TABLE>
<CAPTION>
California Pro Forma Pro Forma
Tax-Exempt Tax-Free Adjustments Combined
-------------- -------------- -------------- ----------------
<S> <C> <C> <C> <C>
Investment Income
Interest $18,280,720 $1,901,606 $20,182,326
Expenses
Management fee 1,572,689 164,716 1,737,405
Transfer agent and shareholder services 731,657 97,895 829,552
Custodian fee 164,698 83,747 (80,752) 167,693
Registration fees 22,088 11,007 (11,007)( (1)) 22,088
Reports to shareholders 66,787 31,072 (21,072)( (1)) 76,787
Audit fees 30,504 28,181 (28,181)( (1)) 30,504
Trustees' fees 36,235 12,739 (12,739)( (1)) 36,235
Legal fees 0 13,645 (5,645)( (1)) 8,000
Distribution fees--Class A 619,885 18,718 638,603
Distribution fees--Class B 366,181 32,505 398,686
Distribution fees--Class D 10,027 6,591 16,618
Amortization of organization costs 0 53 53
Miscellaneous 13,416 3,145 (2,145) 14,416
-------------- -------------- -------------- ----------------
Total expenses 3,634,167 504,014 (161,541) 3,976,640
Expenses borne by the adviser 0 (191,638) 191,638( (2)) 0
-------------- -------------- -------------- ----------------
Net expenses 3,634,167 312,376 30,097 3,976,640
-------------- -------------- -------------- ----------------
Net investment income 14,646,553 1,589,230 (30,097) 16,205,686
-------------- -------------- -------------- ----------------
Net realized loss on investments (913,513) (455,931) (1,369,444)
Net realized loss on forward contracts (9,002) 0 (9,002)
-------------- -------------- -------------- ----------------
(922,515) (455,931) (1,378,446)
Net unrealized appreciation of investments 2,621,516 878,716 3,500,232
Net unrealized depreciation of forward contracts (259,719) 0 (259,719)
-------------- -------------- -------------- ----------------
2,361,797 878,716 3,240,513
-------------- -------------- -------------- ----------------
Net gain on investments and futures contracts 1,439,282 422,785 1,862,067
-------------- -------------- -------------- ----------------
Net increase in net assets resulting from $16,085,835 $2,012,015 (30,097)
operations $18,067,753
============== ============== ============== ================
</TABLE>
((1)) Adjustments reflect expected savings when the two funds combine.
((2)) The Distributor does not anticipate any voluntary assumption of fees or
expenses after the merger.
16
<PAGE>
State Street Research Tax-Exempt Fund
Notes to Pro Forma Statements
For the year ended June 30, 1995
(Unaudited)
1. Basis of Combination
The unaudited Pro Forma Combining Portfolio of Investments, the Pro Forma
Combining Statement of Assets and Liabilities and the Pro Forma Combining
Statement of Operations reflect the accounts of State Street Research
Tax-Exempt Fund ("Tax-Exempt") and State Street Research California Tax-Free
Fund ("California Tax-Free") at and for the year ended June 30, 1995. These
statements have been derived from the semiannual and annual reports for
Tax-Exempt and California Tax-Free, dated June 30, 1994, December 31, 1994
and June 30, 1995.
The pro forma statements give effect to the proposed transfer of the assets
and stated liabilities of California Tax-Free to Tax-Exempt in exchange for
shares of Tax-Exempt under generally accepted accounting principles. The
historical cost of investment securities will be carried forward to the
surviving entity and the results of operations of Tax-Exempt for
pre-combination periods will not be restated. The pro forma statements do not
reflect the expenses of either fund in carrying out its obligations under the
Agreement and Plan of Reorganization and Liquidation.
The Pro Forma Combining Portfolio of Investments, the Pro Forma Combining
Statement of Assets and Liabilities and the Pro Forma Combining Statement of
Operations should be read in conjunction with the historical financial
statements of the funds included or incorporated by reference in the
Statement of Additional Information.
2. Portfolio Valuation
Securities are valued by a pricing service, which utilizes market
transactions, quotations from dealers, and various relationships among
securities in determining value. Securities for which there is no such
valuation, if any, are valued at their fair value as determined in accordance
with established methods consistently applied.
3. Capital Shares
The pro forma net asset value per share assumes the issuance of additional
shares of Tax-Exempt which would have been issued at June 30, 1995 in
connection with the proposed reorganization. The pro forma number of shares
outstanding of 30,893,925, 5,224,830, 2,144,440 and 234,864 in each of Class
A, Class B, Class C and Class D shares, respectively, includes 1,033,183,
445,490, 2,097,605 and 90,039 additional shares from each of Class A, Class
B, Class C and Class D shares, respectively, all of which are assumed to be
issued in the reorganization at June 30, 1995.
17
<PAGE>
STATE STREET RESEARCH TAX-EXEMPT TRUST
PART C
OTHER INFORMATION
Item 15. Indemnification
The response to this item is incorporated by reference to Part A
of each Joint Proxy Statement/Prospectus in this Registration
Statement under the caption "Comparative Information on Shareholder
Rights--Liability of Trustees and Officers."
Item 16. Exhibits
(1)(a) Second Amended and Restated Master Trust Agreement (16)
(1)(b) Amendment No. 1 to Second Amended and Restated
Master Trust Agreement (17)
(1)(c) Form of Amendment No. 2 to Second Amended and Restated
Master Trust Agreement (18)
(2) By-Laws of the Registrant (1)
(3) Not applicable
(4) Agreement and Plan of Reorganization and Liquidation
(Included as Exhibit A to each Joint Proxy
Statement/Prospectus contained in Part A of this
Registration Statement)
(5) Not applicable
(6)(a) Advisory Agreement with MetLife - State Street
Investment Services, Inc. (2)*
(6)(b) Transfer and Assumption of Responsibilities and
Rights relating to the Advisory Agreement (13)
(6)(c) Letter Agreement with respect to the Advisory Agreement
relating to State Street Research California Tax-Free
Fund (10)**
(6)(d) Amended and Restated Letter Agreement with respect to
the Advisory Agreement relating to State Street Research
Florida Tax-Free Fund and State Street Research
Pennsylvania Tax-Free Fund (16)
(7)(a) Distribution Agreement with MetLife - State
Street Investment Services, Inc. (2)**
(7)(b) Form of Selected Dealer Agreement (18)
(7)(c) Form of Bank and Bank Affiliated Broker-Dealer
Agreement (18)
(7)(d) Letter Agreement with respect to the Distribution
Agreement relating to State Street Research California
Tax-Free Fund (10)**
(7)(e) Letter Agreement with respect to the Distribution
Agreement relating to State Street Research Florida
Tax-Free Fund and State Street Research
Pennsylvania Tax-Free Fund (14)
C-1
<PAGE>
(8) Not applicable
(9)(a) Custodian Contract with State Street Bank and
Trust Company (2)
(9)(b) Amendment to the Custodian Contract with State
Street Bank and Trust Company (5)
(9)(c) Letter Agreement with respect to Custodian Contract
relating to State Street Research California Tax-Free Fund
(10)**
(9)(d) Letter Agreement with respect to Custodian
Contract relating to State Street Research Florida Tax-Free
Fund and State Street Research Pennsylvania Tax-Free Fund
(16)
(10) First Amended and Restated Plan of Distribution Pursuant
to Rule 12b-1 (16)
(11) Opinion and Consent of Goodwin, Procter & Hoar with
respect to legality of shares being issued
(12)(a) Opinion and Consent of Goodwin, Procter & Hoar with
respect to tax matters relating to acquisition of State
Street Research California Tax-Free Fund
(12)(b) Opinion and Consent of Goodwin, Procter & Hoar with
respect to tax matters relating to acquisition of State
Street Research Florida Tax-Free Fund
(12)(c) Opinion and Consent of Goodwin, Procter & Hoar with
respect to tax matters relating to acquisition of State
Street Research Pennsylvania Tax-Free Fund
(13) Not applicable
(14) Consent of Independent Accountants
(15) Not applicable
(16) Powers of Attorney
(17)(a) Form of Proxy Card for State Street Research California
Tax-Free Fund
(17)(b) Form of Proxy Card for State Street Research Florida
Tax-Free Fund
(17)(c) Form of Proxy Card for State Street Research Pennsylvania
Tax-Free Fund
(17)(d) Registrant's Declaration pursuant to Rule 24f-2 is
incorporated by reference to its Initial Registration
Statement of January 15, 1986
- -------------------------
* MetLife - State Street Investment Services, Inc. changed its name to
State Street Financial Services, Inc. effective as of June 18, 1992,
and subsequently changed its name to State Street Research Investment
Services, Inc. effective October 28, 1992. Documents in this listing
of Exhibits which were effective prior to the most recent name change
accordingly also refer to MetLife - State Street Investment Services,
Inc. or State Street Financial Services, Inc.
** The series of the Registrant have changed their names at various times.
Documents in this listing of Exhibits which were effective prior to the
most recent name change accordingly refer to a former name of such series.
C-2
<PAGE>
Filed as part of the Registration Statement as noted below and incorporated
herein by reference:
Footnote Securities Act of 1933
Reference Registration/Amendment Dated Filed
1 Initial Registration Statement January 15, 1986
on Form N-1A
2 Pre-Effective Amendment No. 1 July 25, 1986
3 Post-Effective Amendment No. 3 February 27, 1987
4 Post-Effective Amendment No. 4 April 15, 1988
5 Post-Effective Amendment No. 5 March 31, 1989
6 Post-Effective Amendment No. 6 May 3, 1989
7 Post-Effective Amendment No. 7 June 30, 1989
8 Post-Effective Amendment No. 8 December 22, 1989
9 Post-Effective Amendment No. 9 April 27, 1990
10 Post-Effective Amendment No. 10 April 30, 1991
11 Post-Effective Amendment No. 11 February 28, 1992
12 Post-Effective Amendment No. 12 April 29, 1992
13 Post-Effective Amendment No. 13 December 8, 1992
14 Post-Effective Amendment No. 14 March 26, 1993
15 Post-Effective Amendment No. 15 April 6, 1993
16 Post-Effective Amendment No. 16 February 10, 1994
17 Post-Effective Amendment No. 17 April 29, 1994
18 Post-Effective Amendment No. 18 April 27, 1995
Item 17. Undertakings
(1) The undersigned Registrant agrees that prior to any public
reoffering of the securities registered through the use of a
prospectus which is a part of this Registration Statement by any
person or party who is deemed to be an underwriter within the
meaning of Rule 145(c) of the Securities Act of 1933, the reoffering
prospectus will contain the information called for by the applicable
registration form for reofferings by persons who may be deemed
underwriters, in addition to the information called for by the other
items of the applicable form.
(2) The undersigned Registrant agrees that every prospectus that is
filed under paragraph (1) above will be filed as a part of an
amendment to the Registration Statement and will not be used until
the amendment is effective, and that, in determining any liability
under the Securities Act of 1933, each post-effective amendment
shall be deemed to be a new registration statement for the
securities offered therein, and the offering of the securities at
that time shall be deemed to be the initial bona fide offering of
them.
C-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Registration Statement on Form N-14 to be signed on its
behalf by the undersigned, thereto duly authorized, in the City of Boston and
the Commonwealth of Massachusetts, on this 24th day of August, 1995.
STATE STREET RESEARCH TAX-EXEMPT TRUST
By: *
----------------------
Ralph F. Verni
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed on the above date by the following
persons in the capacities indicated.
Signature Title
* Trustee, Chairman of the Board
------------------ and Chief Executive Officer
Ralph F. Verni (Principal Executive Officer )
* Treasurer (Principal
------------------ Financial and Accounting Officer)
Gerard P. Maus
<PAGE>
Signature Title
* Trustee
------------------
Edward M. Lamont
* Trustee
------------------
Robert A. Lawrence
* Trustee
------------------
Dean O. Morton
* Trustee
------------------
Thomas L. Phillips
* Trustee
------------------
Toby Rosenblatt
* Trustee
------------------
Michael S. Scott Morton
* Trustee
------------------
Jeptha H. Wade
By: /s/ Francis J. McNamara, III
------------------
(Attorney-in-Fact under powers
of attorney filed herewith.)
203641.c1
<PAGE>
1933 Act Registration No. 33-_____
Investment Company Act of 1940 File No. 811-4558
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------
FORM N-14
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No. __ [ ]
Post-Effective Amendment No. __ [ ]
--------------------
STATE STREET RESEARCH TAX-EXEMPT TRUST
(Exact Name of Registrant as Specified in Declaration of Trust)
--------------------
EXHIBITS
--------------------
================================================================================
<PAGE>
INDEX TO EXHIBITS
Sequential
Page
Exhibit Number
Number
(11) Opinion and Consent of Goodwin, Procter & Hoar
with respect to legality of shares being issued
(12) (a) Opinion and Consent of Goodwin, Procter & Hoar with
respect to tax matters relating to acquisition of State
Street Research California Tax-Free Fund
(12) (b) Opinion and Consent of Goodwin, Procter & Hoar with
respect to tax matters relating to acquisition of State
Street Research Florida Tax-Free Fund
(12) (c) Opinion and Consent of Goodwin, Procter & Hoar with
respect to tax matters relating to acquisition of State
Street Research Pennsylvania Tax-Free Fund
(14) Consent of Independent Accountants
(16) Powers of Attorney
(17) (a) Form of Proxy Card for State Street Research
California Tax-Free Fund
(b) Form of Proxy Card for State Street Research
Florida Tax-Free Fund
(c) Form of Proxy Card for State Street Research
Pennsylvania Tax-Free Fund
203318.c1
Goodwin, Procter letterhead
August 18, 1995
State Street Research Tax-Exempt Trust
One Financial Center
Boston, Massachusetts 02111
Re: Acquisition by State Street Research Tax-Exempt Fund, a series of
State Street Research Tax-Exempt Trust, of Assets of State Street
Research California Tax-Free Fund, State Street Research Florida Tax-
Free Fund and State Street Research Pennsylvania Tax-Free Fund, each
a series of State Street Research Tax-Exempt Trust
Ladies and Gentlemen:
You have requested our opinion as counsel to State Street Research
Tax-Exempt Trust (the "Trust"), a business trust organized under the laws of the
Commonwealth of Massachusetts, in connection with (i) the transfer of all of the
assets of State Street Research California Tax-Free Fund (the "California
Tax-Free Fund"), a series of the Trust, to the State Street Research Tax-Exempt
Fund (the "Acquiring Fund"), another series of the Trust, in exchange for shares
of beneficial interest of the Acquiring Fund (the "California Shares") and the
assumption by the Acquiring Fund of certain liabilities of the California
Tax-Free Fund, pursuant to an Agreement and Plan of Reorganization and
Liquidation (the "California Agreement") by the Trust, on behalf of the
Acquiring Fund and the California Tax-Free Fund; (ii) the transfer of all of the
assets of State Street Research Florida Tax-Free Fund (the "Florida Tax-Free
Fund"), a series of the Trust, to the Florida Tax-Free Fund in exchange for
shares of beneficial interest of the Acquiring Fund (the "Florida Shares") and
the assumption by the Acquiring Fund of certain liabilities of the Florida
Tax-Free Fund, pursuant to an Agreement and Plan of Reorganization and
Liquidation (the "Florida Agreement") by the Trust, on behalf of the Acquiring
Fund and the Florida Tax-Free Fund; and (iii) the transfer of all of the assets
of State Street Research Pennsylvania Tax-Free Fund (the "Pennsylvania Tax-Free
Fund"), a series of the Trust, to the Acquiring Fund in exchange for shares of
beneficial interest of the Acquiring Fund (the "Pennsylvania Shares," and
together with the California Shares and the Florida Shares, the "Shares") and
the assumption by the Acquiring Fund of certain liabilities of the Pennsylvania
Tax-Free Fund, pursuant to an Agreement and Plan of Reorganization and
Liquidation (the "Pennsylvania Agreement," and together with the California
Agreement and the Florida Agreement, the "Agreements") by the Trust, on behalf
of the Acquiring Fund and the Pennsylvania Tax-Free Fund.
<PAGE>
State Street Research Tax-Exempt Trust
August 18, 1995
Page 2
In connection with this opinion, we have examined:
1. the Agreements;
2. the Second Amended and Restated Master Trust Agreement of the Trust,
dated as of June 5, 1993, as amended to date, certified by the
Assistant Secretary of the Trust (the "Declaration of Trust");
3. the By-laws of the Trust, as amended to date, certified by the
Assistant Secretary of the Trust;
4. a certificate as of a recent date of the Secretary of State of the
Commonwealth of Massachusetts as to the good standing of the Trust and
the authority of the Trust to exercise in the Commonwealth all of the
powers recited in the Declaration of Trust and to transact business in
the Commonwealth; and
5. a certificate of the Assistant Secretary of the Trust as to, among
other things, actions of the trustees of the Trust relating to the
adoption and approval of the Agreements.
As to matters of fact underlying the opinions expressed herein, we have
relied exclusively upon certificates of certain public officials and officers of
the Trust and upon the representations and warranties of the Trust contained in
the Agreements. We have assumed the authenticity of all documents submitted to
us as originals, the genuineness of all signatures, the legal capacity of
natural persons and the conformity to the originals of all documents submitted
to us as copies.
We have made such examination of Massachusetts law as in our judgment is
necessary and appropriate for the purposes of this opinion. We do not purport to
be experts in the laws of any jurisdiction other than the laws of the
Commonwealth of Massachusetts and our opinions expressed herein are limited
solely to the laws of the Commonwealth of Massachusetts.
Anything in this opinion to the contrary notwithstanding, we render or
imply no opinion with respect to compliance with any applicable securities or
anti-fraud statutes, rules, regulations or other similar laws of any state
(including Massachusetts) or the United States of America. In rendering the
opinions herein, we assume that there will be no material changes in the facts
and conditions on which we base such opinions between the date hereof and the
time of issuance of the Shares pursuant to the Agreements.
<PAGE>
State Street Research Tax-Exempt Trust
August 18, 1995
Page 3
Based upon and subject to the foregoing, we are of the opinion that all
necessary Trust action precedent to the issuance of the California Shares
pursuant to the California Agreement has been duly taken; that all necessary
Trust action precedent to the issuance of the Florida Shares pursuant to the
Florida Agreement has been duly taken; and that all necessary Trust action
precedent to the issuance of the Pennsylvania Shares pursuant to the
Pennsylvania Agreement has been duly taken. We are further of the opinion that
the California Shares when issued in accordance with the terms of the California
Agreement will be validly issued, fully paid and nonassessable by the Trust;
that the Florida Shares when issued in accordance with the terms of the Florida
Agreement will be validly issued, fully paid and nonaccessible by the Trust; and
that the Pennsylvania Shares when issued in accordance with the terms of the
Pennsylvania Agreement will be validly issued, fully paid and nonaccessible by
the Trust.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement of the Trust on Form N-14 pursuant to which the Shares
are to be registered under the Securities Act of 1933, as amended. This opinion
is issued to, and may be relied upon only by, you in connection with the
registration of the Shares and this opinion may not be used by any other person
or for any other purpose without our prior written consent.
Very truly yours,
/s/Goodwin, Procter & Hoar
GOODWIN, PROCTER & HOAR
202404.c1
Goodwin, Procter letterhead
August 18, 1995
State Street Research Tax-Exempt Trust
One Financial Center
Boston, Massachusetts 02111
Ladies and Gentlemen:
We have acted as counsel to State Street Research Tax-Exempt Trust (the
"Trust") in connection with the acquisition of the assets of a series of the
Trust by another series of the Trust pursuant to an Agreement and Plan of
Reorganization and Liquidation (the "Plan") described in the prospectus and
proxy statement relating to the Plan included as part of the Registration
Statement on Form N-14 of the Trust (the "Registration Statement") to be filed
with the Securities and Exchange Commission under the Securities Act of 1933, as
amended. You have requested our opinion as to certain federal income tax
consequences of the transactions contemplated by the Plan.
In rendering this opinion, we have reviewed such documents and materials
as we have considered necessary for the purpose of rendering this opinion. In
our examination of the foregoing, we have assumed that such documents as yet
unexecuted will, when executed, conform to the proposed forms of such documents
that we have examined. We have made inquiry as to the underlying facts which we
considered to be relevant to the conclusions set forth in this letter. The
opinions expressed in this letter are based upon certain factual statements
relating to the Trust set forth in the Registration Statement and certain
assumptions set forth below. We expect that such assumptions will be confirmed
to us in representation letters from the Trust dated as of the Closing Date, and
the opinions set forth herein are expressly conditioned on the receipt of such
representation letters from the Trust. Capitalized terms used herein and not
otherwise defined shall have the meanings given them in the Plan.
The discussion and conclusions set forth below are based upon the
Internal Revenue Code of 1986, as amended (the "Code"),(1) the Treasury
Regulations and existing administrative and judicial interpretations thereof,
all of which are subject to change. No assurance can therefore be given that the
federal income tax consequences described below will not be altered in the
future, and we do not assume responsibility to provide notice or advice to any
person or entity regarding any such changes or altered tax consequences.
- --------
(1) All section references contained herein are to the Code.
<PAGE>
State Street Research Tax-Exempt Trust
August 18, 1995
Page 2
I. Background and Facts.
The Trust is an open-end management investment company registered under
the Investment Company Act of 1940, as amended (the "Act"). The Trust consists
of a number of separate portfolios of securities, two of which are the subject
of the Plan: State Street Research Tax-Exempt Fund (the "Acquiring Fund") and
State Street Research California Tax-Free Fund (the "Acquired Fund"). The Trust
is organized as a Massachusetts business trust. The Trust operates as a series
company pursuant to Rule 18f-2 under the Act.
The Acquired Fund owns securities which are of the character in which the
Acquiring Fund is permitted to invest. The investment objectives of the Acquired
Fund and the Acquiring Fund are generally the same.
II. The Plan of Reorganization.
Subject to the requisite approval of the shareholders of the Acquired
Fund and to the other terms and conditions set forth in the Plan, the Acquired
Fund shall transfer to the Acquiring Fund, and the Acquiring Fund shall acquire
from the Acquired Fund, at the Closing Date, all of the Assets of the Acquired
Fund in exchange for that number of shares of the Acquiring Fund determined in
accordance with Section 2 of the Plan ("Acquiring Fund Shares") and the
assumption by Acquiring Fund of the Assumed Liabilities of the Acquired Fund.
There are no dissenters' rights in any of the foregoing transactions, and
no cash will be exchanged for shares of beneficial interest of the Acquired Fund
in lieu of fractional Acquiring Fund Shares.
As soon after the Closing Date as is conveniently practicable, the Trust
will effect the liquidation and termination of the Acquired Fund in the manner
provided in its Master Trust Agreement and in accordance with applicable law,
and on and after the Closing Date it shall not conduct any business on behalf of
the Acquired Fund except in connection with its liquidation and termination. The
Acquired Fund shall distribute pro rata to its shareholders of record determined
as of the close of business on the Valuation Date (the "Acquired Fund's
Shareholders") the Acquiring Fund Shares received by the Acquired Fund pursuant
to Section 1 of the Plan. Shareholders of the Acquired Fund's Class A, Class B,
Class C and Class D shares shall receive only shares of the identical Class of
shares of the Acquiring Fund. Such liquidation and distribution will be
accomplished by the transfer of the Acquiring Fund
<PAGE>
State Street Research Tax-Exempt Trust
August 18, 1995
Page 3
Shares then credited to the account of the Acquired Fund on the books of
the Acquiring Fund to open accounts on the share records of the Acquiring Fund
in the name of the Acquired Fund's Shareholders and representing the respective
pro rata number of the Acquiring Fund Shares due such shareholders. All issued
and outstanding shares of the Acquired Fund will simultaneously be canceled on
the books of the Acquired Fund, and as of the Closing each outstanding
certificate which prior to the Closing represented shares of the Acquired Fund
will be deemed for all purposes to evidence ownership of the number of Acquiring
Fund Shares issuable with respect thereto pursuant to the Reorganization.
The board of trustees of the Trust has concluded that the Reorganization
is in the best interests of the shareholders of the Acquired Fund and will not
result in the dilution of the interests of the existing shareholders of the
Acquired Fund. In making this determination, the Trustees considered a number of
factors, including the efficiencies resulting from combining the operations of
two separate funds with the same investment manager, the same multiple class
structure, the same sales load structure and similar investment objectives and
policies.
III. Assumptions.
We have made the following assumptions with respect to the
Reorganization:
(a) As of the Closing Date, the fair market value of the Acquiring Fund
Shares to which each shareholder of the Acquired Fund is entitled will
approximately equal the fair market value of the shares of the Acquired Fund
such shareholder will surrender.
(b) As of the Closing Date, there is no plan or intention by the
shareholders of the Acquired Fund who own five percent (5%) or more of its
stock, if any, and, to the best of the knowledge of the trustees of the Trust
there is no plan or intention on the part of the other shareholders of the
Acquired Fund, to sell, exchange or otherwise dispose of a number of Acquiring
Fund Shares received in the Reorganization that would reduce the Acquired Fund's
Shareholders' ownership of the Acquiring Fund Shares to a number of shares
having a value, as of the Closing Date, of less than fifty percent (50%) of the
value of all of the formerly outstanding shares of the Acquired Fund as of the
Closing Date. For purposes of this representation, shares of the Acquired Fund
exchanged for cash or other property, if any, will be treated as outstanding
shares of the Acquired Fund on the Closing Date. There are no dissenters'
rights, and the Acquiring Fund will not pay cash in lieu of fractional Acquiring
Fund Shares in connection with the Reorganization. Moreover, shares of the
Acquired Fund that are sold, redeemed or disposed of prior to the Reorganization
will be taken into account for purposes of this representation if such shares
are sold, redeemed or disposed of in
<PAGE>
State Street Research Tax-Exempt Trust
August 18, 1995
Page 4
anticipation of the Reorganization. Acquiring Fund Shares acquired by the
Acquired Fund's Shareholders that are sold, redeemed or disposed of after the
Reorganization but pursuant to a pre-arranged plan also will be taken into
account.
(c) The Acquiring Fund will acquire at least ninety percent (90%) of the
fair market value of the net assets and at least seventy percent (70%) of the
fair market value of the gross assets held by the Acquired Fund immediately
prior to the Reorganization. For purposes of this representation, amounts, if
any, paid by or on behalf of the Acquired Fund for reorganization expenses,
amounts, if any, paid by the Acquired Fund to shareholders who receive cash or
other property and all redemptions and distributions made by the Acquired Fund
immediately preceding or in contemplation of the transfer will be included as
assets of the Acquired Fund immediately prior to the Reorganization. However,
(i) regular distributions and redemptions occurring in the ordinary course of
the Acquired Fund's business as an open-end management investment company and
(ii) distributions made to shareholders of the Acquired Fund prior to the
Reorganization in order to pay out all of the Acquired Fund's (a) investment
company taxable income (before the deduction for dividends paid under
section 852(b)(2)(D)) and (b) net capital gain (after reduction for any capital
loss carryover) will be excluded.
(d) As of the Closing Date, the Acquiring Fund has no plan or intention
to redeem or otherwise reacquire any Acquiring Fund Shares issued in the
Reorganization except as required by the Act.
(e) As of the Closing Date, the Acquiring Fund has no plan or intention
to sell or otherwise dispose of any of the Assets of the Acquired Fund acquired
in the Reorganization, except for dispositions made in the ordinary course of
business or to maintain its qualification as a regulated investment company
under section 851.
(f) As soon as practicable after the Closing Date, the Acquired Fund
will, in pursuance of the Plan, distribute the Acquiring Fund Shares it receives
in the Reorganization and its other properties, if any, and thereupon will
cancel all of its issued and outstanding shares.
(g) In no event will the Acquiring Fund dispose of assets that in the
aggregate will result in less than fifty percent (50%) of the historic business
assets of the Acquired Fund being used in the business of the Acquiring Fund.
For purposes of this representation, assets disposed of by the Acquired Fund
prior to and in anticipation of the Reorganization will be treated as part of
the historic business assets of the Acquired Fund.
<PAGE>
State Street Research Tax-Exempt Trust
August 18, 1995
Page 5
(h) As of the Closing Date, there is no intercorporate indebtedness
existing between the Acquiring Fund and the Acquired Fund.
(i) Each of the Acquired Fund and the Acquiring Fund has qualified as a
separate association taxable as a corporation for federal income tax purposes
under section 851(h) in each taxable year and will qualify as such as of the
Closing Date.
(j) The Acquiring Fund has elected to be treated as a regulated
investment company under section 851, has qualified as such for each taxable
year and will qualify as such as of the Closing Date. The Acquired Fund has
elected to be treated as a regulated investment company under section 851, has
qualified as such for each taxable year and will qualify as such as of the
Closing Date. In order (i) to ensure continued qualification of the Acquired
Fund as a regulated investment company for federal income tax purposes and (ii)
to eliminate any tax liability of the Acquired Fund arising by reason of
undistributed investment company taxable income or net capital gain, the
Acquired Fund has declared or will declare and will pay to its shareholders of
record on or prior to the Closing Date a dividend or dividends that, together
with all previous such dividends, shall have the effect of distributing (i) all
of its investment company taxable income for the last full taxable year of the
Acquired Fund and any subsequent short taxable year ending on the Closing Date
(computed without regard to any deduction for dividends paid) and (ii) all of
its net capital gain realized in the final full taxable year of the Acquired
Fund and any subsequent short taxable year ending on the Closing Date (after
reduction for any capital loss carryover).
(k) The expenses incurred in connection with entering into and carrying
out the provision of the Plan of Reorganization, whether or not the
Reorganization is consummated, will be apportioned between State Street
Research Investment Services, Inc. (the "Distributor"), the distributor for each
of the Funds, and the Funds in a fair and equitable manner. The Distributor will
assume one-half of the expenses and the other half will be allocated to the
Acquiring Fund and the Acquired Fund in an appropriate manner on the basis of
identifiable direct costs or otherwise on the basis of relative net assets. All
such expenses will be solely and directly related to the Reorganization. No cash
will be transferred from the Acquiring Fund to the Acquired Fund for the
purposes of paying any reorganization expenses of the Acquired Fund. The
shareholders of the Acquired Fund and the Acquiring Fund will pay their own
expenses, if any, incurred in connection with the Reorganization.
<PAGE>
State Street Research Tax-Exempt Trust
August 18, 1995
Page 6
(l) As of the Closing Date, the Acquiring Fund does not own, directly or
indirectly, nor has it owned during the past five years, directly or indirectly,
any shares of the Acquired Fund.
(m) The liabilities of the Acquired Fund to be assumed by the Acquiring
Fund and the liabilities to which the transferred assets of the Acquired Fund
will be subject, if any, have been incurred by the Acquired Fund in the ordinary
course of its business.
(n) The fair market value of the assets of the Acquired Fund to be
transferred to the Acquiring Fund equals or exceeds the sum of the liabilities
to be assumed by the Acquiring Fund plus the amount of liabilities, if any, to
which the transferred assets will be subject.
(o) As of the Closing Date, neither the Acquiring Fund nor the Acquired
Fund is under the jurisdiction of a court in a Title 11 or a similar case within
the meaning of section 368(a)(3)(A).
(p) The Acquired Fund has not distributed and will not distribute to its
shareholders in pursuance of the Plan any "appreciated property" within the
meaning of section 361(c)(2).
(q) Shareholders of the Acquired Fund will not be in control (within the
meaning of section 368(a)(2)(H) and section 304(c) of the Acquiring Fund after
the Reorganization.
IV. Opinion.
Based upon the foregoing, it is our opinion with respect to the
Reorganization that:
(i) The transfer of all or substantially all of the Acquired Fund's
Assets solely in exchange for the Acquiring Fund Shares and the assumption by
the Acquiring Fund of the Assumed Liabilities of the Acquired Fund, and the
distribution of such Shares to the shareholders of the Acquired Fund, will
constitute a "reorganization" within the meaning of section 368(a)(1)(C). The
Acquiring Fund and the Acquired Fund are each a "party to a reorganization"
within the meaning of section 368(b).
(ii) No gain or loss will be recognized by the Acquired Fund on the
transfer of the Acquired Fund's Assets to the Acquiring Fund in exchange for the
Acquiring Fund Shares and the assumption by the Acquiring Fund of the Assumed
Liabilities of the Acquired Fund or upon the distribution of the Acquiring Fund
Shares to the Acquired Fund's Shareholders in exchange for their shares of the
Acquired Fund.
<PAGE>
State Street Research Tax-Exempt Trust
August 18, 1995
Page 7
(iii) The tax basis of the Acquired Fund's Assets acquired by the
Acquiring Fund will be the same to the Acquiring Fund as the tax basis of such
Assets to the Acquired Fund immediately prior to the Reorganization, and the
holding period of the Assets of the Acquired Fund in the hands of the Acquiring
Fund will include the period during which those Assets were held by the Acquired
Fund.
(iv) No gain or loss will be recognized by the Acquiring Fund upon the
receipt of the Assets of the Acquired Fund solely in exchange for the Acquiring
Fund Shares and the assumption by the Acquiring Fund of the Assumed Liabilities
of the Acquired Fund.
(v) No gain or loss will be recognized by shareholders of the Acquired
Fund upon the receipt of the Acquiring Fund Shares by such shareholders,
provided such shareholders receive solely Acquiring Fund Shares (including
fractional shares) in exchange for their Acquired Fund's Shares.
(vi) The aggregate tax basis of the Acquiring Fund Shares, including any
fractional shares, received by each shareholder of the Acquired Fund pursuant to
the Reorganization will be the same as the aggregate tax basis of the Acquired
Fund's Shares held by such shareholder immediately prior to the Reorganization,
and the holding period of the Acquiring Fund Shares, including fractional
shares, to be received by each shareholder of the Acquired Fund will include the
period during which the Acquired Fund's Shares exchanged therefor were held by
such shareholder (provided that the Acquired Fund's Shares were held as a
capital asset on the date of the Reorganization).
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the use of our name and any reference to our firm
in the Registration Statement or in the prospectus and proxy statement
constituting a part thereof.
Very truly yours,
/s/ Goodwin, Procter & Hoar
GOODWIN, PROCTER & HOAR
119901.b1
<PAGE>
Exhibit 12(b)
Goodwin, Procter letterhead
August 18, 1995
State Street Research Tax-Exempt Trust
One Financial Center
Boston, Massachusetts 02111
Ladies and Gentlemen:
We have acted as counsel to State Street Research Tax-Exempt Trust (the
"Trust") in connection with the acquisition of the assets of a series of the
Trust by another series of the Trust pursuant to an Agreement and Plan of
Reorganization and Liquidation (the "Plan") described in the prospectus and
proxy statement relating to the Plan included as part of the Registration
Statement on Form N-14 of the Trust (the "Registration Statement") to be filed
with the Securities and Exchange Commission under the Securities Act of 1933, as
amended. You have requested our opinion as to certain federal income tax
consequences of the transactions contemplated by the Plan.
In rendering this opinion, we have reviewed such documents and materials
as we have considered necessary for the purpose of rendering this opinion. In
our examination of the foregoing, we have assumed that such documents as yet
unexecuted will, when executed, conform to the proposed forms of such documents
that we have examined. We have made inquiry as to the underlying facts which we
considered to be relevant to the conclusions set forth in this letter. The
opinions expressed in this letter are based upon certain factual statements
relating to the Trust set forth in the Registration Statement and certain
assumptions set forth below. We expect that such assumptions will be confirmed
to us in representation letters from the Trust dated as of the Closing Date, and
the opinions set forth herein are expressly conditioned on the receipt of such
representation letters from the Trust. Capitalized terms used herein and not
otherwise defined shall have the meanings given them in the Plan.
The discussion and conclusions set forth below are based upon the
Internal Revenue Code of 1986, as amended (the "Code"), (1) the Treasury
Regulations and existing administrative and judicial interpretations thereof,
all of which are subject to change. No assurance can therefore be given that the
federal income tax consequences described below will not be altered in the
future, and we do not assume responsibility to provide notice or advice to any
person or entity regarding any such changes or altered tax consequences.
- --------
(1) All section references contained herein are to the Code.
<PAGE>
State Street Research Tax-Exempt Trust
August 18, 1995
Page 2
I. Background and Facts.
The Trust is an open-end management investment company registered under
the Investment Company Act of 1940, as amended (the "Act"). The Trust consists
of a number of separate portfolios of securities, two of which are the subject
of the Plan: State Street Research Tax-Exempt Fund (the "Acquiring Fund") and
State Street Research Florida Tax-Free Fund (the "Acquired Fund"). The Trust is
organized as a Massachusetts business trust. The Trust operates as a series
company pursuant to Rule 18f-2 under the Act.
The Acquired Fund owns securities which are of the character in which the
Acquiring Fund is permitted to invest. The investment objectives of the Acquired
Fund and the Acquiring Fund are generally the same.
II. The Plan of Reorganization.
Subject to the requisite approval of the shareholders of the Acquired
Fund and to the other terms and conditions set forth in the Plan, the Acquired
Fund shall transfer to the Acquiring Fund, and the Acquiring Fund shall acquire
from the Acquired Fund, at the Closing Date, all of the Assets of the Acquired
Fund in exchange for that number of shares of the Acquiring Fund determined in
accordance with Section 2 of the Plan ("Acquiring Fund Shares") and the
assumption by Acquiring Fund of the Assumed Liabilities of the Acquired Fund.
There are no dissenters' rights in any of the foregoing transactions, and
no cash will be exchanged for shares of beneficial interest of the Acquired Fund
in lieu of fractional Acquiring Fund Shares.
As soon after the Closing Date as is conveniently practicable, the Trust
will effect the liquidation and termination of the Acquired Fund in the manner
provided in its Master Trust Agreement and in accordance with applicable law,
and on and after the Closing Date it shall not conduct any business on behalf of
the Acquired Fund except in connection with its liquidation and termination. The
Acquired Fund shall distribute pro rata to its shareholders of record determined
as of the close of business on the Valuation Date (the "Acquired Fund's
Shareholders") the Acquiring Fund Shares received by the Acquired Fund pursuant
to Section 1 of the Plan. Shareholders of the Acquired Fund's Class A, Class B,
Class C and Class D shares shall receive only shares of the identical Class of
shares of the Acquiring Fund. Such liquidation and distribution will be
accomplished by the transfer of the Acquiring Fund
<PAGE>
State Street Research Tax-Exempt Trust
August 18, 1995
Page 3
Shares then credited to the account of the Acquired Fund on the books of the
Acquiring Fund to open accounts on the share records of the Acquiring Fund in
the name of the Acquired Fund's Shareholders and representing the respective pro
rata number of the Acquiring Fund Shares due such shareholders. All issued and
outstanding shares of the Acquired Fund will simultaneously be canceled on the
books of the Acquired Fund, and as of the Closing each outstanding certificate
which prior to the Closing represented shares of the Acquired Fund will be
deemed for all purposes to evidence ownership of the number of Acquiring Fund
Shares issuable with respect thereto pursuant to the Reorganization.
The board of trustees of the Trust has concluded that the Reorganization
is in the best interests of the shareholders of the Acquired Fund and will not
result in the dilution of the interests of the existing shareholders of the
Acquired Fund. In making this determination, the Trustees considered a number of
factors, including the efficiencies resulting from combining the operations of
two separate funds with the same investment manager, the same multiple class
structure, the same sales load structure and similar investment objectives and
policies.
III. Assumptions.
We have made the following assumptions with respect to the
Reorganization:
(a) As of the Closing Date, the fair market value of the Acquiring Fund
Shares to which each shareholder of the Acquired Fund is entitled will
approximately equal the fair market value of the shares of the Acquired Fund
such shareholder will surrender.
(b) As of the Closing Date, there is no plan or intention by the
shareholders of the Acquired Fund who own five percent (5%) or more of its
stock, if any, and, to the best of the knowledge of the trustees of the Trust
there is no plan or intention on the part of the other shareholders of the
Acquired Fund, to sell, exchange or otherwise dispose of a number of Acquiring
Fund Shares received in the Reorganization that would reduce the Acquired Fund's
Shareholders' ownership of the Acquiring Fund Shares to a number of shares
having a value, as of the Closing Date, of less than fifty percent (50%) of the
value of all of the formerly outstanding shares of the Acquired Fund as of the
Closing Date. For purposes of this representation, shares of the Acquired Fund
exchanged for cash or other property, if any, will be treated as outstanding
shares of the Acquired Fund on the Closing Date. There are no dissenters'
rights, and the Acquiring Fund will not pay cash in lieu of fractional Acquiring
Fund Shares in connection with the Reorganization. Moreover, shares of the
Acquired Fund that are sold, redeemed or disposed of prior to the Reorganization
will be taken into account for purposes of this representation if such shares
are sold, redeemed or disposed of in
<PAGE>
State Street Research Tax-Exempt Trust
August 18, 1995
Page 4
anticipation of the Reorganization. Acquiring Fund Shares acquired by the
Acquired Fund's Shareholders that are sold, redeemed or disposed of after the
Reorganization but pursuant to a pre-arranged plan also will be taken into
account.
(c) The Acquiring Fund will acquire at least ninety percent (90%) of the
fair market value of the net assets and at least seventy percent (70%) of the
fair market value of the gross assets held by the Acquired Fund immediately
prior to the Reorganization. For purposes of this representation, amounts, if
any, paid by or on behalf of the Acquired Fund for reorganization expenses,
amounts, if any, paid by the Acquired Fund to shareholders who receive cash or
other property and all redemptions and distributions made by the Acquired Fund
immediately preceding or in contemplation of the transfer will be included as
assets of the Acquired Fund immediately prior to the Reorganization. However,
(i) regular distributions and redemptions occurring in the ordinary course of
the Acquired Fund's business as an open-end management investment company and
(ii) distributions made to shareholders of the Acquired Fund prior to the
Reorganization in order to pay out all of the Acquired Fund's (a) investment
company taxable income (before the deduction for dividends paid under
section 852(b)(2)(D)) and (b) net capital gain (after reduction for any capital
loss carryover) will be excluded.
(d) As of the Closing Date, the Acquiring Fund has no plan or intention
to redeem or otherwise reacquire any Acquiring Fund Shares issued in the
Reorganization except as required by the Act.
(e) As of the Closing Date, the Acquiring Fund has no plan or intention
to sell or otherwise dispose of any of the Assets of the Acquired Fund acquired
in the Reorganization, except for dispositions made in the ordinary course of
business or to maintain its qualification as a regulated investment company
under section 851.
(f) As soon as practicable after the Closing Date, the Acquired Fund
will, in pursuance of the Plan, distribute the Acquiring Fund Shares it receives
in the Reorganization and its other properties, if any, and thereupon will
cancel all of its issued and outstanding shares.
(g) In no event will the Acquiring Fund dispose of assets that in the
aggregate will result in less than fifty percent (50%) of the historic business
assets of the Acquired Fund being used in the business of the Acquiring Fund.
For purposes of this representation, assets disposed of by the Acquired Fund
prior to and in anticipation of the Reorganization will be treated as part of
the historic business assets of the Acquired Fund.
<PAGE>
State Street Research Tax-Exempt Trust
August 18, 1995
Page 5
(h) As of the Closing Date, there is no intercorporate indebtedness
existing between the Acquiring Fund and the Acquired Fund.
(i) Each of the Acquired Fund and the Acquiring Fund has qualified as a
separate association taxable as a corporation for federal income tax purposes
under section 851(h) in each taxable year and will qualify as such as of the
Closing Date.
(j) The Acquiring Fund has elected to be treated as a regulated
investment company under section 851, has qualified as such for each taxable
year and will qualify as such as of the Closing Date. The Acquired Fund has
elected to be treated as a regulated investment company under section 851, has
qualified as such for each taxable year and will qualify as such as of the
Closing Date. In order (i) to ensure continued qualification of the Acquired
Fund as a regulated investment company for federal income tax purposes and (ii)
to eliminate any tax liability of the Acquired Fund arising by reason of
undistributed investment company taxable income or net capital gain, the
Acquired Fund has declared or will declare and will pay to its shareholders of
record on or prior to the Closing Date a dividend or dividends that, together
with all previous such dividends, shall have the effect of distributing (i) all
of its investment company taxable income for the last full taxable year of the
Acquired Fund and any subsequent short taxable year ending on the Closing Date
(computed without regard to any deduction for dividends paid) and (ii) all of
its net capital gain realized in the final full taxable year of the Acquired
Fund and any subsequent short taxable year ending on the Closing Date (after
reduction for any capital loss carryover).
(k) The expenses incurred in connection with entering into and carrying
out the provision of the Plan of Reorganization, whether or not the
Reorganization is consummated, will be apportioned between State Street
Research Investment Services, Inc. (the "Distributor"), the distributor for each
of the Funds, and the Funds in a fair and equitable manner. The Distributor will
assume one-half of the expenses and the other half will be allocated to the
Acquiring Fund and the Acquired Fund in an appropriate manner on the basis of
identifiable direct costs or otherwise on the basis of relative net assets. No
cash will be transferred from the Acquiring Fund to the Acquired Fund for the
purposes of paying any reorganization expenses of the Acquired Fund. The
shareholders of the Acquired Fund and the Acquiring Fund will pay their own
expenses, if any, incurred in connection with the Reorganization.
<PAGE>
State Street Research Tax-Exempt Trust
August 18, 1995
Page 6
(l) As of the Closing Date, the Acquiring Fund does not own, directly or
indirectly, nor has it owned during the past five years, directly or indirectly,
any shares of the Acquired Fund.
(m) The liabilities of the Acquired Fund to be assumed by the Acquiring
Fund and the liabilities to which the transferred assets of the Acquired Fund
will be subject, if any, have been incurred by the Acquired Fund in the ordinary
course of its business.
(n) The fair market value of the assets of the Acquired Fund to be
transferred to the Acquiring Fund equals or exceeds the sum of the liabilities
to be assumed by the Acquiring Fund plus the amount of liabilities, if any, to
which the transferred assets will be subject.
(o) As of the Closing Date, neither the Acquiring Fund nor the Acquired
Fund is under the jurisdiction of a court in a Title 11 or a similar case within
the meaning of section 368(a)(3)(A).
(p) The Acquired Fund has not distributed and will not distribute to its
shareholders in pursuance of the Plan any "appreciated property" within the
meaning of section 361(c)(2).
(q) Shareholders of the Acquired Fund will not be in control (within the
meaning of section 368(a)(2)(H) and section 304(c) of the Acquiring Fund after
the Reorganization.
IV. Opinion.
Based upon the foregoing, it is our opinion with respect to the
Reorganization that:
(i) The transfer of all or substantially all of the Acquired Fund's
Assets solely in exchange for the Acquiring Fund Shares and the assumption by
the Acquiring Fund of the Assumed Liabilities of the Acquired Fund, and the
distribution of such Shares to the shareholders of the Acquired Fund, will
constitute a "reorganization" within the meaning of section 368(a)(1)(C). The
Acquiring Fund and the Acquired Fund are each a "party to a reorganization"
within the meaning of section 368(b).
(ii) No gain or loss will be recognized by the Acquired Fund on the
transfer of the Acquired Fund's Assets to the Acquiring Fund in exchange for the
Acquiring Fund Shares and the assumption by the Acquiring Fund of the Assumed
Liabilities of the Acquired Fund or upon the distribution of the Acquiring Fund
Shares to the Acquired Fund's Shareholders in exchange for their shares of the
Acquired Fund.
<PAGE>
State Street Research Tax-Exempt Trust
August 18, 1995
Page 7
(iii) The tax basis of the Acquired Fund's Assets acquired by the
Acquiring Fund will be the same to the Acquiring Fund as the tax basis of such
Assets to the Acquired Fund immediately prior to the Reorganization, and the
holding period of the Assets of the Acquired Fund in the hands of the Acquiring
Fund will include the period during which those Assets were held by the Acquired
Fund.
(iv) No gain or loss will be recognized by the Acquiring Fund upon the
receipt of the Assets of the Acquired Fund solely in exchange for the Acquiring
Fund Shares and the assumption by the Acquiring Fund of the Assumed Liabilities
of the Acquired Fund.
(v) No gain or loss will be recognized by shareholders of the Acquired
Fund upon the receipt of the Acquiring Fund Shares by such shareholders,
provided such shareholders receive solely Acquiring Fund Shares (including
fractional shares) in exchange for their Acquired Fund's Shares.
(vi) The aggregate tax basis of the Acquiring Fund Shares, including any
fractional shares, received by each shareholder of the Acquired Fund pursuant to
the Reorganization will be the same as the aggregate tax basis of the Acquired
Fund's Shares held by such shareholder immediately prior to the Reorganization,
and the holding period of the Acquiring Fund Shares, including fractional
shares, to be received by each shareholder of the Acquired Fund will include the
period during which the Acquired Fund's Shares exchanged therefor were held by
such shareholder (provided that the Acquired Fund's Shares were held as a
capital asset on the date of the Reorganization).
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the use of our name and any reference to our firm
in the Registration Statement or in the prospectus and proxy statement
constituting a part thereof.
Very truly yours,
/s/ Goodwin, Procter & Hoar
GOODWIN, PROCTER & HOAR
119905.b1
<PAGE>
Exhibit 12(c)
Goodwin, Procter Letterhead
August 18, 1995
State Street Research Tax-Exempt Trust
One Financial Center
Boston, Massachusetts 02111
Ladies and Gentlemen:
We have acted as counsel to State Street Research Tax-Exempt Trust (the
"Trust") in connection with the acquisition of the assets of a series of the
Trust by another series of the Trust pursuant to an Agreement and Plan of
Reorganization and Liquidation (the "Plan") described in the prospectus and
proxy statement relating to the Plan included as part of the Registration
Statement on Form N-14 of the Trust (the "Registration Statement") to be filed
with the Securities and Exchange Commission under the Securities Act of 1933, as
amended. You have requested our opinion as to certain federal income tax
consequences of the transactions contemplated by the Plan.
In rendering this opinion, we have reviewed such documents and materials
as we have considered necessary for the purpose of rendering this opinion. In
our examination of the foregoing, we have assumed that such documents as yet
unexecuted will, when executed, conform to the proposed forms of such documents
that we have examined. We have made inquiry as to the underlying facts which we
considered to be relevant to the conclusions set forth in this letter. The
opinions expressed in this letter are based upon certain factual statements
relating to the Trust set forth in the Registration Statement and certain
assumptions set forth below. We expect that such assumptions will be confirmed
to us in representation letters from the Trust dated as of the Closing Date, and
the opinions set forth herein are expressly conditioned on the receipt of such
representation letters from the Trust. Capitalized terms used herein and not
otherwise defined shall have the meanings given them in the Plan.
The discussion and conclusions set forth below are based upon the
Internal Revenue Code of 1986, as amended (the "Code"), (1) the Treasury
Regulations and existing administrative and judicial interpretations thereof,
all of which are subject to change. No assurance can therefore be given that the
federal income tax consequences described below will not be altered in the
future, and we do not assume responsibility to provide notice or advice to any
person or entity regarding any such changes or altered tax consequences.
- --------
(1) All section references contained herein are to the Code.
<PAGE>
State Street Research Tax-Exempt Trust
August 18, 1995
Page 2
I. Background and Facts.
The Trust is an open-end management investment company registered under
the Investment Company Act of 1940, as amended (the "Act"). The Trust consists
of a number of separate portfolios of securities, two of which are the subject
of the Plan: State Street Research Tax-Exempt Fund (the "Acquiring Fund") and
State Street Research Pennsylvania Tax-Free Fund (the "Acquired Fund"). The
Trust is organized as a Massachusetts business trust. The Trust operates as a
series company pursuant to Rule 18f-2 under the Act.
The Acquired Fund owns securities which are of the character in which the
Acquiring Fund is permitted to invest. The investment objectives of the Acquired
Fund and the Acquiring Fund are generally the same.
II. The Plan of Reorganization.
Subject to the requisite approval of the shareholders of the Acquired
Fund and to the other terms and conditions set forth in the Plan, the Acquired
Fund shall transfer to the Acquiring Fund, and the Acquiring Fund shall acquire
from the Acquired Fund, at the Closing Date, all of the Assets of the Acquired
Fund in exchange for that number of shares of the Acquiring Fund determined in
accordance with Section 2 of the Plan ("Acquiring Fund Shares") and the
assumption by Acquiring Fund of the Assumed Liabilities of the Acquired Fund.
There are no dissenters' rights in any of the foregoing transactions, and
no cash will be exchanged for shares of beneficial interest of the Acquired Fund
in lieu of fractional Acquiring Fund Shares.
As soon after the Closing Date as is conveniently practicable, the Trust
will effect the liquidation and termination of the Acquired Fund in the manner
provided in its Master Trust Agreement and in accordance with applicable law,
and on and after the Closing Date it shall not conduct any business on behalf of
the Acquired Fund except in connection with its liquidation and termination. The
Acquired Fund shall distribute pro rata to its shareholders of record determined
as of the close of business on the Valuation Date (the "Acquired Fund's
Shareholders") the Acquiring Fund Shares received by the Acquired Fund pursuant
to Section 1 of the Plan. Shareholders of the Acquired Fund's Class A, Class B,
Class C and Class D shares shall receive only shares of the identical Class of
shares of the Acquiring Fund. Such liquidation and distribution will be
accomplished by the transfer of the Acquiring Fund
<PAGE>
State Street Research Tax-Exempt Trust
August 18, 1995
Page 3
Shares then credited to the account of the Acquired Fund on the books of the
Acquiring Fund to open accounts on the share records of the Acquiring Fund in
the name of the Acquired Fund's Shareholders and representing the respective pro
rata number of the Acquiring Fund Shares due such shareholders. All issued and
outstanding shares of the Acquired Fund will simultaneously be canceled on the
books of the Acquired Fund, and as of the Closing each outstanding certificate
which prior to the Closing represented shares of the Acquired Fund will be
deemed for all purposes to evidence ownership of the number of Acquiring Fund
Shares issuable with respect thereto pursuant to the Reorganization.
The board of trustees of the Trust has concluded that the Reorganization
is in the best interests of the shareholders of the Acquired Fund and will not
result in the dilution of the interests of the existing shareholders of the
Acquired Fund. In making this determination, the Trustees considered a number of
factors, including the efficiencies resulting from combining the operations of
two separate funds with the same investment manager, the same multiple class
structure, the same sales load structure and similar investment objectives and
policies.
III. Assumptions.
We have made the following assumptions with respect to the
Reorganization:
(a) As of the Closing Date, the fair market value of the Acquiring Fund
Shares to which each shareholder of the Acquired Fund is entitled will
approximately equal the fair market value of the shares of the Acquired Fund
such shareholder will surrender.
(b) As of the Closing Date, there is no plan or intention by the
shareholders of the Acquired Fund who own five percent (5%) or more of its
stock, if any, and, to the best of the knowledge of the trustees of the Trust
there is no plan or intention on the part of the other shareholders of the
Acquired Fund, to sell, exchange or otherwise dispose of a number of Acquiring
Fund Shares received in the Reorganization that would reduce the Acquired Fund's
Shareholders' ownership of the Acquiring Fund Shares to a number of shares
having a value, as of the Closing Date, of less than fifty percent (50%) of the
value of all of the formerly outstanding shares of the Acquired Fund as of the
Closing Date. For purposes of this representation, shares of the Acquired Fund
exchanged for cash or other property, if any, will be treated as outstanding
shares of the Acquired Fund on the Closing Date. There are no dissenters'
rights, and the Acquiring Fund will not pay cash in lieu of fractional Acquiring
Fund Shares in connection with the Reorganization. Moreover, shares of the
Acquired Fund that are sold, redeemed or disposed of prior to the Reorganization
will be taken into account for purposes of this representation if such shares
are sold, redeemed or disposed of in
<PAGE>
State Street Research Tax-Exempt Trust
August 18, 1995
Page 4
anticipation of the Reorganization. Acquiring Fund Shares acquired by the
Acquired Fund's Shareholders that are sold, redeemed or disposed of after the
Reorganization but pursuant to a pre-arranged plan also will be taken into
account.
(c) The Acquiring Fund will acquire at least ninety percent (90%) of the
fair market value of the net assets and at least seventy percent (70%) of the
fair market value of the gross assets held by the Acquired Fund immediately
prior to the Reorganization. For purposes of this representation, amounts, if
any, paid by or on behalf of the Acquired Fund for reorganization expenses,
amounts, if any, paid by the Acquired Fund to shareholders who receive cash or
other property and all redemptions and distributions made by the Acquired Fund
immediately preceding or in contemplation of the transfer will be included as
assets of the Acquired Fund immediately prior to the Reorganization. However,
(i) regular distributions and redemptions occurring in the ordinary course of
the Acquired Fund's business as an open-end management investment company and
(ii) distributions made to shareholders of the Acquired Fund prior to the
Reorganization in order to pay out all of the Acquired Fund's (a) investment
company taxable income (before the deduction for dividends paid under
section 852(b)(2)(D)) and (b) net capital gain (after reduction for any capital
loss carryover) will be excluded.
(d) As of the Closing Date, the Acquiring Fund has no plan or intention
to redeem or otherwise reacquire any Acquiring Fund Shares issued in the
Reorganization except as required by the Act.
(e) As of the Closing Date, the Acquiring Fund has no plan or intention
to sell or otherwise dispose of any of the Assets of the Acquired Fund acquired
in the Reorganization, except for dispositions made in the ordinary course of
business or to maintain its qualification as a regulated investment company
under section 851.
(f) As soon as practicable after the Closing Date, the Acquired Fund
will, in pursuance of the Plan, distribute the Acquiring Fund Shares it receives
in the Reorganization and its other properties, if any, and thereupon will
cancel all of its issued and outstanding shares.
(g) In no event will the Acquiring Fund dispose of assets that in the
aggregate will result in less than fifty percent (50%) of the historic business
assets of the Acquired Fund being used in the business of the Acquiring Fund.
For purposes of this representation, assets disposed of by the Acquired Fund
prior to and in anticipation of the Reorganization will be treated as part of
the historic business assets of the Acquired Fund.
<PAGE>
State Street Research Tax-Exempt Trust
August 18, 1995
Page 5
(h) As of the Closing Date, there is no intercorporate indebtedness
existing between the Acquiring Fund and the Acquired Fund.
(i) Each of the Acquired Fund and the Acquiring Fund has qualified as a
separate association taxable as a corporation for federal income tax purposes
under section 851(h) in each taxable year and will qualify as such as of the
Closing Date.
(j) The Acquiring Fund has elected to be treated as a regulated
investment company under section 851, has qualified as such for each taxable
year and will qualify as such as of the Closing Date. The Acquired Fund has
elected to be treated as a regulated investment company under section 851, has
qualified as such for each taxable year and will qualify as such as of the
Closing Date. In order (i) to ensure continued qualification of the Acquired
Fund as a regulated investment company for federal income tax purposes and (ii)
to eliminate any tax liability of the Acquired Fund arising by reason of
undistributed investment company taxable income or net capital gain, the
Acquired Fund has declared or will declare and will pay to its shareholders of
record on or prior to the Closing Date a dividend or dividends that, together
with all previous such dividends, shall have the effect of distributing (i) all
of its investment company taxable income for the last full taxable year of the
Acquired Fund and any subsequent short taxable year ending on the Closing Date
(computed without regard to any deduction for dividends paid) and (ii) all of
its net capital gain realized in the final full taxable year of the Acquired
Fund and any subsequent short taxable year ending on the Closing Date (after
reduction for any capital loss carryover).
(k) The expenses incurred in connection with entering into and carrying
out the provision of the Plan of Reorganization, whether or not the
Reorganization is consummated, will be apportioned between State Street
Research Investment Services, Inc. (the "Distributor"), the distributor for each
of the Funds, and the Funds in a fair and equitable manner. The Distributor will
assume one-half of the expenses and the other half will be allocated to the
Acquiring Fund and the Acquired Fund in an appropriate manner on the basis of
identifiable direct costs or otherwise on the basis of relative net assets. All
such expenses will be solely and directly related to the Reorganization. No cash
will be transferred from the Acquiring Fund to the Acquired Fund for the
purposes of paying any reorganization expenses of the Acquired Fund. The
shareholders of the Acquired Fund and the Acquiring Fund will pay their own
expenses, if any, incurred in connection with the Reorganization.
<PAGE>
State Street Research Tax-Exempt Trust
August 18, 1995
Page 6
(l) As of the Closing Date, the Acquiring Fund does not own, directly or
indirectly, nor has it owned during the past five years, directly or indirectly,
any shares of the Acquired Fund.
(m) The liabilities of the Acquired Fund to be assumed by the Acquiring
Fund and the liabilities to which the transferred assets of the Acquired Fund
will be subject, if any, have been incurred by the Acquired Fund in the ordinary
course of its business.
(n) The fair market value of the assets of the Acquired Fund to be
transferred to the Acquiring Fund equals or exceeds the sum of the liabilities
to be assumed by the Acquiring Fund plus the amount of liabilities, if any, to
which the transferred assets will be subject.
(o) As of the Closing Date, neither the Acquiring Fund nor the Acquired
Fund is under the jurisdiction of a court in a Title 11 or a similar case within
the meaning of section 368(a)(3)(A).
(p) The Acquired Fund has not distributed and will not distribute to its
shareholders in pursuance of the Plan any "appreciated property" within the
meaning of section 361(c)(2).
(q) Shareholders of the Acquired Fund will not be in control (within the
meaning of section 368(a)(2)(H) and section 304(c) of the Acquiring Fund after
the Reorganization.
IV. Opinion.
Based upon the foregoing, it is our opinion with respect to the
Reorganization that:
(i) The transfer of all or substantially all of the Acquired Fund's
Assets solely in exchange for the Acquiring Fund Shares and the assumption by
the Acquiring Fund of the Assumed Liabilities of the Acquired Fund, and the
distribution of such Shares to the shareholders of the Acquired Fund, will
constitute a "reorganization" within the meaning of section 368(a)(1)(C). The
Acquiring Fund and the Acquired Fund are each a "party to a reorganization"
within the meaning of section 368(b).
(ii) No gain or loss will be recognized by the Acquired Fund on the
transfer of the Acquired Fund's Assets to the Acquiring Fund in exchange for the
Acquiring Fund Shares and the assumption by the Acquiring Fund of the Assumed
Liabilities of the Acquired Fund or upon the distribution of the Acquiring Fund
Shares to the Acquired Fund's Shareholders in exchange for their shares of the
Acquired Fund.
<PAGE>
State Street Research Tax-Exempt Trust
August 18, 1995
Page 7
(iii) The tax basis of the Acquired Fund's Assets acquired by the
Acquiring Fund will be the same to the Acquiring Fund as the tax basis of such
Assets to the Acquired Fund immediately prior to the Reorganization, and the
holding period of the Assets of the Acquired Fund in the hands of the Acquiring
Fund will include the period during which those Assets were held by the Acquired
Fund.
(iv) No gain or loss will be recognized by the Acquiring Fund upon the
receipt of the Assets of the Acquired Fund solely in exchange for the Acquiring
Fund Shares and the assumption by the Acquiring Fund of the Assumed Liabilities
of the Acquired Fund.
(v) No gain or loss will be recognized by shareholders of the Acquired
Fund upon the receipt of the Acquiring Fund Shares by such shareholders,
provided such shareholders receive solely Acquiring Fund Shares (including
fractional shares) in exchange for their Acquired Fund's Shares.
(vi) The aggregate tax basis of the Acquiring Fund Shares, including any
fractional shares, received by each shareholder of the Acquired Fund pursuant to
the Reorganization will be the same as the aggregate tax basis of the Acquired
Fund's Shares held by such shareholder immediately prior to the Reorganization,
and the holding period of the Acquiring Fund Shares, including fractional
shares, to be received by each shareholder of the Acquired Fund will include the
period during which the Acquired Fund's Shares exchanged therefor were held by
such shareholder (provided that the Acquired Fund's Shares were held as a
capital asset on the date of the Reorganization).
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the use of our name and any reference to our firm
in the Registration Statement or in the prospectus and proxy statement
constituting a part thereof.
Very truly yours,
/s/ Goodwin, Procter & Hoar
GOODWIN, PROCTER & HOAR
119907.b1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Statement of Additional Information
constituting part of this Registration Statement on Form N-14 (the "Registration
Statement") of State Street Research Tax-Exempt Trust of our reports dated
February 10, 1995 relating to the financial statements and financial highlights
of State Street Research Tax-Exempt Fund, State Street Research California
Tax-Free Fund, State Street Research Florida Tax-Free Fund and State Street
Research Pennsylvania Tax-Free Fund (each a series of State Street Research
Tax-Exempt Trust) for the year ended December 31, 1994, which appear in such
Statement of Additional Information, and to the incorporation by reference of
such reports into the Joint Prospectuses/Proxy Statements which constitute part
of this Registration Statement. We also consent to the reference to us under the
heading "Experts" in such Joint Prospectuses/Proxy Statements, to the references
to us under the headings "Independent Accountants" in such Statement of
Additional Information and to the reference to us under the heading "Financial
Highlights" in the Prospectus of each of the State Street Research Tax-Exempt
Fund, State Street Research California Tax-Free Fund, State Street Research
Florida Tax-Free Fund and State Street Research Pennsylvania Tax-Free Fund dated
May 1, 1995 each incorporated by reference into the applicable Joint
Prospectus/Proxy Statement.
/s/ Price Waterhouse LLP
Price Waterhouse LLP
Boston, Massachusetts
August 25, 1995
POWERS OF ATTORNEY
We, the undersigned State Street Research Tax-Exempt Trust ("Trust"), a
Massachusetts business trust, its trustees, its principal executive officer and
its principal financial and accounting officer, hereby severally constitute and
appoint Francis J. McNamara III and Darman A. Wing, as our true and lawful
attorneys, with full power to each of them alone to sign for us, in our names
and in the capacities indicated below, any Registration Statements and any and
all amendments thereto of the Trust filed with the Securities and Exchange
Commission and generally to do all such things in our names and in the indicated
capacities as are required to enable the Trust to comply with provisions of the
Securities Act of 1933, as amended, and/or the Investment Company Act of 1940,
as amended, and all requirements and regulations of the Securities and Exchange
Commission, hereby ratifying and confirming our signatures as they have been and
may be signed by our said attorneys to said Registration Statements, and any and
all amendments thereto.
IN WITNESS WHEREOF, we have hereunto set our hands, on this 24th day of
August, 1995.
<PAGE>
SIGNATURES
STATE STREET RESEARCH TAX-EXEMPT TRUST
By: /s/ Ralph F. Verni
-------------------------------
Ralph F. Verni, Chief Executive
Officer and President
/s/ Ralph F. Verni /s/ Thomas L. Phillips
- --------------------------- ---------------------------
Ralph F. Verni, Trustee and Thomas L. Phillips, Trustee
principal executive officer
/s/ Gerard P. Maus /s/ Toby Rosenblatt
- --------------------------- -----------------------------
Gerard P. Maus, Principal financial Toby Rosenblatt, Trustee
and accounting officer
/s/ Edward M. Lamont /s/ Michael S. Scott Morton
- --------------------------- -----------------------------
Edward M. Lamont, Trustee Michael S. Scott Morton, Trustee
/s/ Robert A. Lawrence /s/ Jeptha H. Wade
- ---------------------------- ------------------------------
Robert A. Lawrence, Trustee Jeptha H. Wade, Trustee
/s/ Dean O. Morton
- ----------------------------
Dean O. Morton, Trustee
poa\SSRTET1
STATE STREET RESEARCH CALIFORNIA TAX-FREE FUND
a series of
STATE STREET RESEARCH TAX-EXEMPT TRUST
PROXY
Special Meeting of Shareholders - _____________, 1995
The undersigned hereby appoints Francis J. McNamara, III, Ralph F. Verni
and Darman A. Wing, and each of them, as proxies with full power of substitution
to act for and vote on behalf of the undersigned all shares of State Street
Research California Tax-Free Fund, a portfolio series of State Street Research
Tax-Exempt Trust, which the undersigned would be entitled to vote if personally
present at the Special Meeting of Shareholders of such Fund to be held at the
principal offices of the Trust, One Financial Center, 31st Floor, Boston,
Massachusetts 02111, at 2:00 local time on __________, 1995, or at any
adjournments thereof, on the following items as set forth in the Notice of
Special Meeting of Shareholders and the accompanying Joint Proxy
Statement/Prospectus.
If a choice is specified for the proposal, this proxy will be voted as
indicated. IF NO CHOICE IS SPECIFIED, THIS PROXY WILL BE VOTED FOR THE PROPOSAL.
In their discretion the proxies are authorized to vote upon such other business
as may properly come before the Meeting. The Board of Trustees recommends a vote
FOR the proposal.
The undersigned acknowledges receipt of the Notice of Special Meeting and
the accompanying Joint Proxy Statement/Prospectus dated ___________________,
1995. PLEASE INDICATE ANY CHANGE OF ADDRESS ON THE REVERSE SIDE. This proxy may
be revoked at any time prior to the exercise of the powers conferred thereby.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF TRUSTEES.
CONTINUED AND TO BE SIGNED ON REVERSE SIDE
- --------------------------------------------------------------------------------
SEE REVERSE SIDE
- --------------------------------------------------------------------------------
<PAGE>
With respect to State Street Research California Tax-Free Fund (the "California
Tax-Free Fund"):
1. To approve an Agreement and Plan of Reorganization and Liquidation
providing for the transfer of the assets of the California Tax-Free Fund
(subject to its liabilities) to the State Street Research Tax-Exempt Fund
(the "Tax-Exempt Fund") in exchange for Class A, Class B, Class C and
Class D shares of the Tax-Exempt Fund, the distribution of such shares to
shareholders of the California Tax-Free Fund and the subsequent
liquidation and dissolution of the California Tax-Free Fund.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
MARK HERE FOR [ ] MARK HERE IF [ ]
ADDRESS YOU PLAN TO
CHANGE AND ATTEND
NOTE AT LEFT MEETING
IT IS IMPORTANT THAT THIS PROXY BE SIGNED
AND RETURNED IN THE ENCLOSED ENVELOPE.
Note: Please date and sign exactly as
name or names appear hereon and
return in the enclosed envelope,
which requires no postage if mailed
in the United States. When signing as
attorney, executor, trustee, guardian
or officer of a corporation, please
give title as such.
Signature:_________________________ Date: ____________
Signature:_________________________ Date: ____________
197909.c1
2
STATE STREET RESEARCH FLORIDA TAX-FREE FUND
a series of
STATE STREET RESEARCH TAX-EXEMPT TRUST
PROXY
Special Meeting of Shareholders - _____________, 1995
The undersigned hereby appoints Francis J. McNamara, III, Ralph F. Verni
and Darman A. Wing, and each of them, as proxies with full power of substitution
to act for and vote on behalf of the undersigned all shares of State Street
Research Florida Tax-Free Fund, a portfolio series of State Street Research
Tax-Exempt Trust, which the undersigned would be entitled to vote if personally
present at the Special Meeting of Shareholders of such Fund to be held at the
principal offices of the Trust, One Financial Center, 31st Floor, Boston,
Massachusetts 02111, at 3:00 local time on __________, 1995, or at any
adjournments thereof, on the following items as set forth in the Notice of
Special Meeting of Shareholders and the accompanying Joint Proxy
Statement/Prospectus.
If a choice is specified for the proposal, this proxy will be voted as
indicated. IF NO CHOICE IS SPECIFIED, THIS PROXY WILL BE VOTED FOR THE PROPOSAL.
In their discretion the proxies are authorized to vote upon such other business
as may properly come before the Meeting. The Board of Trustees recommends a vote
FOR the proposal.
The undersigned acknowledges receipt of the Notice of Special Meeting and
the accompanying Joint Proxy Statement/Prospectus dated ___________________,
1995. PLEASE INDICATE ANY CHANGE OF ADDRESS ON THE REVERSE SIDE. This proxy may
be revoked at any time prior to the exercise of the powers conferred thereby.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF TRUSTEES.
CONTINUED AND TO BE SIGNED ON REVERSE SIDE
- -------------------------------------------------------------------------------
SEE REVERSE SIDE
- -------------------------------------------------------------------------------
<PAGE>
With respect to State Street Research Florida Tax-Free Fund (the "Florida
Tax-Free Fund"):
1. To approve an Agreement and Plan of Reorganization and Liquidation
providing for the transfer of the assets of the Florida Tax-Free Fund
(subject to its liabilities) to the State Street Research Tax-Exempt Fund
(the "Tax-Exempt Fund") in exchange for Class A, Class B, Class C and
Class D shares of the Tax-Exempt Fund, the distribution of such shares to
shareholders of the Florida Tax-Free Fund and the subsequent liquidation
and dissolution of the Florida Tax-Free Fund.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
MARK HERE FOR [ ] MARK HERE IF [ ]
ADDRESS YOU PLAN TO
CHANGE AND ATTEND
NOTE AT LEFT MEETING
IT IS IMPORTANT THAT THIS PROXY BE SIGNED
AND RETURNED IN THE ENCLOSED ENVELOPE.
Note: Please date and sign exactly as
name or names appear hereon and
return in the enclosed envelope,
which requires no postage if mailed
in the United States. When signing as
attorney, executor, trustee, guardian
or officer of a corporation, please
give title as such.
Signature:_________________________ Date: ____________
Signature:_________________________ Date: ____________
203922.c1
2
STATE STREET RESEARCH PENNSYLVANIA TAX-FREE FUND
a series of
STATE STREET RESEARCH TAX-EXEMPT TRUST
PROXY
Special Meeting of Shareholders - _____________, 1995
The undersigned hereby appoints Francis J. McNamara, III, Ralph F. Verni
and Darman A. Wing, and each of them, as proxies with full power of substitution
to act for and vote on behalf of the undersigned all shares of State Street
Research Pennsylvania Tax-Free Fund, a portfolio series of State Street Research
Tax-Exempt Trust, which the undersigned would be entitled to vote if personally
present at the Special Meeting of Shareholders of such Fund to be held at the
principal offices of the Trust, One Financial Center, 31st Floor, Boston,
Massachusetts 02111, at 4:00 local time on __________, 1995, or at any
adjournments thereof, on the following items as set forth in the Notice of
Special Meeting of Shareholders and the accompanying Joint Proxy
Statement/Prospectus.
If a choice is specified for the proposal, this proxy will be voted as
indicated. IF NO CHOICE IS SPECIFIED, THIS PROXY WILL BE VOTED FOR THE PROPOSAL.
In their discretion the proxies are authorized to vote upon such other business
as may properly come before the Meeting. The Board of Trustees recommends a vote
FOR the proposal.
The undersigned acknowledges receipt of the Notice of Special Meeting and
the accompanying Joint Proxy Statement/Prospectus dated ___________________,
1995. PLEASE INDICATE ANY CHANGE OF ADDRESS ON THE REVERSE SIDE. This proxy may
be revoked at any time prior to the exercise of the powers conferred thereby.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF TRUSTEES.
CONTINUED AND TO BE SIGNED ON REVERSE SIDE
- -------------------------------------------------------------------------------
SEE REVERSE SIDE
- -------------------------------------------------------------------------------
<PAGE>
With respect to State Street Research Pennsylvania Tax-Free Fund (the
"Pennsylvania Tax-Free Fund"):
1. To approve an Agreement and Plan of Reorganization and Liquidation
providing for the transfer of the assets of the Pennsylvania Tax-Free
Fund (subject to its liabilities) to the State Street Research Tax-Exempt
Fund (the "Tax-Exempt Fund") in exchange for Class A, Class B, Class C
and Class D shares of the Tax-Exempt Fund, the distribution of such
shares to shareholders of the Pennsylvania Tax-Free Fund and the
subsequent liquidation and dissolution of the Pennsylvania Tax-Free Fund.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
MARK HERE FOR [ ] MARK HERE IF [ ]
ADDRESS YOU PLAN TO
CHANGE AND ATTEND
NOTE AT LEFT MEETING
IT IS IMPORTANT THAT THIS PROXY BE SIGNED
AND RETURNED IN THE ENCLOSED ENVELOPE.
Note: Please date and sign exactly as
name or names appear hereon and
return in the enclosed envelope,
which requires no postage if mailed
in the United States. When signing as
attorney, executor, trustee, guardian
or officer of a corporation, please
give title as such.
Signature:_________________________ Date: ____________
Signature:_________________________ Date: ____________
203925.c1
2
