STATE STREET RESEARCH
TAX-EXEMPT FUND
Prospectus
May 1, 1996
The investment objective of State Street Research Tax-Exempt Fund (the
"Fund") is to seek a high level of interest income exempt from federal income
taxes. In seeking to achieve its investment objective, the Fund invests
primarily in tax-exempt debt obligations which the investment manager
believes will not involve undue risk.
State Street Research & Management Company serves as investment adviser
(the "Investment Manager") for the Fund. As of February 29, 1996, the
Investment Manager had assets of approximately $31.1 billion under
management. State Street Research Investment Services, Inc. serves as
distributor (the "Distributor") for the Fund.
Shareholders may have their shares redeemed directly by the Fund at net
asset value plus the applicable contingent deferred sales charge, if any;
redemptions processed through securities dealers may be subject to processing
charges.
There are risks in any investment program, including the risk of changing
economic and market conditions, and there is no assurance that the Fund will
achieve its investment objective. The net asset value of a share of the Fund
will fluctuate as market conditions change.
This Prospectus sets forth concisely the information a prospective
investor ought to know about the Fund before investing. It should be retained
for future reference. A Statement of Additional Information about the Fund
dated May 1, 1996 has been filed with the Securities and Exchange Commission
and is incorporated by reference in this Prospectus. It is available, at no
charge, upon request to the Fund at the address indicated on the back cover
or by calling 1-800-562-0032.
The Fund is a diversified series of State Street Research Tax-Exempt Trust
(the "Trust"), an open-end management investment company.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
ON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
Table of Expenses 2
Financial Highlights 4
The Fund's Investments 5
Limiting Investment Risk 7
Purchase of Shares 8
Redemption of Shares 17
Shareholder Services 19
The Fund and Its Shares 23
Management of the Fund 24
Dividends and Distributions; Taxes 25
Calculation of Performance Data 26
Appendix--Tax-Exempt vs. Taxable
Yield Comparison 28
<PAGE>
The Fund offers four classes of shares which may be purchased at the next
determined net asset value per share plus, in the case of all classes except
Class C shares, a sales charge which, at the election of the investor, may be
imposed (i) at the time of purchase (the Class A shares) or (ii) on a
deferred basis (the Class B and Class D shares).
Class A shares are subject to (i) an initial sales charge of up to 4.5%
and (ii) an annual service fee of 0.25% of the average daily net asset value
of the Class A shares.
Class B shares are subject to (i) a contingent deferred sales charge
(declining from 5% to 2%), which will be imposed on most redemptions made
within five years of purchase, and (ii) annual distribution and service fees
of 1% of the average daily net asset value of such shares. Class B shares
automatically convert into Class A shares (which pay lower ongoing expenses)
at the end of eight years after purchase. No contingent deferred sales charge
applies after the fifth year following the purchase of Class B shares.
Class C shares are offered only to certain employee benefit plans and
large institutions. No sales charge is imposed at the time of purchase or
redemption of Class C shares. Class C shares do not pay any distribution or
service fees.
Class D shares are subject to (i) a contingent deferred sales charge of 1%
if redeemed within one year following purchase and (ii) annual distribution
and service fees of 1% of the average daily net asset value of such shares.
Table of Expenses
<TABLE>
<CAPTION>
Class A Class B Class C Class D
-------- -------- -------- ----------
<S> <C> <C> <C> <C>
Shareholder Transaction Expenses (1)
Maximum Sales Charge Imposed on Purchases (as a
percentage of offering price) 4.5% None None None
Maximum Sales Charge Imposed on Reinvested Dividends
(as a percentage of offering price) None None None None
Maximum Deferred Sales Charge (as a percentage
of original purchase price or redemption proceeds,
as applicable) None(2) 5% None 1%
Redemption Fees (as a percentage of amount
redeemed, if applicable) None None None None
Exchange Fee None None None None
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 0.33% 0.33% 0.33% 0.33%
----- ------ ------ --------
Total Fund Operating Expenses 1.13% 1.88% 0.88% 1.88%
===== ====== ====== ========
</TABLE>
(1) Reduced sales charge purchase plans are available for Class A shares. The
maximum 5% contingent deferred sales charge on Class B shares applies to
redemptions during the first year after purchase; the charge declines
thereafter and no contingent deferred sales charge is imposed after the
fifth year. Class D shares are subject to a 1% contingent deferred sales
charge on any portion of the purchase redeemed within one year of the
sale. Long-term investors in a class of shares with a distribution fee
may, over a period of years, pay more than the economic equivalent of the
maximum sales charge permissible under applicable rules. See "Purchase of
Shares."
(2) Purchases of Class A shares of $1 million or more are not subject to a
sales charge. If such shares are redeemed within 12 months of purchase, a
contingent deferred sales charge of 1% will be applied to the redemption.
See "Purchase of Shares."
2
<PAGE>
Example:
You would pay the following expenses on a $1,000 investmentincluding, for
Class A shares, the maximum initial sales charge andassuming (1) 5% annual
return and (2) redemption of the entireinvestment at the end of each time
period:
1 Year 3 Years 5 Years 10 Years
-------- -------- -------- ----------
Class A shares $56 $79 $104 $176
Class B shares (1) $69 $89 $122 $201
Class C shares $ 9 $28 $ 49 $108
Class D shares $29 $59 $102 $220
You would pay the following expenses on the same investment,assuming no
redemption:
1 Year 3 Years 5 Years 10 Years
-------- -------- -------- ----------
Class B (1) $19 $59 $102 $201
Class D $19 $59 $102 $220
(1) Ten-year figures assume conversion of Class B shares to Class A shares at
the end of eight years.
The example should not be considered as a representation of past or future
return or expenses. Actual return or expenses may be greater or less than
shown.
The purpose of the table above is to assist the investor in understanding
the various costs and expenses that an investor will bear directly or
indirectly. The percentage expense levels shown in the table above are based
on experience with expenses during the fiscal year ended December 31, 1995;
actual expense levels for the current fiscal year and future years may vary
from the amounts shown. The table does not reflect charges for optional
services elected by certain shareholders, such as the $7.50 fee for
remittance of redemption proceeds by wire. For further information on sales
charges, see "Purchase of Shares--Alternative Purchase Program"; for further
information on management fees, see "Management of the Fund"; and for further
information on 12b-1 fees, see "Purchase of Shares--Distribution Plan."
3
<PAGE>
Financial Highlights
The data set forth below has been audited by Price Waterhouse LLP,
independent accountants, and their report thereon for the latest five years
is included in the Statement of Additional Information. For further
information about the performance of the Fund, see "Financial Statements" in
the Statement of Additional Information.(a)
<TABLE>
<CAPTION>
Class A
----------------------------------------------------------
Year ended December 31
----------------------------------------------------------
1995 1994 1993 1992 1991
----------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning
of year $ 7.46 $ 8.43 $ 7.94 $ 7.69 $ 7.30
Net investment income .39 .40 .40 .43 .44
Net realized and unrealized
gain (loss) on investments .82 (.98) .54 .27 .39
Dividends from net
investment income (.41) (.38) (.39) (.43) (.44)
Distribution from net
realized gains -- (.01) (.06) (.02) --
------- ------- ------- ------- --------
Net asset value, end of year $ 8.26 $ 7.46 $ 8.43 $ 7.94 $ 7.69
======= ======= ======= ======= ========
Total return 16.58%+ (6.90)%+ 12.11%+ 9.34%+ 11.81%+
Net assets at end of year
(000s) $253,402 $238,097 $302,845 $203,312 $118,157
Ratio of operating expenses
to average net assets 1.13% 1.20% 1.20% 1.20% 1.25%
Ratio of net investment
income to average net
assets* 4.95% 5.07% 4.85% 5.48% 6.00%
Portfolio turnover rate 97.32% 78.63% 36.16% 27.44% 81.75%
</TABLE>
<TABLE>
<CAPTION>
Class A
------------------------------------------------------------------
Year ended December 31 August 25, 1986
(Commencement of
-------------------------------------------- Operations) to
1990 1989 1988 1987 December 31, 1986
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning
of year $ 7.42 $ 7.24 $ 6.86 $ 7.49 $ 7.40
Net investment income .46 .50 .52 .50 .17
Net realized and unrealized
gain (loss) on investments (.12) .18 .38 (.61) .09
Dividends from net
investment income (.46) (.50) (.52) (.50) (.17)
Distribution from net
realized gains -- -- -- (.02) --
------- ------- ------- ------- --------
Net asset value, end of year $ 7.30 $ 7.42 $ 7.24 $ 6.86 $ 7.49
======= ======= ======= ======= ========
Total return 4.84%+ 9.63%+ 13.50%+ (1.43%)+ 3.56%+++
Net assets at end of year
(000s) $84,925 $68,392 $31,378 $30,462 $14,383
Ratio of operating expenses
to average net assets 1.25% 1.25% 1.25% 1.25% 1.25%++
Ratio of net investment
income to average net
assets* 6.43% 6.72% 7.24% 7.23% 6.42%++
Portfolio turnover rate 84.12% 106.86% 126.27% 190.50% 53.19%
</TABLE>
* The ratio of net investment income to average net assets differs among
classes by amounts other than the difference in expense ratios because of
fluctuations during the year in relative levels of assets in each class and
in interest income earned.
++ Annualized.
+ Total return figures do not reflect any front-end or contingent deferred
sales charges.
+++ Represents aggregate return for the period without annualization and does
not reflect any front-end or contingent deferred sales charges.
(a) Past results may not be indicative of future performance because of, among
other things, changes in the Fund's investment objective and policies in
March 1992. See "Calculation of Performance Data."
4
<PAGE>
<TABLE>
<CAPTION>
Class B Class C
-------------------------------- ----------------------------------
Year ended December 31 Year ended December 31
-------------------------------- ----------------------------------
1995 1994 1993* 1995 1994 1993*
-------- -------- -------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
year $ 7.46 $ 8.43 $ 8.25 $ 7.45 $ 8.41 $ 8.25
Net investment income .33 .34 .19 .40 .42 .23
Net realized and unrealized
gain (loss) on investments .82 (.97) .24 .81 (.96) .22
Dividends from net investment
income (.35) (.33) (.19) (.42) (.41) (.23)
Distribution from net realized
gains -- (.01) (.06) -- (.01) (.06)
------- ------- ------- ------- ------- --------
Net asset value, end of year $ 8.26 $ 7.46 $ 8.43 $ 8.24 $ 7.45 $ 8.41
======= ======= ======= ======= ======= ========
Total return 15.72%+ (7.59)%+ 5.20%+++ 16.76%+ (6.56)%+ 5.54%+++
Net assets at end of year
(000s) $51,827 $35,338 $27,695 $22,614 $334 $477
Ratio of operating expenses
to average net assets 1.88% 1.95% 1.95%++ 0.88% 0.95% 0.96%++
Ratio of net investment income
to average net assets** 4.19% 4.35% 3.93%++ 4.85% 5.26% 4.92%++
Portfolio turnover rate 97.32% 78.63% 36.16% 97.32% 78.63% 36.16%
</TABLE>
<TABLE>
<CAPTION>
Class D
----------------------------------
Year ended December 31
----------------------------------
1995 1994 1993*
-------- -------- ----------
<S> <C> <C> <C>
Net asset value, beginning of
year $ 7.46 $ 8.43 $ 8.25
Net investment income .33 .34 .19
Net realized and unrealized
gain (loss) on investments .81 (.97) .23
Dividends from net investment
income (.35) (.33) (.18)
Distribution from net realized
gains -- (.01) (.06)
------- ------- --------
Net asset value, end of year $ 8.25 $ 7.46 $ 8.43
======= ======= ========
Total return 15.58%+ (7.59)%+ 5.19%+++
Net assets at end of year
(000s) $4,183 $958 $1,115
Ratio of operating expenses
to average net assets 1.88% 1.95% 1.99%++
Ratio of net investment income
to average net assets** 4.13% 4.31% 3.92%++
Portfolio turnover rate 97.32% 78.63% 36.16%
</TABLE>
*June 7, 1993 (commencement of share class designations) to December 31,
1993.
**The ratio of net investment income to average net assets differs among
classes by amounts other than the difference in expense ratios because of
fluctuations during the year in relative levels of assets in each class and
in interest income earned.
++Annualized.
+Total return figures do not reflect any front-end or contingent deferred
sales charges.
+++Represents aggregate return for the period without annualization and does
not reflect any front-end or contingent deferred sales charge.
The Fund's Investments
The Fund's investment objective is to seek a high level of interest income
exempt from federal income taxes. The Fund's investment objective is a
fundamental policy and may not be changed without the approval of the holders
of a majority of the Fund's outstanding voting securities.
In seeking to achieve its investment objective, the Fund invests at least
80% of its assets under normal circumstances in tax-exempt debt obligations
which the investment manager believes will not involve undue risks. The Fund
invests primarily in notes and bonds issued by or on behalf of state and
local governmental units, the interest income of which, in the opinion of
bond counsel to the issuer, is exempt from federal income taxes ("tax-exempt"
bonds and notes) and which at the time of purchase are considered investment
grade i.e., rated AAA, AA, A or BBB by Standard & Poor's Corporation ("S&P")
or Aaa, Aa, A or Baa by Moody's Investors Service, Inc. ("Moody's"), or which
are not rated but believed by the Investment Manager to be of comparable
quality. Bonds rated Baa by Moody's lack outstanding investment
characteristics and in fact have speculative characteristics as well.
Up to 20% of the Fund's assets may be invested without regard to the
limitations described above. However, during the current year, the Investment
Manager does not anticipate that the Fund will invest more than 5% of its net
assets in securities rated below BBB by S&P or below Baa by Moody's or in
unrated securities of comparable investment quality. See the Statement of
Additional Information for risks associated with lower rated, "high yield"
securities.
The Fund will purchase unrated securities only when the Investment Manager
believes that the issuers of such securities are in financial circumstances
5
<PAGE>
similar to the financial circumstances of issuers of securities rated BB or
Ba or above and the securities themselves are otherwise similar in quality to
those rated BB or Ba or above. In no event will the Fund invest more than 25%
of its total assets in unrated tax-exempt bonds.
The Fund may invest in obligations which have fixed interest rates or
variable or floating interest rates, including short-term obligations which
have daily adjustable rates. Variable or floating rates may be adjusted in
relation to market rates for other instruments, prime rates, indices or
similar indicators. Certain of these adjustable obligations may carry a
demand feature that permits the Fund to receive the par value of the security
upon demand prior to maturity. These obligations may also be subject to
prepayment without penalty at the option of the issuer.
In addition, the Fund may invest in lease obligations or installment
purchase contract obligations, which are instruments supported by lease
payments made by a municipality ("municipal lease obligations"). Municipal
lease obligations may be issued by state and local government authorities to
obtain funds to acquire a wide variety of equipment and facilities such as
fire and sanitation vehicles, computer equipment, buildings and other capital
assets. Although municipal lease obligations do not normally constitute
general obligations of the municipality, a lease obligation is ordinarily
backed by the municipality's agreement to make the payments due under the
lease obligation. However, certain lease obligations contain
"non-appropriation" clauses which provide that the municipality has no
obligation to make lease or installment purchase payments in later years
unless money is appropriated in the future. Municipal lease obligations are a
relatively new form of financing instrument and the market for such
obligations is still developing.
Depending on the development of such markets, such municipal lease
obligations may be deemed to be liquid as determined by or in accordance with
methods adopted by the Trustees. In determining the liquidity and appropriate
valuation of a municipal lease obligation, the following factors relating to
the security are considered, among others: (1) the frequency of trades and
quotes; (2) the number of dealers willing to purchase or sell the security;
(3) the willingness of dealers to undertake to make a market; (4) the nature
of the marketplace trades; and (5) the likelihood that the obligation will
continue to be marketable based on the credit quality of the municipality or
relevant obligor. Municipal lease obligations initially deemed to be liquid
could later become illiquid.
There are risks in any investment program, and there is no assurance that
the Fund will achieve its investment objective. Tax-exempt bonds are subject
to relative degrees of credit risk and market volatility. Credit risk relates
to the issuer's (and any guarantor's) ability to make timely payments of
principal and interest. Market volatility relates to the changes in market
price that occur as a result of variations in the level of prevailing
interest rates and yield relationships between sectors in the tax-exempt bond
market and other market factors.
For information concerning the risks and ratings of tax-exempt bonds, see
"Appendix--Description of Municipal Debt Ratings" in the Statement of
Additional Information.
Portfolio Maturity and Turnover
The Fund's holdings may include issues from across the maturity spectrum.
Ordinarily, the Fund will emphasize investments in longer term tax-exempt
bonds. However, the weighted average maturity of portfolio holdings may be
shortened or lengthened depending upon the Investment Manager's outlook for
interest rates.
The Fund reserves full freedom with respect to portfolio turnover. In periods
when there are rapid changes in economic conditions or security price levels
or when investment strategy is changed significantly, portfolio turnover may
be significantly higher than during times of economic and market price
stability or when investment strategy remains relatively constant. A high
rate of portfolio turnover will result in increased transaction costs for the
Fund and may also result in an increase in the realization of short-term
capital gains.
Portfolio Diversification
The Fund reserves the right to invest more than 25% of its total assets in
tax-exempt industrial develop-
6
<PAGE>
ment revenue bonds. The Fund also reserves the right to invest more than 25%
of its total assets in securities issued in connection with the financing of
projects with similar characteristics, such as toll road revenue bonds,
housing revenue bonds or electric power project revenue bonds, or in
industrial development revenue bonds which are based, directly or indirectly,
on the credit of private entities in any one industry. See "Limiting
Investment Risk" below and the Statement of Additional Information. This may
make the Fund more susceptible to economic, political or regulatory
occurrences affecting a particular industry or sector and increase the
potential for fluctuation of net asset value. Investments in industrial
development revenue bonds which may result in federal alternative minimum
taxes will be limited under present policy to 20% of the Fund's net assets;
see "Dividends and Distributions; Taxes." However, the Fund will not invest
more than 25% of its total assets in securities of issuers conducting their
principal activities in the same state.
Other Investment Policies
The Fund may lend portfolio securities with a value of up to 33-1/3% of its
total assets. The Fund will receive cash or cash equivalents (e.g., U.S.
Government obligations) as collateral in an amount equal to at least 100% of
the current market value of 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 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.
Although the Fund intends to invest primarily in tax-exempt fixed income
securities, to aid in achieving its investment objective it may, subject to
certain limitations, buy and sell options, futures contracts and options on
futures contracts on securities and securities indices and enter into
repurchase agreements and purchase securities on a "when-issued" or forward
commitment basis. The Fund may not establish a position in a commodity
futures contract or purchase or sell a commodity option contract for other
than bona fide hedging purposes if immediately thereafter the sum of the
amount of initial margin deposits and premiums required to establish such
positions for such nonhedging purposes would exceed 5% of the market value of
the Fund's net assets; similar policies apply to options which are not
commodities. The Fund may also enter various forms of swap arrangements,
which have simultaneously the characteristics of a security and a futures
contract, although the Fund does not presently expect to invest more than 5%
of its total assets in such items. These swap arrangements include interest
rate swaps and index swaps. See the Statement of Additional Information.
The Fund may also invest in tax-exempt derivative products including
stripped tax-exempt bonds, synthetic floating rate tax-exempt bonds, and
tax-exempt asset-backed securities, including interests in trusts holding
tax-exempt lease receivables. Some of these products may generate taxable
income or become illiquid. To reduce counterparty risk, the Fund will only
deal with established, reputable institutions.
Limiting Investment Risk
In seeking to lessen investment risk, the Fund operates under certain
fundamental and nonfundamental investment restrictions.
Under the fundamental investment restrictions, the Fund may not (a)
purchase a security of any one issuer (other than securities issued or
guaranteed as to principal or interest by the U.S. Government or its agencies
or instrumentalities or mixed-ownership
7
<PAGE>
Government corporations) if such purchase would, with respect to 75% of the
Fund's total assets, cause more than 5% of the Fund's total assets to be
invested in the securities of such issuer or cause more than 10% of the
voting securities of such issuer to be held by the Fund or (b) invest more
than 25% of the Fund's total assets in securities of non-U.S. Government
issuers conducting their principal activities in the same state. The
foregoing fundamental investment restrictions may not be changed except by
vote of the holders of a majority of the outstanding voting securities of the
Fund.
Under the nonfundamental investment restrictions, the Fund may not invest
more than 15% of its total assets in illiquid securities including repurchase
agreements extending for more than seven days and may not invest more than 5%
of its total assets in restricted securities excluding securities eligible
for resale under Rule 144A under the Securities Act of 1933. Although many
illiquid securities may also be restricted, and vice versa, compliance with
each of these policies will be determined independently. The foregoing
nonfundamental investment restrictions may be changed without a shareholder
vote.
For further information on the above and other fundamental and
nonfundamental investment restrictions, see the Statement of Additional
Information.
The Fund may hold up to 100% of its assets in cash or short-term
securities for temporary defensive purposes. The Fund will adopt a temporary
defensive position when, in the opinion of the Investment Manager, such a
position is more likely to provide protection against adverse market
conditions than adherence to the Fund's other investment policies. The types
of short-term instruments in which the Fund may invest for such purposes
include short-term money market securities such as repurchase agreements and
securities issued or guaranteed by the U.S. Government or its agencies or
instrumentalities, certificates of deposit, time deposits and bankers'
acceptances of certain qualified financial institutions and corporate
commercial paper rated at least "A" by S&P or "Prime" by Moody's (or, if not
rated, issued by companies having an outstanding long-term unsecured debt
issue rated at least "A" by S&P or Moody's). See the Statement of Additional
Information.
The Fund intends that short-term securities acquired for temporary
defensive purposes will be tax-exempt. However, if suitable short-term
tax-exempt securities are not available or if such securities are available
only on a when-issued basis, the Fund may invest up to 50% of its total
assets in short-term securities the interest on which is not exempt from
federal income taxes.
*******************************************************************************
Information on the Purchase of Shares, Redemption of Shares and Shareholder
Services is set forth on pages 8 to 23 below.
The Fund is available for investment by many kinds of investors including
participants investing through savings plans sponsored by employers,
corporations, individuals, etc. The applicability of the general information
and administrative procedures set forth below accordingly will vary depending
on the investor and the recordkeeping system established for a shareholder's
investment in the Fund. Participants in plans should first consult with the
appropriate person at their employer or refer to the plan materials before
following any of the procedures below. For more information or assistance,
anyone may call 1-800-562-0032.
*******************************************************************************
Purchase of Shares
Methods of Purchase
Through Dealers
Shares of the Fund are continuously offered through securities dealers who
have entered into sales agreements with the Distributor. Purchases through
dealers are confirmed at the offering price, which is the net asset value
plus the applicable sales charge, next determined after the order is duly
received by State Street Research Shareholder Services ("Shareholder Ser-
8
<PAGE>
vices"), a division of State Street Research Investment Services, Inc. from
the dealer. ("Duly received" for purposes herein means in accordance with the
conditions of the applicable method of purchase as described below.) The
dealer is responsible for transmitting the order promptly to Shareholder
Services in order to permit the investor to obtain the current price. See
"Purchase of Shares--Net Asset Value" herein.
By Mail
Initial investments in the Fund may be made by mailing or delivering to the
investor's securities dealer a completed Application (accompanying this
Prospectus), together with a check for the total purchase price payable to
the Fund. The dealer must forward the Application and check in accordance
with the instructions on the Application.
Additional shares may be purchased by mailing to Shareholder Services a
check payable to the Fund in the amount of the total purchase price together
with any one of the following: (i) an Application; (ii) the stub from a
shareholder's account statement; or (iii) a letter setting forth the name of
the Fund, the class of shares and the shareholder's account name and number.
Shareholder Services will deliver the purchase order to the transfer agent
and dividend paying agent, State Street Bank and Trust Company (the "Transfer
Agent").
If a check is not honored for its full amount, the purchaser could be
subject to additional charges to cover collection costs and any investment
loss, and the purchase may be cancelled.
By Wire
An investor may purchase shares by wiring Federal Funds of not less than
$5,000 to State Street Bank and Trust Company, which also serves as the
Trust's custodian (the "Custodian"), as set forth below. Prior to making an
investment by wire, an investor must notify Shareholder Services at
1-800-521-6548 and obtain a control number and instructions. Following such
notification, Federal Funds should be wired through the Federal Reserve
System to:
ABA #011000028
State Street Bank and Trust Company
Boston, MA
BNF=State Street Research Tax-Exempt
Fund and class of shares (A, B, C or D)
AC=99029761
OBI=Shareholder Name
Shareholder Account Number
Control #K (assigned by State Street
Research Shareholder Services)
In order for a wire investment to be processed on the same day (i) the
investor must notify Shareholder Services of his or her intention to make
such investment by 12 noon Boston time on the day of his or her investment;
and (ii) the wire must be received by 4 P.M. Boston time that same day.
An investor making an initial investment by wire must promptly complete
the Application accompanying this Prospectus and deliver it to his or her
securities dealer, who should forward it as required. No redemptions will be
effected until the Application has been duly processed.
The Fund may in its discretion discontinue, suspend or change the practice
of accepting orders by any of the methods described above. Orders for the
purchase of shares are subject to acceptance by the Fund. The Fund reserves
the right to suspend the sale of shares, or to reject any purchase order,
including orders in connection with exchanges, for any reason.
Minimum Investment
Class of Shares
---------------------------------
A B C D
----- ----- ---- -------
Minimum Initial Investment
By Wire $5,000 $5,000 (a) $5,000
By Investamatic $1,000 $1,000 (a) $1,000
All Other $2,500 $2,500 (a) $2,500
Minimum Subsequent Investment
By Wire $5,000 $5,000 (a) $5,000
By Investamatic $ 50 $ 50 (a) $ 50
All Other $ 50 $ 50 (a) $ 50
(a) Special conditions apply; contact the Distributor.
The Fund reserves the right to vary the minimums for initial or subsequent
investments as in the case of, for example, exchanges and investments under
various employee benefit plans, sponsored arrangements
9
<PAGE>
involving group solicitation of the members of an organization, or other
investment plans for reinvestment of dividends and distributions or for
periodic investments (e.g., Investamatic Check Program).
Alternative Purchase Program
General
Alternative classes of shares permit investors to select a purchase program
which they believe will be the most advantageous for them, given the amount
of their purchase, the length of time they anticipate holding Fund shares, or
the flexibility they desire in this regard, and other relevant circumstances.
Investors will be able to determine whether in their particular circumstances
it is more advantageous to incur an initial sales charge and not be subject
to certain ongoing charges or to have their entire initial purchase price
invested in the Fund with the investment being subject thereafter to ongoing
service fees and distribution fees.
10
<PAGE>
As described in greater detail below, securities dealers are paid
differing amounts of commission and other compensation depending on which
class of shares they sell.
The major differences among the various classes of shares are as follows:
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS D
--------------------------- ---------------------- -------- ----------------------
<S> <C> <C> <C> <C>
Sales Charges Initial sales charge at Contingent deferred None Contingent deferred
time of investment of up to sales charge of 5% to sales charge of 1%
4.5% depending on amount of 2% applies to any applies to any shares
investment shares redeemed within redeemed within one
first five years year following their
following their purchase
purchase; no
contingent deferred
sales charge after
five years
On investments of $1
million or more, no initial
sales charge; but
contingent deferred sales
charge of 1% applies to any
shares redeemed within one
year following their
purchase
Distribution None 0.75% for first eight None 0.75% each year
Fee years; Class B shares
convert automatically
to Class A shares
after eight years
Service Fee 0.25% each year 0.25% each year None 0.25% each year
Initial Above described initial 4% None 1%
Commission sales charge less 0.25% to
Received by 0.50% retained by
Selling Distributor
Securities
Dealer
On investments of $1
million or more, 0.25% to
0.70% paid to dealer by
Distributor
</TABLE>
11
<PAGE>
In deciding which class of shares to purchase, the investor should
consider the amount of the investment, the length of time the investment is
expected to be held, and the ongoing service fee and distribution fee, among
other factors.
Class A shares are sold at net asset value plus an initial sales charge of
up to 4.5% of the public offering price. Because of the sales charge, not all
of an investor's purchase amount is invested unless the purchase equals
$1,000,000 or more. Class B shareholders pay no initial sales charge, but a
contingent deferred sales charge of up to 5% generally applies to shares
redeemed within five years of purchase. Class D shareholders also pay no
initial sales charge, but a contingent deferred sales charge of 1% generally
applies to redemptions made within one year of purchase. For Class B and
Class D shareholders, therefore, the entire purchase amount is immediately
invested in the Fund.
An investor who qualifies for a significantly reduced initial sales
charge, or a complete waiver of the sales charge on investments of $1,000,000
or more, on the purchase of Class A shares might elect that option to take
advantage of the lower ongoing service and distribution fees that
characterize Class A shares compared with Class B or Class D shares.
Class A, Class B and Class D shares are assessed an annual service fee of
0.25% of average daily net assets. Class B shares are assessed an annual
distribution fee of 0.75% of daily net assets for an eight year period
following the date of purchase and are then automatically converted to Class
A shares. Class D shares are assessed an annual distribution fee of 0.75% of
daily net assets for as long as the shares are held. The prospective investor
should consider these fees plus the initial or contingent deferred sales
charges in estimating the costs of investing in the various classes of the
Fund's shares.
Only certain employee benefit plans and large institutions may make
investments in Class C shares.
Some of the service and distribution fees are also allocated to dealers
(see "Distribution Plan" below). In addition, the Distributor will, at its
expense, provide additional cash and noncash incentives to securities dealers
that sell shares. Such incentives may be extended only to those dealers who
have sold or may sell significant amounts of shares and/or meet other
conditions established by the Distributor; for example, the Distributor may
sponsor special promotions to develop particular distribution channels or to
reach certain investor groups. The incentives may include merchandise and
trips to and attendance at sales seminars at resorts.
Class A Shares--Initial Sales Charges
Sales Charges
The purchase price of a Class A share of the Fund is the Fund's per share net
asset value next determined after the purchase order is duly received, as
defined herein, plus a sales charge which varies depending on the dollar
amount of the shares purchased as set forth in the table below. A major
portion of this sales charge is reallowed by the Distributor to the
securities dealer responsible for the sale.
Sales Sales
Charge Charge
Paid by Paid by Dealer
Dollar Investor Investor Concession
Amount of As % of As % of As % of
Purchase Purchase Net Asset Purchase
Transaction Price Value Price
Less than $100,000 4.50% 4.71% 4.00%
$100,000 or above but
less than $250,000 3.50% 3.63% 3.00%
$250,000 or above but
less than $500,000 2.50% 2.56% 2.00%
$500,000 or above but
less than $1 million 2.00% 2.04% 1.75%
$1 million and above See
following
0% 0% discussion
On any sale of Class A shares to a single investor in the amount of
$1,000,000 or more, the Distributor will pay the authorized securities dealer
a commission based on the aggregate of such sales as follows:
12
<PAGE>
Amount of Sale Commission
------------------------------ -----------
(a) $1 million to $3 million 0.70%
(b) Next $2 million 0.50%
(c) Amount over $5 million 0.25%
On such sales of $1,000,000 or more, the investor is subject to a 1%
contingent deferred sales charge on any portion of the purchase redeemed
within one year of the sale. However, such redeemed shares will not be
subject to the contingent deferred sales charge to the extent that their
value represents (1) capital appreciation or (2) reinvestment of dividends or
capital gains distributions. In addition, the contingent deferred sales
charge will be waived for certain other redemptions as described under
"Contingent Deferred Sales Charge Waivers" below (as otherwise applicable to
Class B shares).
Class A shares of the Fund that are purchased without a sales charge may
be exchanged for Class A shares of certain other Eligible Funds, as described
below, without the imposition of a contingent deferred sales charge, although
contingent deferred sales charges may apply upon a subsequent redemption
within one year of the Class A shares which are acquired through such
exchange. For federal income tax purposes, the amount of the contingent
deferred sales charge will reduce the gain or increase the loss, as the case
may be, on the amount realized on redemption. The amount of any contingent
deferred sales charge will be paid to the Distributor.
Reduced Sales Charges
The reduced sales charges set forth in the table above are applicable to
purchases made at any one time by any "person," as defined in the Statement
of Additional Information, of $100,000 or more of Class A shares of the Fund
or a combination of "Eligible Funds." "Eligible Funds" include the Fund and
other funds so designated by the Distributor from time to time. Class B,
Class C and Class D shares may also be included in the combination under
certain circumstances. Securities dealers should call Shareholder Services
for details concerning the other Eligible Funds and any persons who may
qualify for reduced sales charges and related information. See the Statement
of Additional Information.
Letter of Intent
Any investor who provides a Letter of Intent may qualify for a reduced sales
charge on purchases of no less than an aggregate of $100,000 of Class A
shares of the Fund and any other Eligible Funds within a 13-month period.
Class B, Class C and Class D shares may be included in the combination under
certain circumstances. Additional information on a Letter of Intent is
available from dealers, or from the Distributor, and also appears in the
Statement of Additional Information.
Right of Accumulation
Investors may purchase Class A shares of the Fund or a combination of shares
of the Fund and other Eligible Funds at reduced sales charges pursuant to a
Right of Accumulation. Under the Right of Accumulation, the sales charge is
determined by combining the current purchase with the value of the Class A
shares of other Eligible Funds held at the time of purchase. Class B, Class C
and Class D shares may also be included in the combination under certain
circumstances. See the Statement of Additional Information and call
Shareholder Services for details concerning the Right of Accumulation.
Other Programs
Class A shares of the Fund may be sold or issued in an exchange at a reduced
sales charge or without a sales charge pursuant to certain sponsored
arrangements, which include programs under which a company, employee benefit
plan or other organization makes recommendations to, or permits group
solicitation of, its employees, members or participants, except any
organization created primarily for the purpose of obtaining shares of the
Fund at a reduced sales charge or without a sales charge. Sales without a
sales charge, or with a reduced sales charge, may also be made through
brokers, financial planners, institutions, and others, under managed
fee-based programs (e.g., "wrap fee" or similar programs) which meet certain
requirements established from time to time by the Distributor. Information on
such arrangements and further conditions and limitations is available from
the Distributor.
In addition, no sales charge is imposed in connection with the sale of
Class A shares of the Fund to the fol-
13
<PAGE>
lowing entities and persons: (A) the Investment Manager, Distributor, or any
affiliated entities, including any direct or indirect parent companies and
other subsidiaries of such parents (collectively "Affiliated Companies"); (B)
employees, officers, sales representatives or current or retired directors or
trustees of the Affiliated Companies or any investment company managed by any
of the Affiliated Companies, any relatives of any such individuals whose
relationship is directly verified by such individuals to the Distributor, or
any beneficial account for such relatives or individuals; and (C) employees,
officers, sales representatives or directors of dealers and other entities
with a selling agreement with the Distributor to sell shares of any
aforementioned investment company, any spouse or child of such person, or any
beneficial account for any of them. The purchase must be made for investment
and the shares purchased may not be resold except through redemption. This
purchase program is subject to such administrative policies, regarding the
qualification of purchasers and any other matters, as may be adopted by the
Distributor from time to time.
Class B Shares--Contingent Deferred Sales Charges
Contingent Deferred Sales Charges
The public offering price of Class B shares is the net asset value per share
next determined after the purchase order is duly received, as defined herein.
No sales charge is imposed at the time of purchase; thus the full amount of
the investor's purchase payment will be invested in the Fund. However, a
contingent deferred sales charge may be imposed upon redemptions of Class B
shares as described below.
The Distributor will pay securities dealers at the time of sale a 4%
commission for selling Class B shares. The proceeds of the contingent
deferred sales charge and the distribution fee are used to offset
distribution expenses and thereby permit the sale of Class B shares without
an initial sales charge.
Class B shares that are redeemed within a five year period after their
purchase will not be subject to a contingent deferred sales charge to the
extent that the value of such shares represents (1) capital appreciation of
Fund assets or (2) reinvestment of dividends or capital gains distributions.
The amount of any applicable contingent deferred sales charge will be
calculated by multiplying the net asset value of such shares at the time of
redemption or at the time of purchase, whichever is lower, by the applicable
percentage shown in the table below:
Contingent Deferred Sales Charge As
A Percentage Of Net Asset Value At
Redemption During Redemption
- -------------------------- -----------------------------------
1st Year Since Purchase 5%
2nd Year Since Purchase 4
3rd Year Since Purchase 3
4th Year Since Purchase 3
5th Year Since Purchase 2
6th Year Since
Purchase and Thereafter None
In determining the applicability and rate of any contingent deferred sales
charge, it will be assumed that a redemption of Class B shares is made first
of those shares having the greatest capital appreciation, next of shares
representing reinvestment of dividends and capital gains distributions and
finally of remaining shares held by the shareholder for the longest period of
time. The holding period for purposes of applying a contingent deferred sales
charge on Class B shares of the Fund acquired through an exchange from
another Eligible Fund will be measured from the date that such shares were
initially acquired in the other Eligible Fund, and Class B shares being
redeemed will be considered to represent, as applicable, capital appreciation
or dividend and capital gains distribution reinvestments in such other
Eligible Fund. These determinations will result in any contingent deferred
sales charge being imposed at the lowest possible rate. For federal income
tax purposes, the amount of the contingent deferred sales charge will reduce
the gain or increase the loss, as the case may be, on the amount realized on
redemption. The amount of any contingent deferred sales charge will be paid
to the Distributor.
Contingent Deferred Sales Charge Waivers
The contingent deferred sales charge does not apply to exchanges, or to
redemptions under a systematic withdrawal plan which meets certain
conditions. In addition, the contingent deferred sales charge will be waived
for: (i) redemptions made within one year of the death or total disability,
as defined by the Social
14
<PAGE>
Security Administration, of all shareholders of an account; (ii) redemptions
made after attainment of a specific age in an amount which represents the
minimum distribution required at such age under Section 401(a)(9) of the
Internal Revenue Code for retirement accounts or plans (e.g., age 70-1/2 for
IRAs and Section 403(b) plans), calculated solely on the basis of assets
invested in the Fund or other Eligible Funds; and (iii) a redemption
resulting from a tax-free return of an excess contribution to an IRA. (The
foregoing waivers do not apply to a tax-free rollover or transfer of assets
out of the Fund.) The Fund may modify or terminate the waivers at any time;
for example, the Fund may limit the application of multiple waivers.
Conversion of Class B Shares to Class A Shares
A shareholder's Class B shares, including all shares received as dividends or
distributions with respect to such shares, will automatically convert to
Class A shares of the Fund at the end of eight years following the issuance
of the Class B shares; consequently, they will no longer be subject to the
higher expenses borne by Class B shares. The conversion rate will be
determined on the basis of the relative per share net asset values of the two
classes and may result in a shareholder receiving either a greater or fewer
number of Class A shares than the Class B shares so converted. As noted
above, holding periods for Class B shares received in exchange for Class B
shares of other Eligible Funds will be counted toward the eight-year period.
Class C Shares--Institutional; No Sales Charge
The purchase price of a Class C share of the Fund is the Fund's per share net
asset value next determined after the purchase order is duly received, as
defined herein. No sales charge is imposed at the time of purchase or
redemption. The Fund will receive the full amount of the investor's purchase
payment.
Class C shares are only available for new investments by certain employee
benefit plans and large institutions. See the Statement of Additional
Information. Information on the availability of Class C shares and further
conditions and limitations is available from the Distributor. An employee
benefit plan or endowment fund eligible to invest in Class C shares should
first consult with its dealer before investing in any other class of shares,
to obtain information on the higher sales charges, and service and
distribution fees applicable to such other classes of shares.
Class C shares may have also been issued directly or through exchanges to
those shareholders of the Fund and other Eligible Funds who previously held
shares which are not subject to any future sales charge or service fees or
distribution fees.
Class D Shares--Spread Sales Charges
The purchase price of a Class D share of the Fund is the Fund's per share net
asset value next determined after the purchase order is duly received, as
defined herein. No sales charge is imposed at the time of purchase; thus the
full amount of the investor's purchase payment will be invested in the Fund.
Class D shares are subject to a 1% contingent deferred sales charge on any
portion of the purchase redeemed within one year of the sale. The contingent
deferred sales charge will be 1% of the lesser of the net asset value of the
shares at the time of purchase or at the time of redemption. The Distributor
pays securities dealers a 1% commission for selling Class D shares at the
time of purchase. The proceeds of the contingent deferred sales charge and
the distribution fee are used to offset distribution expenses and thereby
permit the sale of Class D shares without an initial sales charge.
Class D shares that are redeemed within one year after purchase will not
be subject to the contingent deferred sales charge to the extent that the
value of such shares represents (1) capital appreciation of Fund assets or
(2) reinvestment of dividends or capital gains distributions. In addition,
the contingent deferred sales charge will be waived for certain other
redemptions as described under "Contingent Deferred Sales Charge Waivers"
above (as otherwise applicable to Class B shares). For federal income tax
purposes, the amount of the contingent deferred sales charge will reduce the
gain or increase the loss, as the case may be, on the amount realized on
redemption. The amount of any contingent deferred sales charge will be paid
to the Distributor.
15
<PAGE>
Net Asset Value
The Fund's per share net asset values are determined Monday through Friday as
of the close of the New York Stock Exchange (the "NYSE") exclusive of days on
which the NYSE is closed. The NYSE ordinarily closes at 4 P.M. New York City
time. Market quotations for most municipal securities are not readily
available on a daily basis; therefore, the Fund uses one or more pricing
services to value such assets. The pricing services utilize information with
respect to market transactions, quotations from dealers and various
relationships among securities in determining value and may provide prices
determined as of times prior to the close of the NYSE. Assets for which
market quotations are readily available are valued as of the close of
business on the valuation date. Securities for which there is no pricing
service valuation or last reported sale price are valued as determined in
good faith by or under the authority of the Trustees of the Trust. The
Trustees have authorized the use of the amortized cost method to value
short-term debt instruments issued with a maturity of one year or less and
having a remaining maturity of 60 days or less when the value obtained is
fair value. Further information with respect to the valuation of the Fund's
assets is included in the Statement of Additional Information.
Distribution Plan
The Fund has adopted a Plan of Distribution Pursuant to Rule 12b-1 (the
"Distribution Plan") in accordance with the regulations under the Investment
Company Act of 1940, as amended (the "1940 Act"). Under the provisions of the
Distribution Plan, the Fund makes payments to the Distributor based on an
annual percentage of the average daily value of the net assets of each class
of shares as follows:
Class 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 pay or reimburse securities
dealers (including securities dealers that are affiliates of the Distributor)
or others for personal services and/or the maintenance or servicing of
shareholder accounts. A portion of any initial commission paid to dealers for
the sale of shares of the Fund represents payment for personal services
and/or the maintenance of shareholder accounts by such dealer. Dealers who
have sold Class A shares are eligible for further reimbursements commencing
as of the time of such sale. Dealers who have sold Class B and Class D shares
are eligible for further reimbursements after the first year during which
such shares have been held of record by such dealer as nominee for its
clients (or by such clients directly). Any service fees received by the
Distributor and not allocated to dealers may be applied by the Distributor in
reduction of expenses incurred by it directly for personal services and the
maintenance or servicing of shareholder accounts.
The distribution fees are used primarily to offset initial and ongoing
commissions paid to securities dealers for selling such shares. Any
distribution fees received by the Distributor and not allocated to dealers
may be applied by the Distributor in connection with sales or marketing
efforts, including special promotional fees and cash and noncash incentives
based upon sales by securities dealers.
The Distributor provides distribution services on behalf of other funds
having distribution plans and receives similar payments from, and incurs
similar expenses on behalf of, such other funds. When expenses of the
Distributor cannot be identified as relating to a specific fund, the
Distributor allocates expenses among the funds in a manner deemed fair and
equitable to each fund.
Commissions and other cash and noncash incentives and payments to dealers,
to the extent payable out of the general profits, revenues or other sources
of the Distributor (including the advisory fees paid by the Fund), have also
been authorized pursuant to the Distribution Plan.
A rule of the National Association of Securities Dealers, Inc. ("NASD")
limits the annual expenditures which the Fund may incur under the
Distribution Plan to 1%, of which 0.75% may be used to pay distribution
expenses and 0.25% may be used to pay shareholder service fees. The NASD rule
also limits the aggregate amount which the Fund may pay for such distribution
costs to 6.25% of gross share sales of a class since the
16
<PAGE>
inception of any asset-based sales charge plus interest at the prime rate
plus 1% on unpaid amounts thereof (less any contingent deferred sales
charges). Such limitation does not apply to shareholder service fees.
Payments to the Distributor or to dealers funded under the Distribution Plan
may be discontinued at any time by the Trustees of the Trust.
Redemption of Shares
Shareholders may redeem all or any portion of their accounts on any day the
NYSE is open for business. Redemptions will be effective at the net asset
value per share next determined (see "Purchase of Shares--Net Asset Value"
herein) after receipt of the redemption request, in accordance with the
requirements described below, by Shareholder Services and delivery of the
request by Shareholder Services to the Transfer Agent. To allow time for the
clearance of checks used for the purchase of any shares which are tendered
for redemption shortly after purchase, the remittance of the redemption
proceeds for such shares could be delayed for 15 days or more after the
purchase. Shareholders who anticipate a potential need for immediate access
to their investments should, therefore, purchase shares by wire. Except as
noted, redemption proceeds from the Fund are normally remitted within seven
days after receipt of the redemption request by the Fund and any necessary
documents in good order.
Methods of Redemption
Request By Mail
A shareholder may request redemption of shares, with proceeds to be mailed to
the shareholder or wired to a predesignated bank account (see "Proceeds By
Wire" below) by sending to State Street Research Shareholder Services, P.O.
Box 8408, Boston, Massachusetts 02266-8408: (1) a written request for
redemption signed by the registered owner(s) of the shares, exactly as the
account is registered; (2) an endorsed stock power in good order with respect
to the shares or, if issued, the share certificates for the shares endorsed
for transfer or accompanied by an endorsed stock power; (3) any required
signature guarantees (see "Redemption of Shares--Signature Guarantees"
below); and (4) any additional documents which may be required for redemption
in the case of corporations, trustees, etc., such as certified copies of
corporate resolutions, governing instruments, powers of attorney, and the
like. The Transfer Agent will not process requests for redemption until it
has received all necessary documents in good order. A shareholder will be
notified promptly if a redemption request cannot be accepted. Shareholders
having any questions about the requirements for redemption should call
Shareholder Services toll-free at 1-800-562-0032.
Request By Telephone
Shareholders may request redemption by telephone with proceeds to be
transmitted by check or by wire (see "Proceeds By Wire" below). A shareholder
can request a redemption for $50,000 or less to be transmitted by check. Such
check for the proceeds will be made payable to the shareholder of record and
will be mailed to the address of record. There is no fee for this service. It
is not available for shares held in certificate form or if the address of
record has been changed within 30 days of the redemption request. The Fund
may revoke or suspend the telephone redemption privilege at any time and
without notice. See "Shareholder Services--Telephone Services" for a
discussion of the conditions and risks associated with Telephone Privileges.
Request By Check (Class A Shares Only)
Shareholders of Class A shares of the Fund may redeem shares by checks drawn
on State Street Bank and Trust Company. Checks may be made payable to the
order of any person or organization designated by the shareholder and must be
for amounts of at least $500 but not more than $100,000. Shareholders will
continue to earn dividends on the shares to be redeemed until the check
clears. There is currently no charge associated with redemption of shares by
check. Checkbooks are supplied for a $2 fee. Checks will be sent only to the
registered owner at the address of record. A $10 fee will be charged against
an account in the event a redemption check is presented for payment and not
honored pursuant to the terms and conditions established by State Street Bank
and Trust Company.
Shareholders can request the checkwriting privilege by completing the
signature card which is part of the
17
<PAGE>
Application. In order to arrange for redemption-by-check after an account has
been opened, a revised Application with signature card and signatures
guaranteed must be sent to Shareholder Services. Cancelled checks will be
returned to shareholders at the end of each month.
The redemption-by-check service is subject to State Street Bank and Trust
Company's rules and regulations applicable to checking accounts (as amended
from time to time), and is governed by the Massachusetts Uniform Commercial
Code. All notices with respect to checks drawn on State Street Bank and Trust
Company must be given to State Street Bank and Trust Company. Stop payment
instructions with respect to checks must be given to State Street Bank and
Trust Company by calling 1-617-985-8543. Shareholders may not close out an
account by check.
Proceeds By Wire
Upon a shareholder's written request or by telephone if the shareholder has
Telephone Privileges (see "Shareholder Services--Telephone Services" herein),
the Trust's custodian will wire redemption proceeds to the shareholder's
predesignated bank account. To make the request, the shareholder should call
1-800-521-6548 prior to 4 P.M. Boston time. A $7.50 charge against the
shareholder's account will be imposed for each wire redemption. This charge
is subject to change without notice. The shareholder's bank may also impose a
charge for receiving wires of redemption proceeds. The minimum redemption by
wire is $5,000.
Request to Dealer to Repurchase
For the convenience of shareholders, the Fund has authorized the Distributor
as its agent to accept orders from dealers by wire or telephone for the
repurchase of shares by the Distributor from the dealer. The Fund may revoke
or suspend this authorization at any time. The repurchase price is the net
asset value for the applicable shares next determined following the time at
which the shares are offered for repurchase by the dealer to the Distributor.
The dealer is responsible for promptly transmitting a shareholder's order to
the Distributor. Payment of the repurchase proceeds is made to the dealer who
placed the order promptly upon delivery of certificates for shares in proper
form for transfer or, for Open Accounts, upon the receipt of a stock power
with signatures guaranteed as described below, and, if required, any
supporting documents. Neither the Fund nor the Distributor imposes any charge
upon such a repurchase. However, a dealer may impose a charge as agent for a
shareholder in the repurchase of his or her shares.
The Fund has reserved the right to change, modify or terminate the
services described above at any time.
Additional Information
Because of the relatively high cost of maintaining small shareholder
accounts, the Fund reserves the right to involuntarily redeem at its option
any shareholder account which remains below $1,500 for a period of 60 days
after notice is mailed to the applicable shareholder, or to impose a
maintenance fee on such account after 60 days' notice. Such involuntary
redemptions will be subject to applicable sales charges, if any. The Fund may
increase such minimum account value above such amount in the future after
notice to affected shareholders. Involuntarily redeemed shares will be priced
at the net asset value on the date fixed for redemption by the Fund, and the
proceeds of the redemption will be mailed promptly to the affected
shareholder at the address of record. Currently, the maintenance fee is $18
annually, which is paid to the Transfer Agent. The fee does not apply to
certain retirement accounts or if the shareholder has more than an aggregate
of $50,000 invested in the Fund and other Eligible Funds combined. Imposition
of a maintenance fee on a small account could, over time, exhaust the assets
of such account.
To cover the cost of additional compliance administration, a $20 fee will
be charged against any shareholder account that has been determined to be
subject to escheat under applicable state laws.
The Fund may not suspend the right of redemption or postpone the date of
payment of redemption proceeds for more than seven days, except that (a) it
may elect to suspend the redemption of shares or
18
<PAGE>
postpone the date of payment of redemption proceeds: (1) during any period
that the NYSE is closed (other than customary weekend and holiday closings)
or trading on the NYSE is restricted; (2) during any period in which an
emergency exists as a result of which disposal of portfolio securities is not
reasonably practicable or it is not reasonably practicable to determine the
Fund's net asset values; or (3) during such other periods as the Securities
and Exchange Commission may by order permit for the protection of investors;
and (b) the payment of redemption proceeds may be postponed as otherwise
provided under "Redemption of Shares" herein.
Signature Guarantees
To protect shareholder accounts, the Transfer Agent, the Fund, the Investment
Manager and the Distributor from possible fraud, signature guarantees are
required for certain redemptions. Signature guarantees help the Transfer
Agent to determine that the person who has authorized a redemption from the
account is, in fact, the shareholder. Signature guarantees are required for,
among other things: (1) written requests for redemptions for more than
$50,000; (2) written requests for redemptions for any amount if the proceeds
are transmitted to other than the current address of record (unchanged in the
past 30 days); (3) written requests for redemptions for any amount submitted
by corporations and certain fiduciaries and other intermediaries; (4)
requests to transfer the registration of shares to another owner; and (5)
authorizations to establish the checkwriting privilege. Signatures must be
guaranteed by a bank, a member firm of a national stock exchange, or other
eligible guarantor institution. The Transfer Agent will not accept guarantees
(or notarizations) from notaries public. The above requirements may be waived
in certain instances. Please contact Shareholder Services at 1-800-562-0032
for specific requirements relating to your account.
Shareholder Services
The Open Account System
Under the Open Account System full and fractional shares of the Fund owned by
shareholders are credited to their accounts by the Transfer Agent, State
Street Bank and Trust Company, 225 Franklin Street, Boston, Massachusetts
02110. Certificates representing Class B or Class D shares will not be
issued, while certificates representing Class A or Class C shares will only
be issued if specifically requested in writing and, in any case, will only be
issued for full shares, with any fractional shares to be carried on the
shareholder's account. Shareholders will receive periodic statements of
transactions in their account.
The Fund's Open Account System provides the following options:
1. Additional purchases of shares of the Fund may be made through dealers,
by wire or by mailing a check payable to the Fund to Shareholder
Services under the terms set forth above under "Purchase of Shares."
2. The following methods of receiving dividends from investment income and
distributions from capital gains are available:
(a) All income dividends and capital gains distributions reinvested in
additional shares of the Fund.
(b) All income dividends in cash; all capital gains distributions
reinvested in additional shares of the Fund.
(c) All income dividends and capital gains distributions in cash.
(d) All income dividends and capital gains distributions invested in
any one available Eligible Fund designated by the shareholder as
described below. See "Dividend Allocation Plan" herein.
Dividend and distribution selections should be made on the Application
accompanying the initial investment. If no selection is indicated on the
Application, that account will automatically be coded for reinvestment of all
dividends and distributions in additional shares of the same class of the
Fund. Selections may be changed at any time by telephone or written notice to
Shareholder Services. Dividends and distributions are reinvested at net asset
value without a sales charge.
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<PAGE>
Exchange Privilege
Shareholders of the Fund may exchange their shares for available shares with
corresponding characteristics of any of the other Eligible Funds at any time
on the basis of the relative net asset values of the respective shares to be
exchanged, subject to compliance with applicable securities laws.
Shareholders of any other Eligible Fund may similarly exchange their shares
for Fund shares with corresponding characteristics. Prior to making an
exchange, shareholders should obtain the Prospectus of the Eligible Fund into
which they are exchanging. Under the Direct Program, subject to certain
conditions, shareholders may make arrangements for regular exchanges from the
Fund into other Eligible Funds. To effect an exchange, Class A, Class B and
Class D shares may be redeemed without the payment of any contingent deferred
sales charge that might otherwise be due upon an ordinary redemption of such
shares. The State Street Research Money Market Fund issues Class E shares
which are sold without any sales charge. Exchanges of State Street Research
Money Market Fund Class E shares into Class A shares of the Fund or any other
Eligible Fund are subject to the initial sales charge or contingent deferred
sales charge applicable to an initial investment in such Class A shares,
unless a prior Class A sales charge has been paid directly or indirectly with
respect to the shares redeemed. For purposes of computing the contingent
deferred sales charge that may be payable upon disposition of the acquired
Class A, Class B and Class D shares, the holding period of the redeemed
shares is "tacked" to the holding period of the acquired shares. The period
any Class E shares are held is not tacked to the holding period of any
acquired shares. No exchange transaction fee is currently imposed on any
exchange.
Shares of the Fund may also be acquired or redeemed in exchange for shares
of the Summit Cash Reserves Fund ("Summit Cash Reserves") by customers of
Merrill Lynch, Pierce, Fenner & Smith Incorporated (subject to completion of
steps necessary to implement the program). The Fund and Summit Cash Reserves
are related mutual funds for purposes of investment and investor services.
Upon the acquisition of shares of Summit Cash Reserves by exchange for
redeemed shares of the Fund, (a) no sales charge is imposed by Summit Cash
Reserves, (b) no contingent deferred sales charge is imposed by the Fund on
the Fund shares redeemed, and (c) any applicable holding period of the Fund
shares redeemed is "tolled," that is, the holding period clock stops running
pending further transactions. Upon the acquisition of shares of the Fund by
exchange for redeemed shares of Summit Cash Reserves, (a) the acquisition of
Class A shares shall be subject to the initial sales charges or contingent
deferred sales charges applicable to an initial investment in such Class A
shares, unless a prior Class A sales charge has been paid directly or
indirectly with respect to the Summit Cash Reserves shares redeemed, and (b)
the acquisition of Class B or Class D shares of the Fund shall restart any
holding period previously tolled, or shall be subject to the contingent
deferred sales charge applicable to an initial investment in such shares.
For the convenience of its shareholders who have Telephone Privileges, the
Fund permits exchanges by telephone request from either the shareholder or
his or her dealer. Shares may be exchanged by telephone provided that the
registration of the two accounts is the same. The toll-free number for
exchanges is 1-800-521-6548. See "Telephone Services" herein for a discussion
of conditions and risks associated with Telephone Privileges.
The exchange privilege may be exercised only in those states where shares
of the relevant other Eligible Fund may legally be sold. For tax purposes,
each exchange actually represents the sale of shares of one fund and the
purchase of shares of another. Accordingly, exchanges may produce a capital
gain or loss for tax purposes. The exchange privilege may be terminated or
suspended or its terms changed at any time, subject, if required under
applicable regulations, to 60 days' prior notice. New accounts established
for investment upon exchange from an existing account in another fund will
have the same Telephone Privileges as the existing account, unless
Shareholder Services is notified otherwise. Related administrative policies
and procedures may also be adopted with regard to a series of exchanges,
street name accounts, sponsored arrangements and other matters.
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<PAGE>
The exchange privilege is not designed for use in connection with
short-term trading or market timing strategies. To protect the interests of
shareholders, the Fund reserves the right to temporarily or permanently
terminate the exchange privilege for any person who makes more than six
exchanges out of or into the Fund per calendar year. Accounts under common
ownership or control, including accounts with the same taxpayer
identification number, may be aggregated for purposes of the six exchange
limit. Notwithstanding the six exchange limit, the Fund reserves the right to
refuse exchanges by any person or group if, in the Investment Manager's
judgment, the Fund would be unable to invest effectively in accordance with
its investment objective and policies, or would otherwise potentially be
adversely affected. Exchanges may be restricted or refused if the Fund
receives or anticipates simultaneous orders affecting significant portions of
the Fund's assets. In particular, a pattern of exchanges that coincides with
a "market timing" strategy may be disruptive to the Fund. The Fund may impose
these restrictions at any time. The exchange limit may be modified for
accounts in certain institutional retirement plans because of plan exchange
limits, Department of Labor regulations or administrative and other
considerations. Subject to the foregoing, if an exchange request in good
order is received by Shareholder Services and delivered by Shareholder
Services to the Transfer Agent by 12 noon Boston time on any business day,
the exchange usually will occur that day. For further information regarding
the exchange privilege, shareholders should contact Shareholder Services.
Reinvestment Privilege
A shareholder of the Fund who has redeemed shares or had shares repurchased
at his or her request may reinvest all or any portion of the proceeds (plus
that amount necessary to acquire a fractional share to round off his or her
reinvestment to full shares) in shares, of the same class as the shares
redeemed, of the Fund or any other Eligible Fund at net asset value and
without subjecting the reinvestment to an initial sales charge, provided such
reinvestment is made within 120 calendar days after a redemption or
repurchase. Upon such reinvestment, the shareholder will be credited with any
contingent deferred sales charge previously charged with respect to the
amount reinvested. The redemption of shares is, for federal income tax
purposes, a sale on which the shareholder may realize a gain or loss. If a
redemption at a loss is followed by a reinvestment within 30 days, the
transaction may be a "wash sale" resulting in a denial of the loss for
federal income tax purposes.
Any reinvestment pursuant to the reinvestment privilege will be subject to
any applicable minimum account standards imposed by the fund in which the
reinvestment is made. Shares are sold to a reinvesting shareholder at the net
asset value thereof next determined following timely receipt by Shareholder
Services of such shareholder's written purchase request and delivery of the
request by Shareholder Services to the Transfer Agent. A shareholder may
exercise this reinvestment privilege only once per 12-month period with
respect to his or her shares of the Fund. No charge is imposed by the Fund
for such reinvestments; however, dealers may charge fees in connection with
the reinvestment privilege. The reinvestment privilege may be exercised with
respect to an Eligible Fund only in those states where shares of the relevant
other Eligible Fund may legally be sold.
Investment Plans
The Investamatic Check Program is available to Class A, Class B and Class D
shareholders. Under this Program, shareholders may make regular investments
by authorizing withdrawals from their bank accounts each month or quarter on
the Application available from Shareholder Services.
Systematic Withdrawal Plan
A shareholder who owns noncertificated Class A or Class C shares with a value
of $5,000 or more, or Class B or Class D shares with a value of $10,000 or
more, may elect, by participating in the Fund's Systematic Withdrawal Plan,
to have periodic checks issued for specified amount. These amounts may not be
less than certain minimums, depending on the class of shares held. The Plan
provides that all income dividends and capital gains distributions of the
Fund shall be credited to participating shareholders in additional shares of
the Fund. Thus, the withdrawal amounts paid can only be
21
<PAGE>
realized by redeeming shares of the Fund under the Plan. To the extent such
amounts paid exceed dividends and distributions from the Fund, a
shareholder's investment will decrease and may eventually be exhausted.
In the case of shares otherwise subject to contingent deferred sales
charges, no such charges will be imposed on withdrawals of up to 8% annually
of either (a) the value, at the time the Plan is initiated, of the shares
then in the account, or (b) the value, at the time of a withdrawal, of the
same number of shares as in the account when the Plan was initiated,
whichever is higher.
Expenses of the Plan are borne by the Fund. A participating shareholder
may withdraw from the Plan, and the Fund may terminate the Plan at any time
on written notice. Purchase of additional shares while a shareholder is
receiving payments under a Plan is ordinarily disadvantageous because of
duplicative sales charges. For this reason, a shareholder may not participate
in the Investamatic Check Program and the Systematic Withdrawal Plan at the
same time.
Dividend Allocation Plan
The Dividend Allocation Plan allows shareholders to elect to have all their
dividends and any other distributions from the Fund or any Eligible Fund
automatically invested at net asset value in one other such Eligible Fund
designated by the shareholder, provided the account into which the investment
is made is initially funded with the requisite minimum amount. The number of
shares purchased will be determined as of the dividend payment date. The
Dividend Allocation Plan is subject to state securities law requirements, to
suspension at any time, and to such policies, limitations and restrictions,
as, for instance may be applicable to street name or master accounts, that
may be adopted from time to time.
Automatic Bank Connection
A shareholder may elect, by participating in the Fund's Automatic Bank
Connection ("ABC"), to have dividends and other distributions, including
Systematic Withdrawal Plan payments, automatically deposited in the
shareholder's bank account by electronic funds transfer. Some contingent
deferred sales charges may apply. See "Systematic Withdrawal Plan" herein.
Reports
Reports for the Fund will be sent to shareholders of record at least
semiannually. These reports will include a list of the securities owned by
the Fund as well as the Fund's financial statements.
Telephone Services
The following telephone privileges ("Telephone Privileges") can be used:
(1) the privilege allowing the shareholder to make telephone redemptions
for amounts up to $50,000 to be mailed to the shareholder's address of
record is available automatically;
(2) the privilege allowing the shareholder or his or her dealer to make
telephone exchanges is available automatically;
(3) the privilege allowing the shareholder to make telephone redemptions
for amounts over $5,000, to be remitted by wire to the shareholder's
predesignated bank account, is available by election on the
Application accompanying this Prospectus. A current shareholder who
did not previously request such telephone wire privilege on his or her
original Application may request the privilege by completing a
Telephone Redemption-by-Wire Form which may be obtained by calling
1-800-562-0032. The Telephone Redemption-by-Wire Form requires a
signature guarantee; and
(4) the privilege allowing the shareholder to make telephone purchases or
redemptions, transmitted via the Automated Clearing House system, into
or from the shareholder's predesignated bank account, is available
upon completion of the requisite initial documentation. For details
and forms, call 1-800-562-0032. The documentation requires a signature
guarantee.
A shareholder may decline the automatic Telephone Privileges set forth in
(1) and (2) above by so indicating on the Application accompanying this
Prospectus.
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<PAGE>
A shareholder may discontinue any Telephone Privilege at any time by
advising Shareholder Services that the shareholder wishes to discontinue the
use of such privileges in the future.
Unless such Telephone Privileges are declined, a shareholder is deemed to
authorize Shareholder Services and the Transfer Agent to: (1) act upon the
telephone instructions of any person purporting to be the shareholder to
redeem, or purporting to be the shareholder or the shareholder's dealer to
exchange, shares from any account; and (2) honor any written instructions for
a change of address regardless of whether such request is accompanied by a
signature guarantee. All telephone calls will be recorded. None of the Fund,
the other Eligible Funds, the Transfer Agent, the Investment Manager or the
Distributor will be liable for any loss, expense or cost arising out of any
request, including any fraudulent or unauthorized requests. Shareholders
assume the risk to the full extent of their accounts that telephone requests
may be unauthorized. Reasonable procedures will be followed to confirm that
instructions communicated by telephone are genuine. The shareholder will not
be liable for any losses arising from unauthorized or fraudulent instructions
if such procedures are not followed.
Shareholders may redeem or exchange shares by calling toll-free
1-800-521-6548. Although it is unlikely, during periods of extraordinary
market conditions, a shareholder may have difficulty in reaching Shareholder
Services at such telephone number. In that event, the shareholder should
contact Shareholder Services at 1-800-562-0032, 1-617-357-7805 or otherwise
at its main office at One Financial Center, Boston, Massachusetts 02111-2690.
Shareholder Account Inquiries: Please call 1-800-562-0032
Call this number for assistance in answering general questions on your
account, including account balance, available shareholder services, statement
information and performance of the Fund. Account inquiries may also be made
in writing to State Street Research Shareholder Services, P.O. Box 8408,
Boston, Massachusetts 02266-8408. A fee of up to $10 will be charged against
an account for providing additional account transcripts or photocopies of
paid redemption checks or for researching records in response to special
requests.
Shareholder Telephone Transactions: Please call 1-800-521-6548
Call this number for assistance in purchasing shares by wire and for
telephone redemptions or telephone exchange transactions. Shareholder
Services will require some form of personal identification prior to acting
upon instructions received by telephone. Written confirmation of each
transaction will be provided.
The Fund and Its Shares
The Fund was organized in 1985 as a series of State Street Research
Tax-Exempt Trust (formerly,MetLife -State Street Tax-Exempt Trust), a
Massachusetts business trust. The Trustees have authorized shares of the Fund
to be issued in four classes: Class A, Class B, Class C and Class D. The
Trust is registered with the Securities and Exchange Commission as an
open-end management investment company. The fiscal year end of the Fund is
December 31.
Except for those differences between the classes of shares described below
and elsewhere in the Prospectus, each share of a Fund has equal dividend,
redemption and liquidation rights with other shares of the Fund and when
issued is fully paid and nonassessable. In the future, certain classes may be
redesignated, for administrative purposes only, to conform to standard class
designations and common usage of terms which may develop in the mutual fund
industry. For example, Class C shares may be redesignated as Class Y shares
and Class D shares may be redesignated as Class C shares. Any redesignation
would not affect any substantive rights respecting the shares.
Each share of each class of shares represents an identical legal interest
in the same portfolio of investments of the Fund, has the same rights and is
identical in all respects, except that Class B and Class D shares bear the
expenses of the deferred sales arrangement and any expenses (including the
higher service and distribution fees) resulting from such sales arrangement,
and certain other incremental
23
<PAGE>
expenses related to a class. Each class will have exclusive voting rights
with respect to provisions of the Rule 12b-1 distribution plan pursuant to
which the service and distribution fees, if any, are paid. Although the legal
rights of holders of each class of shares are identical, it is likely that
the different expenses borne by each class will result in different net asset
values and dividends. The different classes of shares of the Fund also have
different exchange privileges.
The rights of holders of shares may be modified by the Trustees at any
time, so long as such modifications do not have a material adverse effect on
the rights of any shareholder. Under the Master Trust Agreement, the Trustees
may reorganize, merge or liquidate the Fund without prior shareholder
approval and subject to compliance with applicable law. On any matter
submitted to the shareholders, the holder of shares of the Fund is entitled
to one vote per share (with proportionate voting for fractional shares)
regardless of the relative net asset value thereof.
Under the Master Trust Agreement, no annual or regular meeting of
shareholders is required. Thus, there will ordinarily be no shareholder
meetings unless required by the 1940 Act. Except as otherwise provided under
said Act, the Board of Trustees will be a self-perpetuating body until fewer
than two-thirds of the Trustees serving as such are Trustees who were elected
by shareholders of the Trust. In the event less than a majority of the
Trustees serving as such were elected by shareholders of the Trust, a meeting
of shareholders will be called to elect Trustees. Under the Master Trust
Agreement, any Trustee may be removed by vote of two-thirds of the
outstanding Trust shares; holders of 10% or more of the outstanding shares of
the Trust can require that the Trustees call a meeting of shareholders for
purposes of voting on the removal of one or more Trustees. In connection with
such meetings called by shareholders, shareholders will be assisted in
shareholder communications to the extent required by applicable law.
Under Massachusetts law, the shareholders of the Trust could, under
certain circumstances, be held personally liable for the obligations of the
Trust. However, the Master Trust Agreement of the Trust disclaims shareholder
liability for acts or obligations of the Trust and provides for
indemnification for all losses and expenses of any shareholder held
personally liable for the obligations of the Trust. Thus, the risk of a
shareholder incurring financial loss on account of shareholder liability is
limited to circumstances in which the Fund would be unable to meet its
obligations. The Investment Manager believes that, in view of the above, the
risk of personal liability to shareholders is remote.
Management of the Fund
Under the provisions of the Trust's Master Trust Agreement and the laws of
Massachusetts, responsibility for the management and supervision of the Fund
rests with the Trustees.
The Fund's investment manager is State Street Research & Management
Company. The Investment Manager is charged with the overall responsibility
for managing the investments and business affairs of the Fund, subject to the
authority of the Board of Trustees.
The Investment Manager was founded by Paul Cabot, Richard Saltonstall and
Richard Paine to serve as investment adviser to one of the nation's first
mutual funds, presently known as State Street Research Investment Trust,
which they had formed in 1924. Their investment management philosophy, which
continues to this day, emphasized comprehensive fundamental research and
analysis, including meetings with the management of companies under
consideration for investment. The Investment Manager's portfolio management
group has extensive investment industry experience managing equity and debt
securities. In managing debt securities, if any, for a portfolio, the
Investment Manager may consider yield curve, sector rotation and duration,
among other factors.
The Investment Manager and the Distributor are indirect wholly-owned
subsidiaries of Metropolitan Life Insurance Company and both are located at
One Financial Center, Boston, Massachusetts 02111-2690.
The Investment Manager has entered into an Advisory Agreement with the
Trust pursuant to which investment research and management, administrative
24
<PAGE>
services, office facilities, and personnel are provided to the Fund in
consideration of a fee from the Fund.
Under its Advisory Agreement with the Trust, the Investment Manager
receives a monthly investment advisory fee equal to 0.55% (on an annual
basis) of the average daily value of the net assets of the Fund. The Fund
bears all costs of its operation other than those incurred by the Investment
Manager under the Advisory Agreement. In particular, the Fund pays, among
other expenses, investment advisory fees, certain distribution expenses under
the Fund's Distribution Plan and the compensation and expenses of the
Trustees who are not otherwise currently affiliated with the Investment
Manager or any of its affiliates. The Investment Manager will reduce its
management fee payable by the Fund up to the amount of any expenses
(excluding permissible items, such as brokerage commissions, Rule 12b-1
payments, interest, taxes and litigation expenses) paid or incurred in any
year in excess of the most restrictive expense limitation imposed by any
state in which the Fund sells shares, if any. The Investment Manager provides
the Fund with office space, facilities and personnel. The Investment Manager
compensates Trustees of the Trust if such persons are employees or affiliates
of the Investment Manager or its affiliates.
The Fund is managed by Paul J. Clifford, Jr. Mr. Clifford has managed the
Fund since January 1996. Mr. Clifford's principal occupation currently is
Vice President of State Street Research & Management Company. During the past
five years he has also served as a securities analyst for State Street
Research & Management Company.
Subject to the policy of seeking best overall price and execution, sales
of shares of the Fund may be considered by the Fund and the Investment
Manager in the selection of broker or dealer firms for the Fund's portfolio
transactions.
The Investment Manager has a Code of Ethics governing personal securities
transactions of certain of its employees; see the Statement of Additional
Information.
Dividends and Distributions; Taxes
The Fund qualified and elected to be treated as a regulated investment
company under Subchapter M of the Internal Revenue Code for its most recent
fiscal year and intends to qualify as such in future years, although it
cannot give complete assurance that it will do so. As long as it so qualifies
and satisfies certain distribution requirements, it will not be subject to
federal income tax on its taxable income (including capital gains, if any)
distributed to its shareholders. Consequently, the Fund intends to distribute
annually to its shareholders substantially all of its net investment income
and any capital gain net income (capital gains net of capital losses). As
long as the Fund qualifies as a regulated investment company and meets
certain other Internal Revenue Code requirements, distributions of tax-exempt
interest income will be excluded from a shareholder's gross income for
federal income tax purposes.
Dividends from net investment income will be declared daily during each
calendar month and paid monthly; distributions of long-term and short-term
capital gain net income will generally be made on an annual basis (or as
otherwise required for compliance with applicable tax regulations), except to
the extent that net short-term gains, if any, are included in the monthly
income dividends for the purpose of stabilizing, to the extent possible, the
amount of net monthly distributions as described below. Both dividends from
net investment income and distributions of capital gain net income will be
paid in additional shares of the Fund at net asset value (except in the case
of shareholders who elect a different available distribution method). The
Fund will provide its shareholders of record with annual information on a
timely basis concerning the federal tax status of dividends and distributions
during the preceding calendar year.
The Fund has adopted distribution procedures which differ from those which
have been customary for investment companies in general. The Fund will
declare a dividend each day in an amount based on monthly projections of its
future net investment income and will pay such dividends monthly as described
above.
Consequently, the amount of each daily dividend may differ from actual net
investment income as determined under generally accepted accounting
principles. The purpose of these distribution procedures is to attempt to
eliminate, to the extent possible, fluc-
25
<PAGE>
tuations in the level of monthly dividend payments that might result if the
Fund declared dividends in the exact amount of its daily net investment
income.
Each daily dividend is payable to shareholders of record at the time of
its declaration (for this purpose, including only holders of shares purchased
for which payment has been received by the Transfer Agent and excluding
holders of shares redeemed on that day).
Dividends paid by the Fund from taxable net investment income and
distributions of net short-term capital gains, whether they are paid in cash
or reinvested in additional shares, will be taxable for federal income tax
purposes to shareholders as ordinary income. Distributions of net capital
gains (the excess of net long-term capital gains over net short-term capital
losses) which are designated as capital gains distributions, whether paid in
cash or reinvested in additional shares, will be taxable for federal income
tax purposes to shareholders as long-term capital gains, regardless of how
long shareholders have held their shares. However, it is expected that any
taxable income will be insubstantial in relation to the tax-exempt interest
generated by the Fund. If shares of the Fund which are sold at a loss have
been held six months or less, the loss (not otherwise disallowed as
attributable to an exempt-interest dividend) will be considered as a
long-term capital loss to the extent of any capital gain distributions
received.
Dividends and other distributions and proceeds of redemption of Fund
shares paid to individuals and other nonexempt payees will be subject to a
31% federal backup withholding tax if the Transfer Agent is not provided with
the shareholder's correct taxpayer identification number or certification
that the shareholder is not subject to such backup withholding. However,
exempt-interest dividends will not be subject to backup withholding.
Moreover, backup withholding will not apply to any taxable dividends and
distributions provided the Fund reasonably estimates that 95% or more of all
dividends or distributions paid or treated as paid during the year are
exempt-interest dividends.
Tax-exempt interest from "private activity" bonds (principally industrial
development revenue bonds) issued after August 7, 1986, is considered a
tax-preference item for purposes of the federal alternative minimum tax. For
corporations, all tax-exempt interest will be considered in calculating the
alternative minimum tax as part of the current earnings adjustments. Further,
shareholders who are "substantial users" (or "related persons" of substantial
users), within the meaning of Section 147 of the Internal Revenue Code, of
facilities financed by private activity bonds should consult their tax
advisers as to whether the Fund is a desirable investment.
The exemption of interest income for federal income tax purposes does not
necessarily result in exemption under the income or other tax laws of any
state or local taxing authority. Prospective shareholders should therefore
consult their tax advisers about the status of dividends and distributions
from the Fund in their own states and localities.
Calculation of Performance Data
From time to time, in advertisements or in communications to shareholders or
prospective investors, the Fund may compare the performance of its Class A,
Class B, Class C or Class D shares to that of other mutual funds with similar
investment objectives, to certificates of deposit, to taxable debt
instruments, such as Treasury bonds, as may be included in the Merrill Lynch
Treasury Bond Index, and/or to other financial alternatives. The Fund may
also compare its performance to appropriate indices such as the Lehman
Brothers Municipal Revenue Bond Index, the Merrill Lynch Revenue Index, the
Merrill Lynch 500 Municipal Index or the Bond Buyer Revenue Bond Index and/or
to appropriate rankings or averages such as the Lipper General Municipal Bond
Funds Group compiled by Lipper Analytical Services, Inc., or to those
compiled by Morningstar, Inc., Money Magazine, Business Week, Forbes
Magazine, The Wall Street Journal, Fortune Magazine or Investor's Daily.
Total return is computed separately for each class of shares of the Fund.
The average annual total return ("standard total return") for shares of the
Fund is computed by determining the average annual compounded rate of return
for a designated period that, if
26
<PAGE>
applied to a hypothetical $1,000 initial investment less the maximum initial
or contingent deferred sales charges, if applicable, would produce the
redeemable value of that investment at the end of the period, assuming
reinvestment of all dividends and distributions and with recognition of all
recurring charges. Standard total return may be accompanied with nonstandard
total return information, but for differing periods and computed in the same
manner with or without annualizing the total return or taking sales charges
into account.
The Fund's yield is computed separately for each class of shares by
dividing the net investment income, after recognition of all recurring
charges, per share earned during the most recent month or other specified
thirty-day period by the maximum offering price per share on the last day of
such period and annualizing the result. Yield information may be accompanied
by information on tax equivalent yields computed in the same manner, with
adjustment for assumed federal income tax rates.
The standard total return, yield and tax equivalent yield results take
sales charges into account, if applicable, but do not take into account
recurring and nonrecurring charges for optional services which only certain
shareholders elect and which involve nominal fees, such as the $7.50 fee for
remittance of redemption proceeds by wire. Where sales charges are not
applicable and therefore not taken into account in the calculation of
standard total return, yield and tax equivalent yield, the results will be
increased.
The Fund's distribution rate is calculated separately for each class of
shares by annualizing the latest distribution and dividing the result by the
maximum offering price per share as of the end of the period to which the
distribution relates. The distribution rate is not computed in the same
manner as the above described yield, and therefore can be significantly
different from it. In its supplemental sales literature, the Fund may quote
its distribution rate together with the above described standard total
return, yield and tax equivalent yield information. The use of such
distribution rates would be subject to an appropriate explanation of how the
components of the distribution rate differ from the above described yield.
Performance information may be useful in evaluating the Fund and for
providing a basis for comparison with other financial alternatives. Since the
performance of the Fund varies in response to fluctuations in economic and
market conditions, interest rates and Fund expenses, among other things, no
performance quotation should be considered a representation as to the Fund's
performance for any future period. In evaluating the Fund's performance,
consideration should be given to changes in the Fund's investment objective
and policies in March 1992. Prior to that time, the Fund was required to
invest 80% of its total assets under normal circumstances in tax-exempt
obligations rated A, BBB or BB by S&P or equivalent. In March 1992, such
percentage requirement was eliminated, thereby providing the Fund with
greater investment flexibility.
In addition, the net asset value of shares of the Fund will fluctuate,
with the result that shares of the Fund, when redeemed, may be worth more or
less than their original cost. Neither an investment in the Fund nor its
performance is insured or guaranteed; such lack of insurance or guarantees
should accordingly be given appropriate consideration when comparing the Fund
to financial alternatives which have such features.
Shares of the Fund had no class designations until June 7, 1993, when
designations were assigned based on the pricing and Rule 12b-1 fees
applicable to shares sold thereafter. Performance data for a specified class
includes periods prior to the adoption of class designations. Performance
data for periods prior to June 7, 1993 will not reflect additional Rule 12b-1
Distribution Plan fees, if any, of up to 1% per year depending on the class
of shares, which will adversely affect performance results for periods after
such date. Performance data or rankings for a given class of shares should be
interpreted carefully by investors who hold or may invest in a different
class of shares.
27
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Appendix
Tax-Exempt vs. Taxable Yield Comparison
Based on current 1996 federal tax rates, this table shows the rate of return
you would have to earn from a taxable investment to equal tax-exempt yields
ranging from 3% to 6%. For example, if you are single and your annual taxable
income is $21,000, you would have to earn 7.06% on taxable investment income
to equal a tax-exempt return of 6%.
1996 Tax Year
Sample Federal
Taxable Marginal Tax-Exempt
Income Rate 3.00% 4.00% Yields 5.00% 6.00%
- -------------- ------ ---- ---- --------------------- ------
Joint Return Equivalent Taxable Yield
$30,000 15.00% 3.53% 4.71% 5.88% 7.06%
50,000 28.00 4.17 5.56 6.94 8.33
100,000 31.00 4.35 5.80 7.25 8.70
150,000 36.00 4.69 6.25 7.81 9.38
265,000 39.60 4.97 6.62 8.28 9.93
Single Return
$21,000 15.00% 3.53% 4.71% 5.88% 7.06%
25,000 28.00 4.17 5.56 6.94 8.33
60,000 31.00 4.35 5.80 7.25 8.70
125,000 36.00 4.69 6.25 7.81 9.38
265,000 39.60 4.97 6.62 8.28 9.93
There can be no guarantee that the Fund will achieve any particular
tax-exempt yield. While a substantial portion of the income will be exempt
from federal income tax, investors may be subject to some state or local tax.
To convert a specific tax-exempt yield to the taxable equivalent, the
investor should divide his or her tax-exempt yield by the complement of his
or her tax bracket (e.g., an investor in the 28% tax bracket would divide by
.72; [1.00-.28=.72]). The effect of reductions in itemized deductions and
personal exemptions for taxpayers with incomes exceeding certain levels has
not been taken into account.
28
<PAGE>
[cover]
STATE STREET RESEARCH
TAX-EXEMPT FUND
One Financial Center
Boston, MA 02111
INVESTMENT ADVISER
State Street Research &
Management Company
One Financial Center
Boston, MA 02111
DISTRIBUTOR
State Street Research
Investment Services, Inc.
One Financial Center
Boston, MA 02111
SHAREHOLDER SERVICES
State Street Research
Shareholder Services
P.O. Box 8408
Boston, MA 02266
800-562-0032
CUSTODIAN
State Street Bank and
Trust Company
225 Franklin Street
Boston, MA 02110
LEGAL COUNSEL
Goodwin, Procter & Hoar LLP
Exchange Place
Boston, MA 02109
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP
160 Federal Street
Boston, MA 02110
TE-607D-596IBS CONTROL NUMBER: 3122-960425(0597)SSR-LD
[State Street logo] STATE STREET RESEARCH
State Street Research
Tax-Exempt Fund
May 1, 1996
P R O S P E C T U S
<PAGE>
STATE STREET RESEARCH
NEW YORK TAX-FREE FUND
Prospectus
May 1, 1996
The investment objective of State Street Research New York Tax-Free Fund (the
"Fund") is to seek a high level of interest income exempt from federal income
taxes and New York State and New York City personal income taxes. To achieve
its investment objective, the Fund intends to invest primarily in securities
which are issued by or on behalf of New York State or its political
subdivisions and by other governmental entities.
State Street Research & Management Company serves as investment adviser
(the "Investment Manager") for the Fund. As of February 29, 1996, the
Investment Manager had assets of approximately $31.1 billion under
management. State Street Research Investment Services, Inc. serves as
distributor (the "Distributor") for the Fund.
Shareholders may have their shares redeemed directly by the Fund at net
asset value plus the applicable contingent deferred sales charge, if any;
redemptions processed through securities dealers may be subject to processing
charges.
There are risks in any investment program, including the risk of changing
economic and market conditions, and there is no assurance that the Fund will
achieve its investment objective. The net asset value of a share of the Fund
will fluctuate as market conditions change.
This Prospectus sets forth concisely the information a prospective
investor ought to know about the Fund before investing. It should be retained
for future reference. A Statement of Additional Information about the Fund
dated May 1, 1996 has been filed with the Securities and Exchange Commission
and is incorporated by reference in this Prospectus. It is available, at no
charge, upon request to the Fund at the address indicated on the back cover
or by calling 1-800-562-0032.
The Fund is a diversified series of State Street Research Tax-Exempt Trust
(the "Trust"), an open-end management investment company.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
ON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
Table of Expenses 2
Financial Highlights 4
The Fund's Investments 5
Limiting Investment Risk 8
Purchase of Shares 9
Redemption of Shares 17
Shareholder Services 19
The Fund and Its Shares 23
Management of the Fund 24
Dividends and Distributions; Taxes 25
Calculation of Performance Data 27
Appendix--Taxable Equivalent Yield Table 29
<PAGE>
The Fund offers four classes of shares which may be purchased at the next
determined net asset value per share plus, in the case of all classes except
Class C shares, a sales charge which, at the election of the investor, may be
imposed (i) at the time of purchase (the Class A shares) or (ii) on a
deferred basis (the Class B and Class D shares).
Class A shares are subject to (i) an initial sales charge of up to 4.5%
and (ii) an annual service fee of 0.25% of the average daily net asset value
of the Class A shares.
Class B shares are subject to (i) a contingent deferred sales charge
(declining from 5% to 2%), which will be imposed on most redemptions made
within five years of purchase, and (ii) annual distribution and service fees
of 1% of the average daily net asset value of such shares. Class B shares
automatically convert into Class A shares (which pay lower ongoing expenses)
at the end of eight years after purchase. No contingent deferred sales charge
applies after the fifth year following the purchase of Class B shares.
Class C shares are offered only to certain employee benefit plans and
large institutions. No sales charge is imposed at the time of purchase or
redemption of Class C shares. Class C shares do not pay any distribution or
service fees.
Class D shares are subject to (i) a contingent deferred sales charge of 1%
if redeemed within one year following purchase and (ii) annual distribution
and service fees of 1% of the average daily net asset value of such shares.
Table of Expenses
<TABLE>
<CAPTION>
Class A Class B Class C Class D
<S> <C> <C> <C> <C>
Shareholder Transaction Expenses (1)
Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price) 4.5 % None None None
Maximum Sales Charge Imposed on Reinvested
Dividends (as a percentage of offering price) None None None None
Maximum Deferred Sales Charge (as a
percentage of original purchase price or
redemption proceeds, as applicable) None (2) 5 % None 1 %
Redemption Fees (as a percentage of amount
redeemed, if applicable) None None None None
Exchange Fee None None None None
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 0.51% 0.51% 0.51% 0.51%
Less Voluntary Reduction (0.21%) (0.21%) (0.21%) (0.21%)
Total Fund Operating Expenses
(after voluntary reduction) 1.10% 1.85% 0.85% 1.85%
</TABLE>
(1) Reduced sales charge purchase plans are available for Class A shares. The
maximum 5% contingent deferred sales charge on Class B shares applies to
redemptions during the first year after purchase; the charge declines
thereafter and no contingent deferred sales charge is imposed after the
fifth year. Class D shares are subject to a 1% contingent deferred sales
charge on any portion of the purchase redeemed within one year of the
sale. Long-term investors in a class of shares with a distribution fee
may, over a period of years, pay more than the economic equivalent of the
maximum sales charge permissible under applicable rules. See "Purchase of
Shares."
2
<PAGE>
(2) Purchase of Class A shares of $1 million or more are not subject to a
sales charge. If such shares are redeemed within 12 months of purchase, a
contingent deferred sales charge of 1% will be applied to the redemption.
See "Purchase of Shares."
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:
1 year 3 years 5 years 10 years
Class A shares $56 $78 $103 $173
Class B shares (1) $69 $88 $120 $197
Class C shares $ 9 $27 $ 47 $105
Class D shares $29 $58 $100 $217
You would pay the following expenses on the same investment,
assuming no redemption:
1 year 3 years 5 years 10 years
Class B (1) $19 $58 $100 $197
Class D $19 $58 $100 $217
(1) Ten-year figures assume conversion of Class B shares to Class A shares at
the end of eight years.
The example should not be considered as a representation of past or future
return or expenses. Actual return or expenses may be greater or less than
shown.
The purpose of the table above is to assist the investor in understanding
the various costs and expenses that an investor will bear directly or
indirectly. The percentage expense levels shown in the table above are based
on experience with expenses during the fiscal year ended December 31, 1995;
actual expense levels for the current fiscal year and future years may vary
from the amounts shown. The table does not reflect charges for optional
services elected by certain shareholders, such as the $7.50 fee for
remittance of redemption proceeds by wire. For further information on sales
charges, see "Purchase of Shares--Alternative Purchase Program"; for further
information on management fees, see "Management of the Fund"; and for further
information on 12b-1 fees, see "Purchase of Shares--Distribution Plan."
The Fund has been advised that the Distributor and its affiliates may from
time to time and in varying amounts voluntarily assume some portion of fees
or expenses relating to the Fund. For the fiscal year ended December 31,
1995, Total Fund Operating Expenses as a percentage of average net assets of
Class A, Class B, Class C and Class D shares of the Fund would have been
1.31%, 2.06%, 1.06% and 2.06%, respectively, in the absence of the voluntary
assumption of fees or expenses by the Distributor and its affiliates, which
amounted to 0.21% for each class of shares of the Fund. The Fund expects the
subsidization of fees or expenses to continue in the current year, although
it cannot give complete assurance that such assistance will be received.
3
<PAGE>
Financial Highlights
The data set forth below has been audited by Price Waterhouse LLP,
independent accountants, and their report thereon for the latest five years
is included in the Statement of Additional Information. For further
information about the performance of the Fund, see "Financial Statements" in
the Statement of Additional Information.
<TABLE>
<CAPTION>
Class A Class B
---------------------------------- ------------------------------------
Year ended December 31 Year ended December 31
---------------------------------- ------------------------------------
1995 1994 1993** 1995 1994 1993**
--------- --------- --------- --------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of year $7.53 $8.43 $8.20 $7.53 $8.43 $8.20
Net investment income* .40 .40 .22 .34 .34 .19
Net realized and unrealized gain
(loss) on investments .71 (.90) .25 .71 (.90) .25
Dividends from net investment
income (.41) (.39) (.22) (.35) (.33) (.19)
Distributions from net realized
gains -- (.01) (.02) -- (.01) (.02)
Net asset value, end of year $8.23 $7.53 $8.43 $8.23 $7.53 $8.43
Total return 15.11%+ (6.04)%+ 5.79%+++ 14.26%+ (6.74)%+ 5.35%+++
Net assets at end of year (000s) $20,043 $18,214 $15,175 $15,084 $12,131 $7,567
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* 5.07% 5.07% 4.68%++ 4.32% 4.34% 3.93%++
Portfolio turnover rate 109.74% 64.80% 33.11% 109.74% 64.80% 33.11%
*Reflects voluntary assumption
of fees or expenses per share
in each year $0.02 $0.03 $0.01 $0.02 $0.03 $0.01
</TABLE>
Class D
----------------------------------
Year ended December 31
----------------------------------
1995 1994 1993**
-------- -------- ----------
Net asset value,
beginning of year $7.53 $8.44 $8.20
Net investment income* .35 .34 .19
Net realized and unrealized gain
(loss) on investments .70 (.91) .25
Dividends from net investment
income (.35) (.33) (.18)
Distributions from net realized
gains -- (.01) (.02)
Net asset value, end of year $8.23 $7.53 $8.44
Total return 14.25%+ (6.86)%+ 5.46%+++
Net assets at end of year (000s) $651 $774 $821
Ratio of operating expenses to
average net assets* 1.85% 1.85% 1.85%++
Ratio of net investment income to
average net assets* 4.35% 4.31% 3.94%++
Portfolio turnover rate 109.74% 64.80% 33.11%
*Reflects voluntary assumption
of fees or expenses per share
in each year $0.02 $0.03 $0.01
**June 7, 1993 (commencement of share class designations) to December 31,
1993.
++Annualized.
+Total return figures do not reflect any front-end or contingent deferred
sales charges. Total return would be lower if the Distributor and its
affiliates had not voluntarily assumed a portion of the Fund's expenses.
+++Represents aggregate return for the period without annualization and does
not reflect any front-end or contingent deferred sales charge. Total
return would be lower if the Distributor and its affiliates had not
voluntarily assumed a portion of the Fund's expenses.
4
<PAGE>
<TABLE>
<CAPTION>
Class C
--------------------------------------------------------
Year ended December 31
--------------------------------------------------------
1995 1994 1993 1992
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Net asset value,
beginning of year $7.54 $8.44 $7.84 $7.61
Net investment income* .42 .42 .42 .44
Net realized and unrealized gain
(loss) on investments .71 (.90) .62 .23
Dividends from net investment
income (.43) (.41) (.42) (.44)
Distributions from net realized
gains -- (.01) (.02) --
Net asset value, end of year $8.24 $7.54 $8.44 $7.84
Total return 15.37%+ (5.79)%+ 13.46%+ 9.08%+
Net assets at end of year (000s) $38,757 $40,750 $56,515 $41,558
Ratio of operating expenses to
average net assets* 0.85% 0.85% 0.85% 0.85%
Ratio of net investment income to
average net assets* 5.33% 5.29% 5.10% 5.71%
Portfolio turnover rate 109.74% 64.80% 33.11% 29.39%
*Reflects voluntary assumption
of fees or expenses per share
in each year $0.02 $0.03 $0.01 $0.02
</TABLE>
<TABLE>
<CAPTION>
Class C
--------------------------------------------------------
Year ended December 31 July 5, 1989
(Commencement of
------------------------------ Operations) to
1991 1990 December 31, 1989
------------- ------------- ----------------------
<S> <C> <C> <C>
Net asset value,
beginning of year $7.11 $7.32 $7.40
Net investment income* .45 .45 .20
Net realized and unrealized gain
(loss) on investments .51 (.22) (.08)
Dividends from net investment
income (.46) (.44) (.20)
Distributions from net realized
gains -- -- --
Net asset value, end of year $7.61 $7.11 $7.32
Total return 13.88%+ 3.32%+ 1.72%+++
Net assets at end of year (000s) $21,512 $12,620 $8,154
Ratio of operating expenses to
average net assets* 0.85% 0.85% 0.85%++
Ratio of net investment income to
average net assets* 6.21% 6.39% 5.84%++
Portfolio turnover rate 30.24% 35.54% 0.00%
*Reflects voluntary assumption
of fees or expenses per share
in each year $0.05 $0.07 $0.06
</TABLE>
++Annualized.
+Total return figures do not reflect any front-end or contingent deferred
sales charges. Total return would be lower if the Distributor and its
affiliates had not voluntarily assumed a portion of the Fund's expenses.
+++Represents aggregate return for the period without annualization and does
not reflect any front-end or contingent deferred sales charge. Total
return would be lower if the Distributor and its affiliates had not
voluntarily assumed a portion of the Fund's expenses.
The Fund's Investments
The Fund's investment objective is to seek a high level of interest income
exempt from federal income taxes and New York State and New York City
personal income taxes. The Fund's investment objective is a fundamental
policy and may not be changed without approval of the Fund's shareholders.
Under normal circumstances at least 80% of the Fund's net assets will be
invested in New York Municipal Obligations. New York Municipal Obligations
include securities issued by or on behalf of New York State, its political
subdivisions, municipalities and public authorities and by other governmental
entities (for example, U.S. possessions such as Puerto Rico) if such
securities generate interest income which is, in the opinion of issuer's
counsel at the time of issuance, exempt from both federal income taxes and
New York State ("New York State" or the "State") and New York City ("New York
City" or the "City") personal income taxes.
To achieve its investment objective, the Fund intends to invest primarily
in securities which are investment grade, although this is not a fundamental
policy. Investment grade securities include securities rated, at the time of
purchase, AAA, AA, A, BBB, SP-1 or SP-2 by Standard & Poor's Corporation
("S&P") or Aaa, Aa, A, Baa, MIG-1 or MIG-2 by Moody's Investors Service, Inc.
("Moody's"), securities comparably rated by any other national rating service
and securities not rated but considered by the Investment Manager to be of
equivalent investment quality to comparable rated securities. Securities
rated Baa by Moody's lack outstanding investment characteristics and in fact
have speculative characteristics as well. The Fund may also invest up to 25%
of its total assets in securities rated at the time of purchase as low as CC
by S&P or Ca by Moody's or securities that are not rated but considered by
the Investment Manager to be of equivalent investment quality to
5
<PAGE>
comparable rated securities. Such investments may be considered by the rating
agencies to be speculative in a high degree or to have major risk exposures.
For information concerning the risks and ratings of tax-exempt bonds, see
"Appendix--Description of Municipal Debt Ratings" in the Statement of
Additional Information.
Up to 20% of the Fund's assets may be invested without regard to the
limitations described above. However, during the current year, the Investment
Manager does not anticipate that the Fund will invest more than 5% of its net
assets in securities rated BB or lower by S&P or Ba or lower by Moody's or in
unrated securities of comparable investment quality. See the Statement of
Additional Information for risks associated with lower rated, "high yield"
securities.
The Fund may invest up to 25% of its total assets in unrated securities
considered by the Investment Manager to be of equivalent investment quality
to comparable rated securities in which the Fund may invest. Many issuers of
tax-exempt securities choose not to have their obligations rated. Although
unrated securities usually provide a higher yield than rated securities, they
may also involve a greater degree of risk. Medium and lower rated or unrated
tax-exempt bonds are frequently traded in markets in which liquidity may be
limited. This factor might limit the ability to sell such securities at their
fair value either to meet redemption requests or to respond to changes in the
economy or the financial markets.
The Fund reserves the right to invest more than 25% of its total assets in
tax-exempt industrial development revenue bonds. The Fund may invest up to
25% of its total assets in securities issued in connection with the financing
of projects with similar characteristics, such as toll road revenue bonds,
housing revenue bonds or electric power project revenue bonds, or in
industrial development revenue bonds which are based, directly or indirectly,
on the credit of private entities in any one industry. This may make the Fund
more susceptible to economic, political or regulatory occurrences affecting a
particular industry or sector and increase the potential for fluctuation of
net asset value. Investments in industrial development revenue bonds which
may result in federal alternative minimum taxes will under present policy be
limited to 20% of the Fund's net assets; see "Dividends and Distributions;
Taxes."
The Fund may invest in New York Municipal Obligations which have fixed
interest rates or variable or floating interest rates, including short-term
obligations which have daily adjustable rates. Variable or floating rates may
be adjusted in relation to market rates for other instruments, prime rates,
indices or similar indicators. Certain of these adjustable obligations may
carry a demand feature that permits the Fund to receive the par value of the
security upon demand prior to maturity. These obligations may also be subject
to prepayment without penalty at the option of the issuer.
The Fund may invest in lease obligations or installment purchase contract
obligations, which are instruments supported by lease payments made by a
municipality ("municipal lease obligations"). Municipal lease obligations may
be issued by state and government authorities to obtain funds to acquire a
wide variety of equipment and facilities such as fire and sanitation
vehicles, computer equipment, buildings and other capital assets. Although
municipal lease obligations do not normally constitute general obligations of
the municipality, a lease obligation is ordinarily backed by the
municipality's agreement to make the payments due under the lease obligation.
However, certain lease obligations contain "non-appropriation" clauses which
provide that the municipality has no obligation to make lease or installment
purchase payments in later years unless money is appropriated in the future.
Municipal lease obligations are a relatively new form of financing instrument
and the market for such obligations is still developing.
Depending on the development of such markets, such municipal lease
obligations may be deemed to be liquid as determined by or in accordance with
methods adopted by the Trustees. In determining the liquidity and appropriate
valuation of a municipal lease obligation, the following factors relating to
the security are considered, among others: (1) the frequency of trades and
quotes; (2) the number of dealers willing to purchase or sell the security;
(3) the willingness of dealers to undertake to make a market; (4) the nature
of the
6
<PAGE>
marketplace trades; and (5) the likelihood that the obligation will continue
to be marketable based on the credit quality of the municipality or relevant
obligor. Municipal lease obligations initially deemed to be liquid could
later become illiquid.
Special Considerations and Risk Factors
There are risks in any investment program, and there is no assurance that the
Fund will achieve its investment objective. Tax-exempt securities are subject
to relative degrees of credit risk and market volatility. Credit risk relates
to the issuer's (and any guarantor's) ability to make timely payments of
principal and interest. Market volatility relates to the changes in market
price that occur as a result of variations in the level of prevailing
interest rates and yield relationships between sectors in the tax-exempt
securities market and other market factors.
The Fund's ability to achieve its investment objective is dependent on the
ability of the issuers of New York Municipal Obligations to meet their
continuing obligations for the payment of principal and interest. New York
State and New York City face long-term economic problems that could seriously
affect their ability and that of other issuers of New York Municipal
Obligations to meet their financial obligations.
Certain substantial issuers of New York Municipal Obligations (including
issuers whose obligations may be acquired by the Fund) have experienced
serious financial difficulties in recent years. These difficulties have at
times jeopardized the credit standing and impaired the borrowing abilities of
all New York issuers and have generally contributed to higher interest costs
for their borrowing and fewer markets for their outstanding debt obligations.
In recent years, several different issues of municipal securities of New York
State and its agencies and instrumentalities and of New York City have been
downgraded by S&P and Moody's. On the other hand, strong demand for New York
Municipal Obligations has at times had the effect of permitting New York
Municipal Obligations to be issued with yields relatively lower, and after
issuance, to trade in the market at prices relatively higher, than comparably
rated municipal obligations issued by other jurisdictions. A recurrence of
the financial difficulties previously experienced by certain issuers of New
York Municipal Obligations could result in defaults or declines in the market
values of those issuers' existing obligations and, possibly, in the
obligations of other issuers of New York Municipal Obligations. Although as
of the date of this Prospectus, no issuers of New York Municipal Obligations
are in default with respect to the payment of their municipal obligations,
the occurrence of any such default could adversely affect the market values
and marketability of all New York Municipal Obligations and, consequently,
the net asset value of the Fund's portfolio.
For other considerations affecting the Fund's investments in New York
Municipal Obligations, see the Statement of Additional Information.
Other Investment Policies
The Fund may lend portfolio securities with a value of up to 33-1/3% of its
total assets. The Fund will receive cash or cash equivalents (e.g., U.S.
Government obligations) as collateral in an amount equal to at least 100% of
the current market value of 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 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.
7
<PAGE>
To aid in achieving its investment objective, the Fund may, subject to
certain limitations, buy and sell options, futures contracts and options on
futures contracts on securities and securities indices and enter into
repurchase agreements and purchase securities on a "when-issued" or forward
commitment basis. The Fund may not establish a position in a commodity
futures contract or purchase or sell a commodity option contract for other
than bona fide hedging purposes if immediately thereafter the sum of the
amount of initial margin deposits and premiums required to establish such
positions for such nonhedging purposes would exceed 5% of the market value of
the Fund's net assets; similar policies apply to options which are not
commodities. The Fund may also enter various forms of swap arrangements,
which have simultaneously the characteristics of a security and a futures
contract, although the Fund does not presently expect to invest more than 5%
of its total assets in such items. These swap arrangements include interest
rate swaps and index swaps. See the Statement of Additional Information.
The Fund may also invest in tax-exempt derivative products including
stripped tax-exempt bonds, synthetic floating rate tax-exempt bonds, and
tax-exempt asset-backed securities, including interests in trusts holding
tax-exempt lease receivables. Some of these products may generate taxable
income or become illiquid. To reduce counterparty risk, the Fund will only
deal with established, reputable institutions.
Limiting Investment Risk
In seeking to lessen investment risk, the Fund operates under certain
fundamental and nonfundamental investment restrictions.
Under the fundamental investment restrictions, the Fund may not (a)
purchase a security of any one issuer (other than securities issued or
guaranteed as to principal or interest by the U.S. Government or its agencies
or instrumentalities or mixed-ownership Government corporations) if such
purchase would, with respect to 75% of the Fund's total assets, cause more
than 5% of the Fund's total assets to be invested in the securities of such
issuer or cause more than 10% of the voting securities of such issuer to be
held by the Fund or (b) invest more than 25% of the Fund's total assets in
industrial revenue bonds which are based directly or indirectly on the credit
of private issuers in any one industry. New York State and each of its
separate political subdivisions, agencies, authorities or instrumentalities
are treated as separate issuers in accordance with prevailing regulatory
interpretations. The foregoing fundamental investment restrictions may not be
changed except by vote of the holders of a majority of the outstanding voting
securities of the Fund.
Under the nonfundamental investment restrictions, the Fund may not invest
more than 15% of its total assets in illiquid securities including repurchase
agreements extending for more than seven days and may not invest more than 5%
of its total assets in restricted securities excluding securities eligible
for resale under Rule 144A under the Securities Act of 1933. Although many
illiquid securities may also be restricted, and vice versa, compliance with
each of these policies will be determined independently. The foregoing
nonfundamental investment restrictions may be changed without a shareholder
vote.
For further information on the above and other fundamental and
nonfundamental investment restrictions, see the Statement of Additional
Information.
The Fund may hold up to 100% of its assets in cash or short-term
securities for temporary defensive purposes, subject to limitations. The Fund
will adopt a temporary defensive position when, in the opinion of the
Investment Manager, such a position is more likely to provide protection
against adverse market conditions than adherence to the Fund's other
investment policies. The types of short-term instruments in which the Fund
may invest for such purposes include short-term New York Municipal
Obligations, short-term money market securities such as securities issued or
guaranteed by the U.S. Government or its agencies or instrumentalities,
certificates of deposit, time deposits and bankers' acceptances of certain
qualified financial institutions and corporate commercial paper rated at
least "A" by S&P or "Prime" by Moody's (or, if not rated, issued by companies
having an outstanding long-term unsecured debt issue rated at least "A" by
S&P or Moody's). See the Statement of Additional Information.
8
<PAGE>
The Fund intends that short-term securities acquired for temporary
defensive purposes will be exempt from federal income taxes and New York
State and New York City personal income taxes. However, if suitable
short-term securities are not available or if securities are available only
on a when-issued basis or in the event of an emergency, the Fund may invest
up to 100% of its total assets in short-term securities which may not be
exempt from such taxes.
Portfolio Turnover
The Fund reserves full freedom with respect to portfolio turnover. In periods
when there are rapid changes in economic conditions or security price levels
or when investment strategy is changed significantly, portfolio turnover may
be significantly higher than during times of economic and market price
stability or when investment strategy remains relatively constant. A high
rate of portfolio turnover will result in increased transaction costs for the
Fund and may also result in an increase in the realization of short-term
capital gains.
******************************************************************************
Information on the Purchase of Shares, Redemption of Shares and Shareholder
Services is set forth on pages 9 to 23 below.
The Fund is available for investment by many kinds of investors including
participants investing through savings plans sponsored by employers,
corporations, individuals, etc. The applicability of the general information
and administrative procedures set forth below accordingly will vary depending
on the investor and the recordkeeping system established for a shareholder's
investment in the Fund. Participants in plans should first consult with the
appropriate person at their employer or refer to the plan materials before
following any of the procedures below. For more information or assistance,
anyone may call 1-800-562-0032.
******************************************************************************
Purchase of Shares
Methods of Purchase
Through Dealers
Shares of the Fund are continuously offered through securities dealers who
have entered into sales agreements with the Distributor. Purchases through
dealers are confirmed at the offering price, which is the net asset value
plus the applicable sales charge, next determined after the order is duly
received by State Street Research Shareholder Services ("Shareholder
Services"), a division of State Street Research Investment Services, Inc.,
from the dealer. ("Duly received" for purposes herein means in accordance
with the conditions of the applicable method of purchase as described below.)
The dealer is responsible for transmitting the order promptly to Shareholder
Services in order to permit the investor to obtain the current price. See
"Purchase of Shares -- Net Asset Value" herein.
By Mail
Initial investments in the Fund may be made by mailing or delivering to the
investor's securities dealer a completed Application (accompanying this
Prospectus), together with a check for the total purchase price payable to
the Fund. The dealer must forward the Application and check in accordance
with the instructions on the Application.
Additional shares may be purchased by mailing to Shareholder Services a
check payable to the Fund in the amount of the total purchase price together
with any one of the following: (i) an Application; (ii) the stub from a
shareholder's account statement; or (iii) a letter setting forth the name of
the Fund, the class of shares and the shareholder's account name and number.
Shareholder Services will deliver the purchase order to the transfer agent
and dividend paying agent, State Street Bank and Trust Company (the "Transfer
Agent").
If a check is not honored for its full amount, the purchaser could be
subject to additional charges to cover collection costs and any investment
loss, and the purchase may be cancelled.
By Wire
An investor may purchase shares by wiring Federal Funds of not less than
$5,000 to State Street Bank and Trust Company, which also serves as the
Trust's custo-
9
<PAGE>
dian (the "Custodian"), as set forth below. Prior to making an investment by
wire, an investor must notify Shareholder Services at 1-800-521-6548 and
obtain a control number and instructions. Following such notification,
Federal Funds should be wired through the Federal Reserve System to:
ABA #011000028
State Street Bank and Trust Company
Boston, MA
BNF=State Street Research New York
Tax-Free Fund and class of shares
(A, B, C or D)
AC=99029761
OBI=Shareholder Name
Shareholder Account Number
Control #K (assigned by State Street
Research Shareholder Services)
In order for a wire investment to be processed on the same day (i) the
investor must notify Shareholder Services of his or her intention to make
such investment by 12 noon Boston time on the day of his or her investment;
and (ii) the wire must be received by 4 P.M. Boston time that same day.
An investor making an initial investment by wire must promptly complete
the Application accompanying this Prospectus and deliver it to his or her
securities dealer, who should forward it as required. No redemptions will be
effected until the Application has been duly processed.
The Fund may in its discretion discontinue, suspend or change the practice
of accepting orders by any of the methods described above. Orders for the
purchase of shares are subject to acceptance by the Fund. The Fund reserves
the right to suspend the sale of shares, or to reject any purchase order,
including orders in connection with exchanges, for any reason.
Minimum Investment
Class of Shares
A B C D
Minimum Initial Investment
By Wire $5,000 $5,000 (a) $5,000
By Investamatic $1,000 $1,000 (a) $1,000
All Other $2,500 $2,500 (a) $2,500
Minimum Subsequent Investment
By Wire $5,000 $5,000 (a) $5,000
By Investamatic $ 50 $ 50 (a) $ 50
All Other $ 50 $ 50 (a) $ 50
(a) Special conditions apply; contact the Distributor.
The Fund reserves the right to vary the minimums for initial or subsequent
investments as in the case of, for example, exchanges and investments under
various employee benefit plans, sponsored arrangements involving group
solicitation of the members of an organization, or other investment plans for
reinvestment of dividends and distributions or for periodic investments
(e.g., Investamatic Check Program).
Alternative Purchase Program
General
Alternate classes of shares permit investors to select a purchase program
which they believe will be the most advantageous for them, given the amount
of their purchase, the length of time they anticipate holding Fund shares, or
the flexibility they desire in this regard, and other relevant circumstances.
Investors will be able to determine whether in their particular circumstances
it is more advantageous to incur an initial sales charge and not be subject
to certain ongoing charges or to have their entire initial purchase price
invested in the Fund with the investment being subject thereafter to ongoing
service fees and distribution fees.
As described in greater detail below, securities dealers are paid
differing amounts of commission and other compensation depending on which
class of shares they sell.
10
<PAGE>
The major differences among the various classes of shares are as follows:
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS D
------------------- ------------------- ------------------- ---------------------
<S> <C> <C> <C> <C>
Sales Charges Initial sales Contingent deferred None Contingent deferred
charge at time of sales charge of 5% sales charge of 1%
investment of up to to 2% applies to applies to any shares
4.5% depending on any shares redeemed redeemed within one
amount of within first five year following their
investment years following purchase
their purchase; no
contingent deferred
sales charge after
five years
On investments of
$1 million or more,
no initial sales
charge; but
contingent deferred
sales charge of 1%
applies to any
shares redeemed
within one year
following their
purchase
Distribution None 0.75% for first None 0.75% each year
Fee eight years; Class
B shares convert
automatically to
Class A shares
after eight years
Service Fee 0.25% each year 0.25% each year None 0.25% each year
Initial Above described 4% None 1%
Commission initial sales
Received by charge
Selling less 0.25% to 0.50%
Securities retained by
Dealer Distributor
On investments of
$1 million or more,
0.25% to 0.70% paid
to dealer by
Distributor
</TABLE>
11
<PAGE>
In deciding which class of shares to purchase, the investor should
consider the amount of the investment, the length of time the investment is
expected to be held, and the ongoing service fee and distribution fee, among
other factors.
Class A shares are sold at net asset value plus an initial sales charge of
up to 4.5% of the public offering price. Because of the sales charge, not all
of an investor's purchase amount is invested unless the purchase equals
$1,000,000 or more. Class B shareholders pay no initial sales charge, but a
contingent deferred sales charge of up to 5% generally applies to shares
redeemed within five years of purchase. Class D shareholders also pay no
initial sales charge, but a contingent deferred sales charge of 1% generally
applies to redemptions made within one year of purchase. For Class B and
Class D shareholders, therefore, the entire purchase amount is immediately
invested in the Fund.
An investor who qualifies for a significantly reduced initial sales
charge, or a complete waiver of the sales charge on investments of $1,000,000
or more, on the purchase of Class A shares might elect that option to take
advantage of the lower ongoing service and distribution fees that
characterize Class A shares compared with Class B or Class D shares.
Class A, Class B and Class D shares are assessed an annual service fee of
0.25% of average daily net assets. Class B shares are assessed an annual
distribution fee of 0.75% of daily net assets for an eight year period
following the date of purchase and are then automatically converted to Class
A shares. Class D shares are assessed an annual distribution fee of 0.75% of
daily net assets for as long as the shares are held. The prospective investor
should consider these fees plus the initial or contingent deferred sales
charges in estimating the costs of investing in the various classes of the
Fund's shares.
Only certain employee benefit plans and large institutions may make
investments in Class C shares.
Some of the service and distribution fees are allocated to dealers (see
"Distribution Plan" below). In addition, the Distributor will, at its
expense, provide additional cash and noncash incentives to securities dealers
that sell shares. Such incentives may be extended only to those dealers who
have sold or may sell significant amounts of shares and/or meet other
conditions established by the Distributor; for example, the Distributor may
sponsor special promotions to develop particular distribution channels or to
reach certain investor groups. The incentives may include merchandise and
trips to and attendance at sales seminars at resorts.
Class A Shares--Initial Sales Charges
Sales Charges
The purchase price of a Class A share of the Fund is the Fund's per share net
asset value next determined after the purchase order is duly received, as
defined herein, plus a sales charge which varies depending on the dollar
amount of the shares purchased as set forth in the table below. A major
portion of this sales charge is reallowed by the Distributor to the
securities dealer responsible for the sale.
Sales Sales
Charge Charge
Paid by Paid by Dealer
Dollar Investor Investor Concession
Amount of As % of As % of As % of
Purchase Purchase Net Asset Purchase
Transaction Price Value Price
Less than $100,000 4.50% 4.71% 4.00%
$100,000 or above but less than $250,000 3.50% 3.63% 3.00%
$250,000 or above but less than $500,000 2.50% 2.56% 2.00%
$500,000 or above but less than $1 million 2.00% 2.04% 1.75%
See
following
$1 million and above 0% 0% discussion
On any sale of Class A shares to a single investor in the amount of
$1,000,000 or more, the Distributor will pay the authorized securities dealer
a commission based on the aggregate of such sales as follows:
12
<PAGE>
Amount of Sale Commission
(a) $1 million to $3 million 0.70%
(b) Next $2 million 0.50%
(c) Amount over $5 million 0.25%
On such sales of $1,000,000 or more, the investor is subject to a 1%
contingent deferred sales charge on any portion of the purchase redeemed
within one year of the sale. However, such redeemed shares will not be
subject to the contingent deferred sales charge to the extent that their
value represents (1) capital appreciation or (2) reinvestment of dividends or
capital gains distributions. In addition, the contingent deferred sales
charge will be waived for certain other redemptions as described under
"Contingent Deferred Sales Charge Waivers" below (as otherwise applicable to
Class B shares).
Class A shares of the Fund that are purchased without a sales charge may
be exchanged for Class A shares of certain other Eligible Funds, as described
below, without the imposition of a contingent deferred sales charge, although
contingent deferred sales charges may apply upon a subsequent redemption
within one year of the Class A shares which are acquired through such
exchange. For federal income tax purposes, the amount of the contingent
deferred sales charge will reduce the gain or increase the loss, as the case
may be, on the amount realized on redemption. The amount of any contingent
deferred sales charge will be paid to the Distributor.
Reduced Sales Charges
The reduced sales charges set forth in the table above are applicable to
purchases made at any one time by any "person," as defined in the Statement
of Additional Information, of $100,000 or more of Class A shares of the Fund
or a combination of "Eligible Funds." "Eligible Funds" include the Fund and
other funds so designated by the Distributor from time to time. Class B,
Class C and Class D shares may also be included in the combination under
certain circumstances. Securities dealers should call Shareholder Services
for details concerning the other Eligible Funds and any persons who may
qualify for reduced sales charges and related information. See the Statement
of Additional Information.
Letter of Intent
Any investor who provides a Letter of Intent may qualify for a reduced sales
charge on purchases of no less than an aggregate of $100,000 of Class A
shares of the Fund and any other Eligible Funds within a 13-month period.
Class B, Class C and Class D shares may be included in the combination under
certain circumstances. Additional information on a Letter of Intent is
available from dealers, or from the Distributor, and also appears in the
Statement of Additional Information.
Right of Accumulation
Investors may purchase Class A shares of the Fund or a combination of shares
of the Fund and other Eligible Funds at reduced sales charges pursuant to a
Right of Accumulation. Under the Right of Accumulation, the sales charge is
determined by combining the current purchase with the value of the Class A
shares of other Eligible Funds held at the time of purchase. Class B, Class C
and Class D shares may also be included in the combination under certain
circumstances. See the Statement of Additional Information and call
Shareholder Services for details concerning the Right of Accumulation.
Other Programs
Class A shares of the Fund may be sold or issued in an exchange at a reduced
sales charge or without a sales charge pursuant to certain sponsored
arrangements, which include programs under which a company, employee benefit
plan or other organization makes recommendations to, or permits group
solicitation of, its employees, members or participants, except any
organization created primarily for the purpose of obtaining shares of the
Fund at a reduced sales charge or without a sales charge. Sales without a
sales charge, or with a reduced sales charge, may also be made through
brokers, financial planners, institutions, and others, under managed
fee-based programs (e.g., "wrap fee" or similar programs) which meet certain
requirements established from time to time by the Distributor. Information on
such arrangements and further conditions and limitations is available from
the Distributor.
13
<PAGE>
In addition, no sales charge is imposed in connection with the sale of
Class A shares of the Fund to the following entities and persons: (A) the
Investment Manager, Distributor, or any affiliated entities, including any
direct or indirect parent companies and other subsidiaries of such parents
(collectively "Affiliated Companies"); (B) employees, officers, sales
representatives or current or retired directors or trustees of the Affiliated
Companies or any investment company managed by any of the Affiliated
Companies, any relatives of any such individuals whose relationship is
directly verified by such individuals to the Distributor, or any beneficial
account for such relatives or individuals; and (C) employees, officers, sales
representatives or directors of dealers and other entities with a selling
agreement with the Distributor to sell shares of any aforementioned
investment company, any spouse or child of such person, or any beneficial
account for any of them. The purchase must be made for investment and the
shares purchased may not be resold except through redemption. This purchase
program is subject to such administrative policies, regarding the
qualification of purchasers and any other matters, as may be adopted by the
Distributor from time to time.
Class B Shares--Contingent Deferred Sales Charges
Contingent Deferred Sales Charges
The public offering price of Class B shares is the net asset value per share
next determined after the purchase order is duly received, as defined herein.
No sales charge is imposed at the time of purchase; thus the full amount of
the investor's purchase payment will be invested in the Fund. However, a
contingent deferred sales charge may be imposed upon redemptions of Class B
shares as described below.
The Distributor will pay securities dealers at the time of sale a 4%
commission for selling Class B shares. The proceeds of the contingent
deferred sales charge and the distribution fee are used to offset
distribution expenses and thereby permit the sale of Class B shares without
an initial sales charge.
Class B shares that are redeemed within a five year period after their
purchase will not be subject to a contingent deferred sales charge to the
extent that the value of such shares represents (1) capital appreciation of
Fund assets or (2) reinvestment of dividends or capital gains distributions.
The amount of any applicable contingent deferred sales charge will be
calculated by multiplying the net asset value of such shares at the time of
redemption or at the time of purchase, whichever is lower, by the applicable
percentage shown in the table below:
Contingent Deferred
Sales Charge
As A Percentage Of
Net Asset Value
Redemption During At Redemption
1st Year Since Purchase 5%
2nd Year Since Purchase 4
3rd Year Since Purchase 3
4th Year Since Purchase 3
5th Year Since Purchase 2
6th Year Since Purchase and Thereafter None
In determining the applicability and rate of any contingent deferred sales
charge, it will be assumed that a redemption of Class B shares is made first
of those shares having the greatest capital appreciation, next of shares
representing reinvestment of dividends and capital gains distributions and
finally of remaining shares held by the shareholder for the longest period of
time. The holding period for purposes of applying a contingent deferred sales
charge on Class B shares of the Fund acquired through an exchange from
another Eligible Fund will be measured from the date that such shares were
initially acquired in the other Eligible Fund, and Class B shares being
redeemed will be considered to represent, as applicable, capital appreciation
or dividend and capital gains distribution reinvestments in such other
Eligible Fund. These determinations will result in any contingent deferred
sales charge being imposed at the lowest possible rate. For federal income
tax purposes, the amount of the contingent deferred sales charge will reduce
the gain or increase the loss, as the case may be, on the amount realized on
redemption. The amount of any contingent deferred sales charge will be paid
to the Distributor.
Contingent Deferred Sales Charge Waivers
The contingent deferred sales charge does not apply to exchanges, or to
redemptions under a systematic withdrawal plan which meets certain
conditions. In addition, the contingent deferred sales charge will be
14
<PAGE>
waived for: (i) redemptions made within one year of the death or total
disability, as defined by the Social Security Administration, of all
shareholders of an account, (ii) redemptions made after attainment of a
specific age in an amount with represents the minimum distribution required
at such age under Section 401(a)(9) of the Internal Revenue Code for
retirement accounts or plans (e.g., age 70-1/2 for IRAs and Section 403(b)
plans), calculated solely on the basis of assets invested in the Fund or
other Eligible Funds; and (iii) a redemption resulting from a tax-free return
of an excess contribution to an IRA. (The foregoing waivers do not apply to a
tax-free rollover or transfer of assets out of the Fund.) The Fund may modify
or terminate the waivers at any time; for example, the Fund may limit the
application of multiple waivers.
Conversion of Class B Shares to Class A Shares
A shareholder's Class B shares, including all shares received as dividends or
distributions with respect to such shares, will automatically convert to
Class A shares of the Fund at the end of eight years following the issuance
of such Class B shares; consequently, they will no longer be subject to the
higher expenses borne by Class B shares. The conversion rate will be
determined on the basis of the relative per share net asset values of the two
classes and may result in a shareholder receiving either a greater or fewer
number of Class A shares than the Class B shares so converted. As noted
above, holding periods for Class B shares received in exchange for Class B
shares of other Eligible Funds will be counted toward the eight-year period.
Class C Shares--Institutional; No Sales Charge
The purchase price of a Class C share of the Fund is the Fund's per share net
asset value next determined after the purchase order is duly received, as
defined herein. No sales charge is imposed at the time of purchase or
redemption. The Fund will receive the full amount of the investor's purchase
payment.
Class C shares are only available for new investments by certain employee
benefit plans and large institutions. See the Statement of Additional
Information. Information on the availability of Class C shares and further
conditions and limitations with respect thereto is available from the
Distributor. An employee benefit plan or endowment fund eligible to invest in
Class C shares should first consult with its dealer before investing in any
other class of shares, to obtain information on the higher sales charges, and
service and distribution fees applicable to such other classes of shares.
Shares held prior to June 7, 1993 are deemed to be Class C shares, but
shareholders thereof may not acquire additional Class C shares except through
reinvestment of dividends and distributions. Class C shares may have also
been issued directly or through exchanges to those shareholders of other
Eligible Funds who previously held shares which are not subject to any future
sales charge or service fees or distribution fees.
Class D Shares--Spread Sales Charges
The purchase price of a Class D share of the Fund is the Fund's per share net
asset value next determined after the purchase order is duly received, as
defined herein. No sales charge is imposed at the time of purchase; thus the
full amount of the investor's purchase payment will be invested in the Fund.
Class D shares are subject to a 1% contingent deferred sales charge on any
portion of the purchase redeemed within one year of the sale. The contingent
deferred sales charge will be 1% of the lesser of the net asset value of the
shares at the time of purchase or at the time of redemption. The Distributor
pays securities dealers a 1% commission for selling Class D shares at the
time of purchase. The proceeds of the contingent deferred sales charge and
the distribution fee are used to offset distribution expenses and thereby
permit the sale of Class D shares without an initial sales charge.
Class D shares that are redeemed within one year after purchase will not
be subject to the contingent deferred sales charge to the extent that the
value of such shares represents (1) capital appreciation of Fund assets or
(2) reinvestment of dividends or capital gains distributions. In addition,
the contingent deferred sales charge will be waived for certain other
redemptions as described under "Contingent Deferred Sales Charge Waivers"
above (as otherwise applicable to Class B shares). For federal income tax
pur-
15
<PAGE>
poses, the amount of the contingent deferred sales charge will reduce the
gain or increase the loss, as the case may be, on the amount realized on
redemption. The amount of any contingent deferred sales charge will be paid
to the Distributor.
Net Asset Value
The Fund's per share net asset values are determined Monday through Friday as
of the close of the New York Stock Exchange (the "NYSE") exclusive of days on
which the NYSE is closed. The NYSE ordinarily closes at 4 P.M. New York City
time. Market quotations for most municipal securities are not readily
available on a daily basis; therefore, the Fund uses one or more pricing
services to value such assets. The pricing services utilize information with
respect to market transactions, quotations from dealers and various
relationships among securities in determining value and may provide prices
determined as of times prior to the close of the NYSE. Assets for which
market quotations are readily available are valued as of the close of
business on the valuation date. Securities for which there is no pricing
service valuation or last reported sale price are valued as determined in
good faith by or under the authority of the Trustees of the Trust. The
Trustees have authorized the use of the amortized cost method to value
short-term debt instruments issued with a maturity of one year or less and
having a remaining maturity of 60 days or less when the value obtained is
fair value. Further information with respect to the valuation of the Fund's
assets is included in the Statement of Additional Information.
Distribution Plan
The Fund has adopted a Plan of Distribution Pursuant to Rule 12b-1 (the
"Distribution Plan") in accordance with the regulations under the Investment
Company Act of 1940, as amended (the "1940 Act"). Under the provisions of the
Distribution Plan, the Fund makes payments to the Distributor based on an
annual percentage of the average daily value of the net assets of each class
of shares as follows:
Class 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 pay or reimburse securities
dealers (including securities dealers that are affiliates of the Distributor)
or others for personal services and/or the maintenance or servicing of
shareholder accounts. A portion of any initial commission paid to dealers for
the sale of shares of the Fund represents payment for personal services
and/or the maintenance of shareholder accounts by such dealer. Dealers who
have sold Class A shares are eligible for further reimbursements commencing
as of the time of such sale. Dealers who have sold Class B and Class D shares
are eligible for further reimbursements after the first year during which
such shares have been held of record by such dealer as nominee for its
clients (or by such clients directly). Any service fees received by the
Distributor and not allocated to dealers may be applied by the Distributor in
reduction of expenses incurred by it directly for personal services and the
maintenance or servicing of shareholder accounts.
The distribution fees are used primarily to offset initial and ongoing
commissions paid to securities dealers for selling such shares. Any
distribution fees received by the Distributor and not allocated to dealers
may be applied by the Distributor in reduction of expenses waived by it or in
connection with sales or marketing efforts, including special promotional
fees and cash and noncash incentives based upon sales by securities dealers.
The Distributor provides distribution services on behalf of other funds
having distribution plans and receives similar payments from, and incurs
similar expenses on behalf of, such other funds. When expenses of the
Distributor cannot be identified as relating to a specific fund, the
Distributor allocates expenses among the funds in a manner deemed fair and
equitable to each fund.
16
<PAGE>
Commissions and other cash and noncash incentives and payments to dealers,
to the extent payable out of the general profits, revenues or other sources
of the Distributor (including the advisory fees paid by the Fund), have also
been authorized pursuant to the Distribution Plan.
A rule of the National Association of Securities Dealers, Inc. ("NASD")
limits the annual expenditures which the Fund may incur under the
Distribution Plan to 1%, of which 0.75% may be used to pay distribution
expenses and 0.25% may be used to pay shareholder service fees. The NASD rule
also limits the aggregate amount which the Fund may pay for such distribution
costs to 6.25% of gross share sales of a class since the inception of any
asset-based sales charge plus interest at the prime rate plus 1% on unpaid
amounts thereof (less any contingent deferred sales charges). Such limitation
does not apply to shareholder service fees. Payments to the Distributor or to
dealers funded under the Distribution Plan may be discontinued at any time by
the Trustees of the Trust.
Redemption of Shares
Shareholders may redeem all or any portion of their accounts on any day the
NYSE is open for business. Redemptions will be effective at the net asset
value per share next determined (see "Purchase of Shares -- Net Asset Value"
herein) after receipt of the redemption request, in accordance with the
requirements described below, by Shareholder Services and delivery of the
request by Shareholder Services to the Transfer Agent. To allow time for the
clearance of checks used for the purchase of any shares which are tendered
for redemption shortly after purchase, the remittance of the redemption
proceeds for such shares could be delayed for 15 days or more after the
purchase. Shareholders who anticipate a potential need for immediate access
to their investments should, therefore, purchase shares by wire. Except as
noted, redemption proceeds from the Fund are normally remitted within seven
days after receipt of the redemption request by the Fund and any necessary
documents in good order.
Methods of Redemption
Request By Mail
A shareholder may request redemption of shares, with proceeds to be mailed to
the shareholder or wired to a predesignated bank account (see "Proceeds By
Wire" below) by sending to State Street Research Shareholder Services, P.O.
Box 8408, Boston, Massachusetts 02266-8408: (1) a written request for
redemption signed by the registered owner(s) of the shares, exactly as the
account is registered; (2) an endorsed stock power in good order with respect
to the shares or, if issued, the share certificates for the shares endorsed
for transfer or accompanied by an endorsed stock power; (3) any required
signature guarantees (see "Redemption of Shares -- Signature Guarantees"
below); and (4) any additional documents which may be required for redemption
in the case of corporations, trustees, etc., such as certified copies of
corporate resolutions, governing instruments, powers of attorney, and the
like. The Transfer Agent will not process requests for redemption until it
has received all necessary documents in good order. A shareholder will be
notified promptly if a redemption request cannot be accepted. Shareholders
having any questions about the requirements for redemption should call
Shareholder Services toll-free at 1-800-562-0032.
Request By Telephone
Shareholders may request redemption by telephone with proceeds to be
transmitted by check or by wire (see "Proceeds By Wire" below). A shareholder
can request a redemption for $50,000 or less to be transmitted by check. Such
check for the proceeds will be made payable to the shareholder of record and
will be mailed to the address of record. There is no fee for this service. It
is not available for shares held in certificate form or if the address of
record has been changed within 30 days of the redemption request. The Fund
may revoke or suspend the telephone redemption privilege at any time and
without notice. See "Shareholder Services -- Telephone Services" for a
discussion of the conditions and risks associated with Telephone Privileges.
17
<PAGE>
Request By Check (Class A Shares Only)
Shareholders of Class A shares of the Fund may redeem shares by checks drawn
on State Street Bank and Trust Company. Checks may be made payable to the
order of any person or organization designated by the shareholder and must be
for amounts of at least $500 but not more than $100,000. Shareholders will
continue to earn dividends on the shares to be redeemed until the check
clears. There is currently no charge associated with redemption of shares by
check. Checkbooks are supplied for a $2 fee. Checks will be sent only to the
registered owner at the address of record. A $10 fee will be charged against
an account in the event a redemption check is presented for payment and not
honored pursuant to the terms and conditions established by State Street Bank
and Trust Company.
Shareholders can request the checkwriting privilege by completing the
signature card which is part of the Application. In order to arrange for
redemption-by-check after an account has been opened, a revised Application
with signature card and signatures guaranteed must be sent to Shareholder
Services. Cancelled checks will be returned to shareholders at the end of
each month.
The redemption-by-check service is subject to State Street Bank and Trust
Company's rules and regulations applicable to checking accounts (as amended
from time to time), and is governed by the Massachusetts Uniform Commercial
Code. All notices with respect to checks drawn on State Street Bank and Trust
Company must be given to State Street Bank and Trust Company. Stop payment
instructions with respect to checks must be given to State Street Bank and
Trust Company by calling 1-617-985-8543. Shareholders may not close out an
account by check.
Proceeds By Wire
Upon a shareholder's written request or by telephone if the shareholder has
Telephone Privileges (see "Shareholder Services -- Telephone Services"
herein), the Trust's custodian will wire redemption proceeds to the
shareholder's predesignated bank account. To make the request, the
shareholder should call 1-800-521-6548 prior to 4 P.M. Boston time. A $7.50
charge against the shareholder's account will be imposed for each wire
redemption. This charge is subject to change without notice. The
shareholder's bank may also impose a charge for receiving wires of redemption
proceeds. The minimum redemption by wire is $5,000.
Request to Dealer to Repurchase
For the convenience of shareholders, the Fund has authorized the Distributor
as its agent to accept orders from dealers by wire or telephone for the
repurchase of shares by the Distributor from the dealer. The Fund may revoke
or suspend this authorization at any time. The repurchase price is the net
asset value for the applicable shares next determined following the time at
which the shares are offered for repurchase by the dealer to the Distributor.
The dealer is responsible for promptly transmitting a shareholder's order to
the Distributor. Payment of the repurchase proceeds is made to the dealer who
placed the order promptly upon delivery of certificates for shares in proper
form for transfer or, for Open Accounts, upon the receipt of a stock power
with signatures guaranteed as described below, and, if required, any
supporting documents. Neither the Fund nor the Distributor imposes any charge
upon such a repurchase. However, a dealer may impose a charge as agent for a
shareholder in the repurchase of his or her shares.
The Fund has reserved the right to change, modify or terminate the
services described above at any time.
Additional Information
Because of the relatively high cost of maintaining small shareholder
accounts, the Fund reserves the right to involuntarily redeem at its option
any shareholder account which remains below $1,500 for a period of 60 days
after notice is mailed to the applicable shareholder, or to impose a
maintenance fee on such account after 60 days' notice. Such involuntary
redemptions will be subject to applicable sales charges, if any. The Fund may
increase such minimum account value above such amount in the future after
notice to affected shareholders. Involuntarily redeemed shares will be priced
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at the net asset value on the date fixed for redemption by the Fund, and the
proceeds of the redemption will be mailed promptly to the affected
shareholder at the address of record. Currently, the maintenance fee is $18
annually, which is paid to the Transfer Agent. The fee does not apply to
certain retirement accounts or if the shareholder has more than an aggregate
$50,000 invested in the Fund and other Eligible Funds combined. Imposition of
a maintenance fee on a small account could, over time, exhaust the assets of
such account.
To cover the cost of additional compliance administration, a $20 fee will
be charged against any shareholder account that has been determined to be
subject to escheat under applicable state laws.
The Fund may not suspend the right of redemption or postpone the date of
payment of redemption proceeds for more than seven days, except that (a) it
may elect to suspend the redemption of shares or postpone the date of payment
of redemption proceeds: (1) during any period that the NYSE is closed (other
than customary weekend and holiday closings) or trading on the NYSE is
restricted; (2) during any period in which an emergency exists as a result of
which disposal of portfolio securities is not reasonably practicable or it is
not reasonably practicable to fairly determine the Fund's net asset values;
or (3) during such other periods as the Securities and Exchange Commission
may by order permit for the protection of investors; and (b) the payment of
redemption proceeds may be postponed as otherwise provided under "Redemption
of Shares" herein.
Signature Guarantees
To protect shareholder accounts, the Transfer Agent, the Fund, the Investment
Manager and the Distributor from possible fraud, signature guarantees are
required for certain redemptions. Signature guarantees help the Transfer
Agent to determine that the person who has authorized a redemption from the
account is, in fact, the shareholder. Signature guarantees are required for,
among other things: (1) written requests for redemptions for more than
$50,000; (2) written requests for redemptions for any amount if the proceeds
are transmitted to other than the current address of record (unchanged in the
past 30 days); (3) written requests for redemptions for any amount submitted
by corporations and certain fiduciaries and other intermediaries; (4)
requests to transfer the registration of shares to another owner; and (5)
authorizations to establish the checkwriting privilege. Signatures must be
guaranteed by a bank, a member firm of a national stock exchange, or other
eligible guarantor institution. The Transfer Agent will not accept guarantees
(or notarizations) from notaries public. The above requirements may be waived
in certain instances. Please contact Shareholder Services at 1-800-562-0032
for specific requirements relating to your account.
Shareholder Services
The Open Account System
Under the Open Account System full and fractional shares of the Fund owned by
shareholders are credited to their accounts by the Transfer Agent, State
Street Bank and Trust Company, 225 Franklin Street, Boston, Massachusetts
02110. Certificates representing Class B or Class D shares will not be
issued, while certificates representing Class A or Class C shares will only
be issued if specifically requested in writing and, in any case, will only be
issued for full shares, with any fractional shares to be carried on the
shareholder's account. Shareholders will receive periodic statements of
transactions in their account.
The Fund's Open Account System provides the following options:
1. Additional purchases of shares of the Fund may be made through dealers,
by wire or by mailing a check payable to the Fund to Shareholder
Services under the terms set forth above under "Purchase of Shares."
2. The following methods of receiving dividends from investment income and
distributions from capital gains are available:
(a) All income dividends and capital gains distributions reinvested in
additional shares of the Fund.
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<PAGE>
(b) All income dividends in cash; all capital gains distributions
reinvested in additional shares of the Fund.
(c) All income dividends and capital gains distributions in cash.
(d) All income dividends and capital gains distributions invested in
any one available Eligible Fund designated by the shareholders as
described below. See "Dividend Allocation Plan" herein.
Dividend and distribution selections should be made on the Application
accompanying the initial investment. If no selection is indicated on the
Application, that account will automatically be coded for reinvestment of all
dividends and distributions in additional shares of the same class of the
Fund. Selections may be changed at any time by telephone or written notice to
Shareholder Services. Dividends and distributions are reinvested at net asset
value without a sales charge.
Exchange Privilege
Shareholders of the Fund may exchange their shares for available shares with
corresponding characteristics of any of the other Eligible Funds at any time
on the basis of the relative net asset values of the respective shares to be
exchanged, subject to compliance with applicable securities laws.
Shareholders of any other Eligible Fund may similarly exchange their shares
for Fund shares with corresponding characteristics. Prior to making an
exchange, shareholders should obtain the Prospectus of the Eligible Fund into
which they are exchanging. Under the Direct Program, subject to certain
conditions, shareholders may make arrangements for regular exchanges from the
Fund into other Eligible Funds. To effect an exchange, Class A, Class B and
Class D shares may be redeemed without the payment of any contingent deferred
sales charge that might otherwise be due upon an ordinary redemption of such
shares. The State Street Research Money Market Fund issues Class E shares
which are sold without any sales charge. Exchanges of State Street Research
Money Market Fund Class E shares into Class A shares of the Fund or any other
Eligible Fund are subject to the initial sales charge or contingent deferred
sales charge applicable to an initial investment in such Class A shares,
unless a prior Class A sales charge has been paid directly or indirectly with
respect to the shares redeemed. For purposes of computing the contingent
deferred sales charge that may be payable upon disposition of the acquired
Class A, Class B and Class D shares, the holding period of the redeemed
shares is "tacked" to the holding period of the acquired shares. The period
any Class E shares are held is not tacked to the holding period of any
acquired shares. No exchange transaction fee is currently imposed on any
exchange.
Shares of the Fund may also be acquired or redeemed in exchange for
shares of the Summit Cash Reserves Fund ("Summit Cash Reserves") by customers
of Merrill Lynch, Pierce, Fenner & Smith Incorporated (subject to completion
of steps necessary to implement the program). The Fund and Summit Cash
Reserves are related mutual funds for purposes of investment and investor
services. Upon the acquisition of shares of Summit Cash Reserves by exchange
for redeemed shares of the Fund, (a) no sales charge is imposed by Summit
Cash Reserves, (b) no contingent deferred sales charge is imposed by the Fund
on the Fund shares redeemed, and (c) any applicable holding period of the
Fund shares redeemed is "tolled," that is, the holding period clock stops
running pending further transactions. Upon the acquisition of shares of the
Fund by exchange for redeemed shares of Summit Cash Reserves, (a) the
acquisition of Class A shares shall be subject to the initial sales charges
or contingent deferred sales charges applicable to an initial investment in
such Class A shares, unless a prior Class A sales charge has been paid
directly or indirectly with respect to the Summit Cash Reserves shares
redeemed, and (b) the acquisition of Class B or Class D shares of the Fund
shall restart any holding period previously tolled, or shall be subject to
the contingent deferred sales charge applicable to an initial investment in
such shares.
For the convenience of its shareholders who have Telephone Privileges, the
Fund permits exchanges by telephone request from either the shareholder or
his or her dealer. Shares may be exchanged by telephone provided that the
registration of the two accounts is
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the same. The toll-free number for exchanges is 1-800-521-6548. See
"Telephone Services" herein for a discussion of conditions and risks
associated with Telephone Privileges.
The exchange privilege may be exercised only in those states where shares
of the relevant other Eligible Fund may legally be sold. For tax purposes,
each exchange actually represents the sale of shares of one fund and the
purchase of shares of another. Accordingly, exchanges may produce a capital
gain or loss for tax purposes. The exchange privilege may be terminated or
suspended or its terms changed at any time, subject, if required under
applicable regulations, to 60 days prior notice. New accounts established for
investments upon exchange from an existing account in another fund will have
the same Telephone Privileges as the existing account, unless Shareholder
Services is instructed otherwise. Related administrative policies and
procedures may also be adopted with regard to a series of exchanges, street
name accounts, sponsored arrangements and other matters.
The exchange privilege is not designed for use in connection with
short-term trading or market timing strategies. To protect the interests of
shareholders, the Fund reserves the right to temporarily or permanently
terminate the exchange privilege for any person who makes more than six
exchanges out of or into the Fund per calendar year. Accounts under common
ownership or control, including accounts with the same taxpayer
identification number, may be aggregated for purposes of the six exchange
limit. Notwithstanding the six exchange limit, the Fund reserves the right to
refuse exchanges by any person or group if, in the Investment Manager's
judgment, the Fund would be unable to invest effectively in accordance with
its investment objective and policies, or would otherwise potentially be
adversely affected. Exchanges may be restricted or refused if the Fund
receives or anticipates simultaneous orders affecting significant portions of
the Fund's assets. In particular, a pattern of exchanges that coincides with
a "market timing" strategy may be disruptive to the Fund. The Fund may impose
these restrictions at any time. The exchange limit may be modified for
accounts in certain institutional retirement plans because of plan exchange
limits, Department of Labor regulations or administrative and other
considerations. Subject to the foregoing, if an exchange request in good
order is received by Shareholder Services and delivered by Shareholder
Services to the Transfer Agent by 12 noon Boston time on any business day,
the exchange usually will occur that day. For further information regarding
the exchange privilege, shareholders should contact Shareholder Services.
Reinvestment Privilege
A shareholder of the Fund who has redeemed shares or had shares repurchased
at his or her request may reinvest all or any portion of the proceeds (plus
that amount necessary to acquire a fractional share to round off his or her
reinvestment to full shares) in shares, of the same class as the shares
redeemed, of the Fund or any other Eligible Fund at net asset value and
without subjecting the reinvestment to an initial sales charge, provided such
reinvestment is made within 120 calendar days after a redemption or
repurchase. Upon such reinvestment, the shareholder will be credited with any
contingent deferred sales charge previously charged with respect to the
amount reinvested. The redemption of shares is, for federal income tax
purposes, a sale on which the shareholder may realize a gain or loss. If a
redemption at a loss is followed by a reinvestment within 30 days, the
transaction may be a "wash sale" resulting in a denial of the loss for
federal income tax purposes.
Any reinvestment pursuant to the reinvestment privilege will be subject to
any applicable minimum account standards imposed by the fund in which the
reinvestment is made. Shares are sold to a reinvesting shareholder at the net
asset value thereof next determined following timely receipt by Shareholder
Services of such shareholder's written purchase request and delivery of the
request by Shareholder Services to the Transfer Agent. A shareholder may
exercise this reinvestment privilege only once per 12-month period with
respect to his or her shares of the Fund. No charge is imposed by the Fund
for such reinvestments; however, dealers may charge fees in connection with
the reinvestment privilege. The reinvestment privilege may be exercised with
respect to an Eligible Fund only in those states where shares of the relevant
other Eligible Fund may legally be sold.
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<PAGE>
Investment Plans
The Investamatic Check Program is available to Class A, Class B and Class D
shareholders. Under this Program, shareholders may make regular investments
by authorizing withdrawals from their bank accounts each month or quarter on
the Application available from Shareholder Services.
Systematic Withdrawal Plan
A shareholder who owns noncertificated Class A or Class C shares with a value
of $5,000 or more, or Class B or Class D shares with a value of $10,000 or
more, may elect, by participating in the Fund's Systematic Withdrawal Plan,
to have periodic checks issued for specified amounts. These amounts may not
be less than certain minimums, depending on the class of shares held. The
Plan provides that all income dividends and capital gains distributions of
the Fund shall be credited to participating shareholders in additional shares
of the Fund. Thus, the withdrawal amounts paid can only be realized by
redeeming shares of the Fund under the Plan. To the extent such amounts paid
exceed dividends and distributions from the Fund, a shareholder's investment
will decrease and may eventually be exhausted.
In the case of shares otherwise subject to contingent deferred sales
charges, no such charges will be imposed on withdrawals of up to 8% annually
of either (a) the value, at the time the Plan is initiated, of the shares
then in the account, or (b) the value, at the time of a withdrawal, of the
same number of shares as in the account when the Plan was initiated,
whichever is higher.
Expenses of the Plan are borne by the Fund. A participating shareholder
may withdraw from the Plan, and the Fund may terminate the Plan at any time
on written notice. Purchase of additional shares while a shareholder is
receiving payments under a Plan is ordinarily disadvantageous because of
duplicative sales charges. For this reason, a shareholder may not participate
in the Investamatic Check Program and the Systematic Withdrawal Plan at the
same time.
Dividend Allocation Plan
The Dividend Allocation Plan allows shareholders to elect to have all their
dividends and any other distributions from the Fund or any Eligible Fund
automatically invested at net asset value in one other such Eligible Fund
designated by the shareholder, provided the account into which the investment
is made is initially funded with the requisite minimum amount. The number of
shares purchased will be determined as of the dividend payment date. The
Dividend Allocation Plan is subject to state securities law requirements, to
suspension at any time, and to such policies, limitations and restrictions,
as, for instance, may be applicable to street name or master accounts, that
may be adopted from time to time.
Automatic Bank Connection
A shareholder may elect, by participating in the Fund's Automatic Bank
Connection ("ABC"), to have dividends and other distributions, including
Systematic Withdrawal Plan payments, automatically deposited in the
shareholder's bank account by electronic funds transfer. Some contingent
deferred sales charges may apply. See "Systematic Withdrawal Plan" herein.
Reports
Reports for the Fund will be sent to shareholders of record at least
semiannually. These reports will include a list of the securities owned by
the Fund as well as the Fund's financial statements.
Telephone Services
The following telephone privileges ("Telephone Privileges") can be used:
(1) the privilege allowing the shareholder to make telephone redemptions
for amounts up to $50,000 to be mailed to the shareholder's address of
record is available automatically;
(2) the privilege allowing the shareholder or his or her dealer to make
telephone exchanges is available automatically;
(3) the privilege allowing the shareholder to make telephone redemptions
for amounts over $5,000, to be remitted by wire to the shareholder's
predesignated bank account, is available by election on the
Application accompanying this
22
<PAGE>
Prospectus. A current shareholder who did not previously request such
telephone wire privilege on his or her original Application may
request the privilege by completing a Telephone Redemption-by-Wire
Form which may be obtained by calling 1-800-562-0032. The Telephone
Redemption-by-Wire Form requires a signature guarantee; and
(4) the privilege allowing the shareholder to make telephone purchases or
redemptions, transmitted via the Automated Clearing House system, into
or from the shareholder's predesignated bank account, is available
upon completion of the requisite initial documentation. For details
and forms, call 1-800-562-0032. The documentation requires a signature
guarantee.
A shareholder may decline the automatic Telephone Privileges set forth in
(1) and (2) above by so indicating on the Application accompanying this
Prospectus.
A shareholder may discontinue any Telephone Privilege at any time by
advising Shareholder Services that the shareholder wishes to discontinue the
use of such privileges in the future.
Unless such Telephone Privileges are declined, a shareholder is deemed to
authorize Shareholder Services and the Transfer Agent to: (1) act upon the
telephone instructions of any person purporting to be the shareholder to
redeem, or purporting to be the shareholder or the shareholder's dealer to
exchange, shares from any account; and (2) honor any written instructions for
a change of address regardless of whether such request is accompanied by a
signature guarantee. All telephone calls will be recorded. None of the Fund,
the other Eligible Funds, the Transfer Agent, the Investment Manager or the
Distributor will be liable for any loss, expense or cost arising out of any
request, including any fraudulent or unauthorized requests. Shareholders
assume the risk to the full extent of their accounts that telephone requests
may be unauthorized. Reasonable procedures will be followed to confirm that
instructions communicated by telephone are genuine. The shareholder will not
be liable for any losses arising from unauthorized or fraudulent instructions
if such procedures are not followed.
Shareholders may redeem or exchange shares by calling toll-free
1-800-521-6548. Although it is unlikely, during periods of extraordinary
market conditions, a shareholder may have difficulty in reaching Shareholder
Services at such telephone number. In that event, the shareholder should
contact Shareholder Services at 1-800-562-0032, 1-617-357-7805 or otherwise
at its main office at One Financial Center, Boston, Massachusetts 02111-2690.
Shareholder Account Inquiries: Please call 1-800-562-0032
Call this number for assistance in answering general questions on your
account, including account balance, available shareholder services, statement
information and performance of the Fund. Account inquiries may also be made
in writing to State Street Research Shareholder Services, P.O. Box 8408,
Boston, Massachusetts 02266-8408. A fee of up to $10 will be charged against
an account for providing additional account transcripts or photocopies of
paid redemption checks or for researching records in response to special
requests.
Shareholder Telephone Transactions: Please call 1-800-521-6548
Call this number for assistance in purchasing shares by wire and for
telephone redemptions or telephone exchange transactions. Shareholder
Services will require some form of personal identification prior to acting
upon instructions received by telephone. Written confirmation of each
transaction will be provided.
The Fund and Its Shares
The Fund was organized in 1989 as an additional series of State Street
Research Tax-Exempt Trust (formerly, MetLife - State Street Tax-Exempt
Trust), a Massachusetts business trust. The Trustees have authorized shares
of the Fund to be issued in four classes: Class A, Class B, Class C and Class
D shares. The Trust is registered with the Securities and Exchange Commission
as an open-end management investment company. The fiscal year end of the Fund
is December 31.
Except for those differences between the classes of shares described below
and elsewhere in the Prospec-
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<PAGE>
tus, each share of a Fund has equal dividend, redemption and liquidation
rights with other shares of the Fund and when issued is fully paid and
nonassessable. In the future, certain classes may be redesignated, for
administrative purposes only, to conform to standard class designations and
common usage of terms which may develop in the mutual fund industry. For
example, Class C shares may be redesignated as Class Y shares and Class D
shares may be redesignated as Class C shares. Any redesignation would not
affect any substantive rights respecting the shares.
Each share of each class of shares represents an identical legal interest
in the same portfolio of investments of the Fund, has the same rights and is
identical in all respects, except that Class B and Class D shares bear the
expenses of the deferred sales arrangement and any expenses (including the
higher service and distribution fees) resulting from such sales arrangement,
and certain other incremental expenses related to a class. Each class will
have exclusive voting rights with respect to provisions of the Rule 12b-1
distribution plan pursuant to which the service and distribution fees, if
any, are paid. Although the legal rights of holders of each class of shares
are identical, it is likely that the different expenses borne by each class
will result in different net asset values and dividends. The different
classes of shares of the Fund also have different exchange privileges.
The rights of holders of shares may be modified by the Trustees at any
time, so long as such modifications do not have a material adverse effect on
the rights of any shareholder. Under the Master Trust Agreement, the Trustees
may reorganize, merge or liquidate the Fund without prior shareholder
approval and subject to compliance with applicable law. On any matter
submitted to the shareholders, the holder of shares of the Fund is entitled
to one vote per share (with proportionate voting for fractional shares)
regardless of the relative net asset value thereof.
Under the Master Trust Agreement, no annual or regular meeting of
shareholders is required. Thus, there will ordinarily be no shareholder
meetings unless required by the 1940 Act. Except as otherwise provided under
said Act, the Board of Trustees will be a self-perpetuating body until fewer
than two-thirds of the Trustees serving as such are Trustees who were elected
by shareholders of the Trust. In the event less than a majority of the
Trustees serving as such were elected by shareholders of the Trust, a meeting
of shareholders will be called to elect Trustees. Under the Master Trust
Agreement, any Trustee may be removed by vote of two-thirds of the
outstanding Trust shares; holders of 10% or more of the outstanding shares of
the Trust can require that the Trustees call a meeting of shareholders for
purposes of voting on the removal of one or more Trustees. In connection with
such meetings called by shareholders, shareholders will be assisted in
shareholder communications to the extent required by applicable law.
Under Massachusetts law, the shareholders of the Trust could, under
certain circumstances, be held personally liable for the obligations of the
Trust. However, the Master Trust Agreement of the Trust disclaims shareholder
liability for acts or obligations of the Trust and provides for
indemnification for all losses and expenses of any shareholder held
personally liable for the obligations of the Trust. Thus, the risk of a
shareholder incurring financial loss on account of shareholder liability is
limited to circumstances in which the Fund would be unable to meet its
obligations. The Investment Manager believes that, in view of the above, the
risk of personal liability to shareholders is remote.
As of March 31, 1996, Metropolitan Life Insurance Company ("Metropolitan")
was the record and/or beneficial owner of approximately 78.0% of the
outstanding Class D shares of the Fund, and may be deemed to be in control of
such Class D shares of the Fund. Ownership of 25% or more of a voting
security is deemed "control" as defined in the 1940 Act. So long as 25% of a
class of shares is so owned, such owners will be presumed to be in control of
such class of shares for purposes of voting on certain matters, such as any
Distribution Plan for a given class.
Management of the Fund
Under the provisions of the Trust's Master Trust Agreement and the laws of
Massachusetts, responsibility for the management and supervision of the Fund
rests with the Trustees.
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<PAGE>
The Fund's investment manager is State Street Research & Management
Company. The Investment Manager is charged with the overall responsibility
for managing the investments and business affairs of the Fund, subject to the
authority of the Board of Trustees.
The Investment Manager was founded by Paul Cabot, Richard Saltonstall and
Richard Paine to serve as investment adviser to one of the nation's first
mutual funds, presently known as State Street Research Investment Trust,
which they had formed in 1924. Their investment management philosophy, which
continues to this day, emphasized comprehensive fundamental research and
analysis, including meetings with the management of companies under
consideration for investment. The Investment Manager's portfolio management
group has extensive investment industry experience managing equity and debt
securities. In managing debt securities, if any, for a portfolio, the
Investment Manager may consider yield curve, sector rotation and duration,
among other factors.
The Investment Manager and the Distributor are indirect wholly-owned
subsidiaries of Metropolitan and both are located at One Financial Center,
Boston, Massachusetts 02111-2690.
The Investment Manager has entered into an Advisory Agreement with the
Trust pursuant to which investment research and management, administrative
services, office facilities and personnel are provided to the Fund in
consideration of a fee from the Fund.
Under its Advisory Agreement with the Trust, the Investment Manager
receives a monthly investment advisory fee equal to 0.55% (on an annual
basis) of the average daily value of the net assets of the Fund. The Fund
bears all costs of its operation other than those incurred by the Investment
Manager under the Advisory Agreement. In particular, the Fund pays, among
other expenses, investment advisory fees and the compensation and expenses of
the Trustees who are not otherwise currently affiliated with the Investment
Manager or any of its affiliates. The Investment Manager will reduce its
management fee payable by the Fund up to the amount of any expenses
(excluding permissible items, such as brokerage commissions, Rule 12b-1
payments, interest, taxes and litigation expenses) paid or incurred in any
year in excess of the most restrictive expense limitation imposed by any
state in which the Fund sells shares, if any. The Investment Manager provides
the Fund with office space, facilities and personnel. The Investment Manager
compensates Trustees of the Trust if such persons are employees or affiliates
of the Investment Manager or its affiliates.
The Fund is managed by Paul J. Clifford, Jr. Mr. Clifford has managed the
Fund since March 1993. Mr. Clifford's principal occupation currently is Vice
President of State Street Research & Management Company. During the past five
years he has also served as a securities analyst for State Street Research &
Management Company.
Subject to the policy of seeking best overall price and execution, sales
of shares of the Fund may be considered by the Fund and the Investment
Manager in the selection of broker or dealer firms for the Fund's portfolio
transactions.
The Investment Manager has a Code of Ethics governing personal securities
transactions of certain of its employees; see the Statement of Additional
Information.
Dividends and Distributions; Taxes
The Fund qualified and elected to be treated as a regulated investment
company under Subchapter M of the Internal Revenue Code for its most recent
fiscal year and intends to qualify as such in future years, although it
cannot give complete assurance that it will do so. As long as it so qualifies
and satisfies certain distribution requirements, it will not be subject to
federal income tax on its taxable income (including capital gains, if any)
distributed to its shareholders. Consequently, the Fund intends to distribute
annually to its shareholders substantially all its net investment income and
any capital gain net income (capital gains net of capital losses). As long as
the Fund qualifies as a regulated investment company and meets certain other
Internal Revenue Code requirements, distributions of tax-exempt interest
income will be excluded from a shareholder's gross income for federal income
tax purposes.
Dividends from net investment income will be declared daily during each
calendar month and paid
25
<PAGE>
monthly; distributions of long-term and short-term capital gain net income
will generally be made on an annual basis (or as otherwise required for
compliance with applicable tax regulations), except to the extent that net
short-term gains, if any, are included in the monthly income dividends for
the purpose of stabilizing, to the extent possible, the amount of net monthly
distributions as described below. Both dividends from net investment income
and distributions of capital gain net income will be paid in additional
shares of the Fund at net asset value (except in the case of shareholders who
elect a different available distribution method). The Fund will provide its
shareholders of record with annual information on a timely basis concerning
the federal and state tax status of dividends and distributions during the
preceding calendar year.
The Fund has adopted distribution procedures which differ from those which
have been customary for investment companies in general. The Fund will
declare a dividend each day in an amount based on monthly projections of its
future net investment income and will pay such dividends monthly as described
above. Consequently, the amount of each daily dividend may differ from actual
net investment income as determined under generally accepted accounting
principles. The purpose of these distribution procedures is to attempt to
eliminate, to the extent possible, fluctuations in the level of monthly
dividend payments that might result if the Fund declared dividends in the
exact amount of its daily net investment income.
Each daily dividend is payable to shareholders of record at the time of
its declaration (for this purpose, including only holders of shares purchased
for which payment has been received by the Transfer Agent and excluding
holders of shares redeemed on that day).
To the extent distributions by the Fund are derived from interest on
qualifying New York Municipal Obligations and are designated as
exempt-interest dividends, such distributions shall be excluded from gross
income for federal income tax purposes and exempt from New York State and New
York City personal income, but not corporate franchise, taxes. If shares of
the Fund which are sold at a loss have been held six months or less, the loss
will be disallowed to the extent of any exempt-interest dividends received.
Dividends paid by the Fund from taxable net investment income and
distributions of any net short-term capital gains, whether they are paid in
cash or reinvested in additional shares, will be taxable for federal income
tax purposes to shareholders as ordinary income. Distributions of net capital
gains (the excess of net long-term capital gains over net short-term capital
losses) which are designated as capital gains distributions, whether paid in
cash or reinvested in additional shares, will be taxable for federal income
tax purposes to shareholders as long-term capital gains, regardless of how
long shareholders have held their shares. However, it is expected that any
taxable income will be insubstantial in relation to the tax-exempt interest
generated by the Fund. If shares of the Fund which are sold at a loss have
been held six months or less, the loss (not otherwise disallowed as
attributable to an exempt-interest dividend) will be considered as a
long-term capital loss to the extent of any capital gain distributions
received.
Dividends and other distributions and proceeds of redemption of Fund
shares paid to individuals and other nonexempt payees will be subject to a
31% federal backup withholding tax if the Transfer Agent is not provided with
the shareholder's correct taxpayer identification number or certification
that the shareholder is not subject to such backup withholding. However,
exempt-interest dividends will not be subject to backup withholding.
Moreover, backup withholding will not apply to any taxable dividends and
distributions provided the Fund reasonably estimates that 95% or more of all
dividends or distributions paid or treated as paid during the year are
exempt-interest dividends.
Tax-exempt interest from "private activity" bonds (principally industrial
development revenue bonds) issued after August 7, 1986, is considered a tax
preference item for purposes of the federal alternative minimum tax. However,
the Fund's present intention is to invest no more than 20% of its net assets
in such securities. For corporations, all tax-exempt interest will be
considered in calculating the alternative minimum tax as part of the current
earnings adjustments. Further,
26
<PAGE>
shareholders who are "substantial users" (or "related persons" of substantial
users), within the meaning of Section 147 of the Internal Revenue Code, of
facilities financed by private activity bonds should consult their tax
advisers as to whether the Fund is a desirable investment.
As noted above, exempt-interest dividends derived from interest earned on
qualifying New York Municipal Obligations will be exempt from New York State
and New York City personal income, but not corporate franchise, taxes.
Shareholders will receive an annual notification stating the portion of the
Fund's tax-exempt income attributable to such New York Municipal Obligations.
Dividends and distributions derived from taxable income and capital gains are
not exempt from New York State and New York City taxes. Interest on
indebtedness incurred or continued by a shareholder to purchase or carry
shares of the Fund is not deductible for New York State and New York City
personal income tax purposes.
The foregoing discussion relates only to generally applicable federal and
New York State and New York City income tax provisions in effect as of the
date of this Prospectus and is not a substitute for careful tax planning.
Therefore, prospective shareholders are urged to consult their own tax
advisers with specific reference to their own tax situations including their
liabilities with respect to any other state and local taxes.
Calculation of Performance Data
From time to time, in advertisements or in communications to shareholders or
prospective investors, the Fund may compare the performance of its Class A,
Class B, Class C or Class D shares to that of other mutual funds with similar
investment objectives, to certificates of deposit, to taxable debt
instruments, such as Treasury bonds, as may be included in the Merrill Lynch
Treasury Bond Index, and/or to other financial alternatives. The Fund may
also compare its performance to appropriate indices such as the Lehman
Brothers Municipal Revenue Bond Index, the Merrill Lynch Revenue Index, the
Merrill Lynch 500 Municipal Index, the Lehman Brothers New York Bond Index,
or the Bond Buyer Revenue Bond Index and/or to appropriate rankings or
averages such as the Lipper New York State Municipal Bond Funds Group
compiled by Lipper Analytical Services, Inc., or to those compiled by
Morningstar, Inc., Money Magazine, Business Week, Forbes Magazine, The Wall
Street Journal, Fortune Magazine or Investor's Daily.
Total return is computed separately for each class of shares of the Fund.
The average annual total return ("standard total return") for shares of the
Fund is computed by determining the average annual compounded rate of return
for a designated period that, if applied to a hypothetical $1,000 initial
investment less the maximum initial or contingent deferred sales charges, if
applicable, would produce the redeemable value of that investment at the end
of the period, assuming reinvestment of all dividends and distributions and
with recognition of all recurring charges. Standard total return may be
accompanied with nonstandard total return information, but for differing
periods and computed in the same manner with or without annualizing the total
return or taking sales charges into account.
The Fund's yield is computed separately for each class of shares by
dividing the net investment income, after recognition of all recurring
charges, per share earned during the most recent month or other specified
thirty-day period by the applicable maximum offering price per share on the
last day of such period and annualizing the result. Yield information may be
accompanied by information on tax equivalent yields computed in the same
manner, with adjustment for assumed relevant income tax rates.
The standard total return, yield and tax equivalent yield results take
sales charges into account, if applicable, but do not take into account
recurring and nonrecurring charges for optional services which only certain
shareholders elect and which involve nominal fees, such as the $7.50 fee for
remittance of redemption proceeds by wire. Where sales charges are not
applicable and therefore not taken into account in the calculation of
standard total return, yield and tax equivalent yield, the results will be
increased. Any voluntary waiver of fees or assumption of expenses by the
Fund's affiliates will also increase performance results.
27
<PAGE>
The Fund's distribution rate is calculated separately for each class of
shares by annualizing the latest distribution and dividing the result by the
maximum offering price per share as of the end of the period to which the
distribution relates. The distribution rate is not computed in the same
manner as the above described yield, and therefore can be significantly
different from it. In its supplemental sales literature, the Fund may quote
its distribution rate together with the above described standard total
return, yield and tax equivalent yield information. The use of such
distribution rates would be subject to an appropriate explanation of how the
components of the distribution rate differ from the above described yield.
Performance information may be useful in evaluating the Fund and for
providing a basis for comparison with other financial alternatives. Since the
performance of the Fund varies in response to fluctuations in economic and
market conditions, interest rates and Fund expenses, among other things, no
performance quotation should be considered a representation as to the Fund's
performance for any future period.
In addition, the net asset value of shares of the Fund will fluctuate,
with the result that shares of the Fund, when redeemed, may be worth more or
less than their original cost. Neither an investment in the Fund nor its
performance is insured or guaranteed; such lack of insurance or guarantees
should accordingly be given appropriate consideration when comparing the Fund
to financial alternatives which have such features.
Shares of the Fund had no class designations until June 7, 1993, when
designations were assigned based on the pricing and Rule 12b-1 fees
applicable to shares sold thereafter. Performance data for a specified class
includes periods prior to the adoption of class designations. Performance
data for periods prior to June 7, 1993 will not reflect additional Rule 12b-1
Distribution Plan fees, if any, of up to 1% per year depending on the class
of shares, which will adversely affect performance results for periods after
such date. Performance data or rankings for a given class of shares should be
interpreted carefully by investors who hold or may invest in a different
class of shares.
28
<PAGE>
Appendix
Taxable Equivalent
Yield Table
The table below is for illustrative purposes only, and shows the effect of
the tax status on the effective yield received by shareholders under the
federal income tax laws and New York State and New York City personal income
tax laws. It gives the approximate yield a taxable security must earn at
various income levels to produce after-tax yields equivalent to those of
tax-exempt obligations yielding from 4.0% to 8.0%. The combined effective
marginal tax rate is lower than the sum of federal, New York State and New
York City marginal rates because the state and city personal income taxes
paid are deductible from federal taxable income. Of course, no assurance can
be given that the Fund will achieve any specific tax-exempt yield. While it
is expected that the Fund will invest principally in obligations the interest
from which is exempt from federal income taxes and New York State and New
York City personal income taxes, to the extent this is not the case, other
income received by the Fund may be taxable at the state and city levels or at
the federal, state and city levels.
The tax-exempt yields are for illustration only and are not intended to
represent current or future yields for the Fund, which may be higher or lower
than those shown.
<TABLE>
<CAPTION>
Tax-Exempt Yields
New York
State and
New York Combined
Sample Federal City Combined Effective
Taxable Marginal Marginal Marginal Marginal
Income Rate Rate Rate Rate* 4.00% 5.00% 6.00% 7.00% 8.00%
- ---------------- ------ --------- ------ ------ ------ ------ ------ ------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Joint Return Equivalent Taxable Yield
$ 27,000 15.00% 10.64% 25.64% 24.04% 5.27% 6.58% 7.90% 9.22% 10.53%
42,000 28.00 10.98 38.98 35.90 6.24 7.80 9.36 10.92 12.48
99,000 31.00 10.99 41.99 38.58 6.51 8.14 9.77 11.40 13.03
150,000 36.00 11.04 47.04 43.06 7.02 8.78 10.54 12.29 14.05
265,000 39.60 11.04 50.64 46.27 7.44 9.31 11.17 13.03 14.89
Single Return
$ 17,000 15.00% 10.98% 25.98% 24.33% 5.29% 6.61% 7.93% 9.25% 10.57%
30,000 28.00 10.99 38.99 35.91 6.24 7.80 9.36 10.92 12.48
62,000 31.00 11.04 42.04 38.61 6.52 8.14 9.77 11.40 13.03
125,000 36.00 11.04 47.04 43.06 7.02 8.78 10.54 12.29 14.05
265,000 39.60 11.04 50.64 46.27 7.44 9.31 11.17 13.03 14.89
</TABLE>
*Combined effective marginal tax rate represents the combined federal, New
York State and New York City tax rates adjusted to account for the federal
deduction of state and city personal income taxes paid. The effect of
reductions in itemized deductions and personal exemptions for taxpayers with
incomes exceeding certain levels has not been taken into account.
The federal, New York State and New York City tax rates shown are those
presently in effect for 1996 and are subject to change. These calculations
assume that no income will be subject to the federal individual alternative
minimum tax and do not reflect the effect of the New York State supplemental
income tax.
29
<PAGE>
<PAGE>
<PAGE>
[cover]
STATE STREET RESEARCH
NEW YORK TAX-FREE FUND
One Financial Center
Boston, MA 02111
INVESTMENT ADVISER
State Street Research &
Management Company
One Financial Center
Boston, MA 02111
DISTRIBUTOR
State Street Research
Investment Services, Inc.
One Financial Center
Boston, MA 02111
SHAREHOLDER SERVICES
State Street Research
Shareholder Services
P.O. Box 8408
Boston, MA 02266
800-562-0032
CUSTODIAN
State Street Bank and
Trust Company
225 Franklin Street
Boston, MA 02110
LEGAL COUNSEL
Goodwin, Procter & Hoar LLP
Exchange Place
Boston, MA 02109
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP
160 Federal Street
Boston, MA 02110
NYTF-606D-595IBS CONTROL NUMBER: 3127-960425(0597)SSR-LD
[State Street logo] STATE STREET RESEARCH
State Street Research
New York
Tax-Free Fund
May 1, 1996
P R O S P E C T U S
<PAGE>
STATE STREET RESEARCH TAX-EXEMPT FUND
A Series of
STATE STREET RESEARCH TAX-EXEMPT TRUST
STATEMENT OF ADDITIONAL INFORMATION
May 1, 1996
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.......................15
TRUSTEES AND OFFICERS.................................................19
INVESTMENT ADVISORY SERVICES..........................................23
PURCHASE AND REDEMPTION OF SHARES.....................................24
NET ASSET VALUE.......................................................26
PORTFOLIO TRANSACTIONS................................................27
CERTAIN TAX MATTERS...................................................30
DISTRIBUTION OF SHARES OF THE FUND....................................34
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, 1996 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>
18
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 purchase a security of any one issuer (other than
securities issued or guaranteed as to principal or interest by
the U.S. Government or its agencies or instrumentalities or
mixed-ownership Government corporations) if such purchase
would, with respect to 75% of the Fund's total assets, cause
more than 5% of the Fund's total assets to be invested in the
securities of such issuer or cause more than 10% of the voting
securities of such issuer to be held by the Fund;
(2) not to issue senior securities;
(3) 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;
(4) not to purchase or sell real estate in fee simple;
(5) not to invest in physical commodities or physical commodity
contracts or options in excess of 10% of the Fund's total
assets, except that investments in essentially financial items
or arrangements such as, but not limited to, swap
arrangements, hybrids, currencies, currency and other forward
contracts, delayed delivery and when-issued contracts, futures
contracts and options on futures contracts on securities,
securities indices, interest rates and currencies, shall not
be deemed investments in commodities or commodities contracts;
(6) not to lend money; however, the Fund may lend portfolio
securities and purchase bonds, debentures, notes and similar
obligations (and enter into repurchase agreements with respect
thereto);
(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);
(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); and
(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.
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 any security or enter into a repurchase
agreement if as a result more than 15% of its net assets would
be invested in securities that are illiquid (including
repurchase agreements not entitling the holder to payment of
principal and interest within seven days);
(2) not to invest more than 15% of its net assets in restricted
securities of all types (including not more than 5% of its net
assets in restricted securities which are not eligible for
resale pursuant to Rule 144A, Regulation S or other exemptive
provisions under the Securities Act of 1933);
(3) not to invest more than 5% of its total assets in securities
of private companies including predecessors with less than
three years' continuous operations except (a) securities
guaranteed or backed by an affiliate of the issuer with three
years of continuous operations, (b) securities issued or
guaranteed as to principal or interest by the U.S. Government,
or its agencies or instrumentalities, or a mixed-ownership
Government corporation, (c) securities of issuers with debt
securities rated at least "BBB" by Standard & Poor's
Corporation or "Baa" by Moody's Investor's Service, Inc. (or
their equivalent by any other nationally recognized
statistical rating organization) or securities of issuers
considered by the Investment Manager to be equivalent, (d)
securities issued by a holding company with at least 50% of
its assets invested in companies with three years of
continuous operations including predecessors, and (e)
securities which generate income which is exempt from local,
state or federal taxes; provided that the Fund may invest up
to 15% in such issuers so long as such investments plus
investments in restricted securities (other than those which
are eligible for resale under Rule 144A, Regulation S or other
exemptive provisions) do not exceed 15% of the Fund's total
assets;
(4) 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;
(5) 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);
(6) 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;
(7) 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
(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.
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 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 such instruments and techniques are expected by State
Street Research & Management Company (the "Investment Manager") to aid in
achieving the investment objective of the Fund. The Fund on occasion may also
purchase instruments with characteristics of both futures and securities (e.g.,
debt instruments with interest and principal payments determined by reference to
the value of a commodity 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. 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. 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
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 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 for the underlying security declines or otherwise
is below the exercise price, the Fund's return will be the premium received from
writing the put option minus the amount by which the market price of the
security is below the exercise price.
Limitations and Risks of Options and Futures Activity
The Fund will engage in transactions in futures contracts or options
only as a hedge against changes resulting from market conditions which produce
changes in the values of 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 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 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 months, or over a year or
more; during this period dividends or interest on the securities are not
payable. A frequent form of when-issued trading occurs 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.
Securities transactions involving delayed deliveries or forward commitments are
frequently characterized as when-issued transactions and are similarly treated
by the Fund.
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
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 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:
(bullet) direct obligations of the U.S. Treasury, i.e., Treasury bills, notes,
certificates and bonds;
(bullet) obligations of U.S. Government agencies or instrumentalities such as
the Federal Home Loan Banks, the Federal Farm Credit Banks, the Federal
National Mortgage Association, the Government National Mortgage
Association and the Federal Home Loan Mortgage Corporation; and
(bullet) obligations of mixed-ownership Government corporations such as
Resolution Funding Corporation.
U.S. Government securities which the Fund may buy are backed in a
variety of ways by the U.S. Government, its agencies or instrumentalities. Some
of these obligations, such as Government National Mortgage Association
mortgage-backed securities are backed by the full faith and credit of the U.S.
Treasury. Other obligations, such as those of the Federal National Mortgage
Association, are backed by the discretionary authority of the U.S. Government to
purchase certain obligations of agencies or instrumentalities, although the U.S.
Government has no legal obligation to do so. Obligations such as those of the
Federal Home Loan Banks, the Federal Farm Credit Banks, the Federal National
Mortgage Association and the Federal Home Loan Mortgage Corporation are backed
by the credit of the agency or instrumentality issuing the obligations. Certain
obligations of Resolution Funding Corporation, a mixed-ownership Government
corporation, are backed with respect to interest payments by the U.S. Treasury,
and with respect to principal payments by U.S. Treasury obligations held in a
segregated account with a Federal Reserve Bank. Except for certain
mortgage-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.
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
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.
<PAGE>
TRUSTEES AND OFFICERS
The Trustees and principal officers of the Trust, their addresses, and
their principal occupations and positions with certain affiliates of the
Investment Manager are set forth below.
*Paul J. Clifford, Jr., One Financial Center, Boston, MA 02111, serves
as Vice President of the Trust. He is 33. 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.
*+John H. Kallis, One Financial Center, Boston, MA 02111, serves as
Vice President of the Trust. He is 55. 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 69. He is engaged principally in private
investments and civic affairs, and is an author of business history. Previously,
he was with Morgan Guaranty Trust Company of New York.
+Robert A. Lawrence, Saltonstall & Co., 50 Congress Street, Boston, MA
02109, serves as Trustee of the Trust. He is 69. His principal occupation during
the past five years has been Partner, Saltonstall & Co., a private investment
firm.
*+Gerard P. Maus, One Financial Center, Boston, MA 02111, serves as
Treasurer of the Trust. He is 45. His principal occupation is Executive Vice
President, Treasurer, Chief Financial Officer 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.
*+Francis J. McNamara, III, One Financial Center, Boston, MA 02111, has
served as Secretary and General Counsel of the Trust since May 1995. He is 40.
His principal occupation is Senior Vice President, General Counsel and Secretary
of State Street Research & Management Company. During the past five years he has
also served as Senior Vice President, General Counsel and Assistant Secretary of
The Boston Company, Inc., Boston Safe Deposit and Trust Company and The Boston
Company Advisors, Inc. Mr. McNamara's other principal business affiliations
include Senior Vice President, Clerk and General Counsel 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 64. He is retired, having served during the past
five years, until October 1992, as Executive Vice President, Chief Operating
Officer and Director of Hewlett-Packard Company.
+Thomas L. Phillips, 141 Spring Street, Lexington, MA 02173 serves as
Trustee of the Trust. He is 71. He is retired and was formerly Chairman of the
Board and Chief Executive Officer of Raytheon Company, of which he remains a
Director.
+Toby Rosenblatt, 3409 Pacific Avenue, San Francisco, CA 94118, serves
as Trustee of the Trust. He is 57. His principal occupations during the past
five years have been President of The Glen Ellen Company, a private investment
company, and Vice President of Founders Investment Ltd.
+Michael S. Scott Morton, Massachusetts Institute of Technology, 77
Massachusetts Avenue, Cambridge, MA 02139, serves as Trustee of the Trust. He is
58. His principal occupation during the past five years has been Jay W.
Forrester Professor of Management at Sloan School of Management, Massachusetts
Institute of Technology.
*+Thomas A. Shively, One Financial Center, Boston, MA 02111, serves as
Vice President of the Trust. He is 41. His principal occupation is Executive
Vice President and Director of State Street Research & Management Company.
During the past five years he has also served as Senior Vice President of State
Street Research & Management Company. Mr. Shively's other principal business
affiliation is 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 53. 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 and
Director of State Street Research Investment Services, Inc.
- --------------------
* or + See footnotes on page 21.
<PAGE>
+Jeptha H. Wade, 251 Old Billerica Road, Bedford, MA 01730, serves as
Trustee of the Trust. He is 71. 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.
As of March 31, 1996, 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.
* 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: State Street
Research Equity Trust, State Street Research Financial Trust, State
Street Research Income Trust, State Street Research Money Market Trust,
State Street Research Tax-Exempt Trust, State Street Research Capital
Trust, State Street Research Exchange Trust, State Street Research
Growth Trust, State Street Research Master Investment Trust, State
Street Research Securities Trust, State Street Research Portfolios, Inc.
and Metropolitan Series Fund, Inc.
<PAGE>
As of March 31, 1996, Metropolitan Life Insurance Company
("Metropolitan"), a New York corporation having its principal offices at One
Madison Avenue, New York, NY 10010, was the record and/or beneficial owner,
directly or indirectly through its subsidiaries or affiliates, of approximately
21.1% of the outstanding Class C shares of the Fund. Also as of March 31, 1996,
K.J. Rivera, Trustee, c/o State Street Research Shareholder Services, Inc., One
Financial Center, Boston, Massachusetts 02111, was the beneficial owner of
approximately 7.5% of the outstanding Class C shares of the Fund.
Also as of March 31, 1996, Merrill Lynch, Pierce, Fenner & Smith, Inc.
("Merrill Lynch"), 4800 Deerlake Drive East, Jacksonville, Florida 32246, was
the record holder of approximately 73.8% of the outstanding Class D shares of
the Fund, as to which shares the Fund believes that Merrill Lynch does not have
beneficial ownership.
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 $12,300 $ 63,510
Robert A. Lawrence $12,300 $ 91,685
Dean O. Morton $14,800 $103,085
Thomas L. Phillips $12,100 $ 67,185
Toby Rosenblatt $12,300 $ 63,510
Michael S. Scott Morton $16,800 $109,035
Ralph F. Verni $ 0 $ 0
Jeptha H. Wade $14,100 $ 76,285
(a) Includes compensation from multiple series of the Trust. See
"Distribution of Shares" for a listing of series.
(b) Includes compensation from 30 series, including 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. The Trust does not provide any pension or retirement benefits
for the Trustees.
<PAGE>
INVESTMENT ADVISORY SERVICES
State Street Research & Management Company, the Investment Manager, a
Delaware corporation, with offices at One Financial Center, Boston,
Massachusetts 02111-2690, acts as investment adviser to the Fund. The Advisory
Agreement provides that the Investment Manager shall furnish the Fund with an
investment program, office facilities and such investment advisory, research and
administrative services as may be required from time to time. The Investment
Manager compensates all executive and clerical personnel and Trustees of the
Trust if such persons are employees of the Investment Manager or its affiliates.
The Investment Manager is an indirect wholly-owned subsidiary of Metropolitan.
The advisory fee payable monthly by the Fund to the Investment Manager
is computed as a percentage of the average of the value of the net assets of the
Fund as determined at the close of the New York Stock Exchange (the "NYSE") on
each day the NYSE is open for trading, at the annual rate of 0.55% 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 Distributor and its
affiliates have from time to time and in varying amounts voluntarily assumed
some portion of fees or expenses relating to the Fund. For the fiscal years
ended December 31, 1993, 1994 and 1995, the Fund's investment advisory fees
prior to the assumption of fees or expenses were$1,775,032, $1,798,180 and
$1,523,237, respectively. For the same periods, voluntary reduction of fees or
assumption of expenses amounted to $0, $12,268 and $0, 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 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 in
Boston, where investment management operations are conducted, are only permitted
to engage in personal securities transactions in accordance with certain
conditions relating to an employee's position, the identity of the security, the
timing of the transaction, and similar factors. Such employees must report their
personal securities transactions quarterly and supply broker confirmations of
such transactions to the Investment Manager.
PURCHASE AND REDEMPTION OF SHARES
Shares of the Fund are distributed by the Distributor. The Fund offers
four classes of shares which may be purchased at the next determined net asset
value per share plus, in the case of all classes except Class C shares, a sales
charge which, at the election of the investor, may be imposed (i) at the time of
purchase (the Class A shares) or (ii) on a deferred basis (the Class B and Class
D shares). General information on how to buy shares of the Fund, as well as
sales charges involved, is set forth under "Purchase of Shares" in the
Prospectus. The following supplements that information.
Public Offering Price. The public offering price for each class of
shares of the Fund is based on their net asset value determined as of the close
of the NYSE on the day the purchase order is received by State Street Research
Shareholder Services provided that the order is received prior to the close of
the NYSE on that day; otherwise the net asset value used is that determined as
of the close of the NYSE on the next day it is open for unrestricted trading.
When a purchase order is placed through a dealer, that dealer is responsible for
transmitting the order promptly to State Street Research Shareholder Services in
order to permit the investor to obtain the current price. Any loss suffered by
an investor which results from a dealer's failure to transmit an order promptly
is a matter for settlement between the investor and the dealer.
Reduced Sales Charges. For purposes of determining whether a purchase
of Class A shares qualifies for reduced sales charges, the term "person"
includes: (i) an individual, or 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 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 certain
employee benefit plans such as qualified retirement plans which meet criteria
relating to number of participants (currently a minimum of 100 eligible
employees), service arrangements, or similar factors; banks and insurance
companies; investment companies; and endowment funds of nonprofit organizations
with substantial minimum assets (currently a minimum of $10,000,000); and other
similar institutional investors.
Reorganizations. In the event of mergers or reorganizations with other
public or private collective investment entities, including investment companies
as defined 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.
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.
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, 1994 and 1995 were 78.63% and 97.32%, respectively.
Brokerage Allocation
The Investment Manager's policy is to seek for its clients, including
the Fund, what in the Investment Manager's judgment will be the best overall
execution of purchase or sale orders and the most favorable net prices in
securities transactions consistent with its judgment as to the business
qualifications of the various broker or dealer firms with whom the Investment
Manager may do business, and the Investment Manager may not necessarily choose
the broker offering the lowest available commission rate. Decisions with respect
to the market where the transaction is to be completed, to the form of
transaction (whether principal or agency), and to the allocation of orders among
brokers or dealers are made in accordance with this policy. In selecting brokers
or dealers to effect portfolio transactions, consideration is given to their
proven integrity and financial responsibility, their demonstrated execution
experience and capabilities both generally and with respect to particular
markets or securities, the competitiveness of their commission rates in agency
transactions (and their net prices in principal transactions), their willingness
to commit capital, and their clearance and settlement capability. The Investment
Manager makes every effort to keep informed of commission rate structures and
prevalent bid/ask spread characteristics of the markets and securities in which
transactions for the Fund occur. Against this background, the Investment Manager
evaluates the reasonableness of a commission or a net price with respect to a
particular transaction by considering such factors as difficulty of execution or
security positioning by the executing firm. The Investment Manager may or may
not solicit competitive bids based on its judgment of the expected benefit or
harm to the execution process for that transaction.
When it appears that a number of firms could satisfy the required
standards in respect of a particular transaction, consideration may also be
given to services other than execution services which certain of such firms have
provided in the past or may provide in the future. Negotiated commission rates
and prices, however, are based upon the Investment Manager's judgment of the
rate which reflects the execution requirements of the transaction without regard
to whether the broker provides services in addition to execution. Among such
other services are the supplying of supplemental investment research; general
economic, political and business information; analytical and statistical data;
relevant market information, quotation equipment and services; reports and
information about specific companies, industries and securities; purchase and
sale recommendations for stocks and bonds; portfolio strategy services;
historical statistical information; market data services providing information
on specific issues and prices; financial publications; proxy voting data and
analysis services; technical analysis of various aspects of the securities
markets, including technical charts; computer hardware used for brokerage and
research purposes; computer software and databases, including those used for
portfolio analysis and modeling; and portfolio evaluation services and relative
performance of accounts.
Certain nonexecution services provided by broker-dealers may in turn be
obtained by the broker-dealers from third parties who are paid for such services
by the broker-dealers. The Investment Manager has an investment of less than ten
percent of the outstanding equity of one such third party which provides
portfolio analysis and modeling and other research and investment
decision-making services integrated into a trading system developed and licensed
by the third party to others. The Investment Manager could be said to benefit
indirectly if in the future it allocates brokerage to a broker-dealer who in
turn pays this third party for services to be provided to the Investment
Manager.
The Investment Manager regularly reviews and evaluates the services
furnished by broker-dealers. Some services may be used for research and
investment decision-making purposes, and also for marketing or administrative
purposes. Under these circumstances, the Investment Manager allocates the cost
of such services to determine the appropriate proportion of the cost which is
allocable to purposes other than research or investment decision-making and is
therefore paid directly by the Investment Manager. Some research and execution
services may benefit the Investment Manager's clients as a whole, while others
may benefit a specific segment of clients. Not all such services will
necessarily be used exclusively in connection with the accounts which pay the
commissions to the broker-dealer producing the services.
The Investment Manager has no fixed agreements or understandings with
any broker-dealer as to the amount of brokerage business which that firm may
expect to receive for services supplied to the Investment Manager or otherwise.
There may be, however, understandings with certain firms that in order for such
firms to be able to continuously supply certain services, they need to receive
allocation of a specified amount of brokerage business. These understandings are
honored to the extent possible in accordance with the policies set forth above.
It is not the Investment Manager's policy to intentionally pay a firm a
brokerage commission higher than that which another firm would charge for
handling the same transaction in recognition of services (other than execution
services) provided. However, the Investment Manager is aware that this is an
area where differences of opinion as to fact and circumstances may exist, and in
such circumstances, if any, relies 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, 1993, 1994 and 1995, the Fund paid no brokerage
commissions in secondary trading. 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.
In the case of the purchase of fixed income securities in underwriting
transactions, the Investment Manager follows any instructions received from its
clients as to the allocation of new issue discounts, selling concessions and
designations to brokers or dealers which provide the client with research,
performance evaluation, master trustee and other services. In the absence of
instructions from the client, the Investment Manager may make such allocations
to broker-dealers which have provided the Investment Manager with research and
brokerage services.
When more than one client of the Investment Manager is seeking to buy
or sell the same security, the sale or purchase is carried out in a manner which
is considered fair and equitable to all accounts. In allocating investments
among various clients (including in what sequence orders for trades are placed),
the Investment Manager will use its best business judgment and will take into
account such factors as the investment objectives of the clients, the amount of
investment funds available to each, the amount already committed for each client
to a specific investment and the relative risks of the investments, all in order
to provide on balance a fair and equitable result to each client over time.
Although sharing in large transactions may sometimes affect price or volume of
shares acquired or sold, overall it is believed there may be an advantage in
execution. The Investment Manager may follow the practice of grouping orders of
various clients for execution to get the benefit of lower prices or commission
rates. In certain cases where the aggregate order may be executed in a series of
transactions at various prices, the transactions are allocated as to amount and
price in a manner considered equitable to each so that each receives, to the
extent practicable, the average price of such transactions. Exceptions may be
made based on such factors as the size of the account and the size of the trade.
For example, the Investment Manager may not aggregate trades where it believes
that it is in the best interests of clients not to do so, including situations
where aggregation might result in a large number of small transactions with
consequent increased custodial and other transactional costs which may
disproportionately impact smaller accounts. Such disaggregation, depending on
the circumstances, may or may not result in such accounts receiving more or less
favorable execution relative to other clients.
CERTAIN TAX MATTERS
Federal Income Taxation of 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.
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.
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, a
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.
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 and State Street Research New York 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
portions of such sales charges as concessions to dealers. For the fiscal years
ended December 31, 1993, 1994 and 1995, total sales charges on Class A shares
paid to the Distributor amounted to $3,939,227, $1,069,893 and $610,067,
respectively. For the same periods, $471,923, $128,722 and $74,456,
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 and managed fee-based programs,
the amount of the sales charge reduction will similarly reflect the anticipated
reduction in sales expenses associated with such arrangements. The reduction in
sales expenses, and therefore the reduction in sales charge, will vary depending
on factors such as the size and other characteristics of the organization or
program, and the nature of its membership or the participants. The Fund reserves
the right to make variations in, or eliminate, sales charges at any time or to
revise the terms of or to suspend or discontinue sales pursuant to sponsored
arrangements at any time.
On any sale of Class A shares to a single investor in the amount of
$1,000,000 or more, the Distributor will pay the authorized securities dealer
making such sale a commission based on the aggregate of such sales. Such
commission also is payable to authorized securities dealers upon sales of Class
A shares made pursuant to a Letter of Intent to purchase shares having a net
asset value of $1,000,000 or more. Shares sold with such commissions payable are
subject to a one-year contingent deferred sales charge of 1.00% on any portion
of such shares redeemed within one year following their sale. After a particular
purchase of Class A shares is made under the Letter of Intent, the commission
will be paid only in respect of that particular purchase of shares. If the
Letter of Intent is not completed, the commission paid will be deducted from any
discounts or commissions otherwise payable to such dealer in respect of shares
actually sold. If an investor is eligible to purchase shares at net asset value
on account of the Right of Accumulation, the commission will be paid only in
respect of the incremental purchase at net asset value.
For the periods shown below, the Distributor received contingent
deferred sales charges upon redemption of Class A, Class B and Class D shares of
the Fund and paid initial commissions to securities dealers for sales of such
shares as follows:
<TABLE>
<CAPTION>
June 7, 1993
(Commencement of
Fiscal Year Ended Fiscal Year share class designations)
December 31, 1995 Ended December 31, 1994 to December 31, 1993
-------------------------- -------------------------- ----------------------------
Contingent Commissions Contingent Commissions Contingent Commissions
Deferred Paid to Deferred Paid to Deferred Paid to
Sales Charges Dealers Sales Charges Dealers Sales Charges Dealers
<S> <C> <C> <C> <C> <C> <C>
Class A $ 0 $535,611 $ 0 $941,171 $ 0 $3,467,304*
Class B $417,782 $298,673 $157,341 $634,785 $10,888 $ 1,109,850
Class D $ 36 $ 3,424 $ 0 $ 2,216 $ 1,927 $ 6,855
</TABLE>
- ----------------------
* For the period January 1, 1993 through December 31, 1993.
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.
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, 1995, the Fund paid the
Distributor fees under the Distribution Plan and the Distributor used all of
such payments for expenses incurred on behalf of the Fund as follows:
<PAGE>
Class A Class B Class D
Advertising $ 202 $ 0 $ 978
Printing and mailing of prospectuses 70 0 339
to other than current shareholders
Compensation to dealers 590,073 379,969 5,910
Compensation to sales personnel 616 0 2,981
Interest 0 0 0
Carrying or other financing charges 0 0 0
Other expenses: marketing;
general 379 0 1,829
-------- -------- --------
Total Fees $591,340 $379,969 $ 12,037
======== ======== ========
The Distributor may have also used additional resources of its own for further
expenses on behalf of the Fund.
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.
<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 7, 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, where
applicable, 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 reflected
operations to present
0.25% until June 7, 1993; 1%
B 1.00% June 7, 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 7, 1993 respectively
C None 0.25% until June 7, 1993; None
0% thereafter
D 1.00% 0.25% until June 7, 1993; 1% 1-year period reflects a 1% contingent
June 7, 1993 to present; fee will deferred sales charge
reduce performance for periods
after June 7, 1993
</TABLE>
Total Return
The average annual total return ("standard total return") of each class
of the Fund's shares was as follows:
<PAGE>
Commencement of
Operations Five Years One Year
(August 25, 1986) Ended Ended
Fund to December 31, 1995 December 31, 1995 December 31, 1995
- ---- -------------------- ----------------- -----------------
Class A 7.04% 7.27% 11.33%
Class B 7.35% 7.55% 10.72%
Class C 7.62% 8.35% 16.76%
Class D 7.34% 7.82% 14.58%
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:
n
P(1+T) = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value at the end of the
designated period assuming a hypothetical
$1,000 payment made at the beginning of the
designated period
The calculation is based on the further assumptions that the 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 1995 was as follows:
Class A 4.32%
Class B 3.78%
Class C 4.80%
Class D 3.79%
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:
a-b 6
YIELD = 2[(---- + 1) -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.
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, 1995, assuming a federal income tax rate of 28% was as
follows:
Class A 6.00%
Class B 5.25%
Class C 6.67%
Class D 5.26%
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.
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, 1995, without taking sales charges into account
were as follows:
Class A 8.34%
Class B 8.08%
Class C 8.50%
Class D 7.95%
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.
The distribution rates of the Fund on the month of December 1995 were
as follows:
Class A 4.72%
Class B 4.18%
Class C 5.20%
Class D 4.19%
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 are for the Fund's fiscal year ended
December 31, 1995.
<PAGE>
STATE STREET RESEARCH TAX-EXEMPT FUND
- -------------------------------------------------------------------------------
INVESTMENT PORTFOLIO
- -------------------------------------------------------------------------------
December 31, 1995
<TABLE>
<CAPTION>
- ---------------------------------------------- ---------- --------- --------------
Principal Maturity Value
Amount Date (Note 1)
<S> <C> <C> <C>
- ---------------------------------------------- -------- ------- ------------
MUNICIPAL BONDS 100.2%
California 17.1%
Orange County Local Transportation Authority,
California, Measure M Sales Tax Revenue Bonds,
Second Senior Bonds, Series 1992, FGIC Insured
6.00% $ 500,000 2/15/2007 $ 532,540
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 1,094,400
South Orange County Public Financing
Authority, Special Tax Revenue Bonds, 1994
Series B (Junior Lien Bonds), 7.00% 500,000 9/01/2007 508,245
City of Duarte, California, Certificates of
Participation, (Hope National Medical Center),
6.00% 500,000 4/01/2008 505,950
State Public Works Board of the State of
California, Lease Revenue Refunding Bonds,
(The Regents of the University of California),
1993 Series A, (Various University of
California Projects), 5.40% 2,000,000 6/01/2008 2,008,860
State of California, Various Purpose General
Obligation Bonds, 7.00% 300,000 8/01/2008 353,643
Santa Clara County Financing Authority, (VMC
Facility Replacement Project), 1994 Series A
Bonds, AMBAC Insured, 7.75% 1,000,000 11/15/2008 1,256,340
South Orange County Public Financing
Authority, Special Tax Revenue Bonds, 1994
Series B (Junior Lien Bonds), 7.00% 1,000,000 9/01/2009 1,012,500
California (cont'd)
Foothill/Eastern Transportation Corridor
Agency, Series 1995A Senior Lien Convertible
Capital Appreciation Bonds, 0.00% $1,695,000 1/01/2010 $ 1,001,185
Southern California Public Power Authority,
San Juan Project, Series A, MBIA Insured,
5.375% 4,790,000 1/01/2011 4,842,690
California Housing Finance Agency, Home
Mortgage Revenue Bonds, 1991 Series G, Subject
to AMT, 6.95% 260,000 8/01/2011 280,805
Sacramento Power Authority, Cogeneration
Project Revenue Bonds, 1995 Series, 6.50% 1,300,000 7/01/2014 1,371,084
California Housing Finance Agency, Home
Mortgage Revenue Bonds, 1994 Series G, 7.20% 1,500,000 8/01/2014 1,637,265
Rancho California Water District Financing
Authority, Revenue Refunding Bonds, AMBAC
Insured, Series 1994, 5.00% 4,000,000 8/15/2014 3,872,640
City of Stockton, Revenue Certificates of
Participation, 1995 Series A, (Wastewater
Treatment Plant Expansion), FGIC Insured,
6.70% 1,000,000 9/01/2014 1,125,960
California Educational Facilities Authority,
Series 1994 Revenue Bonds (Southwestern
University Project), 6.60% 1,000,000 11/01/2014 1,095,020
County of Madera, California, Certificates
of Participation, (Valley Children's Hospital
Project), Series 1995, MBIA Insured, 6.50% 1,000,000 3/15/2015 1,140,750
The accompanying notes are an integral part of the financial statements.
3
<PAGE>
STATE STREET RESEARCH TAX-EXEMPT FUND
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- ---------------------------------------------- ---------- --------- --------------
Principal Maturity Value
Amount Date (Note 1)
- ---------------------------------------------- -------- ------- ------------
California (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 $ 693,870
Roseville Joint Union High School District,
1992 General Obligation Bonds, Series B, FGIC
Insured, 0.00% 1,000,000 8/01/2015 337,920
California Educational Facilities Authority,
Revenue Bonds (University of Redlands), Series
1995, 5.875% 1,815,000 10/01/2015 1,874,695
State of California, Various Purpose General
Obligation Bonds, 5.25% 1,000,000 10/01/2015 983,020
Santa Monica-Malibu Unified School District,
Los Angeles County, California, General
Obligation Bonds, Series 1993, (Public School
Facilities Reconstruction Projects), 5.50% 5,000,000 8/01/2018 5,003,400
Fresno Sewer Revenue Bonds, Series A-1, AMBAC
Insured, 5.25% 5,100,000 9/01/2019 5,085,873
State Public Works Board of the State of
California, Lease Revenue Bonds, (Department
of Justice Building), 1995 Series A, FSA
Insured, 5.625% 1,000,000 5/01/2020 1,004,480
East Bay Municipal Utility District Water
System, Revenue Refunding Bonds, Series 1993,
MBIA Insured, 5.00% 2,000,000 6/01/2021 1,897,940
San Francisco City & County Sewer and Water
Revenue Refunding Bonds, FGIC Insured, 5.375% 2,395,000 10/01/2022 2,379,648
California (cont'd)
State of California, Department of Water
Resources, Central Valley Project, Water
System Revenue Bonds, Series O, 5.00% $1,000,000 12/01/2022 $ 959,960
University of California, Board of Regents,
Refunding Revenue Bonds, (Multiple Purpose
Projects), Series C, AMBAC Insured, 5.00% 5,000,000 9/01/2023 4,734,650
Long Beach, California Harbor Revenue Bonds,
Series 1995, Subject to AMT, MBIA Insured,
5.25% 1,000,000 5/15/2025 960,900
Public Facilities Financing Authority of the
City of San Diego, Sewer Revenue Bonds, Series
1995, FGIC Insured, 5.00% 1,000,000 5/15/2025 952,650
San Joaquin Hills Transportation Corridor
Agency, (Orange County, California), Senior
Lien Toll Road Revenue Bonds, 7.00% 1,000,000 1/01/2030 1,066,560
California Housing Finance Agency, Home
Mortgage Revenue Bonds, 1990 Series D, Subject
to AMT, 7.875% 20,000 8/01/2031 21,395
Foothill/Eastern Transportation Corridor
Agency, Toll Road Revenue Bonds Series 1995A
Senior Lien, 5.00% 6,165,000 1/01/2035 5,239,942
--------------
56,836,780
--------------
Connecticut 3.2%
State of Connecticut, Clean Water Fund Revenue
Bonds, 1991 Series, 7.00% 1,000,000 1/01/2011 1,124,750
State of Connecticut, Special Tax Obligation
Bonds, Transportation Infrastructure Purposes,
1991 Series A, 6.50% 1,500,000 10/01/2012 1,725,195
The accompanying notes are an integral part of the financial statements.
4
<PAGE>
STATE STREET RESEARCH TAX-EXEMPT FUND
- -------------------------------------------------------------------------------
INVESTMENT PORTFOLIO (cont'd)
- -------------------------------------------------------------------------------
- ---------------------------------------------- ---------- --------- --------------
Principal Maturity Value
Amount Date (Note 1)
- ---------------------------------------------- -------- ------- ------------
Connecticut (cont'd)
Connecticut Development Authority, Pollution
Control Refunding Bonds, (Pfizer Inc.
Project--1982 Series), 6.55% $ 2,500,000 2/15/2013 $ 2,767,050
State of Connecticut Health and Educational
Facilities Authority, Revenue Bonds,
Quinnipiac College Issue, Series D, 6.00% 5,000,000 7/01/2013 4,883,650
--------------
10,500,645
--------------
Florida 13.5%
Escambia County, Florida, Road Improvement
Revenue Bonds, Series 1993A, 5.00% 500,000 1/01/2000 505,580
Investment Portfolio (cont'd) The School Board
of Dade County, Florida, Certificates of
Participation, Series 1994A, MBIA Insured,
5.00% 500,000 5/01/2001 517,190
East County Water Control District, Water
Management Consolidated Refunding Bonds,
Series 1994, (Lee and Hendry Counties,
Florida), Series 1994, AGIC Insured, 5.375% 500,000 11/01/2001 526,085
Certificates of Participation, (School Board
of Hillsborough County, Florida, Master Lease
Program), Series 1994, MBIA Insured, 5.30% 500,000 7/01/2002 526,900
Dade County, Florida, Aviation Revenue
Refunding Bonds, Series 1994B (Non-AMT), 6.00% 500,000 10/01/2002 546,800
City of Titusville, Florida, Water and Sewer
Revenue Bonds, Series 1994, MBIA Insured,
5.20% 500,000 10/01/2002 530,260
Florida (cont'd)
St. Johns County Industrial Development
Authority, Industrial Development Revenue
Bonds, Series 1993A, (Vicar's Landing
Project), 6.20% $ 500,000 2/15/2003 $ 512,650
Dade County, Florida, Special Obligation
Bonds, (Courthouse Center Project), Series
1994, 5.75% 500,000 4/01/2003 528,725
Certificates of Participation, Series 1994B,
The School Board of Seminole County, Florida,
MBIA Insured, 6.00% 500,000 7/01/2003 553,270
Certificates of Participation, Series 1994A,
The School Board of Seminole County, Florida,
MBIA Insured, 5.50% 500,000 7/01/2003 539,740
Charlotte County, Florida, Utility System
Revenue Bonds, Series 1994, FGIC Insured,
6.00% 500,000 10/01/2003 550,590
Palm Beach County, Florida General Obligation
Bonds, Series 1994, 7.00% 250,000 12/01/2004 296,855
Florida Housing Finance Agency, Single Family
Mortgage Revenue Refunding Bonds, 1994 Series
A (Non-AMT), 5.75% 515,000 1/01/2005 536,635
Florida State Board of Education, Public
Education Capital Outlay Bonds, 1994 Series B,
5.625% 500,000 6/01/2005 534,815
Hillsborough County, Florida, Capital
Improvement Bonds, FGIC Insured, 6.00% 500,000 8/01/2005 550,260
The accompanying notes are an integral part of the financial statements.
5
<PAGE>
STATE STREET RESEARCH TAX-EXEMPT FUND
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- ---------------------------------------------- ---------- --------- --------------
Principal Maturity Value
Amount Date (Note 1)
- ---------------------------------------------- -------- ------- ------------
Florida (cont'd)
Collier County Health Facilities Authority,
Health Facility Refunding Revenue Bonds, (The
Moorings Inc. Project), Series 1994, 6.00% $ 500,000 12/01/2005 $ 521,975
The School District of Dade County, Florida,
General Obligation School Bonds, Series 1995,
MBIA Insured, 5.10% 750,000 8/01/2006 774,742
Orange County, Florida, Public Service Tax
Revenue Bonds Series 1995, FGIC Insured, 5.90% 500,000 10/01/2012 532,230
Orlando Utilities Commission, Water and
Electric Subordinated Revenue Bonds, Series C,
6.75% 8,950,000 10/01/2017 10,703,484
Florida State Board of Education, Public
Education Capital Outlay Bonds, 1993 Series D,
5.125% 5,820,000 6/01/2018 5,687,013
Reedy Creek, Improvement District, (Florida),
(Located in Orange and Osceola Counties),
Utilities Revenue Improvement and Refunding
Bonds, Series 1994-1, MBIA Insured, 5.00% 5,000,000 10/01/2019 4,811,350
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 1,399,963
State of Florida Department of Transportation,
Turnpike Revenue Bonds, Series 1995A, FGIC
Insured, 5.50% 1,000,000 7/01/2021 1,007,920
Florida (cont'd)
Jacksonville Electric Authority,
(Jacksonville, Florida), Revenue Refunding
Bonds, Bulk Power-Scherer 4 Project A, 5.25% $3,000,000 10/01/2021 $ 2,949,810
Vero Beach, Florida, Electric Power & Light,
Revenue Refunding Bonds, Series A, MBIA
Insured, 5.375% 5,000,000 12/01/2021 5,005,400
Florida State Board of Education, Public
Education Refunding Bonds, Series D, 5.125% 2,750,000 6/01/2022 2,662,880
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 1,116,740
--------------
44,929,862
--------------
Georgia 10.4%
State of Georgia, General Obligation Bonds,
Series 1992B, 6.25% 4,300,000 3/01/2011 4,831,867
State of Georgia, General Obligation Bonds,
Series 1994D, 6.70% 5,000,000 8/01/2009 5,857,200
State of Georgia, General Obligation Bonds,
Series 1994E, 6.75% 1,000,000 12/01/2012 1,189,200
Cherokee County, Georgia, School System,
General Obligation Bonds, AMBAC Insured,
5.375% 4,000,000 2/01/2014 4,051,040
Metro Atlanta Rapid Transit Authority, 2nd
Indenture, Series A, AMBAC Insured, 5.125% 2,000,000 7/01/2018 1,944,060
Metro Atlanta Rapid Transit Authority, 2nd
Indenture, Series A, AMBAC Insured, 5.125% 3,000,000 7/01/2019 2,914,200
The accompanying notes are an integral part of the financial statements.
6
<PAGE>
STATE STREET RESEARCH TAX-EXEMPT FUND
- -------------------------------------------------------------------------------
INVESTMENT PORTFOLIO (cont'd)
- -------------------------------------------------------------------------------
- ---------------------------------------------- ---------- --------- --------------
Principal Maturity Value
Amount Date (Note 1)
- ---------------------------------------------- -------- ------- ------------
Georgia (cont'd)
DeKalb County, Georgia, General Obligation
Refunding Bonds, 5.25% $5,000,000 1/01/2020 $ 4,966,250
Fulton County, Georgia, School District,
General Obligation School Bonds, Series 1993,
5.625% 3,870,000 1/01/2021 3,933,545
DeKalb County, Georgia, Water & Sewer Revenue
Refunding Bonds, Series 1993, 5.25% 5,000,000 10/01/2023 4,927,700
--------------
34,615,062
--------------
Hawaii 0.7%
State of Hawaii, General Obligation Bonds of
1991, Series BT, 6.125%* 2,000,000 2/01/2010 2,180,860
--------------
Illinois 1.1%
City of Chicago, Illinois, Gas Supply Revenue
Bonds, 1985 Series B (The Peoples Gas Light
and Coke Company Project), 7.50% 3,300,000 3/01/2015 3,714,117
--------------
Kansas 0.3%
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 1,121,660
--------------
Maryland 1.7%
Howard County, Maryland, Multifamily Mortgage
Refunding Bonds, Series 1994, (Chase Glen
Project), Mandatory Put 7/1/2004 @ 100, 7.00% 5,000,000 7/01/2024 5,489,150
--------------
Massachusetts 7.2%
Massachusetts Industrial Finance Agency, First
Mortgage Refunding Bonds, (Brookhaven
Retirement Community, Lexington--1994 Issue),
Series A, 6.75% 4,500,000 1/01/2001 4,639,770
Massachusets (cont'd)
Massachusetts Industrial Finance Agency, First
Mortgage Revenue Bonds, (Berkshire Retirement
Community, Lenox--1994 Issue), Series A,
6.375% $1,500,000 7/01/2005 $ 1,512,180
The Commonwealth of Massachusetts General
Obligation Refunding Bonds, Series 1995A,
AMBAC Insured, 5.00% 3,500,000 7/01/2010 3,464,405
Massachusetts State Water Resource Authority,
General Revenue Bonds, 1993 Series C, 6.00% 6,155,000 12/01/2011 6,718,059
Massachusetts Health and Educational
Facilities Authority, Refunding Bonds,
Massachusetts General Hospital Issue, Series
F, AMBAC Insured, 6.25% 3,000,000 7/01/2012 3,356,580
Massachusetts Bay Transportation Authority,
General Transportation System Bonds, 1994
Series A Refunding Bonds, 7.00% 3,385,000 3/01/2014 4,046,057
--------------
23,737,051
--------------
Nebraska 3.2%
Omaha Public Power District (Nebraska),
Electric System Revenue Bonds, 1992, Series B,
6.20% 4,700,000 2/01/2017 5,245,623
Nebraska Public Power District, Power Supply
System Revenue Bonds, 1995 Series A, MBIA
Insured, 5.25% 5,475,000 1/01/2022 5,391,014
--------------
10,636,637
--------------
New Hampshire 2.1%
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 7,067,060
--------------
The accompanying notes are an integral part of the financial statements.
7
<PAGE>
STATE STREET RESEARCH TAX-EXEMPT FUND
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- ---------------------------------------------- ---------- --------- --------------
Principal Maturity Value
Amount Date (Note 1)
- ---------------------------------------------- -------- ------- ------------
New Jersey 0.3%
New Jersey Educational Facilities Authority,
Seton Hall University Project Revenue Bonds,
1991 Series D, 7.00% $ 1,000,000 7/01/2021 $ 1,094,580
--------------
New York 10.0%
State of New York, Serial Bonds, 5.50% 4,000,000 3/01/2011 4,068,160
Triborough Bridge & Tunnel Authority, General
Purpose Revenue Bonds, Series Y, 6.00% 5,000,000 1/01/2012 5,442,100
The City of New York, General Obligation
Refunding Bonds, Fiscal 1991 Series B, 7.75% 3,990,000 2/01/2012 4,432,092
State of New York, Serial Bonds, 5.625% 2,000,000 6/15/2012 2,032,900
New York State Thruway Authority, General
Revenue Bonds, Series B, MBIA Insured, 5.00% 5,000,000 1/01/2014 4,827,350
New York Local Government Assistance Corp., (A
Public Benefit Corporation of the State of New
York), Series 1993E Refunding Bonds, 5.00% 9,500,000 4/01/2021 8,978,735
Niagara Falls, New York, Bridge & Toll
Commission, FGIC Insured, 5.25% 3,400,000 10/01/2015 3,412,172
--------------
33,193,509
--------------
North Carolina 8.5%
North Carolina Municipal Power Agency Number
1, Catawba Electric Revenue Bonds, Series
1992, MBIA Insured, 7.25% 5,000,000 1/01/2007 5,970,550
County of Durham, North Carolina, Certificates
of Participation, (1991 Jail Facilities and
Computer Equipment Financing Project), 6.625% 1,850,000 5/01/2014 2,010,950
North Carolina (cont'd)
North Carolina, Eastern Municipal Power
Agency, Power System Revenue Bonds, Refunding
Series 1991A, 6.50% $10,525,000 1/01/2018 $12,616,633
North Carolina Housing Finance Agency,
Multifamily Revenue Refunding Bonds, (1992
Refunding Bond Resolution), Series B, 6.90% 6,990,000 7/01/2024 7,521,031
--------------
28,119,164
--------------
Ohio 2.9%
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 2,261,100
City of Cleveland, Ohio, Public Power System
Improvement First Mortgage Revenue Refunding
Bonds, Series 1991 B, 7.00% 7,000,000 11/15/2017 7,508,340
--------------
9,769,440
--------------
Oregon 0.3%
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 1,134,530
--------------
Pennsylvania 4.7%
Scranton-Lackawanna Health and Welfare
Authority, Revenue Bonds, Series A of 1994,
(Allied Services Rehabilitation Hospitals
Project), 6.60% 500,000 7/15/2000 516,565
</TABLE>
The accompanying notes are an integral part of the financial statements.
8
<PAGE>
STATE STREET RESEARCH TAX-EXEMPT FUND
- -------------------------------------------------------------------------------
INVESTMENT PORTFOLIO (cont'd)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
---------------------------------------------------- ------- --------- ------------
Principal Maturity Value
Amount Date (Note 1)
- ---------------------------------------------------- ------- --------- ------------
<S> <C> <C> <C>
Pennsylvania (cont'd)
Pennsylvania Housing Finance Agency, Single Family
Mortgage Revenue Bonds, Series 1994-41B (AMT), 5.50% $ 410,000 4/01/2001 $ 419,123
City of Bethlehem, Lehigh and Northampton Counties,
Pennsylvania, General Obligation Bonds, Series A of
1992, MBIA Insured, 6.00% 600,000 6/01/2001 645,750
Allegheny County Sanitary Authority, Allegheny
County, Pennsylvania, Sewer Revenue Bonds, Series B
of 1994, MBIA Insured, 5.25% 500,000 12/01/2001 521,085
Commonwealth of Pennsylvania, General Obligation
Bonds, Second Series of 1994, (Refunding and
Projects), MBIA Insured, 5.00% 500,000 6/15/2002 515,260
Pennsylvania Housing Finance Agency, Single Family
Mortgage Revenue Bonds, Series 1994-39B (AMT), 6.00% 360,000 4/01/2003 376,938
Montgomery County Industrial Development Authority,
Health Facilities Revenue Bonds, Series of 1993,
(ECRI Project), 6.40% 855,000 6/01/2003 887,037
Pennsylvania Housing Finance Agency, Single Family
Mortgage Revenue Bonds, Series 1994-39B (AMT), 6.00% 375,000 10/01/2003 393,637
Delaware County Industrial Development Authority,
Revenue Bonds, Series of 1994, (Martins Run), 5.75% 500,000 12/15/2003 495,900
Pennsylvania (cont'd)
Montgomery County Higher Education and Health
Authority, Pennsylvania, Northwestern Corp., 6.50% $1,140,000 6/01/2004 $ 1,232,032
Pennsylvania Intergovernmental Cooperation
Authority, Special Tax Revenue Refunding Bonds,
(City of Philadelphia Funding Program), Series of
1994, FGIC Insured, 7.00% 500,000 6/15/2004 574,510
Pennsylvania Convention Center Authority, Refunding
Revenue Bonds, 1994 Series A, 6.25% 1,000,000 9/01/2004 1,065,190
Southeastern Pennsylvania Transportation Authority,
Special Revenue Bonds, Series of 1995A, FGIC
Insured, 6.50% 200,000 3/01/2005 225,098
Pennsylvania Housing Finance Agency, Single Family
Mortgage Revenue Bonds, Series 1994-38 (Non-AMT),
5.50% 330,000 4/01/2005 333,782
County of Bucks, Pennsylvania, General Obligation
Bonds, Series of 1995, 7.00% 500,000 5/01/2005 593,460
The School District of Philadelphia, Pennsylvania,
General Obligation Refunding Bonds, Series A of
1995, AMBAC Insured, 6.25% 500,000 9/01/2005 555,480
Monroeville, Pennsylvania, Hospital Authority,
Hospital Refunding Bonds, Forbes Health System,
5.75% 500,000 10/01/2005 506,270
The accompanying notes are an integral part of the financial statements.
9
<PAGE>
STATE STREET RESEARCH TAX-EXEMPT FUND
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- ---------------------------------------------------- ------- --------- ------------
Principal Maturity Value
Amount Date (Note 1)
- ---------------------------------------------------- ------- --------- ------------
Pennsylvania (cont'd)
Bradford Area School District, McKean County,
Pennsylvania, General Obligation Bonds, Series of
1995, FGIC Insured, 5.00% $ 500,000 10/01/2005 $ 513,155
Pennsylvania Higher Educational Facilities
Authority, (Commonwealth of Pennsylvania), (RIDC
Regional Growth-Carnegie), Revenue Bonds, 6.00% 350,000 11/01/2005 390,114
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 489,070
Delaware County Authority, (Commonwealth of
Pennsylvania), (Villanova University), Revenue
Bonds, Series of 1995, AMBAC Insured, 5.25% 500,000 8/01/2006 515,535
Bethlehem Authority, Northampton and Lehigh
Counties, Pennsylvania, Water Revenue Refunding
Bonds, Series of 1994, MBIA Insured, 4.75% 500,000 11/15/2006 492,470
County of Cambria, Pennsylvania, General Obligation
Bonds, Series of 1994, FGIC Insured, 5.875% 500,000 8/15/2008 534,815
County of Allegheny, Pennsylvania, General
Obligation Bonds, Series C-44, FGIC Insured, 5.30% 435,000 6/01/2010 439,794
Pennsylvania Higher Educational Facilities
Authority, (Commonwealth of Pennsylvania),
(University of Pennsylvania), Revenue Bonds, Series
A, 5.60% 250,000 9/01/2010 260,582
Pennsylvania (cont'd)
Pennsylvania Economic Development Financing
Authority, Resource Recovery Revenue Bonds, (Colver
Project), Series 1994D, 7.05% $1,000,000 12/01/2010 $ 1,076,450
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 1,094,090
------------
15,663,192
------------
Puerto Rico 1.0%
Puerto Rico Municipal Finance Agency Series A, FSA
Insured, 5.30% 500,000 7/01/2002 525,455
Puerto Rico Highway and Transportation Authority,
Highway Revenue Refunding Bonds, Series V, FSA
Insured, 6.375% 500,000 7/01/2008 554,305
Puerto Rico Public Buildings Authority, Government
Facilities Revenue Bonds, Series A, AMBAC Insured,
6.25% 1,000,000 7/01/2010 1,129,990
Puerto Rico Electric Power Authority, Refunding
Revenue Bonds, Series Z, 5.25% 1,000,000 7/01/2021 965,930
------------
3,175,680
------------
Tennessee 3.2%
City of Memphis, Tennessee, Electric System Revenue
Refunding Bonds, Series of 1992, 6.00% 2,250,000 1/01/2006 2,501,955
City of Memphis, Tennessee, Water Division Revenue
Refunding Bonds, Series of 1992-A, 6.00% 3,000,000 1/01/2012 3,196,680
The accompanying notes are an integral part of the financial statements.
10
<PAGE>
STATE STREET RESEARCH TAX-EXEMPT FUND
- -------------------------------------------------------------------------------
INVESTMENT PORTFOLIO (cont'd)
- -------------------------------------------------------------------------------
- ---------------------------------------------------- ------- --------- ------------
Principal Maturity Value
Amount Date (Note 1)
- ---------------------------------------------------- ------- --------- ------------
Tennessee (cont'd)
The Metropolitan Government of Nashville and
Davidson County (Tennessee), Water and Sewer
Refunding Bonds, Series 1993, FGIC Insured, 5.20% $5,000,000 1/01/2013 $ 5,062,000
------------
10,760,635
------------
Texas 4.6%
City of Austin, Texas, Combined Utility Systems
Revenue Refunding Bonds, Series 1993, 5.80% 2,000,000 11/15/2006 2,201,460
Texas Turnpike Authority, Dallas North Tollway
System Revenue Refunding Bonds, Series 1996, FGIC
Insured, 6.50%+ 5,100,000 1/01/2009 5,465,976
Texas Municipal Power Agency, Refunding Revenue
Bonds, Series 1991A, AMBAC Insured, 6.75% 1,000,000 9/01/2012 1,110,830
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 6,321,550
------------
15,099,816
------------
Virginia 2.8%
The Rector and Visitors of the University of
Virginia, General Revenue Pledge Bonds, Series
1993B, 5.375% 3,250,000 6/01/2014 3,291,698
Virginia Public School Authority, School Financing
Bonds (1991 Resolution) Series 1995C, 5.00% 6,030,000 8/01/2015 5,897,159
------------
9,188,857
------------
Wisconsin 1.4%
Wisconsin Housing and Economic Development
Authority, Home Ownership Revenue Bonds, 1992 Series
2, Subject to AMT, 6.875% $4,250,000 9/01/2024 $ 4,523,615
------------
Total Municipal Bonds and Investments (Cost $313,871,284)--100.2% 332,551,902
Other Assets, Less Liabilities--(0.2)% (525,699)
------------
Net Assets--100.0% $332,026,203
============
</TABLE>
Federal Income Tax Information:
At December 31, 1995, the net unrealized
appreciation of investments based on cost for
Federal income tax purposes of $313,871,284 was
as follows:
Aggregate gross unrealized appreciation for all
investments in which there is an excess of value
over tax cost $18,792,088
Aggregate gross unrealized depreciation for all
investments in which there is an excess of tax
cost over value (111,470)
----------
$18,680,618
==========
+ The delivery and payment of this security is beyond the normal settlement
time of three business days after the trade date. The purchase price and
interest rate are fixed at the trade date although interest is not earned
until settlement date.
* This security is being used to collateralize the delayed delivery purchase
noted above. The total market value of segregated securities is $6,693,230.
The accompanying notes are an integral part of the financial statements.
11
<PAGE>
STATE STREET RESEARCH TAX-EXEMPT FUND
- -------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
- -------------------------------------------------------------------------------
December 31, 1995
Assets
Investments, at value (Cost $313,871,284) (Note 1) $332,551,902
Interest receivable 7,132,956
Receivable for fund shares sold 25,759
Receivable for securities sold 20,000
Other assets 64,266
-----------
339,794,883
Liabilities
Payable for securities purchased 5,977,581
Payable to custodian 419,883
Dividends payable 344,860
Payable for fund shares redeemed 262,175
Accrued transfer agent and shareholder services
(Note 2) 251,279
Accrued management fee (Note 2) 154,507
Accrued distribution and service fees (Note 4) 100,767
Accrued trustees' fees (Note 2) 23,838
Other accrued expenses 233,790
-----------
7,768,680
-----------
Net Assets $332,026,203
===========
Net Assets consist of:
Undistributed net investment income $ 286,673
Unrealized appreciation of investments 18,680,618
Accumulated net realized loss (2,635,682)
Shares of beneficial interest 315,694,594
-----------
$332,026,203
===========
Net Asset Value and redemption price per share of
Class A shares ($253,401,991 / 30,689,939 shares
of beneficial interest) $8.26
===========
Maximum Offering Price per share of Class A shares
($8.26 / .955) $8.65
===========
Net Asset Value and offering price per share of
Class B shares ($51,827,043 / 6,277,911 shares
of beneficial interest)* $8.26
===========
Net Asset Value, offering price and redemption
price per share of Class C shares ($22,614,311 /
2,745,656 shares of beneficial interest) $8.24
===========
Net Asset Value and offering price per share of
Class D shares ($4,182,858 / 507,065 shares of
beneficial interest)* $8.25
===========
*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 year ended December 31, 1995
Investment Income
Interest $16,829,328
Expenses
Management fee (Note 2) 1,523,237
Transfer agent and shareholder services (Note 2) 537,740
Custodian fee 141,763
Reports to shareholders 76,625
Registration fees 49,625
Audit fee 35,285
Trustees' fees (Note 2) 30,683
Service fee--Class A (Note 4) 591,340
Distribution and service fees--Class B (Note 4) 379,969
Distribution and service fees--Class D (Note 4) 12,037
Legal fees 8,533
Miscellaneous 23,545
----------
3,410,382
----------
Net investment income 13,418,946
----------
Realized and Unrealized Gain (Loss) on
Investments and Futures Contracts
Net realized gain on investments (Notes 1 and 3) 8,386,787
Net realized loss on futures contracts (Note 1) (2,991)
----------
Total net realized gain 8,383,796
Net unrealized appreciation of investments (Note 5) 20,715,649
----------
Net gain on investments and futures contracts 29,099,445
----------
Net increase in net assets resulting from operations $42,518,391
==========
The accompanying notes are an integral part of the financial statements.
12
<PAGE>
STATE STREET RESEARCH TAX-EXEMPT FUND
- --------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------
Year ended December 31
----------------------------
1995 1994
- ------------------------------------ ----------- -------------
Increase (Decrease) in Net Assets
Operations:
Net investment income $ 13,418,946 $ 15,317,645
Net realized gain (loss) on
investments and futures contracts* 8,383,796 (9,547,878)
Net unrealized appreciation
(depreciation) of investments 20,715,649 (28,974,700)
--------- -----------
Net increase (decrease) resulting
from operations 42,518,391 (23,204,933)
--------- -----------
Dividends from net investment
income:
Class A (12,265,000) (13,276,823)
Class B (1,664,544) (1,437,982)
Class C (63,631) (21,125)
Class D (52,929) (42,707)
--------- -----------
(14,046,104) (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 increase (decrease) from fund
share transactions (Note 7) 28,826,529 (18,980,504)
--------- -----------
Total increase (decrease) in net
assets 57,298,816 (57,404,148)
Net Assets
Beginning of year 274,727,387 332,131,535
--------- -----------
End of year (including undistributed
net investment income of $286,673
and $880,566, respectively) $332,026,203 $274,727,387
========= ===========
*Net realized gain (loss) for
Federal income tax
purposes (Note 1) $ 7,274,722 $ (8,429,917)
========= ===========
- -------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
December 31, 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. Two series of the Trust are publicly offered: State Street
Research Tax-Exempt Fund and State Street Research New York Tax-Free Fund.
The investment objective of the Fund is to seek a high level of interest
income exempt from federal income taxes. In seeking to achieve its investment
objective, the Fund invests primarily in tax-exempt debt obligations which
the investment manager believes will not involve undue risk.
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. Investments of $1 million or more in Class A
shares, which are not subject to any initial sales charge, are subject to a
1.00% contingent deferred sales charge if redeemed within one year of
purchase. Class B shares are subject to a contingent deferred sales charge on
certain redemptions made within five years of purchase and pay annual
distribution and service fees of 1.00%. Class B shares automatically convert
into Class A shares (which pay lower ongoing expenses) at the end of eight
years after the issuance of the Class B shares. Class C shares are only
offered to certain employee benefit plans and large institutions. No sales
charge is imposed at the time of purchase or redemption of Class C shares.
Class C shares do not pay any distribution or service fees. Class D shares
are subject to a contingent deferred sales charge of 1.00% on any shares
redeemed within one year of their purchase. Class D shares also pay annual
distribution and service fees of 1.00%. The Fund's expenses are borne
pro-rata by each class, except that each class bears expenses, and has
exclusive voting rights with respect to provisions of the Plan of
Distribution, 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.
The accompanying notes are an integral part of the financial statements.
13
<PAGE>
STATE STREET RESEARCH TAX-EXEMPT FUND
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
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 between both 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, 1995, the
Fund had a capital loss carryforward of $1,155,195 available, to the extent
provided in regulations, to offset future capital gains, if any, which
expires on December 31, 2002. In addition, as part of the transaction
described in Note 5, the Fund acquired from State Street Research California
Tax-Free Fund, State Street Research Florida Tax-Free Fund and State Street
Research Pennsylvania Tax-Free Fund a capital loss carryforward of
$1,246,007, of which $937,929 and $308,078 expires on December 31, 2001 and
2002, respectively. The Fund's use of such capital loss carryforward may be
limited under current tax laws.
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 $737,762
and has deferred and treated such losses as arising in the fiscal year ended
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.
G. Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of income and expenses during the reporting period.
Actual results could differ from those estimates.
Note 2
The Trust and State Street Research & Management Company (the "Adviser"), an
indirect wholly owned subsidiary of Metropolitan Life Insurance Company
("Metropolitan"), have entered into 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, 1995, the fees pursuant to
such agreement amounted to $1,523,237.
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, 1995, the amount of
such expenses was $104,948.
The fees of the Trustees not currently affiliated with the Adviser amounted
to $30,683 during the year ended December 31, 1995.
Note 3
For the year ended December 31, 1995, purchases and sales of securities,
exclusive of short-term obligations, aggregated $264,609,685 and
$277,637,906, 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 year ended December 31, 1995,
fees pursuant to such plan amounted to $591,340, $379,969 and $12,037 for
Class A, Class B and Class D, respectively.
14
<PAGE>
STATE STREET RESEARCH TAX-EXEMPT FUND
- -------------------------------------------------------------------------------
NOTES (cont'd)
- -------------------------------------------------------------------------------
Note 4 (cont'd)
The Fund has been informed that the Distributor and MetLife Securities, Inc.,
a wholly owned subsidiary of Metropolitan, earned initial sales charges
aggregating $74,456 and $505,190, respectively, on sales of Class A shares of
the Fund during the year ended December 31, 1995, and that MetLife
Securities, Inc. earned commissions aggregating $261,685 on sales of Class B
shares, and the Distributor collected contingent deferred sales charges
aggregating $417,782 and $36 on redemptions of Class B and Class D shares,
respectively, during the same period.
Note 5
On December 15, 1995, the Fund acquired the assets and liabilities of State
Street Research California Tax-Free Fund, State Street Research Florida
Tax-Free Fund and State Street Research Pennsylvania Tax-Free Fund (the
"Acquired Funds") in exchange for shares of each class of the Fund. The
acquisition was accounted for as a tax-free exchange of 2,085,788 Class A
shares, 1,364,200 Class B shares, 2,727,678 Class C shares and 375,835 Class
D shares of the Fund for the net assets of the Acquired Funds which amounted
to $17,040,955, $11,146,276, $22,230,046 and $3,067,368 for Class A, Class B,
Class C and Class D shares, respectively. The net assets of the Acquired
Funds included $2,518,588 of unrealized appreciation at the close of business
on December 15, 1995. The net assets of the Fund immediately after the
acquisition were $329,021,552.
Note 6
At December 31, 1995, investments totalling 12.5% and 10.2% 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 AMBAC Indemnity Corp.
(AMBAC), respectively.
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, 1995,
Metropolitan owned 184,018 Class A, 122,995 Class B, 1,133,487 Class C and
245,390 Class D shares and the Distributor owned 13,825 Class A shares and
one Class C share of the Fund.
Share transactions were as follows:
<TABLE>
<CAPTION>
Year ended December 31
----------------------------------------------------------
1995 1994
------------------------- -----------------------------
Class A Shares Amount Shares Amount
- ------------------------------------ ---------- ----------- ----------- --------------
<S> <C> <C> <C> <C>
Shares sold 4,674,154 $ 37,484,244 4,795,156 $ 38,277,992
Issued upon reinvestment of:
Dividends from net investment
income 1,134,792 8,963,324 1,261,918 9,851,273
Distribution from net realized
gains -- -- 43,200 322,270
Shares repurchased (7,024,141) (55,275,274) (10,125,093) (79,111,629)
-------- --------- --------- ------------
Net decrease (1,215,195) $ (8,827,706) (4,024,819) $(30,660,094)
======== ========= ========= ============
Class B Shares Amount Shares Amount
- ------------------------------------ -------- --------- --------- ------------
Shares sold 2,374,570 $ 19,127,552 2,332,039 $ 18,581,303
Issued upon reinvestment of:
Dividends from net investment
income 164,613 1,301,099 148,150 1,150,376
Distribution from net realized
gains -- -- 6,731 50,145
Shares repurchased (999,139) (7,870,018) (1,035,950) (7,990,693)
-------- --------- --------- ------------
Net increase 1,540,044 $ 12,558,633 1,450,970 $ 11,791,131
======== ========= ========= ============
Class C Shares Amount Shares Amount
- ------------------------------------ -------- --------- --------- ------------
Shares sold 2,740,046 $ 22,327,564 10,183 $ 81,311
Issued upon reinvestment of:
Dividends from net investment
income 4,806 38,781 2,602 20,345
Distribution from net realized
gains -- -- 72 535
Shares repurchased (43,984) (354,433) (24,703) (192,917)
-------- --------- --------- ------------
Net increase (decrease) 2,700,868 $ 22,011,912 (11,846) $ (90,726)
======== ========= ========= ============
Class D Shares Amount Shares Amount
- ------------------------------------ -------- --------- --------- ------------
Shares sold 417,377 $ 3,395,688 36,875 $ 296,347
Issued upon reinvestment of:
Dividends from net investment
income 2,759 21,771 1,725 13,235
Distribution from net realized
gains -- -- 180 1,341
Shares repurchased (41,573) (333,769) (42,597) (331,738)
-------- --------- --------- ------------
Net increase (decrease) 378,563 $ 3,083,690 (3,817) $ (20,815)
======== ========= ========= ============
</TABLE>
15
<PAGE>
STATE STREET RESEARCH TAX-EXEMPT FUND
- -------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- -------------------------------------------------------------------------------
For a share outstanding throughout each year:
<TABLE>
<CAPTION>
Class A
-----------------------------------------------------
Year ended December 31
-----------------------------------------------------
1995 1994 1993 1992 1991
- ----------------------------------------------------- ------- ------- ------- ------- ---------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $ 7.46 $ 8.43 $ 7.94 $ 7.69 $ 7.30
Net investment income .39 .40 .40 .43 .44
Net realized and unrealized gain (loss) on
investments .82 (.98) .54 .27 .39
Dividends from net investment income (.41) (.38) (.39) (.43) (.44)
Distributions from net realized gains -- (.01) (.06) (.02) --
----- ----- ----- ----- -------
Net asset value, end of year $ 8.26 $ 7.46 $ 8.43 $ 7.94 $ 7.69
===== ===== ===== ===== =======
Total return 16.58%+ (6.90)%+ 12.11%+ 9.34%+ 11.81%+
Net assets at end of year (000s) $253,402 $238,097 $302,845 $203,312 $118,157
Ratio of operating expenses to average net assets 1.13% 1.20% 1.20% 1.20% 1.25%
Ratio of net investment income to average net
assets** 4.95% 5.07% 4.85% 5.48% 6.00%
Portfolio turnover rate 97.32% 78.63% 36.16% 27.44% 81.75%
</TABLE>
<TABLE>
<CAPTION>
Class B Class C
------------------------------ ----------------------------------
Year ended December 31 Year ended December 31
------------------------------ ----------------------------------
1995 1994 1993* 1995 1994 1993*
- --------------------------------- ------ -------- -------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
year $ 7.46 $ 8.43 $ 8.25 $ 7.45 $ 8.41 $ 8.25
Net investment income .33 .34 .19 .40 .42 .23
Net realized and unrealized gain
(loss) on investments .82 (.97) .24 .81 (.96) .22
Dividends from net investment
income (.35) (.33) (.19) (.42) (.41) (.23)
Distributions from net realized
gains -- (.01) (.06) -- (.01) (.06)
---- ------- ------- ------- ------- --------
Net asset value, end of year $ 8.26 $ 7.46 $ 8.43 $ 8.24 $ 7.45 $ 8.41
==== ======= ======= ======= ======= ========
Total return 15.72%+ (7.59)%+ 5.20%+++ 16.76%+ (6.56)%+ 5.54%+++
Net assets at end of year (000s) $51,827 $35,338 $27,695 $22,614 $334 $477
Ratio of operating expenses to
average net assets 1.88% 1.95% 1.95%++ 0.88% 0.95% 0.96%++
Ratio of net investment income to
average net assets** 4.19% 4.35% 3.93%++ 4.85% 5.26% 4.92%++
Portfolio turnover rate 97.32% 78.63% 36.16% 97.32% 78.63% 36.16%
</TABLE>
<TABLE>
<CAPTION>
Class D
----------------------------------
Year ended December 31
----------------------------------
1995 1994 1993*
--------------------------------------- -------- -------- ----------
<S> <C> <C> <C>
Net asset value, beginning of year $ 7.46 $ 8.43 $ 8.25
Net investment income .33 .34 .19
Net realized and unrealized gain (loss)
on investments .81 (.97) .23
Dividends from net investment income (.35) (.33) (.18)
Distributions from net realized gains -- (.01) (.06)
------- ------- --------
Net asset value, end of year $ 8.25 $ 7.46 $ 8.43
======= ======= ========
Total return 15.58%+ (7.59)%+ 5.19%+++
Net assets at end of year (000s) $4,183 $958 $1,115
Ratio of operating expenses to average
net assets 1.88% 1.95% 1.99%++
Ratio of net investment income to
average net assets** 4.13% 4.31% 3.92%++
Portfolio turnover rate 97.32% 78.63% 36.16%
</TABLE>
*June 7, 1993 (commencement of share class designations) to December 31,
1993.
**The ratio of net investment income to average net assets differs among
classes by amounts other than the difference in expense ratios because of
fluctuations during the year in relative levels of assets in each class
and in interest income earned.
++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.
16
<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 (formerly MetLife-State Street Tax-Exempt Fund) (a series of
State Street Research Tax-Exempt Trust, hereafter referred to as the "Trust")
at December 31, 1995, and the results of its operations, the changes in its
net assets and the financial highlights for the periods indicated, in
conformity with generally accepted accounting principles. These financial
statements and financial highlights (hereafter referred to as "financial
statements") are the responsibility of the Trust's management; our
responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these financial statements in
accordance with generally accepted auditing standards which require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of securities at December 31, 1995 by correspondence with the
custodian and brokers, provide a reasonable basis for the opinion expressed
above.
/s/ Price Waterhouse LLP
Price Waterhouse LLP
Boston, Massachusetts
February 2, 1996
17
<PAGE>
STATE STREET RESEARCH TAX-EXEMPT FUND
- -------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE
- -------------------------------------------------------------------------------
Throughout 1995, the slowing economy, low inflation, and declining interest
rates created a very favorable environment for bond investing. In 1995,
municipal bonds experienced their strongest returns since 1986, which helped
buoy Tax-Exempt Fund's returns.
In an effort to keep the economy from slowing too much, the Federal Reserve
Board made two interest-rate cuts in the second half of the year, which also
helped fuel the bond rally. These factors were instrumental in helping the
Fund's performance.
The Fund entered 1995 with a shorter duration than the market average. To
take advantage of the falling interest-rate environment, the Fund gradually
lengthened duration, which positively affected returns.
In selecting bonds for the portfolio, the Fund targeted states whose bonds
demonstrated high demand and low supply.
The Fund benefited from a strong overweighting in California bonds, which
performed well.
December 31, 1995
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 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. Performance for a class
includes periods prior to the adoption of class designations. Performance
reflects up to maximum 4.5% front-end or 5% contingent deferred sales
charges. Performance for "B" and "D" shares prior to class designations in
1993 reflects annual 12b-1 fees of .25%, and performance thereafter reflects
12b-1 fees of 1%, which will reduce subsequent performance. "C" shares,
offered without a sales charge, are available only to certain employee
benefit plans and institutions. The Lehman Municipal 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.
*****************************[LINE GRAPHS]*************************************
Comparison Of Change In Value Of A $10,000
Investment In Tax Exempt Fund and
the Lehman Municipal Bond Index
Class A Shares
Average Annual Total Return
-------------------------------------------------------
1 Year 5 Years Life of Fund
-------------------------------------------------------
+11.3% +7.27 +7.04%
-------------------------------------------------------
Lehman Municipal Tax-Exempt
Bond Index Fund
8/86 10000 9550
12/86 10371 9890
12/87 10527 9748
12/88 11597 11063
12/89 12849 12128
12/90 13785 12713
12/91 15459 14213
12/92 16821 15538
12/93 18888 17420
12/94 17911 16218
12/95 21038 18906
Class B Shares
Average Annual Total Return
-------------------------------------------------------
1 Year 5 Years Life of Fund
-------------------------------------------------------
+10.72 +7.55% +7.35%
-------------------------------------------------------
Lehman Municipal Tax-Exempt
Bond Index Fund
8/86 10000 10000
12/86 10371 10355
12/87 10527 10208
12/88 11597 11585
12/89 12849 12699
12/90 13785 13313
12/91 15459 14883
12/92 16821 16270
12/93 18888 18165
12/94 17911 16786
12/95 21038 19425
Class C Shares
Average Annual Total Return
-------------------------------------------------------
1 Year 5 Years Life of Fund
-------------------------------------------------------
+16.76% +8.35% +7.62%
-------------------------------------------------------
Lehman Municipal Tax-Exempt
Bond Index Fund
8/86 10000 10000
12/86 10371 10355
12/87 10527 10208
12/88 11597 11585
12/89 12849 12699
12/90 13785 13313
12/91 15459 14883
12/92 16821 16270
12/93 18888 18224
12/94 17911 17028
12/95 21038 19882
Class D Shares
Average Annual Total Return
-------------------------------------------------------
1 Year 5 Years Life of Fund
-------------------------------------------------------
+14.58% +7.82% +7.34%
-------------------------------------------------------
Lehman Municipal Tax-Exempt
Bond Index Fund
8/86 10000 10000
12/86 10371 10355
12/87 10527 10208
12/88 11597 11585
12/89 12849 12699
12/90 13785 13313
12/91 15459 14883
12/92 16821 16270
12/93 18888 18163
12/94 17911 16784
12/95 21038 19399
**********************************************************************
18
<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
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 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.
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.c6
<PAGE>
STATE STREET RESEARCH NEW YORK TAX-FREE FUND
A Series of
STATE STREET RESEARCH TAX-EXEMPT TRUST
STATEMENT OF ADDITIONAL INFORMATION
May 1, 1996
TABLE OF CONTENTS
Page
ADDITIONAL INVESTMENT POLICIES AND RESTRICTIONS.......................2
NEW YORK MUNICIPAL OBLIGATIONS........................................5
ADDITIONAL INFORMATION CONCERNING CERTAIN INVESTMENT TECHNIQUES......18
DEBT INSTRUMENTS AND PERMITTED CASH INVESTMENTS......................28
TRUSTEES AND OFFICERS................................................32
INVESTMENT ADVISORY SERVICES.........................................36
PURCHASE AND REDEMPTION OF SHARES....................................37
NET ASSET VALUE......................................................39
PORTFOLIO TRANSACTIONS...............................................40
CERTAIN TAX MATTERS..................................................43
DISTRIBUTION OF SHARES OF THE FUND...................................47
CALCULATION OF PERFORMANCE DATA......................................51
CUSTODIAN............................................................56
INDEPENDENT ACCOUNTANTS..............................................56
FINANCIAL STATEMENTS.................................................57
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
New York Tax-Free Fund (the "Fund") dated May 1, 1996 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.
1285M-950510 (0696) SSR-LD NYTF-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 purchase a security of any one issuer (other than
securities issued or guaranteed as to principal or interest by
the U.S. Government or its agencies or instrumentalities or
mixed-ownership Government corporations) if such purchase
would, with respect to 75% of the Fund's total assets, cause
more than 5% of the Fund's total assets to be invested in the
securities of such issuer or cause more than 10% of the voting
securities of such issuer to be held by the Fund;
(2) not to issue senior securities;
(3) 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;
(4) 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;
(5) not to invest in physical commodities or physical commodity
contracts or options in excess of 10% of the Fund's total
assets, except that investments in essentially financial items
or arrangements such as, but not limited to, swap
arrangements, hybrids, currencies, currency and other forward
contracts, delayed delivery and when-issued contracts, futures
contracts and options on futures contracts on securities,
securities indices, interest rates and currencies, shall not
be deemed investments in commodities or commodities contracts;
(6) not to make loans, except that the Fund may lend portfolio
securities and purchase bonds, debentures, notes and similar
obligations (including repurchase agreements with respect
thereto);
(7) not to conduct arbitrage transactions (provided that
investments in futures and options shall not be deemed
arbitrage transactions);
(8) not to invest 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)
New York 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
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 or instrumentalities or backed by
the U.S. Government or to repurchase agreements involving such
U.S. Government securities to the extent excludable under
relevant regulatory interpretations.
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 any security or enter into a repurchase
agreement if as a result more than 15% of its net assets would
be invested in securities that are illiquid (including
repurchase agreements not entitling the holder to payment of
principal and interest within seven days);
(2) not to invest more than 15% of its net assets in restricted
securities of all types (including not more than 5% of its net
assets in restricted securities which are not eligible for
resale pursuant to Rule 144A, Regulation S or other exemptive
provisions under the Securities Act of 1933);
(3) not to invest more than 5% of its total assets in securities
of private companies including predecessors with less than
three years' continuous operations except (a) securities
guaranteed or backed by an affiliate of the issuer with three
years of continuous operations, (b) securities issued or
guaranteed as to principal or interest by the U.S. Government,
or its agencies or instrumentalities, or a mixed-ownership
Government corporation, (c) securities of issuers with debt
securities rated at least "BBB" by Standard & Poor's
Corporation or "Baa" by Moody's Investor's Service, Inc. (or
their equivalent by any other nationally recognized
statistical rating organization) or securities of issuers
considered by the Investment Manager to be equivalent,(d)
securities issued by a holding company with at least 50% of
its assets invested in companies with three years of
continuous operations including predecessors, and (e)
securities which generate income which is exempt from local,
state or federal taxes; provided that the Fund may invest up
to 15% in such issuers so long as such investments plus
investments in restricted securities (other than those which
are eligible for resale under Rule 144A, Regulation S or other
exemptive provisions) do not exceed 15% of the Fund's total
assets;
(4) 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;
(5) 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);
(6) 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);
(7) 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;
(8) 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;
(9) 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
(10) 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.
NEW YORK MUNICIPAL OBLIGATIONS
As used in the Prospectus and this Statement, the term "New York
Municipal Obligations" refers to debt obligations, including bonds and notes,
issued by the State of New York and its political subdivisions, the interest on
which was at the time of issuance, in the opinion of bond counsel, excluded from
gross income for federal income tax purposes and exempt from New York State and
New York City personal income taxes. Like other tax-exempt bonds, New York
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 New York 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 New York Municipal Obligations if the interest paid thereon is,
in the opinion of bond counsel at the time of issuance, excluded from gross
income for federal income tax purposes and exempt from New York State and City
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 New York 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 New York 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 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 New York 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 objective and policies and
consider changes in the structure of the Fund or dissolution.
<PAGE>
Special Considerations Relating To New York Municipal Obligations
Some of the significant financial considerations relating to the Fund's
investment in New York Municipal Obligations are summarized below. This summary
information is not intended to be a complete description and is principally
derived from official statements relating to issues of New York Municipal
Obligations that were available prior to the date of this Statement of
Additional Information. The accuracy and completeness of the information
contained in those official statements have not been independently verified.
State Economy. New York (the "State") is the third most populous state
in the nation and has a relatively high level of personal wealth. The State's
economy is diverse with a comparatively large share of the nation's finance,
insurance, transportation, communications and services employment, and a very
small share of the nation's farming and mining activity. The State has a
declining proportion of its workforce engaged in manufacturing, and an
increasing proportion engaged in service industries. New York City (the "City"),
which is the most populous city in the State and nation and is the center of the
nation's largest metropolitan area, accounts for a large portion of the State's
population and personal income.
The State has historically been one of the wealthiest states in the
nation. For decades, however, the State has grown more slowly than the nation as
a whole, gradually eroding its relative economic position. The recession has
been more severe in the State, owing to a significant retrenchment in the
financial services industry, cutbacks in defense spending, and an overbuilt real
estate market. There can be no assurance that the State economy will not
experience worse-than-predicted results in the 1995-96 fiscal year, with
corresponding material and adverse effects on the State's projections of
receipts and disbursements.
The unemployment rate in the State dipped below the national rate in
the second half of 1981 and remained lower until 1991. It stood at 6.9% in 1994.
The total employment growth rate in the State has been below the national
average since 1984 and is expected to slow to less than 0.5% in 1995. State per
capita personal income remains above the national average. State per capita
income for 1994 was estimated at $25,999, which was 19.2% above the 1994
estimated national average of $21,809. During the past ten years, total personal
income in the State rose slightly faster than the national average only in 1986
through 1989.
State Budget. The State Constitution requires the Governor to submit to
the Legislature (the "Legislature") a balanced Executive Budget which contains a
complete plan of expenditures for the ensuing fiscal year and all moneys and
revenues estimated to be available therefor, accompanied by bills containing all
proposed appropriations or reappropriations and any new or modified revenue
measures to be enacted in connection with the Executive Budget. The entire plan
constitutes the proposed State financial plan for that fiscal year. The Governor
is required to submit to the Legislature quarterly budget updates which include
a revised cash-basis state financial plan, and an explanation of any changes
from the previous state financial plan.
The State's budget for the 1995-96 fiscal year was enacted by the
Legislature on June 7, 1995, more than two months after the start of the fiscal
year. Prior to adoption of the budget, the Legislature enacted appropriations
for disbursements considered to be necessary for State operations and other
purposes, including all necessary appropriations for debt service. The State
financial plan for the 1995-96 fiscal year was formulated on June 20, 1995 and
was based upon the State's budget as enacted by the Legislature and signed into
law by the Governor (the "1995-96 State Financial Plan").
The 1995-96 State Financial Plan was the first to be enacted in the
administration of the Governor, who assumed office on January 1. It was the
first budget in over half a century which proposed and, as enacted, projected an
absolute year-over-year decline in disbursements in the General Fund, the
State's principal operating fund. Spending for State operations was projected to
drop even more sharply, by 4.6%. Nominal spending from all State spending
sources (i.e., excluding Federal aid) was proposed to increase by only 2.5% from
the prior fiscal year, in contrast to the prior decade when such spending growth
averaged more than 6.0% annually.
The 1995-96 State Financial Plan included actions that will have an
effect on the budget outlook for State fiscal year 1996-97 and beyond. The
Division of the Budget estimated that the 1995-96 State Financial Plan contained
actions that provide nonrecurring resources or savings totaling approximately
$900 million while the State comptroller (the "Comptroller") believed that such
amount exceeded $1 billion. In addition to this use of nonrecurring resources,
the 1995-96 State Financial Plan reflected actions that will directly affect the
State's 1996-97 fiscal year baseline receipts and disbursements. The three-year
plan to reduce State personal income taxes will decrease State tax receipts by
an estimated $1.7 billion in State fiscal year 1996-97 in addition to the amount
of reduction in State fiscal year 1995-96. Further significant reductions in the
personal income tax are scheduled for the 1997-98 State fiscal year. Other tax
reductions enacted in 1994 and 1995 are estimated to cause an additional
reduction in receipts of over $500 million in 1996-97, as compared to the level
of receipts in 1995-96. Similarly, many actions taken to reduce disbursements in
the State's 1995-96 fiscal year are expected to provide greater reductions in
the State's fiscal year 1996-97. These include actions to reduce the State
workforce, reduce Medicaid and welfare expenditures and slow community mental
hygiene program development.
The State issued the first of the three required quarterly updates (the
"First Quarter Update") to the 1995-96 State Financial Plan on July 28, 1995.
The First Quarter Update projected continued balance in the State's 1995-96
State Financial Plan. Actual cash receipts and disbursements during the first
quarter of the fiscal year were impacted by the late adoption of the budget, and
fell somewhat short of original monthly cashflow estimates. Receipt variances
were mainly related to timing issues rather than changes in the forecast.
Disbursement variances were also ascribed to timing factors.
On October 2, 1995, the State Comptroller released a report on the
State's financial condition. The report identified several risks to the 1995-96
State Financial Plan and also estimated a potential imbalance in receipts and
disbursements in the 1996-97 fiscal year of at least $2.7 billion and in the
1997-98 fiscal year of at least $3.9 billion. The Governor is required to submit
a balanced budget to the State Legislature and has indicated that he will close
any potential imbalance primarily through General Fund expenditure reductions
and without increases in taxes or deferrals of scheduled tax reductions.
The State issued its second quarterly update to the 1995-96 State
Financial Plan on October 26, 1995. The Mid-Year Update projected continued
balance in the 1995-96 State Financial Plan, with estimated receipts reduced by
a net $71 million and estimated disbursements reduced by a net $30 million as
compared to the First Quarter Update. The resulting General Fund balance
decreased from $213 million in the First Quarter Update to $172 million in the
Mid-Year Update, reflecting the use of $41 million from the contingency reserve
fund for payments of litigation and disallowance expenses.
The Division of the Budget revised the cash-basis 1995-96 State
Financial Plan on December 15, 1995, in conjunction with the release of the
Executive Budget for the 1996-97 fiscal year (the 'December Update' and together
with the First Quarter Update and the Mid-Year Update, the 'Financial Plan
Updates'). These projections show continued balance in the State's 1995-96
Financial Plan, with estimated receipts reduced by a net $73 million and
estimated disbursements reduced by a net $73 million as compared to the Mid-Year
Update. Reductions in receipts reflect delays in estimated receipts from the
sale of State assets, and other revisions based upon operating results through
November 1995. Disbursement estimates were reduced to reflect
lower-than-expected spending through November, savings from debt refundings, and
other items which more than offset projected increases in disbursements for
school aid and tuition assistance. The resulting General Fund balance of $172
million was unchanged from the Mid-Year Update.
The Governor presented his 1996-97 Executive Budget to the Legislature
on December 15, 1995, one month before the legal deadline. There can be no
assurance that the Legislature will enact the Executive Budget into law or that
the projections set forth in the Executive Budget will not differ materially and
adversely from actual results.
The Governor's Executive Budget projected balance on a cash basis in
the General Fund. It reflected a continuing strategy of substantially reduced
State spending, including programming restructurings, reductions in social
welfare spending, and efficiency and productivity initiatives. In his 1996-97
Executive Budget, the Governor indicated that the 1996-97 General Fund financial
plan (based on current law governing spending and revenues) would have been out
of balance by almost $3.9 billion as a result of the underlying disparity
between receipts and disbursements caused by anticipated spending demands, the
effect of current and prior-year tax changes, and the use of one-time revenues
to fund recurring spending in the 1995-96 State Financial Plan. The Executive
Budget proposes to close this gap primarily through a series of spending
reductions and cost containment measures.
To make progress toward addressing recurring budgetary imbalances, the
1996-97 Executive Budget proposes significant actions to align recurring
receipts and disbursements in future fiscal years. The Governor has proposed
closing the 1996-97 fiscal year imbalance primarily through General Fund
expenditure reductions and without increases in taxes or deferrals of scheduled
tax reductions. However, there can be no assurance that the Legislature will
enact the Governor's proposals or that the State's actions will be sufficient to
preserve budgetary balance or to align recurring receipts and disbursements in
future fiscal years. The 1996-97 Executive Budget includes action that will have
an effect on the budget outlook for the State fiscal year 1997-98 and beyond.
The net impact of these and other factors is expected to produce a potential
imbalance in receipts and disbursements in State fiscal year 1997-98, which the
Governor proposes to close with further spending reductions. The Executive
Budget contains projections of a potential imbalance in the 1997-98 fiscal year
of $1.4 billion and in the 1998-99 fiscal year of $2.5 billion, assuming
implementation of the 1996-97 Executive Budget recommendations.
The 1995-96 State Financial Plan and the Financial Plan Updates were
based on a number of assumptions and projections. Because it is not possible to
predict accurately the occurrence of all factors that may affect the 1995-96
State Financial Plan or the Financial Plan Updates, actual results could differ
materially and adversely from projections made at the outset of a fiscal year.
There can be no assurance that the State will not face substantial potential
budget gaps in future years resulting from a significant disparity between tax
revenues projected from a lower recurring receipts base and the spending
required to maintain State programs at current levels. To address any potential
budgetary imbalance, the State may need to take significant actions to align
recurring receipts and disbursements in future fiscal years.
A significant risk to the 1995-96 State Financial Plan projections
arise from tax legislation under consideration by Congress and the President.
Congressionally-adopted retroactive changes to federal tax treatment of capital
gains would flow through automatically to the State personal income tax. Such
changes, if ultimately enacted, could produce revenue losses in both the 1995-96
fiscal year and the 1996-97 fiscal year.
Recent Financial Results. The General Fund is the principal operating
fund of the State and is used to account for all financial transactions, except
those required to be accounted for in another fund. It is the State's largest
fund and receives almost all State taxes and other resources not dedicated to
particular purposes.
The State reported a General Fund operating deficit of $1.426 billion
for the 1994-95 fiscal year, as compared to an operating surplus of $914 million
for the prior fiscal year. The 1994-95 fiscal year deficit was caused by several
factors, including the use of $1.026 billion of the 1993-94 cash-based surplus
to fund operating expenses in 1994-95 and the adoption of changes in accounting
methodologies by the State Comptroller. These factors were offset by net
proceeds of $315 million in bonds issued by the Local Government Assistance
Corporation. The General Fund is projected to be balanced on a cash basis for
the 1995-96 fiscal year.
Total revenues for 1994-95 were $31.455 billion. Revenues
decreased by $173 million over the prior fiscal year, a decrease of less than
one percent. Total expenditures for 1994-95 totaled $33.079 billion, an increase
of $2.083 billion, or 6.7 percent over the prior fiscal year.
The State's financial position on a GAAP (generally accepted
accounting principles) basis as of March 31, 1995 showed an accumulated deficit
in its combined governmental funds of $1.666 billion, reflecting liabilities of
$14.778 billion and assets of $13.112 billion.
Debt Limits and Outstanding Debt. There are a number of methods by which the
State of New York may incur debt. Under the State Constitution, the State may
not, with limited exceptions for emergencies, undertake long-term general
obligation borrowing (i.e., borrowing for more than one year) unless the
borrowing is authorized in a specific amount for a single work or purpose by the
Legislature and approved by the voters. There is no limitation on the amount of
long-term general obligation debt that may be so authorized and subsequently
incurred by the State.
The State may undertake short-term borrowings without voter
approval (i) in anticipation of the receipt of taxes and revenues, by issuing
tax and revenue anticipation notes, and (ii) in anticipation of the receipt of
proceeds from the sale of duly authorized but unissued general obligation bonds,
by issuing bond anticipation notes. The State may also, pursuant to specific
constitutional authorization, directly guarantee certain obligations of the
State of New York's authorities and public benefit corporations ("Authorities").
Payments of debt service on New York State general obligation and New York
State-guaranteed bonds and notes are legally enforceable obligations of the
State of New York.
The State employs additional long-term financing mechanisms,
lease-purchase and contractual-obligation financings, which involve obligations
of public authorities or municipalities that are State-supported but are not
general obligations of the State. Under these financing arrangements, certain
public authorities and municipalities have issued obligations to finance the
construction and rehabilitation of facilities or the acquisition and
rehabilitation of equipment, and expect to meet their debt service requirements
through the receipt of rental or other contractual payments made by the State.
Although these financing arrangements involve a contractual agreement by the
State to make payments to a public authority, municipality or other entity, the
State's obligation to make such payments is generally expressly made subject to
appropriation by the Legislature and the actual availability of money to the
State for making the payments. The State has also entered into a
contractual-obligation financing arrangement with the Local Government
Assistance Corporation ("LGAC") in an effort to restructure the way the State
makes certain local aid payments.
In 1990, as part of a State fiscal reform program, legislation
was enacted creating LGAC, a public benefit corporation empowered to issue
long-term obligations to fund certain payments to local governments
traditionally funded through New York State's annual seasonal borrowing. The
legislation empowered LGAC to issue its bonds and notes in an amount not in
excess of $4.7 billion (exclusive of certain refunding bonds) plus certain other
amounts. Over a period of years, the issuance of these long-term obligations,
which are to be amortized over no more than 30 years, was expected to eliminate
the need for continued short-term seasonal borrowing. The legislation also
dedicated revenues equal to one-quarter of the four cent State sales and use tax
to pay debt service on these bonds. The legislation also imposed a cap on the
annual seasonal borrowing of the State at $4.7 billion, less net proceeds of
bonds issued by LGAC and bonds issued to provide for capitalized interest,
except in cases where the Governor and the legislative leaders have certified
the need for additional borrowing and provided a schedule for reducing it to the
cap. If borrowing above the cap is thus permitted in any fiscal year, it is
required by law to be reduced to the cap by the fourth fiscal year after the
limit was first exceeded. As of June 1995, LGAC had issued bonds to provide net
proceeds of $4.7 billion, completing the program. The impact of LGAC's borrowing
is that the State is able to meet its cash flow needs in the first quarter of
the fiscal year without relying on short-term seasonal borrowings. The 1995-96
State Financial Plan includes no spring borrowing nor did the 1994-95 State
Financial Plan, which was the first time in 35 years there was no short-term
seasonal borrowing.
In June 1994, the Legislature passed a proposed constitutional
amendment that would significantly change the long-term financing practices of
the State and its public authorities. The proposed amendment would permit the
State, within a formula-based cap, to issue revenue bonds, which would be debt
of the State secured solely by a pledge of certain State tax receipts (including
those allocated to State funds dedicated for transportation purposes), and not
by the full faith and credit of the State. In addition, the proposed amendment
would (i) permit multiple purpose general obligation bond proposals to be
proposed on the same ballot, (ii) require that State debt be incurred only for
capital projects included in a multi-year capital financing plan, and (iii)
prohibit, after its effective date, lease-purchase and contractual-obligation
financing mechanisms for State facilities.
Before the approved constitutional amendment can be presented
to the voters for their consideration, it must be passed by a separately elected
legislature. The amendment must therefore be passed by the newly elected
Legislature in 1995 prior to presentation to the voters in November 1995. The
amendment was passed by the Senate in June 1995, and the Assembly is expected to
pass the amendment shortly. If approved by the voters, the amendment would
become effective January 1, 1996.
On January 13, 1992, S&P reduced its ratings on the State's general
obligation bonds from A to A- and, in addition, reduced its ratings on the
State's moral obligation, lease purchase, guaranteed and contractual obligation
debt. S&P also continued its negative rating outlook assessment on State
general obligation debt. On April 26, 1993, S&P revised the rating outlook
assessment to stable. On February 14, 1994, S&P raised its outlook to positive
and, on February 28, 1994, confirmed its A- rating. On January 6, 1992, Moody's
reduced its ratings on outstanding limited-liability State lease purchase and
contractual obligations from A to Baa1. On February 28, 1994, Moody's
reconfirmed its A rating on the State's general obligation long-term
indebtedness.
The State anticipates that its capital programs will be
financed, in part, by State and public authorities borrowings in 1995-96. The
State expects to issue $248 million in general obligation bonds (including $170
million for purposes of redeeming outstanding bond anticipation notes) and $186
million in general obligation commercial paper. The Legislature has also
authorized the issuance of up to $33 million in certificates of participation
during the State's 1995-96 fiscal year for equipment purchases and $14 million
for capital purposes. These projections are subject to change if circumstances
require.
Principal and interest payments on general obligation bonds
and interest payments on bond anticipation notes and on tax and revenue
anticipation notes were $793.3 million for the 1994-95 fiscal year, and are
estimated to be $774.4 million for the 1995-96 fiscal year. These figures do not
include interest payable on State General Obligation Refunding Bonds issued in
July 1992 ("Refunding Bonds") to the extent that such interest was paid from an
escrow fund established with the proceeds of such Refunding Bonds. Principal and
interest payments on fixed rate and variable rate bonds issued by LGAC were
$239.4 million for the 1994-95 fiscal year, and are estimated to be $328.2
million for 1995-96. State lease-purchase rental and contractual obligation
payments for 1994-95, including State installment payments relating to
certificates of participation, were $1.607 billion and are estimated to be
$1.641 billion in 1995-96.
The State has never defaulted on any of its general obligation
indebtedness or its obligations under lease-purchase or contractual-obligation
financing arrangements and has never been called upon to make any direct
payments pursuant to its guarantees.
Litigation. Certain litigation pending against the State or its
officers or employees could have a substantial or long-term adverse effect on
the State's finances. Among the more significant of these cases are those that
involve (1) the validity of agreements and treaties by which various Indian
tribes transferred title to the State of certain land in central and upstate New
York; (2) certain aspects of the State's Medicaid policies, including its rates,
regulations and procedures; (3) action against State and City officials alleging
inadequate shelter allowances to maintain proper housing; (4) challenges to the
practice of reimbursing certain Office of Mental Health patient care expenses
from the client's Social Security benefits; (5) alleged responsibility of
State officials to assist in remedying racial segregation in the City of
Yonkers; (6) challenges by commercial insurers, employee welfare benefit plans,
and health maintenance organizations to the imposition of 13%, 11% and 9%
surcharges on inpatient hospital bills; (7) challenges to certain aspects of
petroleum business taxes; (8) action alleging damages resulting from the failure
by the State's Department of Environmental Conservation to timely provide
certain data; (9) a challenge to the constitutionality of the treatment of
certain moneys held in a Supplemental Reserve Fund; and (10) a challenge to the
constitutionality of a State lottery game.
Several actions challenging the constitutionality of
legislation enacted during the 1990 legislative session which changed actuarial
funding methods for determining state and local contributions to state employee
retirement systems have been decided against the State. As a result, the
Comptroller has developed a plan to restore the State's retirement systems to
prior funding levels. Such funding is expected to exceed prior levels by $30
million in fiscal 1994-95, $63 million in fiscal 1995-96, $116 million in fiscal
1996-97, $193 million in fiscal 1997-98, peaking at $241 million in fiscal
1998-99. Beginning in fiscal 2001-02, State contributions required under the
Comptroller's plan are projected to be less than that required under the prior
funding method. As a result of the United States Supreme Court decision in the
case of State of Delaware v. State of New York, on January 21, 1994, the State
entered into a settlement agreement with various parties. Pursuant to all
agreements executed in connection with the action, the State is required to make
aggregate payments of $351.4 million, of which $90.3 million have been made.
Annual payments to the various parties will continue through the State's 2002-03
fiscal year in amounts which will not exceed $48.4 million in any fiscal year
subsequent to the State's 1994-95 fiscal year.
The legal proceedings noted above involve State finances,
State programs and miscellaneous tort, real property and contract claims in
which the State is a defendant and the monetary damages sought are substantial.
These proceedings could affect adversely the financial condition of the State.
Adverse developments in these proceedings or the initiation of new proceedings
could affect the ability of the State to maintain a balanced 1995-96 State
Financial Plan. An adverse decision in any of these proceedings could exceed the
amount of the 1995-96 State Financial Plan reserve for the payment of judgments
and, therefore, could affect the ability of the State to maintain a balanced
1995-96 State Financial Plan. In its audited financial statements for the fiscal
year ended March 31, 1995, the State reported its estimated liability for
awarded and anticipated unfavorable judgments to be $676 million.
Although other litigation is pending against the State, except
as described above, no current litigation involves the State's authority, as a
matter of law, to contract indebtedness, issue its obligations, or pay such
indebtedness when it matures, or affects the State's power or ability, as a
matter of law, to impose or collect significant amounts of taxes and revenues.
Authorities. The fiscal stability of the State is related, in part, to the
fiscal stability of its Authorities, which generally have responsibility for
financing, constructing and operating revenue-producing public benefit
facilities. Authorities are not subject to the constitutional restrictions on
the incurrence of debt which apply to the State itself, and may issue bonds and
notes within the amounts of, and as otherwise restricted by, their legislative
authorization. The State's access to the public credit markets could be
impaired, and the market price of its outstanding debt may be materially and
adversely affected, if any of the Authorities were to default on their
respective obligations, particularly with respect to debt that are
State-supported or State-related. As of September 30, 1994, date of the latest
data available, there were 18 Authorities that had outstanding debt of $100
million or more. The aggregate outstanding debt, including refunding bonds, of
these 18 Authorities was $70.3 billion. As of March 31, 1995, aggregate public
authority debt outstanding as State-supported debt was $27.9 billion and as
State-related debt was $36.1 billion.
Authorities are generally supported by revenues generated by
the projects financed or operated, such as fares, user fees on bridges, highway
tolls and rentals for dormitory rooms and housing. In recent years, however, New
York State has provided financial assistance through appropriations, in some
cases of a recurring nature, to certain of the 18 Authorities for operating and
other expenses and, in fulfillment of its commitments on moral obligation
indebtedness or otherwise, for debt service. This operating assistance is
expected to continue to be required in future years. In addition, certain
statutory arrangements provide for State local assistance payments otherwise
payable to localities to be made under certain circumstances to certain
Authorities. The State has no obligation to provide additional assistance to
localities whose local assistance payments have been paid to Authorities under
these arrangements. However, in the event that such local assistance payments
are so diverted, the affected localities could seek additional State funds.
New York City and Other Localities. The fiscal health of the State
may also be impacted by the fiscal health of its localities, particularly the
City of New York, which has required and continues to require significant
financial assistance from New York State. The City depends on State aid both to
enable the City to balance its budget and to meet its cash requirements. The
City has achieved balanced operating results for each of its fiscal years since
1981 as reported in accordance with the then-applicable GAAP.
In 1975, New York City suffered a fiscal crisis that impaired
the borrowing ability of both the City and New York State. In that year the City
lost access to public credit markets. The City was not able to sell short-term
notes to the public again until 1979.
In 1975, S&P suspended its A rating of City bonds. This
suspension remained in effect until March 1981, at which time the City received
an investment grade rating of BBB from S&P. On July 2, 1985, S&P revised its
rating of City bonds upward to BBB+ and on November 19, 1987, to A-. On July 2,
1993, S&P reconfirmed its A- rating of City bonds, continued its negative rating
outlook assessment and stated that maintenance of such rating depended upon the
City's making further progress towards reducing budget gaps in the outlying
years. Moody's ratings of City bonds were revised in November 1981 from B (in
effect since 1977) to Ba1, in November 1983 to Baa, in December 1985 to Baa1, in
May 1988 to A and again in February 1991 to Baa1. On July 10, 1995, S&P
downgraded its rating on the City's $23 billion of outstanding general
obligation bonds to "BBB+" from "A-", citing to the City's chronic structural
budget problems and weak economic outlook. S&P stated that New York City's
reliance on one-time revenue measures to close annual budget gaps, a dependence
on unrealized labor savings, overly optimistic estimates of revenues and state
and federal aid and the City's continued high debt levels also contributed to
its decision to lower the rating.
New York City is heavily dependent on New York State and
federal assistance to cover insufficiencies in its revenues. There can be no
assurance that in the future federal and State assistance will enable the City
to make up its budget deficits. To help alleviate the City's financial
difficulties, the Legislature created the Municipal Assistance Corporation
("MAC") in 1975. MAC is authorized to issue bonds and notes payable from certain
stock transfer tax revenues, from the City's portion of the State sales tax
derived in the City and, subject to certain prior claims, from State per capita
aid otherwise payable by the State to the City. Failure by the State to continue
the imposition of such taxes, the reduction of the rate of such taxes to rates
less than those in effect on July 2, 1975, failure by the State to pay such aid
revenues and the reduction of such aid revenues below a specified level are
included among the events of default in the resolutions authorizing MAC's
long-term debt. The occurrence of an event of default may result in the
acceleration of the maturity of all or a portion of MAC's debt. MAC bonds and
notes constitute general obligations of MAC and do not constitute an enforceable
obligation or debt of either the State or the City. As of June 30, 1995, MAC had
outstanding an aggregate of approximately $4.882 billion of its bonds. MAC is
authorized to issue bonds and notes to refunds its outstanding bonds and notes
and to fund certain reserves, without limitation as to principal amount, and to
finance certain capital commitments to certain authorities in the event the City
fails to provide such financing.
Since 1975, the City's financial condition has been subject to
oversight and review by the New York State Financial Control Board (the "Control
Board") and since 1978 the City's financial statements have been audited by
independent accounting firms. To be eligible for guarantees and assistance, the
City is required during a "control period" to submit annually for Control Board
approval, and when a control period is not in effect for Control Board review, a
financial plan for the next four fiscal years covering the City and certain
agencies showing balanced budgets determined in accordance with GAAP. New York
State also established the Office of the State Deputy Comptroller for New York
City ("OSDC") to assist the Control Board in exercising its powers and
responsibilities. On June 30, 1986, the City satisfied the statutory
requirements for termination of the control period. This means that the Control
Board's powers of approval are suspended, but the Board continues to have
oversight responsibilities.
From time to time, the Control Board staff, OSDC, the City
comptroller and others issue reports and make public statements regarding the
City's financial condition, commenting on, among other matters, the City's
financial plans, projected revenues and expenditures and actions by the City to
eliminate projected operating deficits. Some of these reports and statements
have warned that the City may have underestimated certain expenditures and
overestimated certain revenues and have suggested that the City may not have
adequately provided for future contingencies. Certain of these reports have
analyzed the City's future economic and social conditions and have questioned
whether the City has the capacity to generate sufficient revenues in the future
to meet the costs of its expenditure increases and to provide necessary
services.
The City submitted to the Control Board on July 21, 1995 a
fourth quarter modification to the City's financial plan for the 1995 fiscal
year (the "1995 Modification"), which projects a balanced budget in accordance
with GAAP for the 1995 fiscal year, after taking into account a discretionary
transfer of $75 million. On July 11, 1995, the City submitted to the Control
Board the Financial Plan for the 1996 through 1999 fiscal years (the "1996-1999
Financial Plan").
The 1996-1999 Financial Plan projected revenues and
expenditures for the 1996 fiscal year balanced in accordance with GAAP. The
projections for the 1996 fiscal year reflected proposed actions to close a
previously projected gap of approximately $3.1 billion for the 1996 fiscal year.
The proposed actions in the 1996-1999 Financial Plan for the 1996 fiscal year
included (i) a reduction in spending of $400 million, primarily affecting public
assistance and Medicaid payment to the City; (ii) expenditure reductions in
agencies, totaling $1.2 billion; (iii) transitional labor savings, totaling $600
million; and (iv) the phase-in of the increased annual pension funding cost due
to revisions resulting from an actuarial audit of the City's pension systems,
which would reduce such costs in the 1996 fiscal year.
The proposed agency spending reductions included the reduction
of City personnel through attrition, government efficiency initiatives,
procurement initiatives and labor productivity initiatives. The substantial
agency expenditure reductions proposed in the 1996-1999 Financial Plan may be
difficult to implement, and the 1996-1999 Financial Plan is subject to the
ability of the City to implement proposed reductions in City personnel and other
cost reduction initiatives. In addition, certain initiatives are subject to
negotiation with the City's municipal unions, and various actions, including
proposed anticipated State aid totaling $50 million are subject to approval by
the Governor and the Legislature.
The 1996-1999 Financial Plan also set forth projections for
the 1997 through 1999 fiscal years and outlined a proposed gap-closing program
to eliminate projected gaps of $888 million, $1.5 billion and $1.4 billion for
the 1997, 1998 and 1999 fiscal years, respectively, after successful
implementation of the $3.1 billion gap-closing program for the 1996 fiscal year.
These actions, a substantial number of which were not specified in detail,
include additional agency spending reductions, reduction in entitlements,
government procurement initiatives, revenue initiatives and the availability of
the general reserve.
Contracts with all of the City's municipal unions either
expired in the 1995 fiscal year or will expire in the 1996 fiscal years. The
1996-1999 Financial Plan provided no additional wage increases for City
employees after the 1995 fiscal year. Each 1% wage increase for all union
contracts commencing in the 1995 or 1996 fiscal year would cost the City an
additional $141 million for the 1996 fiscal year and $161 million each year
thereafter above the amounts provided for in the 1996-1999 Financial Plan.
Although the City has balanced its budget since 1981,
estimates of the City's revenues and expenditures, which are based on numerous
assumptions, are subject to various uncertainties. If expected federal or State
aid is not forthcoming, if unforeseen developments in the economy significantly
reduce revenues derived from economically sensitive taxes or necessitate
increased expenditures for public assistance, if the City should negotiate wage
increases for its employees greater than the amounts provided for in the City's
financial plan or if other uncertainties materialize that reduce expected
revenues or increase projected expenditures, then, to avoid operating deficits,
the City may be required to implement additional actions, including increases in
taxes and reductions in essential City services. The City might also seek
additional assistance from New York State.
The City requires certain amounts of financing for seasonal
and capital spending purposes. The City's current monthly cash flow forecast for
the 1996 fiscal year shows a need of $2.4 billion of seasonal financing for the
1996 fiscal year. Seasonal financing requirements for the 1995 fiscal year
increased to $2.2 billion from $1.75 billion and $1.4 billion in the 1994 and
1993 fiscal years, respectively.
Certain localities, in addition to the City, could have
financial problems leading to requests for additional New York State assistance.
The potential impact on the State of such requests by localities was not
included in the projections of the State's receipts and disbursements in the
State's 1995-96 fiscal year.
Fiscal difficulties experienced by the City of Yonkers
("Yonkers") resulted in the creation of the Financial Control Board for the City
of Yonkers (the "Yonkers Board") by New York State in 1984. The Yonkers Board is
charged with oversight of the fiscal affairs of Yonkers. Future actions taken by
the Governor or the Legislature to assist Yonkers could result in allocation of
New York State resources in amounts that cannot yet be determined.
Municipalities and school districts have engaged in
substantial short-term and long-term borrowings. In 1993, the total indebtedness
of all localities in New York State other than New York City was approximately
$17.7 billion. A small portion (approximately $105 million) of that indebtedness
represented borrowing to finance budgetary deficits and was issued pursuant to
enabling New York State legislation. State law requires the comptroller to
review and make recommendations concerning the budgets of those local government
units other than New York City authorized by State law to issue debt to finance
deficits during the period that such deficit financing is outstanding. Fifteen
localities had outstanding indebtedness for deficit financing at the close of
their fiscal year ending in 1993.
From time to time, federal expenditure reductions could
reduce, or in some cases eliminate, federal funding of some local programs and
accordingly might impose substantial increased expenditure requirements on
affected localities. If the State, the City or any of the Authorities were to
suffer serious financial difficulties jeopardizing their respective access to
the public credit markets, the marketability of notes and bonds issued by
localities within the State could be adversely affected. Localities also face
anticipated and potential problems resulting from certain pending litigation,
judicial decisions and long-range economic trends. Long-range potential problems
of declining urban population, increasing expenditures and other economic trends
could adversely affect localities and require increasing State assistance in the
future.
<PAGE>
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 such instruments and techniques are expected by State
Street Research & Management Company (the "Investment Manager") to aid in
achieving the investment objective of the Fund. The Fund on occasion may also
purchase instruments with characteristics of both futures and securities (e.g.,
debt instruments with interest and principal payments determined by reference to
the value of a commodity 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.
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.
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.
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 months, or over a year or
more; during this period dividends or interest on the securities are not
payable. A frequent form of when-issued trading occurs 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.
Securities transactions involving delayed deliveries or forward commitments are
frequently characterized as when-issued transactions and are similarly treated
by the Fund.
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.
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.
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 ratings 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.
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.
Industry Classifications
In determining how much of the Fund's portfolio is invested in a given
private industry, the industry classifications set forth below are currently
used. Companies engaged in the business of financing will be classified
according to the industries of their parent companies or industries that
otherwise most affect such financing companies. Issuers of asset-backed pools
will be classified as separate industries based on the nature of the underlying
assets, such as mortgages, credit card receivables, etc.
Basic Industries Consumer Staple Science & Technology
Chemical Business Service Aerospace
Diversified Container Computer Software & Service
Electrical Equipment Drug Electronic Components
Forest Products Food & Beverage Electronic Equipment
Machinery Hospital Supply Office Equipment
Metal & Mining Personal Care
Railroad Printing & Publishing
Truckers Tobacco
Utility Energy Consumer Cyclical
Electric Oil Refining and Airline
Gas Marketing Automotive
Gas Transmission Oil Production Building
Telephone Oil Service Hotel & Restaurant
Photography
Other Finance Recreation
Trust Certificates - Bank Retail Trade
Government Related Financial Service Textile & Apparel
Lending Insurance
Asset-backed--Mortgages
Asset-backed--Credit Card
Receivables
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 New York State
and New York City 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 New York State or New York City 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:
(bullet) direct obligations of the U.S. Treasury, i.e., Treasury bills, notes,
certificates and bonds;
(bullet) obligations of U.S. Government agencies or instrumentalities such as
the Federal Home Loan Banks, the Federal Farm Credit Banks, the Federal
National Mortgage Association, the Government National Mortgage
Association and the Federal Home Loan Mortgage Corporation; and
(bullet) obligations of mixed-ownership Government corporations such as
Resolution Funding Corporation.
U.S. Government securities which the Fund may buy are backed in a
variety of ways by the U.S. Government, its agencies or instrumentalities. Some
of these obligations, such as Government National Mortgage Association
mortgage-backed securities, are backed by the full faith and credit of the U.S.
Treasury. Other obligations, such as those of the Federal National Mortgage
Association, are backed by the discretionary authority of the U.S. Government to
purchase certain obligations of agencies or instrumentalities, although the U.S.
Government has no legal obligation to do so. Obligations such as those of the
Federal Home Loan Banks, the Federal Farm Credit Banks, the Federal National
Mortgage Association and the Federal Home Loan Mortgage Corporation are backed
by the credit of the agency or instrumentality issuing the obligations. Certain
obligations of Resolution Funding Corporation, a mixed-ownership Government
corporation, are backed with respect to interest payments by the U.S. Treasury,
and with respect to principal payments by U.S. Treasury obligations held in a
segregated account with a Federal Reserve Bank. Except for certain
mortgage-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.
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
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.
<PAGE>
TRUSTEES AND OFFICERS
The Trustees and principal officers of the Trust, their addresses, and
their principal occupations and positions with certain affiliates of the
Investment Manager are set forth below.
*Paul J. Clifford, Jr., One Financial Center, Boston, MA 02111, serves
as Vice President of the Trust. He is 33. 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.
*+John H. Kallis, One Financial Center, Boston, MA 02111 serves as Vice
President of the Trust. He is 55. 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 69. He is engaged principally in private
investments and civic affairs, and is an author of business history. Previously,
he was with Morgan Guaranty Trust Company of New York.
+Robert A. Lawrence, Saltonstall & Co., 50 Congress Street, Boston, MA
02109, serves as Trustee of the Trust. He is 69. His principal occupation during
the past five years has been Partner, Saltonstall & Co., a private investment
firm.
*+Gerard P. Maus, One Financial Center, Boston, MA 02111, serves as
Treasurer of the Trust. He is 45. His principal occupation is Executive Vice
President, Treasurer, Chief Financial Officer 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.
*+Francis J. McNamara, III, One Financial Center, Boston, MA 02111, has
served as Secretary and General Counsel of the Trust since May 1995. He is 40.
His principal occupation is Senior Vice President, General Counsel and Secretary
of State Street Research & Management Company. During the past five years he has
also served as Senior Vice President, General Counsel and Assistant Secretary of
The Boston Company, Inc., Boston Safe Deposit and Trust Company and The Boston
Company Advisors, Inc. Mr. McNamara's other principal business affiliations
include Senior Vice President, Clerk and General Counsel 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 64. He is retired, having served during the past
five years, until October 1992, as Executive Vice President, Chief Operating
Officer and Director of Hewlett-Packard Company.
+Thomas L. Phillips, 141 Spring Street, Lexington, MA 02173 serves as
Trustee of the Trust. He is 71. He is retired and was formerly Chairman of the
Board and Chief Executive Officer of Raytheon Company, of which he remains a
Director.
+Toby Rosenblatt, 3409 Pacific Avenue, San Francisco, CA 94118, serves
as Trustee of the Trust. He is 57. His principal occupations during the past
five years have been President of The Glen Ellen Company, a private investment
company, and Vice President of Founders Investment Ltd.
+Michael S. Scott Morton, Massachusetts Institute of Technology, 77
Massachusetts Avenue, Cambridge, MA 02139, serves as Trustee of the Trust. He is
58. His principal occupation during the past five years has been Jay W.
Forrester Professor of Management at Sloan School of Management, Massachusetts
Institute of Technology.
*Thomas A. Shively, One Financial Center, Boston, MA 02111, serves as
Vice President of the Trust. He is 41. His principal occupation is Executive
Vice President and Director of State Street Research & Management Company.
During the past five years he has also served as Senior Vice President of State
Street Research & Management Company. Mr. Shively's other principal business
affiliation is 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 53. 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 and
Director of State Street Research Investment Services, Inc.
<PAGE>
+Jeptha H. Wade, 251 Old Billerica Road, Bedford, MA 01730, serves as
Trustee of the Trust. He is 71. 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.
As of March 31, 1996, the Trustees and officers of the Trust owned no
shares of the Fund.
As of March 31, 1996, Metropolitan Life Insurance Company
("Metropolitan") a New York corporation having its principal offices at One
Madison Avenue, New York, NY 10010, was the record and/or beneficial owner,
directly or indirectly through its subsidiaries or affiliates, of approximately
78.0% of the Fund's outstanding Class D shares.
Also as of March 31, 1996, Merrill Lynch, Pierce, Fenner & Smith, Inc.
("Merrill Lynch"), 4800 Deerlake Drive East, Jacksonville, Florida 32246, was
the record owner of approximately 19.5% of the Fund's outstanding Class D
shares. The Fund believes that Merrill Lynch does not have beneficial ownership
of such 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.
- ----------------------------
* or + See footnotes on page 34.
* 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: State
Street Research Equity Trust, State Street Research Financial Trust,
State Street Research Income Trust, State Street Research Money Market
Trust, State Street Research Tax-Exempt Trust, State Street Research
Capital Trust, State Street Research Exchange Trust, State Street
Research Growth Trust, State Street Research Master Investment Trust,
State Street Research Securities Trust, State Street Research
Portfolios, Inc. and Metropolitan Series Fund, Inc.
<PAGE>
During the Fund's fiscal year ended December 31, 1995, 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 $12,300 $ 63,510
Robert A. Lawrence $12,300 $ 91,685
Dean O. Morton $14,800 $103,085
Thomas L. Phillips $12,100 $ 67,185
Toby Rosenblatt $12,300 $ 63,510
Michael S. Scott Morton $16,800 $109,035
Ralph F. Verni $ 0 $ 0
Jeptha H. Wade $14,100 $ 76,285
(a) Includes compensation from multiple series of the Trust. See
"Distribution of Shares" for a listing of series.
(b) Includes compensation from 30 series, including 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. The Trust does not provide any pension or retirement benefits
for the Trustees.
<PAGE>
INVESTMENT ADVISORY SERVICES
State Street Research & Management Company, the Investment Manager, a
Delaware corporation, with offices at One Financial Center, Boston,
Massachusetts 02111-2690, acts as investment adviser to the Fund. The Advisory
Agreement provides that the Investment Manager shall furnish the Fund with an
investment program, office facilities and such investment advisory, research and
administrative services as may be required from time to time. The Investment
Manager compensates all executive and clerical personnel and Trustees of the
Trust if such persons are employees of the Investment Manager or its affiliates.
The Investment Manager is an indirect wholly-owned subsidiary of Metropolitan.
The advisory fee payable monthly by the Fund to the Investment Manager
is computed as a percentage of the average of the value of the net assets of the
Fund as determined at the close of the New York Stock Exchange (the "NYSE") on
each day the NYSE is open for trading, at the annual rate of 0.55% of the net
assets of the Fund. The Distributor and its affiliates have from time to time
and in varying amounts voluntarily assumed some portion of fees or expenses
relating to the Fund. For the fiscal years ended December 31, 1993, 1994 and
1995, the Fund's investment advisory fees prior to the assumption of fees or
expenses were $339,919, $426,269, $404,069, respectively. For the same periods,
the voluntary reduction of fees or assumption of expenses amounted to $114,140,
$249,199 and $156,963, 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.
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 and plans, through or under which the Fund's shares may be
purchased.
Under the Code of Ethics of the Investment Manager, its employees in
Boston, where investment management operations are conducted, are only permitted
to engage in personal securities transactions in accordance with certain
conditions relating to an employee's position, the identity of the security, the
timing of the transaction, and similar factors. Such employees must report their
personal securities transactions quarterly and supply broker confirmations of
such transactions to the Investment Manager.
PURCHASE AND REDEMPTION OF SHARES
Shares of the Fund are distributed by the Distributor. The Fund offers
four classes of shares which may be purchased at the next determined net asset
value per share plus, in the case of all classes except Class C shares, a sales
charge which, at the election of the investor, may be imposed (i) at the time of
purchase (the Class A shares) or (ii) on a deferred basis (the Class B and Class
D shares). General information on how to buy shares of the Fund, as well as
sales charges involved, is set forth under "Purchase of Shares" in the
Prospectus. The following supplements that information.
Public Offering Price. The public offering price for each class of
shares of the Fund is based on their net asset value determined as of the close
of 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.
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 certain
employee benefit plans such as qualified retirement plans which meet criteria
relating to number of participants (currently a minimum of 100 eligible
employees), service arrangements, or similar factors; banks and insurance
companies; investment companies; and endowment funds of nonprofit organizations
with substantial minimum assets (currently a minimum of $10,000,000); and other
similar institutional investors.
Reorganizations. In the event of mergers or reorganizations with other
public or private collective investment entities, including investment companies
as defined 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.
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.
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, 1994 and 1995 were 64.80% and 109.74%, respectively. The Investment Manager
believes the portfolio turnover rate for the fiscal year ended December 31, 1995
was significantly higher than that for the previous fiscal year because of
increased trading necessary to better position the Fund's portfolio in response
to dramatic moves in interest rates.
Brokerage Allocation
The Investment Manager's policy is to seek for its clients, including
the Fund, what in the Investment Manager's judgment will be the best overall
execution of purchase or sale orders and the most favorable net prices in
securities transactions consistent with its judgment as to the business
qualifications of the various broker or dealer firms with whom the Investment
Manager may do business, and the Investment Manager may not necessarily choose
the broker offering the lowest available commission rate. Decisions with respect
to the market where the transaction is to be completed, to the form of
transaction (whether principal or agency), and to the allocation of orders among
brokers or dealers are made in accordance with this policy. In selecting brokers
or dealers to effect portfolio transactions, consideration is given to their
proven integrity and financial responsibility, their demonstrated execution
experience and capabilities both generally and with respect to particular
markets or securities, the competitiveness of their commission rates in agency
transactions (and their net prices in principal transactions), their willingness
to commit capital, and their clearance and settlement capability. The Investment
Manager makes every effort to keep informed of commission rate structures and
prevalent bid/ask spread characteristics of the markets and securities in which
transactions for the Fund occur. Against this background, the Investment Manager
evaluates the reasonableness of a commission or a net price with respect to a
particular transaction by considering such factors as difficulty of execution or
security positioning by the executing firm. The Investment Manager may or may
not solicit competitive bids based on its judgment of the expected benefit or
harm to the execution process for that transaction.
When it appears that a number of firms could satisfy the required
standards in respect of a particular transaction, consideration may also be
given to services other than execution services which certain of such firms have
provided in the past or may provide in the future. Negotiated commission rates
and prices, however, are based upon the Investment Manager's judgment of the
rate which reflects the execution requirements of the transaction without regard
to whether the broker provides services in addition to execution. Among such
other services are the supplying of supplemental investment research; general
economic, political and business information; analytical and statistical data;
relevant market information, quotation equipment and services; reports and
information about specific companies, industries and securities; purchase and
sale recommendations for stocks and bonds; portfolio strategy services;
historical statistical information; market data services providing information
on specific issues and prices; financial publications; proxy voting data and
analysis services; technical analysis of various aspects of the securities
markets, including technical charts; computer hardware used for brokerage and
research purposes; computer software and databases, including those used for
portfolio analysis and modelling; and portfolio evaluation services and relative
performance of accounts.
Certain nonexecution services provided by broker-dealers may in turn be
obtained by the broker-dealers from third parties who are paid for such services
by the broker-dealers. The Investment Manager has an investment of less than ten
percent of the outstanding equity of one such third party which provides
portfolio analysis and modelling and other research and investment
decision-making services integrated into a trading system developed and licensed
by the third party to others. The Investment Manager could be said to benefit
indirectly if in the future it allocates brokerage to a broker-dealer who in
turn pays this third party for services to be provided to the Investment
Manager.
The Investment Manager regularly reviews and evaluates the services
furnished by broker-dealers. Some services may be used for research and
investment decision-making purposes, and also for marketing or administrative
purposes. Under these circumstances, the Investment Manager allocates the cost
of such services to determine the appropriate proportion of the cost which is
allocable to purposes other than research or investment decision-making and is
therefore paid directly by the Investment Manager. Some research and execution
services may benefit the Investment Manager's clients as a whole, while others
may benefit a specific segment of clients. Not all such services will
necessarily be used exclusively in connection with the accounts which pay the
commissions to the broker-dealer producing the services.
The Investment Manager has no fixed agreements or understandings with
any broker-dealer as to the amount of brokerage business which that firm may
expect to receive for services supplied to the Investment Manager or otherwise.
There may be, however, understandings with certain firms that in order for such
firms to be able to continuously supply certain services, they need to receive
allocation of a specified amount of brokerage business. These understandings are
honored to the extent possible in accordance with the policies set forth above.
It is not the Investment Manager's policy to intentionally pay a firm a
brokerage commission higher than that which another firm would charge for
handling the same transaction in recognition of services (other than execution
services) provided. However, the Investment Manager is aware that this is an
area where differences of opinion as to fact and circumstances may exist, and in
such circumstances, if any, relies 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, 1993, 1994 and 1995, the Fund paid no brokerage
commissions in secondary trading. 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.
In the case of the purchase of fixed income securities in underwriting
transactions, the Investment Manager follows any instructions received from its
clients as to the allocation of new issue discounts, selling concessions and
designations to brokers or dealers which provide the client with research,
performance evaluation, master trustee and other services. In the absence of
instructions from the client, the Investment Manager may make such allocations
to broker-dealers which have provided the Investment Manager with research and
brokerage services.
When more than one client of the Investment Manager is seeking to buy
or sell the same security, the sale or purchase is carried out in a manner which
is considered fair and equitable to all accounts. In allocating investments
among various clients (including in what sequence orders for trades are placed),
the Investment Manager will use its best business judgment and will take into
account such factors as the investment objectives of the clients, the amount of
investment funds available to each, the amount already committed for each client
to a specific investment and the relative risks of the investments, all in order
to provide on balance a fair and equitable result to each client over time.
Although sharing in large transactions may sometimes affect price or volume of
shares acquired or sold, overall it is believed there may be an advantage in
execution. The Investment Manager may follow the practice of grouping orders of
various clients for execution to get the benefit of lower prices or commission
rates. In certain cases where the aggregate order may be executed in a series of
transactions at various prices, the transactions are allocated as to amount and
price in a manner considered equitable to each so that each receives, to the
extent practicable, the average price of such transactions. Exceptions may be
made based on such factors as the size of the account and the size of the trade.
For example, the Investment Manager may not aggregate trades where it believes
that it is in the best interests of clients not to do so, including situations
where aggregation might result in a large number of small transactions with
consequent increased custodial and other transactional costs which may
disproportionately impact smaller accounts. Such disaggregation, depending on
the circumstances, may or may not result in such accounts receiving more or less
favorable execution relative to other clients.
CERTAIN TAX MATTERS
Federal Income Taxation of 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 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.
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 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 take into account all original issue discount
for purposes of satisfying various requirements to qualify as a regulated
investment company under Subchapter M of the Code, it will be more difficult for
the Fund to make the distributions required for the Fund to maintain such status
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.
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, a
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.
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 and State Street Research New York 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
portions of such sales charges as 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 $444,000 for the period January 1, 1993
through June 4, 1993, of which approximately $53,000 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 years ended December 31, 1994 and 1995, amounted to approximately
$531,102, $256,501 and $129,732, respectively, of which approximately $35,180,
$30,519 and $15,287, 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 and managed fee-based programs, the
amount of the sales charge reduction will similarly reflect the anticipated
reduction in sales expenses associated with such arrangements. The reduction in
sales expenses, and therefore the reduction in sales charge, will vary depending
on factors such as the size and other characteristics of the organization or
program and the nature of its membership or the participants. The Fund reserves
the right to make variations in, or eliminate, sales charges at any time or to
revise the terms of or to suspend or discontinue sales pursuant to sponsored
arrangements at any time.
On any sale of Class A shares to a single investor in the amount of
$1,000,000 or more, the Distributor will pay the authorized securities dealer
making such sale a commission based on the aggregate of such sales. Such
commission also is payable to authorized securities dealers upon sales of Class
A shares made pursuant to a Letter of Intent to purchase shares having a net
asset value of $1,000,000 or more. Shares sold with such commissions payable are
subject to a one-year contingent deferred sales charge of 1.00% on any portion
of such shares redeemed within one year following their sale. After a particular
purchase of Class A shares is made under the Letter of Intent, the commission
will be paid only in respect of that particular purchase of shares. If the
Letter of Intent is not completed, the commission paid will be deducted from any
discounts or commissions otherwise payable to such dealer in respect of shares
actually sold. If an investor is eligible to purchase shares at net asset value
on account of the Right of Accumulation, the commission will be paid only in
respect of the incremental purchase at net asset value.
For the periods shown below, the Distributor received contingent
deferred sales charges upon redemption of Class A, Class B and Class D shares of
the Fund and paid initial commissions to securities dealers for sales of such
shares as follows:
<TABLE>
<CAPTION>
June 7, 1993
(Commencement of
Fiscal Year Ended Fiscal Year share class designations)
December 31, 1995 Ended December 31, 1994 to December 31, 1993
--------------------------- ----------------------------- -----------------------------
Contingent Commissions Contingent Commissions Contingent Commissions
Deferred Paid to Deferred Paid to Deferred Paid to
Sales Charges Dealers Sales Charges Dealers Sales Charges Dealers
<S> <C> <C> <C> <C> <C> <C>
Class A $ 0 $114,445 $ 0 $225,982 $ 0 $ 495,922*
Class B $109,751 $117,596 $41,848 $247,699 $4,974 $284,191
Class D $ 5 $ 300 $ 0 $ 1,194 $ 0 $ 3,002
</TABLE>
- ----------------------
* For the period January 1, 1993 through December 31, 1993.
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.
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, 1995, the Fund paid the
Distributor fees under the Distribution Plan and the Distributor used all of
such payments for expenses incurred on behalf of the Fund as follows:
Class A Class B Class D
Advertising $ 213 $ 0 $ 792
Printing and mailing of prospectuses
to other than current shareholders 74 0 275
Compensation to dealers 47,125 132,971 2,435
Compensation to sales personnel 660 0 2,457
Interest 0 0 0
Carrying or other financing charges 0 0 0
Other expenses: marketing; general 398 0 1,485
-------- -------- -------
Total Fees $48,470 $132,971 $7,444
======= ======== ======
<PAGE>
The Distributor may have also used additional resources of its own for further
expenses on behalf of the Trust.
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.
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 7, 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, where
applicable, as set forth below:
<TABLE>
<CAPTION>
Rule 12b-1 Fees Sales Charges
------------------------------------------ ----------------------------------------
Current
Class Amount Period
- ----- ------ ------
<S> <C> <C> <C>
A 0.25% June 7, 1993 to present; fee will Maximum 4.5% sales charge reflected
reduce performance for periods
after June 7, 1993
B 1.00% June 7, 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 7, 1993 respectively
C None Since commencement of None
operations to present
D 1.00% June 7, 1993 to present; fee will 1-year period reflects a 1% contingent
reduce performance for periods deferred sales charge
after June 7, 1993
</TABLE>
<PAGE>
Total Return
The average annual total return ("standard total return") of each class
of shares was as follows:
Commencement of
Operations Five Years One Year
(July 5, 1989) Ended Ended
Fund to December 31, 1995 December 31, 1995 December 31, 1995
- ---- -------------------- ------------------- -----------------
With Without With Without With Without
Subsidy Subsidy Subsidy Subsidy Subsidy Subsidy
Class A 6.72% 6.15% 7.74% 7.38% 9.93% 9.65%
Class B 7.16% 6.59% 8.03% 7.66% 9.26% 8.97%
Class C 7.60% 7.04% 8.90% 8.54% 15.37% 15.08%
Class D 7.16% 6.59% 8.32% 7.95% 13.25% 12.96%
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:
n
P(1+T) = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value at the end of the
designated period assuming a hypothetical
$1,000 payment made at the beginning of the
designated period
The calculation is based on the further assumptions that the 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 1995 was as follows:
With Subsidy Without Subsidy
Class A 4.34% 4.19%
Class B 3.81% 3.64%
Class C 4.79% 4.63%
Class D 3.80% 3.64%
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:
a-b 6
YIELD = 2[(---- + 1) -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.
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, 1995, assuming a combined federal and state maximum
effective marginal income tax rate of 46.27% was as follows:
With Subsidy Without Subsidy
Class A 8.08% 7.80%
Class B 7.09% 6.77%
Class C 8.91% 8.62%
Class D 7.07% 6.77%
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 income tax rate of 46.27% (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 46.27% is 53.73%, that
is [1.00 - .4627 = .5373].
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, 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, 1995, without taking sales charges into account were as follows:
With Subsidy Without Subsidy
Class A 7.01% 6.88%
Class B 6.61% 6.48%
Class C 7.13% 7.00%
Class D 6.47% 6.34%
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 1995
were as follows:
Class A 4.77%
Class B 4.24%
Class C 5.24%
Class D 4.24%
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 report, if any, by
calling State Street Research Shareholder Services.
The following financial statements are for the Fund's fiscal year ended
December 31, 1995:
<PAGE>
STATE STREET RESEARCH NEW YORK TAX-FREE FUND
- -------------------------------------------------------------------------------
Investment Portfolio
- -------------------------------------------------------------------------------
December 31, 1995
<TABLE>
<CAPTION>
- -------------------------------------------------- ---------- ---------- ------------
Principal Maturity Value
Amount Date (Note 1)
- -------------------------------------------------- ---------- ---------- ------------
<S> <C> <C> <C>
MUNICIPAL BONDS 101.2%
General Obligation 22.6%
The City of New York, General Obligation Bonds,
Fiscal 1992 Series H, 7.00% $1,500,000 2/01/2005 $ 1,605,270
City of New York, General Obligation Bonds, Fiscal
1995 Series F, 6.375% 2,000,000 2/15/2006 2,083,780
City of Niagara Falls, Niagara County, New York,
Water Treatment Plant Bonds, 1994 (AMT), MBIA
Insured, 8.50% 1,000,000 11/01/2006 1,303,480
County of Onondaga, New York, General Improvement
(Serial) Bonds, 1992, 5.70% 2,000,000 4/01/2007 2,154,800
City of Syracuse, Onondaga County, New York,
Public Improvement Refunding Bonds, Series 1993 A,
5.125% 1,750,000 2/15/2009 1,794,485
State of New York, General Obligation Refunding
Bonds, Series C, 5.25%* 2,750,000 10/01/2012 2,704,652
Town of Brookhaven, Suffolk County, New York,
Public Improvement Bonds, Serial 1995, FGIC
Insured, 5.50% 1,000,000 10/01/2012 1,022,920
City of New York, General Obligation Bonds, Fiscal
1996 Series G, 5.75%+ 2,000,000 2/01/2014 1,966,820
County of Nassau, New York, General Obligation
Refunding Bonds, Series G, MBIA Insured, 5.45% 1,140,000 1/15/2015 1,144,001
Commonwealth of Puerto Rico, General Obligation
Public Improvement Refunding Bonds, Series 1995A,
MBIA Insured, 5.65% 1,000,000 7/01/2015 1,049,680
------------
16,829,888
------------
Certificates of Participation 1.8%
City of Syracuse, New York, (Syracuse Hancock
International Airport), Certificates of
Participation, Series 1992, Subject to AMT, 6.60% $1,185,000 1/01/2006 $ 1,323,278
------------
College & University 5.4%
Dormitory Authority of the State of New York,
Canisius College, Revenue Bonds, Series 1995,
CapMAC Insured, 5.55% 1,550,000 7/01/2014 563,239
Dormitory Authority of the State of New York,
University of Rochester, Strong Memorial Hospital,
Revenue Bonds, Series 1994, MBIA Insured, 5.50% 1,500,000 7/01/2021 1,510,680
Dormitory Authority of the State of New York,
Vassar College, Revenue Bonds, 5.00%+ 2,000,000 7/01/2025 1,925,400
------------
3,999,319
------------
Escrowed Bonds 1.3%
Dormitory Authority of the State of New York,
Judicial Facilities Lease Revenue Bonds, (Suffolk
County Issue) Series 1986, 7.375% 755,000 7/01/2016 943,901
------------
Hospital/Health Care 1.6%
New York State Medical Care Facilities Finance
Agency, Mental Health Services Facilities
Improvement Revenue Bonds, 1990 Series A, 7.75% 230,000 8/15/2010 258,548
New York State Medical Care Facilities Finance
Agency, Mental Health Facilities Revenue Bonds,
1993 Series F, FGIC Insured, 5.25% 1,000,000 2/15/2019 978,970
------------
1,237,518
------------
The accompanying notes are an integral part of the financial statements.
3
<PAGE>
STATE STREET RESEARCH NEW YORK TAX-FREE FUND
- -------------------------------------------------------------------------------
- -------------------------------------------------- ---------- ---------- ------------
Principal Maturity Value
Amount Date (Note 1)
- -------------------------------------------------- ---------- ---------- ------------
Industrial Development & Pollution Control 5.9%
Herkimer County Industrial Development Agency,
Industrial Development Revenue Bonds, (Burrows
Paper Corporation Solid Waste Disposal Facility),
Series 1993, Subject to AMT, 8.00% $4,000,000 1/01/2009 $ 4,376,320
------------
Lease Revenue 22.9%
Dormitory Authority of the State of New York,
Judicial Facilities Lease Revenue Bonds, (Suffolk
County Issue), Series 1991A, 9.25% 1,500,000 4/15/2006 1,678,725
Dormitory Authority of the State of New York,
State University Educational Facilities, Revenue
Bonds, Series A, 6.50% 2,500,000 5/15/2006 2,747,125
City University of the State of New York (John Jay
College of Criminal Justice) Project Refunding
Bonds, 6.00%+ 1,000,000 8/15/2006 1,047,920
Puerto Rico Public Buildings Authority, Public
Education and Health Facilities Refunding Bonds,
Series M, 5.60% 2,000,000 7/01/2008 2,076,540
Lyons Community Health Initiatives Corp., Facility
Revenue Bonds, Series 1994, 6.55% 500,000 9/01/2009 540,190
New York State Thruway Authority, Service Contract
Revenue Bonds, 6.25% 1,000,000 4/01/2014 1,046,770
Dormitory Authority of the State of New York, City
University Series A, 5.625% 2,500,000 7/01/2016 2,519,700
New York State Urban Development Corp., Project
Revenue Bonds, (Clarkson University Center for
Advanced Materials Processing Loan), 1995
Refunding Series, 5.50% $1,000,000 1/01/2020 $ 988,180
New York State Urban Development Corp., State
Facilities Refunding Project Revenue Bonds, 1995
Refunding Series, 5.70% 3,300,000 4/01/2020 3,351,942
Lyons Community Health Initiatives Corp., (New
York), Facility Revenue Bonds, Series 1994, 6.80% 1,000,000 9/01/2024 1,091,580
------------
17,088,672
------------
Life Care 3.4%
Orange County Industrial Development Agency, (The
Glen Arden, Inc. Project), Life Care Community
Revenue Bonds, Series 1994, 8.25% 1,000,000 1/01/2002 1,038,210
Tompkins County Industrial Development Agency,
Life Care Community Revenue Bonds, 1994 (Kendal at
Ithaca, Inc. Project), 7.70% 1,430,000 6/01/2011 1,487,014
------------
2,525,224
------------
Multi-Family Housing 1.4%
New York State Housing Finance Agency,
Multi-Family Housing Revenue Bonds, (Secured
Mortgage Program), 1992 Series F, Subject to AMT,
6.625% 1,000,000 8/15/2012 1,064,230
------------
Power 2.8%
Power Authority of the State of New York, General
Purpose Bonds, Series W, 6.50% 1,850,000 1/01/2008 2,114,199
------------
The accompanying notes are an integral part of the financial statements.
4
<PAGE>
STATE STREET RESEARCH NEW YORK TAX-FREE FUND
- --------------------------------------------------------------------------------
INVESTMENT PORTFOLIO (cont'd)
- --------------------------------------------------------------------------------
- -------------------------------------------------- ---------- ---------- ------------
Principal Maturity Value
Amount Date (Note 1)
- -------------------------------------------------- ---------- ---------- ------------
Pre-Refunded Bonds 6.6%
City of Syracuse, Onondaga County, New York,
Public Improvement Bonds, 1991, Pre-Refunded to
2/15/2001 @ 102, 6.70% $ 500,000 2/15/2006 $ 562,575
Grand Central District Management Association,
Inc., Grand Central Business Improvement District,
Capital Improvement Bonds, Series 1992,
Pre-Refunded to 1/01/2002 @ 102, 6.50% 1,000,000 1/01/2010 1,127,780
Dormitory Authority of the State of New York,
State University Educational Facilities, Revenue
Bonds, Series 1990A, Pre-Refunded to 5/15/2000 @
102, 7.70% 600,000 5/15/2012 694,206
New York City Municipal Water Finance Authority,
Water and Sewer System Revenue Bonds, Fiscal 1991
Series C, FGIC Insured, Pre-Refunded to
6/15/2001 @ 101.5, 7.00% 600,000 6/15/2016 686,622
County of Suffolk, New York, General Obligations,
MBIA Insured, 1990 Series B, Pre-Refunded to
4/01/2000 @ 102, 7.10% 425,000 4/01/2018 480,407
Orangetown Housing Authority, (Rockland County,
New York), Housing Facilities Revenue Bonds
(Orangetown Senior Housing Center-1990 Series),
Pre-Refunded to 10/1/2000 @ 102, 7.50% 400,000 10/01/2020 462,748
Town of Clifton Park Water Authority, (New York),
Water System Revenue Bonds, 1991 Series A, FGIC
Insured, Pre-Refunded to 10/1/2001 @ 102, 6.375% $ 800,000 10/01/2026 $ 905,680
------------
4,920,018
------------
Public Facilities 3.4%
Puerto Rico Public Buildings Authority, Government
Facilities Revenue Bonds, Series A, AMBAC Insured,
5.50% 2,500,000 7/01/2021 2,519,050
------------
Single-Family Housing 3.0%
State of New York Mortgage Agency, Homeowner
Mortgage Revenue Bonds, Series 45, 7.20% 2,000,000 10/01/2017 2,203,500
------------
Special/Sales Tax Revenue 5.0%
New York Local Government Assistance Corp., (A
Public Benefit Corporation of the State of New
York), Series 1993 E Refunding Bonds, 6.00% 2,500,000 4/01/2014 2,702,800
New York Local Government Assistance Corp., (A
Public Benefit Corporation of the State of New
York), Series 1995A Tax Revenue Bonds, 6.00% 1,000,000 4/01/2024 1,033,780
------------
3,736,580
------------
Toll Roads/Turnpike Authorities 2.7%
Port Authority of New York and New Jersey
Consolidated Bonds, Series 100, 5.75% 2,000,000 12/15/2020 2,040,280
------------
Transit/Highway 2.6%
New York State Thruway Authority, General Revenue
Bonds, Series B, MBIA Insured, 5.00% 2,000,000 1/01/2014 1,930,940
------------
The accompanying notes are an integral part of the financial statements.
5
<PAGE>
STATE STREET RESEARCH NEW YORK TAX-FREE FUND
- -------------------------------------------------------------------------------
- -------------------------------------------------- ---------- ---------- ------------
Principal Maturity Value
Amount Date (Note 1)
- -------------------------------------------------- ---------- ---------- ------------
Water & Sewer 8.8%
New York State Environmental Facilities
Corporation, State Water Pollution Control,
Revolving Fund Revenue Bonds, Series 1994 D,
(Pooled Loan Issue), 6.70% $2,000,000 11/15/2009 $ 2,326,300
Commonwealth of Puerto Rico, Aqueduct and Sewer
Authority, General Revenue Bonds, 6.25% 1,000,000 7/01/2013 1,085,920
Town of Clifton Park Water Authority, (New York),
Water System Revenue Bonds, MBIA Insured, 5.00% 1,240,000 10/01/2014 1,210,426
Suffolk County Water Authority, New York, Water
System Revenue Bonds, Series 1994, MBIA Insured,
5.00% 1,000,000 6/01/2015 975,690
Commonwealth of Puerto Rico, Aqueduct and Sewer
Authority, General Revenue Bonds, 5.00% 1,000,000 7/01/2015 952,130
6,550,466
------------
Total Municipal Bonds (Cost $71,213,740) 75,403,383
------------
SHORT-TERM OBLIGATIONS 3.9%
New York State Job Development Authority, General
Revenue Bonds, Series B, 5.00%* 100,000 3/01/2005++ 100,000
Metropolitan Nashville, Tennessee, Airport
Authority Special Facilities General Revenue
Bonds, 4.30%* 1,700,000 10/01/2012++ 1,700,000
Lone Star, Texas, Airport Improvement Authority,
(American Airlines Inc. Project), 4.30%* 100,000 12/01/2014++ 100,000
Lone Star, Texas, Airport Improvement Authority,
(American Airlines Inc. Project), 3.95%* $ 200,000 12/01/2014++ $ 200,000
Babylon, New York, Industrial Development Agency,
(Ogden Martin Systems of Babylon Project), General
Revenue Bonds 3.95%* 500,000 12/01/2024++ 500,000
Los Angeles, California, Regional Airports
Improvement Corp., General Revenue Bonds, Series
1985, 4.30%* 200,000 12/01/2025++ 200,000
Delaware State Economic Development Authority,
General Revenue Bonds, 3.40%* 100,000 10/01/2029++ 100,000
------------
Total Short-Term Obligations (Cost $2,900,000) 2,900,000
------------
Total Investments (Cost $74,113,740)--105.1% 78,303,383
Cash and Other Assets, Less Liabilities--(5.1)% (3,769,047)
------------
Net Assets--100% $74,534,336
============
Federal Income Tax Information:
At December 31, 1995, the net unrealized appreciation of investments based on
cost for Federal income tax purposes of $74,113,740 was as follows:
Aggregate gross unrealized appreciation for all investments in which there is
an excess of value over tax cost $ 4,199,282
Aggregate gross unrealized depreciation for all investments in which there is
an excess of tax cost over value (9,639)
------------
$ 4,189,643
============
</TABLE>
- -------------------------------------------------------------------------------
++Interest rates on these obligations may reset daily.
+The delivery and payment of this security is beyond the normal settlement
time of three business days after the trade date. The purchase price and
interest rate are fixed at the trade date although interest is not earned
until settlement date.
*This security is being used to collateralize the delayed delivery purchase
noted above. The total market value of segregated securities is $5,604,652.
The accompanying notes are an integral part of the financial statements.
6
<PAGE>
STATE STREET RESEARCH NEW YORK TAX-FREE FUND
- -------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
- -------------------------------------------------------------------------------
December 31, 1995
Assets
Investments, at value (Cost $74,113,740) (Note 1) $78,303,383
Cash 83,562
Interest receivable 1,322,896
Receivable from Distributor (Note 3) 9,806
Other assets 30
----------
79,719,677
Liabilities
Payable for securities purchased 4,867,533
Dividends payable 71,349
Payable for fund shares redeemed 68,228
Accrued transfer agent and shareholder services
(Note 2) 46,436
Accrued management fee (Note 2) 34,478
Accrued distribution and service fees (Note 5) 17,308
Accrued trustees' fees (Note 2) 5,072
Other accrued expenses 74,937
----------
5,185,341
----------
Net Assets $74,534,336
==========
Net Assets consist of:
Undistributed net investment income $ 59,442
Unrealized appreciation of investments 4,189,643
Accumulated net realized loss (701,193)
Shares of beneficial interest 70,986,444
----------
$74,534,336
==========
Net Asset Value and redemption price per share of
Class A shares ($20,043,063 / 2,436,321 shares
of beneficial interest) $8.23
==========
Maximum Offering Price per share of Class A shares
($8.23 / .955) $8.62
==========
Net Asset Value and offering price per share of
Class B shares ($15,083,560 / 1,833,374 shares
of beneficial interest)* $8.23
==========
Net Asset Value, offering price and redemption
price per share of Class C shares ($38,756,979 /
4,705,972 shares of beneficial interest) $8.24
==========
Net Asset Value and offering price per share of
Class D shares ($650,734 / 79,033 shares of
beneficial interest)* $8.23
==========
*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 year ended December 31, 1995
Investment Income
Interest $ 4,538,455
Expenses
Management fee (Note 2) 404,069
Transfer agent and shareholder services (Note 2) 172,919
Custodian fee 105,157
Reports to shareholders 41,544
Audit fee 20,211
Registration fees 15,350
Trustees' fees (Note 2) 12,892
Service fee--Class A (Note 5) 48,470
Distribution and service fees--Class B (Note 5) 132,971
Distribution and service fees--Class D (Note 5) 7,444
Legal fees 752
Miscellaneous 8,537
----------
970,316
Expenses borne by the Distributor (Note 3) (156,963)
----------
813,353
----------
Net investment income 3,725,102
----------
Realized and Unrealized Gain (Loss) on Investments
and Futures Contracts
Net realized gain on investments (Notes 1 and 4) 2,467,652
Net realized loss on futures contracts (Note 1) (5,636)
----------
Total net realized gain 2,462,016
Net unrealized appreciation of investments 4,123,535
----------
Net gain on investments and futures contracts 6,585,551
----------
Net increase in net assets resulting from
operations $10,310,653
==========
The accompanying notes are an integral part of the financial statements.
7
<PAGE>
STATE STREET RESEARCH NEW YORK TAX-FREE FUND
- -------------------------------------------------------------------------------
Statement of Changes in Net Assets
- -------------------------------------------------------------------------------
Year ended December 31
--------------------------
1995 1994
- ---------------------------------------- ---------- ------------
Increase (Decrease) in Net Assets
Operations:
Net investment income $ 3,725,102 $ 3,954,491
Net realized gain (loss) on investments
and futures contracts* 2,462,016 (3,161,667)
Net unrealized appreciation
(depreciation) of investments 4,123,535 (5,773,470)
-------- ----------
Net increase (decrease) resulting from
operations 10,310,653 (4,980,646)
-------- ----------
Dividends from net investment income:
Class A (1,009,558) (895,478)
Class B (589,598) (441,657)
Class C (2,182,901) (2,488,395)
Class D (33,292) (34,740)
-------- ----------
(3,815,349) (3,860,270)
-------- ----------
Distribution from net realized gains:
Class A -- (19,501)
Class B -- (12,917)
Class C -- (42,991)
Class D -- (854)
-------- ----------
-- (76,263)
-------- ----------
Net increase (decrease) from fund share
transactions (Note 7) (3,830,608) 709,765
-------- ----------
Total increase (decrease) in net assets 2,664,696 (8,207,414)
Net Assets
Beginning of year 71,869,640 80,077,054
-------- ----------
End of year (including undistributed net
investment income of $59,442 and
$141,050, respectively) $74,534,336 $71,869,640
======== ==========
*Net realized gain (loss) for Federal
income tax purposes (Note 1) $ 1,435,929 $(2,135,580)
======== ==========
The accompanying notes are an integral part of the financial statements.
- -------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
December 31, 1995
Note 1
State Street Research New York 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. Two series of the Trust are publicly
offered: State Street Research New York Tax-Free Fund and State Street
Research Tax-Exempt Fund.
The investment objective of the Fund is to seek a high level of interest
income exempt from federal income taxes and New York State and New York City
personal income taxes. To achieve its investment objective, the Fund intends
to invest primarily in securities which are issued by or on behalf of New
York State or its political subdivisions and by other governmental entities.
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. Investments of $1 million or more in Class A
shares, which are not subject to any initial sales charge, are subject to a
1.00% contingent deferred sales charge if redeemed within one year of
purchase. Class B shares are subject to a contingent deferred sales charge on
certain redemptions made within five years of purchase and pay annual
distribution and service fees of 1.00%. Class B shares automatically convert
into Class A shares (which pay lower ongoing expenses) at the end of eight
years after the issuance of the Class B shares. Class C shares are only
offered to certain employee benefit plans and large institutions. No sales
charge is imposed at the time of purchase or redemption of Class C shares.
Class C shares do not pay any distribution or service fees. Class D shares
are subject to a contingent deferred sales charge of 1.00% on any shares
redeemed within one year of their purchase. Class D shares also pay annual
distribution and service fees of 1.00%. The Fund's expenses are borne
pro-rata by each class, except that each class bears expenses, and has
exclusive voting rights with respect to provisions of the Plan of
Distribution, related specifically to that class. The Trustees declared
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.
8
<PAGE>
STATE STREET RESEARCH NEW YORK TAX-FREE FUND
- -------------------------------------------------------------------------------
NOTES (cont'd)
- -------------------------------------------------------------------------------
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 between both 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, 1995, the
Fund had a capital loss carryforward of $701,193 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 $1,026,087
and has deferred and treated such losses as arising in the fiscal year ended
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 differences between the value of the
contract at the time it was opened and the value at the time it was closed.
G. Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of income and expenses during the reporting period.
Actual results could differ from those estimates.
Note 2
The Trust and State Street Research & Management Company (the "Adviser"), an
indirect wholly owned subsidiary of Metropolitan Life Insurance Company
("Metropolitan"), have entered into 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, 1995, the fees pursuant to
such agreement amounted to $404,069.
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, 1995 the amount of
such expenses was $36,119.
The fees of the Trustees not currently affiliated with the Adviser amounted
to $12,892 during the year ended December 31, 1995.
Note 3
The Distributor and its affiliates may from time to time and in varying
amounts voluntarily assume some portion of fees or expenses relating to the
Fund. During the year ended December 31, 1995, the amount of such expenses
assumed by the Distributor and its affiliates was $156,963.
Note 4
For the year ended December 31, 1995, purchases and sales of securities,
exclusive of short-term obligations, aggregated $79,486,594 and $82,408,125,
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, 1995,
fees pursuant to such plan amounted to $48,470, $132,971 and $7,444 for Class
A, Class B and Class D, respectively.
9
<PAGE>
STATE STREET RESEARCH NEW YORK TAX-FREE FUND
- -------------------------------------------------------------------------------
The Fund has been informed that the Distributor and MetLife Securities, Inc.,
a wholly owned subsidiary of Metropolitan, earned initial sales charges
aggregating $15,287 and $113,598, respectively, on sales of Class A shares of
the Fund during the year ended December 31, 1995, and that MetLife
Securities, Inc. earned commissions aggregating $102,365 on sales of Class B
shares, and that the Distributor collected contingent deferred sales charges
aggregating $109,751 and $5 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 New York Municipal Obligations. New York State and New York City
face potential economic problems due to various financial, social, economic
and political factors which could seriously affect their ability to meet
continuing obligations for principal and interest payments. 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, 1995, 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).
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, 1995,
Metropolitan owned 61,186 Class A shares and 61,186 Class D shares and the
Distributor owned one Class C share of the Fund.
Share transactions were as follows:
<TABLE>
<CAPTION>
Year ended December 31
-------------------------------------------------------
1995 1994
----------------------- ----------------------------
Class A Shares Amount Shares Amount
- ------------------------------------- -------- ----------- ---------- --------------
<S> <C> <C> <C> <C>
Shares sold 659,418 $ 5,224,381 1,289,154 $ 10,313,220
Issued upon reinvestment of:
Distribution from net realized gains -- -- 2,365 17,808
Dividends from net investment income 102,754 817,666 84,420 662,001
Shares repurchased (745,045) (5,906,953) (756,289) (5,929,186)
------ --------- -------- ------------
Net increase 17,127 $ 135,094 619,650 $ 5,063,843
====== ========= ======== ============
Class B Shares Amount Shares Amount
- ------------------------------------- ------ --------- -------- ------------
Shares sold 412,260 $ 2,896,528 885,313 $ 7,083,969
Issued upon reinvestment of:
Distribution from net realized gains -- -- 1,577 11,857
Dividends from net investment income 58,893 434,274 32,680 258,543
Shares repurchased (249,652) (1,557,767) (204,942) (1,640,186)
------ --------- -------- ------------
Net increase 221,501 $ 1,773,035 714,628 $ 5,714,183
====== ========= ======== ============
Class C Shares Amount Shares Amount
- ------------------------------------- ------ --------- -------- ------------
Shares sold 24,846 $ 199,861 44,692 $ 369,145
Issued upon reinvestment of:
Distribution from net realized gains -- -- 5,159 38,844
Dividends from net investment income 208,442 1,655,838 226,396 1,765,589
Shares repurchased (934,625) (7,406,811) (1,563,955) (12,288,139)
------ --------- -------- ------------
Net decrease (701,337) $(5,551,112) (1,287,708) $(10,114,561)
====== ========= ======== ============
Class D Shares Amount Shares Amount
- ------------------------------------- ------ --------- -------- ------------
Shares sold 4,415 $ 35,225 14,755 $ 119,504
Issued upon reinvestment of:
Distribution from net realized gains -- -- 99 745
Dividends from net investment income 880 6,996 1,427 11,193
Shares repurchased (28,950) (229,846) (10,858) (85,142)
------ --------- -------- ------------
Net increase (decrease) (23,655) $ (187,625) 5,423 $ 46,300
====== ========= ======== ============
</TABLE>
10
<PAGE>
STATE STREET RESEARCH NEW YORK TAX-FREE FUND
- -------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- -------------------------------------------------------------------------------
For a share outstanding throughout each year:
<TABLE>
<CAPTION>
Class A Class B
--------------------------- -----------------------------
Year ended December 31 Year ended December 31
--------------------------- -----------------------------
1995 1994 1993** 1995 1994 1993**
-------------------------------------------- ------ ------- ------ ------ ------- --------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of year $7.53 $8.43 $8.20 $7.53 $8.43 $8.20
Net investment income* .40 .40 .22 .34 .34 .19
Net realized and unrealized gain (loss)
on investments .71 (.90) .25 .71 (.90) .25
Dividends from net investment income (.41) (.39) (.22) (.35) (.33) (.19)
Distributions from net realized gains -- (.01) (.02) -- (.01) (.02)
---- ----- ---- ---- ----- ------
Net asset value, end of year $8.23 $7.53 $8.43 $8.23 $7.53 $8.43
==== ===== ==== ==== ===== ======
Total return 15.11%+ (6.04)%+ 5.79%+++ 14.26%+ (6.74)%+ 5.35%+++
Net assets at end of year (000s) $20,043 $18,214 $15,175 $15,084 $12,131 $7,567
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* 5.07% 5.07% 4.68%++ 4.32% 4.34% 3.93%++
Portfolio turnover rate 109.74% 64.80% 33.11% 109.74% 64.80% 33.11%
*Reflects voluntary assumption of fees or
expenses per share in each year (Note 3). $.02 $.03 $.01 $.02 $.03 $.01
</TABLE>
<TABLE>
<CAPTION>
Class C
----------------------------------------------------------------
Year ended December 31
----------------------------------------------------------------
1995 1994 1993 1992 1991
- -------------------------------------- ------ ---------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of year $7.54 $8.44 $7.84 $7.61 $7.11
Net investment income* .42 .42 .42 .44 .45
Net realized and unrealized gain
(loss) on investments .71 (.90) .62 .23 .51
Dividends from net investment income (.43) (.41) (.42) (.44) (.46)
Distributions from net
realized gains -- (.01) (.02) -- --
---- -------- -------- -------- ----------
Net asset value, end of year $8.24 $7.54 $8.44 $7.84 $7.61
==== ======== ======== ======== ==========
Total return 15.37%+ (5.79)%+ 13.46%+ 9.08%+ 13.88%+
Net assets at end of year (000s) $38,757 $40,750 $56,515 $41,558 $21,512
Ratio of operating expenses to average
net assets* 0.85% 0.85% 0.85% 0.85% 0.85%
Ratio of net investment income to
average net assets* 5.33% 5.29% 5.10% 5.71% 6.21%
Portfolio turnover rate 109.74% 64.80% 33.11% 29.39% 30.24%
*Reflects voluntary assumption of fees
or expenses per share in each year
(Note 3). $.02 $.03 $.01 $.02 $.05
</TABLE>
<TABLE>
<CAPTION>
Class D
----------------------------------
Year ended December 31
----------------------------------
1995 1994 1993**
- -------------------------------------- ------ ---------- ----------
<S> <C> <C> <C>
Net asset value,
beginning of year $7.53 $8.44 $8.20
Net investment income* .35 .34 .19
Net realized and unrealized gain
(loss) on investments .70 (.91) .25
Dividends from net investment income (.35) (.33) (.18)
Distributions from net
realized gains -- (.01) (.02)
---- -------- --------
Net asset value, end of year $8.23 $7.53 $8.44
==== ======== ========
Total return 14.25%+ (6.86)%+ 5.46%+++
Net assets at end of year (000s) $651 $774 $821
Ratio of operating expenses to average
net assets* 1.85% 1.85% 1.85%++
Ratio of net investment income to
average net assets* 4.35% 4.31% 3.94%++
Portfolio turnover rate 109.74% 64.80% 33.11%
*Reflects voluntary assumption of fees
or expenses per share in each year
(Note 3). $.02 $.03 $.01
</TABLE>
- -------------------------------------------------------------------------------
**June 7, 1993 (commencement of share class designations) to December 31,
1993.
++Annualized.
+Total return figures do not reflect any front-end or contingent deferred
sales charges. Total return would be lower if the Distributor and its
affiliates had not voluntarily assumed a portion of the Fund's expenses.
+++Represents aggregate return for the period without annualization and does
not reflect any front-end or contingent deferred sales charges. Total
return would be lower if the Distributor and its affiliates had not
voluntarily assumed a portion of the Fund's expenses.
11
<PAGE>
- -------------------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
- -------------------------------------------------------------------------------
To the Trustees of State Street Research
Tax-Exempt Trust and the Shareholders of
State Street Research New York 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 New
York Tax-Free Fund (a series of State Street Research Tax-Exempt Trust,
hereafter referred to as the "Trust") at December 31, 1995, and the results
of its operations, the changes in its net assets and the financial highlights
for the periods indicated, in conformity with generally accepted accounting
principles. These financial statements and financial highlights (hereafter
referred to as "financial statements") are the responsibility of the Trust's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these financial
statements in accordance with generally accepted auditing standards with
require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, and evaluating
the overall financial statement presentation. We believe that our audits,
which included confirmation of securities at December 31, 1995 by
correspondence with the custodian and brokers, provide a reasonable basis for
the opinion expressed above.
/s/ Price Waterhouse LLP
Price Waterhouse LLP
Boston, Massachusetts
February 2, 1996
12
<PAGE>
STATE STREET RESEARCH NEW YORK TAX-FREE FUND
- -------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE
- -------------------------------------------------------------------------------
Throughout 1995, the slowing economy, low inflation, and declining interest
rates created a very favorable environment for bond investing. In 1995,
municipal bonds experienced their strongest returns since 1986, which helped
buoy New York Tax-Free Fund's returns.
In an effort to keep the economy from slowing too much, the Federal Reserve
Board made two interest-rate cuts in the final two quarters of the year,
which also helped fuel the bond rally. These factors were instrumental in
helping the Fund's performance.
The Fund entered 1995 with a shorter duration than the market average and
looked to lengthen the duration to take advantage of the falling
interest-rate environment. The low supply of New York municipal bonds slowed
Fund efforts to lengthen the duration, negatively affecting the Fund's
performance.
December 31, 1995
All returns represent past performance, which is no guarantee of future
results. The investment return and principal value of an investment made in
the Fund will fluctuate and shares, when redeemed, may be worth more or less
than their original cost. All returns assume reinvestment of capital gain
distributions and income dividends. Performance results for the Fund are
increased by the Distributor's voluntary reduction of Fund fees and expenses.
In the charts at the right, this first figure reflects expense reduction; the
second shows what results would have been without subsidization. Performance
for a class includes periods prior to the adoption of class designations.
Performance reflects up to maximum 4.5% front-end or 5% contingent deferred
sales charges. 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. "C" shares, offered without
a sales charge, are available only to certain employee benefit plans and
institutions. The Lehman Municipal 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.
Comparison Of Change In Value Of A $10,000
Investment In New York Tax-Free Fund and
The Lehman Municipal Bond Index
********************{*******LINE CHARTS]*************************************
Class A Shares
Average Annual Total Return
-------------------------------------------------------
1 Year 5 Years Life of Fund
-------------------------------------------------------
+9.93%/+9.65% +7.74%/+7.38% +6.72%/+6.15%
-------------------------------------------------------
Lehman
New York Municipal
Tax-Free Bond
Fund Index
7/89 9550 10000
12/89 9714 10391
12/90 10036 11148
12/91 11428 12502
12/92 12465 13604
12/93 14108 15275
12/94 13256 14485
12/95 15259 17014
Class B Shares
Average Annual Total Return
-------------------------------------------------------
1 Year 5 Years Life of Fund
-------------------------------------------------------
+9.26%/+8.97% +8.03%/+7.66% +7.16%/+6.59%
-------------------------------------------------------
Lehman
New York Municipal
Tax-Free Bond
Fund Index
7/89 10000 10000
12/89 10172 10391
12/90 10509 11148
12/91 11967 12502
12/92 13052 13604
12/93 14710 15275
12/94 13719 14485
12/95 15675 17014
Class C Shares
Average Annual Total Return
-------------------------------------------------------
1 Year 5 Years Life of Fund
-------------------------------------------------------
+15.37%/+15.08% +8.90%/+8.54% +7.60%/+7.04%
-------------------------------------------------------
Lehman
New York Municipal
Tax-Free Bond
Fund Index
7/89 10000 10000
12/89 10172 10391
12/90 10509 11148
12/91 11967 12502
12/92 13052 13604
12/93 14810 15275
12/94 13952 14485
12/95 16097 17014
Class D Shares
Average Annual Total Return
-------------------------------------------------------
1 Year 5 Years Life of Fund
-------------------------------------------------------
+13.25%/+12.96% +8.32%/+7.95% +7.16%/+6.59%
-------------------------------------------------------
Lehman
New York Municipal
Tax-Free Bond
Fund Index
7/89 10000 10000
12/89 10172 10391
12/90 10509 11148
12/91 11967 12502
12/92 13052 13604
12/93 14726 15275
12/94 13717 14485
12/95 15671 17014
***************************************************************
<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 rated B has a greater vulnerability to default but currently
has the capacity to meet interest payments and principal repayments. Adverse
business, financial or economic conditions will likely impair capacity or
willingness to pay interest and repay principal. The B rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
BB or BB- rating.
CCC: Debt rated CCC has a currently identifiable vulnerability to
default, and is dependent upon favorable business, financial and economic
conditions to meet timely payment of interest and repayment of principal. In the
event of adverse business, financial 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.
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 0ell.
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.
<PAGE>
STATE STREET RESEARCH TAX-EXEMPT TRUST
PART C
OTHER INFORMATION
Item 24: Financial Statements and Exhibits
(a) Financial Statements
(1) Financial Statements included in PART A (Prospectus)
of this Registration Statement:
Financial Highlights for State Street Research
Tax-Exempt Fund for the period August 25, 1986
(commencement of operations) through December 31,
1995.
Financial Highlights for State Street Research New
York Tax-Free Fund for the period July 5, 1989
(commencement of operations) through December 31,
1995.
(2) Financial Statements included in PART B (Statement of
Additional Information) of this Registration
Statement:
For State Street Research Tax-Exempt Fund and State
Street Research New York Tax-Free Fund for the fiscal
year ended December 31, 1995:
Investment Portfolio
Statement of Assets and Liabilities
Statement of Operations
Statement of Changes in Net Assets (Fiscal
years ended December 31, 1995
and December 31, 1994)
Notes to Financial Statements (including
financial highlights)
Report of Independent Accountants
Management's Discussion of Fund Performance
(b) Exhibits
(1)(a) Second Amended and Restated Master Trust Agreement and
Amendments No. 1 and 2 to Second Amended and Restated
Master Trust Agreement
(1)(b) Form of Amendment No. 3 to Second Amended and Restated
Master Trust Agreement
(1)(c) Form of Amendment No. 4 to Second Amended and Restated
Master Trust Agreement
(2)(a) By-Laws of the Registrant(1)
(2)(b) Amendment to By-Laws effective September 30, 1992(13)
(3) Not applicable
(4)(a) Specimen Share Certificate -- MetLife - State Street High
Income Tax-Exempt Fund(2)**
(4)(b) Specimen Share Certificate -- MetLife - State Street New
York Tax-Free Fund(6)**
(5)(a) Advisory Agreement with MetLife - State Street Investment
Services, Inc.(2)*,***
(5)(b) Transfer and Assumption of Responsibilities and Rights
relating to the Advisory Agreement(13)***
(5)(c) Letter Agreement with respect to the Advisory Agreement
relating to MetLife - State Street New York Tax-Free
Fund(10)**,***
(5)(d) Amendment No. 1 to Advisory Agreement
(6)(a) Distribution Agreement with MetLife - State Street
Investment Services, Inc.(2)**
(6)(b) Form of Selected Dealer Agreement, as Supplemented
(6)(c) Form of Bank and Bank Affiliated Broker-Dealer Agreement
(18)
(6)(d) Letter Agreement with respect to the Distribution
Agreement relating to MetLife - State Street New York
Tax-Free Fund(10)**
(7) Not applicable
(8)(a) Custodian Contract with State Street Bank and Trust
Company(2)
(8)(e) Amendment to the Custodian Contract with State Street Bank
and Trust Company(5)
(8)(f) Letter Agreement with respect to Custodian Contract
relating to MetLife -State Street New York Tax-Free
Fund(10)**
(9) Not applicable
(10)(a) Opinion and Consent of Goodwin, Procter & Hoar(2)
(10)(b) Opinion and Consent of Goodwin, Procter & Hoar with
respect to MetLife -State Street New York Tax-Free
Fund(7)**
(11) Consent of Price Waterhouse LLP
(12) Not applicable
(13)(a) Purchase Agreement and Investment Letter(2)
(13)(b) Purchase Agreement and Investment Letter(2)
(13)(c) Purchase Agreement and Investment Letter -- MetLife -State
Street New York Tax-Free Fund(10)**
(14) Not applicable
(15) First Amended and Restated Plan of Distribution Pursuant
to Rule 12b-1(16)
(16)(a) Calculation of Performance Data relating to MetLife -State
Street Tax-Exempt Fund(5)**
(16)(b) Calculation of Performance Data relating to MetLife -
State Street New York Tax-Free Fund(8)**
(16)(d) Calculation of Distribution Rate relating to MetLife -
State Street Tax-Exempt Fund(9)**
(17)(a) Powers of Attorney
(17)(b) Certificate of Board Resolution Respecting Powers of
Attorney
(18) Multiple Class Expense Allocation Plan Adopted Pursuant to
Rule 18f-3
(19) Application Forms(18)
(27) Financial Data Schedules
- -------------------------
* 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.
*** Filed electronically April 30, 1996.
Filed as part of the Registration Statement as noted below and incorporated
herein by reference:
Footnote Securities Act of 1933
Reference Registration/Amendment Date Filed
- --------- ---------------------- ----------
1 Initial Registration January 15, 1986
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 25. Persons Controlled by or under Common Control with Registrant
Inapplicable.
Item 26. Number of Holders of Securities
As of March 31, 1996, the numbers of record holders of shares of the
Registrant's Funds were as follows:
(1) (2)
Number of
Title of Class Record Holders
Shares of Beneficial Interest
State Street Research
Tax-Exempt Fund
Class A 11,808
Class B 2,163
Class C 626
Class D 29
State Street Research
New York Tax-Free Fund
Class A 1,506
Class B 749
Class C 1,916
Class D 9
<PAGE>
Item 27. Indemnification
Under Article VI of the Registrant's Second Amended and Restated Master
Trust Agreement each of its Trustees and officers or persons serving in such
capacity with another entity at the request of the Registrant ("Covered Person")
shall be indemnified against all liabilities, including but not limited to
amounts paid in satisfaction of judgments, in compromises or as fines and
penalties, and expenses, including reasonable accountants' and counsel fees,
incurred by any Covered Person in connection with the defense or disposition of
any action, suit or other proceeding, whether civil or criminal, before any
court or administrative or legislative body, in which such Covered Person may be
or may have been involved as a party or otherwise or with which such person may
be or may have been threatened, while in office or thereafter, by reason of
being or having been such a Trustee or officer, director or trustee, except with
respect to any matter as to which it has been determined that such Covered
Person had acted with willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of such Covered
Person's office (such conduct being referred to hereafter as "Disabling
Conduct"). A determination that the Covered Person is entitled to
indemnification may be made by (i) a final decision on the merits by a court or
other body before which the proceeding was brought that the person to be
indemnified was not liable by reason of Disabling Conduct, (ii) dismissal of a
court action or an administrative proceeding against a Covered Person for
insufficiency of evidence of Disabling Conduct, or (iii) a reasonable
determination, based upon a review of the facts, that the indemnitee was not
liable by reason of Disabling Conduct by (a) a vote of a majority of a quorum of
Trustees who are neither "interested persons" of the Registrant as defined in
section 2(a)(19) of the 1940 Act nor parties to the proceeding, or (b) an
independent legal counsel in a written opinion.
Under the Distribution Agreement between the Registrant and State Street
Research Investment Services, Inc., the Registrant's distributor, the Registrant
has agreed to indemnify and hold harmless State Street Research Investment
Services, Inc. and each person who has been, is, or may hereafter be an officer,
director, employee or agent of State Street Research Investment Services, Inc.
against any loss, damage or expense reasonably incurred by any of them in
connection with any claim or in connection with any action, suit or proceeding
to which any of them may be a party, which arises out of or is alleged to arise
out of or is based upon a violation of any of its covenants herein contained or
any untrue or alleged untrue statement of material fact, or the omission or
alleged omission to state a material fact necessary to make the statements made
not misleading, in a Registration Statement or Prospectus of the Registrant, or
any amendment or supplement thereto, unless such statement or omission was made
in reliance upon written information furnished by State Street Research
Investment Services, Inc.
Insofar as indemnification by the Registrant for liabilities arising
under the Securities Act of 1933 may be permitted to trustees, officers,
underwriters and controlling persons of the Registrant, pursuant to Article VI
of the Registrant's Second Amended and Restated Master Trust Agreement, or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a trustee, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted against the Registrant by such trustee, officer or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question of whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
<PAGE>
Item 28. Business and Other Connections of Investment Adviser
Describe any other business, profession, vocation or employment of a
substantial nature in which each investment adviser of the Registrant, and each
director, officer or partner of any such investment adviser, is or has been, at
any time during the past two fiscal years, engaged for his own account or in the
capacity of director, officer, employee, partner or trustee.
<TABLE>
<CAPTION>
Principal business
Name Connection Organization address of organization
- ---- ---------- ------------ -----------------------
<S> <C> <C> <C>
State Street Investment Adviser Various investment Boston, MA
Research & advisory clients
Management
Company
Bangs, Linda L. None
Vice President
Barton, Michael E. None
Vice President
Bennett, Peter C. Vice President State Street Research Capital Trust Boston, MA
Director and Vice President State Street Research Exchange Trust Boston, MA
Executive Vice Vice President State Street Research Growth Trust Boston, MA
President Vice President State Street Research Master Investment Trust Boston, MA
Vice President State Street Research Equity Trust
Director State Street Research Investment Services, Inc Boston, MA
Director Boston Private Bank & Trust Co. Boston, MA
President and Director Christian Camps & Conferences, Inc. Boston, MA
Chairman and Trustee Gordon College Wenham, MA
Brown, Susan H. None
Vice President
Burbank, John F. None
Vice President
Canavan, Joseph W. Assistant Treasurer State Street Research Equity Trust Boston, MA
Vice President Assistant Treasurer State Street Research Financial Trust Boston, MA
Assistant Treasurer State Street Research Income Trust Boston, MA
Assistant Treasurer State Street Research Money Market Trust Boston, MA
Assistant Treasurer State Street Research Tax-Exempt Trust Boston, MA
Assistant Treasurer State Street Research Capital Trust Boston, MA
Assistant Treasurer State Street Research Exchange Trust
Assistant Treasurer State Street Research Growth Trust Boston, MA
Assistant Treasurer State Street Research Master Investment Trust Boston, MA
Assistant Treasurer State Street Research Securities Trust Boston, MA
Assistant Controller State Street Research Portfolios, Inc. New York, NY
<PAGE>
Principal business
Name Connection Organization address of organization
- ---- ---------- ------------ -----------------------
Carmen, Michael T. None
Vice President
Carstens, Linda C. None
Vice President
Clifford, Jr., Paul J. Vice President State Street Research Tax-Exempt Trust Boston, MA
Vice President Director Avalon, Inc. Boston, MA
DiFazio, Susan M.W. Senior Vice President State Street Research Investment Services, Inc. Boston, MA
Vice President
Dillman, Thomas J Director of Research Bank of New York New York, NY
Senior Vice President (until 6/95)
Drake, Susan W. Vice President State Street Research Tax-Exempt Trust Boston, MA
Vice President (until 2/96)
Duggan, Peter J. Vice President New England Mutual Life Insurance Company Boston, MA
Senior Vice (until 8/94)
President
Evans, Gordon Senior Vice President State Street Research Investment Services, Inc. Boston, MA
Vice President (Vice President until 3/96)
Federoff, Alex G. None
Vice President
Gardner, Michael D. Partner Prism Group Seattle, WA
Senior Vice President
(Vice President until
6/95)
Geer, Bartlett R. Vice President State Street Research Equity Trust Boston, MA
Senior Vice President Vice President State Street Research Income Trust Boston, MA
<PAGE>
Principal business
Name Connection Organization address of organization
- ---- ---------- ------------ -----------------------
Glovsky, Charles S. Vice President State Street Research Capital Trust Boston, MA
Senior Vice President
Hamilton, Jr., William A. Treasurer and Director Ellis Memorial and Eldredge House Boston, MA
Senior Vice President Treasurer and Director Nautical and Aviation Publishing Company, Inc. Baltimore, MD
(Vice President Treasurer and Director North Conway Institute Boston, MA
until 8/93)
Haverty, Jr., Lawrence J. None
Senior Vice President
Heineke, George R. None
Vice President
Jackson, Jr., Trustee Certain trusts of related and
F. Gardner non-related individuals
Senior Vice President Trustee Vincent Memorial Hospital Boston, MA
Jamieson, Frederick H. Vice President and Asst. Treasurer State Street Research Investment Services, Inc. Boston, MA
Senior Vice President Vice President and Asst. Treasurer SSRM Holdings, Inc. Boston, MA
(Vice President Vice President and Controller MetLife Securities, Inc. New York, NY
until 6/95)
Kallis, John H. Vice President State Street Research Financial Trust Boston, MA
Senior Vice President Vice President State Street Research Income Trust Boston, MA
Vice President State Street Research Tax-Exempt Trust Boston, MA
Vice President State Street Research Securities Trust Boston, MA
Trustee 705 Realty Trust Washington, D.C.
Director and President K&G Enterprises Washington, D.C.
Kasper, M. Katherine None
Vice President
<PAGE>
Principal business
Name Connection Organization address of organization
- ---- ---------- ------------ -----------------------
Kluiber, Rudolph K. Vice President State Street Research Capital Trust Boston, MA
Vice President
Kobrick, Frederick R. Vice President State Street Research Equity Trust Boston, MA
Senior Vice Vice President State Street Research Capital Trust Boston, MA
Vice President State Street Research Growth Trust Boston, MA
Member Harvard Business School Association Cambridge, MA
Member National Alumni Council, Boston University Boston, MA
Leary, Eileen M. None
Vice President
Lintz, Carol None
Vice President
McNamara, III, Francis J. Senior Vice President, Clerk State Street Research Investment Services, Inc. Boston, MA
Senior Vice President, and General Counsel
Secretary and Secretary and General Counsel State Street Research Master Investment Trust Boston, MA
General Counsel Secretary and General Counsel State Street Research Capital Trust Boston, MA
Secretary and General Counsel State Street Research Exchange Trust Boston, MA
Secretary and General Counsel State Street Research Growth Trust Boston, MA
Secretary and General Counsel State Street Research Securities Trust Boston, MA
Secretary and General Counsel State Street Research Equity Trust Boston, MA
Secretary and General Counsel State Street Research Financial Trust Boston, MA
Secretary and General Counsel State Street Research Income Trust Boston, MA
Secretary and General Counsel State Street Research Money Market Trust Boston, MA
Secretary and General Counsel State Street Research Tax-Exempt Trust Boston, MA
Secretary and General Counsel SSRM Holdings, Inc. Boston, MA
Clerk and Director State Street Research Energy, Inc. Boston, MA
Senior Vice President, General The Boston Company, Inc. Boston, MA
Counsel and Assistant Secretary
(until 5/95)
Senior Vice President, General Boston Safe Deposit and Trust Company Boston, MA
Counsel and Assistant Secretary
(until 5/95)
Senior Vice President, General The Boston Company Advisors, Inc. Boston, MA
Counsel and Assistant Secretary
(until 5/95)
<PAGE>
Principal business
Name Connection Organization address of organization
- ---- ---------- ------------ -----------------------
Maus, Gerard P. Treasurer State Street Research Equity Trust Boston, MA
Director, Executive Treasurer State Street Research Financial Trust Boston, MA
Vice President Treasurer State Street Research Income Trust Boston, MA
and Treasurer Treasurer State Street Research Money Market Trust Boston, MA
Treasurer State Street Research Tax-Exempt Trust Boston, MA
Treasurer State Street Research Capital Trust Boston, MA
Treasurer State Street Research Exchange Trust Boston, MA
Treasurer State Street Research Growth Trust Boston, MA
Treasurer State Street Research Master Investment Trust Boston, MA
Treasurer State Street Research Securities Trust Boston, MA
Director, Executive Vice President, State Street Research Investment Services, Inc. Boston, MA
Treasurer and Chief Financial Officer
Director and Treasurer State Street Research Energy, Inc. Boston, MA
Director Metric Holdings, Inc. San Francisco, CA
Director Certain wholly-owned subsidiaries
of Metric Holdings, Inc.
Director GFM International Investors, Ltd. London, England
(until 11/94)
Treasurer and Chief Financial SSRM Holdings, Inc. Boston, MA
Officer
Treasurer MetLife Securities, Inc. New York, NY
Milder, Judith J. None
Senior Vice President
(Vice President
until 6/95)
Miller, Joan D. Senior Vice President State Street Research Investment Services, Inc. Boston, MA
Vice President
Moore, Jr., Thomas P. Director Hibernia Savings Bank Quincy, MA
Senior Vice Vice President State Street Research Capital Trust Boston, MA
President Vice President State Street Research Exchange Trust Boston, MA
Vice President State Street Research Growth Trust Boston, MA
Vice President State Street Research Master Investment Trust Boston, MA
Vice President State Street Research Equity Trust Boston, MA
Mulligan, JoAnne C. Vice President State Street Research Money Market Trust Boston, MA
Vice President
Orr, Stephen C. Member Technology Analysts of Boston Boston, MA
Vice President Member Electro-Science Analysts (of NYC) New York, NY
<PAGE>
Principal business
Name Connection Organization address of organization
- ---- ---------- ------------ -----------------------
Pannell, James C. None
Vice President
Peters, Kim M. Vice President State Street Research Securities Trust Boston, MA
Senior Vice President
(Vice President
until 7/94)
Pluckhahn, Charles W. None
Vice President
Ragsdale, Easton Senior Vice President Kidder, Peabody, & Co. Incorporated New York, NY
Vice President (until 12/94)
Rawlins, Jeffrey A. None
Vice President
Rice III, Daniel Joseph Vice President State Street Research Equity Trust Boston, MA
Senior Vice President
Richards, Scott None
Vice President
Romich, Douglas A. Assistant Treasurer State Street Research Equity Trust Boston, MA
Vice President Assistant Treasurer State Street Research Financial Trust Boston, MA
Assistant Treasurer State Street Research Income Trust Boston, MA
Assistant Treasurer State Street Research Money Market Trust Boston, MA
Assistant Treasurer State Street Research Tax-Exempt Trust Boston, MA
Assistant Treasurer State Street Research Capital Trust Boston, MA
Assistant Treasurer State Street Research Exchange Trust
Assistant Treasurer State Street Research Growth Trust Boston, MA
Assistant Treasurer State Street Research Master Investment Trust Boston, MA
Assistant Treasurer State Street Research Securities Trust Boston, MA
Assistant Controller State Street Research Portfolios, Inc. New York, NY
Row, III, Walter A. None
Vice President
<PAGE>
Principal business
Name Connection Organization address of organization
- ---- ---------- ------------ -----------------------
Schrage, Michael None
Vice President
Schultz, David C. Director (non-voting) Capital Trust, S.A. Luxembourg
Executive Vice Director Alex Brown Capital, Ltd. Hamilton, Bermuda
President
(Senior Vice President Director and Treasurer Mafraq Hospital Association Mafraq, Jordan
until 12/94, Vice Member Association of Investment
President until Management Sales Executives Atlanta, GA
4/94) Member, Investment Committee Lexington Christian Academy Lexington, MA
Shaver, Jr. C. Troy President and Chief Executive State Street Research Investment Services, Inc. Boston, MA
Executive Vice Officer
President President and Chief Executive John Hancock Funds, Inc. Boston, MA
Officer (until 1/96)
Shean, William G. None
Vice President
Shively, Thomas A. Vice President State Street Research Financial Trust Boston, MA
Director and Vice President State Street Research Money Market Trust Boston, MA
Executive Vice Vice President State Street Research Tax-Exempt Trust
President Director State Street Research Investment Services, Inc Boston, MA
Vice President State Street Research Securities Trust Boston, MA
Shoemaker, Richard D. None
Senior Vice President
(Vice President
until 8/93)
Strelow, Dan R. None
Senior Vice President
Stuka, Paul U.S. Portfolio Consultant Teton Partners Boston, MA
Senior Vice President (until 4/95)
<PAGE>
Principal business
Name Connection Organization address of organization
- ---- ---------- ------------ -----------------------
Swanson, Amy McDermott None
Senior Vice President
Trebino, Anne M. Vice President SSRM Holdings, Inc. Boston, MA
Senior Vice President
(Vice President
until 6/95)
Verni, Ralph F. Chairman, President, Chief State Street Research Capital Trust Boston, MA
Chairman, President, Executive Officer and Trustee
Chief Executive Chairman, President, Chief State Street Research Exchange Trust Boston, MA
Officer and Executive Officer and Trustee
Director Chairman, President, Chief State Street Research Growth Trust Boston, MA
Executive Officer and Trustee
Chairman, President, Chief State Street Research Master Investment Trust Boston, MA
Executive Officer and Trustee
Chairman, President, Chief State Street Research Securities Trust Boston, MA
Executive Officer and Trustee
Chairman, President, Chief State Street Research Equity Trust Boston, MA
Executive Officer and Trustee
Chairman, President, Chief State Street Research Financial Trust Boston, MA
Executive Officer and Trustee
Chairman, President, Chief State Street Research Income Trust Boston, MA
Executive Officer and Trustee
Chairman, President, Chief State Street Research Money Market Trust Boston, MA
Executive Officer and Trustee
Chairman, President, Chief State Street Research Tax-Exempt Trust Boston, MA
Executive Officer and Trustee
Chairman and Director State Street Research Investment Services, Inc. Boston, MA
(President and Chief Executive
Officer until 2/96)
President and Director State Street Research Energy, Inc. Boston, MA
Chairman and Director Metric Holdings, Inc. San Francisco, CA
Director and Officer Certain wholly-owned subsidiaries
of Metric Holdings, Inc.
Chairman of the Board and Director MetLife Securities, Inc. New York, NY
Chairman and Director (until 11/94) GFM International Investors, Ltd. London, England
President, Chief Executive SSRM Holdings, Inc. Boston, MA
Officer and Director
Director CML Group, Inc. Boston, MA
<PAGE>
Principal business
Name Connection Organization address of organization
- ---- ---------- ------------ -----------------------
Wade, Dudley Vice President State Street Research Growth Trust Boston, MA
Freeman Vice President State Street Research Master Investment Trust Boston, MA
Senior Vice
President
Wallace, Julie K. None
Vice President
Ward, Geoffrey None
Senior Vice President
Weiss, James M. Chief Investment Officer IDS Equity Advisory Group, Inc. Minneapolis, MN
Senior Vice President (until 12/95)
Westvold, President and Director Bondurant, Inc. Medfield, MA
Elizabeth McCombs (until 2/94)
Vice President
Wing, Darman A. Senior Vice President and State Street Research Investment Services, Inc. Boston, MA
Vice President, Asst. Clerk (Vice President
Assistant Secretary until 6/95)
and Assistant Assistant Secretary State Street Research Capital Trust Boston, MA
General Counsel Assistant Secretary State Street Research Exchange Trust Boston, MA
Assistant Secretary State Street Research Growth Trust Boston, MA
Assistant Secretary State Street Research Master Investment Trust Boston, MA
Assistant Secretary State Street Research Securities Trust Boston, MA
Assistant Secretary State Street Research Equity Trust Boston, MA
Assistant Secretary State Street Research Financial Trust Boston, MA
Assistant Secretary State Street Research Income Trust Boston, MA
Assistant Secretary State Street Research Money Market Trust Boston, MA
Assistant Secretary State Street Research Tax-Exempt Trust Boston, MA
Assistant Secretary SSRM Holdings, Inc. Boston, MA
Woodbury, Robert S. Employee Metropolitan Life Insurance Company New York, NY
Vice President
Woodworth, Jr., Kennard Vice President State Street Research Exchange Trust Boston, MA
Senior Vice Vice President State Street Research Growth Trust Boston, MA
President (until 2/96)
<PAGE>
Principal business
Name Connection Organization address of organization
- ---- ---------- ------------ -----------------------
Wu, Norman N. Partner Atlantic-Acton Realty Framingham, MA
Senior Vice President Director Bond Analysts Society of Boston Boston, MA
(Vice President
until 8/93)
Yogg, Michael Richard Vice President State Street Research Financial Trust Boston, MA
Senior Vice Vice President State Street Research Income Trust Boston, MA
President
</TABLE>
<PAGE>
Item 29. Principal Underwriters
(a) State Street Research Investment Services, Inc., Registrant's
principal underwriter, acts as principal underwriter for State
Street Research Equity Trust, State Street Research Financial
Trust, State Street Research Income Trust, State Street Research
Money Market Trust, State Street Research Tax-Exempt Trust, State
Street Research Capital Trust, State Street Research Growth Trust,
State Street Research Master Investment Trust, State Street
Research Securities Trust and State Street Research Portfolios,
Inc.
(b) Directors and Officers of State Street Investment Research
Services, Inc. are as follows:
<TABLE>
<CAPTION>
(1) (2) (3)
Positions Positions
Name and Principal and Offices and Offices
Business Address with Underwriter with Registrant
<S> <C> <C>
Ralph F. Verni Chairman of the Chairman of the
One Financial Center Board and Director Board, President,
Boston, MA 02111 Chief Executive
Officer and Trustee
Peter C. Bennett Director None
One Financial Center
Boston, MA 02111
Gerard P. Maus Executive Vice President, Treasurer
One Financial Center Treasurer, Chief Financial
Boston, MA 02111 Officer and Director
Thomas A. Shively Director Vice President
One Financial Center
Boston, MA 02111
C. Troy Shaver, Jr. President and None
One Financial Center Chief Executive Officer
Boston, MA 02111
George B. Trotta Executive Vice President None
One Madison Avenue
New York, NY 10010
Dennis C. Barghaan Senior Vice President None
One Financial Center
Boston, MA 02111
Peter Borghi Senior Vice President None
One Financial Center
Boston, MA 02111
Paul V. Daly Senior Vice President None
One Financial Center
Boston, MA 02111
Susan M.W. DiFazio Senior Vice President None
One Financial Center
Boston, MA 02111
Gordon Evans Senior Vice President None
One Financial Center
Boston, MA 02111
Robert Haeusler Senior Vice President None
One Financial Center
Boston, MA 02111
Gregory R. McMahan Senior Vice President None
One Financial Center
Boston, MA 02111
Francis J. McNamara, III Senior Vice President, Secretary and
One Financial Center Clerk and General Counsel General Counsel
Boston, MA 02111
Joan D. Miller Senior Vice President None
One Financial Center
Boston, MA 02111
Richard P. Samartin Senior Vice President None
One Financial Center
Boston, MA 02111
Darman A. Wing Senior Vice President, Assistant Secretary
One Financial Center Assistant
Boston, MA 02111 Clerk and
Assistant
General Counsel
Linda Grasso Vice President None
One Financial Center
Boston, MA 02111
Frederick H. Jamieson Vice President and None
One Financial Center Asst. Treasurer
Boston, MA 02111
</TABLE>
Item 30. Location of Accounts and Records
Gerard P. Maus
State Street Research & Management Company
One Financial Center
Boston, MA 02111
Item 31. Management Services
Inapplicable.
Item 32. Undertakings
(a) Inapplicable.
(b) Deleted.
(c) The Registrant has elected to include the information required
by Item 5A of Form N-1A in its annual report to shareholders.
The Registrant undertakes to furnish each person to whom a
prospectus is delivered with a copy of the applicable fund's
latest annual report to shareholders upon request and without
charge.
(d) Deleted.
(e) Deleted.
(f) The Registrant undertakes to hold a special meeting of
shareholders for the purpose of voting upon the question of
removal of any trustee or trustees when requested in writing so
to do by the record holders of not less than 10 per centum of
the outstanding shares of the Registrant, and, in connection
with such meeting, to comply with the provisions of Section
16(c) of the Investment Company Act of 1940 relating to
shareholder communication.
(g) Deleted.
<PAGE>
Notice
A copy of the Second Amended and Restated Master Trust Agreement of the
Registrant, as further amended is on file with the Secretary of State of The
Commonwealth of Massachusetts and notice is hereby given that the obligations of
the Registrant hereunder, and the authorization, execution and delivery of this
amendment to the Registrant's Registration Statement, shall not be binding upon
any of the Trustees, shareholders, nominees, officers, agents or employees of
the Registrant as individuals or personally, but shall bind only the property of
the Funds of the Registrant, as provided in the Second Amended and Restated
Master Trust Agreement, as further amended. Each Fund of the Registrant shall be
solely and exclusively responsible for all of its direct or indirect debts,
liabilities and obligations, and no other Fund shall be responsible for the
same.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of this Registration Statement pursuant to
Rule 485(b) under the Securities Act of 1933 and has duly caused this
Post-Effective Amendment No. 19 to its Registration Statement on Form N-1A to be
signed on its behalf by the undersigned, thereto duly authorized, in the City
of Boston and the Commonwealth of Massachusetts on the 30th day of April, 1996.
STATE STREET RESEARCH
TAX EXEMPT TRUST
By: *
_____________________________
Ralph F. Verni
President
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment to the Registration Statement has been signed on the
above date by the following persons in the capacities indicated below:
*
______________________________ Trustee, Chairman of the Board &
Ralph F. Verni President (principal executive officer)
*
______________________________ Treasurer (principal
Gerard P. Maus financial and accounting
officer)
*
______________________________ Trustee
Edward M. Lamont
*
______________________________ Trustee
Robert A. Lawrence
*
______________________________ Trustee
Dean O. Morton
<PAGE>
*
______________________________ Trustee
Thomas L. Phillips
*
______________________________ Trustee
Toby Rosenblatt
*
______________________________ Trustee
Michael S. Scott Morton
*
______________________________ Trustee
Jeptha H. Wade
*By: /s/ Francis J. McNamara, III
______________________________________________
Francis J. McNamara, III
Attorney-in-Fact under Powers of Attorney filed herein.
<PAGE>
1933 Act Registration No. 33-2703
1940 Act File No. 811-4558
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT [ ]
OF 1933
Pre-Effective Amendment No. __ [ ]
Post-Effective Amendment No. 19 [X]
and/or
REGISTRATION STATEMENT
UNDER THE INVESTMENT COMPANY
ACT OF 1940 [ ]
Amendment No. 20 [X]
--------------------
STATE STREET RESEARCH TAX-EXEMPT TRUST
(Exact Name of Registrant as Specified in Charter)
--------------------
EXHIBITS
<PAGE>
INDEX TO EXHIBITS
Item
(1)(a) Second Amended and Restated Master Trust Agreement and Amendments No. 1
and 2 to Second Amended and Restated Master Trust Agreement
(1)(b) Form of Amendment No. 3 to Second Amended And Restated Master Trust
Agreement
(1)(c) Form of Amendment No. 4 to Second Amended and Restated Master Trust
Agreement
(5)(a) Advisory Agreement with MetLife - State Street Investment Services,
Inc.
(5)(b) Transfer and Assumption of Responsibilities and Rights relating to the
Advisory Agreement
(5)(c) Letter Agreement with respect to the Advisory Agreement relating to
MetLife - State Street New York Tax-Free Fund
(5)(d) Amendment No. 1 to Advisory Agreement
(6)(b) Form of Selected Dealer Agreement, as Supplemented
(11) Consent of Price Waterhouse
(17)(a) Powers of Attorney
(17)(b) Certificate of Board Resolution Respecting Powers of Attorney
(18) Multiple Class Expense Allocation Plan Adopted Pursuant to Rule 18f-3
(27) Financial Data Schedules
EXHIBIT (1)(a)
METLIFE - STATE STREET TAX-EXEMPT TRUST
SECOND AMENDED AND RESTATED
MASTER TRUST AGREEMENT
June 5, 1993
c. 1992 Goodwin, Procter & Hoar
All Rights Reserved
<PAGE>
METLIFE - STATE STREET TAX-EXEMPT TRUST
MASTER TRUST AGREEMENT
Page
ARTICLE I. NAME AND DEFINITIONS.................... 1
- --------- --------------------
Section 1.1 Name.................................... 1
Section 1.2 Definitions............................. 1
(a) "By-laws".......................... 1
(b) "Class"........................... 1
(c) "Commission"....................... 2
(d) "Declaration of Trust"............. 2
(e) "1940 Act"......................... 2
(f) "Shareholder"...................... 2
(g) "Shares"........................... 2
(h) "Sub-Trust" or "Series"............ 2
(i) "Trust"............................ 2
(j) "Trustees"......................... 2
ARTICLE II. PURPOSE OF TRUST........................ 2
- ---------- ----------------
ARTICLE III. THE TRUSTEES............................ 3
- ----------- ------------
Section 3.1 Number, Designation, Election, Term, etc. 3
(a) Initial Trustees................... 3
(b) Number............................. 3
(c) Election and Term.................. 3
(d) Resignation and Retirement......... 3
(e) Removal............................ 3
(f) Vacancies.......................... 4
(g) Effect of Death, Resignation, etc.. 4
(h) No Accounting...................... 4
Section 3.2 Powers of Trustees...................... 4
(a) Investments........................ 6
(b) Disposition of Assets.............. 6
(c) Ownership Powers................... 6
(d) Subscription....................... 6
(e) Form of Holding.................... 6
(f) Reorganization, etc................ 6
(g) Voting Trusts, etc................. 7
(h) Compromise......................... 7
(i) Partnerships, etc.................. 7
(j) Borrowing and Security............. 7
(k) Guarantees, etc.................... 7
(i)
<PAGE>
Page
(l) Insurance.......................... 7
(m) Pensions, etc...................... 8
(n) Distribution Plans................. 8
Section 3.3 Certain Contracts....................... 8
(a) Advisory........................... 9
(b) Administration..................... 9
(c) Distribution....................... 9
(d) Custodian and Depository........... 9
(e) Transfer and Dividend Disbursing
Agency........................... 9
(f) Shareholder Servicing.............. 9
(g) Accounting......................... 9
Section 3.4 Payment of Trust Expenses and Compensa-
tion of Trustees...................... 11
Section 3.5 Ownership of Assets of the Trust........ 11
ARTICLE IV. SHARES.................................. 11
- ---------- ------
Section 4.1 Description of Shares................... 11
Section 4.2 Establishment and Designation of
Sub-Trusts............................ 13
(a) Assets Belonging to Sub-Trusts..... 13
(b) Liabilities Belonging to Sub-Trusts 14
(c) Dividends.......................... 14
(d) Liquidation........................ 15
(e) Voting............................. 15
(f) Redemption by Shareholder.......... 16
(g) Redemption by Trust................ 16
(h) Net Asset Value.................... 16
(i) Transfer........................... 17
(j) Equality........................... 17
(k) Fractions.......................... 18
(l) Conversion Rights.................. 18
Section 4.3 Ownership of Shares..................... 18
Section 4.4 Investments in the Trust................ 18
Section 4.5 No Pre-emptive Rights................... 18
Section 4.6 Status of Shares and Limitation of
Personal Liability.................... 18
(ii)
<PAGE>
Page
ARTICLE V. SHAREHOLDERS VOTING POWERS AND MEETINGS 19
- --------- ----------------------------------------
Section 5.1 Voting Powers........................... 19
Section 5.2 Meetings................................ 20
Section 5.3 Record Dates............................ 20
Section 5.4 Quorum and Required Vote................ 21
Section 5.5 Action by Written Consent............... 21
Section 5.6 Inspection of Records................... 21
Section 5.7 Additional Provisions................... 21
Section 5.8 Shareholder Communications.............. 21
ARTICLE VI. LIMITATION OF LIABILITY; INDEMNIFICATION 22
- ---------- ----------------------------------------
Section 6.1 Trustees, Shareholders, etc. Not
Personally Liable..................... 22
Section 6.2 Trustees Good Faith Action; Expert
Advice; No Bond or Surety............. 23
Section 6.3 Indemnification of Shareholders......... 23
Section 6.4 Indemnification of Trustees, Officers,
Etc................................... 24
Section 6.5 Compromise Payment...................... 25
Section 6.6 Indemnification Not Exclusive, Etc...... 25
Section 6.7 Liability of Third Persons Dealing with
Trustees.............................. 25
ARTICLE VII. MISCELLANEOUS........................... 26
- ----------- -------------
Section 7.1 Duration and Termination of Trust....... 26
Section 7.2 Reorganization.......................... 26
Section 7.3 Amendments.............................. 27
Section 7.4 Filing of Copies; References; Headings.. 27
Section 7.5 Applicable Law.......................... 28
(iii)
<PAGE>
METLIFE - STATE STREET TAX-EXEMPT TRUST
SECOND AMENDED AND RESTATED
MASTER TRUST AGREEMENT
SECOND AMENDED AND RESTATED AGREEMENT AND DECLARATION OF TRUST made at
Boston, Massachusetts this 5th day of June, 1993, by the Trustees hereunder, and
by the holders of shares of beneficial interest to be issued hereunder as
hereinafter provided.
WITNESSETH
WHEREAS this Trust has been formed to carry on the business of an
investment company; and
WHEREAS this Trust is authorized to issue its shares of beneficial
interest in separate series, each separate series to be a Sub-Trust hereunder,
all in accordance with the provisions hereinafter set forth; and
WHEREAS the Trustees have agreed to manage all property coming into
their hands as trustees of a Massachusetts business trust in accordance with the
provisions hereinafter set forth.
NOW, THEREFORE, the Trustees hereby declare that they will hold all
cash, securities and other assets which they may from time to time acquire in
any manner as Trustees hereunder IN TRUST to manage and dispose of the same upon
the following terms and conditions for the benefit of the holders from time to
time of shares of beneficial interest in this Trust or Sub-Trusts created
hereunder as hereinafter set forth.
ARTICLE I
NAME AND DEFINITIONS
Section 1.1 Name. This Trust shall be known as State Street Research
Tax-Exempt Trust and the Trustees shall conduct the business of the Trust under
that name or any other name or names as they may from time to time determine.
Section 1.2 Definitions. Whenever used herein, unless otherwise required
by the context or specifically provided:
(a) "By-Laws" shall mean the By-Laws of the Trust as amended
from time to time;
(b) "Class" refers to any class of Shares of any Series or
Sub-Trust established and designated under or in accordance with the provisions
of Article IV;
(c) "Commission" shall have the meaning given it in the 1940
Act;
(d) "Declaration of Trust" shall mean this First Amended and
Restated Agreement and Declaration of Trust as amended or restated from time to
time;
(e) "1940 Act" refers to the Investment Company Act of 1940 and
the Rules and Regulations thereunder, all as amended from time to time;
(f) "Shareholder" means a record owner of Shares;
(g) "Shares" refers to the transferable units of interest into
which the beneficial interest in the Trust and each Sub-Trust of the Trust
and/or any class of any Series (as the context may require) shall be divided
from time to time;
(h) "Sub-Trust" or "Series" refers to a series of Shares
established and designated under or in accordance with the provisions of Article
IV;
(i) "Trust" refers to the Massachusetts business trust
established by this Agreement and Declaration of Trust, as amended from time to
time, inclusive of each and every Sub-Trust established hereunder; and
(j) "Trustees" refers to the Trustees of the Trust and of each
Sub-Trust hereunder named herein or elected in accordance with Article III.
ARTICLE II
PURPOSE OF TRUST
The purpose of the Trust is to operate as an investment company and to
offer Shareholders of the Trust and each Sub-Trust of the Trust one or more
investment programs primarily in securities and debt instruments. With respect
to the State Street Research Pennsylvania Tax-Free Fund series of the Trust, the
Trust will invest in securities for income earnings rather than trading for
profit; however, the Trust will be permitted to sell securities held in such
Series and, as a result, may realize capital gain or loss.
<PAGE>
ARTICLE III
THE TRUSTEES
Section 3.1 Number, Designation, Election, Term, etc.
(a) Initial Trustees. The Trustees hereof are Edward M. Lamont,
Robert A. Lawrence, Dean O. Morton, Thomas L. Phillips, Toby Rosenblatt, Michael
S. Scott Morton, Ralph F. Verni and Jeptha H. Wade.
(b) Number. The Trustees serving as such, whether named above or
hereafter becoming Trustees, may increase or decrease (to not less than two at
any time after the effective date of the Trust's Registration Statement on Form
N-1A with the Commission) the number of Trustees to a number other than the
number theretofore determined. No decrease in the number of Trustees shall have
the effect of removing any Trustee from office Prior to the expiration of his
term, but the number of Trustees may be decreased in conjunction with the
removal of a Trustee Pursuant to subsection (e) of this Section 3.1.
(c) Election and Term. The Shareholders shall elect a Board of
Trustees at the first meeting of Shareholders following the initial Public
offering of shares of the Trust. Each Trustee, whether named above or hereafter
becoming a Trustee, shall serve as a Trustee of the Trust and of each Sub-Trust
hereunder during the lifetime of this Trust and until its termination as
hereinafter provided except as such Trustee sooner dies, resigns or is removed.
The Trustees may elect their own successors and may, pursuant to Section 3.1(f)
hereof, appoint Trustees to fill vacancies; provided, however, that the
Shareholders shall have the right to elect trustees subsequent to the initial
election contemplated by this Section 3.1(c) in the event there shall at any
time be no Trustees in office or when and to the extent otherwise required by
Section 16(a) of the 1940 Act.
(d) Resignation and Retirement. Any Trustee may resign his trust
or retire as a Trustee, by written instrument signed by him and delivered to the
other Trustees or to any officer of the Trust, and such resignation or
retirement shall take effect upon such delivery or upon such later date as is
specified in such instrument and shall be effective as to the Trust and each
Sub-Trust hereunder.
(e) Removal. Any Trustee may be removed with or without cause at
any time: (i) by 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; or (ii) by vote of Shareholders
holding not less than two-thirds of the Shares then outstanding, cast in person
or by proxy at any 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. Any such removal
shall be effective as to the Trust and each Sub-Trust hereunder.
(f) Vacancies. Any vacancy or anticipated vacancy resulting from
any reason, including without limitation the death, resignation, retirement,
removal or incapacity of any of the Trustees, or resulting from an increase in
the number of Trustees by the other Trustees may (but so long as there are at
least two remaining Trustees, need not unless required by the 1940 Act) be
filled by a majority of the remaining Trustees, subject to the Provisions of
Section 16(a) of the 1940 Act, through the appointment in writing of such other
person as such remaining Trustees in their discretion shall determine and such
appointment shall be effective upon the written acceptance of the person named
therein to serve as a Trustee and agreement by such person to be bound by the
provisions of this Declaration of Trust, except that any such appointment in
anticipation of a vacancy to occur by reason of retirement, resignation or
increase in number of Trustees to be effective at a later date shall become
effective only at or after the effective date of said retirement, resignation,
or increase in number of Trustees. As soon as any Trustee so appointed shall
have accepted such appointment and shall have agreed in writing to be bound by
this Declaration of Trust and the appointment is effective, the Trust estate
shall vest in the new Trustee, together with the continuing Trustees, without
any further act or conveyance.
(g) Effect of Death, Resignation, Etc. The death, resignation,
retirement, removal or incapacity of the Trustees, or any one of them, shall not
operate to annul or terminate the Trust or any Sub-Trust hereunder or to revoke
or terminate any existing agency or contract created or entered into pursuant to
the terms of this Declaration of Trust.
(h) No Accounting. Except to the extent required by the 1940 Act
or under circumstances which would justify his removal for cause, no person
ceasing to be a Trustee as a result of his death, resignation, retirement,
removal or incapacity (nor the estate of any such person) shall be required to
make an accounting to the Shareholders or remaining Trustees upon such
cessation.
Section 3.2 Powers of Trustees. Subject to the provisions of this
Declaration of Trust, the business of the Trust shall be managed by the
Trustees, and they shall have all powers necessary or convenient to carry out
that responsibility and the purpose of the Trust. The Trustees in all instances
shall act as principals, and are and shall be free from the control of the
Shareholders. The Trustees shall have full power and authority to do any and all
acts and to make and execute any and all contracts and instruments that they may
consider necessary or appropriate in connection with the management of the
Trust. The Trustees shall not be bound or limited by present or future laws or
customs with regard to investment by trustees or fiduciaries, but shall have
full authority and absolute power and control over the assets of the Trust and
the business of the Trust to the same extent as if the Trustees were the sole
owners of the assets of the Trust and the business in their own right, including
such authority, power and control to do all acts and things as they, in their
uncontrolled discretion, shall deem proper to accomplish the purposes of this
Trust. Without limiting the foregoing, the Trustees may adopt By-Laws not
inconsistent with this Declaration of Trust providing for the conduct of the
business and affairs of the Trust and may amend and repeal them to the extent
that such By-Laws do not reserve that right to the Shareholders; they may sue or
be sued in the name of the Trust; they may from time to time in accordance with
the provisions of Section 4.1 hereof establish classes of Shares of any Series
or divide the Shares of any Series into classes, each such Sub-Trust to operate
as a separate and distinct investment medium and with separately defined
investment objectives and policies and distinct investment purposes; they may as
they consider appropriate elect and remove officers and appoint and terminate
agents and consultants and hire and terminate employees, any one or more of the
foregoing of whom may be a Trustee, and may provide for the compensation of all
of the foregoing; they may appoint from their own number, and terminate, any one
or more committees consisting of two or more Trustees, including without implied
limitation an executive committee, which may, when the Trustees are not in
session and subject to the 1940 Act, exercise some or all of the power and
authority of the Trustees as the Trustees may determine; in accordance with
Section 3.3 they may employ one or more advisers, administrators, depositories
and custodians and may authorize any depository or custodian to employ
subcustodians or agents and to deposit all or any part of such assets in a
system or systems for the central handling of securities and debt instruments,
retain transfer, dividend, accounting or Shareholder servicing agents or any of
the foregoing, provide for the distribution of Shares by the Trust through one
or more distributors, principal underwriters or otherwise, and set record dates
or times for the determination of Shareholders or various of them with respect
to various matters; they may compensate or provide for the compensation of the
Trustees, officers, advisers, administrators, custodians, other agents,
consultants and employees of the Trust or the Trustees on such terms as they
deem appropriate; and in general they may delegate to any officer of the Trust,
to any committee of the Trustees and to any employee, adviser, administrator,
distributor, depository, custodian, transfer and dividend disbursing agent, or
any other agent or consultant of the Trust such authority, powers, functions and
duties as they consider desirable or appropriate for the conduct of the business
and affairs of the Trust, including without implied limitation the power and
authority to act in the name of the Trust and any Sub-Trust and of the Trustees,
to sign documents and to act as attorney-in-fact for the Trustees.
Without limiting the foregoing and to the extent not inconsistent with
the 1940 Act or other applicable law, the Trustees shall have power and
authority for and on behalf of the Trust and each separate Sub-Trust established
hereunder:
(a) Investments. To invest and reinvest cash and other property,
and to hold cash or other property uninvested without in any event being bound
or limited by any present or future law or custom in regard to investments by
trustees;
(b) Disposition of Assets. To sell, exchange, lend, pledge,
mortgage, hypothecate, write options on and lease any or all of the assets of
the Trust;
(c) Ownership Powers. To vote or give assent, or exercise any
rights of ownership, with respect to stock or other securities, debt instruments
or property; and to execute and deliver proxies or powers of attorney to such
person or persons as the Trustees shall deem proper, granting to such person or
persons such power and discretion with relation to securities, debt instruments
or property as the Trustees shall deem proper;
(d) Subscription. To exercise powers and rights of subscription
or otherwise which in any manner arise out of ownership of securities or debt
instruments;
(e) Form of Holding. To hold any security, debt instrument or
property in a form not indicating any trust, whether in bearer, unregistered or
other negotiable form, or in the name of the Trustees or of the Trust or of any
Sub-Trust or in the name of a custodian, subcustodian or other depository or a
nominee or nominees or otherwise;
(f) Reorganization, etc. To consent to or participate in any
plan for the reorganization, consolidation or merger of any corporation or
issuer, any security or debt instrument of which is or was held in the Trust; to
consent to any contract, lease, mortgage, purchase or sale of property by such
corporation or issuer, and to pay calls or subscriptions with respect to any
security or debt instrument held in the Trust;
(g) Voting Trusts, etc. To join with other holders of any
securities or debt instruments in acting through a committee, depositary, voting
trustee or otherwise, and in that connection to deposit any security or debt
instrument with, or transfer any security or debt instrument to, any such
committee, depositary or trustee, and to delegate to them such power and
authority with relation to any security or debt instrument (whether or not so
deposited or transferred) as the Trustees shall deem proper, and to agree to
pay, and to pay, such portion of the expenses and compensation of such
committee, depositary or trustee as the Trustees shall deem proper;
(h) Compromise. To compromise, arbitrate or otherwise adjust
claims in favor of or against the Trust or any Sub-Trust or any matter in
controversy, including but not limited to claims for taxes;
(i) Partnerships, etc. To enter into joint ventures, general or
limited partnerships and any other combinations or associations;
(j) Borrowing and Security. To borrow funds and to mortgage and
pledge the assets of the Trust or any part thereof to secure obligations arising
in connection with such borrowing;
(k) Guarantees, etc. To endorse or guarantee the payment of any
notes or other obligations of any person; to make contracts of guaranty or
suretyship, or otherwise assume liability for payment thereof; and to mortgage
and pledge the Trust property or any part thereof to secure any of or all such
obligations;
(l) Insurance. To purchase and pay for entirely out of Trust
property such insurance as they may deem necessary or appropriate for the
conduct of the business, including, without limitation, insurance policies
insuring the assets of the Trust and payment of distributions and principal on
its portfolio investments, and insurance policies insuring the Shareholders,
Trustees, officers, employees, agents, consultants, investment advisers,
managers, administrators, distributors, principal underwriters, or independent
contractors, or any thereof (or any person connected therewith), of the Trust
individually against all claims and liabilities of every nature arising by
reason of holding, being or having held any such office or position, or by
reason of any action alleged to have been taken or omitted by any such person in
any such capacity, including any action taken or omitted that may be determined
to constitute negligence, whether or not the Trust would have the power to
indemnify such person against such liability; and
(m) Pensions, etc. To pay pensions for faithful service, as
deemed appropriate by the Trustees, and to adopt, establish and carry out
pension, profit-sharing, share bonus, share purchase, savings, thrift and other
retirement, incentive and benefit plans, trusts and provisions, including the
purchasing of life insurance and annuity contracts as a means of providing such
retirement and other benefits, for any or all of the Trustees, officers,
employees and agents of the Trust.
(n) Distribution Plans. To adopt on behalf of the Trust or any
Sub-Trust a plan of distribution and related agreements thereto pursuant to the
terms of Rule 12b-1 of the 1940 Act and to make payments from the assets of the
Trust or the relevant Sub-Trust or Sub-Trusts or class or classes thereof
pursuant to said Rule 12b-1 Plan.
Except as otherwise provided by the l940 Act or other applicable law,
this Declaration of Trust or the By-Laws, any action to be taken by the Trustees
on behalf of the Trust or any Sub-Trust may be taken by a majority of the
Trustees present at a meeting of Trustees (a quorum, consisting of at least
one-half of the Trustees then in office, being present), within or without
Massachusetts, including any meeting held by means of a conference telephone or
other communications equipment by means of which all persons participating in
the meeting can hear each other at the same time, and participation by such
means shall constitute presence in person at a meeting, or by written consents
of a majority of the Trustees then in office (or such larger or different number
as may be required by the 1940 Act or other applicable law).
Notwithstanding other provisions of this Section 3.2, the Trust may vary
its investments in the State Street Research Pennsylvania Tax-Free Fund series
of the Trust only to: (i) eliminate unsafe investments and investments not
consistent with the preservation of capital or the tax status of such series;
(ii) honor redemption orders, meet anticipated redemption requirements and
negate gains from discount purchases; (iii) reinvest the earnings from
securities in like securities; or (iv) defray normal administrative expenses.
Section 3.3 Certain Contracts. Subject to compliance with the provisions
of the 1940 Act, but notwithstanding any limitations of present and future law
or custom in regard to delegation of powers by trustees generally, the Trustees
may, at any time and from time to time and without limiting the generality of
their powers and authority otherwise set forth herein, enter into one or more
contracts with any one or more corporations, trusts, associations, partnerships,
limited partnerships, other type of organizations, or individuals (a
"Contracting Party"), to provide for the performance and assumption of some or
all of the following services, duties and responsibilities to, for or on behalf
of the Trust and/or any Sub-Trust, and/or the Trustees, and to provide for the
performance and assumption of such other services, duties and responsibilities
in addition to those set forth below as the Trustees may determine appropriate:
(a) Advisory. Subject to the general supervision of the Trustees
and in conformity with the stated policy of the Trustees with respect to the
investments of the Trust or of the assets belonging to any Sub-Trust of the
Trust (as that phrase is defined in subsection (a) of Section 4.2), to manage
such investments and assets, make investment decisions with respect thereto, and
to place purchase and sale orders for portfolio transactions relating to such
investments and assets;
(b) Administration. Subject to the general supervision of the
Trustees and in conformity with any policies of the Trustees with respect to the
operations of the Trust and each Sub-Trust, to supervise all or any part of the
operations of the Trust and each Sub-Trust, and to provide all or any part of
the administrative and clerical personnel, office space and office equipment and
services appropriate for the efficient administration and operations of the
Trust and each Sub-Trust;
(c) Distribution. To distribute the Shares of the Trust and each
Sub-Trust (including any classes thereof), to be principal underwriter of such
Shares, and/or to act as agent of the Trust and each Sub-Trust in the sale of
Shares and the acceptance or rejection of orders for the purchase of Shares;
(d) Custodian and Depository. To act as depository for and to
maintain custody of the property of the Trust and each Sub-Trust and accounting
records in connection therewith;
(e) Transfer and Dividend Disbursing Agency. To maintain records
of the ownership of outstanding Shares, the issuance and redemption and the
transfer thereof, and to disburse any dividends declared by the Trustees and in
accordance with the policies of the Trustees and/or the instructions of any
particular Shareholder to reinvest any such dividends;
(f) Shareholder Servicing. To provide service with respect to
the relationship of the Trust and its Shareholders, records with respect to
Shareholders and their Shares, and similar matters; and
(g) Accounting. To handle all or any part of the accounting
responsibilities, whether with respect to the Trust's properties, Shareholders
or otherwise.
The same person may be the Contracting Party for some or all of the
services, duties and responsibilities to, for and of the Trust and/or the
Trustees, and the contracts with respect thereto may contain such terms
interpretive of or in addition to the delineation of the services, duties and
responsibilities provided for, including provisions that are not inconsistent
with the 1940 Act relating to the standard of duty of and the rights to
indemnification of the Contracting Party and others, as the Trustees may
determine. Nothing herein shall preclude, prevent or limit the Trust or a
Contracting Party from entering into sub-contractual arrangements relating to
any of the matters referred to in Sections 3.3(a) through (g) hereof.
The fact that:
(i) any of the Shareholders, Trustees or officers of the
Trust is a shareholder, director, officer, partner, trustee, employee,
manager, adviser, principal underwriter or distributor or agent of or
for any Contracting Party, or of or for any parent or affiliate of any
Contracting Party or that the Contracting Party or any parent or
affiliate thereof is a Shareholder or has an interest in the Trust or
any Sub-Trust, or that
(ii) any Contracting Party may have a contract providing for
the rendering of any similar services to one or more other corporations,
trusts, associations, partner ships, limited partnerships or other
organizations, or have other business or interests,
shall not affect the validity of any contract for the performance and assumption
of services, duties and responsibilities to, for or of the Trust or any
Sub-Trust and/or the Trustees or disqualify any Shareholder, Trustee or officer
of the Trust from voting upon or executing the same or create any liability or
accountability to the Trust, any Sub-Trust or its Shareholders, provided that in
the case of any relationship or interest referred to in the preceding clause (i)
on the part of any Trustee or officer of the Trust either (x) the material facts
as to such relationship or interest have been disclosed to or are known by the
Trustees not having any such relationship or interest and the contract involved
is approved in good faith by a majority of such Trustees not having any such
relationship or interest (even though such unrelated or disinterested Trustees
are less than a quorum of all of the Trustees), (y) the material facts as to
such relationship or interest and as to the contract have been disclosed to or
are known by the Shareholders entitled to vote thereon and the contract involved
is specifically approved in good faith by vote of the Shareholders, or (z) the
specific contract involved is fair to the Trust as of the time it is authorized,
approved or ratified by the Trustees or by the Shareholders.
Section 3.4 Payment of Trust Expenses and Compensation of Trustees. The
Trustees are authorized to pay or to cause to be paid out of the principal or
income of the Trust or any Sub-Trust, or partly out of principal and partly out
of income, and to charge or allocate the same to, between or among such one or
more of the Sub-Trusts and/or one or more classes of Shares thereof that may be
established and designated pursuant to Article IV, as the Trustees deem fair,
all expenses, fees, charges, taxes and liabilities incurred or arising in
connection with the Trust or any Sub-Trust and/or one or more classes of Shares
thereof, or in connection with the management thereof, including, but not
limited to, the Trustees, compensation and such expenses and charges for the
services of the Trust's officers, employees, investment adviser, administrator,
distributor, principal underwriter, auditor, counsel, depository, custodian,
transfer agent, dividend disbursing agent, accounting agent, Shareholder
servicing agent, and such other agents, consultants, and independent contractors
and such other expenses and charges as the Trustees may deem necessary or proper
to incur. Without limiting the generality of any other provision hereof, the
Trustees shall be entitled to reasonable compensation from the Trust for their
services as Trustees and may fix the amount of such compensation.
Section 3.5 Ownership of Assets of the Trust. Title to all of the assets
of the Trust shall at all times be considered as vested in the Trustees.
ARTICLE IV
SHARES
Section 4.1 Description of Shares. The beneficial interest in the Trust
shall be divided into Shares, all with $.001 par value, but the Trustees shall
have the authority from time to time to establish and designate one or more
Series of Shares (each of which Series of Shares shall be a separate and
distinct Sub-Trust of the Trust, including without limitation those Sub-Trusts
specifically established and designated in Section 4.2) and one or more classes
thereof, as they deem necessary or desirable. For all purposes under this
Declaration of Trust, including, without implied limitation, (i) with respect to
the rights of creditors and (ii) for purposes of interpreting the relative
rights of each Sub-Trust and the Shareholders of each Sub-Trust, each Sub-Trust
established hereunder shall be deemed to be a separate trust. The Trustees shall
have exclusive power without the requirement of shareholder approval to
establish and designate such separate and distinct Sub-Trusts or classes
thereof, and to fix and determine the relative rights and preferences as between
the shares of the separate Sub-Trusts or classes as to right of redemption and
the price, terms and manner of redemption, special and relative rights as to
dividends and other distributions and on liquidation, sinking or purchase fund
provisions, conversion rights, and conditions under which the several Sub-Trusts
or classes thereof shall have separate voting rights or no voting rights.
The number of authorized Shares and the number of Shares of each
Sub-Trust or class thereof that may be issued is unlimited, and the Trustees may
issue Shares of any Sub-Trust or class for such consideration and on such terms
as they may determine (or for no consideration if pursuant to a Share dividend
or split-up), all without action or approval of the Shareholders. All Shares
when so issued on the terms determined by the Trustees shall be fully paid and
non-assessable (but may be subject to mandatory contribution back to the Trust
as provided in subsection (h) of Section 4.2). The Trustees may classify or
reclassify any unissued Shares or any Shares previously issued and reacquired of
any Sub-Trust or class into one or more Sub-Trusts or classes that may be
established and designated from time to time. The Trustees may hold as treasury
Shares, reissue for such consideration and on such terms as they may determine,
or cancel, at their discretion from time to time, any Shares of any Sub-Trust
reacquired by the Trust.
The Trustees may from time to time close the transfer books or establish
record dates and times for the purposes of determining the holders of Shares
entitled to be treated as such, to the extent provided or referred to in Section
5.3.
The establishment and designation of any Sub-Trust or classes in
addition to those established and designated in Section 4.2 shall be effective
(i) upon the execution by a majority of the then Trustees of an instrument
setting forth such establishment and designation and the relative rights and
preferences of the Shares of such Sub-Trust, (ii) upon the execution of an
instrument in writing by an officer of the Trust pursuant to the vote of a
majority of the Trustees, or (iii) or as otherwise provided in either such
instrument. At any time that there are no Shares outstanding of any particular
Sub-Trust previously established and designated the Trustees may by an
instrument executed by a majority of their number abolish that Sub-Trust and the
establishment and designation thereof. Each instrument referred to in this
paragraph shall have the status of an amendment to this Declaration of Trust.
Any Trustee, officer or other agent of the Trust, and any organization
in which any such person is interested may acquire, own, hold and dispose of
Shares of any Sub-Trust of the Trust to the same extent as if such person were
not a Trustee, officer or other agent of the Trust; and the Trust may issue and
sell or cause to be issued and sold and may purchase Shares of any Sub-Trust
from any such person or any such organization subject only to the general
limitations, restrictions or other provisions applicable to the sale or purchase
of Shares of such Sub-Trust generally.
Section 4.2 Establishment and Designation of Sub-Trusts. Without
limiting the authority of the Trustees set forth in Section 4.1 to establish and
designate any further Sub-Trusts, the Trustees hereby establish and designate
the following Sub-Trusts: the "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," "State Street
Research Massachusetts Tax-Free Fund," "State Street Research Pennsylvania
Tax-Free Fund," "State Street Research Texas Tax-Free Fund" and "State Street
Research Virginia Tax-Free Fund." The Shares of such Sub-Trusts and any Shares
of any further Sub-Trusts that may from time to time be established and
designated by the Trustees shall (unless the Trustees otherwise determine with
respect to some further Sub-Trust at the time of establishing and designating
the same) have the following relative rights and preferences:
(a) Assets Belonging to Sub-Trusts. All consideration received
by the Trust for the issue or sale of Shares of a particular Sub-Trust or any
classes thereof, together with all assets in which such consideration is
invested or reinvested, all income, earnings, profits, and proceeds thereof,
including any proceeds derived from the sale, exchange or liquidation of such
assets, and any funds or payments derived from any reinvestment of such proceeds
in whatever form the same may be, shall be held by the Trustees in trust for the
benefit of the holders of Shares of that Sub-Trust and shall irrevocably belong
to that Sub-Trust (and be allocable to any classes thereof) for all purposes,
and shall be so recorded upon the books of account of the Trust. Such
consideration, assets, income, earnings, profits, and proceeds thereof,
including any proceeds derived from the sale, exchange or liquidation of such
assets, and any funds or payments derived from any reinvestment of such
Proceeds, in whatever form the same may be, together with any General Items (as
hereinafter defined) allocated to that Sub-Trust as provided in the following
sentence, are herein referred to as "assets belonging to" that Sub-Trust (and be
allocable to any classes thereof). In the event that there are any assets,
income, earnings, profits, and proceeds thereof, funds, or payments which are
not readily identifiable as belonging to any particular Sub-Trust (collectively
"General Items"), the Trustees shall allocate such General Items to and among
any one or more of the Sub-Trusts established and designated from time to time
in such manner and on such basis as they, in their sole discretion, deem fair
and equitable; and any General Items so allocated to a particular Sub-Trust
shall belong to that Sub-Trust (and be allocable to any classes thereof). Each
such allocation by the Trustees shall be conclusive and binding upon the
Shareholders of all Sub-Trusts (including any classes thereof) for all purposes.
(b) Liabilities Belonging to Sub-Trusts. The assets belonging to
each particular Sub-Trust shall be charged with the liabilities in respect of
that Sub-Trust and all expenses, costs, charges and reserves belonging to that
Sub-Trust, and any general liabilities, expenses, costs, charges or reserves of
the Trust which are not readily identifiable as belonging to any particular
Sub-Trust shall be allocated and charged by the Trustees to and among any one or
more of the Sub-Trusts established and designated from time to time in such
manner and on such basis as the Trustees in their sole discretion deem fair and
equitable. In addition, the liabilities in respect of a particular class of
Shares of a particular Series and all expenses, costs, charges and reserves
belonging to that class of Shares, and any general liabilities, expenses, costs,
charges or reserves of that particular Series which are not readily identifiable
as belonging to any particular class of Shares of that Series shall be allocated
and charged by the Trustees to and among any one or more of the classes of
Shares of that Series established and designated from time to time in such
manner and on such basis as the Trustees in their sole discretion deem fair and
equitable. The liabilities, expenses, costs, charges and reserves allocated and
so charged to a Series or class thereof are herein referred to as "liabilities
belonging to" that Series or class thereof. Each allocation of liabilities,
expenses, costs, charges and reserves by the Trustees shall be conclusive and
binding upon the Shareholders of all Series (including any classes thereof) for
all purposes. Any creditor of any Sub-Trust may look only to the assets of that
Sub-Trust to satisfy such creditor's debt.
The Trustees shall have full discretion, to the extent not inconsistent
with the 1940 Act, to determine which items shall be treated as income and which
items as capital; and each such determination and allocation shall be conclusive
and binding upon the Shareholders.
(c) Dividends. Dividends and distributions on Shares of a
particular Sub-Trust or any class thereof may be paid with such frequency as the
Trustees may determine, which may be daily or otherwise pursuant to a standing
resolution or resolutions adopted only once or with such frequency as the
Trustees may determine, to the holders of Shares of that Sub-Trust or class,
from such of the income and capital gains, accrued or realized, from the assets
belonging to that Sub-Trust or in the case of a class, belonging to that
Sub-Trust and allocable to that class, as the Trustees may determine, after
providing for actual and accrued liabilities belonging to that Sub-Trust or
class. All dividends and distributions on Shares of a particular Sub-Trust or
class thereof shall be distributed pro rata to the holders of Shares of that
Sub-Trust or class in proportion to the number of Shares of that Sub-Trust or
class held by such holders at the date and time of record established for the
payment of such dividends or distributions, except that in connection with any
dividend or distribution program or procedure the Trustees may determine that no
dividend or distribution shall be payable on Shares as to which the
Shareholder's purchase order and/or payment have not been received by the time
or times established by the Trustees under such program or procedure. Such
dividends and distributions may be made in cash or Shares of that Sub-Trust or
class or a combination thereof as determined by the Trustees or pursuant to any
program that the Trustees may have in effect at the time for the election by
each Shareholder of the mode of the making of such dividend or distribution to
that Shareholder. Any such dividend or distribution paid in Shares will be paid
at the net asset value thereof as determined in accordance with subsection (h)
of Section 4.2.
(d) Liquidation. In the event of the liquidation or dissolution
of the Trust, the Shareholders of each Sub-Trust or any class thereof that has
been established and designated shall be entitled to receive, when and as
declared by the Trustees, the excess of the assets belonging to that Sub-Trust
or in the case of a class, belonging to that Sub-Trust and allocable to that
class, over the liabilities belonging to that Sub-Trust or class. The assets so
distributable to the Shareholders of any particular Sub-Trust or class thereof
shall be distributed among such Shareholders in proportion to the number of
Shares of that Sub-Trust or class thereof held by them and recorded on the books
of the Trust. The liquidation of any particular Sub-Trust or class thereof may
be authorized at any time by vote of a majority of the Trustees then in office
subject to the approval of a majority of the outstanding voting Shares of that
Sub-Trust or class, as defined in the 1940 Act.
(e) Voting. On each matter submitted to a vote of the
Shareholders, each holder of a Share of each Sub-Trust or class thereof shall be
entitled to one vote for each whole Share and to a proportionate fractional vote
for each fractional Share standing in his name on the books of the Trust and all
Shares of each Sub-Trust and classes thereof shall vote as a separate class
except as to voting for Trustees and as otherwise required by the 1940 Act. As
to any matter which does not affect the interest of a particular Sub-Trust or
class, only the holders of Shares of the one or more affected Sub-Trusts or
classes shall be entitled to vote.
(f) Redemption by Shareholder. Each holder of Shares of a
particular Sub-Trust or any class thereof shall have the right at such times as
may be permitted by the Trust, but no less frequently than once each week, to
require the Trust to redeem all or any part of his Shares of that Sub-Trust or
class thereof at a redemption price equal to the net asset value per Share of
that Sub-Trust or class thereof next determined in accordance with subsection
(h) of this Section 4.2 after the Shares are properly tendered for redemption,
subject to any contingent deferred sales charge in effect at the time of
redemption. Payment of the redemption price shall be in cash; provided, however,
that if the Trustees determine, which determination shall be conclusive, that
conditions exist which make payment wholly in cash unwise or undesirable, the
Trust may, subject to the requirements of the 1940 Act, make payment wholly or
partly in securities or other assets belonging to the Sub-Trust of which the
Shares being redeemed are part at the value of such securities or assets used in
such determination of net asset value.
Notwithstanding the foregoing, the Trust may postpone payment of the
redemption price and may suspend the right of the holders of Shares of any
Sub-Trust to require the Trust to redeem Shares of that Sub-Trust during any
period or at any time when and to the extent permissible under the 1940 Act.
(g) Redemption by Trust. Each Share of each Sub-Trust or class
thereof that has been established and designated is subject to redemption by the
Trust at the redemption price which would be applicable if such Share was then
being redeemed by the Shareholder pursuant to subsection (f) of this Section 4.2
upon such other conditions as may from time to time be determined by the
Trustees and set forth in the then current Prospectus of the Trust with respect
to maintenance of Shareholder accounts of a minimum amount. Upon such redemption
the holders of the Shares so redeemed shall have no further right with respect
thereto other than to receive payment of such redemption price.
(h) Net Asset Value. The net asset value per Share of any
Sub-Trust shall be (i) in the case of a Sub-Trust whose shares are not divided
into classes, the quotient obtained by dividing the value of the net assets of
that Sub-Trust (being the value of the assets belonging to that Sub-Trust less
the liabilities belonging to that Sub-Trust) by the total number of Shares of
that Sub-Trust outstanding, and (ii) in the case of a class of Shares of a
Series whose Shares are divided into classes, the quotient obtained by dividing
the value of the net assets of that Series allocable to such class (being the
value of the assets belonging to that Series allocable to such class less the
liabilities belonging to such class) by the total number of Shares of such class
outstanding; all determined in accordance with the methods and procedures,
including without limitation those with respect to rounding, established by the
Trustees from time to time.
The Trustees may determine to maintain the net asset value per Share of
any Sub-Trust at a designated constant dollar amount and in connection therewith
may adopt Procedures not inconsistent with the 1940 Act for the continuing
declarations of income attributable to that Sub-Trust as dividends payable in
additional Shares of that Sub-Trust at the designated constant dollar amount and
for the handling of any losses attributable to that Sub-Trust. Such procedures
may provide that in the event of any loss each Shareholder shall be deemed to
have contributed to the capital of the Trust attributable to that Sub-Trust his
pro rata portion of the total number of Shares required to be cancelled in order
to permit the net asset value per Share of that Sub-Trust to be maintained,
after reflecting such loss, at the designated constant dollar amount. Each
Shareholder of the Trust shall be deemed to have agreed, by his investment in
any Sub-Trust with respect to which the Trustees shall have adopted any such
procedure, to make the contribution referred to in the preceding sentence in the
event of any such loss.
(i) Transfer. All Shares of each particular Sub-Trust or class
thereof shall be transferable, but transfers of Shares of a particular Sub-Trust
or class thereof will be recorded on the Share transfer records of the Trust
applicable to that Sub-Trust or class only at such times as Shareholders shall
have the right to require the Trust to redeem Shares of that Sub-Trust or class
and at such other times as may be Permitted by the Trustees.
(j) Equality. Except as provided herein or in the instrument
designating and establishing any class of Shares or any Series, all Shares of
each particular Series or class thereof shall represent an equal proportionate
interest in the assets belonging to that Series, or in the case of a class,
belonging to that Series and allocable to that class, subject to the liabilities
belonging to that Series or class, and each Share of any particular Series or
class shall be equal to each other Share of that Series or class; but the
provisions of this sentence shall not restrict any distinctions permissible
under subsection (c) of this Section 4.2 that may exist with respect to
dividends and distributions on Shares of the same Series or class. The Trustees
may from time to time divide or combine the Shares of any particular Series or
class into a greater or lesser number of Shares of that Series or class without
thereby changing the proportionate beneficial interest in the assets belonging
to that Series or class or in any way affecting the rights of Shares of any
other Series or class.
(k) Fractions. Any fractional Share of any Sub-Trust, if any
such fractional Share is outstanding, shall carry proportionately all the rights
and obligations of a whole Share of that Sub-Trust, including rights and
obligations with respect to voting, receipt of dividends and distributions,
redemption of Shares, and liquidation of the Trust.
(l) Conversion Rights. Subject to compliance with the
requirements of the 1940 Act, the Trustees shall have the authority to provide
that holders of Shares of any Sub-Trust or class thereof shall have the right to
convert said Shares into Shares of one or more other Sub-Trust or class thereof
in accordance with such requirements and procedures as may be established by the
Trustees.
Section 4.3 Ownership of Shares. The ownership of Shares shall be
recorded on the books of the Trust or of a transfer or similar agent for the
Trust, which books shall be maintained separately for the Shares of each
Sub-Trust and each class thereof that has been established and designated. No
certificates certifying the ownership of Shares need be issued except as the
Trustees may otherwise determine from time to time. The Trustees may make such
rules as they consider appropriate for the issuance of Share certificates, the
use of facsimile signatures, the transfer of Shares and similar matters. The
record books of the Trust as kept by the Trust or any transfer or similar agent,
as the case may be, shall be conclusive as to who are the Shareholders and as to
the number of Shares of each Sub-Trust held from time to time by each such
Shareholder.
Section 4.4 Investments in the Trust. The Trustees may accept
investments in the Trust and each Sub-Trust thereof from such persons and on
such terms and for such consideration, not inconsistent with the provisions of
the 1940 Act, as they from time to time authorize. The Trustees may authorize
any distributor, principal underwriter, custodian, transfer agent or other
person to accept orders for the purchase of Shares that conform to such
authorized terms and to reject any purchase orders for Shares whether or not
conforming to such authorized terms.
Section 4.5 No Pre-emptive Rights. Shareholders shall have no
pre-emptive or other right to subscribe to any additional Shares or other
securities issued by the Trust.
Section 4.6 Status of Shares and Limitation of Personal Liability.
Shares shall be deemed to be personal property giving only the rights provided
in this instrument. Every Shareholder by virtue of having become a Shareholder
shall be held to have expressly assented and agreed to the terms hereof and to
have become a party hereto. The death of a Shareholder during the continuance of
the Trust shall not operate to terminate the Trust or any Sub-Trust thereof nor
entitle the representative of any deceased Shareholder to an accounting or to
take any action in court or elsewhere against the Trust or the Trustees, but
only to the rights of said decedent under this Trust. Ownership of Shares shall
not entitle the Shareholder to any title in or to the whole or any part of the
Trust Property or right to call for a partition or division of the same or for
an accounting, nor shall the ownership of Shares constitute the Shareholders
partners. Neither the Trust nor the Trustees, nor any officer, employee or agent
of the Trust shall have any power to bind personally any Shareholder, nor except
as specifically provided herein to call upon any Shareholder for the payment of
any sum of money or assessment whatsoever other than such as the Shareholder may
at any time personally agree to pay.
ARTICLE V
SHAREHOLDERS' VOTING POWERS AND MEETINGS
Section 5.1 Voting Powers. The Shareholders shall have power to vote
only (i) for the election or removal of Trustees as provided in Section 3.1,
(ii) with respect to any contract with a Contracting Party as provided in
Section 3.3 as to which Shareholder approval is as required by the 1940 Act,
(iii) with respect to any termination or reorganization of the Trust or any
Sub-Trust to the extent and as provided in Sections 7.1 and 7.2, (iv) with
respect to any amendment of this Declaration of Trust to the extent and as
provided in Section 7.3, (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 or any Sub-Trust thereof or the
Shareholders (provided, however, that a shareholder of a particular Sub-Trust
shall not be entitled to a derivative or class action on behalf of any other
Sub-Trust (or shareholder of any other Sub-Trust) of the Trust) and (vi) with
respect to such additional matters relating to the Trust as may be required by
the 1940 Act, this Declaration of Trust, the By-Laws or any registration of the
Trust with the Commission (or any successor agency) or any state, or as the
Trustees may consider necessary or desirable. There shall be no cumulative
voting in the election of Trustees. Shares may be voted in person or by proxy. A
proxy with respect to Shares held in the name of two or more persons shall be
valid if executed by any one of them unless at or prior to exercise of the proxy
the Trust receives a specific written notice to the contrary from any one of
them. A proxy purporting to be executed by or on behalf of a Shareholder shall
be deemed valid unless challenged at or prior to its exercise and the burden of
proving invalidity shall rest on the challenger. Until Shares are issued, the
Trustees may exercise all rights of Shareholders and may take any action
required by law, this Declaration of Trust or the By-Laws to be taken by
Shareholders.
Section 5.2 Meetings. No annual or regular meeting of Shareholders is
required. Special meetings of Shareholders may be called by the Trustees from
time to time for the purpose of taking action upon any matter requiring the vote
or authority of the Shareholders as herein provided or upon any other matter
deemed by the Trustees to be necessary or desirable. Written notice of any
meeting of Shareholders shall be given or caused to be given by the Trustees by
mailing such notice at least seven days before such meeting, postage prepaid,
stating the time, place and purpose of the meeting, to each Shareholder at the
Shareholder's address as it appears on the records of the Trust. The Trustees
shall promptly call and give notice of a meeting of Shareholders for the purpose
of voting upon removal of any Trustee of the Trust when requested to do so in
writing by Shareholders holding not less than 10% of the Shares then
outstanding. If the Trustees shall fail to call or give notice of any meeting of
Shareholders for a period of 30 days after written application by Shareholders
holding at least 10% of the Shares then outstanding requesting a meeting be
called for any other purpose requiring action by the Shareholders as provided
herein or in the By-Laws, then Shareholders holding at least 10% of the Shares
then outstanding may call and give notice of such meeting, and thereupon the
meeting shall be held in the manner provided for herein in case of call thereof
by the Trustees.
Section 5.3 Record Dates. For the purpose of determining the
Shareholders who are entitled to vote or act at any meeting or any adjournment
thereof, or who are entitled to participate in any dividend or distribution, or
for the purpose of any other action, the Trustees may from time to time close
the transfer books for such period, not exceeding 30 days (except at or in
connection with the termination of the Trust), as the Trustees may determine; or
without closing the transfer books the Trustees may fix a date and time not more
than 60 days prior to the date of any meeting of Shareholders or other action as
the date and time of record for the determination of Shareholders entitled to
vote at such meeting or any adjournment thereof or to be treated as Shareholders
of record for purposes of such other action, and any Shareholder who was a
Shareholder at the date and time so fixed shall be entitled to vote at such
meeting or any adjournment thereof or to be treated as a Shareholder of record
for purposes of such other action, even though he has since that date and time
disposed of his Shares, and no Shareholder becoming such after that date and
time shall be so entitled to vote at such meeting or any adjournment thereof or
to be treated as a Shareholder of record for purposes of such other action.
Section 5.4 Quorum and Required Vote. A majority of the Shares entitled
to vote shall be a quorum for the transaction of business at a Shareholders'
meeting, but any lesser number shall be sufficient for adjournments. Any
adjourned session or sessions may be held, within a reasonable time after the
date set for the original meeting without the necessity of further notice. A
majority of the Shares voted, at a meeting of which a quorum is present shall
decide any questions and a plurality shall elect a Trustee, except when a
different vote is required or permitted by any provision of the 1940 Act or
other applicable law or by this Declaration of Trust or the By-Laws.
Section 5.5 Action by Written Consent. Subject to the provisions of the
1940 Act and other applicable law, any action taken by Shareholders may be taken
without a meeting if a majority of Shareholders entitled to vote on the matter
(or such larger proportion thereof as shall be required by the 1940 Act or by
any express provision of this Declaration of Trust or the By-Laws) consent to
the action in writing and such written consents are filed with the records of
the meetings of Shareholders. Such consent shall be treated for all purposes as
a vote taken at a meeting of Shareholders.
Section 5.6 Inspection of Records. The records of the Trust shall be
open to inspection by Shareholders to the same extent as is permitted
stockholders of a Massachusetts business corporation under the Massachusetts
Business Corporation Law.
Section 5.7 Additional Provisions. The By-Laws may include further
provisions for Shareholders. votes and meetings and related matters not
inconsistent with the provisions hereof.
Section 5.8 Shareholder Communications. Whenever ten or more
Shareholders of record who have been such for at least six months preceding the
date of application, and who hold in the aggregate either Shares having a net
asset value of at least $25,000 or at least 1% of the outstanding Shares,
whichever is less, shall apply to the Trustees in writing, stating that they
wish to communicate with other Shareholders with a view to obtaining signatures
to a request for a Shareholder meeting and accompanied by a form of
communication and request which they wish to transmit, the Trustees shall within
five business days after receipt of such application either (1) afford to such
applicants access to a list of the names and addresses of all Shareholders as
recorded on the books of the Trust or Sub-Trust, as applicable; or (2) inform
such applicants as to the approximate number of Shareholders of record, and the
approximate cost of mailing to them the proposed communication and form of
request.
If the Trustees elect to follow the course specified in clause (2)
above, the Trustees, upon the written request of such applicants, accompanied by
a tender of the material to be mailed and of the reasonable expenses of mailing,
shall, with reasonable promptness, mail such material to all Shareholders of
record at their addresses as recorded on the books, unless within five business
days after such tender the Trustees shall mail to such applicants and file with
the Commission, together with a copy of the material to be mailed, a written
statement signed by at least a majority of the Trustees to the effect that in
their opinion either such material contains untrue statements of fact or omits
to state facts necessary to make the statements contained therein not
misleading, or would be in violation of applicable law, and specifying the basis
of such opinion. The Trustees shall thereafter comply with any order entered by
the Commission and the requirements of the 1940 Act and the Securities Exchange
Act of 1934.
ARTICLE VI
LIMITATION OF LIABILITY; INDEMNIFICATION
Section 6.1 Trustees, Shareholders, Etc. Not Personally Liable. All
persons extending credit to, contracting with or having any claim against the
Trust shall look only to the assets of the Sub-Trust with which such person
dealt for payment under such credit, contract or claim; and neither the
Shareholders of any Sub-Trust nor the Trustees, nor any of the Trust's officers,
employees or agents, whether past, present or future, nor any other Sub-Trust
shall be personally liable therefor. Every note, bond, contract, instrument,
certificate or undertaking and every other act or thing whatsoever executed or
done by or on behalf of the Trust, any Sub-Trust or the Trustees or any of them
in connection with the Trust shall be conclusively deemed to have been executed
or done only by or for the Trust (or the Sub-Trust) or the Trustees and not
personally. Nothing in this Declaration of Trust shall protect any Trustee or
officer against any liability to the Trust or the Shareholders to which such
Trustee or officer would otherwise be subject by reason of willful misfeasance,
bad faith, gross negligence or reckless disregard of the duties involved in the
conduct of the office of Trustee or of such officer.
Section 6.2 Trustee's Good Faith Action; Expert Advice; No Bond or
Surety. The exercise by the Trustees of their powers and discretion hereunder
shall be binding upon everyone interested. A Trustee shall be liable for his own
willful misfeasance, bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of the office of Trustee, and for nothing else,
and shall not be liable for errors of judgment or mistakes of fact or law.
Subject to the foregoing, (a) the Trustees shall not be responsible or liable in
any event for any neglect or wrongdoing of any officer, agent, employee,
consultant, adviser, administrator, distributor or principal underwriter,
custodian or transfer, dividend disbursing, Shareholder servicing or accounting
agent of the Trust, nor shall any Trustee be responsible for the act or omission
of any other Trustee; (b) the Trustees may take advice of counsel or other
experts with respect to the meaning and operation of this Declaration of Trust
and their duties as Trustees, and shall be under no liability for any act or
omission in accordance with such advice or for failing to follow such advice;
and (c) in discharging their duties, the Trustees, when acting in good faith,
shall be entitled to rely upon the books of account of the Trust and upon
written reports made to the Trustees by any officer appointed by them, any
independent public accountant, and (with respect to the subject matter of the
contract involved) any officer, partner or responsible employee of a Contracting
Party appointed by the Trustees pursuant to Section 3.3. The Trustees as such
shall not be required to give any bond or surety or any other security for the
performance of their duties.
Section 6.3 Indemnification of Shareholders. In case any Shareholder (or
former Shareholder) of any Sub-Trust of the Trust shall be charged or held to be
personally liable for any obligation or liability of the Trust solely by reason
of being or having been a Shareholder and not because of such Shareholder's acts
or omissions or for some other reason, said Sub-Trust (upon proper and timely
request by the Shareholder) shall assume the defense against such charge and
satisfy any judgment thereon, and the Shareholder or former Shareholder (or his
heirs, executors, administrators or other legal representatives or in the case
of a corporation or other entity, its corporate or other general successor)
shall be entitled out of the assets of said Sub-Trust estate to be held harmless
from and indemnified against all loss and expense arising from such liability.
Section 6.4 Indemnification of Trustees, Officers, etc. The Trust shall
indemnify (from the assets of the Sub-Trust or Sub-Trusts in question) each of
its Trustees and officers (including persons who serve at the Trust's request as
directors, officers or trustees of another organization in which the Trust has
any interest as a shareholder, creditor or otherwise (hereinafter referred to as
a "Covered Person")) against all liabilities, including but not limited to
amounts paid in satisfaction of judgments, in compromise or as fines and
penalties, and expenses, including reasonable accountants' and counsel fees,
incurred by any Covered Person in connection with the defense or disposition of
any action, suit or other proceeding, whether civil or criminal, before any
court or administrative or legislative body, in which such Covered Person may be
or may have been involved as a party or otherwise or with which such person may
be or may have been threatened, while in office or thereafter, by reason of
being or having been such a Trustee or officer, director or trustee, except with
respect to any matter as to which it has been determined that such Covered
Person had acted with willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of such Covered
Person's office (such conduct referred to hereafter as "Disabling Conduct"). A
determination that the Covered Person is entitled to indemnification may be made
by (i) a final decision on the merits by a court or other body before whom the
proceeding was brought that the person to be indemnified was not liable by
reason of Disabling Conduct, (ii) dismissal of a court action or an
administrative proceeding against a Covered Person for insufficiency of evidence
of Disabling Conduct, or (iii) a reasonable determination, based upon a review
of the facts, that the indemnitee was not liable by reason of Disabling Conduct
by (a) a vote of a majority of a quorum of Trustees who are neither "interested
persons" of the Trust as defined in section 2(a)(l9) of the 1940 Act nor parties
to the proceeding, or (b) an independent legal counsel in a written opinion.
Expenses, including accountants' and counsel fees so incurred by any such
Covered Person (but excluding amounts paid in satisfaction of judgments, in
compromise or as fines or penalties), may be paid from time to time by the
Sub-Trust in question in advance of the final disposition of any such action,
suit or proceeding, provided that the Covered Person shall have undertaken to
repay the amounts so paid to the Sub-Trust in question if it is ultimately
determined that indemnification of such expenses is not authorized under this
Article VI and (i) the Covered Person shall have provided security for such
undertaking, (ii) the Trust shall be insured against losses arising by reason of
any lawful advances, or (iii) a majority of a quorum of the disinterested
Trustees who are not a party to the proceeding, or an independent legal counsel
in a written opinion, shall have determined, based on a review of readily
available facts (as opposed to a full trial-type inquiry), that there is reason
to believe that the Covered Person ultimately will be found entitled to
indemnification.
Section 6.5 Compromise Payment. As to any matter disposed of by a
compromise payment by any such Covered Person referred to in Section 6.4,
pursuant to a consent decree or otherwise, no such indemnification either for
said payment or for any other expenses shall be provided unless such
indemnification shall be approved (a) by a majority of the disinterested
Trustees who are not parties to the proceeding or (b) by an independent legal
counsel in a written opinion. Approval by the Trustees pursuant to clause (a) or
by independent legal counsel pursuant to clause (b) shall not prevent the
recovery from any Covered Person of any amount paid to such Covered Person in
accordance with any of such clauses as indemnification if such Covered Person is
subsequently adjudicated by a court of competent jurisdiction to have been
liable to the Trust or its Shareholders by reason of willful misfeasance, bad
faith, gross negligence or reckless disregard of the duties involved in the
conduct of such Covered Person's office.
Section 6.6 Indemnification Not Exclusive, Etc. The right of
indemnification provided by this Article VI shall not be exclusive of or affect
any other rights to which any such Covered Person may be entitled. As used in
this Article VI, "Covered Person" shall include such person's heirs, executors
and administrators, an "interested Covered Person" is one against whom the
action, suit or other proceeding in question or another action, suit or other
proceeding on the same or similar grounds is then or has been pending or
threatened, and a "disinterested" person is a person against whom none of such
actions, suits or other proceedings or another action, suit or other proceeding
on the same or similar grounds is then or has been pending or threatened.
Nothing contained in this Article shall affect any rights to indemnification to
which personnel of the Trust, other than Trustees and officers, and other
persons may be entitled by contract or otherwise under law, nor the power of the
Trust to purchase and maintain liability insurance on behalf of any such person.
Section 6.7 Liability of Third Persons Dealing with Trustees. No person
dealing with the Trustees shall be bound to make any inquiry concerning the
validity of any transaction made or to be made by the Trustees or to see to the
application of any payments made or property transferred to the Trust or upon
its order.
ARTICLE VII
MISCELLANEOUS
Section 7.1 Duration and Termination of Trust. Unless terminated as
provided herein, the Trust shall continue without limitation of time and,
without limiting the generality of the foregoing, no change, alteration or
modification with respect to any Sub-Trust or class thereof shall operate to
terminate the Trust. The Trust or any Sub-Trust or class may be terminated at
any time by a majority of the Trustees then in office subject to a favorable
vote of a majority of the outstanding voting securities, as defined in the 1940
Act, Shares of each Sub-Trust or class voting separately by Sub-Trust or class.
Section 7.2 Reorganization. The Trustees may sell, convey, merge and
transfer the assets of the Trust, or the assets belonging to any one or more
Sub-Trusts, to another trust, partnership, association or corporation organized
under the laws of any state of the United States, or to the Trust to be held as
assets belonging to another Sub-Trust of the Trust, in exchange for cash, shares
or other securities (including, in the case of a transfer to another Sub-Trust
of the Trust, Shares of such other Sub-Trust or any class thereof) with such
transfer either (1) being made subject to, or with the assumption by the
transferee of, the liabilities belonging to each Sub-Trust the assets of which
are so transferred, or (2) not being made subject to, or not with the assumption
of, such liabilities; provided, however, that no assets belonging to any
particular Sub-Trust shall be so transferred unless the terms of such transfer
shall have first been approved at a meeting called for the purpose by the
affirmative vote of the holders of a majority of the outstanding voting Shares,
as defined in the 1940 Act, of that Sub-Trust. Following such transfer, the
Trustees shall distribute such cash, shares or other securities (giving due
effect to the assets and liabilities belonging to and any other differences
among the various Sub-Trusts or classes thereof the assets belonging to which
have so been transferred) among the Shareholders of the Sub-Trust the assets
belonging to which have been so transferred; and if all of the assets of the
Trust have been so transferred, the Trust shall be terminated.
The Trust, or any one or more Sub-Trusts, may, either as the successor,
survivor, or non-survivor, (1) consolidate with one or more other trusts,
partnerships, associations or corporations organized under the laws of the
Commonwealth of Massachusetts or any other state of the United States, to form a
new consolidated trust, partnership, association or corporation under the laws
of which any one of the constituent entities is organized, or (2) merge into one
or more other trusts, partnerships, associations or corporations organized under
the laws of the Commonwealth of Massachusetts or any other state of the United
States, or have one or more such trusts, partnerships, associations or
corporations merged into it, any such consolidation or merger to be upon such
terms and conditions as are specified in an agreement and plan of reorganization
entered into by the Trust, or one or more Sub-Trusts as the case may be, in
connection therewith. The terms "merge" or "merger" as used herein shall also
include the purchase or acquisition of any assets of any other trust,
partnership, association or corporation which is an investment company organized
under the laws of the Commonwealth of Massachusetts or any other state of the
United States. Any such consolidation or merger shall require the affirmative
vote of the holders of a majority of the outstanding voting Shares, as defined
in the 1940 Act, of each Sub-Trust affected thereby.
Section 7.3 Amendments. All rights granted to the Shareholders under
this Declaration of Trust are granted subject to the reservation of the right to
amend this Declaration of Trust as herein provided, except that no amendment
shall repeal the limitations on personal liability of any Shareholder or Trustee
or repeal the prohibition of assessment upon the Shareholders without the
express consent of each Shareholder or Trustee involved. Subject to the
foregoing, the provisions of this Declaration of Trust (whether or not related
to the rights of Shareholders) 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, including the 1940 Act, by
an instrument in writing signed by a majority of the then Trustees (or by an
officer of the Trust pursuant to the vote of a majority of such Trustees). Any
amendment to this Declaration of Trust that adversely affects the rights of
Shareholders may be adopted at any time by an instrument in writing signed by a
majority of the then Trustees (or by an officer of the Trust Pursuant to a vote
of a majority of such Trustees) when authorized to do so by the vote in
accordance with subsection (e) of Section 4.2 of Shareholders holding a majority
of the Shares entitled to vote. Subject to the foregoing, any such amendment
shall be effective as provided in the instrument containing the terms of such
amendment or, if there is no provision therein with respect to effectiveness,
upon the execution of such instrument and of a certificate (which may be a part
of such instrument) executed by a Trustee or officer of the Trust to the effect
that such amendment has been duly adopted.
Section 7.4 Filing of Copies; References; Headings. The original or a
copy of this instrument and of each amendment hereto shall be kept at the office
of the Trust where it may be inspected by any Shareholder. A copy of this
instrument and of each amendment hereto shall be filed by the Trust with the
Secretary of The Commonwealth of Massachusetts and with the Boston City Clerk,
as well as any other governmental office where such filing may from time to time
be required, but the failure to make any such filing shall not impair the
effectiveness of this instrument or any such amendment. Anyone dealing with the
Trust may rely on a certificate by an officer of the Trust as to whether or not
any such amendments have been made, as to the identities of the Trustees and
officers, and as to any matters in connection with the Trust hereunder; and,
with the same effect as if it were the original, may rely on a copy certified by
an officer of the Trust to be a copy of this instrument or of any such
amendments. In this instrument and in any such amendment, references to this
instrument, and all expressions like "herein", "hereof" and "hereunder" shall be
deemed to refer to this instrument as a whole as the same may be amended or
affected by any such amendments. The masculine gender shall include the feminine
and neuter genders. Headings are placed herein for convenience of reference only
and shall not be taken as a part hereof or control or affect the meaning,
construction or effect of this instrument. This instrument may be executed in
any number of counterparts each of which shall be deemed an original.
Section 7.5 Applicable Law. This Declaration of Trust is made in The
Commonwealth of Massachusetts, and it is created under and is to be governed by
and construed and administered according to the laws of said Commonwealth,
including the Massachusetts Business Corporation Law as the same may be amended
from time to time, to which reference is made with the intention that matters
not specifically covered herein or as to which an ambiguity may exist shall be
resolved as if the Trust were a business corporation organized in Massachusetts,
but the reference to said Business Corporation Law is not intended to give the
Trust, the Trustees, the Shareholders or any other person any right, power,
authority or responsibility available only to or in connection with an entity
organized in corporate form. The Trust shall be of the type referred to in
Section 1 of Chapter 182 of the Massachusetts General Laws and of the type
commonly called a Massachusetts business trust, and without limiting the
provisions hereof, the Trust may exercise all powers which are ordinarily
exercised by such a trust.
<PAGE>
IN WITNESS WHEREOF, the undersigned officer of the Trust adopts the
foregoing on behalf of the Trust pursuant to authorization by the Trustees of
the Trust.
/s/ Constantine Hutchins, Jr.
------------------------------
Constantine Hutchins, Jr.
Secretary
Date: June 5, 1993
Principal office of the Trust:
One Financial Center
Boston, Massachusetts 02111
<PAGE>
METLIFE - STATE STREET TAX-EXEMPT TRUST
Amendment No. 1
to
Second Amended and Restated Master Trust Agreement
INSTRUMENT OF AMENDMENT
Pursuant to Article VII, Section 7.3 of the Second Amended and Restated
Master Trust Agreement (the "Master Trust Agreement") of MetLife - State Street
Tax-Exempt Trust (the "Trust") dated June 5, 1993, the Master Trust Agreement is
hereby amended as follows:
1. Article II is amended by deleting the second sentence thereof.
2. Article III, Section 3.2, is amended by deleting the last
paragraph thereof.
This Amendment shall be effective as of February 24, 1994.
IN WITNESS WHEREOF, the undersigned officer of the Trust hereby adopts
the foregoing on behalf of the Trust pursuant to authorization by the Trustees
of the Trust.
/s/ Constantine Hutchins, Jr.
------------------------------
Constantine Hutchins, Jr.
Secretary
<PAGE>
METLIFE - STATE STREET TAX-EXEMPT TRUST
Amendment No. 2
to
Second Amended and Restated Master Trust Agreement
INSTRUMENT OF AMENDMENT
Pursuant to Article I, Section 1.1, Article IV, Sections 4.1 and 4.2
and Article VII, Section 7.3 of the Second Amended and Restated Master Trust
Agreement of MetLife - State Street Tax-Exempt Trust (the "Trust") dated June 5,
1993 (the "Master Trust Agreement"),as heretofore amended, the Master Trust
Agreement is hereby amended to change the name of the Trust to State Street
Research Tax-Exempt Trust and to change the name of one of the series of shares
under such Trust, currently a Sub-Trust designated as MetLife - State Street
Tax-Exempt Fund to State Street Research Tax-Exempt Fund.
Pursuant to Article VII, Section 7.3 of the Master Trust Agreement, the
third sentence of the third paragraph of Article IV, Section 4.1 of the Master
Trust Agreement is hereby amended to read as follows:
"The Trustees may classify or reclassify any Shares of any
Sub-Trust or class into one or more Sub-Trusts or classes that
may be established and designated from time to time provided,
however, that no such classification or reclassification shall
adversely affect the rights of any Shareholder."
This Amendment shall be effective as of May 1, 1995.
IN WITNESS WHEREOF, the undersigned officer of the Trust hereby adopts
the foregoing on behalf of the Trust pursuant to authorization by the Trustees
of the Trust.
/s/ Constantine Hutchins, Jr.
------------------------------
Constantine Hutchins, Jr.
Secretary
EXHIBIT (1)(b)
STATE STREET RESEARCH TAX-EXEMPT TRUST
Amendment No. 3
to
Second Amended and Restated Master Trust Agreement
INSTRUMENT OF AMENDMENT
Pursuant to Article VII, Section 7.3 and Article IV, Section 4.1 of the
Second Amended and Restated Master Trust Agreement (the "Master Trust
Agreement") of State Street Research Tax-Exempt Trust (the "Trust") dated June
5, 1993, as heretofore amended, the following action is taken:
The first sentence of the first paragraph of Section 4.2 of Article IV
of the Master Trust Agreement is hereby amended to read as follows:
"Section 4.2 Establishment and Designation of Sub-Trusts. Without
limiting the authority of the Trustees set forth in Section 4.1 to
establish and designate any further Sub-Trusts, the Trustees hereby
establish and designate two Sub-Trusts: The 'State Street Research
Tax-Exempt Fund' and 'State Street Research New York Tax-Free Fund.'"
This Amendment shall operate to abolish State Street Research
California Tax-Free Fund, State Street Research Florida Tax-Free Fund, State
Street Research Massachusetts Tax-Free Fund, State Street Research Pennsylvania
Tax-Free Fund, State Street Research Texas Tax-Free Fund and State Street
Research Virginia Tax-Free Fund and shall be effective as of April 30, 1996.
IN WITNESS WHEREOF, the undersigned Trustees of the Trust hereby adopt
the foregoing on behalf of the Trust pursuant to Article IV, Section 4.1.
- -------------------------------- ----------------------------------
Edward M. Lamont Toby Rosenblatt
- -------------------------------- ----------------------------------
Robert A. Lawrence Michael S. Scott Morton
- -------------------------------- ----------------------------------
Dean O. Morton Ralph F. Verni
- -------------------------------- ----------------------------------
Thomas L. Phillips Jeptha H. Wade
EXHIBIT (1)(c)
STATE STREET RESEARCH TAX-EXEMPT TRUST
Amendment No. 4
to
Second Amended and Restated Master Trust Agreement
INSTRUMENT OF AMENDMENT
Pursuant to Article VII, Section 7.3 of the Second Amended and Restated
Master Trust Agreement of the State Street Research Tax-Exempt Trust (the
"Trust") dated June 5, 1993 ("Master Trust Agreement"), as heretofore amended,
the following actions are taken:
The last sentence of Article IV, Section 4.2(d) of the Master Trust
Agreement is hereby amended to read as follows:
"The liquidation of any particular Sub-Trust or class thereof may be
authorized by vote of a majority of the Trustees then in office without
the approval of shareholders of such Sub-Trust."
Section 5.3 of Article V of the Master Trust Agreement is revised in
its entirety to read as follows:
"Section 5.3 Record Dates. For the purpose of determining the
Shareholders who are entitled to vote or act at any meeting or any
adjournment thereof, or who are entitled to participate in any dividend
or distribution, or for the purpose of any other action, the Trustees
may from time to time close the transfer books for such period, not
exceeding 30 days (except at or in connection with the termination of
the Trust), as the Trustees may determine; or without closing the
transfer books the Trustees may fix a reasonable date and time prior to
the date of any meeting of Shareholders or other action as the date and
time of record for the determination of Shareholders entitled to vote
at such meeting or any adjournment thereof or to be treated as a
Shareholder of record for purposes of such other action, even though he
has since that date and time disposed of his Shares, and no Shareholder
becoming such after that date and time shall be so entitled to vote at
such meeting or any adjournment thereof or to be treated as a
Shareholder of record for purposes of such other action."
Section 7.2 of Article VII of the Master Trust Agreement is revised in
its entirety to read as
follows:
"Section 7.2 Reorganization. The Trust, or any one or more Sub-Trusts,
may, either as the successor, survivor, or non-survivor, (1)
consolidate or merge with one or more other trusts, sub-trusts,
partnerships, associations or corporations organized under the laws of
the Commonwealth of Massachusetts or any other state of the United
States, to form a consolidated or merged trust, sub-trust, partnership,
limited liability company, association or corporation under the laws of
which any one of the constituent entities is organized, with the Trust
or Sub-Trust to be the survivor or non-survivor of such consolidation
or merger or (2) transfer a substantial portion of its assets to one or
more other trusts, sub-trusts, partnerships, limited liability
companies, associations or corporations organized under the laws of the
Commonwealth of Massachusetts or any other state of the United States,
or have one or more such trusts, sub-trusts, partnerships, limited
liability companies, associations or corporations transfer a
substantial portion of its assets to it, any such consolidation, merger
or transfer to be upon such terms and conditions as are specified in an
agreement and plan of reorganization authorized and approved by the
Trustees and entered into by the Trust, or one or more Sub-Trusts, as
the case may be, in connection therewith. Any such consolidation,
merger or transfer may be authorized by vote of a majority of the
Trustees then in office without the approval of shareholders of any
Sub-Trust."
This Amendment shall be effective as of May 1, 1996.
IN WITNESS WHEREOF, the undersigned officer of the Trust hereby adopts
the foregoing on behalf of the Trust pursuant to authorization by the Trustees
of the Trust.
------------------------------
Francis J. McNamara, III
Secretary
EHXIBIT (5)(a)
ADVISORY AGREEMENT
ADVISORY AGREEMENT made as of this 17th day of July, 1986, by and
between METLIFE - STATE STREET INVESTMENT SERVICES, INC., a corporation
organized under the laws of the Commonwealth of Massachusetts having its
principal place of business in Boston, Massachusetts (the "Manager"), and
METLIFE - STATE STREET TAX-EXEMPT TRUST, a Massachusetts business trust having
its principal place of business in Boston, Massachusetts (the "Trust").
WHEREAS, the Trust is engaged in business as an open-end diversified
management investment company and is registered as such under the Investment
Company Act of 1940, as amended (the "1940 Act"); and
WHEREAS, the Manager is engaged principally in the business of rendering
investment management services and is registered as an investment adviser under
the Investment Advisers Act of 1940, as amended; and
WHEREAS, the Trust is authorized to issue shares of beneficial interest
in separate series with each such series representing interests in a separate
portfolio of securities and other assets; and
WHEREAS, the Trust has established two series, the MetLife - State
Street High Income Tax-Exempt Fund and the MetLife - State Street Insured
Tax-Exempt Fund, such series (the "Initial Funds"), together with all other
series subsequently established by the Trust with respect to which the Manager
renders management and investment advisory services pursuant to the terms of
this Agreement, being herein collectively referred to as the "Funds" and
individually as a "Fund."
NOW, THEREFORE, WITNESSETH: That it is hereby agreed between the
parties hereto as follows:
1. APPOINTMENT OF MANAGER.
(a) Initial Funds. The Trust hereby appoints the Manager to act as
manager and investment adviser to each of the Initial Funds for the period and
on the terms herein set forth. The Manager accepts such appointment and agrees
to render the services herein set forth, for the compensation herein provided.
<PAGE>
(b) Additional Funds. In the event that the Trust establishes one or
more series of shares other than the Initial Funds with respect to which it
desires to retain the Manager to render management and investment advisory
services hereunder, it shall so notify the Manager in writing, indicating the
advisory fee to be payable with respect to the additional series of shares. If
the Manager is willing to render such services, it shall so notify the Trust in
writing, whereupon such series of shares shall become a Fund hereunder. In such
event a writing signed by both the Trust and the Manager shall be annexed hereto
as a part hereof indicating that such additional series of shares has become a
Fund hereunder and reflecting the agreed-upon fee schedule for such Fund to the
extent the provisions of Section 4 shall not apply with respect thereto.
2. DUTIES OF MANAGER.
The Manager, at its own expense, shall furnish the following services
and facilities to the Trust:
(a) Investment Program. The Manager shall (i) furnish continuously an
investment program for each Fund, (ii) determine (subject to the overall
supervision and review of the Board of Trustees of the Trust) what investments
shall be purchased, held, sold or exchanged by each Fund and what portion, if
any, of the assets of each Fund shall be held uninvested, and (iii) make changes
on behalf of the Trust in the investments of each Fund. The Manager shall also
manage, supervise and conduct the other affairs and business of the Trust and
each Fund thereof and matters incidental thereto, subject always to the control
of the Board of Trustees of the Trust and to the provisions of the Master Trust
Agreement and By-laws of the Trust, as amended, and the Prospectus of the Trust
as from time to time amended and in effect and the 1940 Act. Subject to the
foregoing, the Manager shall have the authority to engage one or more
sub-advisers in connection with the management of the Funds, which sub-advisers
may be affiliates of the Manager.
(b) Regulatory Reports. The Manager shall furnish to the Trust necessary
assistance in:
(i) the preparation of all reports now or hereafter required by
federal or other laws; and
(ii)the preparation of prospectuses, registration statements and
amendments thereto that may be required by federal or other laws or by the rules
or regulations of any duly authorized commission or administrative body.
(c) Office Space and Facilities. The Manager shall furnish the Trust
office space in the offices of the Manager, or in such other place or places as
may be agreed upon from time to time, and all necessary office facilities,
simple business equipment, supplies, utilities, and telephone service for
managing the affairs and investments of the Trust.
(d) Services of Personnel. The Manager shall provide all necessary
executive and administrative personnel for managing the affairs of the Trust,
including personnel to perform clerical, bookkeeping, accounting and other
office functions. These services are exclusive of the bookkeeping and accounting
services of any dividend disbursing agent, transfer agent, registrar or
custodian. The Manager shall compensate all personnel, officers and Trustees of
the Trust if such persons are also employees of the Manager or its affiliates.
(e) Fidelity Bond. The Manager shall arrange for providing and
maintaining a bond issued by a reputable insurance company authorized to do
business in the place where the bond is issued against larceny and embezzlement
covering each officer and employee of the Trust and/or the Manager who may
singly or jointly with others have access to funds or securities of the Trust,
with direct or indirect authority to draw upon such funds or to direct generally
the disposition of such funds. The bond shall be in such reasonable amount as a
majority of the Trustees who are not "interested persons" of the Trust, as
defined in the 1940 Act, shall determine, with due consideration given to the
aggregate assets of the Trust to which any such officer or employee may have
access. The premium for the bond shall be payable by the Trust in accordance
with paragraph 3(o).
(f) Portfolio Transactions. The Manager shall place all orders for the
purchase and sale of portfolio securities for the account of each Fund with
brokers or dealers selected by the Manager, although the Trust will pay the
actual brokerage commissions on portfolio transactions in accordance with
paragraph 3(d).
3. ALLOCATION OF EXPENSE
Except for the services and facilities to be provided by the Manager as
set forth in paragraph 2 above, the Trust assumes and shall pay all expenses for
all other Trust operations and activities and shall reimburse the Manager for
any such expenses incurred by the Manager (it being understood that the Trust
shall allocate such expenses between or among its Funds to the extent
contemplated by its Master Trust Agreement). The expenses to be borne by the
Trust shall include, without limitation:
(a) all expenses of organizing the Trust or forming any Fund thereof;
(b) the charges and expenses of any registrar, stock transfer or
dividend disbursing agent, shareholder servicing agent, custodian, or depository
appointed by the Trust for the safekeeping of its cash, portfolio securities and
other property, including the costs of servicing shareholder investment accounts
and bookkeeping, accounting and pricing services;
(c) the charges and expenses of auditors;
(d) brokerage commissions and other costs incurred in connection with
transactions in the portfolio securities of the Trust, including any portion of
such commissions attributable to brokerage and research services as defined in
Section 28(e) of the Exchange Act;
(e) taxes, including issuance and transfer taxes, and corporate
registration, filing or other fees payable by the Trust to federal, state or
other governmental agencies;
(f) expenses, including the cost of printing certificates, relating to
the issuance of shares of the Trust;
(g) expenses involved in registering and maintaining registrations of
the Trust and of its shares with the Securities and Exchange Commission and
various states and other jurisdictions, including reimbursement of actual
expenses incurred by the Manager in performing such functions for the Trust, and
including compensation of persons who are employees of the Manager, in
proportion to the relative time spent on such matters;
(h) expenses related to the redemption of shares of the Trust, including
expenses attributable to any program of periodic redemption;
(i) expenses of shareholders' and Trustees' meetings, including meetings
of committees, and of preparing, printing and mailing proxy statements,
quarterly reports, semi-annual reports, annual reports and other communications
to existing shareholders;
(j) expenses of preparing and setting in type prospectuses, and expenses
of printing and mailing the same to existing shareholders (but not expenses of
printing and mailing of prospectuses and literature used for promotional
purposes);
(k) compensation and expenses of Trustees who are not "interested
persons" within the meaning of the 1940 Act;
(l) expense of maintaining shareholder accounts and furnishing, or
causing to be furnished, to each shareholder a statement of his account,
including the expense of mailing;
(m) charges and expenses of legal counsel in connection with matters
relating to the Trust, including, without limitation, legal services rendered in
connection with the Trust's corporate and financial structure and relations with
its shareholders, issuance of shares of the Trust, and registration and
qualification of securities under federal, state and other laws;
(n) the cost and expense of maintaining the books and records of the
Trust, including general ledger accounting;
(o) insurance premiums on fidelity, errors and omissions and other
coverages including the expense of obtaining and maintaining a fidelity bond as
required by Section 17(g) of the 1940 Act;
(p) interest payable on Trust borrowings; and
(q) such other non-recurring expenses of the Trust as may arise,
including expenses of actions, suits, or proceedings to which the Trust is a
party and expenses resulting from the legal obligation which the Trust may have
to provide indemnity with respect thereto.
4. ADVISORY FEE.
For the services and facilities to be provided by the Manager as set
forth in paragraph 2 hereof, the Trust agrees that each Fund shall pay to the
Manager a monthly fee as soon as practical after the last day of each calendar
month, which fee shall be paid at a rate equal to sixty-five one hundredths of
one percent (.65%) on an annual basis of the average daily net asset value of
such Fund for such calendar month, commencing as of the date on which this
Agreement becomes effective with respect to such Fund.
In the case of commencement or termination of this Agreement with
respect to any Fund during any calendar month, the fee with respect to such Fund
for that month shall be reduced proportionately based upon the number of
calendar days during which this Agreement is in effect with respect to such
Fund, and the fee shall be computed based upon the average daily net asset value
of such Fund during such period.
5. EXPENSE LIMITATION.
The Manager agrees that if the total expenses of any Fund (exclusive of
interest, taxes, payments to fund certain distribution expenses pursuant to the
Trust's 12b-1 Distribution Plan, brokerage expenses and extraordinary items such
as litigation expenses) for any fiscal year of the Trust exceed the lowest
expense limitation imposed in any jurisdiction in which that Fund is then making
sales of its shares or in which its shares are then qualified for sale, if any,
the Manager will pay or reimburse such Fund for that excess up to the amount of
its advisory fees payable with respect to that Fund during that fiscal year. The
amount of the monthly advisory fee payable by any Fund under paragraph 4 hereof
shall be reduced to the extent that the monthly expenses of that Fund, on an
annualized basis, would exceed the foregoing limitation. At the end of each
fiscal year of the Trust, if the aggregate annual expenses chargeable to any
Fund for that year exceed the foregoing limitation based upon the average of the
monthly average net asset value of that Fund for the year, the Manager will
promptly reimburse that Fund for the amount of such excess to the extent not
already reimbursed by reduction of the monthly advisory fee, but if such
expenses are within the foregoing limitation, any excess amount previously
withheld from the monthly advisory fee during that fiscal year will be promptly
paid over to the Manager.
In the event that this Agreement (i) is terminated with respect to any
one or more Funds as of a date other than the last day of the fiscal year of the
Trust or (ii) commences with respect to one or more Funds as of a date other
than the first day of the fiscal year of the Trust, then the expenses of such
Fund or Funds shall be annualized and the Manager shall pay to, or receive from,
the applicable Fund or Funds a pro rata portion of the amount that the Manager
would have been required to pay or would have been entitled to receive, if any,
had this Agreement been in effect with respect to such Fund or Funds for the
full fiscal year.
6. RELATIONS WITH TRUST.
Subject to and in accordance with the Master Trust Agreement and By-laws
of the Trust and the Articles of Organization and By-laws of the Manager, it is
understood that Trustees, officers, agents and shareholders of the Trust are or
may be interested in the Manager (or any successor thereof) as directors,
officers or otherwise, that directors, officers, agents and shareholders of the
Manager (or any successor thereof) are or may be interested in the Trust as
Trustees, officers, agents, shareholders or otherwise, that the Manager (or any
such successor thereof) is or may be interested in the Trust as a shareholder or
otherwise and that the effect of any such adverse interests shall be governed by
said Master Trust Agreement, Articles of Organization and By-laws.
7. LIABILITY OF MANAGER.
The Manager shall not be liable to the Trust for any error of judgment
or mistake of law or for any loss suffered by the Trust in connection with the
matters to which this Agreement relates; provided, however, that no provision of
this Agreement shall be deemed to protect the Manager against any liability to
the Trust or its shareholders to which it might otherwise be subject by reason
of any willful misfeasance, bad faith or gross negligence in the performance of
its duties or the reckless disregard of its obligations and duties under this
Agreement, nor shall any provision hereof be deemed to protect any Trustee or
officer of the Trust against any such liability to which he might otherwise be
subject by reason of any willful misfeasance, bad faith or gross negligence in
the performance of his duties or the reckless disregard of his obligations and
duties. If any provision of this Agreement shall be held or made invalid by a
court decision, statute, rule or otherwise, the remainder of this Agreement
shall not be affected thereby.
8. DURATION AND TERMINATION OF THIS AGREEMENT.
(a) Duration. This Agreement shall become effective with respect to each
Initial Fund on the later of (i) the date on which a Registration Statement with
respect to its shares under the Securities Act of 1933, as amended, is first
declared effective by the Securities and Exchange Commission or (ii) the date on
which such Initial Fund commences offering its shares to the public, and, with
respect to any additional Fund, on the date of receipt by the Trust of notice
from the Manager in accordance with paragraph 1(b) hereof that the Manager is
willing to serve as Manager with respect to such Fund. Unless terminated as
herein provided, this Agreement shall remain in full force and effect with
respect to each Initial Fund until the date which is two years after the
effective date of this Agreement, with respect to such Initial Fund and, with
respect to each additional Fund, for two years from the date on which such Fund
becomes a Fund hereunder. Subsequent to such initial periods of effectiveness
this Agreement shall continue in full force and effect, subject to Section 8(c),
for successive one-year periods with respect to each Fund so long as such
continuance with respect to such Fund is approved at least annually (a) by
either the Trustees of the Trust or by vote of a majority of the outstanding
voting securities (as defined in the 1940 Act) of such Fund, and (b) in either
event, by the vote of a majority of the Trustees of the Trust who are not
parties to this Agreement or "interested persons" (as defined in the 1940 Act)
of any such party, cast in person at a meeting called for the purpose of voting
on such approval. Notwithstanding the foregoing provisions of this Section 8(a),
the continuance of this Agreement with respect to the Initial Funds or any
additional Fund is subject to the approval of this Agreement by a majority of
the outstanding voting securities thereof (as defined in the 1940 Act) at the
initial meeting of shareholders after this Agreement becomes effective with
respect thereto.
(b) Amendment. No provision of this Agreement may be changed, waived,
discharged or terminated orally, but only by an instrument in writing signed by
the party against which enforcement of the change, waiver, discharge or
termination is sought, and no amendments of this Agreement shall be effective
with respect to any Fund until approved by vote of the holders of a majority of
that Fund's outstanding voting securities (as defined in the 1940 Act).
(c) Termination. This Agreement may be terminated with respect to any
Fund at any time, without payment of any penalty, by vote of the Trustees or by
vote of a majority of the outstanding voting securities (as defined in the 1940
Act) of that Fund, or by the Manager, in each case on sixty (60) days' prior
written notice to the other party.
(d) Automatic Termination. This Agreement shall automatically and
immediately terminate in the event of its assignment (as defined in the 1940
Act).
(e) Approval, Amendment or Termination by Individual Fund. Any approval,
amendment or termination of this Agreement shall be effective to continue, amend
or terminate this Agreement with respect to such Fund notwithstanding (i) that
such action has not been approved by the holders of a majority of the
outstanding voting securities of any other Fund affected thereby, and (ii) that
such action has not been approved by the vote of a majority of the outstanding
voting securities of the Trust, unless such action shall be required by any
applicable law or otherwise.
9. SERVICES NOT EXCLUSIVE.
The services of the Manager to the Trust hereunder are not to be deemed
exclusive, and the Manager shall be free to render similar services to others so
long as its services hereunder are not impaired thereby.
10. NAME OF TRUST.
It is understood that the names "State Street" and "MetLife" and any
logos associated with those names are the valuable property of, respectively,
State Street Research & Management Company ("SSRM"), the parent company of the
Manager, and Metropolitan Life Insurance Company, the ultimate parent company of
SSRM, and that the Trust has the right to include such names as a part of its
name and the names of its Funds only so long as this Agreement shall continue.
Upon termination of this Agreement the Trust shall forthwith cease to use the
State Street and MetLife names and logos and shall submit to its shareholders an
amendment to its Master Trust Agreement changing the Trust's name and the names
of any Funds then utilizing such name or names or any portion thereof.
11. PRIOR AGREEMENTS SUPERSEDED.
This Agreement supersedes any prior agreement relating to the subject
matter hereof between the parties hereto.
12. NOTICES.
Notices under this Agreement shall be in writing and shall be addressed,
and delivered or mailed postage prepaid, to the other party at such address as
such other party may designate from time to time for the receipt of such
notices. Until further notice to the other party, the address of each party to
this Agreement for this purpose shall be One Financial Center, Boston,
Massachusetts 02111.
13. GOVERNING LAW; COUNTERPARTS.
This Agreement shall be construed in accordance with the laws of the
Commonwealth of Massachusetts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original, but such
counterparts shall, together, constitute only one instrument.
14. LIMITATION OF LIABILITY.
The term "State Street Research Tax-Exempt Trust" means and refers to
the Trustees from time to time serving under the Master Trust Agreement of the
Trust dated December 23, 1985 as the same may subsequently hereto have been, or
subsequently hereto may be, amended. It is expressly agreed that the obligations
of the Trust hereunder shall not be binding upon any of the Trustees,
shareholders, nominees, officers, agents or employees of the Trust as
individuals or personally, but shall bind only the trust property of the Trust,
as provided in the Master Trust Agreement of the Trust. The execution and
delivery of this Agreement have been authorized by the Trustees of the Trust and
signed by the President of the 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 Trust as provided in its Master Trust Agreement. The Master
Trust Agreement of the Trust provides, and it is expressly agreed, that each
Fund of the Trust shall be solely and exclusively responsible for the payment of
its debts, liabilities and obligations, and that no other Fund shall be
responsible for the same.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the date first set forth above.
METLIFE - STATE STREET
Attest: INVESTMENT SERVICES, INC.
By:
/s/ Constantine Hutchins, Jr., /s/ Herbert P. Hess
- ------------------------------ ---------------------------------
Constantine Hutchins, Jr., Herbert P. Hess,
Clerk Senior Vice President
METLIFE - STATE STREET
Attest: TAX-EXEMPT TRUST
By:
/s/ Constantine Hutchins, Jr., /s/ Charles L. Smith, Jr.
- ------------------------------ ---------------------------------
Constantine Hutchins, Jr., Charles L. Smith, Jr.,
Clerk President
EXHIBIT (5)(b)
TRANSFER AND ASSUMPTION OF RESPONSIBILITIES AND RIGHTS
In accordance with the vote unanimously adopted by all of the Trustees
of MetLife - State Street Tax-Exempt Trust ("Trust") who were present at a
meeting of such Trustees duly called and held on September 14, 1992, being a
majority of such Trustees, including a majority of Trustees who are not parties
to the attached Advisory Agreement dated July 17, 1986, by and between State
Street Financial Services, Inc. (formerly MetLife - State Street Investment
Services, Inc.) and the Trust ("Advisory Agreement"), or "interested persons"
(as defined in the Investment Company Act of 1940) of any such party, effective
as of the commencement of business on July 1, 1992, all of the duties and
responsibilities of the Manager to provide services and facilities to the Trust
as set forth in the Advisory Agreement and all the rights of the Manager,
including but not limited to the right to be compensated by the Trust as
described in the Advisory Agreement, are hereby transferred from State Street
Financial Services, Inc., a Massachusetts corporation, to State Street Research
& Management Company, a Delaware corporation, formerly sub-adviser to the Trust,
and State Street Research & Management Company hereby assumes such
responsibilities and rights, all of the foregoing transactions being effected in
reliance on Rule 2a-6 under the Investment Company Act of 1940, as amended.
STATE STREET FINANCIAL
SERVICES, INC.
by /s/ Donald E. Webber
-------------------------------------
Donald E. Webber, President and
Chief Executive Officer
STATE STREET RESEARCH &
MANAGEMENT COMPANY
by /s/ Ralph F. Verni
-------------------------------------
Ralph F. Verni, Chairman and
Chief Executive Officer
Dated: October 6, 1992.
EXHIBIT (5)(c)
METLIFE - STATE STREET TAX-EXEMPT TRUST
One Financial Center
Boston, MA 02111
July 1, 1989
MetLife - State Street
Investment Services, Inc.
One Financial Center
Boston, MA 02111-2690
Gentlemen:
This letter is to confirm to you that State Street Research Tax-Exempt
Trust (the "Trust") has created a new series of shares to be known as MetLife -
State Street New York Tax-Free Fund (the "Fund"), and that pursuant to Section
1(b) of the Advisory Agreement dated as of July 17, 1986 between the Trust and
you (the "Agreement"), the Trust desires to retain you to render management and
investment advisory services under the Advisory Agreement to the Fund as a
"Series" thereunder for a fee equal to 0.55% on an annual basis of the average
daily net asset value of the Fund.
Please indicate your acceptance of this responsibility in accordance
with the terms of the Agreement by signing this letter as indicated below:
The term "MetLife - State Street Tax-Exempt Trust" means and refers to
the Trustees from time to time serving under the Master Trust Agreement of the
Trust dated December 23, 1985 as the same may subsequently thereto have been, or
subsequently hereto may be, amended. It is expressly agreed that the obligations
of the Trust hereunder shall not be binding upon any of the Trustees,
shareholders, nominees, officers, agents or employees of the Trust as
individuals or personally, but shall bind only the trust property of the Trust,
as provided in the Master Trust Agreement of the Trust. The execution and
delivery of this Agreement have been authorized by the Trustees of the Trust and
signed by the President of the 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 Trust as provided in its Master Trust Agreement. The Master
Trust Agreement of the Trust provides, and it is expressly agreed, that each
Fund of the Trust shall be solely and exclusively responsible for the payment of
its debts, liabilities and obligations, and that no other fund shall be
responsible for the same.
METLIFE - STATE STREET
TAX-EXEMPT TRUST
By: /s/ Charles L. Smith, Jr.
---------------------------------
President
ACCEPTED AND AGREED TO:
METLIFE - STATE STREET
INVESTMENT SERVICES, INC.
By: /s/ David P. McLean
-------------------
EXHIBIT (5)(d)
METLIFE - STATE STREET TAX-EXEMPT TRUST
Amendment No. 1
to the Advisory Agreement
That the first paragraph of Section 4 of the Advisory Agreement of the
MetLife - State Street Tax-Exempt Trust is hereby amended to read as follows:
"For the services and facilities to be provided by the Manager as set
forth in paragraph 2 hereof, the Trust agrees that the MetLife - State
Street Tax-Exempt Fund shall pay to the Manager a monthly fee as soon
as practical after the last day of each calendar month, which fee shall
be paid at a rate equal to fifty-five one hundredths of one percent
(0.55%) on an annual basis of the average daily net asset value of such
Fund for such calendar month, commencing as of the date on which this
Amendment becomes effective with respect to such Fund."
Effective Date: May 1, 1994
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed as of the date set forth above.
STATE STREET RESEARCH METLIFE - STATE STREET
& MANAGEMENT COMPANY TAX-EXEMPT TRUST
By: /s/ Gerard P. Maus By: /s/ Constantine Hutchins, Jr.
- --------------------------------- --------------------------------
Treasurer Secretary
EXHIBIT (6)(b)
SELECTED DEALER AGREEMENT
Boston, Massachusetts
Effective Date: __________
Dealer Name:
---------------------------------------
Address:
---------------------------------------
---------------------------------------
Attn:
---------------------------------------
Ladies and Gentlemen:
We have been appointed to serve as an agent and principal underwriter as
defined in the Investment Company Act of 1940 (the "1940 Act") for the purpose
of selling and distributing shares (the "Shares") of each of the portfolio
series as specified from time to time, of certain investment companies,
including, but not limited to, the MetLife - State Street trusts, the State
Street trusts and MetLife Portfolios, Inc. Hereinafter the specified portfolio
series shall be denoted individually as a "Fund" and collectively as the
"Funds", and the investment companies shall be denoted individually as an
"Investment Company" and collectively as the "Investment Companies" for purposes
of this Agreement.
We are hereby inviting you, as a selected dealer and subject to the terms
and conditions set forth below, to make available to your customers Shares of
the Funds. By your acceptance hereof, you agree that you shall exercise your
best efforts to find purchasers for the Shares, shall purchase Shares only from
us or from your customers, and shall act only as agent for your customers or
dealer for your own account, with no authority to act as agent for the Funds,
for us or for any other dealer in any respect.
1. Acceptance of Orders. Orders received from you will be accepted only at
the public offering price (as defined below in Section 2) applicable to each
order. You agree to place orders for Shares immediately upon the receipt of, and
in the same amount as, orders from your customers. We will not accept a
conditional order from you on any basis. All orders are subject to our receipt
of Shares from the Investment Company and to acceptance and confirmation of such
<PAGE>
orders by us and by the Investment Company. The procedures relating to the
handling of orders shall be subject to instructions which we shall provide from
time to time to you. We and the Investment Companies reserve the right in our
sole discretion to reject any order.
2. Public Offering Price and Sales Charge. The public offering price shall
be the net asset value per Share plus any sales charge payable upon the purchase
of Shares of such Fund or class thereof as described in the then current
prospectus applicable to such Shares, as amended and in effect from time to time
(the "Prospectus"). The public offering price may reflect scheduled variations
in, or the elimination of, the sales charge on sales of the Shares either
generally to the public or in connection with special purchase plans, as
described in the Prospectus and related Statement of Additional Information. You
agree that you will apply any scheduled variation in, or elimination of, the
sales charge uniformly to all offerees in the class specified in the Prospectus.
The sales charge applicable to any sale of Shares by you and the dealer
concession or commission applicable to any order from you for the purchase of
Shares accepted by us shall be as set forth in the applicable Prospectus and
related Statement of Additional Information. You agree that you will not combine
customer orders to reach breakpoints in commissions for any purpose unless
authorized by the Prospectus or by us in writing. All commissions and
concessions are subject to change without notice by us.
3. 12b-1 Plans.
(a) As consideration for your providing distribution and marketing
services in the promotion of the sale of Shares of certain Funds or classes
thereof which have adopted Distribution Plans pursuant to Rule 12b-1 under the
1940 Act, and for providing personal services to and/or the maintenance of the
accounts of, your customers who invest in and own such Shares, we shall pay you
such fee, if any, as is described in the applicable Prospectus and otherwise
established by us from time to time on Shares which are owned of record by your
firm as nominee for your customers or which are owned by those customers of your
firm whose records, as maintained by such Fund or its agent, designate your firm
as the customer's dealer of record. Any fee payable hereunder shall be computed
and accrued daily and for each month shall be based on average daily net asset
value of the relevant Shares which remain outstanding during such month. No such
fee will be paid to you with respect to Shares redeemed or repurchased by such
Fund within seven business days after the date of our confirmation of such
purchase. No such fee will be paid to you with respect to any of your customers
2
<PAGE>
if the amount of such fee based upon the value of such customer's Shares will be
less than $1.00.
(b) The provisions of this Paragraph 3 may be terminated with respect to
any Fund or class thereof in accordance with the provisions of Rule 12b-1 under
the 1940 Act or the rules of the National Association of Securities Dealers,
Inc. (the "NASD") and thereafter no such fee will be paid to you.
(c) Consistent with NASD policies as amended or interpreted from time to
time (i) you waive payment of amounts due from us which are funded by fees we
receive under such Distribution Plans until we are in receipt of the fees on the
relevant shares of a Fund, and (ii) our liability for amounts payable to you is
limited solely to the proceeds of the fees receivable to us on the relevant
shares.
4. Payment for Shares. Payment for Shares sold through you shall be made on
or before the settlement date specified in the applicable confirmation, at the
office of our clearing agent, and by your check payable to the order of such
Fund or, if applicable, by Federal Funds wire for credit to such Fund, in any
case in accordance with the procedures and conditions described in the
applicable Prospectus. Each Fund reserves the right to delay issuance or
transfer of Shares until such check has cleared. If such payment is not received
by us, we reserve the right, without notice, forthwith to cancel the sale.
Unless other instructions are received by us on or before the settlement date,
orders accepted by us may be placed in an Open Account in your name. If such
payment or instruments are not timely received by us, we may hold you
responsible for any expense or loss, including loss of profit, suffered by us or
by such Fund resulting from your failure to make payment as aforesaid.
5. Redemption and Repurchase of Shares. If any of the Shares sold through
you hereunder are redeemed by such Fund or repurchased by us as agent for such
Fund within seven business days after confirmation of the original purchase, it
is agreed that you shall forfeit your right to the entire dealer concession and
related commission, if any, received by you on such Shares. We will notify you
of any such repurchase or redemption within ten business days from the date
thereof and you shall forthwith refund to us the entire concession and
commission, if any, received by you on such sale. We agree, in the event of any
such repurchase or redemption, to refund to such Fund our share of the sales
charge retained by us, if any, and upon receipt from you of the refund of the
concession allowed to you, to pay such refund forthwith to such Fund.
3
<PAGE>
If you purchase Shares from any customer in connection with repurchase
arrangements offered by an Investment Company, you agree to pay such customer
not less than the applicable repurchase price as established by the Prospectus.
If you act as agent for your customer in selling Shares to us or a Fund, you
agree not to charge your customer more than a fair commission for handling the
transaction. Any order placed by you for the repurchase of Shares of a Fund is
subject to the timely receipt by the Fund's transfer agent of all required
documents in good order. If such documents are not received within a reasonable
time after the order is placed, the order is subject to cancellation, in which
case you agree to be responsible for any loss resulting to the Fund or to us
from such cancellation.
6. Manner of Offering.
(a) No person is authorized to make any representations concerning
Shares except those contained in the applicable Prospectus, in the related
Statement of Additional Information and in any then current sales literature or
other material issued by us supplemental to such Prospectus, which sales
literature or other material is used in conformity with applicable rules or
conditions. All offerings of Shares by you shall be subject to the conditions
set forth in the applicable Prospectus (including the condition relating to
minimum purchases) and to the terms and conditions herein set forth. We will
furnish additional copies of the Prospectuses and such sales literature and
other material issued by us in reasonable quantities upon request. You will
provide all customers with the applicable Prospectus prior to or at the time
such customer purchases Shares and will forward promptly to us any customer
request for a copy of the applicable Statement of Additional Information. Sales
and exchanges of Shares may only be made in those states and jurisdictions where
the Shares are registered or qualified for sale to the public. We agree to
advise you currently of the identity of those states and jurisdictions in which
the Shares are registered or qualified for sale, and you agree to indemnify us
and/or the Funds for any claim, liability, expense or loss in any way arising
out of a sale of Shares in any state or jurisdiction in which such Shares are
not so registered or qualified.
(b) You agree to conform to any compliance or offering standards that we
may establish from time to time, including without limitation standards as to
when classes of Shares may appropriately be sold to particular investors.
4
<PAGE>
7. NASD Matters. This Agreement is conditioned upon your representation and
warranty that you are a member of the NASD or, in the alternative, that you are
a foreign dealer not eligible for membership in the NASD. You and we agree to
abide by the Rules and Regulations of the NASD, including Rule 26 of its Rules
of Fair Practice, and all applicable federal, state, and foreign laws, rules and
regulations.
8. Rejection of Orders. We shall have the right to accept or reject orders
for the purchase of Shares of any Fund. It is understood that for the purposes
hereof no Share shall be considered to have been sold by you and no compensation
will be payable to you with respect to any subscription for Shares which is
rejected by us or an Investment Company. Any consideration which you may receive
in connection with a rejected purchase order will be returned promptly.
Confirmations of all accepted purchase orders will be transmitted by the
Transfer Agent for the applicable Fund or class thereof to the investor or to
you, if authorized.
9. Status of Soliciting Dealer. Nothing herein shall make you a partner
with us or render our relationship an association. You are responsible for your
own conduct, for the employment, control and conduct of your employees and
agents and for injury to such employees or agents or to others through such
employees or agents. You assume full responsibility for your employees and
agents under applicable laws and agree to pay all employer taxes relating
thereto.
10. No Liability. As distributor of the Shares, we shall have full
authority to take such action as we may deem advisable in respect of all matters
pertaining to the distribution of such Shares. We shall not be under any
liability to you, except for lack of good faith and for obligations expressly
assumed by us in this Agreement; provided, however, that nothing in this
sentence shall be deemed to relieve any of us from any liability imposed by the
Securities Act of 1933, as amended.
11. Term of Contract; Amendment; Termination. This Agreement shall become
effective on the date hereof. We and each Fund reserve the right, in our
discretion upon notice to you, to amend, modify or terminate this Agreement at
any time, to change any sales charges, commissions, concessions and other fees
described in the applicable Prospectus or to suspend sales or withdraw the
offering of Shares of any Fund or class of Shares thereof entirely. You agree
that any order to purchase Shares placed by you after notice of any amendment to
this Agreement has been sent to you shall constitute your agreement to such
amendment.
5
<PAGE>
12. Miscellaneous. This Agreement supersedes any and all prior agreements
between us. All communications to us should be sent to the above address. Any
notice to you shall be duly given if mailed or telefacsimiled to you at the
address specified by you above. This Agreement shall be effective when accepted
by you below and shall be construed under the laws of the Commonwealth of
Massachusetts.
The following provision, as marked, applies to this agreement.
[ ] This document constitutes an amendment to and restatement of the Selected
Dealer Agreement currently in effect between you and us.
[ ] Please confirm your agreement hereto by signing and returning the enclosed
counterpart of this Agreement at once to: State Street Research Investment
Services, Inc., One Financial Center, Boston, Massachusetts 02111,
Attention: President. Upon receipt thereof, this Agreement and such signed
duplicate copy will evidence the agreement between us as of the date
indicated.
State Street Research
Investment Services, Inc.
(Distributor)
By:
-----------------------
ACCEPTED:
[ ]
(Selected Dealer)
By:
----------------------------
6
<PAGE>
SUPPLEMENT NO. 1 TO
SELECTED DEALER AGREEMENT
Boston, Massachusetts
Effective Date: _________________
Dealer Name: _____________________________________
Address: _____________________________________
_____________________________________
Attn: _____________________________________
Ladies and Gentlemen:
This Agreement amends and supplements the Selected Dealer Agreement
between you and us, as in effect from time to time (the "Selected Dealer
Agreement"). All of the terms and provisions of the Selected Dealer Agreement
remain in full force and effect, and this Agreement and the Selected Dealer
Agreement shall be construed and interpreted as one Agreement, provided that in
the event of any inconsistency between this Agreement and the Selected Dealer
Agreement, the terms and provisions of this Agreement shall control. Capitalized
terms used in this Agreement and not defined herein are used as defined in the
Selected Dealer Agreement.
We understand that you wish to use Shares of the Funds in managed
fee-based programs in which you participate (the "Fee-Based Program"), and that
you wish to afford investors participating in such programs the opportunity to
qualify for the ability to purchase shares of the Funds at net asset value. We
are willing to allow you to purchase Shares of the Funds for sale to investors
participating in the Fee-Based Program on such basis, subject to the terms and
conditions of this Agreement and the Selected Dealer Agreement.
1. Sale of Shares through Fee-Based Program
You may, in connection with the Fee-Based Program, sell shares of any
Funds made available by us, from time to time, at net asset value to investors
participating in a bona fide Fee-Based Program. You will receive no discount,
commission or other concession with respect to any
<PAGE>
such sale, but will be entitled to receive any service fees otherwise payable
with respect thereto to the extent provided from time to time in the applicable
Funds' Prospectuses and in the Dealer Agreement. We will, after consulting with
you, determine, from time to time, which Funds we will make available to you for
use in the Fee-Based Program. You agree that Shares will not be made available
through the Fee-Based Program for the sole purpose of enabling evasion of sales
charges.
2. Fees under Fee-Based Program
For any Fee-Based Program investor eligible to purchase Fund shares at
net asset value, the investor shall be subject to an annual fee of not more than
2.50% of such investor's average net assets included in the Fee-Based Program,
nor less than 0.50% of such assets. You shall send to us upon request from time
to time the then-current standard fee schedule for the applicable Fee-Based
Program and a copy of the applicable Schedule H to the Form ADV containing the
required disclosures relating to the Fee-Based Program, or any successor
required disclosures. Any brochures, written materials or advertising relating
to the Fee-Based Program may refer to the Funds as available at net asset value
if the fees and expenses of the Fee-Based Program are given at least equal
prominence. In connection with explaining the fees and expenses of the Fee-Based
Program, your representatives may describe to customers the option of purchasing
Fund shares through such Program at net asset value.
3. Undertakings
You will (i) provide us with continuous reasonable access to your
offices, representatives and mutual fund and Fee-Based Program sales support
personnel and to meetings, including national and regional sales conferences and
training programs, of your representatives and sales personnel, (ii) include
descriptions of all Funds offered through the Fee-Based Program in internal
sales materials and electronic information displays used in conjunction with the
Fee-Based Program, (iii) include our representatives on your internal sales
lines and conference calls on a regular basis, (iv) use reasonable efforts to
motivate your representatives to recommend suitable Funds for clients of the
Fee-Based Program, (v) provide us with sales information in reasonable
Fund-by-Fund detail, including identification of offices and representatives
that account for the most significant sales of shares of the Funds through the
Fee-Based Program, and (vi) include the Funds on any approved, preferred or
other similar list of mutual fund products offered through the Fee-Based
Program.
4. Customer Accounts
You may maintain with the Funds' shareholder servicing agent either (i)
one or more omnibus accounts solely for the participants in the applicable
Fee-Based Program or (ii) separate accounts for each participant in the
applicable Fee-Based Program. If one or more omnibus accounts are maintained,
you shall, among other things, be responsible for forwarding proxies, annual and
semi-annual reports and other materials to each beneficial owner in a timely
manner.
5. Applicable Law
This Agreement shall be governed by and construed and interpreted in
accordance with the internal laws of The Commonwealth of Massachusetts.
6. Disclaimer and Indemnity
We are not endorsing, recommending and are not otherwise involved in
providing any investment product of yours, including but not limited to any
Fee-Based Program. We are merely affording you the opportunity to use shares of
the Funds as an investment medium for the applicable Fee-Based Program. You
acknowledge and agree that you are solely responsible for any such Fee-Based
Program and you agree to indemnify, defend and hold harmless us, the Funds and
our and their affiliates, directors, trustees, officers, employees and agents
from and against any claims, losses, damages or costs (including attorneys'
fees) arising from or related to such Fee-Based Program, including without
limitation any brochures, written materials or advertising in any form that
refers to the Funds or the Fee-Based Program.
7. Miscellaneous
This Agreement is not exclusive and shall terminate automatically upon
termination of the Selected Dealer Agreement. We reserve the right, in our
discretion upon notice to you, to amend, modify or terminate this Agreement at
any time. You agree that any order to purchase Shares placed by you after notice
of any amendment to this Agreement has been sent to you shall constitute your
agreement to such amendment.
STATE STREET RESEARCH
INVESTMENT SERVICES, INC.
By: __________________________
Name:
Title:
Accepted:
__________________________________
Name of Dealer
By: __________________________________
Name:
Title:
EXHIBIT (11)
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Statements of Additional Information
constituting part of this Post-Effective Amendment No. 19 to the registration
statement (No. 33-2703) on Form N-1A (the "Registration Statement") of our
reports dated February 2, 1996, relating to the financial statements and
financial highlights of State Street Research Tax-Exempt Fund and State Street
Research New York Tax-Free Fund (each a series of State Street Research
Tax-Exempt Trust), which appear in such Statements of Additional Information and
to the incorporation by reference of our reports into the Prospectuses which
constitute part of this Registration Statement. We also consent to the reference
to us under the heading "Independent Accountants" in such Statements of
Additional Information and to the reference to us under the heading "Financial
Highlights" in such Prospectuses.
/s/ Price Waterhouse LLP
- ------------------------
Price Waterhouse LLP
Price Waterhouse LLP
Boston, Massachusetts
April 29, 1996
EXHIBIT (17)(a)
POWER 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.
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, Toby Rosenblatt, Trustee
Principal financial
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
EXHIBIT (17)(b)
STATE STREET RESEARCH TAX-EXEMPT TRUST
Certificate of Resolution
I, the undersigned Amy L. Simmons, hereby certify that I am Assistant
Secretary of State Street Research Tax-Exempt Trust (the "Trust"), a
Massachusetts business trust duly authorized and validly existing under
Massachusetts law, and that the following is a true, correct and complete
statement of a vote duly adopted by the Trustees of said Trust on May 5, 1995:
"VOTED: That Francis J. McNamara III and
Darman A. Wing be, and each hereby is, authorized and
empowered, for and on behalf of the Trust, its
principal financial and accounting officer, and in
their name, to execute, and file a Power of Attorney
relating to, the Trust's Registration Statements
under the Investment Company Act of 1940 and/or the
Securities Act of 1933, and amendments thereto, the
execution and delivery of such Power of Attorney,
Registration Statements and amendments thereto, to
constitute conclusive proof of such authorization."
I further certify that said vote has not been amended or revoked and
that the same is now in full force and effect.
IN WITNESS WHEREOF, I have hereunto set my hand this 30th day of April,
1996.
/s/ Amy L. Simmons
-------------------------------
Assistant Secretary
EXHIBIT (18)
Multiple Class Expense Allocation Plan
Adopted Pursuant to Rule 18f-3
WHEREAS, State Street Research Tax-Exempt Trust, an unincorporated
association of the type commonly known as a business trust organized under the
laws of the Commonwealth of Massachusetts (the "Trust"), engages in business as
an open-end management investment company and is registered as such under the
Investment Company Act of 1940, as amended (the "Act");
WHEREAS, the Trust is authorized to (i) issue shares of beneficial
interest ("Shares") in separate series, with the Shares of each such series
representing the interests in a separate portfolio of securities and other
assets, and (ii) divide the Shares within each such series into two or more
classes;
WHEREAS, the Trust has established one or more portfolio series as of
the date hereof (such portfolios being referred to collectively herein as the
"Initial Series", such series, together with all other series subsequently
established by the Trust and made subject to this Plan, being referred to herein
individually as a "Series" and collectively as the "Series"), and four classes
thereof and of series of affiliated investment companies, have been designated
as "Class A," "Class B," "Class C," and "Class D" shares, except for the MetLife
- - State Street Research Money Market Fund, which issues four classes thereof
designated as "Class B," "Class C," "Class D," and "Class E" shares);
WHEREAS, prior to the adoption of Rule 18f-3 by the Securities and
Exchange Commission the Trust received an Order from the Securities and Exchange
Commission under Section 6(c) of the Act for an exemption from Sections
2(a)(32), 2(a)(35), 18(f), 18(g), 18(i), 22(c) and 22(d) of the Act and Rule
22c-1 thereunder to permit the Trust to issue multiple classes of shares
representing interests in the same portfolio of securities, assess a contingent
deferred sales charge ("CDSC") on certain redemptions of shares, and waive the
CDSC in certain cases; and
WHEREAS, the Trustees have determined to operate under Rule 18f-3 and
pursuant to such Rule the Board of Trustees as a whole, and the Trustees who are
not interested persons of the Trust (as defined in the Act) (the "Qualified
Trustees"), having determined in the exercise of their reasonable business
judgment this Plan is in the best interest of each class of the Initial Series
individually and the Initial Series as a whole, have accordingly approved this
Plan.
NOW, THEREFORE, Trust hereby adopts this Plan in accordance with Rule
18f-3 under the Act, on the following terms and conditions:
1. Class Differences. Each class of Shares of each Initial Series shall
represent interests in the same portfolio of investments of Initial Series and
shall be identical in all respects, and except as otherwise set forth in this
Plan, shall differ solely with respect to: (i) arrangements for shareholder
services or the distribution of Shares, or both, as provided for in Sections 2
and 3 of this Plan; (ii) the exclusive right of a Class to vote on certain
matters relating to the Plan of Distribution Pursuant to Rule 12b-1 adopted by
the Trust with respect to such Class; (iii) such differences relating to
purchase minimums, sales charges and eligible investors as may be set forth in
the Prospectuses and Statement of Additional Information of the Initial Series,
as the same may be amended or supplemented from time to time (the "Prospectuses"
and "SAI"); (iv) the different exchange privileges of the classes of Shares; (v)
the fact that only certain classes will have a conversion feature; and (iv) the
designation of each Class of shares.
2. Differences in Distribution and Shareholder Services. Each Class of
Shares of the Initial Series shall have a different arrangement for shareholder
services or the distribution of Shares, or both, as follows:
Class A Shares shall be sold subject to a front-end sales
charge as set forth in the Prospectuses and SAI with respect to the applicable
Initial Series. Class A, Class B and Class D Shares shall be sold subject to a
contingent deferred sales charge as set forth in the Prospectuses and SAI with
respect to the applicable Initial Series. Class A, B and D Shares shall be
subject to a service fee of up to 0.25% of the nets assets of the Initial Series
allocable to such Class of Shares. Class B and D Shares shall also be subject to
an annual distribution fee of up to 0.75% of the nets assets of the Initial
Series allocable to such Class of Shares. Such service and distribution fees may
be used to finance activities in accordance with Rule 12b-1 under the Act and
the Plan of Distribution pursuant to Rule 12b-1 adopted by the Trust.
3. Allocation of Expenses. Expenses of the Series shall be allocated as
follows:
(a) Class Expenses. Expenses relating to different
arrangements for shareholder services or the distribution of Shares, or both,
shall be allocated to and paid by that class. A class may pay a different share
of other expenses, not including advisory or custodial fees or other expenses
related to the management of a Series' assets, if such expenses are actually
incurred in a different amount by that class, or if the class receives services
of a different kind or to a different degree than other classes.
(b) Other Allocations. All expenses of the Series not
allocated to a particular class pursuant to Sections 2 and 3(a) of this Plan
shall be allocated to each class on the basis of the net asset value of that
class in relation to the net asset value of the Series. Notwithstanding the
foregoing, the underwriter, adviser, or other provider of services to a Series
may waive or reimburse the expenses of a specific class or classes to the extent
permitted under Rule 18f-3 under the Act; provided, however, that the Board
shall monitor the use of such waivers or reimbursements intended to differ by
class.
4. Term and Termination.
(a) Initial Series. This Plan shall become effective with
respect to the Initial Series as of the date hereof, and shall continue in
effect with respect to each Class of Shares of the Initial Series (subject to
Section 4(c) hereof) until terminated in accordance with the provisions of
Section 4(c) hereof.
(b) Additional Series or Classes. This Plan shall become
effective with respect to any class of the Initial Series other than Class A,
Class B, Class C, and Class D, and in the case of the MetLife State Street Money
Market Fund, Class E, and with respect to each additional Series or class
thereof established by the Trust after the date hereof and made subject to this
Plan, upon commencement of operations thereof or as otherwise determined, and
shall continue in effect with respect to each such additional Series or class
(subject to Section 4(c) hereof) until terminated in accordance with the
provisions of Section 4(c) hereof. An addendum hereto setting forth such
specific and different terms of such additional series of classes shall be
attached to this Plan.
(c) Termination. This Plan may be terminated at any time with
respect to the Trust or any Series or class thereof, as the case may be, by vote
of a majority of both the Trustees of the Trust and the Qualified Trustees. The
Plan may remain in effect with respect to a Series or class thereof even if it
has been terminated in accordance with this Section 4(e) with respect to such
Series or class or one or more other Series of the Trust.
5. Amendments. Any material amendment to this Plan shall require the
affirmative vote of a majority of both the Trustees of the Trust and the
Qualified Trustees.
Dated: May 5, 1995
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