As filed with the Securities and Exchange Commission on February 28, 1997
Securities Act of 1933 Registration No. 33-2703
Investment Company Act of 1940 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. 20 [X]
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [ ]
Amendment No. 21 [X]
--------------------
STATE STREET RESEARCH TAX-EXEMPT TRUST
(Exact Name of Registrant as Specified in Charter)
One Financial Center, Boston, Massachusetts 02111
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (617) 357-7800
Francis J. McNamara, III
Executive Vice President, Secretary & General Counsel
State Street Research & Management Company
One Financial Center
Boston, Massachusetts 02111
(Name and Address of Agent for Service)
Copies of Communications to:
Geoffrey R.T. Kenyon, Esq
Goodwin, Procter & Hoar LLP
Exchange Place
Boston, Massachusetts 02109
It is proposed that this filing will become effective under Rule 485:
[ ] Immediately upon filing pursuant to paragraph (b).
[ ] On May 1, 1997 pursuant to paragraph (b).
[ ] 60 days after filing pursuant to paragraph (a)(1).
[X] On May 1, 1997 pursuant to paragraph (a)(1).
[ ] 75 days after filing pursuant to paragraph (a)(2).
[ ] On ______________ pursuant to paragraph (a)(2).
If appropriate, check the following box:
[ ] This post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
------------------------------------------------
The Registrant hereby declares that, pursuant to Rule 24f-2 promulgated
under the Investment Company Act of 1940, as amended, it has
registered an indefinite number of shares of beneficial interest, par
value $.001 per share, in each of the State Street Research Tax-Exempt
Fund series and the State Street Research New York Tax-Free Fund
series of the Registrant, which shares are designated as Class A
shares, Class B shares, Class C shares and Class D shares.
A Rule 24f-2 Notice for the fiscal year ended December 31, 1996
was filed by the Registrant on or about February 25, 1997.
<PAGE>
CROSS REFERENCE SHEET
Pursuant to Rule 481(a)
Part A
<TABLE>
<CAPTION>
CAPTION OR LOCATION IN
PROSPECTUS FOR CAPTION OR LOCATION IN PROSPECTUS
STATE STREET RESEARCH FOR STATE STREET RESEARCH
FORM N-1A ITEM NO. TAX-EXEMPT FUND NEW YORK TAX-FREE FUND
<S> <C> <C>
1. Cover Page........... Same Same
2. Synopsis.............. Table of Expenses Table of Expenses
3. Condensed Financial Financial Highlights; Financial Highlights; Calculation
Information.......... Calculation of Performance Data of Performance Data
4. General Description The Fund's Investments; The Fund's Investments;
of Registrant.......... Limiting Investment Risk; Limiting Investment Risk;
The Fund and Its Shares; Appendix The Fund and Its Shares;
Appendix
5. Management of the Management of the Fund; Management of the Fund;
Fund................. Purchase of Shares Purchase of Shares
5A. Management's Discussion [To be included in [To be included in
of Fund Performance.... Financial Statements] Financial Statements]
6. Capital Stock and Shareholder Services; The Fund and Shareholder Services; The Fund
Other Securities..... Its Shares; Management of the and its Shares; Management
Fund; Dividends and Distributions; of the Fund; Dividends and
Taxes Distributions; Taxes
7. Purchase of Securities Purchase of Shares; Shareholder Purchase of Shares; Shareholder
Being Offered........ Services Services
8. Redemption or Redemption of Shares; Redemption of Shares;
Repurchase........... Shareholder Services Shareholder Services
9. Legal Proceedings.... Not Applicable Not Applicable
<PAGE>
Part B
CAPTION OR LOCATION IN
STATEMENT OF ADDITIONAL CAPTION OR LOCATION IN
INFORMATION FOR STATEMENT OF ADDITIONAL INFORMATION
STATE STREET RESEARCH FOR STATE STREET RESEARCH
FORM N-1A ITEM NO. TAX-EXEMPT FUND NEW YORK TAX-FREE FUND
10. Cover Page............ Same Same
11. Table of Contents.... Same Same
12. General Information
and History............. Not Applicable Not Applicable
13. Investment Objectives Additional Investment Policies and Additional Investment Policies and
and Policies............ Restrictions; Additional Restrictions; New York Municipal
Information Concerning Certain Obligations; Additional Information
Investment Techniques; Debt Concerning Certain Investment
Instruments and Permitted Cash Techniques; Debt Instruments and
Investments; Portfolio Transactions Permitted Cash Investments;
Portfolio Transactions
14. Management of the
Registrant........... Trustees and Officers Trustees and Officers
15. Control Persons and
Principal Holders of Trustees and Officers; Trustees and Officers;
Securities........... Investment Advisory Services Investment Advisory Services
16. Investment Advisory Investment Advisory Services; Investment Advisory Services;
and Other Services... Custodian; Independent Custodian; Independent
Accountants; Distribution of Accountants; Distribution of
Shares of the Fund Shares of the Fund
17. Brokerage Allocation.. Portfolio Transactions Portfolio Transactions
18. Capital Stock and Not Applicable (Description in Not Applicable (Description in
Other Securities..... Prospectus) Prospectus)
19. Purchase, Redemption Purchase and Redemption Purchase and Redemption of
and Pricing of of Shares; Net Asset Value Shares; Net Asset Value
Securities Being
Offered..............
20. Tax Status........... Certain Tax Matters Certain Tax Matters
21. Underwriters......... Distribution of Shares of the Fund Distribution of Shares of the Fund
22. Calculation of
Performance Data..... Calculation of Performance Data Calculation of Performance Data
23. Financial Statements Financial Statements Financial Statements
</TABLE>
<PAGE>
[State Street Research Logo]
State Street Research
Tax-Exempt Fund
May 1, 1997
PROSPECTUS
<PAGE>
State Street Research
Tax-Exempt Fund
Prospectus
May 1, 1997
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 December 31, 1996, the
Investment Manager had assets of approximately $41.7 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, 1997 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 NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY FINANCIAL INSTITUTION, ARE NOT INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER AGENCY,
AND INVOLVE INVESTMENT RISK, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL AMOUNT
INVESTED.
Table of Contents Page Page
-----------------------------------------------------------------------------
Table of Expenses 2 Management of the Fund 24
Financial Highlights 4 Dividends and Distributions; Taxes 25
The Fund's Investments 5 Calculation of Performance Data 26
Limiting Investment Risk 8 Appendix I--Tax-Exempt vs. Taxable
Purchase of Shares 9 Yield Comparison 28
Redemption of Shares 17 Appendix II--Description of
Shareholder Services 19 Municipal Debt Ratings 29
The Fund and Its Shares 23
-----------------------------------------------------------------------------
<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 Deferred Sales Charge (as a percentage of
net asset value at time of purchase or redemption,
whichever is lower) None(2) 5% None 1%
Maximum Sales Charge Imposed on Reinvested
Dividends (as a percentage of offering price) None None None None
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 0.24% 0.24% 0.24% 0.24%
------------ ------------------------ ------------
Total Fund Operating Expenses 1.04% 1.79% 0.79% 1.79%
============ ======================== ============
</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 Class A, Class B or Class D shares 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 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 $55 $77 $100 $166
Class B shares (1) $68 $86 $117 $191
Class C shares $ 8 $25 $ 44 $ 98
Class D shares $28 $56 $ 97 $211
You would pay the following expenses on the same investment,
assuming no redemption:
1 Year 3 Years 5 Years 10 Years
-------- --------- --------- -----------
Class B (1) $18 $56 $97 $191
Class D $18 $56 $97 $211
- ---------------
(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, 1996;
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
------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of year $ 8.26 $ 7.46 $ 8.43 $ 7.94 $ 7.69 $ 7.30 $ 7.42 $ 7.24 $ 6.86 $ 7.49
Net investment income .39 .39 .40 .40 .43 .44 .46 .50 .52 .50
Net realized and
unrealized gain
(loss) on investments
and futures contracts (.16) .82 (.98) .54 .27 .39 (.12) .18 .38 (.61)
Dividends from net
investment income (.39) (.41) (.38) (.39) (.43) (.44) (.46) (.50) (.52) (.50)
Distributions from net
realized gains -- -- (.01) (.06) (.02) -- -- -- -- (.02)
------- ------ ------ ------ ------ ------ ------ ------- ------- -------
Net asset value,
end of year $ 8.10 $ 8.26 $ 7.46 $ 8.43 $ 7.94 $ 7.69 $ 7.30 $ 7.42 $ 7.24 $ 6.86
======= ====== ====== ====== ====== ====== ====== ======= ======= =======
Total return 2.93%+ 16.58%+ (6.90)%+ 12.11%+ 9.34%+ 11.81%+ 4.84%+ 9.63%+ 13.50%+ (1.43%)+
Net assets at end
of year (000s) $223,407 $253,402 $238,097 $302,845 $203,312 $118,157 $84,925 $68,392 $31,378 $30,462
Ratio of operating
expenses to average
net assets 1.04% 1.13% 1.20% 1.20% 1.20% 1.25% 1.25% 1.25% 1.25% 1.25%
Ratio of net investment
income to average
net assets* 4.82% 4.95% 5.07% 4.85% 5.48% 6.00% 6.43% 6.72% 7.24% 7.23%
Portfolio turnover rate 125.24% 97.32% 78.63% 36.16% 27.44% 81.75% 84.12% 106.86% 126.27% 190.50%
</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.
+Total return figures do 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
---------------------------------------------- -------------------------------------------
1996 1995 1994 1993* 1996 1995 1994 1993*
--------- --------- ----------- ------------- --------- --------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of year $ 8.26 $ 7.46 $ 8.43 $ 8.25 $ 8.24 $ 7.45 $ 8.41 $ 8.25
Net investment income .32 .33 .34 .19 .39 .40 .42 .23
Net realized and unrealized gain
(loss) on investments and
futures contracts (.15) .82 (.97) .24 (0.13) .81 (.96) .22
Dividends from net investment
income (.33) (.35) (.33) (.19) (0.41) (.42) (.41) (.23)
Distributions from net realized
gains -- -- (.01) (.06) -- -- (.01) (.06)
--------- --------- ----------- ------------- --------- --------- ----------- ----------
Net asset value, end of year $ 8.10 $ 8.26 $ 7.46 $ 8.43 $ 8.09 $ 8.24 $ 7.45 $ 8.41
========= ========= =========== ============= ========= ========= =========== ==========
Total return 2.15%+ 15.72%+ (7.59)%+ 5.20%+++ 3.30%+ 16.76%+ (6.56)%+ 5.54%+++
Net assets at end of year (000s) $51,710 $51,827 $35,338 $27,695 $ 8,990 $22,614 $ 334 $ 477
Ratio of operating expenses to
average net assets 1.79% 1.88% 1.95% 1.95%++ 0.79% 0.88% 0.95% 0.96%++
Ratio of net investment income
to average net assets** 4.07% 4.19% 4.35% 3.93%++ 5.04% 4.85% 5.26% 4.92%++
Portfolio turnover rate 125.24% 97.32% 78.63% 36.16% 125.24% 97.32% 78.63% 36.16%
</TABLE>
<TABLE>
<CAPTION>
Class D
-------------------------------------------------------
Year ended December 31
-------------------------------------------------------
1996 1995 1994 1993*
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net asset value, beginning of
year $ 8.25 $ 7.46 $ 8.43 $ 8.25
Net investment income .32 .33 .34 .19
Net realized and unrealized gain
(loss) on investments and
futures contracts (0.14) .81 (.97) .23
Dividends from net investment
income (0.33) (.35) (.33) (.18)
Distributions from net realized
gains -- -- (.01) (.06)
------------- ------------- ------------- -------------
Net asset value, end of year $ 8.10 $ 8.25 $ 7.46 $ 8.43
============= ============= ============= =============
Total return 2.28%+ 15.58%+ (7.59)%+ 5.19%+++
Net assets at end of year (000s) $ 2,889 $4,183 $ 958 $1,115
Ratio of operating expenses to
average net assets 1.79% 1.88% 1.95% 1.99%++
Ratio of net investment income
to average net assets** 4.06% 4.13% 4.31% 3.92%++
Portfolio turnover rate 125.24% 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 net assets under normal circumstances in tax-exempt debt
obligations. Tax-exempt obligations include notes, bonds and other
obligations issued by or on behalf of state and local governmental units, the
interest income on which, in the opinion of bond counsel to the issuer, is
exempt from federal income taxes. Eighty percent of the Fund's net assets is
expected to be invested in tax-exempt obligations which are investment grade
at the time of purchase, although this is not a fundamental policy.
Investment grade securities include securities rated within the AAA, AA, A,
BBB, SP-1 or SP-2 major rating categories by Standard & Poor's Corporation
("S&P"), within the Aaa, Aa, A, Baa, MIG-1, MIG-2, MIG-3 or MIG-4 major
rating categories by Moody's Investors Service, Inc. ("Moody's"), securities
comparably rated by any other nationally recognized statistical rating
organization, or securities not rated but considered by the
5
<PAGE>
Investment Manager to be of comparable quality. Securities rated by Moody's
within the Baa category lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Up to 20% of the Fund's assets may be invested in other securities,
including lower quality tax-exempt obligations, i.e., rated within the BB
category or below by S&P, the Ba category or below by Moody's, or in unrated
securities of comparable investment quality. See the Statement of Additional
Information for risk 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 the
fair value either to meet redemption requests or to respond to changes in the
economy or the financial markets. The Fund will purchase unrated securities
only when the Investment Manager believes that the issuers of such securities
are in financial circumstances similar to the financial circumstances of
issuers of securities rated within the BB or Ba categories or above and the
securities themselves are otherwise similar in quality to those rated within
the BB or Ba categories or above.
The Fund may invest in debt instruments which are split rated; for
example, rated investment grade by one rating agency, but lower than
investment grade by the other. Where an investment is split rated, the Fund
may invest on the basis of the higher rating. Where an investment is rated by
only one rating agency, the Fund may invest on the basis of the one rating or
on the basis of a higher rating derived from its own analysis.
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
6
<PAGE>
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.
Risk Factors
Lower rated high yield, high risk securities 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. Bonds rated
in the lowest category and in default may never resume interest payments or
repay principal and their market value may be difficult to determine. 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. For further
information concerning the ratings of debt securities, see the Appendix to
this Prospectus.
Additional risks of such securities include (i) limited liquidity and
secondary market support, particularly in the case of securities that are not
rated or are subject to restrictions on resale, which may 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, and make
selection and valuation of portfolio securities more subjective and dependent
upon the Investment Manager's credit analysis; (ii) the potential for the
insolvency of issuers during periods of changing interest rates and economic
difficulty; (iii) subordination to the prior claims of senior lenders; and
(iv) the possibility that earnings of the issuer may be insufficient to meet
its debt service. Growth in the market for this type of security 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.
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 development revenue bonds. The Fund also reserves the
right to invest more than 25% of its total assets in securities issued in
connection with the financing of projects with similar characteristics, such
as toll road revenue bonds, housing revenue bonds or electric power project
revenue bonds, or in industrial development revenue bonds which are based,
directly or indirectly, on the credit of private entities in any one
industry. See "Limiting Investment Risk" below and the Statement of
Additional Information. This may make the Fund more susceptible to economic,
political or regulatory occurrences affecting a particular 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
7
<PAGE>
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 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.
8
<PAGE>
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 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 and Others
Shares of the Fund are continuously offered through securities dealers,
financial institutions and others (collectively referred to herein as
securities dealers or 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 dealer a completed Application (accompanying this Prospectus),
together with a check for the total purchase price payable to the Fund.
9
<PAGE>
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
1-800-562-0032 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
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 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, dealers are paid differing amounts
of commission and other compensation depending on which class of shares they
sell.
The major differences among the various classes of shares are as follows:
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS D
------- ------- ------- -------
<S> <C> <C> <C> <C>
Sales Charges Initial sales charge at time of Contingent deferred sales None Contingent deferred sales
investment of up to 4.5% depending charge of 5% to 2% applies to charge of 1% applies to
on amount of investment any shares redeemed within any shares redeemed
first five years following within one year following
their purchase; no contingent their purchase
deferred sales charge after
five years
On investments of $1 million or
more, no initial sales charge; but
contingent deferred sales charge
of 1% applies to any shares
redeemed within one year following
their purchase
Distribution None 0.75% for first eight years; None 0.75% each year
Fee 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 sales 4% None 1%
Commission charge less 0.25% to 0.50%
Received by retained by Distributor
Selling
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 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 Distributor may also compensate those dealers
with clients who maintain their investments in a Fund over a period of years.
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 dealer
responsible for the sale.
<TABLE>
<CAPTION>
Sales Sales
Charge Charge
Paid by Paid by Dealer
Dollar Investor Investor Concession
Amount of As % of As % of As % of
Purchase Purchase Net Asset Purchase
Transaction Price Value Price
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Less than $100,000 4.50% 4.71% 4.00%
$100,000 or above but less than $250,000 3.50% 3.63% 3.00%
$250,000 or above but less than $500,000 2.50% 2.56% 2.00%
$500,000 or above but less than $1 million 2.00% 2.04% 1.75%
See
following
$1 million and above 0% 0% discussion
</TABLE>
On any sale of Class A shares to a single investor in the amount of
$1,000,000 or more, the Distributor
12
<PAGE>
may pay the authorized dealer a commission based on the aggregate of such
sales as follows:
Amount of Sale Commission
- ------------------------------ -------------
(a) $1 million to $3 million 1.00%
(b) Next $2 million 0.50%
(c) Amount over $5 million 0.25%
On such sales of $1,000,000 or more, unless the above commission is waived
by the dealer, 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. 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
13
<PAGE>
arrangements and further conditions and limitations is available from the
Distributor.
In addition, no sales charge is imposed in connection with the sale of
Class A shares of the Fund to the following entities and persons: (A) the
Investment Manager, Distributor, or any affiliated entities, including any
direct or indirect parent companies and other subsidiaries of such parents
(collectively "Affiliated Companies"); (B) employees, officers, sales
representatives or 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, minimum investments by various groups of
eligible persons 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 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
Redemption During Percentage Of Net Asset Value
- --------------------------------------- ---------------------------------------
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.
14
<PAGE>
Contingent Deferred Sales Charge Waivers
The contingent deferred sales charge does not apply to exchanges, or to
redemptions under a systematic withdrawal plan which meets certain
conditions. In addition, the contingent deferred sales charge will be waived
for: (i) redemptions made within one year of the death or total disability,
as defined by the Social Security Administration, of all shareholders of an
account; (ii) redemptions made after attainment of a specific age in an
amount which represents the minimum distribution required at such age under
Section 401(a)(9) of the Internal Revenue Code for retirement accounts or
plans (e.g., age 70-1/2 for IRAs and Section 403(b) plans), calculated solely
on the basis of assets invested in the 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 and establish other conditions for employee benefit plans.
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.
In general, Class C shares are only available for new investments by
certain large institutions and, employee benefit plans which acquire shares
through programs or products sponsored by Metropolitan Life Insurance Company
("Metropolitan") and/or its affiliates, for which Class C shares have been
designated. Information on the availability of Class C shares and further
conditions and limitations is available from the Distributor.
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 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 appli-
15
<PAGE>
cable to Class B shares). For federal income tax purposes, the amount of the
contingent deferred sales charge will reduce the gain or increase the loss,
as the case may be, on the amount realized on redemption. The amount of any
contingent deferred sales charge will be paid to the Distributor.
Net Asset Value
The Fund's per share net asset values are determined Monday through Friday as
of the close of the New York Stock Exchange (the "NYSE") exclusive of days on
which the NYSE is closed. The NYSE 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 dealers
(including 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 dealers for selling such shares. Any distribution fees
received by the Distributor and not allocated to dealers may be applied by
the Distributor in connection with sales or marketing efforts, including
special promotional fees and cash and noncash incentives based upon sales by
dealers.
The Distributor provides distribution services on behalf of other funds
having distribution plans and receives similar payments from, and incurs
similar expenses on behalf of, such other funds. When expenses of the
Distributor cannot be identified as relating to a specific fund, the
Distributor allocates expenses among the funds in a manner deemed fair and
equitable to each fund.
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
16
<PAGE>
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.
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
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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- 562-0032 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.
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The Fund may not suspend the right of redemption or postpone the date of
payment of redemption proceeds for more than seven days, except that (a) it
may elect to suspend the redemption of shares or postpone the date of payment
of redemption proceeds: (1) during any period that the NYSE is closed (other
than customary weekend and holiday closings) or trading on the NYSE is
restricted; (2) during any period in which an emergency exists as a result of
which disposal of portfolio securities is not reasonably practicable or it is
not reasonably practicable to determine the Fund's net asset values; or (3)
during such other periods as the Securities and Exchange Commission may by
order permit for the protection of investors; and (b) the payment of
redemption proceeds may be postponed as otherwise provided under "Redemption
of Shares" herein.
Signature Guarantees
To protect shareholder accounts, the Transfer Agent, the Fund, the Investment
Manager and the Distributor 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
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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 indirectly 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 1-800-562-0032. 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
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<PAGE>
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.
Investment Plans
The Investamatic 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
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<PAGE>
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 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 dividends
and distributions are directed 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.
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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
1-800-562-0032. 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 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 1-800-562-0032
Call this number for assistance in purchasing shares by wire and for
telephone redemptions or telephone exchange transactions. Shareholder
Services will require some form of personal identification prior to acting
upon instructions received by telephone. Written confirmation of each
transaction will be provided.
The Fund and Its Shares
The Fund was organized in 1985 as a series of State Street Research
Tax-Exempt Trust, a Massachusetts business trust. The Trustees have
authorized shares of the Fund to be issued in four classes: Class A, Class B,
Class C and Class D. The Trust is registered with the Securities and Exchange
Commission as an open-end management investment company. The fiscal year end
of the Fund is December 31.
Except for those differences between the classes of shares described below
and elsewhere in the Prospectus, each share of a Fund has equal dividend,
redemption and liquidation rights with other shares of the Fund and when
issued is fully paid and nonassessable. In the future, certain classes may be
redesignated, for administrative purposes only, to conform to standard class
designations and common usage of terms which may develop in the mutual fund
industry. For example, Class C shares may be redesignated as Class Y shares
and Class D shares may be redesignated as Class C shares. Any redesignation
would not affect any substantive rights respecting the shares.
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
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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.
Management of the Fund
Under the provisions of the 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
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investment research and management, administrative services, office
facilities, and personnel are provided to the Fund in consideration of a fee
from the Fund.
Under its Advisory Agreement with the Trust, the Investment Manager
receives a monthly investment advisory fee equal to 0.55% (on an annual
basis) of the average daily value of the net assets of the Fund. The Fund
bears all costs of its operation other than those incurred by the Investment
Manager under the Advisory Agreement. In particular, the Fund pays, among
other expenses, investment advisory fees, certain distribution expenses under
the Fund's Distribution Plan and the compensation and expenses of the
Trustees who are not otherwise currently affiliated with the Investment
Manager or any of its affiliates. The Investment Manager will reduce its
management fee payable by the Fund up to the amount of any expenses
(excluding permissible items, such as brokerage commissions, Rule 12b-1
payments, interest, taxes and litigation expenses) paid or incurred in any
year in excess of the most restrictive expense limitation imposed by any
state in which the Fund sells shares, if any. The Investment Manager provides
the Fund with office space, facilities and personnel. The Investment Manager
compensates Trustees of the Trust if such persons are employees or affiliates
of the Investment Manager or its affiliates.
The Fund is managed by 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 has 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 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 Debt
Funds Average 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 historical period as applied to a hypothetical $1,000
initial
26
<PAGE>
investment, which is redeemed in total at the end of such period. In making
the calculation, all dividends and distributions are assumed to be
reinvested, and all accrued expenses and recurring charges, including
management and distribution fees, are recognized. The calculation also
reflects the highest applicable initial or contingent deferred sales charge,
determined as of the assumed date of initial investment or the assumed date
of redemption, as the case may be. 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 do not reflect additional Rule 12b-1
Distribution Plan fees, if any, of up to 1% per year depending on the class
of shares, which will adversely affect performance results for periods after
such date. Performance data or rankings for a given class of shares should be
interpreted carefully by investors who hold or may invest in a different
class of shares.
27
<PAGE>
Appendix I
Tax-Exempt vs. Taxable Yield Comparison
Based on current 1997 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%.
1997 Tax Year
Sample Federal Tax-Exempt Yields
Taxable Marginal
Income Rate 3.00% 4.00% 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
155,000 36.00 4.69 6.25 7.81 9.38
280,000 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
275,000 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>
Appendix II
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 shown 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 cre-
29
<PAGE>
ated 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.
SP-3: Notes rated SP-3 have a speculative 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.
30
<PAGE>
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
INDEPEDENT ACCOUNTANTS
Price Waterhouse LLP
160 Federal Street
Boston, MA 02110
TE-607D-597 CONTROL NUMBER: 3807-970424(0598)SSR-LD
<PAGE>
{State Street Research Logo]
State Street Research
New York
Tax-Free Fund
May 1, 1997
PROSPECTUS
<PAGE>
State Street Research
New York Tax-Free Fund
Prospectus
May 1, 1997
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 December 31, 1996, the
Investment Manager had assets of approximately $41.7 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, 1997 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 NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY FINANCIAL INSTITUTION, ARE NOT INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER AGENCY,
AND INVOLVE INVESTMENT RISK, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL AMOUNT
INVESTED.
Table of Contents Page
- --------------------------------------------------------
Table of Expenses 2
Financial Highlights 4
The Fund's Investments 5
Limiting Investment Risk 8
Purchase of Shares 10
Redemption of Shares 18
Shareholder Services 20
The Fund and Its Shares 24
Management of the Fund 25
Dividends and Distributions; Taxes 26
Calculation of Performance Data 28
Appendix I--Taxable Equivalent Yield Table 30
Appendix II--Description of Municipal Debt Ratings 31
<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 Deferred Sales Charge (as a
percentage of net asset value at time of purchase
or redemption, whichever is lower) None(2) 5% None 1%
Maximum Sales Charge Imposed on Reinvested Dividends
(as a percentage of offering price) None None None None
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 0.47% 0.47% 0.47% 0.47%
----- ----- ----- -----
Less Voluntary Reduction (0.17)% (0.17)% (0.17)% (0.17)%
----- ----- ----- -----
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 Class A, Class B or Class D shares may, over
a period of years, pay more than the economic equivalent of the maximum
sales charge permissible under applicable rules. See "Purchase of
Shares."
(2) Purchase of Class A shares of $1 million or more are not subject to a
sales charge. If such shares are redeemed within 12 months of purchase, a
contingent deferred sales charge of 1% will be applied to the redemption.
See "Purchase of Shares."
2
<PAGE>
Example:
You would pay the following expenses on a $1,000 investment including, for
Class A shares, the maximum initial sales charge and assuming (1) 5% annual
return and (2) redemption of the entire investment at the end of each time
period:
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, 1996;
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,
1996, 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
1.27%, 2.02%, 1.02% and 2.02%, respectively, in the absence of the voluntary
assumption of fees or expenses by the Distributor and its affiliates, which
amounted to 0.17% 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
--------------------------------------------------------------
Year ended December 31
--------------------------------------------------------------
1996 1995 1994 1993**
-------------- -------------- -------------- ---------------
<S> <C> <C> <C> <C>
Net asset value, beginning of year $ 8.23 $ 7.53 $ 8.43 $ 8.20
Net investment income* .38 .40 .40 .22
Net realized and unrealized gain (loss) on
investments and futures contracts (.09) .71 (.90) .25
Dividends from net investment income (.39) (.41) (.39) (.22)
Distributions from net realized gains -- -- (.01) (.02)
-------------- -------------- -------------- ---------------
Net asset value, end of year $ 8.13 $ 8.23 $ 7.53 $ 8.43
============== ============== ============== ===============
Total return 3.68%+ 15.11%+ (6.04)%+ 5.79%+++
Net assets at end of year (000s) $19,636 $20,043 $18,214 $15,175
Ratio of operating expenses to average
net assets* 1.10% 1.10% 1.10% 1.10%++
Ratio of net investment income to average
net assets* 4.76% 5.07% 5.07% 4.68%++
Portfolio turnover rate 89.14% 109.74% 64.80% 33.11%
- ----------
*Reflects voluntary assumption of fees or
expenses per share in each year $ 0.01 $ 0.02 $ 0.03 $ 0.01
</TABLE>
<TABLE>
<CAPTION>
Class B
--------------------------------------------------------------
Year ended December 31
--------------------------------------------------------------
1996 1995 1994 1993**
-------------- -------------- -------------- ---------------
<S> <C> <C> <C> <C>
Net asset value, beginning of year $ 8.23 $ 7.53 $ 8.43 $ 8.20
Net investment income* .32 .34 .34 .19
Net realized and unrealized gain (loss) on
investments and futures contracts (.09) .71 (.90) .25
Dividends from net investment income (.33) (.35) (.33) (.19)
Distributions from net realized gains -- -- (.01) (.02)
-------------- -------------- -------------- ---------------
Net asset value, end of year $ 8.13 $ 8.23 $ 7.53 $ 8.43
============== ============== ============== ===============
Total return 2.91%+ 14.26%+ (6.74)%+ 5.35%+++
Net assets at end of year (000s) $16,824 $15,084 $12,131 $7,567
Ratio of operating expenses to average
net assets* 1.85% 1.85% 1.85% 1.85%++
Ratio of net investment income to average
net assets* 4.01% 4.32% 4.34% 3.93%++
Portfolio turnover rate 89.14% 109.74% 64.80% 33.11%
- ----------
*Reflects voluntary assumption of fees or
expenses per share in each year $ 0.01 $ 0.02 $ 0.03 $ 0.01
</TABLE>
<TABLE>
<CAPTION>
Class C
--------------------------------------------------------------
Year ended December 31
--------------------------------------------------------------
1996 1995 1994 1993
--------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value, beginning of year $ 8.24 $ 7.54 $ 8.44 $ 7.84
Net investment income* .40 .42 .42 .42
Net realized and unrealized gain (loss)
on investments and futures contracts (.09) .71 (.90) .62
Dividends from net investment income (.41) (.43) (.41) (.42)
Distributions from net realized gains -- -- (.01) (.02)
-------------- -------------- -------------- ---------------
Net asset value, end of year $ 8.14 $ 8.24 $ 7.54 $ 8.44
============== ============== ============== ===============
Total return 3.93%+ 15.37%+ (5.79)%+ 13.46%+
Net assets at end of year (000s) $34,050 $38,757 $40,750 $56,515
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* 5.01% 5.33% 5.29% 5.10%
Portfolio turnover rate 89.14% 109.74% 64.80% 33.11%
- ----------
*Reflects voluntary assumption of fees or
expenses per share in each year $ 0.01 $ 0.02 $ 0.03 $ 0.01
</TABLE>
<TABLE>
<CAPTION>
Class C
-------------------------------------------------------------------
Year ended December 31 July 5, 1989
(Commencement of
---------------------------------------------- Operations) to
1992 1991 1990 December 31, 1989
-------------- -------------- -------------- -------------------
<S> <C> <C> <C> <C>
Net asset value, beginning of year $ 7.61 $ 7.11 $ 7.32 $ 7.40
Net investment income* .44 .45 .45 .20
Net realized and unrealized gain (loss)
on investments and futures contracts .23 .51 (.22) (.08)
Dividends from net investment income (.44) (.46) (.44) (.20)
Distributions from net realized gains -- -- -- --
-------------- -------------- -------------- -------------------
Net asset value, end of year $ 7.84 $ 7.61 $ 7.11 $ 7.32
============== ============== ============== ===================
Total return 9.08%+ 13.88%+ 3.32%+ 1.72%+++
Net assets at end of year (000s) $41,558 $21,512 $12,620 $8,154
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* 5.71% 6.21% 6.39% 5.84%++
Portfolio turnover rate 29.39% 30.24% 35.54% 0.00%
- ----------
*Reflects voluntary assumption of fees or
expenses per share in each year $ 0.02 $ 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.
**June 7, 1993 (commencement of share class designations) to December 31,
1993.
4
<PAGE>
<TABLE>
<CAPTION>
Class D
------------------------------------------
Year ended December 31
------------------------------------------
1996 1995 1994 1993**
-------- --------- ----------- ---------
<S> <C> <C> <C> <C>
Net asset value,
beginning of year $ 8.23 $ 7.53 $ 8.44 $ 8.20
Net investment income* .32 .35 .34 .19
Net realized and unrealized gain (loss)
on investments and futures contracts (.09) .70 (.91) .25
Dividends from net investment income (.33) (.35) (.33) (.18)
Distributions from net realized gains -- -- (.01) (.02)
-------- --------- ----------- ---------
Net asset value, end of year $ 8.13 $ 8.23 $ 7.53 $ 8.44
======== ========= =========== =========
Total return 2.90%+ 14.25%+ (6.86)%+ 5.46%+++
Net assets at end of year (000s) $ 622 $ 651 $ 774 $ 821
Ratio of operating expenses to average
net assets* 1.85% 1.85% 1.85% 1.85%++
Ratio of net investment income to average
net assets* 4.03% 4.35% 4.31% 3.94%++
Portfolio turnover rate 89.14% 109.74% 64.80% 33.11%
- ---------------
*Reflects voluntary assumption of fees or
expenses per share in each year $ 0.01 $ 0.02 $ 0.03 $ 0.01
</TABLE>
**June 7, 1993 (commencement of share class designations) to December 31,
1993.
++Annualized.
+Total return figures do not reflect any front-end or contingent deferred
sales charges. Total return would be lower if the Distributor and its
affiliates had not voluntarily assumed a portion of the Fund's expenses.
+++Represents aggregate return for the period without annualization and does
not reflect any front-end or contingent deferred sales charge. Total
return would be lower if the Distributor and its affiliates had not
voluntarily assumed a portion of the Fund's expenses.
The Fund's Investments
The Fund's investment objective is to seek a high level of interest income
exempt from federal income taxes and New York State and New York City
personal income taxes. The Fund's investment objective is a fundamental
policy and may not be changed without approval of the Fund's shareholders.
In seeking to achieve its investment objective, the Fund invests at least
80% of its net assets under normal circumstances 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.
Eighty percent of the Fund's net assets is expected to be invested in New
York Municipal Obligations which are investment grade at the time of
purchase, although this is not a fundamental policy. Investment grade
securities include securities rated within the AAA, AA, A, BBB, SP-1 or SP-2
major rating categories by Standard & Poor's Corporation ("S&P"), within the
Aaa, Aa, A, Baa, MIG-1, MIG-2, MIG-3 or MIG-4 major rating categories by
Moody's Investors Service, Inc. ("Moody's"), securities comparably rated by
any other nationally recognized statistical rating organization, or
securities not rated but considered by the Investment Manager to be of
equivalent quality. Securities rated by Moody's within the Baa category lack
outstanding investment characteristics and in fact have speculative
characteristics as well.
Up to 20% of the Fund's assets may be invested in other securities,
including lower quality New York Municipal Obligations i.e., rated within the
BB category or below by S&P, the Ba category or below by Moody's, or in
unrated securities of comparable
5
<PAGE>
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 the
fair value either to meet redemption requests or to respond to changes in the
economy or the financial markets. The Fund will purchase unrated securities
only when the Investment Manager believes that the issuers of such securities
are in financial circumstances similar to the financial circumstances of
issuers of securities rated within the BB or Ba categories or above and the
securities themselves are otherwise similar in quality to those rated within
the BB or Ba categories or above.
The Fund may invest in debt instruments which are split rated; for
example, rated investment grade by one rating agency, but lower than
investment grade by the other. Where an investment is split rated, the Fund
may invest on the basis of the higher rating. Where an investment is rated by
only one rating agency, the Fund may invest on the basis of the one rating or
on the basis of a higher rating derived from its own analysis.
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 obliga
6
<PAGE>
tion, the following factors relating to the security are considered, among
others: (1) the frequency of trades and quotes; (2) the number of dealers
willing to purchase or sell the security; (3) the willingness of dealers to
undertake to make a market; (4) the nature of the marketplace trades; and (5)
the likelihood that the obligation will continue to be marketable based on
the credit quality of the municipality or relevant obligor. Municipal lease
obligations initially deemed to be liquid could later become illiquid.
Special Considerations and Risk Factors
There are risks in any investment program, and there is no assurance that the
Fund will achieve its investment objective. Tax-exempt securities are subject
to relative degrees of credit risk and market volatility. Credit risk relates
to the issuer's (and any guarantor's) ability to make timely payments of
principal and interest. Market volatility relates to the changes in market
price that occur as a result of variations in the level of prevailing
interest rates and yield relationships between sectors in the tax-exempt
securities market and other market factors.
The Fund's ability to achieve its investment objective is dependent on the
ability of the issuers of New York Municipal Obligations to meet their
continuing obligations for the payment of principal and interest. New York
State and New York City face long-term economic problems that could seriously
affect their ability and that of other issuers of New York Municipal
Obligations to meet their financial obligations.
Certain substantial issuers of New York Municipal Obligations (including
issuers whose obligations may be acquired by the Fund) have experienced
serious financial difficulties in recent years. These difficulties have at
times jeopardized the credit standing and impaired the borrowing abilities of
all New York issuers and have generally contributed to higher interest costs
for their borrowing and fewer markets for their outstanding debt obligations.
In recent years, several different issues of municipal securities of New York
State and its agencies and instrumentalities and of New York City have been
downgraded by S&P and Moody's. On the other hand, strong demand for New York
Municipal Obligations has at times had the effect of permitting New York
Municipal Obligations to be issued with yields relatively lower, and after
issuance, to trade in the market at prices relatively higher, than comparably
rated municipal obligations issued by other jurisdictions. A recurrence of
the financial difficulties previously experienced by certain issuers of New
York Municipal Obligations could result in defaults or declines in the market
values of those issuers' existing obligations and, possibly, in the
obligations of other issuers of New York Municipal Obligations. Although as
of the date of this Prospectus, no issuers of New York Municipal Obligations
are in default with respect to the payment of their Municipal Obligations,
the occurrence of any such default could affect adversely the market values
and marketability of all New York Municipal Obligations and, consequently,
the net asset value of the Fund's portfolio.
Other considerations affecting the Fund's investments in New York
Municipal Obligations are summarized in the Statement of Additional
Information.
Lower rated high yield, high risk securities 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 his 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. Bonds rated
in the lowest category and in default may never resume interest payments or
repay principal and their market value may be difficult to determine. 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. For further
information concerning the ratings of debt securities, see the Appendix to
this Prospectus.
Additional risks of such securities include (i) limited liquidity and
secondary market support, particularly in the case of securities that are not
rated or are
7
<PAGE>
subject to restrictions on resale, which may 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, and make selection and
valuation of portfolio securities more subjective and dependent upon the
Investment Manager's credit analysis; (ii) the potential for the insolvency
of issuers during the periods of changing interest rates and economic
difficulty; (iii) subordination to the prior claims of senior lenders; and
(iv) the possibility that earnings of the issuer may be insufficient to meet
its debt service. Growth in the market for this type of security 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.
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.
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%
8
<PAGE>
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. 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.
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 10 to 24.
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.
9
<PAGE>
Purchase of Shares
Methods of Purchase
Through Dealers and Others
Shares of the Fund are continuously offered through securities dealers,
financial institutions and others (collectively referred to herein as
securities dealers or 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 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
1-800-562-0032 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
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.
10
<PAGE>
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 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, dealers are paid differing amounts
of commission and other compensation depending on which class of shares they
sell.
11
<PAGE>
The major differences among the various classes of shares are as follows:
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS D
------- ------- ------- -------
<S> <C> <C> <C> <C>
Sales Charges Initial sales charge at Contingent deferred sales None Contingent deferred sales
time of investment of up charge of 5% to 2% charge of 1% applies to
to 4.5% depending on applies to any shares any shares redeemed
amount of investment redeemed within first within one year following
five years following their 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 eight None 0.75% each year
Fee years; Class B shares
convert automatically to
Class A shares after
eight years
Service Fee 0.25% each year 0.25% each year None 0.25% each year
Initial Above described 4% None 1%
Commission initial sales charge
Received by less 0.25% to 0.50%
Selling retained by
Dealer Distributor
On investments of $1
million or more,
0.25% to 0.70% paid
to dealer by
Distributor
</TABLE>
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 share-
12
<PAGE>
holders 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 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 Distributor may also compensate those dealers
with clients who maintain their investments in a Fund over a period of years.
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 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 may pay the authorized securities dealer
a commission based on the aggregate of such sales as follows:
Amount of Sale Commission
- ------------------------------- -------------
(a) $1 million to $3 million 1.00%
(b) Next $2 million 0.50%
(c) Amount over $5 million 0.25%
On such sales of $1,000,000 or more, unless the above commission is waived
by the dealer, 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
13
<PAGE>
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. 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 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
14
<PAGE>
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, minimum investments by various groups of
eligible persons 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 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
Redemption During Net Asset Value
- ----------------- ---------------------
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 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 Sec-
15
<PAGE>
tion 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 and establish other
conditions for employee benefit plans.
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.
In general, Class C shares are only available for new investments by
certain large institutions and, employee benefit plans which acquire shares
through programs or products sponsored by Metropolitan Life Insurance Company
("Metropolitan") and/or its affiliates, for which Class C shares have been
designated. Information on the availability of Class C shares and further
conditions and limitations with respect thereto is available from the
Distributor.
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 dealers a 1% commission for selling Class D shares at the time of
purchase. The proceeds of the contingent deferred sales charge and the
distribution fee are used to offset distribution expenses and thereby permit
the sale of Class D shares without an initial sales charge.
Class D shares that are redeemed within one year after purchase will not
be subject to the contingent deferred sales charge to the extent that the
value of such shares represents (1) capital appreciation of Fund assets or
(2) reinvestment of dividends or capital gains distributions. In addition,
the contingent deferred sales charge will be waived for certain other
redemptions as described under "Contingent Deferred Sales Charge Waivers"
above (as otherwise applicable to Class B shares). For federal income tax
purposes, the amount of the contingent deferred sales charge will reduce the
gain or increase the loss, as the case may be, on the amount realized on
redemption. The amount of any contingent deferred sales charge will be paid
to the Distributor.
Net Asset Value
The Fund's per share net asset values are determined Monday through Friday as
of the close of the New York Stock Exchange (the "NYSE") exclusive of
16
<PAGE>
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 dealers
(including 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 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 dealers.
The Distributor provides distribution services on behalf of other funds
having distribution plans and receives similar payments from, and incurs
similar expenses on behalf of, such other funds. When expenses of the
Distributor cannot be identified as relating to a specific fund, the
Distributor allocates expenses among the funds in a manner deemed fair and
equitable to each fund.
Commissions and other cash and noncash incentives and payments to dealers,
to the extent payable out of the general profits, revenues or other sources
of the Distributor (including the advisory fees paid by the Fund), have also
been authorized pursuant to the Distribution Plan.
A rule of the National Association of Securities Dealers, Inc. ("NASD")
limits the annual expenditures which the Fund may incur under the
Distribution Plan to 1%, of which 0.75% may be used to pay distribution
expenses and 0.25% may be used to pay shareholder service fees. The NASD rule
also limits the aggregate amount which the Fund may pay for such distribution
costs to 6.25% of gross share sales of a class since the inception of any
asset-based sales charge plus interest at the prime rate plus 1% on unpaid
amounts thereof (less any contingent deferred sales charges). Such limitation
does not apply to shareholder service fees. Payments to the Distributor
17
<PAGE>
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 Application. In order to arrange for
redemption-by-
18
<PAGE>
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 1-800-562-0032 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
$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
19
<PAGE>
(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.
(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.
20
<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 indirectly 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 1-800-562-0032. 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
21
<PAGE>
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 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
22
<PAGE>
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 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 dividends
and distributions are directed 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.
A shareholder may discontinue any Telephone Privilege at any time by
advising Shareholder Serv-
23
<PAGE>
ices 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
1-800-562-0032. 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 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 1-800-562-0032
Call this number for assistance in purchasing shares by wire and for
telephone redemptions or telephone exchange transactions. Shareholder
Services will require some form of personal identification prior to acting
upon instructions received by telephone. Written confirmation of each
transaction will be provided.
The Fund and Its Shares
The Fund was organized in 1989 as an additional series of State Street
Research Tax-Exempt Trust, a Massachusetts business trust. The Trustees have
authorized shares of the Fund to be issued in four classes: Class A, Class B,
Class C and Class D shares. The Trust is registered with the Securities and
Exchange Commission as an open-end management investment company. The fiscal
year end of the Fund is December 31.
Except for those differences between the classes of shares described below
and elsewhere in the Prospectus, each share of a Fund has equal dividend,
redemption and liquidation rights with other shares of the Fund and when
issued is fully paid and nonassessable. In the future, certain classes may be
redesignated, for administrative purposes only, to conform to standard class
designations and common 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
24
<PAGE>
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 January 31, 1997, Metropolitan was the record and/or beneficial
owner of approximately 80.1% 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 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.
25
<PAGE>
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 has qualified and elected to be treated as a regulated investment
company under Subchapter M of the Internal Revenue Code for its most recent
fiscal year and intends to qualify as such in future years, although it
cannot give complete assurance that it will do so. As long as it so qualifies
and satisfies certain distribution requirements, it will not be subject to
federal income tax on its taxable income (including capital gains, if any)
distributed to its shareholders. Consequently, the Fund intends to distribute
annually to its shareholders substantially all its net investment income and
any capital gain net income (capital gains net of capital losses). As long as
the Fund qualifies as a regulated investment company and meets certain other
Internal Revenue Code requirements, distributions of tax-exempt interest
income will be excluded from a shareholder's gross income for federal income
tax purposes.
Dividends from net investment income will be declared daily during each
calendar month and paid monthly; distributions of long-term and short-term
capital gain net income will generally be made on an annual basis (or as
otherwise required for compliance with applicable tax regulations), except to
the extent that net short-term gains, if any, are included in the monthly
income dividends for the purpose of 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
26
<PAGE>
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, 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.
27
<PAGE>
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 Master Index, and/or to other financial alternatives. The Fund may
also compare its performance to appropriate indices such as the Lehman
Brothers Municipal 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 Municipal Debt Funds Average 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 historical period as applied to a hypothetical $1,000
initial investment, which is redeemed in total at the end of such period. In
making the calculation, all dividends and distributions are assumed to be
reinvested, and certain accrued expenses and recurring charges, including
management and distribution fees, are recognized. The calculation also
reflects the highest applicable initial or contingent deferred sales charge,
determined as of the assumed date of initial investment or the assumed date
of redemption, as the case may be. 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.
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.
28
<PAGE>
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 do 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.
29
<PAGE>
Appendix I
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% for residents of New York
City. 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>
New York
State and Combined
Sample Federal New York City Combined Effective Tax-Exempt Yields
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% 5.21% 6.51% 7.81% 9.12% 10.42%
42,000 28.00 10.98 38.98 35.90 6.22 7.77 9.33 10.88 12.44
99,000 31.00 10.99 41.99 38.58 6.49 8.12 9.74 11.36 12.99
150,000 36.00 11.04 47.04 43.06 7.00 8.75 10.50 12.25 14.00
265,000 39.60 11.04 50.64 46.27 7.42 9.27 11.13 12.98 14.84
Single Return
$ 17,000 15.00% 10.98% 25.98% 24.33% 5.21% 6.51% 7.81% 9.12% 10.42%
30,000 28.00 10.99 38.99 35.91 6.22 7.77 9.33 10.88 12.44
62,000 31.00 11.04 42.04 38.61 6.49 8.12 9.74 11.36 12.99
125,000 36.00 11.04 47.04 43.06 7.00 8.75 10.50 12.25 14.00
265,000 39.60 11.04 50.64 46.27 7.42 9.27 11.13 12.98 14.84
</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 1997 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.
30
<PAGE>
Appendix II
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 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 last 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 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.
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<PAGE>
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.
SP-3: Notes rated SP-3 have a speculative 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.
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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
INDEPEDENT ACCOUNTANTS
Price Waterhouse LLP
160 Federal Street
Boston, MA 02110
NYTF-606D-597IBS CONTROL NUMBER: 3127-960425(0597)SSR-LD
<PAGE>
STATE STREET RESEARCH TAX-EXEMPT FUND
A Series of
STATE STREET RESEARCH TAX-EXEMPT TRUST
STATEMENT OF ADDITIONAL INFORMATION
May 1, 1997
TABLE OF CONTENTS
Page
----
ADDITIONAL INVESTMENT POLICIES AND RESTRICTIONS.......................... 2
TAX-EXEMPT BONDS......................................................... 5
ADDITIONAL INFORMATION CONCERNING CERTAIN INVESTMENT TECHNIQUES.......... 6
DEBT INSTRUMENTS AND PERMITTED CASH INVESTMENTS......................... 14
TRUSTEES AND OFFICERS................................................... 18
INVESTMENT ADVISORY SERVICES............................................ 22
PURCHASE AND REDEMPTION OF SHARES....................................... 23
NET ASSET VALUE......................................................... 25
PORTFOLIO TRANSACTIONS.................................................. 26
CERTAIN TAX MATTERS..................................................... 29
DISTRIBUTION OF SHARES OF THE FUND...................................... 32
CALCULATION OF PERFORMANCE DATA......................................... 37
CUSTODIAN............................................................... 42
INDEPENDENT ACCOUNTANTS................................................. 42
FINANCIAL STATEMENTS.................................................... 42
The following Statement of Additional Information is not a Prospectus.
It should be read in conjunction with the Prospectus of State Street Research
Tax-Exempt Fund (the "Fund") dated May 1, 1997 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.
CONTROL NUMBER: 1285Q-96501(0697)SSR-LD TE-607D-597
<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, 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; [as a matter of
interpretation, which is not part of the fundamental policy,
this restriction does not apply to the extent that, in
connection with the disposition of the Fund's securities, the
Fund may be deemed to be an underwriter under certain federal
securities laws];
(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;
2
<PAGE>
(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 5% of its total assets in securities
of private companies including predecessors with less than
three years' continuous operations except
3
<PAGE>
(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 ("S&P") or "Baa" by Moody's Investor's
Service, Inc. ("Moody's") (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;
(3) 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;
(4) 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);
(5) not to purchase a security issued by another investment
company if, immediately after such purchase, the Fund would
own, in the aggregate, (i) more than 3% of the total
outstanding voting stock of such other investment company;
(ii) securities issued by such other investment company having
an aggregate value in excess of 5% of the value of the Fund's
total assets; or (iii) securities issued by such other
investment company and all other investment companies (other
than treasury stock of the Fund) having an aggregate value in
excess of 10% of the value of the Fund's total assets;
provided, however, that the Fund may purchase investment
company securities without limit for the purpose of completing
a merger, consolidation or other acquisition of assets;
(6) not to purchase 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
4
<PAGE>
(7) not to invest in companies for the purpose of exercising
control over their management, although the Fund may from time
to time present its views on various matters to the management
of issuers in which it holds investments.
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).
5
<PAGE>
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.
6
<PAGE>
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.
7
<PAGE>
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
8
<PAGE>
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.
9
<PAGE>
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
10
<PAGE>
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.
11
<PAGE>
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 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
12
<PAGE>
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
13
<PAGE>
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
14
<PAGE>
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
15
<PAGE>
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 in the A category by S&P or Prime category by Moody's,
or, if not rated, issued by companies having an outstanding long-term unsecured
debt issue rated at least in the A category by S&P or by Moody's. The money
market investments in corporate bonds and debentures (which must have maturities
at the date of settlement of one year or less) must be rated at the time of
purchase at least in the A category by S&P or by Moody's.
Commercial paper rated in the A category (highest quality) by S&P is
issued by entities which have liquidity ratios which are adequate to meet cash
requirements. Long-term senior
16
<PAGE>
debt is rated A or better, although in some cases credits in the BBB category
may be allowed. The issuer has access to at least two additional channels of
borrowing. Basic earnings and cash flow have an upward trend with allowance made
for unusual circumstances. Typically, the issuer's industry is well established
and the issuer has a strong position within the industry. The reliability and
quality of management are unquestioned. the relative strength or weakness of the
above factors determines whether the issuer's commercial paper is rated A-1, A-2
or A- 3. (Those A-1 issues determined to possess overwhelming safety
characteristics are denoted with a plus (+) sign: A-1+.)
The rating Prime is the highest commercial paper rating category
assigned by Moody's. Among the factors considered by Moody's in assigning
ratings are the following: evaluation of the management of the issuer; economic
evaluation of the issuer's industry or industries and an appraisal of
speculative-type risks which may be inherent in certain areas; evaluation of the
issuer's products in relation to competition and customer acceptance; liquidity;
amount and quality of long-term debt; trend of earnings over a period of 10
years; financial management of obligations which may be present or may arise as
a result of public interest questions and preparations to meet such obligations.
These factors are all considered in determining whether the commercial paper is
rated Prime-1, Prime-2 or Prime-3.
In the event applicable rating agencies lower the ratings of debt
instruments held by the Fund, resulting in a material decline in the overall
quality of the Fund's portfolio, the situation will be reviewed and necessary
action, if any, will be taken, including changes in the composition of the
portfolio.
17
<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 34. 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.
+Steve A. Garban, The Pennsylvania State University, 208 Old Main,
University Park, PA 16802, serves as Trustee of the Trust. He is 59. He
is retired and was formerly Senior Vice President for Finance and Operations and
Treasurer of The Pennsylvania State University.
+Malcolm T. Hopkins, 14 Brookside Road, Biltmore Forest, Asheville,
NC 28803, serves as Trustee of the Trust. He is 69. He is engaged
principally in private investments. Previously, he was Vice Chairman of the
Board and Chief Financial Officer of St. Regis Corp.
*+John H. Kallis, One Financial Center, Boston, MA 02111, serves as
Vice President of the Trust. He is 56. 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 70. 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 70. 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 46. 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.
- ------------------
* or + See footnotes on page 20.
18
<PAGE>
*+Francis J. McNamara, III, One Financial Center, Boston, MA 02111,
serves as Secretary and General Counsel of the Trust. He is 41. His principal
occupation is Executive Vice President, General Counsel and Secretary of State
Street Research & Management Company. During the past five years he has also
served as Senior Vice President of State Street Research & Management Company
and as Senior Vice President, General Counsel and Assistant Secretary of The
Boston Company, Inc., Boston Safe Deposit and Trust Company and The Boston
Company Advisors, Inc. Mr. McNamara's other principal business affiliations
include 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 65. 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 72. 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 58. 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 59. 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 42. 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.
- ------------------
* or + See footnotes on page 20.
19
<PAGE>
*+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 54. 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., and until February, 1996,
prior positions as President and Chief Executive Officer.
+Jeptha H. Wade, 251 Old Billerica Road, Bedford, MA 01730, serves as
Trustee of the Trust. He is 72. 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 January 31, 1997, 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.
20
<PAGE>
As of January 31, 1997, Merrill Lynch, Pierce, Fenner & Smith, Inc.
("Merrill Lynch"), 4800 Deerlake Drive East, Jacksonville, FL 32246, was the
record holder of approximately 75.1% 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.
The Trustees were compensated as follows:
<TABLE>
<CAPTION>
Aggregate Total Compensation From
Name of Compensation Trust and Complex
Trustee From Trust(a) Paid to Trustees(b)
------- ------------ ------------------------
<S> <C> <C>
Steve A. Garban* $ 0 $ 34,750
Malcolm T. Hopkins* $ 0 $ 34,750
Edward M. Lamont $ 5,900 $ 59,375
Robert A. Lawrence $ 5,900 $ 92,125
Dean O. Morton $ 6,300 $ 96,125
Thomas L. Phillips $ 5,900 $ 59,375
Toby Rosenblatt $ 5,900 $ 59,375
Michael S. Scott Morton $ 6,700 $ 100,325
Ralph F. Verni $ 0 $ 0
Jeptha H. Wade $ 6,300 $ 63,375
</TABLE>
(a) For the Fund's fiscal year ended December 31, 1996. Includes compensation
from multiple series of the Trust. See "Distribution of Shares" for a
listing of series.
(b) Includes compensation on behalf of 31 funds representing all series of
investment companies for which the Investment Manager serves as the
primary investment adviser, series of Metropolitan Services Fund, Inc. for
which the Investment Manager serves as sub-investment adviser, and series
of State Street Research Portfolios, Inc., for which State Street Research
Investment Services, Inc. serves as distributor. "Total Compensation from
Trust and Complex Paid to Trustees" is for the 12 months ended December
31, 1996. The Trust does not provide any pension or retirement benefits
for the Trustees.
* Elected Trustee as of February 5, 1997. Fees shown are for the fiscal
year ended December 31, 1996.
21
<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, 1994, 1995 and 1996, the Fund's investment advisory fees
prior to the assumption of fees or expenses were $1,798,180, $1,523,237 and
$1,665,478, respectively. For the same periods, voluntary reduction of fees or
assumption of expenses amounted to $12,268, $0 and $0, respectively.
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
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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.
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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 employees),
service arrangements, or similar factors; insurance companies; investment
companies; endowment funds of nonprofit organizations with substantial minimum
assets (currently a minimum of $10,000,000); and other similar institutional
investors.
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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'
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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 with the use of
such pricing services as may be deemed appropriate or methodologies approved by
the Trustees.
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, 1995 and 1996 were 97.32% and 125.24%, respectively. The Investment Manager
believes the portfolio turnover rate was significantly higher in 1996 than that
for the previous fiscal year because of trading in 1996 to restructure the
Fund's portfolio to adjust the duration and volatility of the portfolio.
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
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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
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<PAGE>
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, the Investment Manager 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, 1994, 1995 and 1996, 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
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<PAGE>
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
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<PAGE>
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
purchased before May 1, 1993) issued after July 18, 1984, or issued on or before
July 18, 1984 if purchased after April 30, 1993, 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
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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 85% 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.
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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
generally 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 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.
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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, 1994, 1995 and 1996, total sales charges on Class A shares
paid to the Distributor amounted to $1,069,893, $610,067 and $575,326,
respectively. For the same periods, $128,722, $74,456 and $70,079, 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
33
<PAGE>
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>
Fiscal Year Fiscal Year Fiscal Year
Ended December 31, 1996 Ended December 31, 1995 Ended December 31, 1994
----------------------- ----------------------- -----------------------
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 $ 505,247 $ 0 $ 535,611 $ 0 $ 941,171
Class B $ 183,514 $ 371,322 $ 417,782 $ 298,673 $ 157,341 $ 634,785
Class D $ 2,346 $ 6,882 $ 36 $ 3,424 $ 0 $ 2,216
</TABLE>
The Fund has adopted a "Plan of Distribution Pursuant to Rule 12b-1"
(the "Distribution Plan") under which the Fund may engage, directly or
indirectly, in financing any activities primarily intended to result in the sale
of Class A, Class B and Class D shares, including, but not limited to, (1) the
payment of commissions and/or reimbursement to underwriters, securities dealers
and others engaged in the sale of shares, including payments to the Distributor
to be used to pay commissions and/or reimbursement to securities dealers (which
securities dealers may be affiliates of the Distributor) engaged in the
distribution and marketing of shares and furnishing ongoing assistance to
investors, (2) reimbursement of direct out-of-pocket expenditures incurred by
the Distributor in connection with the distribution and marketing of shares and
the servicing of investor accounts including special promotional fees and cash
and noncash incentives based upon sales by securities dealers, expenses relating
to the formulation and implementation of marketing strategies and promotional
activities such as direct mail promotions and television, radio, newspaper,
magazine and other mass media advertising, the preparation, printing and
distribution of Prospectuses of the Fund and reports for recipients other than
existing shareholders of the Fund, and obtaining such information, analyses and
reports with respect to marketing and promotional activities and investor
accounts as the Fund may, from time to time, deem advisable, and (3)
reimbursement of expenses incurred by the Distributor in connection with the
servicing of shareholder accounts including payments to securities dealers and
others in consideration of the provision of personal services to investors
and/or the maintenance or servicing 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
34
<PAGE>
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 or servicing 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, 1996, 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:
35
<PAGE>
Class A Class B Class D
------- ------- -------
Advertising $ 410 $ 0 $ 2,548
Printing and mailing of prospectuses 109 0 678
to other than current shareholders
Compensation to dealers 579,868 515,242 9,206
Compensation to sales personnel 1,327 0 9,480
Interest 0 0 0
Carrying or other financing charges 0 0 0
Other expenses: marketing;
general 677 0 4,278
---------- ----------- --------
Total Fees $582,391 $515,242 $26,190
======== ======== =======
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.
36
<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, if any, 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>
37
<PAGE>
Total Return
The standard total return of each class of the Fund's shares was as
follows:
Commencement of
Operations Five Years One Year
(August 25, 1986) Ended Ended
Fund to December 31, 1996 December 31, 1996 December 31, 1996
- ---- -------------------- ----------------- -----------------
Class A 6.64% 5.51% -1.70%
Class B 6.84% 5.60% -2.76%
Class C 7.19% 6.65% 3.30%
Class D 6.84% 5.92% 1.30%
Standard total return is computed by determining the average annual
compounded rates of return over the designated periods that, if applied to the
initial amount invested would produce the ending redeemable value in accordance
with the following formula:
P(1+T)n = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value at the end of the designated period
assuming a hypothetical $1,000 payment made at the beginning
of the designated period
The calculation is based on the further assumptions that the highest
applicable initial or contingent deferred sales charge is deducted, and that all
dividends and distributions by the Fund are reinvested at net asset value on the
reinvestment dates during the periods. Certain accrued expenses and recurring
charges are also taken into account as described later herein.
38
<PAGE>
Yield
The annualized yield of each class of shares of the Fund based on the
month of December 1996 was as follows:
Class A 4.66%
Class B 4.13%
Class C 5.12%
Class D 4.14%
Yield for each of the Fund's Class A, Class B, Class C and Class D
shares is computed by dividing the net investment income per share earned during
a recent month or other specified 30-day period by the maximum offering price
per share on the last day of the period and annualizing the result, in
accordance with the following formula:
YIELD = 2[( a-b + 1)6 -1]
---
cd
Where: a = dividends and interest earned during the period
b = expenses accrued for the period (net of voluntary expense
reductions by the Investment Manager)
c = the average daily number of shares outstanding during the
period that were entitled to receive dividends
d = the maximum offering price per share on the last day of the
period
To calculate interest earned (for the purpose of "a" above) on debt
obligations, the Fund computes the yield to maturity of each obligation held by
the Fund based on the market value of the obligation (including actual accrued
interest) at the close of the last business day of the preceding period, or,
with respect to obligations purchased during the period, the purchase price
(plus actual accrued interest). The yield to maturity is then divided by 360 and
the quotient is multiplied by the market value of the obligation (including
actual accrued interest) to determine the interest income on the obligation for
each day of the period that the obligation is in the portfolio. Dividend income
is recognized daily based on published rates.
In the case of a tax-exempt obligation issued without original issue
discount and having a current market discount, the coupon rate of interest is
used in lieu of the yield to maturity. Where, in the case of a tax-exempt
obligation with original issue discount, the discount based on the current
market value exceeds the then-remaining portion of original issue discount
(market discount), the yield to maturity is the imputed rate based on the
original issue discount calculation. Where, in the case of a tax-exempt
obligation with original issue discount, the discount based on the current
market value is less than the then-remaining portion of original
39
<PAGE>
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, 1996, assuming a federal income tax rate of 28% was as
follows:
Class A 6.47%
Class B 5.74%
Class C 7.11%
Class D 5.75%
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].
40
<PAGE>
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, 1996, without taking sales charges into account
were as follows:
Class A 5.28%
Class B 4.89%
Class C 5.55%
Class D 5.02%
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.
41
<PAGE>
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 1996 were
as follows:
Class A 4.53%
Class B 3.99%
Class C 5.00%
Class D 3.99%
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.
42
<PAGE>
The following financial statements are for the Fund's fiscal year ended
December 31, 1996.
359877.c3
43
<PAGE>
STATE STREET RESEARCH TAX-EXEMPT FUND
- -------------------------------------------------------------------------------
INVESTMENT PORTFOLIO
- -------------------------------------------------------------------------------
December 31, 1996
- -------------------------------------------------------------------------------
Principal Maturity Value
Amount Date (Note 1)
- -------------------------------------------------------------------------------
MUNICIPAL BONDS 100.0%
Arizona 1.6%
Salt River Project Agricultural
Improvement and Power District,
Arizona, Salt River Project Electric
System Refunding Revenue Bonds, 1993
Series C, 5.00% $5,000,000 1/01/2016 $ 4,713,250
-------------
California 13.8%
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 1,089,000
South Orange County Public Financing
Authority, Special Tax Revenue
Bonds, 1994 Series B (Junior Lien
Bonds), 7.00% 500,000 9/01/2007 508,275
City of Duarte, California,
Certificates of Participation, (Hope
National Medical Center), 6.00% 500,000 4/01/2008 506,095
Santa Clara County Financing
Authority, (VMC Facility Replacement
Project), 1994 Series A Bonds, AMBAC
Insured, 7.75% 1,000,000 11/15/2008 1,242,660
South Orange County Public Financing
Authority, Special Tax Revenue
Bonds, 1994 Series B (Junior Lien
Bonds), 7.00% 1,000,000 9/01/2009 1,010,090
Foothill/Eastern Transportation
Corridor Agency, Series 1995A Senior
Lien Convertible Capital
Appreciation Bonds, 0.00% 1,695,000 1/01/2010 1,101,818
California Housing Finance Agency,
Home Mortgage Revenue Bonds, 1991
Series G, Subject to AMT, 6.95% 260,000 8/01/2011 275,839
Port Hueneme Redevelopment Agency,
Central Community Project, 1993 Tax
Allocation Refunding Bonds, AMBAC
Insured, 5.50% 1,800,000 5/01/2014 1,817,910
California Pollution Control
Financing Authority, Pollution
Control Refunding Revenue Bonds,
(San Diego Gas & Electric Company),
1996 Series A, 5.90% $2,000,000 6/01/2014 $ 2,100,220
Sacramento Power Authority,
Cogeneration Project Revenue Bonds,
(Procter & Gamble Project), 1995
Series, 6.50% 1,300,000 7/01/2014 1,359,293
California Housing Finance Agency,
Home Mortgage Revenue Bonds, 1994
Series G, 7.20% 1,500,000 8/01/2014 1,592,490
Rancho California Water District
Financing Authority, Revenue
Refunding Bonds, AMBAC Insured,
Series 1994, 5.00% 4,000,000 8/15/2014 3,793,280
City of Stockton, Revenue
Certificates of Participation, 1995
Series A, (Wastewater Treatment
Plant Expansion), FGIC Insured,
6.70% 1,000,000 9/01/2014 1,109,800
California Educational Facilities
Authority, Series 1994 Revenue Bonds
(Southwestern University, Project),
MBIA Insured, 6.60% 1,000,000 11/01/2014 1,065,310
County of Madera, California,
Certificates of Participation,
(Valley Children's Hospital
Project), Series 1995, MBIA Insured,
6.50% 1,000,000 3/15/2015 1,118,880
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 679,014
Roseville Joint Union High School
District, 1992 General Obligation
Bonds, Series B, FGIC Insured, 0.00% 1,000,000 8/01/2015 348,370
Fresno Sewer Revenue Bonds, Series
A-1, AMBAC Insured, 5.25% 5,100,000 9/01/2019 4,961,331
The accompanying notes are an integral part of the financial statements.
44
<PAGE>
STATE STREET RESEARCH TAX-EXEMPT FUND
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Principal Maturity Value
Amount Date (Note 1)
- -------------------------------------------------------------------------------
California (cont'd)
Central Coast Water Authority,
Refunding Revenue Bonds, (State
Water Project Regional Facilities),
Series 1996A, AMBAC Insured, 5.00% $2,000,000 10/01/2022 $ 1,847,500
The Metropolitan Water District of
Southern California, Water Revenue
Bonds, 1996 Series C, 5.00% 5,000,000 7/01/2027 4,597,800
San Joaquin Hills Transportation
Corridor Agency, (Orange County,
California), Senior Lien Toll Road
Revenue Bonds, 7.00% 1,000,000 1/01/2030 1,074,680
Foothill/Eastern Transportation
Corridor Agency, Toll Road Revenue
Bonds Series 1995A Senior Lien,
6.50% 6,000,000 1/01/2032 6,273,240
-------------
39,472,895
-------------
Colorado 4.2%
City and County of Denver, Colorado,
Department of Aviation, Airport
System Revenue Bonds, Series 1996C,
MBIA Insured, Subject to AMT, 5.50% 1,500,000 11/15/2013 1,478,820
City and County of Denver, Colorado,
Department of Aviation, Airport
System Revenue Bonds, Series 1996B,
MBIA Insured, Subject to AMT, 5.75% 3,500,000 11/15/2015 3,505,670
Arapahoe County, Colorado, Public
Highway Authority, Capital
Improvement Trust Fund, Highway
Revenue, Bonds (E-470 Project),
7.00% 5,000,000 8/31/2026 5,519,950
Colorado Housing and Finance
Authority, Single Family Program
Senior and Subordinate Bonds, 1996
Series B, 7.45% 1,500,000 11/01/2027 1,680,375
-------------
12,184,815
-------------
Connecticut 3.4%
State of Connecticut, Clean Water
Fund Revenue Bonds, 1991 Series,
7.00% $1,000,000 1/01/2011 $ 1,108,970
State of Connecticut, Special Tax
Obligation Bonds, Transportation
Infrastructure Purposes, 1991 Series
A, 6.50% 1,500,000 10/01/2012 1,678,365
Connecticut Development Authority,
Pollution Control Refunding Bonds,
(Pfizer Inc. Project-1982 Series),
6.55% 2,500,000 2/15/2013 2,720,200
State of Connecticut Health and
Educational Facilities Authority,
Revenue Bonds, Quinnipiac College,
Issue, Series D, 6.00% 4,465,000 7/01/2023 4,282,337
-------------
9,789,872
-------------
Florida 10.1%
St. Johns County Industrial
Development Authority, Industrial
Development Revenue Bonds, Series
1993A, (Vicar's Landing Project),
6.20% 500,000 2/15/2003 514,780
Collier County Health Facilities
Authority, Health Facility Refunding
Revenue Bonds, (The Moorings, Inc.
Project), Series 1994, 6.00% 500,000 12/01/2005 514,545
Orlando Utilities Commission, Water
and Electric Subordinated Revenue
Bonds, Series D, 6.75% 8,950,000 10/01/2017 10,457,627
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 1,367,438
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 1,089,420
The accompanying notes are an integral part of the financial statements.
45
<PAGE>
STATE STREET RESEARCH TAX-EXEMPT FUND
- -------------------------------------------------------------------------------
INVESTMENT PORTFOLIO (cont'd)
- -------------------------------------------------------------------------------
Principal Maturity Value
Amount Date (Note 1)
- -------------------------------------------------------------------------------
Florida (cont'd)
Orange County, Florida, Health
Facilities Authority, First Mortgage
Revenue Bonds, Series 1996, (Orlando
Lutheran Towers, Inc.), 8.75% $5,000,000 7/01/2026 $ 5,248,200
Volusia County Educational Facility
Authority, Educational Facilities
Revenue Bonds, (Embry-Riddle
Aeronautical University Project),
Series 1996A, 6.125% 5,000,000 10/15/2026 5,081,200
Northern Palm Beach County, Florida,
Improvement District, Water Control
and Improvement Bonds, Unit of
Development No. 9A, Series 1996A,
7.30% 3,000,000 8/01/2027 3,056,040
Housing Authority of Lee County,
Florida, Single Family Mortgage
Revenue Bonds, (Multi-County
Program), Series 1996A, Subseries 2,
Subject to AMT, 7.50% 1,500,000 9/01/2027 1,667,670
-------------
28,996,920
-------------
Georgia 3.9%
State of Georgia, General Obligation
Bonds, Series 1992B, 6.25% 4,300,000 3/01/2011 4,761,691
State of Georgia, General Obligation
Bonds, Series 1994E, 6.75% 1,000,000 12/01/2012 1,163,870
Metropolitan Atlanta Rapid Transit
Authority, Georgia, Sales Tax
Revenue Bonds, Refunding Series P,
AMBAC Insured, 6.25% 4,700,000 7/01/2020 5,208,023
-------------
11,133,584
-------------
Hawaii 2.6%
State of Hawaii, General Obligation
Bonds of 1991, Series BT, 6.125%* 2,000,000 2/01/2010 2,140,080
State of Hawaii, Airports System
Revenue Bonds, Second Series of
1991, MBIA Insured, Subject to AMT,
7.00% $5,000,000 7/01/2018 $ 5,418,650
-------------
7,558,730
-------------
Illinois 2.0%
City of Chicago, Illinois, Gas
Supply Revenue Bonds, 1985 Series B
(The Peoples Gas Light and Coke
Company Project), 7.50% 3,500,000 3/01/2015 3,804,360
City of Chicago, Illinois, Midway
Airport Revenue Bonds, Series B,
MBIA Insured, Subject to AMT, 5.625% 2,000,000 1/01/2029 1,915,720
-------------
5,720,080
-------------
Kansas 0.4%
State of Kansas, Department of
Transportation, Highway Revenue
Bonds, Series 1992, Pre-Refunded, to
3/1/2002 @ 102, 6.50% 1,000,000 3/01/2008 1,099,600
-------------
Maryland 1.9%
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 5,397,850
-------------
Massachusetts 7.9%
Massachusetts Industrial Finance
Agency, First Mortgage Revenue
Bonds, (Brookhaven Retirement
Community, Lexington-1994 Issue),
Series A, 6.75% 4,500,000 1/01/2001 4,718,475
Massachusetts Industrial Finance
Agency, First Mortgage Revenue
Bonds, (Berkshire Retirement
Community, Lenox- 1994 Issue) Series
A, 6.375% 1,500,000 7/01/2005 1,526,985
The accompanying notes are an integral part of the financial statements.
46
<PAGE>
STATE STREET RESEARCH TAX-EXEMPT FUND
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Principal Maturity Value
Amount Date (Note 1)
- -------------------------------------------------------------------------------
Massachusetts (cont'd)
The Commonwealth of Massachusetts,
General Obligation Refunding Bonds,
1995 Series A, AMBAC Insured, 5.00% $4,000,000 7/01/2011 $ 3,871,800
Massachusetts State Water Resources
Authority, General Revenue Bonds,
1993 Series C, 6.00% 6,155,000 12/01/2011 6,542,334
Massachusetts Bay Transportation
Authority, General Transportation
System Bonds, 1994 Series A
Refunding Bonds, 7.00% 3,385,000 3/01/2014 3,998,125
Massachusetts Housing Finance
Agency, Single Family Housing
Revenue Bonds, Series 34, MBIA
Insured, Subject to AMT, 6.25% 2,000,000 12/01/2015 2,032,460
-------------
22,690,179
-------------
Minnesota 0.7%
Minnesota Housing Finance Authority,
Single Family Mortgage Bonds, 1994
Series E, 5.90% 2,100,000 7/01/2025 2,123,646
-------------
Mississipi 0.7%
Claiborne County, Mississippi,
Pollution Control Revenue Bonds,
(Middle South Energy, Inc. Project),
Series B, 8.25% 1,750,000 6/01/2014 1,893,360
-------------
Nevada 2.6%
North Las Vegas, Nevada, Local
Special Improvements District No.
707, 7.10% 2,500,000 6/01/2016 2,548,675
State of Nevada, General Obligation
(Limited Tax) Bonds, Nevada
Municipal Bond Bank Project Nos. 49
and 50, Series November 1, 1995A,
FGIC Insured, 5.50% 5,000,000 11/01/2025 4,935,450
-------------
7,484,125
-------------
New Hampshire 4.2%
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 $ 7,182,280
New Hampshire Higher Educational and
Health Facilities Authority Revenue
Bonds, Dartmouth College Issue,
Series 1993, 5.375% 5,000,000 6/01/2023 4,832,150
-------------
12,014,430
-------------
New Jersey 2.0%
New Jersey Transportation Trust Fund
Authority, Transportation System
Bonds, 1996 Series B, 5.00% 5,000,000 6/15/2017 4,666,150
New Jersey Educational Facilities
Authority, Seton Hall University
Project Revenue Bonds, 1991 Series
D, 7.00% 1,000,000 7/01/2021 1,053,060
-------------
5,719,210
-------------
New Mexico 0.9%
City of Farmington, New Mexico,
Pollution Control Revenue Refunding
Bonds, (Public Service Company of
New Mexico San Juan Project), 1996
Series B, 6.30% 2,500,000 12/01/2016 2,514,350
-------------
New York 7.7%
The Port Authority of New York and
New Jersey, Special Project Bonds,
Series 4, KIAC Partners Project,
Subject to AMT, 6.75% 5,000,000 10/01/2011 5,163,050
City of New York, General Obligation
Refunding Bonds, Fiscal 1991 Series
B, 7.75% 3,990,000 2/01/2012 4,489,907
The accompanying notes are an integral part of the financial statements.
47
<PAGE>
STATE STREET RESEARCH TAX-EXEMPT FUND
- -------------------------------------------------------------------------------
INVESTMENT PORTFOLIO (cont'd)
- -------------------------------------------------------------------------------
Principal Maturity Value
Amount Date (Note 1)
- -------------------------------------------------------------------------------
New York (cont'd)
New York Local Government Assistance
Corp., (A Public Benefit Corporation
of the State of New York), Series
1993E Refunding Bonds, 6.00% $5,000,000 4/01/2014 $ 5,380,050
Metropolitan Transportation
Authority, Transit Facilities
Revenue Bonds, Series K, 6.625% 2,000,000 7/01/2014 2,222,900
Dormitory Authority of the State of
New York, Department of Health of
the State of New York, Revenue
Bonds, Series 1996, 5.75% 5,000,000 7/01/2017 4,842,200
-------------
22,098,107
-------------
North Carolina 6.4%
North Carolina Municipal Power
Agency Number 1, Catawba Electric
Revenue Bonds, Series 1992, MBIA
Insured, 7.25% 5,000,000 1/01/2007 5,858,650
County of Durham, North Carolina,
Certificates of Participation, (1991
Jail Facilities and Computer
Equipment Financing Project), 6.625% 2,065,000 5/01/2014 2,200,485
Board of Governors of The University
of North Carolina, University of
North Carolina Hospitals at Chapel
Hill, Revenue Bonds, Series 1996, 5.25% 3,000,000 2/15/2019 2,856,660
North Carolina Housing Finance
Agency, Multifamily Revenue
Refunding Bonds, (1992 Refunding
Bond Resolution), Series B, 6.90% 6,990,000 7/01/2024 7,403,668
-------------
18,319,463
-------------
Ohio 5.2%
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 $ 2,215,200
County of Miami, Ohio, Hospital
Facilities Revenue Refunding and
Improvement Bonds, Series 1996A,
(Upper Valley Medical Center), 6.25% 2,500,000 5/15/2016 2,503,775
City of Cleveland, Ohio, Various
Purpose General Obligation Bonds,
Series 1996, AMBAC Insured, 5.50% 2,250,000 9/01/2016 2,263,275
City of Cleveland, Ohio, Public
Power System Improvement First
Mortgage Revenue Refunding Bonds,
Series 1991 B, 7.00% 7,000,000 11/15/2017 7,910,980
-------------
14,893,230
-------------
Oregon 0.4%
State of Oregon, Housing,
Educational and Cultural Facilities
Authority, Revenue Bonds, (Reed
College Project), 1991 Series A,
6.75%* 1,000,000 7/01/2021 1,109,010
-------------
Pennsylvania 2.8%
Scranton-Lackawanna Health and
Welfare Authority, Revenue Bonds,
Series A of 1994, (Allied Services
Rehabilitation Hospitals Project),
6.60% 500,000 7/15/2000 510,695
Montgomery County Industrial
Development Authority, Health
Facilities Revenue Bonds, Series of
1993, (ECRI Project), 6.40% 770,000 6/01/2003 794,771
Delaware County Industrial
Development Authority, Revenue
Bonds, Series of 1994, (Martins
Run), 5.75% 500,000 12/15/2003 497,720
The accompanying notes are an integral part of the financial statements.
48
<PAGE>
STATE STREET RESEARCH TAX-EXEMPT FUND
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Principal Maturity Value
Amount Date (Note 1)
- -------------------------------------------------------------------------------
Pennsylvania (cont'd)
Montgomery County Higher Education
and Health Authority, Pennsylvania,
Northwestern Corp., 6.50% $1,140,000 6/01/2004 $ 1,213,234
Monroeville, Pennsylvania, Hospital
Authority, Hospital Refunding Bonds,
Forbes Health System, 5.75% 500,000 10/01/2005 508,530
Pennsylvania Economic Development
Financing Authority, Resource
Recovery Revenue Bonds, (Northampton
Generating Project), Series 1994A,
6.40% 2,500,000 1/01/2009 2,481,400
Pennslyvania Economic Development
Financing Authority, Resource
Recovery Revenue Bonds, (Colver
Project), Series 1994D, 7.05% 1,000,000 12/01/2010 1,048,540
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 1,074,890
-------------
8,129,780
-------------
Tennessee 1.9%
City of Memphis, Tennessee, Electric
System Revenue Refunding Bonds,
Series of 1992, 6.00% 2,250,000 1/01/2006 2,440,057
City of Memphis, Tennessee, Water
Division Revenue Refunding Bonds,
Series of 1992-A, 6.00% 3,000,000 1/01/2012 3,142,530
-------------
5,582,587
-------------
Texas 9.1%
City of Austin, Texas, Combined
Utility Systems Revenue Refunding
Bonds, Series 1993, 5.80% 2,000,000 11/15/2006 2,136,040
Texas Turnpike Authority, Dallas
North Tollway System Revenue
Refunding Bonds, Series 1996, FGIC
Insured, 6.50%+ $5,100,000 1/01/2009 $ 5,595,006
Texas Municipal Power Agency,
Refunding Revenue Bonds, Series
1991A, AMBAC Insured, 6.75% 1,000,000 9/01/2012 1,079,850
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 6,238,175
Dallas-Fort Worth International
Airport, Facility Improvement
Corporation, American Airlines, Inc.
Revenue Bonds, Series 1990, 7.50% 5,250,000 11/01/2025 5,624,377
AllianceAirport Authority, Inc.,
Special Facilities Revenue Bonds,
Series 1990, (American Airlines,
Inc. Project), 7.50% 5,000,000 12/01/2029 5,361,800
-------------
26,035,248
-------------
Utah 0.9%
Intermountain Power Agency, Utah,
Power Supply Revenue Refunding
Bonds, 1996 Series A, MBIA Insured,
6.15% 2,500,000 7/01/2014 2,630,450
-------------
Vermont 0.5%
Vermont Educational and Health
Buildings Financing Agency, Revenue
Bonds, (Middlebury College Project),
Series 1996, 5.375% 1,500,000 11/01/2026 1,424,175
-------------
Washington 0.7%
Washington Public Power Supply
System, Nuclear Project No. 1,
Refunding Revenue Bonds, Series
1996A, 5.70% 2,000,000 7/01/2012 2,015,060
-------------
The accompanying notes are an integral part of the financial statements.
49
<PAGE>
STATE STREET RESEARCH TAX-EXEMPT FUND
- -------------------------------------------------------------------------------
INVESTMENT PORTFOLIO (cont'd)
- -------------------------------------------------------------------------------
Principal Maturity Value
Amount Date (Note 1)
- -------------------------------------------------------------------------------
Wisconsin 1.5%
Wisconsin Housing and Economic
Development Authority, Home
Ownership Revenue Bonds, 1992
Series 2, Subject to AMT, 6.875% $4,250,000 9/01/2024 $ 4,453,320
-------------
Total Municipal Bonds (Cost $273,381,058) 287,197,326
-------------
SHORT-TERM OBLIGATIONS--0.2%
State of Massachusetts, Series
B, 4.80% 500,000 1/02/1997++ 500,000
-------------
Total Short-Term Obligations (Cost $500,000) 500,000
-------------
Total Investments (Cost $273,881,058)--100.2% 287,697,326
Cash and Other Assets, Less Liabilities--(0.2%) (702,017)
-------------
Net Assets--100.0% $286,995,309
=============
Federal Income Tax Information:
At December 31, 1996, the net unrealized appreciation of
investments based on cost for Federal income tax purposes of
$273,881,058 was as follows:
Aggregate gross unrealized appreciation for all investments
in which there is an excess of value
over tax cost $ 13,843,652
Aggregate gross unrealized depreciation for all investments
in which there is an excess of tax
cost over value (27,384)
-------------
$ 13,816,268
=============
- -------------------------------------------------------------------------------
++ Interest rate on this obligation 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 $6,553,710.
- -------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
- -------------------------------------------------------------------------------
December 31, 1996
Assets
Investments, at value (Cost $273,881,058) (Note 1) $287,697,326
Cash 74,621
Interest receivable 6,074,632
Receivable for fund shares sold 95,933
Other assets 247
------------
293,942,759
Liabilities
Payable for securities purchased 5,977,581
Dividends payable 308,558
Payable for fund shares redeemed 160,302
Accrued transfer agent and shareholder services (Note 2) 144,621
Accrued management fee (Note 2) 135,117
Accrued distribution and service fees (Note 4) 93,462
Accrued trustees' fees (Note 2) 31,133
Other accrued expenses 96,676
------------
6,947,450
------------
Net Assets $286,995,309
============
Net Assets consist of:
Undistributed net investment income $ 118,283
Unrealized appreciation of investments 13,816,268
Accumulated net realized loss (4,469,908)
Shares of beneficial interest 277,530,666
------------
$286,995,309
============
Net Asset Value and redemption price per share of Class A
shares ($223,406,716 / 27,564,079 shares of beneficial
interest) $8.10
=====
Maximum Offering Price per share of Class A shares ($8.10
/ .955) $8.48
=====
Net Asset Value and offering price per share of Class B
shares ($51,710,259 / 6,380,372 shares of beneficial
interest)* $8.10
=====
Net Asset Value, offering price and redemption price per
share of Class C shares ($8,989,569 / 1,111,576 shares of
beneficial interest) $8.09
=====
Net Asset Value and offering price per share of Class D
shares ($2,888,765 / 356,711 shares of beneficial
interest)* $8.10
=====
- -------------------------------------------------------------------------------
* Redemption price per share for Class B and Class D is equal to net asset
value less any applicable contingent deferred sales charge.
The accompanying notes are an integral part of the financial statements.
50
<PAGE>
STATE STREET RESEARCH TAX-EXEMPT FUND
- -------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
- -------------------------------------------------------------------------------
For the year ended December 31, 1996
Investment Income
Interest $17,719,764
Expenses
Management fee (Note 2) 1,665,478
Transfer agent and shareholder services (Note 2) 356,505
Custodian fee 147,365
Reports to shareholders 60,745
Trustees' fees (Note 2) 44,545
Registration fees 24,206
Service fee--Class A (Note 4) 582,391
Distribution and service fees--Class B (Note 4) 515,242
Distribution and service fees--Class D (Note 4) 26,190
Audit fee 18,191
Legal fees 16,836
Miscellaneous 43,193
-----------
3,500,887
-----------
Net investment income 14,218,877
-----------
Realized and Unrealized Gain (Loss) on Investments and
Futures Contracts
Net realized loss on investments (Notes 1 and 3) (2,797,711)
Net realized gain on futures contracts (Note 1) 963,485
-----------
Total net realized loss (1,834,226)
Net unrealized depreciation of investments (4,864,350)
-----------
Net loss on investments and futures contracts (6,698,576)
-----------
Net increase in net assets resulting from operations $ 7,520,301
===========
- -------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
- -------------------------------------------------------------------------------
Year ended December 31
----------------------------
1996 1995
- -------------------------------------------------------------------------------
Increase (Decrease) in Net Assets
Operations:
Net investment income $ 14,218,877 $ 13,418,946
Net realized gain (loss) on
investments and futures
contracts* (1,834,226) 8,383,796
Net unrealized appreciation
(depreciation) of investments (4,864,350) 20,715,649
------------ ------------
Net increase resulting from
operations 7,520,301 42,518,391
------------ ------------
Dividends from net investment income:
Class A (11,329,888) (12,265,000)
Class B (2,112,558) (1,664,544)
Class C (810,073) (63,631)
Class D (108,938) (52,929)
------------ ------------
(14,361,457) (14,046,104)
------------ ------------
Net increase (decrease) from
fund share transactions (Note
6) (38,189,738) 28,826,529
------------ ------------
Total increase (decrease) in
net assets (45,030,894) 57,298,816
Net Assets
Beginning of year 332,026,203 274,727,387
------------ ------------
End of year (including
undistributed net investment
income of $118,283 and
$286,673, respectively) $286,995,309 $332,026,203
============ ============
* Net realized gain (loss) for
Federal income tax purposes
(Note 1) $ (1,738,904) $ 7,274,722
============ ============
The accompanying notes are an integral part of the financial statements.
51
<PAGE>
STATE STREET RESEARCH TAX-EXEMPT FUND
- -------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
December 31, 1996
Note 1
State Street Research Tax-Exempt Fund (the "Fund"), is a series of State
Street Research Tax-Exempt Trust (the "Trust"), which was organized as a
Massachusetts business trust in December, 1985 and is registered under the
Investment Company Act of 1940, as amended, as an open-end management
investment company. The Fund commenced operations in August, 1986. 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. Class B shares are subject to a contingent deferred
sales charge on certain redemptions made within five years of purchase and
pay annual distribution and service fees of 1.00%. Class B shares
automatically convert into Class A shares (which pay lower ongoing expenses)
at the end of eight years after the issuance of the Class B shares. Class C
shares are only offered to certain employee benefit plans and large
institutions. No sales charge is imposed at the time of purchase or
redemption of Class C shares. Class C shares do not pay any distribution or
service fees. Class D shares are subject to a contingent deferred sales
charge of 1.00% on any shares redeemed within one year of their purchase.
Class D shares also pay annual distribution and service fees of 1.00%. The
Fund's expenses are borne pro-rata by each class, except that each class
bears expenses, and has exclusive voting rights with respect to provisions of
the Plan of Distribution, related specifically to that class. The Trustees
declare separate dividends on each class of shares.
The following significant accounting policies are consistently followed by
the Fund in preparing its financial statements, and such policies are in
conformity with generally accepted accounting principles for investment
companies.
A. Investment Valuation
Tax-exempt securities are valued by a pricing service, which utilizes market
transactions, quotations from dealers, and various relationships among
securities in determining value. Short-term obligations are valued at
amortized cost. Other securities, if any, are valued at their fair value as
determined in accordance with established methods consistently applied.
B. Security Transactions
Security transactions are accounted for on the trade date (date the order to
buy or sell is executed). Realized gains or losses are reported on the basis
of identified cost of securities delivered.
C. Net Investment Income
Net investment income is determined daily and consists of interest accrued
and discount earned, less amortization of premium and the estimated daily
expenses of the Fund. Interest income is accrued daily as earned. The Fund is
charged for expenses directly attributable to it, while indirect expenses are
allocated 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, 1996, the
Fund had a capital loss carryforward of $3,135,166 available, to the extent
provided in regulations, to offset future capital gains, if any, of which
$1,396,262 and $1,738,904 expires on December 31, 2002 and 2004,
respectively. 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 $1,111,197, of which $803,119
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.
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.
52
<PAGE>
STATE STREET RESEARCH TAX-EXEMPT FUND
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
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, 1996, the fees pursuant to
such agreement amounted to $1,665,478.
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, 1996, the amount of
such expenses was $80,602.
The fees of the Trustees not currently affiliated with the Adviser amounted
to $44,545 during the year ended December 31, 1996.
Note 3
For the year ended December 31, 1996, purchases and sales of securities,
exclusive of short-term obligations, aggregated $377,616,831 and
$415,192,668, 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 or servicing of shareholder
accounts, to reimburse securities dealers for distribution and marketing
services, to furnish ongoing assistance to investors and to defray a portion
of its distribution and marketing expenses. For the year ended December 31,
1996, fees pursuant to such plan amounted to $582,391, $515,242 and $26,190
for Class A, Class B and Class D shares, respectively.
The Fund has been informed that the Distributor and MetLife Securities, Inc.,
a wholly owned subsidiary of Metropolitan, earned initial sales charges
aggregating $70,079 and $467,370, respectively, on sales of Class A shares of
the Fund during the year ended December 31, 1996, and that MetLife
Securities, Inc. earned commissions aggregating $315,859 on sales of Class B
shares, and the Distributor collected contingent deferred sales charges
aggregating $183,514 and $2,346 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.
53
<PAGE>
STATE STREET RESEARCH TAX-EXEMPT FUND
- -------------------------------------------------------------------------------
NOTES (cont'd)
- -------------------------------------------------------------------------------
Note 6
The Trustees have the authority to issue an unlimited number of shares of
beneficial interest, $.001 par value per share. At December 31, 1996, 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
--------------------------------------------------------------
1996 1995
------------------------------- ------------------------------
Class A Shares Amount Shares Amount
------------------------------------------------------- ---------------- -------------- ---------------
<S> <C> <C> <C> <C>
Shares sold 3,002,670 $ 23,933,082 4,674,154 $ 37,484,244
Issued upon reinvestment of dividends 1,019,921 8,152,263 1,134,792 8,963,324
Shares repurchased (7,148,451) (57,087,469) (7,024,141) (55,275,274)
-------------- ---------------- -------------- ---------------
Net decrease (3,125,860) $(25,002,124) (1,215,195) $ (8,827,706)
============== ================ ============== ===============
Class B Shares Amount Shares Amount
------------------------------------------------------- ---------------- -------------- ---------------
Shares sold 1,380,510 $ 11,106,098 2,374,570 $ 19,127,552
Issued upon reinvestment of dividends 183,701 1,368,769 164,613 1,301,099
Shares repurchased (1,461,750) (11,643,649) (999,139) (7,870,018)
-------------- ---------------- -------------- ---------------
Net increase 102,461 $ 831,218 1,540,044 $ 12,558,633
============== ================ ============== ===============
Class C Shares Amount Shares Amount
------------------------------------------------------- ---------------- -------------- ---------------
Shares sold 573,749 $ 4,662,961 2,740,046 $ 22,327,564
Issued upon reinvestment of dividends 49,208 392,454 4,806 38,781
Shares repurchased (2,257,037) (17,834,280) (43,984) (354,433)
-------------- ---------------- -------------- ---------------
Net increase (decrease) (1,634,080) $(12,778,865) 2,700,868 $ 22,011,912
============== ================ ============== ===============
Class D Shares Amount Shares Amount
------------------------------------------------------- ---------------- -------------- ---------------
Shares sold 252,936 $ 2,023,533 417,377 $ 3,395,688
Issued upon reinvestment of dividends 5,443 44,400 2,759 21,771
Shares repurchased (408,733) (3,307,900) (41,573) (333,769)
-------------- ---------------- -------------- ---------------
Net increase (decrease) (150,354) $ (1,239,967) 378,563 $ 3,083,690
============== ================ ============== ===============
</TABLE>
54
<PAGE>
STATE STREET RESEARCH TAX-EXEMPT FUND
- -------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- -------------------------------------------------------------------------------
For a share outstanding throughout each year:
<TABLE>
<CAPTION>
Class A
----------------------------------------------------------
Year ended December 31
----------------------------------------------------------
1996 1995 1994 1993 1992
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $ 8.26 $ 7.46 $ 8.43 $ 7.94 $ 7.69
Net investment income 0.39 0.39 0.40 0.40 0.43
Net realized and unrealized gain (loss)
on investments and futures contracts (0.16) 0.82 (0.98) 0.54 0.27
Dividends from net investment income (0.39) (0.41) (0.38) (0.39) (0.43)
Distributions from net realized gains -- -- (0.01) (0.06) (0.02)
--------- --------- ---------- ---------- ---------
Net asset value, end of year $ 8.10 $ 8.26 $ 7.46 $ 8.43 $ 7.94
========= ========= ========== ========== =========
Total return 2.93%+ 16.58%+ (6.90)%+ 12.11%+ 9.34%+
Net assets at end of year (000s) $223,407 $253,402 $238,097 $302,845 $203,312
Ratio of operating expenses to average
net assets 1.04% 1.13% 1.20% 1.20% 1.20%
Ratio of net investment income to average
net assets** 4.82% 4.95% 5.07% 4.85% 5.48%
Portfolio turnover rate 125.24% 97.32% 78.63% 36.16% 27.44%
</TABLE>
<TABLE>
<CAPTION>
Class B
---------------------------------------------
Year ended December 31
---------------------------------------------
1996 1995 1994 1993*
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value, beginning of year $ 8.26 $ 7.46 $ 8.43 $ 8.25
Net investment income 0.32 0.33 0.34 0.19
Net realized and unrealized gain (loss)
on investments and futures contracts (0.15) 0.82 (0.97) 0.24
Dividends from net investment income (0.33) (0.35) (0.33) (0.19)
Distributions from net realized gains -- -- (0.01) (0.06)
------- ------- --------- --------
Net asset value, end of year $ 8.10 $ 8.26 $ 7.46 $ 8.43
======= ======= ========= ========
Total return 2.15%+ 15.72%+ (7.59)%+ 5.20%+++
Net assets at end of year (000s) $51,710 $ 51,827 $35,338 $27,695
Ratio of operating expenses to average
net assets 1.79% 1.88% 1.95% 1.95%++
Ratio of net investment income to average
net assets** 4.07% 4.19% 4.35% 3.93%++
Portfolio turnover rate 125.24% 97.32% 78.63% 36.16%
</TABLE>
<TABLE>
<CAPTION>
Class C
----------------------------------------------
Year ended December 31
----------------------------------------------
1996 1995 1994 1993*
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value, beginning of year $ 8.24 $ 7.45 $ 8.41 $ 8.25
Net investment income 0.39 0.40 0.42 0.23
Net realized and unrealized gain (loss)
on investments and futures contracts (0.13) 0.81 (0.96) 0.22
Dividends from net investment income (0.41) (0.42) (0.41) (0.23)
Distributions from net realized gains -- -- (0.01) (0.06)
------- ------- ------ ------
Net asset value, end of year $ 8.09 $ 8.24 $ 7.45 $ 8.41
======= ======= ====== ======
Total return 3.30%+ 16.76%+ (6.56)%+ 5.54%+++
Net assets at end of year (000s) $ 8,990 $22,614 $ 334 $ 477
Ratio of operating expenses to
average net assets 0.79% 0.88% 0.95% 0.96%++
Ratio of net investment income to
average net assets** 5.04% 4.85% 5.26% 4.92%++
Portfolio turnover rate 125.24% 97.32% 78.63% 36.16%
</TABLE>
<TABLE>
<CAPTION>
Class D
------------------------------------------
Year ended December 31
------------------------------------------
1996 1995 1994 1993*
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value, beginning of year $ 8.25 $ 7.46 $ 8.43 $ 8.25
Net investment income 0.32 0.33 0.34 0.19
Net realized and unrealized gain (loss)
on investments and futures contracts (0.14) 0.81 (0.97) 0.23
Dividends from net investment income (0.33) (0.35) (0.33) (0.18)
Distributions from net realized gains -- -- (0.01) (0.06)
------- ------ ------ ------
Net asset value, end of year $ 8.10 $ 8.25 $ 7.46 $ 8.43
======= ====== ====== ======
Total return 2.28%+ 15.58%+ (7.59)%+ 5.19%+++
Net assets at end of year (000s) $ 2,889 $4,183 $ 958 $1,115
Ratio of operating expenses to
average net assets 1.79% 1.88% 1.95% 1.99%++
Ratio of net investment income to
average net assets** 4.06% 4.13% 4.31% 3.92%++
Portfolio turnover rate 125.24% 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.
55
<PAGE>
- -------------------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
- -------------------------------------------------------------------------------
To the Trustees of State Street Research
Tax-Exempt Trust and the Shareholders of
State Street Research Tax-Exempt Fund:
In our opinion, the accompanying statement of assets and liabilities,
including the investment portfolio, and the related statements of operations
and of changes in net assets and the financial highlights present fairly, in
all material respects, the financial position of State Street Research
Tax-Exempt Fund (a series of State Street Research Tax-Exempt Trust,
hereafter referred to as the "Trust") at December 31, 1996, 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, 1996 by
correspondence with the custodian and brokers, provide a reasonable basis for
the opinion expressed above.
Price Waterhouse LLP
Boston, Massachusetts
February 5, 1997
56
<PAGE>
STATE STREET RESEARCH TAX-EXEMPT FUND
- -------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE
- -------------------------------------------------------------------------------
The investment environment for municipal bonds had a negative tone early in
1996 and improved steadily in the second half of the year, a trend reflected
in the performance of State Street Research Tax-Exempt Fund.
The Fund underperformed the average total return for Lipper Analytical
Services' General Municipal Debt Funds category for the 12 months ended
December 31, 1996. However, during the final six months of the year, the Fund
outperformed its peer group.
Fund management improved performance by shortening the Fund's duration when
necessary, reducing holdings in AAA insured bonds and increasing the Fund's
position in higher-yielding issues. Fund management also increased the Fund's
holdings in securities rated in the AA, A and BBB categories.
Despite the turnaround of both the market and the Fund in the second half of
the year, the volatility in the early part of 1996 negatively affected the
municipal bond market's twelve-month performance, resulting in annual total
returns for the tax-exempt sector that were low by historical standards.
December 31, 1996
All returns represent past performance, which is no guarantee of future
results. The investment return and principal value of an investment made in
the Fund will fluctuate and shares, when redeemed, may be worth more or less
than their original cost. All returns assume reinvestment of capital gain
distributions and income dividends. In March 1992, the Fund changed its
investment objective to eliminate requirements that specify that a percentage
of the Fund be invested in certain rating categories. Previously, it was
required to invest 80% in securities rated A, BBB, BB, or better. Past
performance, therefore, may not be indicative of future results. Performance
for a class may include periods prior to the adoption of class designations
in 1993, which resulted in new or increased 12b-1 fees of up to 1% per class
thereafter and which will reduce subsequent performance. "C" shares, offered
without a sales charge, are available only to certain employee benefit plans
and large institutions. Performance reflects maximum 4.5% "A" share front-end
sales charge or 5% "B" share or 1% "D" share contingent deferred sales
charges where applicable. The Lehman Brothers Municipal Bond Index is a
commonly used measure of bond market performance. The index is unmanaged and
does not take sales charges into consideration. Direct investment in the
index is not possible; results are for illustrative purposes only.
Change In Value Of $10,000 Based On The
Lehman Municipal Bond Index Compared To
Change In Value Of $10,000 Invested
In Tax-Exempt Fund
[typeset representation of line charts]
Class A Shares
Average Annual Total Return
1 Year 5 Years 10 Years
- -1.70% +5.51% +6.51%
Tax-Exempt Lehman Municipal
Fund Bond Index
9550 10000
9414 10151
10684 11183
11712 12389
12278 13292
13726 14906
15006 16220
16823 18212
15662 17271
18259 20285
18794 21184
Class B Shares
Average Annual Total Return
1 Year 5 Years 10 Years
- -2.76% +5.60% +6.72%
Tax-Exempt Lehman Municipal
Fund Bond Index
10000 10000
9858 10151
11188 11183
12264 12389
12856 13292
14373 14906
15713 16220
17543 18212
16211 17271
18759 20285
19162 21184
Class C Shares
Average Annual Total Return
1 Year 5 Years 10 Years
+3.30% +6.65% +7.09%
Tax-Exempt Lehman Municipal
Fund Bond Index
10000 10000
9858 10151
11188 11183
12264 12389
12856 13292
14373 14906
15713 16220
17600 18212
16445 17271
19200 20285
19835 21184
Class D Shares
Average Annual Total Return
1 Year 5 Years 10 Years
+1.30% +5.92% +6.72%
Tax-Exempt Lehman Municipal
Fund Bond Index
10000 10000
9858 10151
11188 11183
12264 12389
12856 13292
14383 14906
15713 16220
17541 18212
16209 17271
18734 20285
19161 21184
[end line charts]
57
<PAGE>
STATE STREET RESEARCH TAX-EXEMPT FUND
- -------------------------------------------------------------------------------
REPORT ON SPECIAL MEETING OF SHAREHOLDERS
- -------------------------------------------------------------------------------
A Special Meeting of Shareholders of the State Street Research Tax-Exempt
Fund ("Fund"), along with shareholders of other series of State Street
Research Tax-Exempt Trust ("Meeting"), was convened on April 19, 1996. The
results of the Meeting are set forth below.
Votes (millions of
shares)
------------------
For Withheld
------ -----------
1. The following persons were elected as Trustees:
Edward M. Lamont 25.9 1.0
Robert A. Lawrence 25.9 1.0
Dean O. Morton 25.9 1.0
Thomas L. Phillips 25.9 1.0
Toby Rosenblatt 25.9 1.0
Michael S. Scott Morton 25.9 1.0
Ralph F. Verni 25.8 1.1
Jeptha H. Wade 25.9 1.0
<TABLE>
<CAPTION>
Votes (millions of
shares)
----------------------
For Against Abstain
---- ------- --------
<S> <C> <C> <C>
2. The Fund's following investment policies were reclassified from fundamental to
nonfundamental:
a. The policy regarding investments in securities of companies with less than three (3)
years' continuous operation 17.5 1.6 2.9
b. The policy regarding investments in illiquid securities. 17.4 1.7 3.0
3. The Fund's fundamental policy regarding investments in commodities and commodity contracts
was amended. 17.5 1.6 3.0
4. The Fund's fundamental policy on lending was amended to clarify the permissibility of
securities lending. 17.3 1.8 2.9
5. The Fund's fundamental policies regarding diversification of investments were amended 17.9 1.3 2.8
6. The Master Trust Agreement was amended to permit the Trustees to reorganize, merge or
liquidate a fund without prior shareholder approval. 20.0 3.7 3.3
7. The Master Trust Agreement was amended to eliminate specified time permitted between the
record date and any shareholders meeting. 21.2 2.5 3.2
</TABLE>
58
<PAGE>
STATE STREET RESEARCH NEW YORK TAX-FREE FUND
A Series of
STATE STREET RESEARCH TAX-EXEMPT TRUST
STATEMENT OF ADDITIONAL INFORMATION
May 1, 1997
TABLE OF CONTENTS
Page
----
ADDITIONAL INVESTMENT POLICIES AND RESTRICTIONS..................... 2
NEW YORK MUNICIPAL OBLIGATIONS...................................... 5
ADDITIONAL INFORMATION CONCERNING
CERTAIN INVESTMENT TECHNIQUES................................. 21
DEBT INSTRUMENTS AND PERMITTED CASH INVESTMENTS.................... 30
TRUSTEES AND OFFICERS.............................................. 34
INVESTMENT ADVISORY SERVICES....................................... 38
PURCHASE AND REDEMPTION OF SHARES.................................. 39
NET ASSET VALUE.................................................... 41
PORTFOLIO TRANSACTIONS............................................. 42
CERTAIN TAX MATTERS................................................ 45
DISTRIBUTION OF SHARES OF THE FUND................................. 48
CALCULATION OF PERFORMANCE DATA.................................... 52
CUSTODIAN.......................................................... 57
INDEPENDENT ACCOUNTANTS............................................ 58
FINANCIAL STATEMENTS............................................... 58
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, 1997 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.
CONTROL NUMBER: 1285M-960501(0697)SSR-LD NYTF-606D-597
1
<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
2
<PAGE>
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); and
3
<PAGE>
(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 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 ("S&P") or "Baa" by Moody's Investor's Service,
Inc. ("Moody's") (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;
(3) 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;
(4) 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);
4
<PAGE>
(5) 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);
(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 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;
(8) 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
(9) 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
5
<PAGE>
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.
6
<PAGE>
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.
Special Considerations Relating to New York Municipal Obligations
Some of the significant financial considerations relating to the Fund's
investments 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 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.
7
<PAGE>
There can be no assurance that the State economy will not experience
worse-than-predicted results in the 1996-97 or 1997-1998 fiscal years, with
corresponding material and adverse effects on the State's projections of
receipts and disbursements.
State per capita personal income has historically been significantly
higher than the national average, although the ratio has varied substantially.
Between 1975 and 1990, total employment grew by 21.3 percent while the labor
force grew only by 15.7 percent, unemployment fell from 9.5 percent to 5.2
percent of the labor force. In 1991 and 1992, however, total employment in the
State fell by 5.5 percent. As a result, the unemployment rate rose to 8.5
percent reflecting a recession that has had a particularly strong impact on the
entire Northeast. Calendar years 1993 and 1994 saw only a partial recovery, with
the unemployment rate decreasing to 7.8 percent and 6.9 percent, respectively.
The unemployment rate for 1995 was 6.3 percent and was projected by the Division
of Budget to be 6.2 percent for 1996.
State Budget. The State Constitution requires the governor (the
"Governor") to submit to the State 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 1996-97 fiscal year was enacted by the
Legislature on July 13, 1996, more than three 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 necessary appropriations for all State- supported
debt service. The State Financial Plan for the 1996-97 fiscal year was
formulated on July 25, 1996 and was based on the State's budget as enacted by
the Legislature and signed into law by the Governor, as well as actual results
for the first quarter of the current fiscal year (the "1996-97 State Financial
Plan").
The State issued its first update to the 1996-97 State Financial Plan
(the "Mid-Year Update") on October 25, 1996. Revisions were made to estimates of
both receipts and disbursements based on: (1) updated economic forecasts for
both the nation and the State, (2) an analysis of actual receipts and
disbursements through the first six months of the fiscal year, and (3) an
assessment of changing program requirements. The Mid-Year Update reflected a
balanced 1996-97 State Financial Plan, with a reserve for contingencies in the
General Fund of $300 million.
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The State revised the 1996-97 State Financial Plan on January 14, 1997
(the "Third Quarter Update"), in conjunction with the release of the Executive
Budget for the 1997-98 fiscal year.
The Third Quarter Update continues to be balanced. As compared to the
Mid-Year Update, underlying estimates of General Fund receipts have been revised
upward $566 million, primarily in personal income taxes and business taxes.
However, the actions described below offset these projected increases, producing
a projected $627 million reduction in available General Fund receipts as
compared to the Mid-Year Update. These actions include implementing reduced
personal income tax withholding to reflect the impact of tax reduction actions
which took effect on January 1, 1997; the use of $250 million was assumed for
this purpose in the Third Quarter Update. In addition, $943 million is projected
to be used to pay tax refunds during the 1996-97 fiscal year or reserved to pay
refunds during the 1997- 98 fiscal year, which produces a benefit for the
1997-98 financial plan. Finally, $80 million is projected to be deposited into
the Tax Stabilization Reserve Fund ("TSRF"), increasing the cash balance in that
fund to $317 million by the end of 1996-97.
Projected General Fund disbursements are reduced by a total of $348
million from the Mid-Year Update, with changes made in most categories of the
financial plan. Most of this savings is attributable to reductions in local
assistance spending, primarily due to significant reestimates in social services
spending to reflect lower caseload growth.
The Mid-Year Update had reserved $300 million in the General Fund for
certain contingencies, including litigation which could have produced an adverse
impact on the State's finances, either by itself or because of the precedential
nature of the court's decision. The Third Quarter Update no longer includes this
reserve, reflecting the State's belief that such risks are unlikely to
materialize before the end of the 1996-97 fiscal year. Other reserves are,
however, contained in the Third Quarter Update.
The Governor presented his 1997-98 Executive Budget to the Legislature
on January 14, 1997. It is expected that the Governor will prepare amendments to
his Executive Budget as permitted under law. There can be no assurance that the
Legislature will enact the Executive Budget as proposed by the Governor into
law, or that the State's adopted budget projections will not differ materially
and adversely from the projections set forth therein.
The 1997-98 Executive Budget projects balance on a cash basis in the
General Fund. It reflects a continuing strategy of substantially reduced State
spending, including program restructurings, reductions in social welfare
spending, and efficiency and productivity initiatives. Total General Fund
receipts and transfers from other funds are projected to be $32.88 billion, a
decrease of $88 million from total receipts projected in the current fiscal
year. Total General Fund disbursements and transfers to other funds are
projected to be $32.84 billion, a decrease of $56 million from spending totals
projected for the current fiscal year. As compared to the 1996-97 State
Financial Plan, the 1997-98 Executive Budget proposes a year-to-year decline in
General Fund spending of 0.2 percent. State funds spending
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(i.e., General Fund plus other dedicated funds, with the exception of federal
aid) is projected to grow by 1.2 percent. Spending from all governmental funds
(excluding transfers) is proposed to increase by 2.2 percent from the prior
fiscal year.
The 1997-98 Executive Budget proposes $2.3 billion in actions to
balance the 1997-98 financial plan. Before reflecting any actions proposed by
the Governor to restrain spending, General Fund disbursements for 1997-98 were
projected to grow by approximately 4 percent. This increase would have resulted
from growth in Medicaid, higher fixed costs such as pensions and debt service,
collective bargaining agreements, inflation, and the loss of non-recurring
resources that offset spending in 1996-97. General Fund receipts were projected
to fall by roughly 3 percent. This reduction would have been attributable to
modest growth in the State's economy and underlying tax base, the loss of
non-recurring revenues available in 1996-97 and implementation of previously
enacted tax reduction programs. The 1997-98 Executive Budget proposes to close
this gap primarily through a series of spending reductions and Medicaid cost
containment measures, the use of a portion of the 1996-97 projected budget
surplus, and other actions, with a projected 1997-98 closing fund balance in the
General Fund of $397 million.
The 1997-98 Executive Budget projects General Fund receipts of $33.02
billion and $33.91 billion for 1998-99 and 1999-2000, respectively. The receipts
projections were prepared on the basis of an economic forecast of a steadily
growing national economy, in an environment of low inflation and slow employment
growth. The forecast for the State's economic performance likewise is for slow
but steady economic growth. The receipt projections reflect tax reductions
proposed in the 1997-98 Executive Budget that will reduce receipts by an
estimated $798 million in 1998-99 and at $1.43 billion in 1999-2000. The bulk of
previously enacted tax reductions are annualized in 1997-98 and their impact in
the out years is largely proportional to projected growth in the underlying tax
liability.
Disbursements from the General Fund are projected at $34.60 billion in
1998-99 and $35.93 billion in 1999-2000, before assuming additional spending
efficiencies and/or additional federal revenue maximization. Assuming
implementation of proposed cost containment and other actions proposed in the
1997-98 Executive Budget, annual disbursements for fiscal years 1998-99 and
1999-2000 grow by $1.77 billion and $1.33 billion, respectively.
It is expected that the 1997-98 financial plan will reflect a
continuing strategy of substantially reduced State spending, including agency
consolidations, reductions in the State workforce, and efficiency and
productivity initiatives.
The Division of the Budget believes that the economic assumptions and
projections of receipts and disbursements accompanying the 1997-98 Executive
Budget are reasonable. However, the economic and financial condition of the
State may be affected by various financial, social, economic and political
factors. Those factors can be very complex, can vary from fiscal year to fiscal
year, and are frequently the result of actions taken not only by the
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State but also by entities, such as the federal government, that are outside the
State's control. Because of the uncertainty and unpredictability of changes in
these factors, their impact cannot be fully included in the assumptions
underlying the State's projections. There can be no assurance that the State
economy will not experience results that are worse than predicted, with
corresponding material and adverse effects on the State's financial projections.
To make progress toward addressing recurring budgetary imbalances, the
1997-98 Executive Budget proposes significant actions to align recurring
receipts and disbursements in future fiscal years. 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 either 1997-98 or in future fiscal
years. In the States 1996-1997 fiscal year and in certain recent fiscal years,
the State has failed to enact a budget prior to the beginning of the State's
fiscal year.
In addition, there has been discussion of additional tax reductions,
beyond those reflected in the State's current projections for 1997-98 and the
out years that, if enacted, could make it more difficult to achieve budget
balance over this period. In particular, modifying the State's sales tax
treatment of clothing has been discussed. The State now receives approximately
$700 million annually under the current tax statutes from taxation on clothing,
and localities receive a roughly equivalent amount.
Uncertainties with regard to both the economy and potential decisions
at the federal level add further pressure on future budget balance in New York
State. Risks to the financial plan include either a financial market or broader
economic "correction" during the period, a risk heightened by the relatively
lengthy expansions currently underway. In addition, a normal "forecast error" of
one percentage point in the expected growth rate could raise or lower receipts
by $600 million during the last year of the projection period. Potential changes
to federal tax law could alter the federal definitions of income on which many
State taxes rely. Similarly, the financial plan assumes no significant federal
disallowances or other actions which could affect State finances.
On August 22, 1996, the President signed into law the Personal
Responsibility and Work Opportunity Reconciliation Act of 1996. This federal
legislation fundamentally changed the programmatic and fiscal responsibilities
for administration of welfare programs at the federal, state and local levels.
The new law abolishes the federal Aid to Families with Dependent Children
program (AFDC), and creates a new Temporary Assistance to Needy Families program
(TANF) funded with a fixed federal block grant to states. The new law also
imposes (with certain exceptions) a five-year durational limit on TANF
recipients, requires that virtually all recipients be engaged in work or
community service activities within two years of receiving benefits, and limits
assistance provided to certain immigrants and other classes of individuals.
States are required to meet work activity participation targets for their TANF
caseload; these requirements are phased in over time. States that fail to meet
these federally mandated job participation rates, or that fail to conform with
certain other federal standards, face potential sanctions in the form of a
reduced federal block grant.
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On October 16, 1996, the Governor submitted the State's TANF
implementation plan to the federal government as required under the new federal
welfare law. On December 13, 1996, the State's plan was approved by the federal
government. Legislation will be required to implement the State's TANF plan, and
the Governor has introduced legislation necessary to conform with federal law.
States are required to comply with the new federal welfare reform law
no later than July 1, 1997. There can be no assurances that the State
Legislature will enact welfare reform proposals as submitted by the Governor and
as required under federal law.
An additional risk to the financial plan arises from the potential
impact of certain litigation now pending against the State, which could produce
adverse effects on the State's projections of receipts and disbursements.
Specifically, in the case of Tug Buster Bouchard et al. v. Wetzler, the Division
of the Budget believes that the court's decision, as interpreted by the State,
will reduce tax revenues by approximately $5 million in 1997-98 and $2 million
thereafter.
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 General Fund is projected to be balanced on a cash basis for the
1996-97 fiscal year. Total receipts and transfers from other funds are projected
to be $33.17 billion, an increase of $365 million from the prior fiscal year.
Total General Fund disbursements and transfers to other funds are projected to
be $33.12 billion, an increase of $444 million from the total in the prior
fiscal year.
The State's financial position on a GAAP (generally accepted accounting
principles) basis as of March 31, 1996 showed an accumulated deficit in its
combined governmental funds of $1.23 billion, reflecting liabilities of $14.59
billion and assets of $13.35 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
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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") 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 were 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 was thus permitted in any fiscal year, it was 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.
On January 13, 1992, Standard & Poor's Corporation ("Standard &
Poor's") 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. On January 6, 1992,
Moody's Investors Service, Inc. ("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.
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The State anticipated that its capital programs would be financed, in
part, by State and public authorities borrowings in 1996-97. The State expected
to issue $411 million in general obligation bonds (including $153.6 million for
purposes of redeeming outstanding bond anticipation notes) and $154 million in
general obligation commercial paper. The Legislature had also authorized the
issuance of up to $101 million in certificates of participation during the
State's 1996-97 fiscal year for equipment purchases. The projection of the State
regarding its borrowings for the 1996-97 fiscal year may change if circumstances
require.
In November 1996 voters approved a $1.75 billion State general
obligation bond referendum to finance various environmental improvement and
remediation projects. As a result, the amount of general obligation bonds issued
during the 1996-97 fiscal year may increase above the $411 million currently
included in the 1996-97 borrowing plan to finance a portion of this new program.
Principal and interest payments on general obligation bonds and
interest payments on bond anticipation notes were $735 million for the 1995-96
fiscal year, and were estimated to be $719 million for the 1996-97 fiscal year.
Principal and interest payments on fixed rate and variable rate bonds issued by
LGAC were $340 million for the 1995-96 fiscal year, and were estimated to be
$323 million for 1996-97.
New York 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 New York State or its
officers or employees could have a substantial or long-term adverse effect on
New York State 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 New York State of certain land in central and
upstate New York; (2) certain aspects of New York State's Medicaid policies,
including its rates, regulations and procedures; (3) action against New York
State and New York 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 New York 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 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 a State lottery game; (10) an action seeking reimbursement
from the State for certain costs arising out of the provision of pre-school
services and programs for children with handicapped conditions; and (ii)
challenges to regulations promulgated by the Superintendent of Insurance
establishing excess malpractice premium rates for the 1986-87 through 1995-96
and 1996-97 fiscal years, respectively.
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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 developed a plan to restore the State's retirement systems to prior
funding levels. Such funding is expected to exceed prior levels by $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 was required to
make aggregate payments of $351.4 million. 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. Litigation challenging the constitutionality of the
treatment of certain moneys held in a reserve fund was settled in June 1996 and
certain amounts in a Supplemental Reserve Fund previously credited by the State
against prior State and local pension contributions will be paid in 1998.
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 1996-97 State Financial
Plan. An adverse decision in any of these proceedings could exceed the amount of
the 1996-97 State Financial Plan reserve for the payment of judgments and,
therefore, could affect the ability of the State to maintain a balanced 1996-97
State Financial Plan. In its audited financial statements for the fiscal year
ended March 31, 1996, the State reported its estimated liability for awarded and
anticipated unfavorable judgments to be $474 million.
Although other litigation is pending against New York State, except as
described herein, no current litigation involves New York State's authority, as
a matter of law, to contract indebtedness, issue its obligations, or pay such
indebtedness when it matures, or affects New York 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 New York 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, 1995, date of the latest
data
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available, there were 17 Authorities that had outstanding debt of $100 million
or more. The aggregate outstanding debt, including refunding bonds, of these 17
Authorities was $73.45 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 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 of
New York 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. There can be no assurance that there will not be reductions in
State aid to the City from amounts currently projected or that State budgets
will be adopted by the April 1 statutory deadline or that any such reductions or
delays will not have adverse effects on the City's cash flow or expenditures. In
addition, the Federal budget negotiation process could result in a reduction in
or a delay in the receipt of Federal grants which could have additional adverse
effects on the City's cash flow or revenues.
For each of the 1981 through 1996 fiscal years, the City achieved
balanced operating results as reported in accordance with then applicable GAAP.
The City was required to close substantial budget gaps in recent years in order
to maintain balanced operating results. There can be no assurance that the City
will continue to maintain a balanced operating results. There can be no
assurance that the City will continue to maintain a balanced budget as required
by State law without additional tax or other revenue increases or additional
reductions in City services or entitlement programs, which could adversely
affect the City's economic base.
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 the public credit markets. The City was not able to sell
short-term notes to the public again until 1979.
In 1975, Standard & Poor's 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 Standard & Poor's. On July 2, 1985,
Standard & Poor's revised its rating of City bonds upward to BBB+ and on
November 19, 1987, to A-. On July 2, 1993,
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Standard & Poor's 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,
Standard & Poor's downgraded its rating on the City's $23 billion of outstanding
general obligation bonds to "BBB+" from "A-", citing the City's chronic
structural budget problems and weak economic outlook. Standard & Poor's 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. This rating
was re-affirmed by Standard & Poor's on November 1996.
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. Since
its creation, MAC has provided, among other things, financing assistance to the
City by refunding maturing City short-term debt and transferring to the City
funds received from sales of MAC bonds and notes. 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 September 30, 1996, MAC had outstanding an aggregate of approximately $4.563
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 the Transit
Authority and the New York City School Construction Authority for the 1992
through 1997 fiscal years in the event the City fails to provide such financing.
As of September 30, 1996, the City had received an aggregate of
approximately $4.85 billion from MAC for certain authorized uses by the City
exclusive of capital purposes. In addition, the City had received an aggregate
of approximately $2.352 billion from MAC for capital purposes in exchange for
serial bonds in a like principal amount, of which $760 million was held by MAC
as of September 30, 1996, from which $626.165 million was redeemed on January 7,
1997. MAC has also exchanged $1.839 billion principal amount of MAC bonds for
City debt, of which approximately $57.1 million was held by MAC on September 30,
1996.
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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.
On November 14, 1996, the City submitted to the Control Board the
Financial Plan for the 1997 through 2000 fiscal years, which relates to the
City, the Board of Education ("BOE") and the City University of New York
("CUNY"). The 1997-2000 Financial Plan projects revenues and expenditures for
1997 fiscal year balanced in accordance with GAAP, and projects gaps of $1.2
billion, $2.1 billion and $3.0 billion for the 1998, 1999 and 2000 fiscal years,
respectively.
The 1997-2000 Financial Plan assumes (i) approval by the Governor and
the State Legislature of the extension of the 12.5% personal income tax
surcharge, which expired on December 31, 1996 and is projected to provide
revenue of $170 million, $463 million, $492 million, and $521 million, in the
1997 through 2000 fiscal years, respectively; (ii) collection of the projected
rent payments for the City's airports, totaling $270 million and $180 million in
the 1998 and 1999 fiscal years, respectively, which may depend on the successful
completion of negotiations with the Port Authority or the enforcement of the
City's rights under the existing leases thereto through pending legal actions;
(iii) the ability of the New York City Health and Hospitals Corporation ("HHC")
and BOE to identify actions to offset substantial City and State revenue
reductions and the receipt by BOE of additional State aid; (iv) State approval
of the cost containment initiatives and State aid proposed by the City; and (v)
a reduction in City funding for labor settlements for certain public authorities
or corporations. Legislation extending the 12.5% personal income tax surcharge
beyond
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December 31, 1996, was not enacted in the special legislative session held in
December 1996. Such legislation may be enacted in the 1997 State legislative
session. The 1997-2000 Financial Plan does not reflect any increased costs which
the City might incur as a result of welfare legislation recently enacted by
Congress or legislation proposed by the Governor, which would, if enacted,
implement such Federal welfare legislation.
The City's projections set forth in the 1997-2000 Financial Plan are
based on various assumptions and contingencies which are uncertain and which may
not materialize. Changes in major assumptions could significantly affect the
City's ability to balance its budget as required by State law and to meet its
annual cash flow and financing requirements. Such assumptions and contingencies
include the condition of the regional and local economies, the impact on real
estate tax revenues of the real estate market, wage increases for City employees
consistent with those assumed in the 1997-2000 Financial Plan, employment
growth, the ability to implement proposed reductions in City personnel and other
cost reduction initiatives, the ability of the HHC and the BOE to take actions
to offset reduced revenues, the ability to complete revenue generating
transactions, provision of State and Federal aid and mandate relief and the
impact on City revenues and expenditures of Federal and State welfare reform and
any future legislation affecting Medicare or other entitlements.
Implementation of the 1997-2000 Financial Plan is also dependent upon
the City's ability to market its securities successfully. The City's financing
program for fiscal years 1997 through 2000 contemplates the issuance of $9
billion of general obligation bonds and $3.8 billion of bonds to be issued by
the proposed New York City Finance Authority (the "Finance Authority") to
finance City capital projects. The creation of the Finance Authority, which is
subject to the enactment of State legislation, is being proposed as part of the
City's effort to assist in keeping the City's indebtedness within the forecast
level of the constitutional restrictions on the amount of debt the City is
authorized to incur. Indebtedness subject to the constitutional debt limit
includes liability on capital contracts that are expected to be funded with
general obligation bonds, as well as general obligation bonds. The City's
projections of total debt subject to the general debt limit that would be
required to be issued to fund the Updated Ten-Year Capital Strategy published in
April 1995 indicates that projected contracts for capital projects and debt
issuance may exceed the general debt limit by the end of fiscal year 1997 and
would exceed the general debt limit by a substantial amount thereafter, unless
legislation is enacted creating the Finance Authority or other legislative
initiatives are identified and implemented. Depending on a number of factors,
the City may find it necessary to curtail its currently defined capital program
before the end of fiscal year 1997 to ensure that there is ongoing capacity to
enter into capital contracts necessary to preserve projects designed to
safeguard health and safety in the City. Without the Finance Authority or other
legislatives relief, the City's general obligation financed capital program with
respect to new projects would be virtually brought to a halt during the
1997-2000 Financial Plan period.
The City since 1981 has fully satisfied its seasonal financing needs in
the public credit markets, repaying all short-term obligations within their
fiscal year of issuance. The City has issued $2.4 billion of short-term
obligations in fiscal year 1997 to finance the City's current
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<PAGE>
estimate of its seasonal cash flow needs for the 1997 fiscal year. Seasonal
financing requirements for the 1996 fiscal year increased to $2.4 billion from
$2.2 billion and $1.75 billion in the 1995 and 1994 fiscal years, respectively.
Seasonal financing requirements were $1.4 billion and $2.25 billion in the 1993
and 1992 fiscal years, respectively. The delay in the adoption of the State's
budget in certain past fiscal years has required the City to issue short-term
notes in amounts exceeding those expected early in such fiscal year.
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 State's projections of its receipts and disbursements.
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.
Beginning in 1990, the City of Troy experienced a series of budgetary
deficits that resulted in the establishment of a Supervisory Board for the City
of Troy in 1994. The Supervisory Board's powers were increased in 1995, when
Troy MAC was created to help Troy avoid default on certain obligations. The
legislation creating Troy MAC prohibits the city of Troy from seeking federal
bankruptcy protection while Troy MAC bonds are outstanding.
Seventeen municipalities received extraordinary assistance during the
1996 legislative session through $50 million in special appropriations targeted
for distressed cities.
Municipalities and school districts have engaged in substantial
short-term and long-term borrowings. In 1994, the total indebtedness of all
localities in New York State other than New York City was approximately $17.7
billion. A small portion (approximately $82.9 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. Seventeen
localities had outstanding indebtedness for deficit financing at the close of
their fiscal year ending in 1994.
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 New York State, New York 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 New York State could be adversely affected. Localities also
face anticipated
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<PAGE>
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 New York State
assistance in the future.
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
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<PAGE>
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.
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<PAGE>
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.
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<PAGE>
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,
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<PAGE>
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.
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<PAGE>
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.
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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 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
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<PAGE>
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
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<PAGE>
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 following industry classifications are currently
used. Securities issued or guaranteed as to principal or interest by the U.S.
Government or its agencies or instrumentalities or mixed-ownership Government
corporations or sponsored enterprises (including repurchase agreements involving
U.S. Government securities to the extent excludable under relevant regulatory
interpretations) are excluded. Securities issued by foreign governments are also
excluded. Companies engaged in the business of financing 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 and credit card receivables includes private pools of
nongovernment backed mortgages.
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<TABLE>
<CAPTION>
Basic Industries Consumer Staple Science & Technology
- ---------------- --------------- --------------------
<S> <C> <C>
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
- ----- ------- Retail Trade
Trust Certificates - Bank Textile & Apparel
Government Related Financial Service
Lending Insurance
Asset-backed--Mortgages
Asset-backed--Credit Card
Receivables
</TABLE>
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
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as described herein. The U.S. Government securities in which the Fund invests
include, among others:
[bullet] direct obligations of the U.S. Treasury, i.e., 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.
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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.
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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 in the A category by S&P or Prime category by Moody's,
or, if not rated, issued by companies having an outstanding long-term unsecured
debt issue rated at least in the A category by S&P or by Moody's. The money
market investments in corporate bonds and debentures (which must have maturities
at the date of settlement of one year or less) must be rated at the time of
purchase at least in the A category by S&P or by Moody's.
Commercial paper rated in the A category (highest quality) by S&P is
issued by entities which have liquidity ratios which are adequate to meet cash
requirements. Long-term senior debt is rated A or better, although in some cases
credits in the BBB category may be allowed. The issuer has access to at least
two additional channels of borrowing. Basic earnings and cash flow have an
upward trend with allowance made for unusual circumstances. Typically, the
issuer's industry is well established and the issuer has a strong position
within the industry. The reliability and quality of management are unquestioned.
The relative strength or weakness of the above factors determines whether the
issuer's commercial paper is rated A-1, A-2 or A- 3. (Those A-1 issues
determined to possess overwhelming safety characteristics are denoted with a
plus (+) sign: A-1+.)
The rating Prime is the highest commercial paper rating category
assigned by Moody's. Among the factors considered by Moody's in assigning
ratings are the following: evaluation of the management of the issuer; economic
evaluation of the issuer's industry or industries and an appraisal of
speculative-type risks which may be inherent in certain areas; evaluation of the
issuer's products in relation to competition and customer acceptance; liquidity;
amount and quality of long-term debt; trend of earnings over a period of 10
years; financial management of obligations which may be present or may arise as
a result of public interest questions and preparations to meet such obligations.
These factors are all considered in determining whether the commercial paper is
rated Prime-1, Prime-2 or Prime-3.
In the event 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.
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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 34. 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.
+Steve A. Garban, The Pennsylvania State University, 208 Old Main,
University Park, PA 16802, serves as Trustee of the Trust. He is 59. He
is retired and was formerly Senior Vice President for Finance and Operations and
Treasurer of The Pennsylvania State University.
+Malcolm T. Hopkins, 14 Brookside Road, Biltmore Forest, Asheville, NC
28803, serves as Trustee of the Trust. He is 69. He is engaged
principally in private investments. Previously, he was Vice Chairman of the
Board and Chief Financial Officer of St. Regis Corp.
*+John H. Kallis, One Financial Center, Boston, MA 02111 serves as Vice
President of the Trust. He is 56. 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 70. 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 70. 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 46. 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.
- ---------------
* or + See footnotes on page 36
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*+Francis J. McNamara, III, One Financial Center, Boston, MA 02111,
serves as Secretary and General Counsel of the Trust. He is 41. His principal
occupation is Executive Vice President, General Counsel and Secretary of State
Street Research & Management Company. During the past five years he has also
served as Senior Vice President of State Street Research & Management Company
and as Senior Vice President, General Counsel and Assistant Secretary of The
Boston Company, Inc., Boston Safe Deposit and Trust Company and The Boston
Company Advisors, Inc. Mr. McNamara's other principal business affiliations
include 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 65. 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 72. 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 58. 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 59. 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 42. 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 54. 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.
- -----------------
* or + See footnotes on page 36
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Mr. Verni's other principal business affiliations include Chairman of the Board
and Director of State Street Research Investment Services, Inc., and until
February, 1996, prior positions as President and Chief Executive Officer.
+Jeptha H. Wade, 251 Old Billerica Road, Bedford, MA 01730, serves as
Trustee of the Trust. He is 72. 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 January 31, 1997, the Trustees and officers of the Trust owned no
shares of the Fund.
As of January 31, 1997, 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
80.1% of the Fund's outstanding Class D shares.
Also as of January 31, 1997, Merrill Lynch, Pierce, Fenner & Smith,
Inc. ("Merrill Lynch"), 4800 Deerlake Drive East, Jacksonville, Florida 32246,
was the record owner of approximately 5.1% and 17.4% of the Fund's outstanding
Class B and Class D shares, respectively. 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.
- ----------------
* 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.
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<PAGE>
The Trustees were compensated as follows:
Total
Compensation
Aggregate From Trust and
Name of Compensation Complex Paid
Trustee From Trust(a) to Trustees(b)
- --------------------------------------------------------------------
Steve A. Garban* $ 0 $ 34,750
Malcolm T. Hopkins* $ 0 $ 34,750
Edward M. Lamont $ 5,900 $ 59,375
Robert A. Lawrence $ 5,900 $ 92,125
Dean O. Morton $ 6,300 $ 96,125
Thomas L. Phillips $ 5,900 $ 59,375
Toby Rosenblatt $ 5,900 $ 59,375
Michael S. Scott Morton $ 6,700 $ 100,325
Ralph F. Verni $ 0 $ 0
Jeptha H. Wade $ 6,300 $ 63,375
(a) For the Fund's fiscal year ended December 31, 1996. Includes
compensation from multiple series of the Trust. See "Distribution of
Shares" for a listing of series.
(b) Includes compensation on behalf of 31 funds representing all series of
investment companies for which the Investment Manager serves as the
primary investment adviser, series of Metropolitan Series Fund, Inc. for
which the Investment Manager serves as sub-investment adviser, and series
of State Street Research Portfolios, Inc., for which State Street
Research Investment Services, Inc. serves as distributor. "Total
Compensation from Trust and Complex Paid to Trustees" is for the 12 \
months ended December 31, 1996. The Trust does not provide any pension
or retirement benefits for the Trustees.
* Elected Trustee as of February 5, 1997. Fees shown are for the fiscal
year ended December 31, 1996.
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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, 1994, 1995 and
1996, the Fund's investment advisory fees prior to the assumption of fees or
expenses were $426,269, $404,069 and $391,693, respectively. For the same
periods, the voluntary reduction of fees or assumption of expenses amounted to
$249,199, $156,963 and $120,150, respectively.
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
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<PAGE>
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.
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<PAGE>
Investors may purchase Class A shares of the Fund at reduced sales
charges by executing a Letter of Intent to purchase no less than an aggregate of
$100,000 of the Fund or any combination of Class A shares of "Eligible Funds" 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; insurance companies;
investment companies; endowment funds of nonprofit organizations with
substantial minimum assets (currently a minimum of $10,000,000); and other
similar institutional investors.
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<PAGE>
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'
41
<PAGE>
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 with the use of
such pricing services as may be deemed appropriate or methodologies approved by
the Trustees.
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, 1995 and 1996 were 109.74% and 89.14%, respectively. The Investment Manager
believes the portfolio turnover rate was significantly lower in 1996 than that
for the previous fiscal year because of trading in 1995 to restructure the
Fund's portfolio to adjust the duration and volatility of the portfolio.
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
42
<PAGE>
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
43
<PAGE>
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, the Investment Manager 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, 1994, 1995 and 1996, 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
44
<PAGE>
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
45
<PAGE>
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
46
<PAGE>
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.
47
<PAGE>
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 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.
48
<PAGE>
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, 1995 and 1996, amounted to $256,501,
$129,732 and $140,433, respectively, of which $30,519, $15,287 and $17,248,
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
49
<PAGE>
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>
Fiscal Year Ended Fiscal Year Ended Fiscal Year Ended
December 31, 1996 December 31, 1995 December 31, 1994
----------------- ----------------- -----------------
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 $ 123,185 $ 0 $ 114,445 $ 0 $ 225,982
Class B $ 38,918 $ 154,234 $ 109,751 $ 117,596 $ 41,848 $ 247,699
Class D $ 0 $ 171 $ 5 $ 300 $ 0 $ 1,194
</TABLE>
The Fund has adopted a "Plan of Distribution Pursuant to Rule 12b-1"
(the "Distribution Plan") under which the Fund may engage, directly or
indirectly, in financing any activities primarily intended to result in the sale
of Class A, Class B and Class D shares, including, but not limited to, (1) the
payment of commissions and/or reimbursement to underwriters, securities dealers
and others engaged in the sale of shares, including payments to the Distributor
to be used to pay commissions and/or reimbursement to securities dealers (which
securities dealers may be affiliates of the Distributor) engaged in the
distribution and marketing of shares and furnishing ongoing assistance to
investors, (2) reimbursement of direct out-of-pocket expenditures incurred by
the Distributor in connection with the distribution and marketing of shares and
the servicing of investor accounts including special promotional fees and cash
and noncash incentives based upon sales by securities dealers, expenses relating
to the formulation and implementation of marketing strategies and promotional
activities such as direct mail promotions and television, radio, newspaper,
magazine and other mass media advertising, the preparation, printing and
distribution of Prospectuses of the Fund and reports for recipients other than
existing shareholders of the Fund, and obtaining such information, analyses and
reports with respect to marketing and promotional activities and investor
accounts as the Fund may, from time to time, deem advisable, and (3)
reimbursement of expenses incurred by the Distributor in connection with the
servicing of shareholder accounts including payments to securities dealers and
others in
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<PAGE>
consideration of the provision of personal services to investors and/or the
maintenance of shareholder accounts and expenses associated with the provision
of personal services by the Distributor directly to investors. In addition, the
Distribution Plan is deemed to authorize the Distributor and the Investment
Manager to make payments out of general profits, revenues or other sources to
underwriters, securities dealers and others in connection with sales of shares,
to the extent, if any, that such payments may be deemed to be within the scope
of Rule 12b-1 under the 1940 Act.
The expenditures to be made pursuant to the Distribution Plan may not
exceed (i) with respect to Class A shares, an annual rate of 0.25% of the
average daily value of net assets represented by such Class A shares, and (ii)
with respect to Class B and Class D shares, an annual rate of 0.75% of the
average daily value of the net assets represented by such Class B or Class D
shares (as the case may be) to finance sales or promotion expenses and an annual
rate of 0.25% of the average daily value of the net assets represented by such
Class B or Class D shares (as the case may be) to make payments for personal
services and/or the maintenance of shareholder accounts. Proceeds from the
service fee will be used by the Distributor to compensate securities dealers and
others selling shares of the Fund for rendering service to shareholders on an
ongoing basis. Such amounts are based on the net asset value of shares of the
Fund held by such dealers as nominee for their customers or which are owned
directly by such customers for so long as such shares are outstanding and the
Distribution Plan remains in effect with respect to the Fund. Any amounts
received by the Distributor and not so allocated may be applied by the
Distributor as reimbursement for expenses incurred in connection with the
servicing of investor accounts. The distribution and servicing expenses of a
particular class will be borne solely by that class.
During the fiscal year ended December 31, 1996, 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:
51
<PAGE>
<TABLE>
<CAPTION>
Class A Class B Class D
------- ------- -------
<S> <C> <C> <C>
Advertising $ 37 $ 0 $ 787
Printing and mailing of prospectuses
to other than current shareholders 10 0 209
Compensation to dealers 48,463 155,239 886
Compensation to sales personnel 132 0 2,948
Interest 0 0 0
Carrying or other financing charges 0 0 0
Other expenses: marketing; general 61 1,322
----------- ----------- ----------
Total Fees $ 48,703 $ 155,239 $ 6,152
=========== =========== ==========
</TABLE>
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, if any, by the Fund's affiliates to reduce fees or expenses
relating to the Fund; see "Accrued Expenses" later in this section.
52
<PAGE>
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>
Total Return
The standard total return of each class of shares was as follows:
<TABLE>
<CAPTION>
Commencement of
Operations Five Years One Year
(July 5, 1989) Ended Ended
Fund to December 31, 1996 December 31, 1996 December 31, 1996
- ---- -------------------- ----------------- -----------------
With Without With Without With Without
Subsidy Subsidy Subsidy Subsidy Subsidy Subsidy
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Class A 6.31% 5.78% 5.74% 5.47% -0.99% -1.23%
Class B 6.58% 6.05% 5.84% 5.56% -2.03% -2.29%
Class C 7.10% 6.58% 6.93% 6.67% 3.93% 3.67%
Class D 6.58% 6.05% 6.15% 5.87% 1.91% 1.66%
</TABLE>
Standard total return is computed by determining the average annual
compounded rates of return over the designated periods that, if applied to the
initial amount invested would produce the ending redeemable value, according to
the following formula:
53
<PAGE>
P(1+T)n = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value at the end of the designated
period assuming a hypothetical $1,000 payment made at
the beginning of the designated period
The calculation is based on the further assumptions that the highest
applicable initial or contingent deferred sales charge is deducted, and that all
dividends and distributions by the Fund are reinvested at net asset value on the
reinvestment dates during the periods. Certain 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 1996 was as follows:
With Subsidy Without Subsidy
------------ ---------------
Class A 4.53% 4.38%
Class B 4.00% 3.84%
Class C 4.99% 4.83%
Class D 3.99% 3.84%
Yield for each of the Fund's Class A, Class B, Class C and Class D
shares is computed by dividing the net investment income per share earned during
a recent month or other specified 30-day period by the applicable maximum
offering price per share on the last day of the period and annualizing the
result, according to the following formula:
YIELD = 2[( a-b + 1)6 -1]
---
cd
Where: a = dividends and interest earned during the period
b = expenses accrued for the period (net of voluntary expense
reductions by the Investment Manager)
c = the average daily number of shares outstanding during the
period that were entitled to receive dividends
54
<PAGE>
d = the maximum offering price per share on the last day of
the period
To calculate interest earned (for the purpose of "a" above) on debt
obligations, 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.
55
<PAGE>
Tax Equivalent Yield
The tax equivalent yield of each class of shares of the Fund for the
month ended December 31, 1996 assuming a combined federal and state maximum
effective marginal income tax rate of 46.27% was as follows:
With Subsidy Without Subsidy
------------ ---------------
Class A 8.43% 8.15%
Class B 7.44% 7.15%
Class C 9.29% 8.99%
Class D 7.43% 7.15%
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
56
<PAGE>
nonstandardized total return for the six months ended December 31, 1996, without
taking sales charges into account were as follows:
With Subsidy Without Subsidy
------------ ---------------
Class A 4.90% 4.77%
Class B 4.50% 4.38%
Class C 5.02% 4.89%
Class D 4.37% 4.24%
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 1996
were as follows:
Class A 4.55%
Class B 4.00%
Class C 5.01%
Class D 4.00%
CUSTODIAN
State Street Bank and Trust Company, 225 Franklin Street, Boston,
Massachusetts 02110, is the Trust's custodian. As custodian, State Street Bank
and Trust Company is
57
<PAGE>
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 financing 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, 1996:
359869.c3
2/25/97
58
<PAGE>
STATE STREET RESEARCH NEW YORK TAX-FREE FUND
-----------------------------------------------------------------------------
INVESTMENT PORTFOLIO
-----------------------------------------------------------------------------
December 31, 1996
<TABLE>
<CAPTION>
Principal Maturity Value
Amount Date (Note 1)
------------------------------------------ -------------- --------------
<S> <C> <C> <C>
MUNICIPAL BONDS 98.0%
General Obligation 20.5%
The City of New York, General
Obligation Bonds, Fiscal
1992 Series H, 7.00% $1,500,000 2/01/2005 $ 1,619,520
City of New York, General
Obligation Bonds, Fiscal
1995 Series F, 6.375% 2,000,000 2/15/2006 2,106,340
County of Onondaga, New York,
General Improvement (Serial)
Bonds, 1992, 5.70% 2,000,000 4/01/2007 2,132,380
City of Syracuse, Onondaga
County, New York, Public
Improvement Refunding Bonds,
Series 1993 A, 5.125% 1,750,000 2/15/2009 1,742,877
Commonwealth of Puerto Rico,
General Obligation Public
Improvement Refunding Bonds,
Series 1995, MBIA Insured,
6.25% 1,000,000 7/01/2012 1,102,850
State of New York, General
Obligation Refunding Bonds,
Series A, 5.25% 1,500,000 7/15/2014 1,445,070
County of Nassau, New York,
General Obligation Refunding
Bonds, Series G, MBIA
Insured, 5.45% 1,140,000 1/15/2015 1,129,649
County of Monroe, New York,
Public Improvement Refunding
Bonds, Series A, 6.00% 1,250,000 3/01/2015 1,332,988
Commonwealth of Puerto Rico,
General Obligation Public
Improvement Refunding Bonds,
Series 1995A, MBIA Insured,
5.65% 1,000,000 7/01/2015 1,038,510
Municipal Assistance Corp.
for the City of Troy, (A
Public Benefit Corp. of the
State of New York), General
Resolution Bonds, Series
1996A Bonds, MBIA Insured,
5.00% 1,000,000 1/15/2016 938,090
--------------
14,588,274
--------------
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 $ 1,293,416
--------------
College & University 7.1%
Dormitory Authority of the
State of New York, Mt. Sinai
School of Medicine, Series
B, MBIA Insured, 5.70% 1,450,000 7/01/2011 1,496,255
Dormitory Authority of the
State of New York, Canisius
College, Revenue Bonds,
Series 1995, CapMAC Insured,
0.00% 1,550,000 7/01/2013 608,762
Dormitory Authority of the
State of New York, City
University System
Consolidated, Series A,
AMBAC Insured, 5.625% 1,000,000 7/01/2016 1,022,040
Dormitory Authority of the
State of New York, City
University System
Consolidated, Third General
Resolution, Revenue Bonds,
Series 1995 1, AMBAC
Insured, 5.375% 2,000,000 7/01/2025 1,941,820
--------------
5,068,877
--------------
Escrowed Bonds 1.8%
Dormitory Authority of the
State of New York, Judicial
Facilities Lease Revenue
Bonds, (Suffolk, County
Issue) Series 1986, 7.375% 1,110,000 7/01/2016 1,311,021
--------------
Hospital/Health Care 2.5%
Dormitory Authority of the
State of New York, Nyack
Hospital Revenue Bonds,
Series 1996, 6.00% 1,500,000 7/01/2006 1,527,105
The accompanying notes are an integral part of the financial statements.
59
<PAGE>
STATE STREET RESEARCH NEW YORK TAX-FREE FUND
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Principal Maturity Value
Amount Date (Note 1)
------------------------------------------ -------------- --------------
Hospital/Health Care (cont'd)
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 $ 252,207
--------------
1,779,312
--------------
Industrial Development & Pollution Control 6.0%
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 4,279,920
--------------
Lease Revenue 13.6%
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 1,666,200
Lyons Community Health
Initiatives Corp., Facility
Revenue Bonds, Series 1994,
6.55% 470,000 9/01/2009 498,223
New York State Environmental
Facilities Corporation,
Riverbank State Park Special
Obligation Refunding Revenue
Bonds, 1996 Series, AMBAC
Insured, 6.25% 1,000,000 4/01/2012 1,097,250
New York State Thruway
Authority, Local Highway and
Bridge Service Contract
Bonds, Series 1994, MBIA
Insured, 5.875% 2,000,000 4/01/2014 2,001,900
Lease Revenue (cont'd)
New York State Thruway
Authority, Service Contract
Revenue Bonds, 6.25% $1,000,000 4/01/2014 $1,028,810
Dormitory Authority of the
State of New York, State
University Educational
Facilities, Revenue Bonds,
Series 1993 A, 5.50% 2,500,000 5/15/2019 2,379,450
Lyons Community Health
Initiatives Corp., (New
York), Facility Revenue
Bonds, Series 1994, 6.80% 940,000 9/01/2024 1,003,629
--------------
9,675,462
--------------
Life Care 6.5%
Orange County Industrial
Development Agency, (The
Glen Arden Inc. Project),
Life Care Community Revenue
Bonds, Series 1994, 8.25% 2,000,000 1/01/2002 2,072,440
Tompkins County Industrial
Development Agency, Life
Care Community Revenue
Bonds, 1994 (Kendal at
Ithaca Inc., Project), 7.70% 1,430,000 6/01/2011 1,492,634
Tompkins County Industrial
Development Agency, Life
Care Community Revenue
Bonds, 1994 (Kendal at
Ithaca Inc., Project),
7.875% 1,000,000 6/01/2024 1,032,370
--------------
4,597,444
--------------
Multi-Family Housing 1.5%
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 1,047,420
--------------
The accompanying notes are an integral part of the financial statements.
60
<PAGE>
STATE STREET RESEARCH NEW YORK TAX-FREE FUND
- --------------------------------------------------------------------------------
INVESTMENT PORTFOLIO (cont'd)
- --------------------------------------------------------------------------------
Principal Maturity Value
Amount Date (Note 1)
------------------------------------------ -------------- --------------
Power 3.7%
Power Authority of the State
of New York, General Purpose
Bonds, Series W, 6.50% $2,350,000 1/01/2008 $2,628,287
--------------
Pre-Refunded Bonds 6.7%
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 549,140
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 1,102,090
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 673,512
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 668,424
County of Suffolk, New York,
General Obligation, MBIA
Insured, 1990 Series B,
Pre-Refunded to, 4/01/2000 @
102, 7.10% 425,000 4/01/2018 467,959
Pre-Refunded Bonds (cont'd)
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 $ 449,787
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 885,272
--------------
4,796,184
--------------
Single-Family Housing 5.2%
State of New York Mortgage
Agency, Homeowner Mortgage
Revenue Bonds, Series 45,
7.20% 2,000,000 10/01/2017 2,140,640
State of New York Mortgage
Agency, Homeowner Mortgage
Revenue Bonds, Series 55,
5.95% 1,550,000 10/01/2017 1,559,920
--------------
3,700,560
--------------
Special/Sales Tax Revenue 1.4%
New York Local Government
Assistance Corp., (A Public
Benefit Corporation of the
State of New York), Series
1996A Tax Revenue Bonds,
5.375% 1,000,000 4/01/2019 964,100
--------------
Structured Financings 2.2%
The Port Authority of New
York and New Jersey, Special
Project Bonds, Series 4,
KIAC Partners Project,
Subject to AMT, 6.75% 1,500,000 10/01/2011 1,548,915
--------------
The accompanying notes are an integral part of the financial statements.
61
<PAGE>
STATE STREET RESEARCH NEW YORK TAX-FREE FUND
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Principal Maturity Value
Amount Date (Note 1)
------------------------------------------ -------------- --------------
Toll Roads/Turnpike Authorities 6.5%
Triborough Bridge and Tunnel
Authority, General Purpose
Revenue Bonds, Series 1994
A, 6.00% $2,500,000 1/01/2010 $ 2,711,750
New York State Thruway
Authority, General Revenue
Bonds, Series B, MBIA
Insured, 5.00% 2,000,000 1/01/2014 1,909,620
--------------
4,621,370
--------------
Water & Sewer 11.0%
City of Niagara Falls,
Niagara County, New York,
Water Treatment Plant Bonds,
1994 (AMT), MBIA Insured,
8.50% 1,000,000 11/01/2006 1,275,130
New York City Municipal Water
Finance Authority, Water and
Sewer System Revenue Bonds,
Fiscal 1993, Series A, 6.00% 3,000,000 6/15/2009 3,252,120
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 2,231,820
Commonwealth of Puerto Rico,
Aqueduct and Sewer
Authority, General Revenue
Bonds, 6.25% 1,000,000 7/01/2012 1,090,620
--------------
7,849,690
--------------
Total Municipal Bonds (Cost $66,469,062) 69,750,252
--------------
SHORT-TERM OBLIGATIONS 1.7%
North Central Texas Health
Facility Development Bonds,
1.70% $ 200,000 7/10/1996++ $ 200,000
New York State Energy
Research and Development
Authority, 3.50% 100,000 9/20/1996++ 100,000
Industrial Development
Corporation of Grapevine,
Texas, Revenue Bonds, 3.60% 100,000 12/01/2024++ 100,000
New York State Energy
Research and Development
Authority, 3.00% 800,000 6/15/2029++ 800,000
Total Short-Term Obligations (Cost $1,200,000) 1,200,000
--------------
Total Investments (Cost $67,669,062)--99.7% 70,950,252
Other Assets, Less Liabilities--0.3% 181,362
--------------
Net Assets--100.0% $71,131,614
==============
</TABLE>
<TABLE>
<S> <C>
Federal Income Tax Information:
At December 31, 1996, the net unrealized
appreciation of investments based on cost
for Federal income tax purposes of
$67,669,062 was as follows:
Aggregate gross unrealized appreciation for
all investments in which there is an excess
of value over tax cost $3,296,007
Aggregate gross unrealized depreciation for
all investments in which there is an excess
of tax cost over value (14,817)
--------------
$3,281,190
==============
</TABLE>
- -----------------------------------------------------------------------------
++Interest rates on these obligations may reset daily.
The accompanying notes are an integral part of the financial statements.
62
<PAGE>
STATE STREET RESEARCH NEW YORK TAX-FREE FUND
-----------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
-----------------------------------------------------------------------------
December 31, 1996
Assets
Investments, at value (Cost $67,669,062) (Note 1) $70,950,252
Interest receivable 1,425,488
Receivable for securities sold 100,286
Receivable for fund shares sold 17,168
Receivable from Distributor (Note 3) 9,053
Other assets 3,481
--------------
72,505,728
Liabilities
Payable for securities purchased 1,096,669
Dividends payable 64,484
Accrued transfer agent and shareholder services (Note 2) 57,122
Accrued management fee (Note 2) 33,033
Payable to custodian 19,717
Accrued distribution and service fees (Note 5) 18,685
Payable for fund shares redeemed 13,807
Accrued trustees' fees (Note 2) 5,490
Other accrued expenses 65,107
--------------
1,374,114
--------------
Net Assets $71,131,614
==============
Net Assets consist of:
Unrealized appreciation of investments $ 3,281,190
Accumulated net realized loss (665,078)
Shares of beneficial interest 68,515,502
--------------
$71,131,614
==============
Net Asset Value and redemption price per share of Class
A shares ($19,636,245 / 2,415,471 shares of beneficial
interest) $8.13
==============
Maximum Offering Price per share of Class A shares
($8.13 / .955) $8.51
==============
Net Asset Value and offering price per share of Class B
shares ($16,823,951 / 2,069,700 shares of beneficial
interest)* $8.13
==============
Net Asset Value, offering price and redemption price per
share of Class C shares ($34,049,712 / 4,184,877
shares of beneficial interest) $8.14
==============
Net Asset Value and offering price per share of Class D
shares ($621,706 / 76,431 shares of beneficial
interest)* $8.13
==============
- -----------------------------------------------------------------------------
* 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, 1996
Investment Income
Interest $4,177,094
Expenses
Management fee (Note 2) 391,693
Transfer agent and shareholder services (Note 2) 145,713
Custodian fee 98,636
Reports to shareholders 30,555
Audit fee 20,719
Legal fees 16,881
Trustees' fees (Note 2) 16,044
Service fee--Class A (Note 5) 48,703
Distribution and service fees--Class B (Note 5) 155,239
Distribution and service fees--Class D (Note 5) 6,152
Miscellaneous 8,471
-------------
938,806
Expenses borne by the Distributor (Note 3) (120,150)
-------------
818,656
-------------
Net investment income 3,358,438
-------------
Realized and Unrealized Gain (Loss)
on Investments and Futures Contracts
Net realized loss on investments (Notes 1 and 4) (423,995)
Net realized gain on futures contracts (Note 1) 460,110
-------------
Total net realized gain 36,115
Net unrealized depreciation of investments (908,453)
-------------
Net loss on investments and futures contracts (872,338)
-------------
Net increase in net assets resulting from operations $2,486,100
=============
The accompanying notes are an integral part of the financial statements.
63
<PAGE>
STATE STREET RESEARCH NEW YORK TAX-FREE FUND
-----------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
-----------------------------------------------------------------------------
Year ended December 31
-----------------------------
1996 1995
------------------------------ -------------- --------------
Increase (Decrease) in Net Assets
Operations:
Net investment income $ 3,358,438 $ 3,725,102
Net realized gain on
investments and futures
contracts* 36,115 2,462,016
Net unrealized appreciation
(depreciation) of investments (908,453) 4,123,535
-------------- --------------
Net increase resulting from
operations 2,486,100 10,310,653
-------------- --------------
Dividends from net investment income:
Class A (943,352) (1,009,558)
Class B (635,153) (589,598)
Class C (1,809,871) (2,182,901)
Class D (25,084) (33,292)
-------------- --------------
(3,413,460) (3,815,349)
-------------- --------------
Net decrease from fund share
transactions (Note 7) (2,475,362) (3,830,608)
-------------- --------------
Total increase (decrease) in
net assets (3,402,722) 2,664,696
Net Assets
Beginning of year 74,534,336 71,869,640
-------------- --------------
End of year (including
undistributed net investment
income of $0 and $59,442,
respectively) $71,131,614 $74,534,336
============== ==============
* Net realized gain for
Federal income tax purposes
(Note 1) $ 36,115 $ 1,435,929
============== ==============
- -----------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
- -----------------------------------------------------------------------------
December 31,1996
Note 1
State Street Research New York Tax-Free Fund (the "Fund"), is a series of
State Street Research Tax-Exempt Trust (the "Trust"), which was organized as
a Massachusetts business trust in December, 1985 and is registered under the
Investment Company Act of 1940, as amended, as an open-end management
investment company. The Fund commenced operations in July, 1989. 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.
The accompanying notes are an integral part of the financial statements.
64
<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, 1996, the
Fund had a capital loss carryforward of $665,078 available, to the extent
provided in regulations, to offset future capital gains, if any, which
expires on December 31, 2002.
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, 1996, the fees pursuant to
such agreement amounted to $391,693.
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, 1996 the amount of
such expenses was $25,922.
The fees of the Trustees not currently affiliated with the Adviser amounted
to $16,044 during the year ended December 31, 1996.
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, 1996, the amount of such expenses
assumed by the Distributor and its affiliates was $120,150.
Note 4
For the year ended December 31, 1996, purchases and sales of securities,
exclusive of short-term obligations, aggregated $62,658,752 and $66,895,448,
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 or servicing of shareholder
accounts, to reimburse securities dealers for distribution and marketing
services, to furnish ongoing assistance to investors and to defray a portion
of its distribution and marketing expenses. For the year ended December 31,
1996, fees pursuant to such plan amounted to $48,703, $155,239 and $6,152 for
Class A, Class B and Class D shares, respectively.
The Fund has been informed that the Distributor and MetLife Securities, Inc.,
a wholly owned subsidiary of Metropolitan, earned initial sales charges
aggregating $17,248 and $121,217, respectively, on sales of Class A shares of
the Fund during the year ended December 31, 1996, and that MetLife
Securities, Inc. earned commissions aggregating $125,593 on sales of Class B
shares, and that the Distributor collected contingent deferred sales charges
aggregating $38,918 on redemptions of Class B shares during the same period.
65
<PAGE>
STATE STREET RESEARCH NEW YORK TAX-FREE FUND
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
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, 1996, investments totalling 16.0% of the Fund's net assets
were insured as to the timely payment of principal and interest by Municipal
Bond Investors Assurance Corp. (MBIA).
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, 1996, Metropolitan owned 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
---------------------------------------------------------
1996 1995
---------------------------- ----------------------------
Class A Shares Amount Shares Amount
----------------------------------------------------- --------------- ------------ ---------------
<S> <C> <C> <C> <C>
Shares sold 598,718 $ 4,808,712 659,418 $ 5,224,381
Issued upon reinvestment of dividends 93,925 754,768 102,754 817,666
Shares repurchased (713,493) (5,744,887) (745,045) (5,906,953)
------------ --------------- ------------ ---------------
Net increase (decrease) (20,850) $ (181,407) 17,127 $ 135,094
============ =============== ============ ===============
Class B Shares Amount Shares Amount
----------------------------------------------------- --------------- ------------ ---------------
Shares sold 504,073 $ 4,044,795 412,260 $ 2,896,528
Issued upon reinvestment of dividends 61,038 490,585 58,893 434,274
Shares repurchased (328,785) (2,628,310) (249,652) (1,557,767)
------------ --------------- ------------ ---------------
Net increase 236,326 $ 1,907,070 221,501 $ 1,773,035
============ =============== ============ ===============
Class C Shares Amount Shares Amount
----------------------------------------------------- --------------- ------------ ---------------
Shares sold 3,913 $ 31,610 24,846 $ 199,861
Issued upon reinvestment of dividends 169,712 1,369,640 208,442 1,655,838
Shares repurchased (694,720) (5,581,623) (934,625) (7,406,811)
------------ --------------- ------------ ---------------
Net decrease (521,095) $(4,180,373) (701,337) $(5,551,112)
============ =============== ============ ===============
Class D Shares Amount Shares Amount
----------------------------------------------------- --------------- ------------ ---------------
Shares sold 2,131 $ 17,119 4,415 $ 35,225
Issued upon reinvestment of dividends 597 4,804 880 6,996
Shares repurchased (5,330) (42,575) (28,950) (229,846)
------------ --------------- ------------ ---------------
Net decrease (2,602) $ (20,652) (23,655) $ (187,625)
============ =============== ============ ===============
</TABLE>
66
<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
----------------------------------------------- -------------------------------------------
1996 1995 1994 1993** 1996 1995 1994 1993**
- -------------------------------- --------- -------------------- -------------- --------- -------------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
year $ 8.23 $ 7.53 $ 8.43 $ 8.20 $ 8.23 $ 7.53 $ 8.43 $ 8.20
Net investment income* 0.38 0.40 0.40 0.22 0.32 0.34 0.34 0.19
Net realized and unrealized gain
(loss) on investments and
futures contracts (0.09) 0.71 (0.90) 0.25 (0.09) 0.71 (0.90) 0.25
Dividends from net investment
income (0.39) (0.41) (0.39) (0.22) (0.33) (0.35) (0.33) (0.19)
Distributions from net realized
gains -- -- (0.01) (0.02) -- -- (0.01) (0.02)
--------- -------------------- -------------- --------- -------------------- ----------
Net asset value, end of year $ 8.13 $ 8.23 $ 7.53 $ 8.43 $ 8.13 $ 8.23 $ 7.53 $ 8.43
========= ==================== ============== ========= ==================== ==========
Total return 3.68%+ 15.11%+ (6.04)%+ 5.79%+++ 2.91%+ 14.26%+ (6.74)%+ 5.35%+++
Net assets at end of year (000s) $19,636 $20,043 $18,214 $15,175 $16,824 $15,084 $12,131 $7,567
Ratio of operating expenses to
average net assets* 1.10% 1.10% 1.10% 1.10%++ 1.85% 1.85% 1.85% 1.85%++
Ratio of net investment income
to average net assets* 4.76% 5.07% 5.07% 4.68%++ 4.01% 4.32% 4.34% 3.93%++
Portfolio turnover rate 89.14% 109.74% 64.80% 33.11% 89.14% 109.74% 64.80% 33.11%
* Reflects voluntary assumption
of fees or expenses per share
in each year (Note 3) $ 0.01 $ 0.02 $ 0.03 $ 0.01 $ 0.01 $ 0.02 $ 0.03 $ 0.01
</TABLE>
<TABLE>
<CAPTION>
Class C Class D
------------------------------------------------------ ------------------------------------------
Year ended December 31 Year ended December 31
------------------------------------------------------ ------------------------------------------
1996 1995 1994 1993 1992 1996 1995 1994 1993**
------------------------- --------- --------- ----------- --------- --------- -------- --------- ---------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of year $ 8.24 $ 7.54 $ 8.44 $ 7.84 $ 7.61 $ 8.23 $ 7.53 $ 8.44 $ 8.20
Net investment income* 0.40 0.42 0.42 0.42 0.44 0.32 0.35 0.34 0.19
Net realized and
unrealized gain (loss)
on investments and
futures contracts (0.09) 0.71 (0.90) 0.62 0.23 (0.09) 0.70 (0.91) 0.25
Dividends from net
investment income (0.41) (0.43) (0.41) (0.42) (0.44) (0.33) (0.35) (0.33) (0.18)
Distributions from net
realized gains -- -- (0.01) (0.02) -- -- -- (0.01) (0.02)
--------- --------- ----------- --------- --------- -------- --------- ---------------------
Net asset value, end of
year $ 8.14 $ 8.24 $ 7.54 $ 8.44 $ 7.84 $ 8.13 $ 8.23 $ 7.53 $ 8.44
========= ========= =========== ========= ========= ======== ========= =====================
Total return 3.93%+ 15.37%+ (5.79)%+ 13.46%+ 9.08%+ 2.90%+ 14.25%+ (6.86)%+ 5.46%+++
Net assets at end of year
(000s) $34,050 $38,757 $40,750 $56,515 $41,558 $ 622 $ 651 $ 774 $ 821
Ratio of operating
expenses to average net
assets* 0.85% 0.85% 0.85% 0.85% 0.85% 1.85% 1.85% 1.85% 1.85%++
Ratio of net investment
income to average net
assets* 5.01% 5.33% 5.29% 5.10% 5.71% 4.03% 4.35% 4.31% 3.94%++
Portfolio turnover rate 89.14% 109.74% 64.80% 33.11% 29.39% 89.14% 109.74% 64.80% 33.11%
* Reflects voluntary
assumption of fees or
expenses per share in
each year (Note 3) $ 0.01 $ 0.02 $ 0.03 $ 0.01 $ 0.02 $ 0.01 $ 0.02 $ 0.03 $ 0.01
</TABLE>
**June 7, 1993 (commencement of share class designations) to December 31,
1993.
++Annualized.
+Total return figures do not reflect any front-end or contingent deferred
sales charges. Total return would be lower if the Distributor and its
affiliates had not voluntarily assumed a portion of the Fund's expenses.
+++Represents aggregate return for the period without annualization and does
not reflect any front-end or contingent deferred sales charges. Total
return would be lower if the Distributor and its affiliates had not
voluntarily assumed a portion of the Fund's expenses.
67
<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, 1996, 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, 1996 by
correspondence with the custodian and brokers, and the application of
alternative auditing procedures where confirmations from brokers were not
received, provide a reasonable basis for the opinion expressed above.
Price Waterhouse LLP
Boston, Massachusetts
February 5, 1997
68
<PAGE>
STATE STREET RESEARCH NEW YORK TAX-FREE FUND
-----------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE
-----------------------------------------------------------------------------
New York municipal bonds experienced volatility in the first half of 1996,
regained stability by mid-year and developed a positive momentum in the
second half of the year, a trend reflected in the performance of State Street
Research New York Tax-Free Fund.
The Fund outperformed the average for its peer category, Lipper Analytical
Services' New York Municipal Debt Funds for the 12 months ended December 31,
1996.
Fund management worked to improve performance by adjusting the Fund's
duration, keeping it short in the beginning of the year, when interest rates
were volatile and extending the duration mid-year, when prices became more
stable.
Because AAA insured bonds have become less attractive, Fund management
limited their position in the portfolio. Investors turned from insured bonds
and sought higher yields by investing in non-insured bonds. This drove the
yields of non-insured bonds lower--and prices higher--relative to those of
insured bonds.
December 31, 1996
All returns represent past performance, which is no guarantee of future
results. The investment return and principal value of an investment made in
the Fund will fluctuate and shares, when redeemed, may be worth more or less
than their original cost. All returns assume reinvestment of capital gain
distributions and income dividends. Performance for a class may include
periods prior to the adoption of class designations in 1993, which resulted
in new or increased 12b-1 fees of up to 1% per class thereafter and which
will reduce subsequent performance. "C" shares, offered without a sales
charge, are available only to certain employee benefit plans and large
institutions. Performance reflects maximum 4.5% "A" share front-end sales
charge or 5% "B" share or 1% "D" share contingent deferred sales charges
where applicable. The Lehman Brothers Municipal Bond Index is a commonly used
measure of bond market performance. The index is unmanaged and does not take
sales charges into consideration. Direct investment in the index is not
possible; results are for illustrative purposes only. Performance results for
the Fund are increased by the voluntary reduction of Fund fees and expenses.
In the above charts, this first figure reflects expense reduction; the second
shows what results would have been without subsidization.
Change In Value Of $10,000 Based On
The Lehman Municipal Bond Index
Compared To Change In Value of $10,000
Invested In New York Tax-Free Fund
[typeset representation of line charts]
Class A Shares
Average Annual Total Return
1 Year 5 Years 10 Years
- -0.99%/-1.23% +5.74%/+5.47% +6.31%/+5.78%
New York
Tax-Free Lehman Municipal
Fund Bond Index
9550 9550
9714 10931
10036 11148
11428 12502
12465 13604
14108 15275
13256 14485
15259 17014
15820 17767
Class B Shares
Average Annual Total Return
1 Year 5 Years 10 Years
- -2.03%/-2.29% +5.84%/+5.56% +6.58%/+6.05%
New York
Tax-Free Lehman Municipal
Fund Bond Index
10000 10000
10172 10391
10509 11148
11967 12502
13052 13604
14710 15275
13719 14485
15675 17014
16131 17767
Class C Shares
Average Annual Total Return
1 Year 5 Years 10 Years
+3.93%/+3.67% +6.93%/+6.67% +7.10%/+6.58%
New York
Tax-Free Lehman Municipal
Fund Bond Index
10000 10000
10172 10391
10509 11148
11967 12502
13052 13604
14810 15275
13952 14485
16097 17014
16729 17767
Class D Shares
Average Annual Total Return
1 Year 5 Years 10 Years
+1.91%/+1.66% +6.15%/+5.87% +6.58%/+6.05%
New York
Tax-Free Lehman Municipal
Fund Bond Index
10000 10000
10172 10391
10509 11148
11967 12502
13052 13604
14726 15275
13717 14485
15671 17014
16126 17767
[end line charts]
69
<PAGE>
STATE STREET RESEARCH NEW YORK TAX-FREE FUND
-----------------------------------------------------------------------------
REPORT ON SPECIAL MEETING OF SHAREHOLDERS
-----------------------------------------------------------------------------
A Special Meeting of Shareholders of the State Street Research New York
Tax-Free Fund ("Fund"), along with shareholders of other series of State
Street Research Tax-Exempt Trust ("Meeting"), was convened on April 19, 1996.
The results of the Meeting are set forth below.
Votes (millions of
shares)
------------------
For Withheld
------ -----------
1. The following persons were elected as Trustees:
Edward M. Lamont 25.9 1.0
Robert A. Lawrence 25.9 1.0
Dean O. Morton 25.9 1.0
Thomas L. Phillips 25.9 1.0
Toby Rosenblatt 25.9 1.0
Michael S. Scott Morton 25.9 1.0
Ralph F. Verni 25.8 1.1
Jeptha H. Wade 25.9 1.0
<TABLE>
<CAPTION>
Votes (millions of
shares)
----------------------
For Against Abstain
---- ---------------
<S> <C> <C> <C>
2. The Fund's following investment policies were reclassified from
fundamental to nonfundamental:
a. The policy regarding investments in securities of companies with less
than three (3) years' continuous operation 3.8 0.5 0.5
b. The policy regarding investments in illiquid securities. 3.8 0.5 0.6
3. The Fund's fundamental policy regarding investments in commodities and
commodity contracts was amended. 3.8 0.5 0.6
4. The Fund's fundamental policies regarding diversification of investments
were amended 4.0 0.4 0.5
5. The Master Trust Agreement was amended to permit the Trustees to
reorganize, merge or liquidate a fund without prior shareholder
approval. 20.0 3.7 3.3
6. The Master Trust Agreement was amended to eliminate specified time
permitted between the record date and any shareholders meeting. 21.2 2.5 3.2
</TABLE>
70
<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 fiscal year ended December
31, 1987 through December 31, 1996.
Financial Highlights for State Street Research New
York Tax-Free Fund for the period July 5, 1989
(commencement of operations) through December 31,
1996.
(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, 1996:
Investment Portfolio
Statement of Assets and Liabilities
Statement of Operations
Statement of Changes in Net Assets (Fiscal
years ended December 31, 1996
and December 31, 1995)
Notes to Financial Statements (including
financial highlights)
Report of Independent Accountants
Management's Discussion of Fund Performance
Report on Special Meeting of Shareholders
(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 (19)
(1)(b) Amendment No. 3 to Second Amended and Restated Master
Trust Agreement
(1)(c) 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 (19)
(6)(a) Distribution Agreement with MetLife - State Street
Investment Services, Inc.(2)**
(6)(b) Form of Selected Dealer Agreement, as Supplemented
C-1
<PAGE>
(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 (19)
(17)(b) Certificate of Board Resolution Respecting Powers of
Attorney (19)
(18) First Amended and Restated Multiple Class Expense
Allocation Plan Adopted Pursuant to Rule 18f-3
(19) Application Forms
(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.
C-2
<PAGE>
Filed as part of the Registration Statement as noted below and incorporated
herein by reference:
Footnote Securities Act of 1933
Reference Registration/Amendment 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
19 Post-Effective Amendment No. 19 April 30, 1996
Item 25. Persons Controlled by or under Common Control with Registrant
Inapplicable.
Item 26. Number of Holders of Securities
As of January 31, 1997, 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 10,351
Class B 2,034
Class C 476
Class D 37
State Street Research
New York Tax-Free Fund
Class A 1,352
Class B 720
Class C 1,672
Class D 7
C-3
<PAGE>
Item 27. Indemnification
Under Article VI of the Registrant's Second Amended and Restated Master
Trust Agreement as further amended ("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.
C-4
<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
Arpiarian, Tanya None
Vice President
Bangs, Linda L. 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 Financial Trust Boston, MA
President 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
Vice President State Street Research Income Trust Boston, MA
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
Bochman, Kathleen None
Vice President
Bray, Michael J. Employee Merrill Lynch & Co. Boston, MA
Vice President
Brown, Susan H. None
Vice President
Buffum, Andrea Project Manager BankBoston Boston, MA
Vice President (until 12/96)
Managing Director State Street Global Advisors Boston, MA
(until 12/95)
Burbank, John F. None
Senior Vice President
(Vice President until
7/96)
Cabrera, Jesus A. Vice President First Chicago Investment Management Co. Chicago, IL
Vice President (until 5/96)
Vice President State Street Research Capital Trust Boston, MA
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 Boston, MA
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
C-5
<PAGE>
Principal business
Name Connection Organization address of organization
- ---- ---------- ------------ -----------------------
Carmen, Michael Portfolio Manager Montgomery Asset Management San Francisco, CA
Vice President (until 11/96)
Vice President State Street Research & Management Company Boston, MA
(until 4/96)
Vice President State Street Research Capital Trust Boston, MA
Carstens, Linda C. None
Vice President
Clifford, Jr., Paul J. Vice President State Street Research Tax-Exempt Trust Boston, MA
Vice President
D'Vari, Ronald None
Vice President
DeVeuve, Donald None
Vice President
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. None
Senior Vice
President
Evans, Gordon Senior Vice President State Street Research Investment Services, Inc. Boston, MA
Vice President (Vice President until 3/96)
Even, Karen None
Vice President
Federoff, Alex G. None
Vice President
Feliciano, Rosalina 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
Vice President State Street Research Securities Trust Boston, MA
Govoni, Electra None
Vice President
C-6
<PAGE>
Principal business
Name Connection Organization address of organization
- ---- ---------- ------------ -----------------------
Granger, Allison None
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
Treasurer and Director North Conway Institute Boston, MA
Hanson, Phyllis None
Vice President
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 and Chairman Vincent Memorial Hospital Boston, MA
of the Board
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) Assistant Treasurer State Street Research Energy, Inc. Boston, MA
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 Money Market 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
C-7
<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
President Vice President State Street Research Growth Trust Boston, MA
Member Harvard Business School Association Cambridge, MA
Member National Alumni Council, Boston University Boston, MA
Langholm, Knut None
Vice President
Leary, Eileen M. None
Vice President
McNamara, III, Francis J. Senior Vice President, Clerk State Street Research Investment Services, Inc. Boston, MA
Executive Vice and General Counsel
President, Secretary and General Counsel State Street Research Master Investment Trust Boston, MA
Secretary and Secretary and General Counsel State Street Research Capital Trust Boston, MA
General Counsel Secretary and General Counsel State Street Research Exchange Trust Boston, MA
(Senior Vice President Secretary and General Counsel State Street Research Growth Trust Boston, MA
until 7/96) 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
C-8
<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.
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
Senior Vice President
(Vice President
until 7/96)
Moore, Jr., Thomas P. Vice President State Street Research Capital Trust Boston, MA
Senior Vice (until 11/96)
President Vice President State Street Research Exchange Trust Boston, MA
(until 2/97)
Vice President State Street Research Growth Trust Boston, MA
(until 2/97)
Vice President State Street Research Master Investment Trust Boston, MA
(until 2/97)
Vice President State Street Research Equity Trust Boston, MA
Vice President State Street Research Energy, Inc. Boston, MA
Director Hibernia Savings Bank Quincy, MA
Governor on the Association for Investment Management
Board of Governors and Research Charlottesville, VA
Mulligan, JoAnne C. Vice President State Street Research Money Market Trust Boston, MA
Senior Vice President
(Vice President
until 7/96)
Orr, Stephen C. Member Technology Analysts of Boston Boston, MA
Vice President Member Electro-Science Analysts (of NYC) New York, NY
C-9
<PAGE>
Principal business
Name Connection Organization address of organization
- ---- ---------- ------------ -----------------------
Paddon, Steven W. Employee Metropolitan Life Insurance Company New York, NY
Vice President (until 10/96)
Pannell, James C. None
Vice President
Peters, Kim M. Vice President State Street Research Securities Trust Boston, MA
Senior Vice President
Ragsdale, E.K. Easton None
Senior Vice President
(Vice President
until 7/96)
Rawlins, Jeffrey A. None
Senior Vice President
(Vice President
until 7/96)
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
Saperstone, Paul None
Vice President
C-10
<PAGE>
Principal business
Name Connection Organization address of organization
- ---- ---------- ------------ -----------------------
Schrage, Michael None
Vice President
Schultz, David C. Director and Treasurer Mafraq Hospital Association Mafraq, Jordan
Executive Vice Member Association of Investment
President Management Sales Executives Atlanta, GA
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
Strelow, Dan R. None
Senior Vice President
C-11
<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
President, Chief Executive SSRM Holdings, Inc. Boston, MA
Officer and Director
Director CML Group, Inc. Boston, MA
Director Colgate University Hamilton, NY
C-12
<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. Vice President State Street Research Equity Trust Boston, MA
Senior Vice 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 Capital Trust Boston, MA
Chief Investment Officer IDS Equity Advisors Minneapolis, MN
(until 12/95)
Westvold, Vice President State Street Research Securities Trust Boston, MA
Elizabeth McCombs
Senior Vice President
(Vice President
until 7/96)
Wilson, John T. Vice President State Street Research Equity Trust Boston, MA
Vice President Vice President State Street Research Master Investment Trust Boston, MA
Vice President Phoenix Investment Counsel, Inc. Hartford, CT
(until 6/96)
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)
C-13
<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
</TABLE>
C-14
<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 Research Investment
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 General Counsel and Clerk 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
C-15
<PAGE>
Darman A. Wing Senior Vice President, Assistant Secretary
One Financial Center Assistant General
Boston, MA 02111 Counsel and Assistant
Clerk
Linda Grasso Vice President None
One Financial Center
Boston, MA 02111
Robert M. Gunville Vice President None
One Financial Center
Boston, MA 02111
Frederick H. Jamieson Vice President and None
One Financial Center Asst. Treasurer
Boston, MA 02111
Amy L. Simmons Vice President Assistant Secretary
One Financial Center
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.
C-16
<PAGE>
Notice
A copy of the Second Amended and Restated Master Trust Agreement of the
Registrant, as further amended ("Master Trust Agreement") 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.
C-17
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this
Post-Effective Amendment No. 20 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 28th day of February, 1997.
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
Steve A. Garban
______________________________ Trustee
Malcolm T. Hopkins
*
______________________________ Trustee
Edward M. Lamont
*
______________________________ Trustee
Robert A. Lawrence
*
______________________________ Trustee
Dean O. Morton
C-18
<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
dated August 24, 1995,
incorporated by reference
from Post-Effective
Amendment No. 19 filed on
April 26, 1996
C-19
<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. 20 [X]
and/or
REGISTRATION STATEMENT
UNDER THE INVESTMENT COMPANY
ACT OF 1940 [ ]
Amendment No. 21 [X]
--------------------
STATE STREET RESEARCH TAX-EXEMPT TRUST
(Exact Name of Registrant as Specified in Charter)
--------------------
EXHIBITS
<PAGE>
INDEX TO EXHIBITS
(1)(b) Amendment No. 3 to Second Amended And Restated Master Trust
Agreement
(1)(c) Amendment No. 4 to Second Amended and Restated Master Trust
Agreement
(6)(b) Form of Selected Dealer Agreement, as Supplemented
(11) Consent of Price Waterhouse
(18) First Amended and Restated Multiple Class Expense Allocation Plan
(19) Application Forms
(27) Financial Data Schedules
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.
/s/Edward M. Lamont /s/Toby Rosenblatt
- -------------------------- -----------------------------
Edward M. Lamont Toby Rosenblatt
/s/Robert A. Lawrence /s/Michael S. Scott Morton
- -------------------------- -----------------------------
Robert A. Lawrence Michael S. Scott Morton
/s/Dean O. Morton /s/Ralph F. Verni
- -------------------------- -----------------------------
Dean O. Morton Ralph F. Verni
/s/Thomas L. Phillips /s/Jeptha H. Wade
- -------------------------- -----------------------------
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."
<PAGE>
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.
/s/ Francis J. McNamara, III
------------------------------
Francis J. McNamara, III
Secretary
Exhibit (6b)
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 if the
2
<PAGE>
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.
<PAGE>
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 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. Eligibility of Fee-Based Program
We reserve the right to establish basic eligibility requirements from
time to time for the sale of Fund shares under your programs, relating to the
minimum aggregate amount of your clients' assets invested in the Funds,
management fees you charge on such assets, regulatory requirements, and/or
similar matters. 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, (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) use reasonable efforts to motivate
your representatives to recommend suitable Funds for clients of the Fee-Based
Program, and (iv) 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.
<PAGE>
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 Statement of Additional Information
constituting part of this Post-Effective Amendment No. 20 to the registration
statement (No. 33-2703) on Form N-1A (the "Registration Statement") of our
reports dated February 5, 1997, 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
Boston, Massachusetts
February 27, 1997
EXHIBIT (18)
First Amended and Restated
Multiple Class Expense Allocation Plan
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 (i) is authorized to 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) is or may be authorized to 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 such Series,
and Series of affiliated investment companies, have or may establish classes
thereof designated as "Class A," "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
<PAGE>
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 or on the basis of the Dividend Assets of that
2
<PAGE>
class in relation to the aggregate Dividend Assets of the Series for periodic
income distribution funds and daily income distributions funds, respectively.
"Dividend Assets" are defined as the net asset value of those shares eligible to
receive a dividend on the current day as set forth in the Fund's prospectus.
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 multiple classes, if any, of the Initial Series as of May 5, 1995, 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,
Class D, and 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 8, 1996
3
Exhibit (19)
[STATE STREET RESEARCH LOGO]
MUTUAL FUND ACCOUNT APPLICATION
Mail this application to State Street Research Shareholder Services,
P.O. Box 8408, Boston, MA 02266-8408
- --------------------------------------------------------------------------------
1 Type of Account (PLEASE PRINT FULL NAME(S) CONSISTENT WITH YOUR SIGNATURE(S)
IN SECTION 5.)
<TABLE>
<S> <C> <C>
[ ] Individual--complete (a) only [ ] Joint Tenant--complete (a & b) [ ] Gift to a Minor--complete (c) only
[ ] Trust(1)--complete (d) only [ ] Corporation(1)--complete (e) only [ ] Partnership/Other Entity--complete (e) only
</TABLE>
Note: If the investment is to be used for an Individual Retirement Account
(IRA), a separate IRA application must be used.
(1)Call 1-800-562-0032 for additional forms.
Individual or Joint Tenant
a _____________________________________________________________________________
Name of Investor Social Security Number
b _____________________________________________________________________________
Name(s) of Joint Tenant(s)
Gift to a Minor
as custodian for under the
c _____________________________________________________________________________
Name of Custodian (one only) Name of Minor (one only)
"Uniform Gifts to Minors Act"
- -------------------------------------------------------------------------------
Minor's State of Residence Minor's Social Security Number
Trust Account
d _____________________________________________________________________________
Trustee(s) Name(s)
- -------------------------------------------------------------------------------
Name and Date of Trust Agreement Tax Identification Number
Corporation, Partnership or Other Entity (Please include corporate resolution.)
e _____________________________________________________________________________
Name of Corporation or Other Entity
------------------------------------------------------------------------------
Type of Business (specify corporation, Tax Identification Number
partnership, estate, guardian, etc.)
-----------------------------------------------------------------------------
2 Your Mailing Address (PLEASE PRINT.)
( )
- -------------------------------------------------------------------------------
Street Address Home Telephone Number
( )
- -------------------------------------------------------------------------------
City State ZIP Business Telephone Number
Residency [ ] U.S. (State ______) [ ] Other_____________________________
Specify Country
- --------------------------------------------------------------------------------
3 Fund Selection(s) and Distribution Option(s) (Choose only one distribution
option per Fund; see Fund prospectus for minimum initial investment
requirements.)
[ ] By Mail--Make check payable to "State Street Research" [ ] By Dealer
[ ] By Federal Funds Wire (Control #___________)
<TABLE>
<CAPTION>
Class Wire Order
Fund Name Designation(2) Amount Distribution Option by Dealer
- -----------------------------------------------------------------------------------------------------------------------------------
Dividends & Dividends in Dividends & Dividend
Capital Gains Cash; Capital Capital Gains Allocation Confirmation
A B D Reinvested Gains Reinvested(3) in Cash Plan (DAP)(4) Number
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
- -------------- [ ] [ ] [ ] $------- [ ] [ ] [ ] [ ] -----------
- -------------- [ ] [ ] [ ] $------- [ ] [ ] [ ] [ ] -----------
- -------------- [ ] [ ] [ ] $------- [ ] [ ] [ ] [ ] -----------
- -------------- [ ] [ ] [ ] $------- [ ] [ ] [ ] [ ] -----------
</TABLE>
(2)All Money Market Fund investments will purchase Class E shares. Be sure to
designate share class for Money Market Fund DAP allocations.
(3)Does not apply to Money Market Fund.
(4)Dividend Allocation Plan: The Transfer Agent is authorized to invest all
dividends and distributions from ___________________________________________
Fund Name
in the following Eligible Fund: ____________________________________________
Fund Name Account Number
(Fund must meet (if existing
minimum investment account)
requirements)
Authorization of Dividend Allocation Plan constitutes an acknowledgment that the
shareholder has received the current prospectus of the Fund to be acquired.
Except for Money Market Fund Class E, DAP must be allocated to same class
designation.
<PAGE>
4 _____________________________________________________________________________
Reduced Sales Charges (Applies to Class A shares only)
[ ] Right of Accumulation (ROA): I apply for Right of Accumulation reduced sales
charges subject to the Transfer Agent's confirmation of the following holdings
of certain designated persons, e.g. family members, in the Eligible Funds:
- --------------------------------------------------------------------------------
Name on Account Account Number
- --------------------------------------------------------------------------------
Name on Account Account Number
[ ] Letter of Intent (LOI): Although I am not obligated to purchase and the
Funds are not obligated to sell, I intend to invest over a 13-month period
beginning___________, 19___ (purchase date not more than 90 days prior to this
letter) at least an aggregate of [ ] $100,000 [ ] $250,000 [ ] $500,000 [ ]
$1,000,000 of Eligible Funds.
5 _____________________________________________________________________________
Your Signature (All registered shareholders must sign.)
I have received the current prospectus of the Fund and confirm that all the
information, instructions and agreements set forth hereon shall apply to the
account, and if applicable, shall also apply to any other fund account with
shares acquired upon exchange of shares of the Fund.
Under penalties of perjury, I certify that (1) the number shown on this form is
my correct taxpayer identification number (or I am waiting for a number to be
issued to me), and (2) I am not subject to backup withholding because (a) I am
exempt from backup withholding, or (b) I have not been notified by the Internal
Revenue Service that I am subject to backup withholding as a result of a failure
to report all interest or dividends, or (c) the IRS has notified me that I am no
longer subject to backup withholding.
Certification instructions: You must cross out item (2) above if you have been
notified by the IRS that you are currently subject to backup withholding because
of underreporting interest or dividends on your tax return.
The Internal Revenue Service does not require your consent to any provision of
this document other than the certification required to avoid backup withholding.
- --------------------------------------------------------------------------------
Signature of Shareholder (exactly as your name appears in Section 1) Date
- --------------------------------------------------------------------------------
Signature of Joint Tenant (if any) Date
6 _____________________________________________________________________________
Signature Guarantee and Dealer Information (Complete section (a) or (b) as
applicable.)
The undersigned guarantees the signature and legal capacity of the shareholder.
a. Signature Guarantee (fill out if your Dealer does not complete section below)
- --------------------------------- -------------------------------------------
Name of Bank or Street Address
Eligible Guarantor
- --------------------------------- -------------------------------------------
Authorized Signature of Bank City State ZIP
or Eligible Guarantor
b. Dealer Information and Signature Guarantee (for Dealer use only)
- --------------------------------- -------------------------------------------
Dealer Name Branch Office Number
- --------------------------------- -------------------------------------------
Street Address of Home Office Address of Branch Office Servicing Account
- --------------------------------- -------------------------------------------
City State ZIP City State ZIP
- --------------------------------- -------------------------------------------
Authorized Signature of Dealer Registered Representative's Name and Number
If this application is for an account introduced through the above-named Dealer,
the Dealer agrees to all applicable provisions in this application and in the
Prospectus, and represents that it has provided a current Prospectus to the
Applicant and that the application is properly executed by a person authorized
by the Dealer to guarantee signatures. The Dealer warrants that this application
is completed in accordance with the shareholder's instructions and agrees to
indemnify the Fund, any other Eligible Funds, the Distributor, the Investment
Manager, State Street Research Shareholder Services and the Transfer Agent for
any loss or liability from acting or relying upon such instructions and
information. The terms and conditions of the Distributor's currently effective
Selected Dealer Agreement or sales agreement are included by reference in this
section. The Dealer represents that it has a currently effective Selected Dealer
Agreement or sales agreement with the Distributor authorizing the Dealer to sell
shares of the Fund and the Eligible Funds, and that it may lawfully sell shares
of the designated Fund(s) in the state designated as the Applicant's address of
record.
<PAGE>
Application for Optional Shareholder Services
Your Bank Account (You must complete this section if you request Section A, B, D
or E.)
Type of Bank Account: [ ] Checking [ ] NOW or Money Market
- --------------------------------------------------------------------------------
Account Title (print exactly as it Bank Routing Number
appears on bank records)
- --------------------------------------------------------------------------------
Bank Account Number Bank Name
- --------------------------------------------------------------------------------
Bank Address City State ZIP
- --------------------------------------------------------------------------------
Depositor's Signature(s) (exactly Date
as it appears on bank records)
- --------------------------------------------------------------------------------
Depositor's Address City State ZIP
You must attach a blank check marked "VOID."
A _____________________________________________________________________________
Telephone Redemption and Exchange Privileges (Service available only for shares
held on deposit with Transfer Agent)
None of the Transfer Agent, the Fund, any other Eligible Funds, State Street
Research Shareholder Services, the Investment Manager or the Distributor will be
liable for any loss, injury, damage or expense as a result of acting upon, and
will not be responsible for the authenticity of, any telephone instructions. I
understand that all telephone calls are tape recorded. My liability shall be
subject to the use of reasonable procedures to confirm that instructions
communicated by telephone are genuine.
Telephone Exchange By Shareholder OR DEALER
The Transfer Agent may effect exchanges for my account according to telephone
instructions FROM ME OR MY DEALER as set forth in the Prospectus, and may
register the shares of the fund to be acquired exactly the same as my existing
account. Authorizing an exchange constitutes an acknowledgment that the
shareholder has received the current prospectus of the fund to be acquired. The
account will automatically have this privilege unless it is expressly declined
by providing your initials in the space below.
I DO NOT WANT THE TELEPHONE EXCHANGE PRIVILEGE. ____ (Initial here.)
Telephone Redemption By Shareholder Only
1. Proceeds to Shareholder's Address of Record. The Transfer Agent may effect
redemptions of shares from my account according to telephone instructions from
me, as set forth in the Prospectus, and send the proceeds to my address of
record. The account will automatically have this privilege unless it is
expressly declined by providing your initials in the space below.
I DO NOT WANT THE TELEPHONE REDEMPTION PRIVILEGE (to address of record).
____ (Initial here.)
2. Proceeds to Bank Designated by Shareholder. The Telephone Redemption
Privilege (to bank designated by shareholder) is not provided automatically;
please check the box below if you want this Privilege for the account. ATTACH A
BLANK CHECK MARKED "VOID" AND FILL OUT "YOUR BANK ACCOUNT" SECTION. The Transfer
Agent may effect redemptions of shares from my account according to telephone
instructions from me, as set forth in the Prospectus, and send the proceeds to
the bank named in "Your Bank Account."
[ ] (Check here.)
B _____________________________________________________________________________
Investamatic Check Program (YOU MUST ATTACH A BLANK CHECK MARKED "VOID.") I
hereby request and authorize the bank named in "Your Bank Account" section to
pay and charge checks drawn on, or debits against, my account initiated by and
payable to the order of the mutual fund transfer agent designated by the
Distributor. I agree that the named Bank's rights in respect to each such check
or debit shall be the same as if it were a check drawn on or debit against my
account authorized personally by me. This authority is to remain in effect until
revoked by me in writing, and until the named Bank actually receives such
notice, I agree that the named Bank shall be fully protected in honoring any
such check or debit authorization. I further agree that if any check or debit
authorization be dishonored, whether with or without cause and whether
intentionally or inadvertently, the named Bank shall be under no liability
whatsoever, unless the nonpayment is because of insufficient funds. I understand
that this Program may be revoked by the Transfer Agent or the Distributor
without prior notice if any check is not paid upon presentation, and that this
Program may be discontinued by the Distributor, the Transfer Agent or me upon
thirty (30) business days' notice prior to the due date of any deposit.
<TABLE>
<S> <C> <C> <C>
$
- ----------------------------------------------------------------------------------------------------
Fund Name Class Designation Amount ($50 minimum) Account Number
$
- ----------------------------------------------------------------------------------------------------
Fund Name Class Designation Amount ($50 minimum) Account Number
------------------------------------------------------------
Total Amount of Investment: $________ Account Registration (exactly as it appears on Fund records)
</TABLE>
<TABLE>
<S> <C> <C>
[ ] Monthly Investment Date: [ ] 5th or [ ] 20th If you do not choose a date, the
[ ] Quarterly Investment Date: [ ] 5th or [ ] 20th 5th will be chosen automatically.
</TABLE>
C _____________________________________________________________________________
Checkwriting Privilege
(Available for Class A shares and
Money Market Fund Class E shares only)
[ ] I request the checkwriting feature and have completed the signature card to
the right.
- --------------------------------------------------------------------------------
Account Number (if existing account)
- --------------------------------------------------------------------------------
Account Number (if existing account)
Signature Card Complete and sign this card and return it with your application
and investment. Do not detach.
<TABLE>
<CAPTION>
Check applicable Fund(s) TO: State Street Bank and Trust Company ("Bank")
<S> <C> <C> <C> <C>
[ ] Government Income ----------------------------------------------------------------------------
[ ] NY Tax-Free Name (please print)
[ ] Money Market, Class E
[ ] High Income ----------------------------------------------------------------------------
[ ] Tax-Exempt Name (please print)
[ ] Strategic Income
----------------------------------------------------------------------------
Address City State ZIP
----------------------------------------------------------------------------
Signature (exactly as it appears in the Application, including any capacity)
----------------------------------------------------------------------------
Signature (exactly as it appears in the Application, including any capacity)
----------------------------------------------------------------------------
Indicate the number of signatures required----------------------------------
----------------------------------------------------------------------------
Tax Identification Number
</TABLE>
Corporate and other accounts must include appropriate resolution forms. In
signing this signature card, the signator(s) signifies his/her or their
agreement to be subject to the rules and regulations of State Street Bank and
Trust Company pertaining thereto, as amended from time to time, and subject to
the conditions printed on the reverse side.
<PAGE>
D _____________________________________________________________________________
Automatic Bank Connection (ABC) Not available for retirement plan accounts. YOU
MUST ATTACH A BLANK CHECK MARKED "VOID."
[ ] I authorize the Transfer Agent to liquidate $________________ (minimum-$50)
from my fund account beginning the month of ________________ to provide
[ ] monthly, [ ] quarterly, [ ] semiannual or [ ] annual payments. I would like
the following payment to be deposited directly into the bank account named in
"Your Bank Account" section. (Choose only one.)
[ ] Income dividends only
[ ] Income dividends and capital gains
[ ] Systematic Withdrawal Plan payments (see below)
Specify Fund(s):
- --------------------------------------------------------------------------------
Fund Name Class Designation
- --------------------------------------------------------------------------------
Fund Name Class Designation
I hereby authorize the Fund and the Transfer Agent to effect the deposit of the
above indicated items by initiating credit entries to my account at the bank
named in "Your Bank Account" section. The named Bank shall not be responsible
for the correctness of the items, and the Transfer Agent is authorized to
correct and adjust any incorrect items to my bank account. This authorization
may be terminated at any time by written notification to the Fund, the Transfer
Agent and the Bank.
E _____________________________________________________________________________
Systematic Withdrawal Plan (SWP) Not available for retirement plan accounts. See
the prospectus for minimum account size and maximum withdrawal amounts. YOU MUST
ATTACH A BLANK CHECK MARKED "VOID."
[ ] I authorize the Transfer Agent to liquidate shares in and withdraw cash
(minimum-$50) from my fund account beginning the month of ________________ to
provide [ ] monthly, [ ] quarterly, [ ] semiannual or [ ] annual Systematic
Withdrawal Plan (SWP) payments in the amount of $________________ to [ ] me, [ ]
the bank named in "Your Bank Account" section, or[ ]the following payee. (Note:
If you authorize a SWP, you may not receive dividend or capital gain
distributions in cash.)
- --------------------------------------------------------------------------------
Name of Payee
- --------------------------------------------------------------------------------
Street Address City State ZIP
Specify Fund(s):
- --------------------------------------------------------------------------------
Fund Name Class Designation
- --------------------------------------------------------------------------------
Fund Name Class Designation
The payment of monies is authorized by the signature(s) on the reverse side.
If the shareholder's account with the Fund is joint, all checks drawn upon this
account must include the signatures of all persons named in the account, unless
the persons signing this card have indicated on the reverse side of this card
that the Bank is authorized to accept any one signature. Each person guarantees
the genuineness of the other's signature. Checks may not be for less than $500
or such other minimum or maximum amounts as may from time to time be established
by the Fund.
The Bank is hereby appointed agent by the person(s) signing this card (the
"Depositor(s)") and, as agent, is authorized and directed to present checks
drawn on this checking account to the Fund or its redemption agent as requests
to redeem shares of the Fund registered in the name of the Depositor(s) in the
amounts of such checks and to deposit the proceeds of such redemptions in this
checking account. The Bank shall be liable only for its own negligence.
Depositor(s) hereby authorize(s) the Fund or its redemption agent to honor
redemption requests presented in the above manner by the Bank. The Fund and its
redemption agent will not be liable for any loss, expense or cost arising out of
check redemptions. If shares of the Fund are purchased by check, redemption
proceeds will ordinarily be withheld until the Fund is reasonably assured that
payment has been collected on the check. The Bank has the right not to honor
checks in amounts exceeding the value of the depositor(s) shareholder account at
the time the check is presented for payment.
The Bank reserves the right to change, modify or terminate this checking account
at any time upon notification mailed to the address of record of the
Depositor(s).
SSR-543E-197
<PAGE>
[STATE STREET RESEARCH LOGO] [METLIFE SECURITIES LOGO]
Mutual Fund Account Application
Mail this application to MetLife Securities, Inc., P.O. Box 30421, Tampa, FL
33630
[ ] New Application [ ] Change--Account #_____________________
1 _____________________________________________________________________________
Type of Account (PLEASE PRINT FULL NAME(S) CONSISTENT WITH YOUR SIGNATURE(S) IN
SECTION 6.)
<TABLE>
<S> <C> <C>
[ ] Individual--complete (a) only [ ] Joint Tenant--complete (a & b) only [ ] Gift to a Minor--complete (c) only
[ ] Trust(1)--complete (d) only [ ] Corporation(1)--complete (e) only [ ] Partnership/Other Entity--complete (e) only
</TABLE>
Note: If the investment is to be used for an Individual Retirement Account
(IRA), a separate IRA application must be used.
(1)Call 1-800-638-8378 for additional forms.
Do you have any other mutual fund accounts with State Street Research?
[ ] Yes [ ] No
Individual or Joint Tenant
a _____________________________________________________________________________
Name of Investor Social Security Number
b _____________________________________________________________________________
Name(s) of Joint Tenant(s)
Gift to a Minor
as custodian for under the
- -------------------------------------------------------------------------------
Name of Custodian (one only) Name of Minor (one only)
"Uniform Gifts to Minors Act"
- -------------------------------------------------------------------------------
Minor's State of Residence Minor's Social Security Number
Trust Account
d _____________________________________________________________________________
Trustee(s) Name(s)
- -------------------------------------------------------------------------------
Name and Date of Trust Agreement Tax Identification Number
Corporation, Partnership or Other Entity (Please include corporate resolution.)
e _____________________________________________________________________________
Name of Corporation or Other Entity
-----------------------------------------------------------------------------
Type of Business (specify corporation, Tax Identification Number
partnership, estate, guardian, etc.)
2 _____________________________________________________________________________
Your Mailing Address (Please print.)
( )
- -------------------------------------------------------------------------------
Street Address Home Telephone Number
( )
- -------------------------------------------------------------------------------
City State ZIP Business Telephone Number
Residency [ ] U.S. (State _____) [ ] Other(2)________________________
Specify Country
(2)Call 1-800-638-8378 for additional forms.
3 _____________________________________________________________________________
Fund Selection(s) and Distribution Option(s) (Choose only one distribution
option per Fund; see Fund prospectus for minimum initial investment
requirements.)
[ ] By Mail--Make check payable to "State Street Research"
[ ] By Federal Funds Wire
<TABLE>
<CAPTION>
Class
Fund Name Designation(3) Amount Distribution Option
- ----------------------------------------------------------------------------------------------------------------------------
Dividends & Dividends in Dividends & Dividend
Capital Gains Cash; Capital Capital Gains Allocation
A B(4) Reinvested Gains Reinvested(5) in Cash Plan (DAP)6
---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
- ---------------- [ ] [ ] $------------ [ ] [ ] [ ] [ ]
- ---------------- [ ] [ ] $------------ [ ] [ ] [ ] [ ]
- ---------------- [ ] [ ] $------------ [ ] [ ] [ ] [ ]
- ---------------- [ ] [ ] $------------ [ ] [ ] [ ] [ ]
</TABLE>
(3)All Money Market Fund investments will purchase Class E shares. Be sure to
designate Class A or B shares for Money Market Fund DAP allocations.
(4)For purchase of Class B shares of more than $250,000, I hereby acknowledge
that I am aware of the reduced front-end sales charges available to me for
the purchase of Class A shares, and have chosen to purchase Class B shares. I
am aware that Class B shares have higher asset-based charges than Class A
shares for the first eight years.
(5)Does not apply to Money Market Fund.
(6)Dividend Allocation Plan: The Transfer Agent is authorized to invest all
dividends and distributions from ______________________
Fund Name
in the following Eligible Fund: _______________________________________________
Fund Name (Fund must Account Number
meet minimum investment (if existing
requirements) account)
Authorization of Dividend Allocation Plan constitutes an acknowledgment that the
shareholder has received the current prospectus of the Fund to be acquired.
Except for Money Market Fund Class E, DAP must be allocated to same class
designation.
<PAGE>
4 _____________________________________________________________________________
Reduced Sales Charges (Applies to Class A shares only)
[ ] Right of Accumulation (ROA): I apply for Right of Accumulation reduced sales
charges subject to the Transfer Agent's confirmation of the following holdings
of certain designated persons, e.g. family members, in the Eligible Funds:
- --------------------------------------------------------------------------------
Name of Account Account Number
- --------------------------------------------------------------------------------
Name of Account Account Number
[ ] Letter of Intent (LOI): Although I am not obligated to purchase and the
Funds are not obligated to sell, I intend to invest over a 13-month period
beginning ___________________, 19__ (purchase date not more than 90 days prior
to this letter) at least an aggregate of [ ] $100,000 [ ] $250,000 [ ] $500,000
[ ] $1,000,000 of Eligible Funds.
5 _____________________________________________________________________________
Optional Shareholder Services
Your Bank Account (You must complete this section if you request Section A, B, C
or D below.)
Type of Bank Account: [ ] Checking [ ] NOW or Money Market
- --------------------------------------------------------------------------------
Account Title (print exactly as it Bank Routing Number
appears on bank records)
- --------------------------------------------------------------------------------
Bank Account Number Bank Name
- --------------------------------------------------------------------------------
Bank Address City State ZIP
- --------------------------------------------------------------------------------
Depositor's Signature(s) (exactly as it Date
appears on bank records)
- --------------------------------------------------------------------------------
Depositor's Address City State ZIP
YOU MUST ATTACH A BLANK CHECK MARKED "VOID."
A _____________________________________________________________________________
Telephone Redemption and Exchange Privileges (Service available only for shares
held on deposit with Transfer Agent)
None of the Transfer Agent, the Fund, any other Eligible Funds, State Street
Research Shareholder Services, the Investment Manager or the Distributor will be
liable for any loss, injury, damage or expense as a result of acting upon, and
will not be responsible for the authenticity of, any telephone instructions. I
understand that all telephone calls are tape recorded. My liability shall be
subject to the use of reasonable procedures to confirm that instructions
communicated by telephone are genuine.
Telephone Exchange By Shareholder OR DEALER
The Transfer Agent may effect exchanges for my account according to telephone
instructions FROM ME OR MY DEALER as set forth in the Prospectus, and may
register the shares of the fund to be acquired exactly the same as my existing
account. Authorizing an exchange constitutes an acknowledgment that the
shareholder has received the current prospectus of the fund to be acquired. The
account will automatically have this privilege unless it is expressly declined
by providing your initials in the space below.
I DO NOT WANT THE TELEPHONE EXCHANGE PRIVILEGE. ____ (Initial here.)
Telephone Redemption By Shareholder Only
1. Proceeds to Shareholder's Address of Record. The Transfer Agent may effect
redemptions of shares from my account according to telephone instructions from
me, as set forth in the Prospectus, and send the proceeds to my address of
record. The account will automatically have this privilege unless it is
expressly declined by providing your initials in the space below.
I DO NOT WANT THE TELEPHONE REDEMPTION PRIVILEGE (to address of record).
____ (Initial here.)
2. Proceeds to Bank Designated by Shareholder. The Telephone Redemption
Privilege (to bank designated by shareholder) is not provided automatically;
please check the box below if you want this Privilege for the account.
ATTACH A BLANK CHECK MARKED "VOID" AND FILL OUT "YOUR BANK ACCOUNT" SECTION.
The Transfer Agent may effect redemptions of shares from my account according to
telephone instructions from me, as set forth in the Prospectus, and send the
proceeds to the bank named in "Your Bank Account." [ ] (Check here.)
<PAGE>
B _____________________________________________________________________________
Investamatic Check Program (YOU MUST ATTACH A BLANK CHECK MARKED "VOID.")
I hereby request and authorize the bank named in "Your Bank Account" section to
pay and charge checks drawn on, or debits against, my account initiated by and
payable to the order of the mutual fund transfer agent designated by the
Distributor. I agree that the named Bank's rights in respect to each such check
or debit shall be the same as if it were a check drawn on or debit against my
account authorized personally by me. This authority is to remain in effect until
revoked by me in writing, and until the named Bank actually receives such
notice, I agree that the named Bank shall be fully protected in honoring any
such check or debit authorization. I further agree that if any check or debit
authorization be dishonored, whether with or without cause and whether
intentionally or inadvertently, the named Bank shall be under no liability
whatsoever, unless the nonpayment is because of insufficient funds. I understand
that this Program may be revoked by the Transfer Agent or the Distributor
without prior notice if any check is not paid upon presentation, and that this
Program may be discontinued by the Distributor, the Transfer Agent or me upon
thirty (30) business days' notice prior to the due date of any deposit.
$
- --------------------------------------------------------------------------------
Fund Name Class Designation Amount ($50 minimum) Account Number
$
- --------------------------------------------------------------------------------
Fund Name Class Designation Amount ($50 minimum) Account Number
-----------------------------------------
Total Amount of Investment: $______ Account Registration (exactly as it
appears on Fund records)
[ ] Monthly Investment Date: [ ] 5th or [ ] 20th If you do not choose a date,
the 5th will be chosen
automatically.
[ ] Quarterly Investment Date: [ ] 5th or [ ] 20th
C _____________________________________________________________________________
Automatic Bank Connection (ABC) Not available for retirement plan accounts.
YOU MUST ATTACH A BLANK CHECK MARKED "VOID."
[ ] I authorize the Transfer Agent to liquidate $ _________ (minimum-$50) from
my fund account beginning the month of _________ to provide [ ] monthly,
[ ] quarterly, [ ] semiannual or [ ] annual payments. I would like the following
payment to be deposited directly into the bank account named in "Your Bank
Account" section. (Choose only one.)
[ ] Income dividends only
[ ] Income dividends and capital gains
[ ] Systematic Withdrawal Plan payments (see below)
- --------------------------------------------------------------------------------
Fund Name Class Designation
- --------------------------------------------------------------------------------
Fund Name Class Designation
I hereby authorize the Fund and the Transfer Agent to effect the deposit of the
above indicated items by initiating credit entries to my account at the bank
named in "Your Bank Account" section. The named Bank shall not be responsible
for the correctness of the items, and the Transfer Agent is authorized to
correct and adjust any incorrect items to my bank account. This authorization
may be terminated at any time by written notification to the Fund, the Transfer
Agent and the Bank.
D _____________________________________________________________________________
Systematic Withdrawal Plan (SWP) Not available for retirement plan accounts.
See the prospectus for minimum account size and maximum withdrawal amounts.
YOU MUST ATTACH A BLANK CHECK MARKED "VOID."
[ ] I authorize the Transfer Agent to liquidate shares in and withdraw cash
(minimum-$50) from my fund account beginning the month of _____________ to
provide [ ] monthly, [ ] quarterly, [ ] semiannual or [ ] annual Systematic
Withdrawal Plan (SWP) payments in the amount of $_____________ to [ ] me, [ ]
the bank named in "Your Bank Account" section, or [ ] the following payee.
(Note: If you authorize a SWP, you may not receive dividend or capital gain
distributions in cash.)
- --------------------------------------------------------------------------------
Name of Payee
- --------------------------------------------------------------------------------
Street Address City State ZIP
- --------------------------------------------------------------------------------
Fund Name Class Designation
- --------------------------------------------------------------------------------
Fund Name Class Designation
E _____________________________________________________________________________
Checkwriting Privilege
(Available for Class A shares and Money Market Fund Class E shares only)
[ ] I request the checkwriting feature and have completed the signature card
below.
- --------------------------------------------------------------------------------
Account Number (if existing account)
- --------------------------------------------------------------------------------
Account Number (if existing account)
Signature Card Complete and sign this card and return it with your application
and investment. Do not detach.
<TABLE>
<CAPTION>
Check applicable Fund(s) TO: State Street Bank and Trust Company ("Bank")
<S> <C> <C> <C> <C>
[ ] Money Market, Class E ----------------------------------------------------------------------------
[ ] High Income Name (please print)
[ ] Tax-Exempt
[ ] Government Income ----------------------------------------------------------------------------
[ ] NY Tax-Free Name (please print)
[ ] Strategic Income
----------------------------------------------------------------------------
Address City State ZIP
----------------------------------------------------------------------------
Signature (exactly as it appears in the Application, including any capacity)
----------------------------------------------------------------------------
Signature (exactly as it appears in the Application, including any capacity)
Indicate the number of signatures required----------------------------------
----------------------------------------------------------------------------
Tax Identification Number
</TABLE>
Corporate and other accounts must include appropriate resolution forms. In
signing this signature card, the signator(s) signifies his/her or their
agreement to be subject to the rules and regulations of State Street Bank and
Trust Company pertaining thereto, as amended from time to time, and subject to
the conditions printed on the reverse side.
<PAGE>
6 _____________________________________________________________________________
Your Signature (All registered shareholders must sign.)
The undersigned confirms that all the information, instructions and agreements
set forth hereon shall apply to the account, and if applicable, shall also apply
to any other fund account with shares acquired upon exchange of shares of the
Fund.
Under penalties of perjury, I certify that (1) the number shown on this form is
my correct taxpayer identification number (or I am waiting for a number to be
issued to me), and (2) I am not subject to backup withholding because (a) I am
exempt from backup withholding, or (b) I have not been notified by the Internal
Revenue Service that I am subject to backup withholding as a result of a failure
to report all interest or dividends, or (c) the IRS has notified me that I am no
longer subject to backup withholding.
Certification instructions: You must cross out item (2) above if you have been
notified by the IRS that you are currently subject to backup withholding because
of underreporting interest or dividends on your tax return.
1. Arbitration
(i) Arbitration is final and binding on the parties.
(ii) The parties are waiving their right to seek remedies in court, including
the right to jury trial.
(iii) Pre-arbitration discovery is generally more limited than and different
from court proceedings.
(iv) The arbitrators' award is not required to include factual findings or
legal reasoning and any party's right to appeal or to seek modification of
rulings by the arbitrators is strictly limited.
(v) The panel of arbitrators will typically include a minority of arbitrators
who were or are affiliated with the securities industry.
(vi) No person shall bring a putative or certified class action to arbitration,
nor seek to enforce any pre-dispute arbitration agreement against any
person who has initiated in court a putative class action; or who is a
member of a putative class who has not opted out of the class with respect
to any claims encompassed by the putative class action until (i) the class
certification is denied; or (ii) the class is decertified; or (iii) the
customer is excluded from the class by the court. Such forbearance to
enforce an agreement to arbitrate shall not constitute a waiver of any
rights under this agreement except to the extent stated herein.
2. MetLife Securities, Inc. (hereinafter "MSI") and the purchaser of the shares,
who is the signatory below (hereinafter the "Customer"), agree that any
controversy between MSI, its employees, directors, agents, officers or
affiliates and the Customer arising out of or relating to any transactions
between such parties shall be determined by arbitration. Any arbitration
pursuant to this agreement shall be conducted before, and under the rules of,
the National Association of Securities Dealers, Inc. Judgment upon the award of
the arbitrators may be entered in any federal or state court having
jurisdiction.
3. This agreement and any arbitration hereunder shall be governed and construed
in accordance with the laws of the State of New York, United States of America,
including New York procedural and substantive arbitration laws and rules,
without giving effect to conflicts of law principles. The predispute arbitration
agreement located immediately above is accepted and agreed to. I have also
received the current prospectus of the fund and have given a check in the amount
of $_______ on this, the ________ day of __________________ 19__
The Internal Revenue Service does not require your consent to any provision of
this document other than the certification required to avoid backup withholding.
- ------------------------------- ----------------------------------------
Customer Signature (exactly as Registered Representative's Signature
your name appears in Section 1)
/s/Ralph F. Verni
- ------------------------------- ----------------------------------------
Customer Signature MetLife Securities, Inc.;
by: Ralph F. Verni,
Chairman of the Board
- -------------------------------
Capacity
7 _____________________________________________________________________________
Dealer Information and Signature Guarantee (For Dealer use only)
The Dealer agrees to all applicable provisions in this application and in the
Prospectus, guarantees the signature and legal capacity of the shareholder, and
represents that it has provided a current Prospectus to the Applicant and that
the application is properly executed by a person authorized by the Dealer to
guarantee signatures. The Dealer warrants that this application is completed in
accordance with the shareholder's instructions and information and agrees to
indemnify the Fund, any other Eligible Funds, the Investment Manager, the
Distributor, State Street Research Shareholder Services and the Transfer Agent
for any loss or liability from acting or relying upon such instructions and
information.
Signature(s) Guaranteed By
MetLife Securities, Inc.
- ------------------------------- --------------------------------------------
Dealer Name Branch Office Number
P.O. Box 30421
- ------------------------------- --------------------------------------------
Address of Home Office Address of Branch Office Servicing Account
Tampa, FL 33630
- ------------------------------- --------------------------------------------
City State ZIP City State ZIP
- ------------------------------- --------------------------------------------
Authorized Signature of Registered Representative's
Dealer - Tampa, FL Name and Number
- -------------------------------
Signature Guarantee
The payment of monies is authorized by the signature(s) on the reverse side.
If the shareholder's account with the Fund is joint, all checks drawn upon this
account must include the signatures of all persons named in the account, unless
the persons signing this card have indicated on the reverse side of this card
that the Bank is authorized to accept any one signature. Each person guarantees
the genuineness of the other's signature. Checks may not be for less than $500
or such other minimum or maximum amounts as may from time to time be established
by the Fund.
The Bank is hereby appointed agent by the person(s) signing this card (the
"Depositor(s)") and, as agent, is authorized and directed to present checks
drawn on this checking account to the Fund or its redemption agent as requests
to redeem shares of the Fund registered in the name of the Depositor(s) in the
amounts of such checks and to deposit the proceeds of such redemptions in this
checking account. The Bank shall be liable only for its own negligence.
Depositor(s) hereby authorize(s) the Fund or its redemption agent to honor
redemption requests presented in the above manner by the Bank. The Fund and its
redemption agent will not be liable for any loss, expense or cost arising out of
check redemptions. If shares of the Fund are purchased by check, redemption
proceeds will ordinarily be withheld until the Fund is reasonably assured that
payment has been collected on the check. The Bank has the right not to honor
checks in amounts exceeding the value of the depositor(s) shareholder account at
the time the check is presented for payment.
The Bank reserves the right to change, modify or terminate this checking account
at any time upon notification mailed to the address of record of the
Depositor(s).
The terms and conditions of the Distributor's currently effective Selected
Dealer Agreement are included by reference in this section. The Dealer
represents that it has a currently effective Selected Dealer Agreement with the
Distributor authorizing the Dealer to sell shares of the Fund and the Eligible
Funds, and that it may lawfully sell shares of the designated Fund(s) in the
state designated as the Applicant's address of record.
- -----------------------------------
DO NOT COMPLETE
MSI - Tampa
Dealer #____________ ST _________
Rep #______________________________
Rep Name___________________________
- -----------------------------------
CONTROL NUMBER: 3659-970115(0298)SSR-LD
ML-544E-197
<PAGE>
MetLife Securities, Inc. Customer Profile
1
- --------------------------------------------------------------------------------
Client's Name (or minor if U.G.M.A.) Age Social Security Number
- --------------------------------------------------------------------------------
Joint Tenant Name (if any, or Age Social Security Number
custodian if U.G.M.A.)
Occupation______________________________________ State of Residence_________
Name/Address of Employer________________________________________________________
________________________________________________________
Is client an associated person of a broker/dealer? [ ] Yes [ ] No
If yes, furnish name and address________________________________________________
2 Client's Estimated Annual Income (Not including income from this investment)
(N/A for UGMA, Trust, Partnership or Corp.)
[ ] $0-9,999 [ ] $20-39,999 [ ] $60-79,999 [ ] $100,000-199,999
[ ] $10-19,999 [ ] $40-59,999 [ ] $80-99,999 [ ] $200,000+
3 Savings and Investments (Exclusive of personal residence, home furnishings,
personal automobiles, and the amount of this investment) (N/A for UGMA, Trust,
Partnership or Corp.)
[ ] $0-9,999 [ ] $20-39,999 [ ] $60-79,999 [ ] $100,000-199,999
[ ] $400,000+ [ ] $10-19,999 [ ] $40-59,999 [ ] $80-99,999
[ ] $200,000-399,999
4 Net Worth (Assets minus liabilities exclusive of assets and liabilities
relating to personal residence, home furnishings and automobiles) (N/A for UGMA,
Trust, Partnership or Corp.)
[ ] $0-9,999 [ ] $20-39,999 [ ] $60-79,999 [ ] $100,000-199,999 [ ] $400,000+
[ ] $10-19,999 [ ] $40-59,999 [ ] $80-99,999 [ ] $200,000-399,999
5 Main Investment Objective (select one)
[ ] Aggressive Growth [ ] Growth & Income [ ] Tax Advantages
[ ] Growth [ ] Current Income
Secondary Investment Objective (optional)
[ ] Aggressive Growth [ ] Growth & Income [ ] Tax Advantages
[ ] Growth [ ] Current Income
6 Source of Funds for This Investment
[ ] CD (Certificate of Deposit) [ ] Savings [ ] Money Market Fund
[ ] Surrender Life/Annuity Contract [ ] Rollover/Transfer of Pension Assets
[ ] Another MetLife Policy, Account or Contract [ ] Discretionary Income
[ ] Loan [ ] Other_______________________
7 This account was: [ ] Solicited [ ] Unsolicited
8 Tax Status of These Funds: [ ] Qualified [ ] Non-Qualified
9 Prior Investment Experience: (complete all that apply) Stocks yrs.
Bonds yrs. Mutual Funds yrs. Margin yrs.
Limited Partnerships yrs. Options yrs. Other____ None
Investor Receipt and Arbitration Agreement
1. Arbitration
(i) Arbitration is final and binding on the parties.
(ii) The parties are waiving their right to seek remedies in court, including
the right to jury trial.
(iii) Pre-arbitration discovery is generally more limited than and different
from court proceedings.
(iv) The arbitrators' award is not required to include factual findings or
legal reasoning and any party's right to appeal or to seek modification of
rulings by the arbitrators is strictly limited.
(v) The panel of arbitrators will typically include a minority of arbitrators
who were or are affiliated with the securities industry.
(vi) No person shall bring a putative or certified class action to arbitration,
nor seek to enforce any pre-dispute arbitration agreement against any
person who has initiated in court a putative class action; or who is a
member of a putative class who has not opted out of the class with respect
to any claims encompassed by the putative class action until: (i) the
class certification is denied; or (ii) the class is decertified; or (iii)
the customer is excluded from the class by the court. Such forbearance to
enforce an agreement to arbitrate shall not constitute a waiver of any
rights under this agreement except to the extent stated herein.
2. MetLife Securities, Inc. (hereinafter "MSI") and the purchaser of the shares,
who is the signatory below (hereinafter the "Customer"), agree that any
controversy between MSI, its employees, directors, agents, officers or
affiliates and the Customer arising out of or relating to any transactions
between such parties shall be determined by arbitration. Any arbitration
pursuant to this agreement shall be conducted before, and under the rules of,
the National Association of Securities Dealers, Inc. Judgment upon the award of
the arbitrators may be entered in any federal or state court having
jurisdiction.
3. This agreement and any arbitration hereunder shall be governed and construed
in accordance with the laws of the State of New York, United States of America,
including New York procedural and substantive arbitration laws and rules,
without giving effect to conflicts of law principles.
The predispute arbitration agreement located immediately above is accepted and
agreed to. I have also received the current prospectus of the fund and have
given a check in the amount of $_______________ on this, the ____________ day of
______________________ 19__
- ----------------------------------- ------------------------------------------
Customer Signature (exactly as Registered Representative's Signature your name
appears in Section 1)
/s/ Ralph F. Verni
- ----------------------------------- ------------------------------------------
Customer Signature MetLife Securities, Inc.;
by: Ralph F. Verni, Chairman of the Board
- ----------------------------------- ------------------------------------------
Capacity
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<NUMBER> 022
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<SERIES>
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<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
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<OVERDISTRIBUTION-GAINS> (4,469,908)
<ACCUM-APPREC-OR-DEPREC> 13,816,268
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<DIVIDEND-INCOME> 0
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<OTHER-INCOME> 0
<EXPENSES-NET> 3,500,887
<NET-INVESTMENT-INCOME> 14,218,877
<REALIZED-GAINS-CURRENT> (1,834,226)
<APPREC-INCREASE-CURRENT> (4,864,350)
<NET-CHANGE-FROM-OPS> 7,520,301
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (2,112,558)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,380,510
<NUMBER-OF-SHARES-REDEEMED> (1,461,750)
<SHARES-REINVESTED> 183,701
<NET-CHANGE-IN-ASSETS> (45,030,894)
<ACCUMULATED-NII-PRIOR> 286,673
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> (2,635,682)
<GROSS-ADVISORY-FEES> 1,665,478
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 3,500,887
<AVERAGE-NET-ASSETS> 302,814,182
<PER-SHARE-NAV-BEGIN> 8.26
<PER-SHARE-NII> 0.32
<PER-SHARE-GAIN-APPREC> (0.15)
<PER-SHARE-DIVIDEND> (0.33)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 8.10
<EXPENSE-RATIO> 1.79
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
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<NUMBER> 013
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<S> <C>
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<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 273,881,058
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<OTHER-ITEMS-LIABILITIES> 969,869
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