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As filed with the Securities and Exchange Commission on March 3, 1999
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. 22 [X]
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [ ]
Amendment No. 23 [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 ___________ pursuant to paragraph (b).
[ ] 60 days after filing pursuant to paragraph (a)(1).
[X] On May 1, 1999 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.
------------------------------------------------
<PAGE>
[STATE STREET RESEARCH Logo]
TAX-EXEMPT FUND
A municipal bond fund
seeking income free
from federal taxes.
Prospectus
May 1, 1999
[sidebar text]
This prospectus has information you should know before you invest. Please read
it carefully and keep it with your investment records.
Although these securities have been registered with the Securities and Exchange
Commission, the SEC has not approved or disapproved them and does not guarantee
the accuracy or adequacy of the information in this prospectus. Anyone who
informs you otherwise is committing a federal crime.
[end sidebar text]
[graphic of clock face]
<PAGE>
CONTENTS
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
1 THE FUND
----------------
1 Goal and Strategies
3 Principal Risks
4 Volatility and Performance
6 Investor Expenses
8 Investment Management
9 YOUR INVESTMENT
-----------------------
9 Opening an Account
9 Choosing a Share Class
10 Sales Charges
13 Dealer Compensation
14 Buying and Selling Shares
18 Account Policies
20 Distributions and Taxes
21 Investor Services
22 OTHER INFORMATION
-------------------------
22 Other Securities and Risks
24 Financial Highlights
26 Board of Trustees
Back Cover For Additional Information
</TABLE>
<PAGE>
THE FUND 1
- --------------------------------------------------------------------------------
[chess piece graphic] GOAL AND STRATEGIES
FUNDAMENTAL GOAL The fund seeks a high level of interest income exempt from
federal income tax.
PRINCIPAL STRATEGIES Under normal market conditions, the fund invests at least
80% of net assets in securities whose interest income is free from federal
income tax and that are investment grade at the time the fund buys them. These
securities are typically bonds issued by various U.S. states, counties, cities,
towns, territories and public authorities. The fund may invest up to 20% of net
assets in other securities, including junk bonds of similar issuers (that is,
bonds that are in or below the Standard & Poor's BB or Moody's Ba major rating
categories).
When bonds are rated by one or more independent rating agencies, the fund uses
these ratings to determine bond quality. In cases where a bond is rated in
conflicting categories by different rating agencies, the fund may choose to
follow the higher rating. If a bond is unrated, the fund may assign it to a
given category based on its own credit research. The fund may invest up to 25%
of net assets in unrated bonds.
In managing its portfolio, the fund focuses on security selection, using
proprietary research to identify
[magnifying glass graphic] WHO MAY WANT TO INVEST
State Street Research Tax-Exempt Fund is designed for investors who seek one or
more of the following:
* high current income that is exempt from federal income tax
* a diversified portfolio of municipal securities
* a fund to complement a portfolio of more aggressive investments
The fund is not appropriate for investors who:
* want an investment for a tax-advantaged account such as an IRA or 401(k)
* do not pay U.S. income taxes
* want to avoid even moderate volatility or possible losses
* are seeking high growth or maximum income
* are investing emergency reserve money
<PAGE>
2 THE FUND continued
- --------------------------------------------------------------------------------
those individual bonds that offer higher yields or higher potential total return
than others that appear to be of comparable credit quality. The fund may invest
in securities of any maturity, and may invest in certain securities, such as
municipal lease obligations and industrial revenue bonds, that may have
different risks than ordinary municipal bonds.
The fund may adjust the composition of its portfolio as market conditions and
economic outlooks change. For more information about the fund's investments and
practices, see page 22.
[magnifying glass graphic] MUNICIPAL BONDS
AND TAXES
The municipal bond category is defined as including securities issued by
municipalities as well as states and various agencies and authorities.
Some of these bonds are backed by the issuer's authority to levy taxes and are
considered an obligation of the issuer (hence the name "general obligation
bonds"). Other bonds are issued to raise money for a particular project -- for
example, a water system or a toll road -- and are backed by revenues earned by
that project ("revenue bonds"). So-called industrial revenue bonds are typically
issued by municipal issuers on behalf of private companies. Because revenue
bonds are backed only by income from a certain source and may not be an
obligation of the issuer itself, they may be less creditworthy than general
obligation bonds -- a fact that is usually reflected in their ratings.
The federal government allows the interest from municipal bonds to be tax-exempt
in order to make it easier for municipalities to finance public projects.
Investors in municipal bonds thus play a role in helping to finance roads,
hospitals and other public facilities.
<PAGE>
3
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[traffic sign graphic] PRINCIPAL RISKS
Because the fund invests primarily in bonds and other fixed income securities,
its major risks are those of bond investing, including the tendency of prices to
fall when interest rates rise. Such a fall would lower the fund's share price
and the value of your investment.
Bond prices in general tend to move in the opposite direction from interest
rates, for the reason that new bonds issued after a rise in rates will offer
higher yields to investors; the only way an existing bond with a lower yield can
appear attractive to investors is by selling at a lower price. (This principal
works in reverse as well: a fall in interest rates will tend to cause a rise in
bond prices).
The fund's performance may be affected by political and economic conditions at
the state, regional or federal level. These may include budgetary problems,
declines in the tax base and other factors that may cause rating agencies to
downgrade the credit ratings on certain issues. Actual or proposed changes in
tax rates, regulations or federal programs could also affect your net return on
investment.
The issuer of any bond, particularly a junk bond, could default on principal or
interest payments, which would cause a loss for the fund. Lower-rated bonds also
tend to be more sensitive to economic changes and may increase the volatility of
the fund's share price.
The success of the fund's investment strategy depends largely on the portfolio
manager's skill in assessing the direction and impact of interest rate movements
and the creditworthiness of the securities the fund buys.
The fund's shares will rise and fall in value and there is a risk that you could
lose money by investing in the fund. Also, the fund cannot be certain that it
will achieve its goal. Finally, fund shares are not bank deposits and are not
guaranteed, endorsed or insured by any financial institution, government entity
or the FDIC.
Information on other securities and risks appears on page 22.
A "snapshot" of the fund's investments may be found in the current annual or
semiannual report (see back cover).
<PAGE>
4 VOLATILITY AND PERFORMANCE
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
[bar chart graphic] Years ended December 31
----------------------------------------------------------------------------
YEAR-BY-YEAR TOTAL RETURN (CLASS A) 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
9.63% 4.84% 11.81% 9.34% 12.12% (6.90)% 16.58% 2.93% 10.17% 5.79%
</TABLE>
[graphic of up arrow] BEST QUARTER: first quarter 1995, up 6.08%
[graphic of down arrow] WORST QUARTER: first quarter 1994, down 6.02%
Return from 1/1/99 - 3/31/99 (not annualized):
<TABLE>
<CAPTION>
As of December 31, 1998
---------------------------------
AVERAGE ANNUAL TOTAL RETURN 1 Year 5 Years 10 Years
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Class A (%) 1.03 4.45 6.95
Class B(1) (introduced January 1, 1999) -- -- --
Class B (%) 0.01 4.30 7.00
Class C (%) 4.14 4.64 7.00
Class S (%) 6.07 5.69 7.57
Lehman Brothers Municipal Bond Index (%) 6.48 6.22 7.94
Lipper General Municipal Debt Funds Index (%) 5.64 5.70 7.75
</TABLE>
<PAGE>
5
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[sidebar text]
[magnifying glass graphic] UNDERSTANDING
VOLATILITY AND
PERFORMANCE
The chart and table on the opposite page are designed to show two aspects of the
fund's track record:
* YEAR-BY-YEAR TOTAL RETURN shows how volatile the fund has been: how much the
difference has been, historically, between its best years and worst years. In
general, funds with higher average annual total returns will also have higher
volatility. The graph includes the effects of fund expenses, but not sales
charges. If sales charges had been included, returns would have been less
than shown.
* AVERAGE ANNUAL TOTAL RETURN is a measure of the fund's performance over time.
It is determined by taking the fund's performance over a given period and
expressing it as an average annual rate. Average annual total return includes
the effects of fund expenses and maximum sales charges for each class, and
assumes that you sold your shares at the end of the period.
Also included are two independent measures of performance. The Lehman Brothers
Municipal Bond Index is an unmanaged index of 8,000 fixed-rate investment-grade
municipal bonds, all from issues larger than $50 million and with maturities
greater than two years. The Lipper General Municipal Debt Funds Index shows the
performance of a category of mutual funds with similar goals. The Lipper index,
which is also unmanaged, shows you how well the fund has done compared to
competing funds.
While the fund does not seek to match the returns or the volatility of any
index, these indices can be used as rough guides when gauging the return of this
and other investments. When making comparisons, keep in mind that none of the
indices includes the effects of sales charges. Also, even if your bond portfolio
were identical to the Lehman Brothers Municipal Bond Index, your returns would
always be lower, because this index does not include brokerage and
administrative expenses.
In both the chart and the table, the returns shown for the fund include
performance from before the creation of share classes in 1993. If the returns
for Class B and Class C from before 1993 had reflected their current
distribution/service (12b-1) fees (as described on page 6), these returns would
have been lower.
Keep in mind that past performance is no guarantee of future results.
[end of sidebar text]
<PAGE>
6 INVESTOR EXPENSES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class descriptions begin on page 9
----------------------------------------------------------------
SHAREHOLDER FEES (% of offering price) Class A Class B(1) Class B Class C Class S
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
MAXIMUM FRONT-END SALES CHARGE (LOAD) 4.50 0.00 0.00 0.00 0.00
MAXIMUM DEFERRED SALES CHARGE (LOAD) 0.00(a) 5.00 5.00 1.00 0.00
ANNUAL FUND EXPENSES (% of average net assets) Class A Class B(1) Class B Class C Class S
- ----------------------------------------------------------------------------------------------------------------
MANAGEMENT FEE 0.55 0.55 0.55 0.55 0.55
DISTRIBUTION/SERVICE (12B-1) FEES 0.25 1.00 1.00 1.00 0.00
OTHER EXPENSES 0.23 0.23 0.23 0.23 0.23
---- ---- ---- ---- ----
TOTAL ANNUAL FUND OPERATING EXPENSES 1.03 1.78 1.78 1.78 0.78
==== ==== ==== ==== ====
Example Year Class A Class B(1) Class B Class C Class S
- ----------------------------------------------------------------------------------------------------------------
1 $550 $681/$181 $681/$181 $281/$181 $80
3 $763 $860/$560 $860/$560 $560/$560 $249
5 $993 $1,164/$964 $1,164/$964 $964/$964 $433
10 $1,653 $1,897 $1,897 $2,095 $966
</TABLE>
[sidebar text]
[footnote text]
(a) Except for investments of $1 million or more; see page 10.
[end of footnote text]
[end of sidebar text]
<PAGE>
7
----
[sidebar text]
[magnifying glass graphic] UNDERSTANDING
INVESTOR EXPENSES
The information of the opposite page is designed to give you an idea of what you
should expect to pay in expenses as an investor in the fund.
* SHAREHOLDER FEES are costs that are charged to you directly. These fees are
not charged on reinvestments or exchanges.
* ANNUAL FUND EXPENSES are deducted from the fund's assets every year, and are
thus paid indirectly by all fund investors.
* The EXAMPLE is designed to allow you to compare the costs of this fund with
those of other funds. It assumes that you invested $10,000 over the years
indicated, reinvested all distributions, earned a hypothetical 5% annual
return and paid the maximum applicable sales charges. For Class B(1) and
Class B shares, it also assumes the automatic conversion to Class A after
eight years.
Where two numbers are shown separated by a slash, the first one assumes you sold
all your shares at the end of the period, while the second assumes you stayed in
the fund. Where there is only one number, the costs would be the same either
way.
Investors should keep in mind that the example is for comparison purposes only.
The fund's actual performance and expenses may be higher or lower.
[end of sidebar text]
<PAGE>
8 THE FUND continued
- --------------------------------------------------------------------------------
[the thinker graphic] INVESTMENT MANAGEMENT
The fund's investment manager is State Street Research & Management Company, One
Financial Center, Boston, Massachusetts 02111. The firm traces its heritage back
to 1924 and the founding of one of America's first mutual funds. Today the firm
has more than $__ billion in assets under management (as of March 31, 1999),
including $__ billion in mutual funds.
The investment manager is responsible for the fund's investment and business
activities, and receives the management fee as compensation (0.55% of fund
assets, annually). The investment manager is a subsidiary of Metropolitan Life
Insurance Company.
Paul J. Clifford, Jr. has been responsible for the fund's day-to-day portfolio
management since January 1996. A vice president, he joined the firm in 1989 and
has worked as an investment professional since 1986.
<PAGE>
YOUR INVESTMENT 9
- --------------------------------------------------------------------------------
[key graphic] OPENING AN ACCOUNT
If you are opening an account through a financial professional, he or she can
assist you with all phases of your investment.
If you are investing through a special program, follow the instructions in your
program materials.
To open an account without the help of a financial professional, please use the
instructions on these pages.
[checklist graphic] CHOOSING A SHARE CLASS
The fund generally offers four share classes, each with its own sales charge and
expense structure: Class A, Class B(1), Class C and Class S. The fund also
offers Class B shares, but only to current Class B shareholders through
reinvestment of dividends and distributions or through exchanges from existing
Class B accounts of State Street Research funds.
If you are investing a substantial amount and plan to hold your shares for a
long period, Class A shares may make the most sense for you. If you are
investing a lesser amount, you may want to consider Class B(1) shares (if
investing for at least six years) or Class C shares (if investing for less than
six years). If you are investing through a special program, such as a large
employer-sponsored retirement plan or certain programs available through
brokers, you may be eligible to purchase Class S shares.
Because all future investments in your account will be made in the share class
you designate when opening the account, you should make your decision carefully.
Your financial professional can help you choose the share class that makes the
most sense for you.
<PAGE>
10 YOUR INVESTMENT continued
- --------------------------------------------------------------------------------
CLASS A -- FRONT LOAD
* Initial sales charge of 4.5% or less
* Lower sales charges for larger investments; see sales charge schedule at
right
* Lower annual expenses than Class B(1) or C shares because of lower
distribution/service (12b-1) fee of 0.25%
CLASS B(1) -- BACK LOAD
* No initial sales charge
* Deferred sales charge of 5% or less on shares you sell within six years
* Annual distribution/service (12b-1) fee of 1.00%
* Automatic conversion to Class A shares after eight years, reducing future
annual expenses
CLASS B -- BACK LOAD
* Available only to current shareholders. See page 11 for details.
CLASS C -- LEVEL LOAD
* No initial sales charge
* Deferred sales charge of 1%, paid if you sell shares within one year of
purchase
* Lower deferred sales charge than Class B(1) shares
* Annual distribution/service (12b-1) fee of 1.00%
* No conversion to Class A shares after eight years, so annual expenses do not
decrease
CLASS S -- SPECIAL PROGRAMS
* Available only through certain advisory accounts of the investment manager
and other special programs, including broker programs with record-keeping and
other services; these programs usually involve special conditions and
separate fees. Consult your financial professional or your program materials
* No sales charges of any kind
* No distribution/service (12b-1) fees; annual expenses are lower than other
share classes
SALES CHARGES
CLASS A -- FRONT LOAD
<TABLE>
<CAPTION>
WHEN YOU INVEST THIS % IS WHICH EQUALS
THIS AMOUNT DEDUCTED THIS % OF
FOR SALES YOUR NET
CHARGES INVESTMENT
- -----------------------------------------------------
<S> <C> <C>
Up to $100,000 4.50 4.71
$100,000 to $250,000 3.50 3.63
$250,000 to $500,000 2.50 2.56
$500,000 to $1 million 2.00 2.04
$1 million or more see below
</TABLE>
With Class A shares, you pay a sales charge only when you buy shares.
If you are investing $1 million or more (either as a lump sum or through any of
the methods described on the application), you can purchase Class A shares
without any sales charge. However, you may be charged a "contingent deferred
sales charge" (CDSC) of 1% if you sell any shares within one year of purchasing
them. See "Other
<PAGE>
11
----
CDSC Policies" on page 12.
Class A shares are also offered with low or no sales charges through various
wrap-fee programs and other sponsored arrangements (consult your financial
professional or your program materials).
CLASS B(1) -- BACK LOAD
<TABLE>
<CAPTION>
THIS % OF NET ASSET VALUE
WHEN YOU SELL SHARES AT THE TIME OF PURCHASE (OR
IN THIS YEAR AFTER YOU OF SALE, IF LOWER) IS DEDUCT-
BOUGHT THEM ED FROM YOUR PROCEEDS
- -------------------------------------------------------
<S> <C>
First year 5.00
Second year 4.00
Third year 3.00
Fourth year 3.00
Fifth year 2.00
Sixth 1.00
Seventh or Eighth year None
</TABLE>
With Class B(1) shares, you pay no sales charge when you invest, but you are
charged a "contingent deferred sales charge" (CDSC) when you sell shares you
have held for six years or less, as described in the table above. See "Other
CDSC Policies" on page 12.
Class B(1) shares automatically convert to Class A shares after eight years,
lowering your annual expenses from that time on.
CLASS B -- BACK LOAD
Class B shares are available only to current shareholders through
reinvestment of dividends and distributions or through exchanges from existing
Class B accounts of the State Street Research funds. Other investments made by
current Class B shareholders will be in Class B(1) shares.
With Class B shares, you are charged a "contingent deferred sales charge" (CDSC)
when you sell shares you have held for five years or less. The CDSC is a
percentage of net asset value at the time of purchase (or of sale, if lower) and
is deducted from your proceeds. When you sell shares in the first year after you
bought them, the CDSC is 5.00%; second year, 4.00%; third year, 3.00%; fourth
year, 3.00%; fifth year, 2.00%; sixth year or later, none. See "Other CDSC
Policies" on page 12.
Class B shares automatically convert to Class A shares after eight years.
CLASS C -- LEVEL LOAD
<TABLE>
<CAPTION>
THIS % OF NET ASSET VALUE
WHEN YOU SELL SHARES AT THE TIME OF PURCHASE (OR
IN THIS YEAR AFTER YOU OF SALE, IF LOWER) IS DEDUCT-
BOUGHT THEM ED FROM YOUR PROCEEDS
- ---------------------------------------------------------
<S> <C>
First year 1.00
Second year or later None
</TABLE>
With Class C shares, you pay no sales charge when you invest, but you are
charged a "contingent deferred sales charge" (CDSC) when you sell shares you
have held for one year or less, as described in the table above. See "Other CDSC
Policies" on page 12.
<PAGE>
12 YOUR INVESTMENT continued
- --------------------------------------------------------------------------------
Class C shares currently have the same annual expenses as Class B(1) shares.
CLASS S -- SPECIAL PROGRAMS
Class S shares have no sales charges.
OTHER CDSC POLICIES
The CDSC will be based on the net asset value of the shares at the time of
purchase (or sale, if lower). Any shares acquired through reinvestment are not
subject to the CDSC. There is no CDSC on exchanges into other State Street
Research funds, and the date of your initial investment will continue to be used
as the basis for CDSC calculations when you exchange. To ensure that you pay the
lowest CDSC possible, the fund will always use the shares with the lowest CDSC
to fill your sell requests.
The CDSC is waived on shares sold for participant initiated distributions from
State Street Research prototype retirement plans. In other cases, the CDSC is
waived on shares sold for mandatory retirement distributions or for
distributions because of disability or death. Consult your financial
professional or the State Street Research Service Center for more information.
[sidebar text]
[magnifying glass graphic] UNDERSTANDING
DISTRIBUTION/SERVICE FEES
As noted in the descriptions on pages 10 to 12 all share classes except Class S
have an annual distribution/service fee, also called a 12b-1 fee.
Under its current 12b-1 plans, the fund may pay certain distribution and service
fees for these classes out of fund assets. Because 12b-1 fees are an ongoing
expense, they will increase the cost of your investment and, over time, could
potentially cost you more than if you had paid other types of sales charges. For
that reason, you should consider the effects of 12b-1 fees as well as sales
loads when choosing a share class.
Some of the 12b-1 fee is used to compensate those financial professionals who
sell fund shares and provide ongoing service to shareholders. The table on the
next page shows how these professionals' compensation is calculated.
The fund may continue to pay 12b-1 fees even if the fund is subsequently closed
to new investors.
[end of sidebar text]
<PAGE>
13
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[graphic of a check] DEALER COMPENSATION
Financial professionals who sell shares of State Street Research funds and
perform services for fund investors may receive sales commissions and annual
fees. These are paid by the fund's distributor, using money from sales charges,
distribution/service (12b-1) fees and its other resources.
Brokers and agents may charge a transaction fee on orders of fund shares placed
directly through them. The distributor may pay its affiliate, MetLife
Securities, Inc. additional compensation of up to 0.25% of certain sales or
assets.
<TABLE>
<CAPTION>
MAXIMUM DEALER COMPENSATION (%) Class A Class B(1) Class B Class C Class S
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Commission see below 4.00 4.00 1.00 0.00
Investments up to $100,000 4.00 -- -- -- --
$100,000 to $250,000 3.00 -- -- -- --
$250,000 to $500,000 2.00 -- -- -- --
$500,000 to $1 million 1.75 -- -- -- --
First $1 to $3 million 1.00(a) -- -- -- --
Next $2 million 0.75(a) -- -- -- --
Next $2 million 0.50(a) -- -- -- --
Next $1 and above 0.25(a) -- -- -- --
Annual fee 0.25 0.25 0.25 1.00 0.00
</TABLE>
BROKERS FOR PORTFOLIO TRADES
When placing trades for the fund's portfolio, State Street Research chooses
brokers that provide the best execution (a term defined by service as well as
price), but may also consider a broker's sales of fund shares.
[sidebar text]
[begin footnote text]
(a) If your broker declines this commission, the one-year CDSC on your
investment is waived.
[end of footnote text]
[end of sidebar text]
<PAGE>
14 BUYING AND SELLING SHARES
- --------------------------------------------------------------------------------
[cash register graphic] POLICIES FOR
BUYING SHARES
Once you have chosen a share class, the next step is to determine the amount you
want to invest.
MINIMUM INITIAL INVESTMENTS:
* $1,000 for accounts that use the Investamatic program
* $2,500 for all other accounts
MINIMUM ADDITIONAL INVESTMENTS:
* $50 for any account
Complete the enclosed application. You can avoid future inconvenience by signing
up now for any services you might later use.
TIMING OF REQUESTS All requests received in good order by State Street Research
before the close of regular trading on the New York Stock Exchange (usually 4:00
p.m. eastern time) will be executed the same day, at that day's closing share
price. Orders received thereafter will be executed the following day, at that
day's closing share price.
WIRE TRANSACTIONS Funds may be wired between 8:00 a.m. and 4:00 p.m. eastern
time. To make a same-day wire investment, please notify State Street Research by
12:00 noon of your intention to wire funds, and make sure your wire arrives by
4:00 p.m. If the New York Stock Exchange closes before 4:00 p.m. eastern time,
you may be unable to make a same-day wire investment. Your bank may charge a fee
for wiring money.
<PAGE>
INSTRUCTIONS FOR BUYING SHARES 15
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
To Open an Account To Add to an Account
<S> <C> <C>
[graphic of briefcase] Through a Consult your financial professional or your Consult your financial professional or your
Professional program materials. program materials.
or Program
By Mail [graphic of Make your check payable to "State Street Fill out an investment slip or indicate the
mailbox] Research Funds." Forward the check and your fund name and account number on your check.
application to State Street Research. Make your check payable to "State Street
Research Funds." Forward the check and slip to
State Street Research.
[graphic of By Federal Call to obtain an account number and Call State Street Research to obtain a control
Federal Building] Funds Wire forward your application to State Street number. Instruct your bank to wire funds to:
Research. Wire funds using the instructions * State Street Bank and Trust Company,
at right. Boston, MA
* ABA: 011000028
* BNF: fund name and share class you want to
buy
* AC: 99029761
* OBI: your name and your account number
* Control: the number given to you by State
Street Research
By Electronic [graphic Verify that your bank is a member of the Call State Street Research to verify that the
Funds Transfer of electric ACH (Automated Clearing House) system. necessary bank information is on file for your
(ACH) plug] Forward your application to State Street account. If it is, you may request a transfer
Research. Please be sure to include the with the same phone call. If not, please ask
appropriate bank information. Call State State Street Research to provide you with an
Street Research to request a purchase. EZ Trader application.
[graphic of By Investamatic Forward your application, with all Call State Street Research to verify that
calendar] appropriate sections completed, to State Investamatic is in place on your account, or
Street Research, along with a check for to request a form to add it. Investments
your initial investment payable to are automatic once Investamatic is in place.
"State Street Research Funds."
By Exchange [graphic of Call State Street Research or visit our Call State Street Research or visit our
Exchange] Web site. Web site.
State Street Research Service Center PO Box 8408, Boston, MA 02266-8408 Internet www.ssrfunds.com
Call toll-free: 1-800-562-0032 (business days 8:00 a.m. - 6:00 p.m., eastern time)
</TABLE>
<PAGE>
16 YOUR INVESTMENT continued
- --------------------------------------------------------------------------------
[graphic of receipt] POLICIES FOR
SELLING SHARES
CIRCUMSTANCES THAT REQUIRE WRITTEN REQUESTS Please submit instructions in
writing when any of the following apply:
* you are selling more than $100,000 worth of shares
* the name or address on the account has changed within the last 30 days
* you want the proceeds to go to a name or address not on the account
registration
* you are transferring shares to an account with a different registration or
share class
* you are selling shares held in a corporate or fiduciary account; for these
accounts, additional documents are required:
corporate accounts: certified copy of a corporate resolution
fiduciary accounts: copy of power of attorney or other governing document
To protect your account against fraud, all signatures on these documents must be
guaranteed. You may obtain a signature guarantee at most banks and securities
dealers. A notary public cannot provide a signature guarantee.
INCOMPLETE SELL REQUESTS State Street Research will attempt to notify you
promptly if any information necessary to process your request is missing.
TIMING OF REQUESTS All requests received in good order by State Street Research
before the close of regular trading on the New York Stock Exchange (usually 4:00
p.m. eastern time) will be executed the same day, at that day's closing share
price. Requests received thereafter will be executed the following day, at that
day's closing share price.
WIRE TRANSACTIONS Proceeds sent by federal funds wire must total at least
$5,000. A fee of $7.50 will be deducted from all proceeds sent by wire, and your
bank may charge an additional fee to receive wired funds.
SELLING RECENTLY PURCHASED SHARES If you sell shares before the check or
electronic funds transfer (ACH) for those shares has been collected, you will
not receive the proceeds until your initial payment has cleared. This may take
up to 15 days after your purchase was recorded (in rare cases, longer). If you
open an account with shares purchased by wire, you cannot sell those shares
until your application has been processed.
<PAGE>
INSTRUCTIONS FOR SELLING SHARES 17
- --------------------------------------------------------------------------------
<TABLE>
To Sell Some or All of Your Shares
<S> <C>
[graphic of briefcase] Through a Consult your financial professional or your program materials.
Professional
or Program
By Mail [graphic of mailbox] Send a letter of instruction, an endorsed stock power or share certificates (if
you hold certificate shares) to State Street Research. Specify the fund, the
account number and the dollar value or number of shares. Be sure to include all
necessary signatures and any additional documents, as well as signature
guarantees if required (see facing page).
[graphic of By Federal Check with State Street Research to make sure that a wire redemption privilege,
Federal Building] Funds Wire including a bank designation, is in place on your account. Once this is
established, you may place your request to sell shares with State Street
Research. Proceeds will be wired to your pre-designated bank account.
By Electronic [graphic of electric Check with State Street Research to make sure that the EZ Trader feature,
Funds Transfer plug] including a bank designation, is in place on your account. Once this is
(ACH) established, you may place your request to sell shares with State Street
Research. Proceeds will be sent to your pre-designated bank account.
[graphic of By Telephone As long as the transaction does not require a written request (see facing page),
telephone] you or your financial professional can sell shares by calling State Street
Research. A check will be mailed to you on the following business day.
By Exchange [graphic of Exchange] Read the prospectus for the fund into which you are exchanging. Call State Street
Research or visit our Web site.
[graphic of By Systematic See plan information on page 21.
calendar] Withdrawal Plan
By Check [graphic of The checkwriting privilege is available for Class E shares only. If you have requested
check] this privilege on your application, you may write checks for amounts of from $500 to
$100,000.
State Street Research Service Center PO Box 8408, Boston, MA 02266-8408 Internet www.ssrfunds.com
Call toll-free: 1-800-562-0032 (business days 8:00 a.m. - 6:00 p.m., eastern time)
</TABLE>
<PAGE>
18 YOUR INVESTMENT continued
- --------------------------------------------------------------------------------
[graphic of policies] ACCOUNT POLICIES
TELEPHONE REQUESTS When you open an account you automatically receive telephone
privileges, allowing you to place requests for your account by telephone. Your
financial professional can also use these privileges to request exchanges on
your account and, with your written permission, redemptions. For your
protection, all telephone calls are recorded.
As long as State Street Research takes certain measures to authenticate
telephone requests on your account, you may be held responsible for unauthorized
requests. Unauthorized telephone requests are rare, but if you want to protect
yourself completely, you can decline the telephone privilege on your
application.
The fund may suspend or eliminate the telephone privilege at any time.
EXCHANGE PRIVILEGES There is no fee to exchange shares among State Street
Research funds. Your new fund shares will be the equivalent class of your
current shares. Any contingent deferred sales charges will continue to be
calculated from the date of your initial investment.
You must hold Class A shares of any fund for at least 30 days before you can
exchange them for Class A shares of a different fund with a higher applicable
sales charge.
Frequent exchanges can interfere with fund management and drive up costs for all
shareholders. Because of this, the fund currently limits each account, or group
of accounts under common ownership or control, to six exchanges per calendar
year. The fund may change or eliminate the exchange privilege at any time, may
limit or cancel any shareholder's exchange privilege and may refuse to accept
any exchange request, particularly those associated with "market timing"
strategies.
For Merrill Lynch customers, exchange privileges extend to Summit Cash Reserves
Fund, which is related to the fund for purposes of investment and investor
services.
ACCOUNTS WITH LOW BALANCES If the value of your account falls below $1,500,
State Street Research may mail you a notice asking you to bring the account back
up to $1,500 or close it out. If you do not take action within 60 days, State
Street Research
<PAGE>
19
----
may either sell your shares and mail the proceeds to you at the address of
record or, depending on the circumstances, may deduct an annual maintenance fee
(currently $18).
THE FUND'S BUSINESS HOURS The fund is open the same days as the New York Stock
Exchange (generally Monday through Friday). Fund representatives are available
from 8:00 a.m. to 6:00 p.m. eastern time on these days.
CALCULATING SHARE PRICE The fund calculates its net asset value per share (NAV)
every business day at the close of regular trading on the New York Stock
Exchange (usually at 4:00 p.m. eastern time). NAV is calculated by dividing the
fund's net assets by the number of its shares outstanding.
In calculating its NAV, the fund uses the last reported sale price or quotation
for portfolio securities. However, in cases where these are unavailable, or when
the investment manager believes that subsequent events have rendered them
unreliable, the fund may use fair-value estimates instead.
REINSTATING RECENTLY SOLD SHARES For 120 days after you sell shares, you have
the right to "reinstate" your investment by putting some or all of the proceeds
into any currently available State Street Research fund at net asset value. Any
CDSC you paid on the amount you are reinstating will be credited to your
account. You may only use this privilege once in any twelve-month period with
respect to your shares of a given fund.
ADDITIONAL POLICIES Please note that the fund maintains additional policies and
reserves certain rights, including:
* The fund may vary its requirements for initial or additional investments,
exchanges, reinvestments, periodic investment plans, sponsored arrangements
and other similar programs
* All orders to purchase shares are subject to acceptance by the fund
* At any time, the fund may change or discontinue its sales charge waivers and
any of its order acceptance practices, and may suspend the sale of its shares
* The fund may delay sending you redemption proceeds for up to seven days, or
longer, if permitted by the SEC
* To permit investors to obtain the current price, dealers are responsible for
transmitting all orders to the State Street Research Service Center promptly
<PAGE>
20 YOUR INVESTMENT continued
- --------------------------------------------------------------------------------
[sidebar text]
[magnifying glass graphic] THE ALTERNATIVE MINIMUM TAX
The Alternative Minimum Tax (AMT) is a federal tax that could affect you if you
are a high-income individual who would pay comparatively little tax under the
ordinary tax schedules -- for example, because you have significant deductions
or certain types of tax-free income.
Interest from industrial revenue bonds and other so-called private activity
bonds is generally subject to AMT; because of this, the fund does not invest
more than 20% of its net assets in these securities. For corporations, all
tax-exempt interest is considered in calculating AMT.
[end of sidebar text]
[Uncle Same graphic] DISTRIBUTIONS AND TAXES
INCOME AND CAPITAL GAINS DISTRIBUTIONS The fund distributes its net income and
net capital gains to shareholders. Using projections of its future income, the
fund declares dividends daily and pays them monthly. Net capital gains, if any,
are distributed in December.
You may have your distributions reinvested in the fund, invested in a different
State Street Research fund, deposited in a bank account or mailed out by check.
If you do not give State Street Research other instructions, your distributions
will automatically be reinvested in the fund.
TAX EFFECTS OF DISTRIBUTIONS AND TRANSACTIONS As a general rule, the fund's
income distributions are exempt from federal income tax for all investors
(including corporations). A small portion of these distributions may be exempt
from state or local personal income taxes; these exemptions, if any, will vary
from state to state. You may have federal or state tax liability to the extent
that the fund earns income from non-tax-exempt securities or realizes net
capital gains. In addition, even tax-exempt income may be subject to the federal
alternative minimum tax (see sidebar).
In general, any taxable income distributions and short-term capital gain
distributions are taxable as ordinary income. Distributions of other capital
gains are generally taxable as capital gains--in most cases, at different rates
from those that apply to ordinary income.
The tax you pay on a given capital gains distribution generally depends on how
long the fund has held the portfolio securities it sold. It does not depend on
how long you have owned your fund
<PAGE>
21
----
shares or whether you reinvest your distributions.
Every year, the fund will send you information detailing the amount of federal,
state and city tax-exempt income distributed to you during the previous year, as
well as taxable ordinary income and capital gains.
The sale of shares in your account may produce a gain or loss, and is a taxable
event. For tax purposes, an exchange is the same as a sale.
Your investment in the fund could have additional tax consequences. Please
consult your tax professional for assistance.
BACKUP WITHHOLDING By law, the fund must withhold 31% of your distributions and
proceeds if you have not provided complete, correct taxpayer information.
[interlocked hands graphic] INVESTOR SERVICES
INVESTAMATIC PROGRAM Use Investamatic to set up regular automatic investments in
the fund from your bank account. You determine the frequency and amount of your
investments.
SYSTEMATIC WITHDRAWAL PLAN This plan is designed for retirees and other
investors who want regular withdrawals from a fund account. The plan is free and
allows you to withdraw up to 8% of your fund assets a year without incurring any
contingent deferred sales charges. Certain terms and minimums apply.
EZ TRADER This service allows you to purchase or sell fund shares over the
telephone through ACH (Automated Clearing House) system.
DIVIDEND ALLOCATION PLAN This plan automatically invests your distributions from
the fund into another fund of your choice, without any fees or sales charges.
AUTOMATIC BANK CONNECTION This plan lets you route any distributions or
Systematic Withdrawal Plan payments directly to your bank account.
RETIREMENT PLANS State Street Research also offers a full range of prototype
retirement plans for individuals, sole proprietors, partnerships, corporations
and employees.
Call 1-800-562-0032 for information on any of the services described above.
<PAGE>
22 OTHER INFORMATION
- --------------------------------------------------------------------------------
[graphic of securities certificates] OTHER SECURITIES
AND RISKS
Each of the fund's portfolio securities and investment practices offers certain
opportunities and carries various risks. Major investments and risk factors are
outlined in the fund description starting on page 1. Below are brief
descriptions of other securities and practices, along with their associated
risks.
LIMITED OBLIGATION SECURITIES Certain municipal securities are not general
obligations of their issuers, meaning that in the event of a default or
termination the securities holders may have limited recourse. These securities
may include:
* lease obligations and installment contracts: issued by government entities to
obtain funds to lease or acquire equipment and other property
* project finance obligations: issued in connection with the financing of
infrastructure projects, such as toll roads or housing projects
* industrial revenue bonds: issued in the name of a public authority to finance
infrastructure used by a private entity (these are generally obligations of
the private entity, not the issuer)
RESTRICTED AND ILLIQUID SECURITIES Any securities that are thinly traded or
whose resale is restricted can be difficult to sell at a desired time and price.
Some of these securities are new and complex, and trade only among institutions;
the markets for these securities are still developing, and may not function as
efficiently as established markets. Owning a large percentage of restricted and
illiquid securities could hamper the fund's ability to raise cash to meet
redemptions. Also, because there may not be an established market price for
these securities, the fund may have to estimate their value, which means that
their valuation (and, to a much smaller extent, the valuation of the fund) may
have a subjective element.
DERIVATIVES Derivatives, a category that includes options and futures, are
financial instruments whose value derives from one or more securities, indices
or currencies. Depending on a derivative's issuer and structure, its income may
be taxable or tax-exempt to shareholders. The fund may use certain derivatives
for hedging (attempting to offset a potential loss in one position by
establishing an interest in an opposite position). The fund may
<PAGE>
23
----
also use derivatives for speculation (investing for potential income or capital
gain).
While hedging can guard against potential risks, it adds to the fund's expenses
and can eliminate some opportunities for gains. There is also a risk that a
derivative intended as a hedge may not perform as expected.
The main risk with derivatives is that some types can amplify a gain or loss,
potentially earning or losing substantially more money than the actual cost of
the derivative.
With some derivatives, whether used for hedging or speculation, there is also
the risk that the counterparty may fail to honor its contract terms, causing a
loss for the fund.
SECURITIES LENDING The fund may seek additional income or fees by lending
portfolio securities to qualified institutions. By reinvesting any cash
collateral it receives in these transactions, the fund could realize additional
gains or losses. If the borrower fails to return the securities and the invested
collateral has declined in value, the fund could lose money.
WHEN-ISSUED SECURITIES The fund may invest in securities prior to their date of
issue. These securities could fall in value by the time they are actually
issued, which may be anytime from a few days to over a year.
ZERO (OR STEP) COUPONS A zero coupon security is a debt security that is
purchased and traded at a discount to its face value because it pays no interest
for some or all of its life. Interest, however, is reported as income to the
fund and the fund is required to distribute to shareholders an amount equal to
the amount reported. Those distributions may force the fund to liquidate
portfolio securities at a disadvantageous time.
DEFENSIVE INVESTING During unusual market conditions, the fund may place up to
100% of total assets in cash or high quality short-term debt securities.To the
extent that the fund does this, it is not pursuing its goal.
YEAR 2000 The investment manager does not currently anticipate that computer
problems related to the year 2000 will have a material effect on the fund.
However, there can be no assurances in this area, including the possibility that
year 2000 computer problems could negatively affect communication systems,
investment markets or the economy in general.
<PAGE>
24 FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
These highlights are intended to help you understand the fund's performance over
the past five years. The information in these tables has been audited by
PricewaterhouseCoopers LLP, the fund's independent accountants. Their report and
the fund's financial statements are included in the fund's annual report, which
is available upon request. Total return figures assume reinvestment of all
distributions.
<TABLE>
<CAPTION>
Class A Class B
-------------------------------------------------------------------------------
Years ended December 31 Years ended December 31
-------------------------------------------------------------------------------
Per Share Data 1994 1995 1996 1997 1998 1994 1995 1996 1997 1998
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of year ($) 8.43 7.46 8.26 8.10 8.51 8.43 7.46 8.26 8.10 8.51
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Net investment income ($) 0.40 0.39 0.39 0.40 0.40 0.34 0.33 0.32 0.34 0.34
Net realized and unrealized gain (loss) on
investments and futures contracts ($) (0.98) 0.82 (0.16) 0.40 0.08 (0.97) 0.82 (0.15) 0.40 0.08
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Total from investment operations ($) (0.58) 1.21 0.23 0.80 0.48 (0.63) 1.15 0.17 0.74 0.42
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Dividends from net investment income ($) (0.38) (0.41) (0.39) (0.39) (0.41) (0.33) (0.35) (0.33) (0.33) (0.35)
Distributions from capital gains ($) (0.01) -- -- -- (0.04) (0.01) -- -- -- (0.04)
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Total distributions ($) (0.39) (0.41) (0.39) (0.39) (0.45) (0.34) (0.35) (0.33) (0.33) (0.39)
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Net asset value, end of year ($) 7.46 8.26 8.10 8.51 8.54 7.46 8.26 8.10 8.51 8.54
===== ===== ===== ===== ===== ===== ===== ===== ===== =====
Total return (%)(a) (6.90) 16.58 2.93 10.17 5.79 (7.59) 15.72 2.15 9.35 5.01
Ratios/Supplemental Data
- --------------------------------------------------------------------------------------------------------------------------------
Net assets at end of year ($ thousands) 238,097 253,402 223,407 209,552 205,773 35,338 51,827 51,710 54,093 63,445
Expense ratio (%) 1.20 1.13 1.04 1.08 1.03 1.95 1.88 1.79 1.83 1.78
Ratio of net investment income to
average net assets (%) 5.07 4.95 4.82 4.91 4.69 4.35 4.19 4.07 4.15 3.93
Portfolio turnover rate (%) 78.63 97.32 125.24 60.48 36.22 78.63 97.32 125.24 60.48 36.22
</TABLE>
<PAGE>
25
----
<TABLE>
<CAPTION>
Class C Class S
-------------------------------------------------------------------------------
Years ended December 31 Years ended December 31
-------------------------------------------------------------------------------
Per Share Data 1994 1995 1996 1997 1998 1994 1995 1996 1997 1998
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of year ($) 8.43 7.46 8.25 8.10 8.50 8.41 7.45 8.24 8.09 8.49
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Net investment income ($) 0.34 0.33 0.32 0.34 0.33 0.42 0.40 0.39 0.42 0.42
Net realized and unrealized gain (loss) on
investments and futures contracts ($) (0.97) 0.81 (0.14) 0.39 0.10 (0.96) 0.81 (0.13) 0.39 0.08
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Total from investment operations ($) (0.63) 1.14 0.18 0.73 0.43 (0.54) 1.21 0.26 0.81 0.50
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Dividends from net investment income ($) (0.33) (0.35) (0.33) (0.33) (0.35) (0.41) (0.42) (0.41) (0.41) (0.43)
Distributions from capital gains ($) (0.01) -- -- -- (0.04) (0.01) -- -- -- (0.04)
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Total distributions ($) (0.34) (0.35) (0.33) (0.33) (0.39) (0.42) (0.42) (0.41) (0.41) (0.47)
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Net asset value, end of year ($) 7.46 8.25 8.10 8.50 8.54 7.45 8.24 8.09 8.49 8.52
===== ===== ===== ===== ===== ===== ===== ===== ===== =====
Total return (%)(a) (7.59) 15.58 2.28 9.23 5.14 (6.56) 16.76 3.30 10.33 6.07
Ratios/Supplemental Data
- --------------------------------------------------------------------------------------------------------------------------------
Net assets at end of year ($ thousands) 958 4,183 2,889 2,836 3,982 334 22,614 8,990 8,817 10,713
Expense ratio (%) 1.95 1.88 1.79 1.83 1.78 0.95 0.88 0.79 0.83 0.78
Ratio of net investment income
to average net assets (%) 4.31 4.13 4.06 4.16 3.86 5.26 4.85 5.04 5.15 4.93
Portfolio turnover rate (%) 78.63 97.32 125.24 60.48 36.22 78.63 97.32 125.24 60.48 36.22
</TABLE>
[sidebar text]
[begin footnote text]
(a) Does not reflect any front-end or contingent deferred sales charge.
[end footnote text]
[end of sidebar text]
<PAGE>
26 BOARD OF TRUSTEES
- --------------------------------------------------------------------------------
[pillar graphic] The Board of Trustees is responsible for the operation of the
fund. They establish the fund's major policies, review investments, and provide
guidance to the investment manager and others who provide services to the fund.
The Trustees have diverse backgrounds and substantial experience in business
and other areas.
RALPH F. VERNI
Chairman of the Board, President,
Chief Executive Officer and Director,
State Street Research & Management
Company
STEVE A. GARBAN
Former Senior Vice President for Finance
and Operations and Treasurer,
The Pennsylvania State University
MALCOLM T. HOPKINS
Former Vice Chairman of the Board
and Chief Financial Officer,
St. Regis Corp.
DEAN O. MORTON
Former Executive Vice President,
Chief Operating Officer and Director,
Hewlett-Packard Company
SUSAN M. PHILLIPS
Dean, School of Business and Public
Management, George Washington
University; former Member of the Board of
Governors of the Federal Reserve System
and Chairman and Commissioner of the
Commodity Futures Trading Commission
TOBY ROSENBLATT
President, The Glen Ellen Company
Vice President, Founders Investments Ltd.
MICHAEL S. SCOTT MORTON
Jay W. Forrester Professor of
Management, Sloan School of
Management, Massachusetts
Institute of Technology
<PAGE>
NOTES 27
- --------------------------------------------------------------------------------
<PAGE>
FOR ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------
[sidebar text]
If you have questions about the fund or would like to request a free copy of the
current annual/semiannual report or SAI, contact State Street Research or your
financial professional.
[State Street Research logo]
Service Center
P.O. Box 8408, Boston, MA 02266
Telephone: 1-800-562-0032
Internet: www.ssrfunds.com
You can also obtain information about the fund, including the SAI and certain
other fund documents, on the Internet at www.sec.gov, in person at the SEC's
Public Reference Room in Washington, DC (telephone 1-800-SEC-0330) or by mail by
sending your request, along with a duplicating fee, to the SEC's Public
Reference Section, Washington, DC 20549-6009.
prospectus
- -----------
SEC File Number: 811-4558
[end of sidebar text]
You can find additional information on the fund's structure and its performance
in the following documents:
ANNUAL/SEMIANNUAL REPORTS While the prospectus describes the fund's potential
investments, these reports detail the fund's actual investments as of the report
date. Reports include a discussion by fund management of recent economic and
market trends and fund performance. The annual report also includes the report
of the fund's independent accountants.
STATEMENT OF ADDITIONAL INFORMATION (SAI) A supplement to the prospectus, the
SAI contains further information about the fund and its investment limitations
and policies. A current SAI for this fund is on file with the Securities and
Exchange Commission and is incorporated by reference (is legally part of this
prospectus).
TICKER SYMBOLS
- ----------------------------
Class A SSATX
Class B(1) (proposed) SSTPX
Class B SSXBX
Class C SSTDX
Class S SSXCX
TE-965E-599
Control Number: (exp0500)
<PAGE>
[STATE STREET RESEARCH Logo]
NEW YORK TAX-FREE FUND
A municipal bond fund
seeking tax-free income for
New York State taxpayers.
Prospectus
May 1, 1999
[sidebar text]
This prospectus has information you should know before you invest. Please read
it carefully and keep it with your investment records.
Although these securities have been registered with the Securities and Exchange
Commission, the SEC has not approved or disapproved them and does not guarantee
the accuracy or adequacy of the information in this prospectus. Anyone who
informs you otherwise is committing a federal crime.
[end sidebar text]
[graphic of clock face]
<PAGE>
CONTENTS
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
1 THE FUND
----------------
1 Goal and Strategies
3 Principal Risks
4 Volatility and Performance
6 Investor Expenses
8 Investment Management
9 YOUR INVESTMENT
-----------------------
9 Opening an Account
9 Choosing a Share Class
10 Sales Charges
13 Dealer Compensation
14 Buying and Selling Shares
18 Account Policies
20 Distributions and Taxes
21 Investor Services
22 OTHER INFORMATION
-------------------------
22 Other Securities and Risks
24 Financial Highlights
26 Board of Trustees
Back Cover For Additional Information
</TABLE>
<PAGE>
THE FUND 1
- --------------------------------------------------------------------------------
[chess piece graphic] GOAL AND STRATEGIES
FUNDAMENTAL GOAL The fund seeks a high level of interest income exempt from
federal income taxes and New York State and New York City personal income taxes.
PRINCIPAL STRATEGIES Under normal market conditions, the fund invests at least
80% of net assets in securities whose interest income is free from certain taxes
as described in the fund's goal, and that are investment grade at the time the
fund buys them. These securities are typically bonds issued by the State of New
York, its counties, cities, towns and public authorities. They may also be
securities of issuers with special tax status, such as the Commonwealth of
Puerto Rico. The fund may invest up to 20% of net assets in other securities,
including junk bonds of similar issuers (that is, bonds that are in or below the
Standard & Poor's BB or Moody's Ba major rating categories).
When bonds are rated by one or more independent rating agencies, the fund uses
these ratings to determine bond quality. In cases where a bond is rated in
conflicting categories by different rating agencies, the fund may choose to
follow the higher rating. If a bond is unrated, the fund may assign it to a
given category based on its own credit research. The fund may invest up to 25%
of net assets in unrated bonds.
[sidebar text]
[magnifying glass graphic] WHO MAY WANT TO
INVEST
State Street Research New York Tax-Free Fund is designed for New York State
taxpayers seeking one or more of the following:
* high current income that is exempt from federal, New York State and City
income taxes
* a diversified portfolio of municipal securities
* a fund to complement a portfolio of more aggressive investments
The fund is not appropriate for investors who:
* want an investment for a tax-advantaged account such as an IRA or 401(k)
* do not pay personal income taxes in New York State
* want to avoid even moderate volatility or potential losses
* are seeking high growth or maximum income
* are investing emergency reserve money
[end sidebar text]
<PAGE>
2 THE FUND continued
- --------------------------------------------------------------------------------
In managing its portfolio, the fund focuses on security selection, using
proprietary research to identify those individual bonds that offer higher yields
or higher potential total return than others that appear to be of comparable
credit quality. The fund may invest in securities of any maturity, and may
invest in certain securities, such as municipal lease obligations and industrial
revenue bonds, that may have different risks than ordinary municipal bonds.
The fund may adjust the composition of its portfolio as market conditions and
economic outlooks change. For more information about the fund's investments and
practices, see page 22.
[sidebar text]
[magnifying glass graphic] MUNICIPAL BONDS
AND TAXES
The municipal bond category is defined as including securities issued by
municipalities as well as states and various agencies and authorities.
Some of these bonds are backed by the issuer's authority to levy taxes and are
considered an obligation of the issuer (hence the name "general obligation
bonds"). Other bonds are issued to raise money for a particular project -- for
example, a water system or a toll road -- and are backed by revenues earned by
that project ("revenue bonds"). So-called industrial revenue bonds are typically
issued by municipal issuers on behalf of private companies. Because revenue
bonds are backed only by income from a certain source and may not be an
obligation of the issuer itself, they may be less creditworthy than general
obligation bonds -- a fact that is usually reflected in their ratings.
The federal government allows the interest from municipal bonds to be tax-exempt
in order to make it easier for municipalities to finance public projects.
Investors in municipal bonds thus play a role in helping to finance roads,
hospitals and other public facilities.
[end sidebar text]
<PAGE>
3
-----
[traffic sign graphic] PRINCIPAL RISKS
Because the fund invests primarily in bonds and other fixed income securities,
its major risks are those of bond investing, including the tendency of prices to
fall when interest rates rise. Such a fall would lower the fund's share price
and the value of your investment.
Bond prices in general tend to move in the opposite direction from interest
rates, for the reason that new bonds issued after a rise in rates will offer
higher yields to investors; the only way an existing bond with a lower yield can
appear attractive to investors is by selling at a lower price. (This principle
works in reverse as well: a fall in interest rates will tend to cause a rise in
bond prices.)
Because most of the fund's securities are from the State of New York, the fund's
performance may be affected by political and economic conditions at the state or
local level. These may include state or city budgetary problems, declines in the
tax base and other factors that may cause rating agencies to downgrade the
credit ratings on certain issues. Actual or proposed changes in tax rates,
regulations or federal programs could also affect your net return on investment.
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
securities to meet their financial obligations.
The issuer of any bond, particularly a junk bond, could default on principal or
interest payments, which would cause a loss for the fund. Lower-rated bonds also
tend to be more sensitive to economic changes and may increase the volatility of
the fund's share price.
The success of the fund's investment strategy depends largely on the portfolio
manager's skill in assessing the direction and impact of interest rate movements
and the creditworthiness of the securities the fund buys.
The fund's shares will rise and fall in value and there is a risk that you could
lose money by investing in the fund. Also, the fund cannot be certain that it
will achieve its goal. Finally, fund shares are not bank deposits and are not
guaranteed, endorsed or insured by any financial institution, government entity
or the FDIC.
Information on other securities and risks appears on page 22.
A "snapshot" of the fund's investments may be found in the current annual or
semiannual report (see back cover).
<PAGE>
4 VOLATILITY AND PERFORMANCE
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
[bar chart graphic] Years ended December 31
----------------------------------------------------------------------------
YEAR-BY-YEAR TOTAL RETURN (CLASS A) 1989* 1990 1991 1992 1993 1994 1995 1996 1997 1998
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1.72% 3.32% 13.88% 9.08% 13.19% (6.04)% 15.11% 3.68% 9.22% 5.92%
</TABLE>
[graphic of up arrow] BEST QUARTER: First Quarter 1995, up 5.64%
[graphic of down arrow] WORST QUARTER: First Quarter 1994, down 5.30%
Return from 1/1/99 - 3/31/99 (not annualized):
<TABLE>
<CAPTION>
As of December 31, 1998
-----------------------------------------
AVERAGE ANNUAL TOTAL RETURN 1 Year 5 Years Since Inception*
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Class A (%) 1.16 4.38 6.57
Class B(1) (introduced January 1, 1999) -- -- --
Class B (%) 0.14 4.22 6.62
Class C (%) 4.01 4.53 6.62
Class S (%) 6.18 5.60 7.25
Lehman Brothers Municipal Bond Index (%) 6.48 6.22 8.22
Lipper New York Municipal Debt Funds Index (%) 5.79 5.26 7.34
</TABLE>
[footnote text]
*Since inception (7/5/89)
[end of footnote text]
<PAGE>
5
----
[sidebar text]
[magnifying glass graphic] UNDERSTANDING
VOLATILITY AND
PERFORMANCE
The chart and table on the opposite page are designed to show two aspects of the
fund's track record:
* YEAR-BY-YEAR TOTAL RETURN shows how volatile the fund has been: how much the
difference has been, historically, between its best years and worst years. In
general, funds with higher average annual total returns will also have higher
volatility. The graph includes the effects of fund expenses, but not sales
charges. If sales charges had been included, returns would have been less
than shown.
* AVERAGE ANNUAL TOTAL RETURN is a measure of the fund's performance over time.
It is determined by taking the fund's performance over a given period and
expressing it as an average annual rate. Average annual total return includes
the effects of fund expenses and maximum sales charges for each class, and
assumes that you sold your shares at the end of the period.
Also included are two independent measures of performance. The Lehman Brothers
New York Municipal Bond Index is an unmanaged index of 8,000 fixed-rate
investment-grade municipal bonds, all from issues larger than $50 million and
with maturities greater than two years. The Lipper New York Municipal Debt Funds
Index shows the performance of a category of mutual funds with similar goals.
The Lipper Index, which is also unmanaged, shows you how well the fund has done
compared to competing funds.
While the fund does not seek to match the returns or the volatility of any
index, these indices can be used as rough guides when gauging the return of this
and other investments. When making comparisons, keep in mind that none of the
indices includes the effects of sales charges. Also, even if your bond portfolio
were identical to the Lehman Brothers Municipal Bond Index, your returns would
always be lower, because this index does not include brokerage and
administrative expenses.
The returns in both the chart and the table would have been lower if the
distributor had not voluntarily reduced the fund's expenses.
In both the chart and the table, the returns shown for the fund include
performance from before the creation of share classes in 1993. If the returns
for Class B and Class C from before 1993 had reflected their current
distribution/service (12b-1) fees (as described on page 6), these returns would
have been lower.
Keep in mind that past performance is no guarantee of future results.
[end of sidebar text]
<PAGE>
6 INVESTOR EXPENSES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class descriptions begin on page 9
----------------------------------------------------------------
SHAREHOLDER FEES (% of offering price) Class A Class B(1) Class B Class C Class S
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
MAXIMUM FRONT-END SALES CHARGE (LOAD) 4.50 0.00 0.00 0.00 0.00
MAXIMUM DEFERRED SALES CHARGE (LOAD) 0.00(a) 5.00 5.00 1.00 0.00
ANNUAL FUND OPERATING EXPENSES (% of average net assets) Class A Class B(1) Class B Class C Class S
- --------------------------------------------------------------------------------------------------------------------------
MANAGEMENT FEE 0.55 0.55 0.55 0.55 0.55
DISTRIBUTION/SERVICE (12B-1) FEES 0.25 1.00 1.00 1.00 0.00
OTHER EXPENSES 0.45 0.45 0.45 0.45 0.45
----- ----- ----- ----- -----
TOTAL ANNUAL FUND OPERATING EXPENSES 1.25 2.00 2.00 2.00 1.00
===== ===== ===== ===== =====
* Because some of the fund's
expenses have been subsidized,
actual total operating
expenses for the prior year
were: 1.12 -- 1.87 1.87 0.87
----- ----- ----- ----- -----
The fund expects the expense
subsidy to continue through the
current fiscal year, although
there is no guarantee that it will.
Example Year Class A Class B(1) Class B Class C Class S
- --------------------------------------------------------------------------------------------------------------------------
1 $572 $703/$203 $703/$203 $303/$203 $102
3 $829 $927/$627 $927/$627 $627 $318
5 $1,105 $1,278/$1,078 $1,278/$1,078 $1,078 $552
10 $1,893 $2,134 $2,134 $2,327 $1,225
</TABLE>
[sidebar text]
[footnote text]
(a) Except for investments of $1 million or more; see page 10.
[end of footnote text]
[end of sidebar text]
<PAGE>
7
----
[sidebar text]
[magnifying glass graphic] UNDERSTANDING
INVESTOR EXPENSES
The information on the opposite page is designed to give you an idea of what you
should expect to pay in expenses as an investor in the fund:
* SHAREHOLDER FEES are costs that are charged to you directly. These fees are
not charged on reinvestments or exchanges.
* ANNUAL FUND OPERATING EXPENSES are deducted from the fund's assets every
year, and are thus paid indirectly by all fund investors.
* The EXAMPLE is designed to allow you to compare the costs of this fund with
those of other funds. It assumes that you invested $10,000 over the years
indicated, reinvested all distributions, earned a hypothetical 5% annual
return and paid the maximum applicable sales charges. For Class B(1) and
Class B shares, it also assumes the automatic conversion to Class A after
eight years.
Where two numbers are shown separated by a slash, the first one assumes you
sold all your shares at the end of the period, while the second assumes you
stayed in the fund. Where there is only one number, the costs would be the
same either way.
Investors should keep in mind that the example is for comparison purposes
only. The fund's actual performance and expenses may be higher or lower.
[end of sidebar text]
<PAGE>
8 THE FUND continued
- --------------------------------------------------------------------------------
[the thinker graphic] INVESTMENT MANAGEMENT
The fund's investment manager is State Street Research & Management Company, One
Financial Center, Boston, Massachusetts 02111. The firm traces its heritage back
to 1924 and the founding of one of America's first mutual funds. Today the firm
has more than $__ billion in assets under management (as of March 31, 1999),
including $__ billion in mutual funds.
The investment manager is responsible for the fund's investment and business
activities, and receives the management fee as compensation (0.55% of fund
assets, annually). The investment manager is a subsidiary of Metropolitan Life
Insurance Company. Paul J. Clifford, Jr. has been responsible for the fund's
day-to-day portfolio management since March 1993. A vice president, he joined
the firm in 1989 and has worked as an investment professional since 1986.
<PAGE>
YOUR INVESTMENT 9
- --------------------------------------------------------------------------------
[key graphic] OPENING AN ACCOUNT
If you are opening an account through a financial professional, he or she can
assist you with all phases of your investment.
If you are investing through a special program, follow the instructions in your
program materials.
To open an account without the help of a financial professional, please use the
instructions on these pages.
[checklist graphic] CHOOSING A SHARE CLASS
The fund generally offers four share classes, each with its own sales charge and
expense structure: Class A, Class B(1), Class C and Class S. The fund also
offers Class B shares, but only to current Class B shareholders through
reinvestment of dividends and distributions or through exchanges from existing
Class B accounts of State Street Research funds.
If you are investing a substantial amount and plan to hold your shares for a
long period, Class A shares may make the most sense for you. If you are
investing a lesser amount, you may want to consider Class B(1) shares (if
investing for at least six years) or Class C shares (if investing for less than
six years). If you are investing through a special program, such as a large
employer-sponsored retirement plan or certain programs available through
brokers, you may be eligible to purchase Class S shares.
Because all future investments in your account will be made in the share class
you designate when opening the account, you should make your decision carefully.
Your financial professional can help you choose the share class that makes the
most sense for you.
<PAGE>
10 YOUR INVESTMENT continued
- --------------------------------------------------------------------------------
CLASS A - FRONT LOAD
* Initial sales charge of 4.5% or less
* Lower sales charges for larger investments; see sales charge schedule at
right
* Lower annual expenses than Class B(1) or C shares because of lower
distribution/service (12b-1) fee of 0.25%
CLASS B(1) - BACK LOAD
* No initial sales charge
* Deferred sales charge of 5% or less on shares you sell within six years;
* Annual distribution/service (12b-1) fee of 1.00%
* Automatic conversion to Class A shares after eight years, reducing future
annual expenses
CLASS B - BACK LOAD
* Available only to current shareholders. See page 11 for details.
CLASS C - LEVEL LOAD
* No initial sales charge
* Deferred sales charge of 1%, paid if you sell shares within one year of
purchase
* Lower deferred sales charge than Class B(1) shares
* Annual distribution/service (12b-1) fee of 1.00%
* No conversion to Class A shares after eight years, so annual expenses do not
decrease
CLASS S - SPECIAL PROGRAMS
* Available only through certain advisory accounts of the investment manager
and other special programs, including broker programs with record-keeping and
other services; these programs usually involve special conditions and
separate fees (consult your financial professional or your program materials)
* No sales charges of any kind
* No distribution/service (12b-1) fees; annual expenses are lower than other
share classes
SALES CHARGES
CLASS A - FRONT LOAD
<TABLE>
<CAPTION>
WHEN YOU INVEST THIS % IS WHICH EQUALS
THIS AMOUNT DEDUCTED THIS % OF
FOR SALES YOUR NET
CHARGES INVESTMENT
- ----------------------------------------------------
<S> <C> <C>
Up to $100,000 4.50 4.71
$100,000 to $250,000 3.50 3.63
$250,000 to $500,000 2.50 2.56
$500,000 to $1 million 2.00 2.04
$1 million or more see below
</TABLE>
With Class A shares, you pay a sales charge only when you buy shares.
If you are investing $1 million or more (either as a lump sum or through any of
the methods described on the application), you can purchase Class A shares
without any sales charge. However, you may be charged a "contingent deferred
sales charge" (CDSC) of 1% if you sell
<PAGE>
11
-------
any shares within one year of purchasing them. See "Other CDSC Policies" on page
12.
Class A shares are also offered with low or no sales charges through various
wrap-fee programs and other sponsored arrangements (contact your financial
professional for information).
CLASS B(1) - BACK LOAD
<TABLE>
<CAPTION>
THIS % OF NET ASSET VALUE
WHEN YOU SELL SHARES AT THE TIME OF PURCHASE (OR
IN THIS YEAR AFTER YOU OF SALE, IF LOWER) IS DEDUCT-
BOUGHT THEM ED FROM YOUR PROCEEDS
- ------------------------------------------------------------
<S> <C>
First year 5.00
Second year 4.00
Third year 3.00
Fourth year 3.00
Fifth year 2.00
Sixth year 1.00
Seventh or Eighth year None
</TABLE>
With Class B(1) shares, you pay no sales charge when you invest, but you are
charged a "contingent deferred sales charge" (CDSC) when you sell shares you
have held for six years or less, as described in the table above. See "Other
CDSC Policies" on page 12.
Class B(1) shares automatically convert to Class A shares after eight years,
lowering your annual expenses from that time on.
CLASS B - BACK LOAD
Class B shares are available only to current shareholders through reinvestment
of dividends and distributions or through exchanges from existing Class B
accounts of the State Street Research funds. Other investments made by current
Class B shareholders will be in Class B(1) shares.
With Class B shares, you are charged a "contingent deferred sales charge" (CDSC)
when you sell shares you have held for five years or less. The CDSC is a
percentage of net asset value at the time of purchase (or of sale, if lower) and
is deducted from your proceeds. When you sell shares in the first year after you
bought them, the CDSC is 5.00%; second year, 4.00%; third year, 3.00%; fourth
year, 3.00%; fifth year, 2.00%; sixth year or later, none. See "Other CDSC
Policies" on page 12.
Class B shares automatically convert to Class A shares after eight years.
<PAGE>
12 YOUR INVESTMENT continued
- --------------------------------------------------------------------------------
CLASS C - LEVEL LOAD
<TABLE>
<CAPTION>
THIS % OF NET ASSET VALUE
WHEN YOU SELL SHARES AT THE TIME OF PURCHASE (OR
IN THIS YEAR AFTER YOU OF SALE, IF LOWER) IS DEDUCT-
BOUGHT THEM ED FROM YOUR PROCEEDS
- ------------------------------------------------------------
<S> <C>
First year 1.00
Second year or later None
</TABLE>
With Class C shares, you pay no sales charge when you invest, but you are
charged a "contingent deferred sales charge" (CDSC) when you sell shares you
have held for one year or less, as described in the table above. See "Other CDSC
Policies".
Class C shares currently have the same annual expenses as Class B(1) shares.
CLASS S - SPECIAL PROGRAMS
Class S shares have no sales charges or CDSC.
OTHER CDSC POLICIES
The CDSC will be based on the net asset value of the shares at the time of
purchase (or sale, if lower). Any shares acquired through reinvestment are not
subject to the CDSC. There is no CDSC on exchanges into other State Street
Research funds, and the date of your initial investment will continue to be used
as the basis for CDSC calculations when you exchange. To ensure that you pay the
lowest CDSC possible, the fund will always use the shares with the lowest CDSC
to fill your sell requests.
The CDSC is waived on shares sold for mandatory retirement distributions or
because of disability or death. Consult your financial professional or the State
Street Research Service Center for more information.
[sidebar text]
[magnifying glass graphic] UNDERSTANDING
DISTRIBUTION/SERVICE
FEES
As noted in the descriptions on pages 9 to 12, all share classes except Class S
have an annual distribution/service fee, also called a 12b-1 fee.
Under its current 12b-1 plans, the fund may pay certain distribution and service
fees for these classes out of fund assets. Because 12b-1 fees are an ongoing
expense, they will increase the cost of your investment and, over time, could
potentially cost you more than if you had paid other types of sales charges. For
that reason, you should consider the effects of 12b-1 fees as well as sales
loads when choosing a share class.
Some of the 12b-1 fee is used to compensate those financial professionals who
sell fund shares and provide ongoing service to shareholders. The table on the
next page shows how these professionals' compensation is calculated.
The fund may continue to pay 12b-1 fees even if the fund is subsequently closed
to new investors.
[end sidebar text]
<PAGE>
13
---------
[graphic of a check] DEALER COMPENSATION
Financial professionals who sell shares of State Street Research funds and
perform services for fund investors may receive sales commissions and annual
fees. These are paid by the fund's distributor, using money from sales charges,
distribution/service (12b-1) fees and its other resources.
Brokers and agents may charge a transaction fee on orders of fund shares placed
directly through them. The distributor may pay its affiliate, MetLife
Securities, Inc. additional compensation of up to 0.25% of certain sales or
assets.
<TABLE>
<CAPTION>
Maximum Dealer Compensation (%) Class A Class B(1) Class B Class C Class S
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Commission see below 4.00 4.00 1.00 0.00
Investments up to $100,000 4.00 -- -- -- --
$100,000 to $250,000 3.00 -- -- -- --
$250,000 to $500,000 2.00 -- -- -- --
$500,000 to $1 million 1.75 -- -- -- --
First $1 to $3 million 1.00(a) -- -- -- --
Next $2 million 0.75(a) -- -- -- --
Next $2 million 0.50(a) -- -- -- --
Next $1 and above 0.25(a) -- -- -- --
Annual fee 0.25 0.25 0.25 1.00 0.00
</TABLE>
BROKERS FOR PORTFOLIO TRADES
When placing trades for the fund's portfolio, State Street Research choose
brokers that provide the best execution (a term defined by service as well as
price), but may also consider a broker's sales of fund shares.
[footnote text]
(a) If your broker declines this commission, the one-year CDSC on your
investment is waived.
[end footnote text]
<PAGE>
14 BUYING AND SELLING SHARES
- --------------------------------------------------------------------------------
[cash register graphic] POLICIES FOR
BUYING SHARES
Once you have chosen a share class, the next step is to determine the amount you
want to invest.
MINIMUM INITIAL INVESTMENTS:
* $1,000 for accounts that use the Investamatic program
* $2,500 for all other accounts
MINIMUM ADDITIONAL INVESTMENTS:
* $50 for any account
Complete the enclosed application. You can avoid future inconvenience by signing
up now for any services you might later use.
TIMING OF REQUESTS All requests received in good order by State Street Research
before the close of regular trading on the New York Stock Exchange (usually 4:00
p.m. eastern time) will be executed the same day, at that day's closing share
price. Orders received thereafter will be executed the following day, at that
day's closing share price.
WIRE TRANSACTIONS Funds may be wired between 8:00 a.m. and 4:00 p.m. eastern
time. To make a same-day wire investment, please notify State Street Research by
12:00 noon of your intention to wire funds, and make sure your wire arrives by
4:00 p.m. If the New York Stock Exchange closes before 4:00 p.m. eastern time,
you may be unable to make a same-day wire investment. Your bank may charge a fee
for wiring money.
<PAGE>
INSTRUCTIONS FOR BUYING SHARES 15
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
To Open an Account To Add to an Account
<S> <C> <C>
[graphic of briefcase] Through a Consult your financial professional or your Consult your financial professional or your
Professional program materials. program materials.
or Program
By Mail [graphic of Make your check payable to "State Street Fill out an investment slip or indicate the
mailbox] Research Funds." Forward the check and your fund name and account number on your check.
application to State Street Research. Make your check payable to "State Street
Research Funds." Forward the check and slip to
State Street Research.
[graphic of By Federal Call to obtain an account number and Call State Street Research to obtain a control
Federal Building] Funds Wire forward your application to State Street number. Instruct your bank to wire funds to:
Research, then wire funds using the * State Street Bank and Trust Company,
instructions at right. Boston, MA
* ABA: 011000028
* BNF: fund name and share class you want to
buy
* AC: 99029761
* OBI: your name and your account number
* Control: the number given to you by State
Street Research
By Electronic [graphic Verify that your bank is a member of the Call State Street Research to verify that the
Funds Transfer of electric ACH (Automated Clearing House) system. necessary bank information is on file for your
(ACH) plug] Forward your application to State Street account. If it is, you may request a transfer
Research. Please be sure to include the with the same phone call. If not, please ask
appropriate bank information. Call State State Street Research to provide you with an
Street Research to request a purchase. EZ Trader application.
[graphic of By Investamatic Forward your application, with all Call State Street Research to verify that
calendar] appropriate sections completed, to State Investamatic is in place on your account, or
Street Research, along with a check for to request a form to add it. Investments
your initial investment payable to are automatic once Investamatic is in place.
"State Street Research Funds."
By Exchange [graphic of Call State Street Research or visit our Call State Street Research or visit our
Exchange] Web site. Web site.
</TABLE>
<TABLE>
<CAPTION>
<S> <C>
State Street Research Service Center PO Box 8408, Boston, MA 02266-8408 Internet www.ssrfunds.com
Call toll-free: 1-800-562-0032 (business days 8:00 a.m. - 6:00 p.m., eastern time)
</TABLE>
<PAGE>
16 YOUR INVESTMENT continued
- --------------------------------------------------------------------------------
[graphic of receipt] POLICIES FOR
SELLING SHARES
CIRCUMSTANCES THAT REQUIRE WRITTEN REQUESTS Please submit instructions in
writing when any of the following apply:
* you are selling more than $100,000 worth of shares
* the name or address on the account has changed within the last 30 days
* you want the proceeds to go to a name or address not on the account
registration
* you are transferring shares to an account with a different registration or
share class
* you are selling shares held in a corporate or fiduciary account; for these
accounts, additional documents are required:
corporate accounts: certified copy of a corporate resolution
fiduciary accounts: copy of power of attorney or other governing document
To protect your account against fraud, all signatures on these documents must be
guaranteed. You may obtain a signature guarantee at most banks and securities
dealers. A notary public cannot provide a signature guarantee.
INCOMPLETE SELL REQUESTS State Street Research will attempt to notify you
promptly if any information necessary to process your request is missing.
TIMING OF REQUESTS All requests received in good order by State Street Research
before the close of regular trading on the New York Stock Exchange (usually 4:00
p.m. eastern time) will be executed the same day, at that day's closing share
price. Requests received thereafter will be executed the following day, at that
day's closing share price.
WIRE TRANSACTIONS Proceeds sent by federal funds wire must total at least
$5,000. A fee of $7.50 will be deducted from all proceeds sent by wire, and your
bank may charge an additional fee to receive wired funds.
SELLING RECENTLY PURCHASED SHARES If you sell shares before the check or
electronic funds transfer (ACH) for those shares has been collected, you will
not receive the proceeds until your initial payment has cleared. This may take
up to 15 days after your purchase was recorded (in rare cases, longer). If you
open an account with shares purchased by wire, you cannot sell those shares
until your application has been processed.
<PAGE>
INSTRUCTIONS FOR SELLING SHARES 17
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
To Sell Some or All of Your Shares
[graphic of briefcase] Through a Consult your financial professional or your program materials.
Professional
or Program
By Mail [graphic of mailbox] Send a letter of instruction, an endorsed stock power or share certificates (if
you hold certificate shares) to State Street Research. Specify the fund, the
account number and the dollar value or number of shares. Be sure to include all
necessary signatures and any additional documents, as well as signature
guarantees if required (see facing page).
[graphic of By Federal Check with State Street Research to make sure that a wire redemption privilege,
Federal Building] Funds Wire including a bank designation, is in place on your account. Once this is
established, you may place your request to sell shares with State Street
Research. Proceeds will be wired to your pre-designated bank account.
By Electronic [graphic of electric Check with State Street Research to make sure that the EZ Trader feature,
Funds Transfer plug] including a bank designation, is in place on your account. Once this is
(ACH) established, you may place your request to sell shares with State Street
Research. Proceeds will be sent to your pre-designated bank account.
[graphic of By Telephone As long as the transaction does not require a written request (see facing page),
telephone] you or your financial professional can sell shares by calling State Street
Research. A check will be mailed to your address of record on the following business day.
By Exchange [graphic of Exchange] Read the prospectus for the fund into which you are exchanging. Call State Street
Research or visit our Web site.
[graphic of By Systematic See plan information on page 21.
calendar] Withdrawal Plan
By Check [graphic of The checkwriting privilege is available for Class E shares only. If you have requested
check] this privilege on your application, you may write checks for amounts from $500 to $100,000.
State Street Research Service Center PO Box 8408, Boston, MA 02266-8408 Internet www.ssrfunds.com
Call toll-free: 1-800-562-0032 (business days 8:00 a.m. - 6:00 p.m., eastern time)
</TABLE>
<PAGE>
18 YOUR INVESTMENT continued
- --------------------------------------------------------------------------------
[graphic of policies] ACCOUNT POLICIES
TELEPHONE REQUESTS When you open an account you automatically receive telephone
privileges, allowing you to place requests for your account by telephone. Your
financial professional can also use these privileges to request exchanges on
your account, and with your written permission, redemptions. For your
protection, all telephone calls are recorded.
As long as State Street Research takes certain measures to authenticate
telephone requests on your account, you may be held responsible for unauthorized
requests. Unauthorized telephone requests are rare, but if you want to protect
yourself completely, you can decline the telephone privilege on your
application. The fund may suspend or eliminate the telephone privilege at any
time.
EXCHANGE PRIVILEGES There is no fee to exchange shares among State Street
Research funds. Your new fund shares will be the equivalent class of your
current shares. Any contingent deferred sales charges will continue to be
calculated from the date of your initial investment.
You must hold Class A shares of any fund for at least 30 days before you can
exchange them for Class A shares of a different fund with a higher applicable
sales charge.
Frequent exchanges can interfere with fund management and drive up costs for all
shareholders. Because of this, the fund currently limits each account, or group
of accounts under common ownership or control, to six exchanges per calendar
year. The fund may change or eliminate the exchange privilege at any time, may
limit or cancel any shareholder's exchange privilege and may refuse to accept
any exchange request, particularly those associated with "market timing"
strategies.
For Merrill Lynch customers, exchange privileges extend to Summit Cash Reserves
Fund, which is related to the fund for purposes of investment and investor
services.
ACCOUNTS WITH LOW BALANCES If the value of your account falls below $1,500,
State Street Research may mail you a notice asking you to bring the account back
up to $1,500 or close it out. If you do not take action within 60 days, State
Street Research may either sell your shares and mail the proceeds to you at the
address of record or, depending on the circumstances, may deduct an annual
maintenance fee (currently $18).
<PAGE>
19
-------
THE FUND'S BUSINESS HOURS The fund is open the same days as the New York Stock
Exchange (generally Monday through Friday). Fund representatives are available
from 8:00 a.m. to 6:00 p.m. eastern time on these days.
CALCULATING SHARE PRICE The fund calculates its net asset value per share (NAV)
every business day at the close of regular trading on the New York Stock
Exchange (usually at 4:00 p.m. eastern time). NAV is calculated by dividing the
fund's net assets by the number of its shares outstanding.
In calculating its NAV, the fund uses the last reported sale price or quotation
for portfolio securities. However, in cases where these are unavailable, or when
the investment manager believes that subsequent events have rendered them
unreliable, the fund may use fair value estimates instead.
REINSTATING RECENTLY SOLD SHARES For 120 days after you sell shares, you have
the right to "reinstate" your investment by putting some or all of the proceeds
into any currently available State Street Research fund at net asset value. Any
CDSC you paid on the amount you are reinstating will be credited to your
account. You may only use this privilege once in any twelve-month period with
respect to your shares of a given fund.
ADDITIONAL POLICIES Please note that the fund maintains additional policies and
reserves certain rights, including:
* The fund may vary its initial or additional investments in the case of
exchanges, reinvestments, periodic investment plans, sponsored arrangements
and other similar programs
* All orders to purchase shares are subject to acceptance by the fund
* At any time, the fund may change or discontinue its sales charge waivers and
any of its order acceptance practices, and may suspend the sale of its shares
* The fund may delay sending you redemption proceeds for up to seven days, or
longer if permitted by the SEC
* To permit investors to obtain the current price, dealers are responsible for
transmitting all orders to the State Street Research Service Center promptly
<PAGE>
20 YOUR INVESTMENT continued
- --------------------------------------------------------------------------------
[begin sidebar text]
[magnifying glass graphic] THE ALTERNATIVE
MINIMUM TAX
The Alternative Minimum Tax (AMT) is a federal tax that could affect you if you
are a high-income individual who would pay comparatively little tax under the
ordinary tax schedules -- for example, because you have significant deductions
or certain types of tax-free income.
Interest from industrial revenue bonds and other so-called private activity
bonds is generally subject to AMT; because of this, the fund does not invest
more than 20% of its net assets in these securities. For corporations, all
tax-exempt interest is considered in calculating AMT.
[end sidebar text]
[graphic of Uncle Sam] DISTRIBUTIONS AND TAXES
INCOME AND CAPITAL GAINS DISTRIBUTIONS The fund distributes its net income and
net capital gains to shareholders. Using projections of its future income, the
fund declares dividends daily and pays them monthly. Net capital gains, if any,
are distributed in December.
You may have your distributions reinvested in the fund, invested in a different
State Street Research fund, deposited in a bank account or mailed out by check.
If you do not give State Street Research other instructions, your distributions
will automatically be reinvested in the fund.
TAX EFFECTS OF DISTRIBUTIONS AND TRANSACTIONS As a general rule, the fund's
income distributions are exempt from federal income tax for all investors
(including corporations) as well as New York State or New York City personal
income taxes. However, you may have federal or state tax liability to the extent
that the fund earns income from non-tax-exempt securities or realizes net
capital gains. In addition, even tax-exempt income may be subject to the federal
alternative minimum tax (see sidebar) or certain state or local taxes, such as
corporate franchise tax.
In general, any taxable income distributions and short-term capital gain
distributions are taxable as ordinary income. Distributions of other capital
gains are generally taxable as capital gains -- in most cases, at different
rates from those that apply to ordinary income.
The tax you pay on a given capital gains distribution generally depends on how
long the fund has held the portfolio securities it sold. It does not depend on
how
<PAGE>
21
------
long you have owned your fund shares or whether you reinvest your distributions.
Every year, the fund will send you information detailing the amount of federal,
New York State and New York City tax-exempt income distributed to you during the
previous year, as well as taxable ordinary income and capital gains.
The sale of shares in your account may produce a gain or loss, and is a taxable
event. For tax purposes, an exchange is the same as a sale.
Your investment in the fund could have additional tax consequences, especially
for corporate investors. Please consult your tax professional for assistance.
Backup Withholding By law, the fund must withhold 31% of your distributions and
proceeds if you have not provided complete, correct taxpayer information.
[graphic of interlocked hands] INVESTOR SERVICES
INVESTAMATIC PROGRAM Use Investamatic to set up regular automatic investments in
the fund from your bank account. You determine the frequency and amount of your
investments.
SYSTEMATIC WITHDRAWAL PLAN This plan is designed for retirees and
other investors who want regular withdrawals from a fund account. The plan is
free and allows you to withdraw up to 8% of your fund assets a year without
incurring any contingent deferred sales charges. Certain terms and minimums
apply.
EZ-TRADER This service allows you to purchase shares or sell fund shares
over the telephone through the ACH (Automated Clearing House) system.
DIVIDEND ALLOCATION PLAN This plan automatically invests your distributions from
the fund into another fund of your choice, without any fees or sales charges.
AUTOMATIC BANK CONNECTION This plan lets you route any distributions or
Systematic Withdrawal Plan payments directly to your bank account.
RETIREMENT PLANS State Street Research also offers a full range of prototype
retirement plans for individuals, sole proprietors, partnerships, corporations
and employees.
Call 1-800-562-0032 for information on any of the services described
above.
<PAGE>
22 OTHER INFORMATION
- --------------------------------------------------------------------------------
[graphic of securities certificates] OTHER SECURITIES
AND RISKS
Each of the fund's portfolio securities and investment practices offers certain
opportunities and carries various risks. Major investments and risk factors are
outlined in the fund description starting on page 1. Below are brief
descriptions of other securities and practices, along with their associated
risks.
LIMITED OBLIGATION SECURITIES Certain municipal securities are not general
obligations of their issuers, meaning that in the event of a default or
termination the securities holders may have limited recourse. These securities
may include:
* lease obligations and installment contracts: issued by government entities to
obtain funds to lease or acquire equipment and other property
* project finance obligations: issued in connection with the financing of
infrastructure projects, such as toll roads or housing projects
* industrial revenue bonds: issued in the name of a public authority to finance
infrastructure used by a private entity (these are generally obligations of
the private entity, not the issuer)
RESTRICTED AND ILLIQUID SECURITIES Any securities that are thinly traded or
whose resale is restricted can be difficult to sell at a desired time and price.
Some of these securities are new and complex, and trade only among institutions;
the markets for these securities are still developing, and may not function as
efficiently as established markets. Owning a large percentage of restricted and
illiquid securities could hamper the fund's ability to raise cash to meet
redemptions. Also, because there may not be an established market price for
these securities, the fund may have to estimate their value, which means that
their valuation (and, to a much smaller extent, the valuation of the fund) may
have a subjective element.
DERIVATIVES Derivatives, a category that includes options and futures, are
financial instruments whose value derives from one or more securities, indices
or currencies. Depending on a derivative's issuer and structure, its income may
be taxable or tax-exempt to shareholders. The fund may use certain derivatives
for hedging (attempting to offset a potential loss in one position by
establishing an interest in an opposite position). The fund may also use
derivatives for speculation (investing for potential income or capital gain).
While hedging can guard against potential risks, it adds to the fund's expenses
and can eliminate some opportunities for gains. There is also a risk that a
derivative intended as a hedge may not perform as expected.
<PAGE>
23
-------
The main risk with derivatives is that some types can amplify a gain or loss,
potentially earning or losing substantially more money than the actual cost of
the derivative.
With some derivatives, whether used for hedging or speculation, there is also
the risk that the counterparty may fail to honor its contract terms, causing a
loss for the fund.
SECURITIES LENDING The fund may seek additional income or fees by lending
portfolio securities to qualified institutions. By reinvesting any cash
collateral it receives in these transactions, the fund could realize additional
gains or losses. If the borrower fails to return the securities and the invested
collateral has declined in value, the fund could lose money.
WHEN-ISSUED SECURITIES The fund may invest in securities prior to their date of
issue. These securities could fall in value by the time they are actually
issued, which may be anytime from a few days to over a year.
ZERO (OR STEP) COUPONS A zero coupon security is a debt security that is
purchased and traded at a discount to its face value because it pays no interest
for some or all of its life. Interest, however, is reported as income to the
fund and the fund is required to distribute to shareholders an amount equal to
the amount reported. Those distributions may force the fund to liquidate
portfolio securities at a disadvantageous time.
DEFENSIVE INVESTING During unusual market conditions, the fund may place up to
100% of total assets in cash or high quality short-term debt securities. To the
extent that the fund does this, it is not pursuing its goal.
YEAR 2000 The investment manager does not currently anticipate that computer
problems related to the year 2000 will have a material effect on the fund.
However, there can be no assurances in this area, including the possibility that
year 2000 computer problems could negatively affect communication systems,
investment markets or the economy in general.
<PAGE>
24 FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
These highlights are intended to help you understand the fund's performance over
the past five years. The information in these tables has been audited by
PricewaterhouseCoopers LLP, the fund's independent accountants. Their report and
the fund's financial statements are included in the fund's annual report, which
is available upon request. Total return figures assume reinvestment of all
distributions.
<TABLE>
<CAPTION>
Class A Class B
-----------------------------------------------------------------------------
Years ended December 31 Years ended December 31
PER SHARE DATA 1994 1995 1996 1997 1998 1994 1995 1996 1997 1998
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR ($) 8.43 7.53 8.23 8.13 8.48 8.43 7.53 8.23 8.13 8.48
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Net investment income ($)* 0.40 0.40 0.38 0.39 0.39 0.34 0.34 0.32 0.33 0.32
Net realized and unrealized gain (loss) on
investments and futures contracts ($) (0.90) 0.71 (0.09) 0.35 0.09 (0.90) 0.71 (0.09) 0.35 0.10
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
TOTAL FROM INVESTMENT OPERATIONS ($) (0.50) 1.11 0.29 0.74 0.48 (0.56) 1.05 0.23 0.68 0.42
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Dividends from net investment income ($) (0.39) (0.41) (0.39) (0.39) (0.40) (0.33) (0.35) (0.33) (0.33) (0.34)
Distributions from capital gains ($) (0.01) -- -- -- (0.04) (0.01) -- -- -- (0.04)
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
TOTAL DISTRIBUTIONS ($) (0.40) (0.41) (0.39) (0.39) (0.44) (0.34) (0.35) (0.33) (0.33) (0.38)
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
NET ASSET VALUE, END OF YEAR ($) 7.53 8.23 8.13 8.48 8.52 7.53 8.23 8.13 8.48 8.52
===== ===== ===== ===== ===== ===== ===== ===== ===== =====
Total return (%)(a) (6.04) 15.11 3.68 9.22 5.92 (6.74) 14.26 2.91 8.41 5.14
RATIOS/SUPPLEMENTAL DATA
- -------------------------------------------------------------------------------------------------------------------------------
Net assets at end of year ($ thousands) 18,214 20,043 19,636 20,193 21,831 12,131 15,084 19,824 17,426 19,273
Expense ratio (%)* 1.10 1.10 1.10 1.10 1.12 1.85 1.85 1.85 1.85 1.87
Ratio of net investment income to
average net assets (%)* 5.07 5.07 4.76 4.88 4.55 4.34 4.32 4.01 4.12 3.81
Portfolio turnover rate (%) 64.80 109.74 89.14 50.92 32.86 64.80 109.74 89.14 50.92 32.86
*Reflects voluntary reduction of expenses
per share of these amounts ($) 0.03 0.02 0.01 0.01 0.01 0.03 0.02 0.01 0.01 0.01
</TABLE>
<PAGE>
25
-------
<TABLE>
<CAPTION>
Class C Class S
-----------------------------------------------------------------------------
Years ended December 31 Years ended December 31
PER SHARE DATA 1994 1995 1996 1997 1998 1994 1995 1996 1997 1998
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR ($) 8.44 7.53 8.23 8.13 8.49 8.44 7.54 8.24 8.14 8.49
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Net investment income ($)* 0.34 0.35 0.32 0.34 0.32 0.42 0.42 0.40 0.43 0.41
Net realized and unrealized gain (loss) on
investments and futures contracts ($) (0.91) 0.70 (0.09) 0.35 0.09 (0.90) 0.71 (0.09) 0.33 0.09
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
TOTAL FROM INVESTMENT OPERATIONS ($) (0.57) 1.05 0.23 0.69 0.41 (0.48) 1.13 0.31 0.76 0.50
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Dividends from net investment income ($) (0.33) (0.35) (0.33) (0.33) (0.34) (0.41) (0.43) (0.41) (0.41) (0.42)
Distributions from capital gains ($) (0.01) -- -- -- (0.04) (0.01) -- -- -- (0.04)
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
TOTAL DISTRIBUTIONS ($) (0.34) (0.35) (0.33) (0.33) (0.38) (0.42) (0.43) (0.41) (0.41) (0.46)
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
NET ASSET VALUE, END OF YEAR ($) 7.53 8.23 8.13 8.49 8.52 7.54 8.24 8.14 8.49 8.53
===== ===== ===== ===== ===== ===== ===== ===== ===== =====
Total return (%)(a) (6.86) 14.25 2.90 8.53 5.01 (5.79) 15.37 3.93 9.48 6.18
RATIOS/SUPPLEMENTAL DATA
- -----------------------------------------------------------------------------------------------------------------------------
Net assets at end of year ($ thousands) 774 651 622 805 1,122 40,750 38,757 34,050 31,759 29,505
Expense ratio (%)* 1.85 1.85 1.85 1.85 1.87 0.85 0.85 0.85 0.85 0.87
Ratio of net investment income
to average net assets (%)* 4.31 4.35 4.03 4.11 3.80 5.29 5.33 5.01 5.13 4.81
Portfolio turnover rate (%) 64.80 109.74 89.14 50.92 32.86 64.80 109.74 89.14 50.92 32.86
*Reflects voluntary reduction of expenses
per share of these amounts ($) 0.03 0.02 0.01 0.01 0.01 0.03 0.02 0.01 0.01 0.01
</TABLE>
[sidebar text]
[begin footnote text]
(a) 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 reduced the fund's expenses.
[end footnote text]
[end sidebar text]
<PAGE>
26 BOARD OF TRUSTEES
- --------------------------------------------------------------------------------
[pillar graphic]
The Board of Trustees is responsible for the operation of the fund. They
establish the fund's major policies, review investments, and provide guidance to
the investment manager and others who provide services to the fund. The Trustees
have diverse backgrounds and substantial experience in business and other areas.
RALPH F. VERNI
Chairman of the Board, President,
Chief Executive Officer and Director,
State Street Research & Management
Company
STEVE A. GARBAN
Former Senior Vice President for Finance
and Operations and Treasurer,
The Pennsylvania State University
MALCOLM T. HOPKINS
Former Vice Chairman of the Board
and Chief Financial Officer,
St. Regis Corp.
DEAN O. MORTON
Former Executive Vice President,
Chief Operating Officer and Director,
Hewlett-Packard Company
SUSAN M. PHILLIPS
Dean, School of Business and Public
Management, George Washington
University; former Member of the Board of
Governors of the Federal Reserve System
and Chairman and Commissioner
of the Commodity Futures Trading
Commission
TOBY ROSENBLATT
President, The Glen Ellen Company
Vice President, Founders Investments Ltd.
MICHAEL S. SCOTT MORTON
Jay W. Forrester Professor of
Management, Sloan School of
Management, Massachusetts
Institute of Technology
<PAGE>
NOTES 27
- --------------------------------------------------------------------------------
<PAGE>
For Additional Information
- --------------------------------------------------------------------------------
[sidebar text]
If you have questions about the fund or would like to request a free copy of the
current annual/semiannual report or SAI, contact State Street Research or your
financial professional.
[State Street Research logo]
Service Center
P.O. Box 8408, Boston, MA 02266
Telephone: 1-800-562-0032
Internet: www.ssrfunds.com
You can also obtain information about the fund, including the SAI and certain
other fund documents, on the Internet at www.sec.gov, in person at the SEC's
Public Reference Room in Washington, DC (telephone 1-800-SEC-0330) or by mail by
sending your request, along with a duplicating fee, to the SEC's Public
Reference Section, Washington, DC 20549-6009.
prospectus
SEC File Number: 811-4558
[end of sidebar text]
You can find additional information on the fund's structure and its performance
in the following documents:
ANNUAL/SEMIANNUAL REPORTS While the prospectus describes the fund's potential
investments, these reports detail the fund's actual investments as of the report
date. Reports include a discussion by fund management of recent economic and
market trends and fund performance. The annual report also includes the report
of the fund's independent accountants.
TICKER SYMBOLS
- --------------------------------------
Class A SNYAX
Class B(1) (proposed) SNYPX
Class B SSYBX
Class C (proposed) SSYDX
Class S SSNYX
STATEMENT OF ADDITIONAL INFORMATION (SAI) A supplement to the prospectus, the
SAI contains further information about the fund and its investment limitations
and policies. A current SAI for this fund is on file with the Securities and
Exchange Commission and is incorporated by reference (is legally part of this
prospectus).
Control Number:
<PAGE>
STATE STREET RESEARCH TAX-EXEMPT FUND
a Series of
STATE STREET RESEARCH TAX-EXEMPT TRUST
STATEMENT OF ADDITIONAL INFORMATION
May 1, 1999
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
INVESTMENT OBJECTIVE......................................................2
ADDITIONAL INVESTMENT POLICIES AND RESTRICTIONS...........................2
TAX-EXEMPT OBLIGATIONS....................................................4
ADDITIONAL RISKS AND INFORMATION CONCERNING
CERTAIN INVESTMENT TECHNIQUES.........................................6
DEBT INSTRUMENTS AND
PERMITTED CASH INVESTMENTS...........................................16
THE TRUST, THE FUND AND ITS SHARES.......................................24
TRUSTEES AND OFFICERS....................................................26
MANAGEMENT OF THE FUND AND INVESTMENT ADVISORY SERVICES..................31
PURCHASE AND REDEMPTION OF SHARES........................................32
SHAREHOLDER ACCOUNTS.....................................................40
NET ASSET VALUE..........................................................44
PORTFOLIO TRANSACTIONS...................................................45
CERTAIN TAX MATTERS......................................................49
DISTRIBUTION OF SHARES OF THE FUND.......................................52
CALCULATION OF PERFORMANCE DATA..........................................56
CUSTODIAN ..............................................................62
INDEPENDENT ACCOUNTANTS..................................................62
FINANCIAL STATEMENTS.....................................................63
</TABLE>
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, 1999, 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.
The Fund's financial statements as of and for the fiscal year ended
December 31, 1998, which are included in the Fund's Annual Report for that year,
are incorporated by reference. The Annual Report is available, without charge,
upon request by calling 1-800-562-0032.
CONTROL NUMBER:
<PAGE>
INVESTMENT OBJECTIVE
As set forth under "The Fund--Goal and Strategies--Fundamental Goal" in the
Prospectus of State Street Research Tax-Exempt Fund (the "Fund"), the Fund's
investment goal, which is to seek a high level of interest income exempt from
federal income taxes, is fundamental and may not be changed by the Fund except
by the affirmative vote of a majority of the outstanding voting securities of
the Fund, as defined in the Investment Company Act of 1940, as amended (the
"1940 Act"). (Under the 1940 Act, a "vote of the majority of the outstanding
voting securities" means the vote, at the annual or a special meeting of
security holders duly called, (i) of 67% or more of the voting securities
present at the meeting if the holders of more than 50% of the outstanding voting
securities are present or represented by proxy or (ii) of more than 50% of the
outstanding voting securities, whichever is less.)
ADDITIONAL INVESTMENT POLICIES AND RESTRICTIONS
As set forth under "The Fund--Principal Risks" and "Other
Information--Other Securities and Risks" in the Fund's Prospectus, the Fund has
adopted certain investment restrictions, and those restrictions are either
fundamental or not fundamental. Fundamental restrictions may not be changed by
the Fund except by the affirmative vote of a majority of the outstanding voting
securities of the Fund. Restrictions that are not fundamental may be changed by
a vote of a majority of the Trustees of the Trust.
The Fund's fundamental investment restrictions are set forth below. Under
these restrictions, it is the Fund's policy:
(1) not to purchase a security of any one issuer (other than securities
issued or guaranteed as to principal or interest by the U.S.
Government or its agencies or instrumentalities or mixed-ownership
Government corporations) if such purchase would, with respect to 75%
of the Fund's total assets, cause more than 5% of the Fund's total
assets to be invested in the securities of such issuer or cause more
than 10% of the voting securities of such issuer to be held by the
Fund;
(2) not to 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
2
<PAGE>
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;
(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
3
<PAGE>
transaction is greater than the interest expense of the reverse
repurchase agreement.
The following investment restrictions may be changed without shareholder
approval. 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 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
this Statement of Additional Information;
(3) 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);
(4) not to purchase a security issued by another investment company,
except to the extent permitted under the 1940 Act or except by
purchases in the open market involving only customary brokers'
commissions, or securities acquired as dividends or distributions or
in connection with a merger, consolidation or similar transaction or
other exchange.
(5) not to invest in companies for the purpose of exercising control over
their management, although the Trust may from time to time present its
views on various matters to the management of issuers in which it
holds investments.
TAX-EXEMPT OBLIGATIONS
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 obligations 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
obligations may be issued include refunding
4
<PAGE>
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).
Municipal lease obligations, that is, lease obligations or installment
purchase contract obligations supported by lease payments made by a
municipality, 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 based 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
5
<PAGE>
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.
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 Investor's Services, Inc. ("Moody's") and Standard &
Poor's Corporation ("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 RISKS AND INFORMATION CONCERNING
CERTAIN INVESTMENT TECHNIQUES
Derivatives
The Fund may buy and sell certain types of derivatives such as options,
futures contracts, options on futures contracts, and swaps under circumstances
in which such instruments are expected by State Street Research & Management
Company (the "Investment Manager") to aid in achieving the Fund's investment
objective. The Fund may also purchase instruments with characteristics of both
futures and securities (e.g., debt instruments with
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interest and principal payments determined by reference to the value of a
commodity or a currency at a future time) and which, therefore, possess the
risks of both futures and securities investments.
Derivatives, such as options, futures contracts, options on futures
contracts, and swaps enable the Fund to take both "short" positions (positions
which anticipate a decline in the market value of a particular asset or index)
and "long" positions (positions which anticipate an increase in the market value
of a particular asset or index). The Fund may also use strategies which involve
simultaneous short and long positions in response to specific market conditions,
such as where the Investment Manager anticipates unusually high or low market
volatility.
The Investment Manager may enter into derivative positions for the Fund for
either hedging or non-hedging purposes. The term hedging is applied to defensive
strategies designed to protect the Fund from an expected decline in the market
value of an asset or group of assets that the Fund owns (in the case of a short
hedge) or to protect the Fund from an expected rise in the market value of an
asset or group of assets which it intends to acquire in the future (in the case
of a long or "anticipatory" hedge). Non-hedging strategies include strategies
designed to produce incremental income (such as the option writing strategy
described below) or "speculative" strategies which are undertaken to profit (i)
from an expected decline in the market value of an asset or group of assets
which the Fund does not own or (ii) expected increases in the market value of an
asset which it does not plan to acquire. Information about specific types of
instruments is provided below.
Futures Contracts. Futures contracts are publicly traded contracts to buy
or sell an underlying asset or group of assets, such as a currency, or an index
of securities, at a future time at a specified price. A contract to buy
establishes a long position while a contract to sell establishes a short
position.
The purchase of a futures contract on an equity security or an index of
equity securities normally enables a buyer to participate in the market movement
of the underlying asset or index after paying a transaction charge and posting
margin in an amount equal to a small percentage of the value of the underlying
asset or index. The Fund will initially be required to deposit with the Trust's
custodian or the futures commission merchant effecting the futures transaction
an amount of "initial margin" in cash or securities, as permitted under
applicable regulatory policies.
Initial margin in futures transactions is different from margin in
securities transactions in that the former does not involve the borrowing of
funds by the customer to finance the transaction. Rather, the initial margin is
like a performance bond or good faith deposit on the contract. Subsequent
payments (called "maintenance margin") to and from the broker will be made on a
daily basis as the price of the underlying asset fluctuates. This process is
known as "marking to market." For example, when the Fund has taken a long
position in a futures contract and the value of the underlying asset has risen,
that position will have increased in value and the Fund will receive from the
broker a maintenance margin payment equal to the
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increase in value of the underlying asset. Conversely, when the Fund has taken a
long position in a futures contract and the value of the underlying instrument
has declined, the position would be less valuable, and the Fund would be
required to make a maintenance margin payment to the broker.
At any time prior to expiration of the futures contract, the Fund may elect
to close the position by taking an opposite position which will terminate the
Fund's position in the futures contract. A final determination of maintenance
margin is then made, additional cash is required to be paid by or released to
the Fund, and the Fund realizes a loss or a gain. While futures contracts with
respect to securities do provide for the delivery and acceptance of such
securities, such delivery and acceptance are seldom made.
In transactions establishing a long position in a futures contract, assets
equal to the face value of the futures contract will be identified by the Fund
to the Trust's custodian for maintenance in a separate account to insure that
the use of such futures contracts is unleveraged. Similarly, assets having a
value equal to the aggregate face value of the futures contract will be
identified with respect to each short position. The Fund will utilize such
assets and methods of cover as appropriate under applicable exchange and
regulatory policies.
Options
The Fund may use options to implement its investment strategy. There are
two basic types of options: "puts" and "calls." Each type of option can
establish either a long or a short position, depending upon whether the Fund is
the purchaser or the writer of the option. A call option on a security, for
example, gives the purchaser of the option the right to buy, and the writer the
obligation to sell, the underlying asset at the exercise price during the option
period. Conversely, a put option on a security gives the purchaser the right to
sell, and the writer the obligation to buy, the underlying asset at the exercise
price during the option period.
Purchased options have defined risk, that is, the premium paid for the
option, no matter how adversely the price of the underlying asset moves, while
affording an opportunity for gain corresponding to the increase or decrease in
the value of the optioned asset. In general, a purchased put increases in value
as the value of the underlying security falls and a purchased call increases in
value as the value of the underlying security rises.
The principal reason to write options is to generate extra income (the
premium paid by the buyer). Written options have varying degrees of risk. An
uncovered written call option theoretically carries unlimited risk, as the
market price of the underlying asset could rise far above the exercise price
before its expiration. This risk is tempered when the call option is covered,
that is, when the option writer owns the underlying asset. In this case, the
writer runs the risk of the lost opportunity to participate in the appreciation
in value of the asset rather than the risk of an out-of-pocket loss. A written
put option has defined risk, that is, the difference between the agreed upon
price that the Fund must pay to the buyer upon exercise of the put and the
value, which could be zero, of the asset at the time of exercise.
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The obligation of the writer of an option continues until the writer
effects a closing purchase transaction or until the option expires. To secure
its obligation to deliver the underlying asset in the case of a call option, or
to pay for the underlying asset in the case of a put option, a covered writer is
required to deposit in escrow the underlying security or other assets in
accordance with the rules of the applicable clearing corporation and exchanges.
Among the options which the Fund may enter are options on securities
indices. In general, options on indices of securities are similar to options on
the securities themselves except that delivery requirements are different. For
example, a put option on an index of securities does not give the holder the
right to make actual delivery of a basket of securities but instead gives the
holder the right to receive an amount of cash upon exercise of the option if the
value of the underlying index has fallen below the exercise price. The amount of
cash received will be equal to the difference between the closing price of the
index and the exercise price of the option expressed in dollars times a
specified multiple. As with options on equity securities or futures contracts,
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. In connection
with the use of such options, the Fund may cover its position by identifying
assets having a value equal to the aggregate face value of the option position
taken.
Options on Futures Contracts
An option on a futures contract gives the purchaser the right, in return
for the premium paid, to assume a position in a futures contract (a long
position if the option is a call and a short position if the option is a put) at
a specified exercise price at any time during the period of the option.
Limitations and Risks of Options and Futures Activity
The Fund may not establish a position in a commodity futures contract or
purchase or sell a commodity option contract for other than bona fide hedging
purposes if immediately thereafter the sum of the amount of initial margin
deposits and premiums required to establish such positions for such nonhedging
purposes would exceed 5% of the market value of the Fund's net assets. The Fund
applies a similar policy to options that are not commodities.
As noted above, the Fund may engage in both hedging and nonhedging
strategies. Although effective hedging can generally capture the bulk of a
desired risk adjustment, no hedge is completely effective. The Fund's ability to
hedge effectively through transactions in futures and options depends on the
degree to which price movements in its holdings correlate with price movements
of the futures and options.
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Nonhedging strategies typically involve special risks. The profitability of
the Fund's non-hedging strategies will depend on the ability of the Investment
Manager to analyze both the applicable derivatives market and the market for the
underlying asset or group of assets. Derivatives markets are often more volatile
than corresponding securities markets and a relatively small change in the price
of the underlying asset or group of assets can have a magnified effect upon the
price of a related derivative instrument.
Derivatives markets also are often less liquid than the market for the
underlying asset or group of assets. Some positions in futures and options may
be closed out only on an exchange which provides a secondary market therefor.
There can be no assurance that a liquid secondary market will exist for any
particular futures contract or option at any specific time. Thus, it may not be
possible to close such an option or futures position prior to maturity. The
inability to close options and futures positions also could have an adverse
impact on the Fund's ability to effectively carry out their derivative
strategies and might, in some cases, require 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.
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, currency rates or indices,
including purchase of caps, floors and collars as described below. In an
interest rate swap the Fund could agree for a specified period to pay a bank or
investment banker the floating rate of interest on a so-called notional
principal amount (i.e., an assumed figure selected by the parties for this
purpose) in exchange for agreement by the bank or investment banker to pay the
Fund a fixed rate of interest on the notional principal amount. In a currency
swap the Fund would agree with the other party to exchange cash flows based on
the relative differences in values of a notional amount of two (or more)
currencies; in an index swap, the Fund would agree to exchange cash flows on a
notional amount based on changes in the values of the selected indices. Purchase
of a cap entitles the purchaser to receive payments from the seller on a
notional amount to the extent that the selected index exceeds an agreed upon
interest rate or amount whereas purchase of a floor entitles the purchaser to
receive such payments to the extent the selected index falls below an agreed
upon interest rate or amount. A collar combines a cap and a floor.
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The Fund may enter credit protection swap arrangements involving the sale
by the Fund of a put option on a debt security which is exercisable by the buyer
upon certain events, such as a default by the referenced creditor on the
underlying debt or a bankruptcy event of the creditor.
Most swaps entered into by the Fund will be on a net basis; for example, in
an interest rate swap, amounts generated by application of the fixed rate and
the floating rate to the notional principal amount would first offset one
another, with the Fund either receiving or paying the difference between such
amounts. In order to be in a position to meet any obligations resulting from
swaps, the Fund will set up a segregated custodial account to hold appropriate
liquid assets, including cash; for swaps entered into on a net basis, assets
will be segregated having a daily net asset value equal to any excess of the
Fund's accrued obligations over the accrued obligations of the other party,
while for swaps on other than a net basis assets will be segregated having a
value equal to the total amount of the Fund's obligations.
These arrangements will be made primarily for hedging purposes, to preserve
the return on an investment or on a portion of the Fund's portfolio. However,
the Fund may, as noted above, enter into such arrangements for income purposes
to the extent permitted by the Commodities Futures Trading Commission for
entities which are not commodity pool operators, such as the Fund. In entering a
swap arrangement, the Fund is dependent upon the creditworthiness and good faith
of the counterparty. The Fund attempts to reduce the risks of nonperformance by
the counterparty by dealing only with established, reputable institutions. The
swap market is still relatively new and emerging; positions in swap arrangements
may become illiquid to the extent that nonstandard arrangements with one
counterparty are not readily transferable to another counterparty or if a market
for the transfer of swap positions does not develop. The use of interest rate
swaps is a highly specialized activity which involves investment techniques and
risks different from those associated with ordinary portfolio securities
transactions. If the Investment Manager is incorrect in its forecasts of market
values, interest rates and other applicable factors, the investment performance
of the Fund would diminish compared with what it would have been if these
investment techniques were not used. Moreover, even if the Investment Manager is
correct in its forecasts, there is a risk that the swap position may correlate
imperfectly with the price of the asset or liability being hedged.
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 net assets, except that
repurchase agreements extending for more than seven days when combined with any
other illiquid securities held by the Fund will be limited to 15% of the Fund's
net assets. 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
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continuous operations; and (c) not more than 25% in issuers conducting their
principal activities in the same state.
Reverse Repurchase Agreements
The Fund may enter into reverse repurchase agreements. However, the Fund
may not engage in reverse repurchase agreements in excess of 5% of the Fund's
total assets. In a reverse repurchase agreement the Fund transfers possession of
a portfolio instrument to another person, such as a financial institution,
broker or dealer, in return for a percentage of the instrument's market value in
cash, and agrees that on a stipulated date in the future the Fund will
repurchase the portfolio instrument by remitting the original consideration plus
interest at an agreed-upon rate. The ability to use reverse repurchase
agreements may enable, but does not ensure the ability of, the Fund to avoid
selling portfolio instruments at a time when a sale may be deemed to be
disadvantageous.
When effecting reverse repurchase agreements, assets of the Fund in a
dollar amount sufficient to make payment of the obligations to be purchased are
segregated on the Fund's records at the trade date and maintained until the
transaction is settled.
When-Issued Securities
The Fund may purchase "when-issued" securities, which are traded on a price
or yield basis prior to actual issuance. Such purchases will be made only to
achieve the Fund's investment objective and not for leverage. The when-issued
trading period generally lasts from a few days to months, or over a year or
more; during this period dividends or interest on the securities are not
payable. A frequent form of when-issued trading occurs 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.
Restricted Securities
It is the Fund's policy not to make an investment in restricted securities,
including restricted securities sold in accordance with Rule 144A under the
Securities Act of 1933 ("Rule 144A Securities") if, as a result, more than 35%
of the Fund's total assets are invested in restricted securities, provided not
more than 10% of the Fund's total assets are invested in restricted securities
other than Rule 144A Securities.
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Securities may be resold pursuant to Rule 144A under certain circumstances
only to qualified institutional buyers as defined in the rule, and the markets
and trading practices for such securities are relatively new and still
developing; depending on the development of such markets, Rule 144A Securities
may be deemed to be liquid as determined by or in accordance with methods
adopted by the Trustees. Under such methods the following factors are
considered, among others: the frequency of trades and quotes for the security,
the number of dealers and potential purchasers in the market, market making
activity, and the nature of the security and marketplace trades. Investments in
Rule 144A Securities could have the effect of increasing the level of the Fund's
illiquidity to the extent that qualified institutional buyers become, for a
time, uninterested in purchasing such securities. Also, the Fund may be
adversely impacted by the subjective valuation of such securities in the absence
of a market for them. Restricted securities that are not resalable under Rule
144A may be subject to risks of illiquidity and subjective valuations to a
greater degree than Rule 144A Securities.
Securities Lending
The Fund may lend portfolio securities with a value of up to 33 1/3%
of its total assets. The Fund will receive cash or cash equivalents (e.g., U.S.
Government obligations) as collateral in an amount equal to at least 100% of the
current market value of any loaned securities plus accrued interest. Collateral
received by the Fund will generally be held in the form tendered, although cash
may be invested in unaffiliated mutual funds with quality short-term portfolios,
securities issued or guaranteed by the U.S. Government or its agencies or
instrumentalities or certain unaffiliated mutual funds, irrevocable stand-by
letters of credit issued by a bank, or repurchase agreements, or other similar
investments. The investing of cash collateral received from loaning portfolio
securities involves leverage which magnifies the potential for gain or loss on
monies invested and, therefore, results in an increase in the volatility of the
Fund's outstanding securities. Such loans may be terminated at any time.
The Fund may receive a lending fee and will retain rights to dividends,
interest or other distributions, on the loaned securities. Voting rights pass
with the lending, although the Fund may call loans to vote proxies if desired.
Should the borrower of the securities fail financially, there is a risk of delay
in recovery of the securities or loss of rights in the collateral. Loans are
made only to borrowers which are deemed by the Investment Manager or its agents
to be of good financial standing.
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Short-Term Trading
The Fund may engage in short-term trading of securities and reserves full
freedom with respect to portfolio turnover. In periods where there are rapid
changes in economic conditions and security price levels or when reinvestment
strategy changes significantly, portfolio turnover may be higher than during
times of economic and market price stability or when investment strategy remains
relatively constant. The Fund's portfolio turnover rate may involve greater
transaction costs, relative to other funds in general, and may have tax and
other consequences.
Temporary and Defensive Investments
The Fund may hold up to 100% of its assets in cash or short-term debt securities
for temporary defensive purposes. The Fund will adopt a temporary defensive
position when, in the opinion of the Investment Manager, such a position is more
likely to provide protection against adverse market conditions than adherence to
the Fund's other investment policies. The types of short-term instruments in
which the Fund may invest for such purposes include short-term money market
securities, such as repurchase agreements, and securities issued or guaranteed
by the U.S. Government or its agencies or instrumentalities, certificates of
deposit, time deposits and bankers' acceptances of certain qualified financial
institutions and corporate commercial paper, which at the time of purchase are
rated at least within the "A" major rating category by Standard & Poor's
Corporation ("S&P") or the "Prime" major rating category by Moody's Investor's
Service, Inc. ("Moody's"), or, if not rated, issued by companies having an
outstanding long-term unsecured debt issued rated at least within the "A"
category by S&P or Moody's.
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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.
Computer-Related Risks
Many mutual funds and other companies that issue securities, as well as
government entities upon whom those mutual funds and companies depend, may be
adversely affected by computer systems (whether their own systems or systems of
their service providers) that do not properly process dates beginning with
January 1, 2000 and information related to those dates.
The Investment Manager currently is in the process of reviewing its
internal computer systems as they relate to the Fund, as well as the computer
systems of those service providers upon which the Fund relies, in order to
obtain reasonable assurances that the Fund will not experience a material
adverse impact related to the problem. The Fund does not currently anticipate
that the problem will have a material adverse impact on its portfolio
investments, taken as a whole. There can be no assurances, however, including
the possibility that the problem could negatively affect the investment markets
or the economy generally.
Other Investment Companies
The Fund may invest in securities of other investment companies, including
affiliated investment companies, such as open- or closed-end management
investment companies, hub and spoke (master/feeder) funds, pooled accounts or
other similar, collective investment vehicles. As a shareholder of an investment
company, a Fund may indirectly bear service and other fees in addition to the
fees the Fund pays its service providers. Similarly, other investment companies
may invest in the Fund. Other investment companies which invest in the Fund may
hold significant portions of the Fund and materially affect the sale and
redemption of Fund shares and the Fund's portfolio transactions.
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DEBT INSTRUMENTS AND
PERMITTED CASH INVESTMENTS
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.
Managing Volatility. In administering the Fund's portfolio, the Investment
Manager attempts to reduce volatility in part by managing the duration and
weighted average maturity of the Fund's bond position.
Duration is an indicator of the expected volatility of a bond position in
response to changes in interest rates. In calculating duration, the Fund
measures the average time required to receive all cash flows associated with
those debt securities held in the Fund's portfolio -- representing payments of
principal and interest -- by considering the timing, frequency and amount of
payment expected from each portfolio security. The higher the duration, the
greater the gains and losses when interest rates change. Duration generally is a
more accurate measure of potential volatility with a portfolio composed of
high-quality debt securities, such as U.S.
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government securities, municipal securities and high-grade U.S. corporate bonds,
than with lower-grade securities.
The Investment Manager may use several methods to manage the duration of
the Fund's bond position in order to increase or decrease its exposure to
changes in interest rates. First, the Investment Manager may adjust portfolio
duration by adjusting the mix of debt securities held by the Fund. For example,
if the Investment Manager intends to shorten the duration, it may sell debt
instruments that individually have a long duration and purchase other debt
instruments that individually have a shorter duration. Among the factors that
will affect a debt security's duration are the length of time to maturity, the
timing of interest and principal payments, and whether the terms of the security
give the issuer of the security the right to call the security prior to
maturity. Second, the Investment Manager may adjust bond duration using
derivative transactions, especially with interest rate futures and options
contracts. For example, if the Investment Manager wants to lengthen the duration
of the Fund's bond position, it could purchase interest rate futures contracts
instead of buying longer-term bonds or selling shorter-term bonds. Similarly,
during periods of lower interest rate volatility, the Investment Manager may use
a technique to extend duration in the event rates rise writing an
out-of-the-money put option and receiving premium income with the expectation
the option could be exercised. In managing duration, the use of such derivatives
may be faster and more efficient than trading specific portfolio securities.
Weighted average maturity is another indicator of potential volatility used
by the Investment Manager with respect to the Fund's bond portfolio, although
for certain types of debt securities, such as high quality debt securities, it
is not as accurate as duration in quantifying potential volatility. Weighted
average maturity is the average of all maturities of the individual debt
securities held by the Fund, weighted by the market value of each security.
Generally, the longer the weighted average maturity, the more bond prices will
vary in response to changes in interest rates.
U.S. Government and Related Securities. U.S. Government securities are
securities which are issued or guaranteed as to principal or interest by the
U.S. Government, a U.S. Government agency or instrumentality, or certain
mixed-ownership Government corporations as described herein. The U.S. Government
securities in which the Fund invests include, among others:
o direct obligations of the U.S. Treasury, i.e., U.S. Treasury bills,
notes, certificates and bonds;
o 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
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o 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 Bank, the Federal National Mortgage Association
and the Federal Home Loan Mortgage Corporation are backed by the credit of the
agency or instrumentality issuing the obligations. Certain obligations of
Resolution Funding Corporation, a mixed- ownership Government corporation, are
backed with respect to interest payments by the U.S. Treasury, and with respect
to principal payments by U.S. Treasury obligations held in a segregated account
with a Federal Reserve Bank. Except for certain mortgage-related securities, the
Fund will only invest in obligations issued by mixed-ownership Government
corporations where such securities are guaranteed as to payment of principal or
interest by the U.S. Government or a U.S. Government agency or instrumentality,
and any unguaranteed principal or interest is otherwise supported by U.S.
Government obligations held in a segregated account.
U.S. Government securities may be acquired by the Fund in the form of
separately traded principal and interest components of securities issued or
guaranteed by the U.S. Treasury. The principal and interest components of
selected securities are traded independently under the Separate Trading of
Registered Interest and Principal of Securities ("STRIPS") program. Under the
STRIPS program, the principal and interest components are individually numbered
and separately issued by the U.S. Treasury at the request of depository
financial institutions, which then trade the component parts independently.
Obligations of Resolution Funding Corporation are similarly divided into
principal and interest components and maintained as such on the book entry
records of the Federal Reserve Banks.
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.
18
<PAGE>
Bank Money Investments
Bank money investments include, but are not limited to, certificates of
deposit, bankers' acceptances and time deposits. Certificates of deposit are
generally short-term (i.e., less than one year), interest-bearing negotiable
certificates issued by commercial banks or savings and loan associations against
funds deposited in the issuing institution. A banker's acceptance is a time
draft drawn on a commercial bank by a borrower, usually in connection with an
international commercial transaction (to finance the import, export, transfer or
storage of goods). A banker's acceptance may be obtained from a domestic or
foreign bank, including a U.S. branch or agency of a foreign bank. The borrower
is liable for payment as well as the bank, which unconditionally guarantees to
pay the draft at its face amount on the maturity date. Most acceptances have
maturities of six months or less and are traded in secondary markets prior to
maturity. Time deposits are nonnegotiable deposits for a fixed period of time at
a stated interest rate. The Fund will not invest in any such bank money
investment unless the investment is issued by a U.S. bank that is a member of
the Federal Deposit Insurance Corporation ("FDIC"), including any foreign branch
thereof, a U.S. branch or agency of a foreign bank, a foreign branch of a
foreign bank, or a savings bank or savings and loan association that is a member
of the FDIC and which at the date of investment has capital, surplus and
undivided profits (as of the date of its most recently published financial
statements) in excess of $50 million. The Fund will not invest in time deposits
maturing in more than seven days and will not invest more than 10% of its total
assets in time deposits maturing in two to seven days.
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.
Lower Rated Debt Securities ("Junk Bonds")
Lower rated convertible or nonconvertible debt securities generally involve
more credit risk than higher rated securities and are considered by S&P and
Moody's to be speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. Further, such
securities may be subject to greater market fluctuations and risk of loss of
income and principal than lower yielding, higher rated debt securities. Risk of
lower quality debt securities, commonly known as "junk bonds," include (i)
limited liquidity and secondary market support; (ii) substantial market price
volatility resulting from changes in prevailing interest rates and/or investor
perceptions; (iii) subordination to the prior claims of banks and other senior
lenders; (iv) the operation of mandatory sinking fund or call/redemption
provisions during periods of declining interest rates when the Fund may be
required to reinvest premature redemption proceeds in lower yielding portfolio
securities; (v) the possibility that earnings of the issuer may be insufficient
to meet its debt service; and (vi) the issuer's low creditworthiness and
potential for insolvency during period of rising interest rates and economic
downturn. For further information concerning the rating categories of debt
securities, see the Appendix to this Statement of Additional Information.
19
<PAGE>
Zero and Step Coupon Securities
Zero and step coupon securities are debt securities that may pay no
interest for all or a portion of their life but are purchased at a discount to
face value at maturity. Their return consists of the amortization of the
discount between their purchase price and their maturity value, plus in the case
of a step coupon, any fixed rate interest income. Zero coupon securities pay no
interest to holders prior to maturity even though interest on these securities
is reported as income to the Fund. The Fund will be required to distribute all
or substantially all of such amounts annually to its shareholders. These
distributions may cause the Fund to liquidate portfolio assets in order to make
such distributions at a time when the Fund may have otherwise chosen not to sell
such securities. The market value of such securities, which may be more volatile
than that of securities which pay interest at regular intervals.
Commercial Paper Ratings
Commercial paper investments at the time of purchase will be rated within
the "A" major rating category by S&P or within the "Prime" major rating category
by Moody's, or, if not rated, issued by companies having an outstanding
long-term unsecured debt issue rated at least within the "A" category by S&P or
by Moody's. The money market investments in corporate bonds and debentures
(which must have maturities at the date of settlement of one year or less) must
be rated at the time of purchase at least within the "A" category by S&P or
within the "Prime" category by Moody's, within comparable categories of other
rating agencies or considered to be of comparable quality by the Investment
Manager.
Commercial paper rated within the "A" category (highest quality) by S&P is
issued by entities which have liquidity ratios which are adequate to meet cash
requirements. Long-term senior debt is rated within the "A" category or better,
although in some cases credits within the "BBB" category may be allowed. The
issuer has access to at least two additional channels of borrowing. Basic
earnings and cash flow have an upward trend with allowance made for unusual
circumstances. Typically, the issuer's industry is well established and the
issuer has a strong position within the industry. The reliability and quality of
management are unquestioned. The relative strength or weakness of the above
factors determines whether the issuer's commercial paper is rated A-1, A-2 or
A-3. (Those A-1 issues determined to possess overwhelming safety characteristics
are denoted with a plus (+) sign: A-1+.)
The rating Prime is the highest commercial paper rating category assigned
by Moody's. Among the factors considered by Moody's in assigning ratings are the
following: evaluation of the management of the issuer; economic evaluation of
the issuer's industry or industries and an appraisal of speculative-type risks
which may be inherent in certain areas; evaluation of the issuer's products in
relation to competition and customer acceptance; liquidity; amount and quality
of long-term debt; trend of earnings over a period of 10 years; financial
management of obligations which may be present or may arise as a result of
public interest questions and
20
<PAGE>
preparations to meet such obligations. These factors are all considered in
determining whether the commercial paper is rated Prime-1, Prime-2 or Prime-3.
In the event the lowering of ratings of debt instruments held by the Fund
by applicable rating agencies results in a material decline in the overall
quality of the Fund's portfolio, the Trustees of the Trust will review the
situation and take such action as they deem in the best interests of the Fund's
shareholders, including, if necessary, changing the composition of the
portfolio.
Unrated and Split-Rated 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 unratec 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.
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
21
<PAGE>
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 CC 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 CC debt rating. The C rating may be used
to cover a situation where a bankruptcy petition has been filed, but debt
service payments are continued.
CI: The rating CI is reserved for income bonds on which no interest is
being paid.
D: Debt rated D is in payment default. The D rating category is used when
interest payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grace period. The D rating also will be used upon the
filing of a bankruptcy petition if debt service payments are jeopardized.
Plus (+) or Minus (-): The rating from AA to CCC may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
S&P may attach the "r" symbol to derivative, hybrid, and certain other
obligations that S&P believes may experience high volatility or high variability
in expected returns due to noncredit risks created by the terms of the
obligation, such as securities whose principal or interest return is indexed to
equities, commodities, or currencies; certain swaps and options, and interest
only (IO) and principal only (PO) mortgage securities.
SP-1: Notes rated SP-1 are of the highest quality with very strong or
strong capacity to pay principal and interest. Issues determined to possess
overwhelming safety characteristics are given a plus (+) designation.
SP-2: Notes rated SP-2 are of high quality with satisfactory capacity to
pay principal and interest.
SP-3: Notes rated SP-3 have a speculative capacity to pay principal and
interest.
22
<PAGE>
Moody's Investors Service, Inc.
Aaa: Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present,
which make the long-term risks appear somewhat larger than in Aaa securities.
A: Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving security
to principal and interest are considered adequate but elements may be present
which suggest a susceptibility to impairment sometime in the future.
Baa: Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present, but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba: Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate, and thereby not well safeguarded
during other good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance or
other terms of the contract over any long period of time may be small.
Caa: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca: Bonds which are rated Ca represent obligations which are speculative in
a high degree. Such issues are often in default or have other marked
shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds, and issues
so rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
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<PAGE>
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.
THE TRUST, THE FUND AND ITS SHARES
The Fund was organized in 1985 as a separate series of State Street
Research Tax-Exempt Trust, a Massachusetts business trust. A "series" is a
separate pool of assets of the Trust which is separately managed and has a
different investment objective and different policies from those of another
series. The 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 of the Trust have authority to issue an unlimited number of shares of
beneficial interest of separate series, $.001 par value per share. The Trustees
also have authority, without the necessity of a shareholder vote, to create any
number of new series or classes or to commence the public offering of shares of
any previously established series or class. The Trustees have authorized shares
of the Fund to be issued in five classes: Class A, Class B(1), Class B, Class C
and Class S shares.
Each share of each class of shares represents an identical legal interest
in the same portfolio of investments of the Fund, has the same rights and is
identical in all respects, except that Class A, Class B and Class C shares bear
the expenses of the deferred sales arrangement and any expenses (including the
higher service and distribution fees) resulting from such sales arrangement, and
certain other incremental expenses related to a class. Each class will have
exclusive voting rights with respect to provisions of the Rule 12b-1
distribution plan pursuant to which the service and distribution fees, if any,
are paid. Although the legal rights of holders of each class of shares are
identical, it is likely that the different expenses borne by each class will
result in different net asset values and dividends. The different classes of
shares of the Fund also have different exchange privileges. Except for those
differences between classes of shares described above, in the Fund's Prospectus
and otherwise this Statement of Additional Information, each share of the Fund
has equal dividend, redemption and liquidation rights with other shares of the
Fund, and when issued, is fully paid and nonassessable by the Fund.
Shareholder rights granted under the Master Trust Agreement may be modified
by the Trustees provided, however, that the Master Trust Agreement may not be
amended if such amendment (a) repeals the limitations on personal liability of
any shareholder, or repeals the prohibition of assessment upon shareholders,
without the
24
<PAGE>
express consent of each shareholder involved or (b) adversely modifies any
shareholder right without the consent of the holders of a majority of the
outstanding shares entitled to vote. On any matter submitted to the
shareholders, the holder of a Fund share is entitled to one vote per share (with
proportionate voting for fractional shares) regardless of the relative net asset
value thereof. Except as provided by law, the Trustees may otherwise modify the
rights of shareholders at any time.
Under the Master Trust Agreement, no annual or regular meeting of
shareholders is required. Thus, there ordinarily will be no shareholder meetings
unless required by the 1940 Act. Except as otherwise provided under the 1940
Act, the Board of Trustees will be a self-perpetuating body until fewer than
two-thirds of the Trustees serving as such are Trustees who were elected by
shareholders of the Trust. In the event less than a majority of the Trustees
serving as such were elected by shareholders of the Trust, a meeting of
shareholders will be called to elect Trustees. Under the Master Trust Agreement,
any Trustee may be removed by vote of two-thirds of the outstanding Trust
shares; holders of 10% or more of the outstanding shares of the Trust can
require that the Trustees call a meeting of shareholders for purposes of voting
on the removal of one or more Trustees. In connection with such meetings called
by shareholders, shareholders will be assisted in shareholder communications to
the extent required by applicable law.
Under Massachusetts law, the shareholders of the Trust could, under certain
circumstances, be held personally liable for the obligations for the Trust.
However, the Master Trust Agreement of the Trust disclaims shareholder liability
for acts or obligations of the Trust and provides for indemnification for all
losses and expenses of any shareholder of the Fund held personally liable for
the obligations of the Trust. Thus, the risk of a shareholder incurring
financial loss on account of shareholder liability is limited to circumstances
in which the Fund would be unable to meet its obligations. The Investment
Manager believes that, in view of the above, the risk of personal liability to
shareholders is remote.
25
<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 36. 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, 210 Old Main,
University Park, PA 16802, serves as Trustee of the Trust. He is 61. 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 71. 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 58. 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.
*+Gerard P. Maus, One Financial Center, Boston, MA 02111, serves as
Treasurer of the Trust. He is 48. His principal occupation is currently, and
during the past five years has been, Executive Vice President, Treasurer, Chief
Financial Officer, Chief Administrative Officer and Director of State Street
Research & Management Company. Mr. Maus's other principal business affiliations
include Executive Vice President, Treasurer, Chief Financial Officer, Chief
Administrative Officer and Director of State Street Research Investment
Services, Inc.
- ------------------
* or +, see footnotes on page 28.
26
<PAGE>
*+Francis J. McNamara, III, One Financial Center, Boston, MA 02111,
serves as Secretary and General Counsel of the Trust. He is 43. His principal
occupation is Executive Vice President, General Counsel and Secretary of State
Street Research & Management Company. During the past five years he has also
served as Senior Vice President of State Street Research & Management Company
and as Senior Vice President, General Counsel and Assistant Secretary of The
Boston Company, Inc., Boston Safe Deposit and Trust Company and The Boston
Company Advisors, Inc. Mr. McNamara's other principal business affiliations
include Executive Vice President, Clerk and General Counsel of State Street
Research Investment Services, Inc.
+Dean O. Morton, 3200 Hillview Avenue, Palo Alto, CA 94304, serves as
Trustee of the Trust. He is 67. He is retired and was formerly Executive Vice
President, Chief Operating Officer and Director of Hewlett-Packard Company.
+Toby Rosenblatt, 3409 Pacific Avenue, San Francisco, CA 94118, serves as
Trustee of the Trust. He is 60. His principal occupations during the past five
years have been President of The Glen Ellen Company, a private investment
company, and Vice President of Founders Investments Ltd.
+Michael S. Scott Morton, Massachusetts Institute of Technology, 77
Massachusetts Avenue, Cambridge, MA 02139, serves as Trustee of the Trust. He is
61. 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.
+Susan M. Phillips, The George Washington University, 710 21st Street,
Suite 206, Washington, DC 20052, serves as Trustee of the Trust. She is 55. Her
principal occupation is currently Dean and Professor of Finance and
Administration, School of Business and Public Management, The George Washington
University. Previously, she was a member of the Board of Governors of the
Federal Reserve System and Chairman and Commissioner of the Commodity Futures
Trading Commission.
*+Thomas A. Shively, One Financial Center, Boston, MA 02111, serves as Vice
President of the Trust. He is 44. His principal occupation is Executive Vice
President and Director and Chief Investment Officer-Fixed Income 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 28.
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<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 56. His principal occupation is currently, and for the past five
years has been, Chairman of the Board, President, Chief Executive Officer and
Director of State Street Research & Management Company. Mr. Verni's other
principal business affiliations include Chairman of the Board and Director of
State Street Research Investment Services, Inc. (until February, 1996, prior
positions as President and Chief Executive Officer of that company).
- ----------------
* These Trustees and/or officers are or may be deemed to be "interested
persons" of the Trust under the 1940 Act because of their affiliations
with the Fund's investment adviser.
+ Serves as a Trustee/Director and/or officer of one or more of the
following investment companies, each of which has an advisory relationship
with the Investment Manager or its parent, Metropolitan Life Insurance
Company ("Metropolitan"): State Street Research Equity Trust, State Street
Research Financial Trust, State Street Research Income Trust, State Street
Research Money Market Trust, State Street Research Tax-Exempt Trust, State
Street Research Capital Trust, State Street Research Exchange Trust, State
Street Research Growth Trust, State Street Research Master Investment
Trust, State Street Research Securities Trust, State Street Research
Portfolios, Inc. and Metropolitan Series Fund, Inc.
28
<PAGE>
As of January 31, 1999, the Trustees and officers of the Trust as a group
owned less than 1% of the Fund's outstanding Class A shares and none of the
Fund's outstanding Class B(1), B, C and S shares.
Record ownership of shares of the Fund as of January 31, 1999 was as
follows:
<TABLE>
<CAPTION>
% of
Class Holder Class
- ----- ------ -----
<S> <C> <C>
B(1) Metropolitan Life(a) 47.3
M.E. Bonds(c) 7.1
E.A. Bonds(c) 7.1
G.E. and K.E. Cummings, Jt. Ten.(c) 6.2
B Merrill Lynch(b) 7.6
C Merrill Lynch(b) 75.2
S Turtle & Co.(c) 34.5
</TABLE>
- ------------------
(a) The full name of the above institution is Metropolitan Life Insurance
Company, One Madison Avenue, New York, NY 10010. Metropolitan Life
Insurance Company, a New York corporation, was the record and/or
beneficial owner, directly or indirectly through its subsidiaries or
affiliates, of such shares.
(b) The full name of the above institution is Merrill Lynch, Pierce, Fenner
& Smith, Inc. Its address is 4800 Deerlake Drive E., Jacksonville, FL
32246. The Fund believes that Merrill Lynch does not have beneficial
ownership of such shares.
(c) Turtle & Co.
M.E. Bonds
E.A. Bonds
G.E. and K.E. Cummings, Jt. Ten.
c/o State Street Research Service Center
One Financial Center
Boston, MA 02111
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.
29
<PAGE>
The Trustees were compensated as follows:
<TABLE>
<CAPTION>
Aggregate Total Compensation From
Name of Compensation Fund and Fund Complex
Trustee From Fund(a) Paid to Trustees(b)
------- ------------ -----------------------
<S> <C> <C>
Steve A. Garban $ 4,500 $ 110,300
Malcolm T. Hopkins $ 4,000 $ 97,200
Dean O. Morton $ 4,600 $ 110,700
Susan M. Phillips $ 1,235 $ 12,145
Toby Rosenblatt $ 4,000 $ 72,600
Michael S. Scott Morton $ 4,800 $ 115,500
Ralph F. Verni $ 0 $ 0
</TABLE>
- ----------------
(a) For the Fund's fiscal year ended December 31, 1998.
(b) Includes compensation on behalf of all series of 12 investment
companies for which the Investment Manager or its parent,
Metropolitan, served as investment adviser. "Total Compensation from
Fund and Fund Complex Paid to Trustees" for the 12 months ended
December 31, 1998. The Fund does not provide any pension or
retirement benefits for the Trustees.
30
<PAGE>
MANAGEMENT OF THE FUND AND INVESTMENT ADVISORY SERVICES
Under the provisions of the Trust's Master Trust Agreement and the laws of
Massachusetts, responsibility for the management and supervision of the Fund
rests with the Trustees.
State Street Research & Management Company, the Investment Manager, a
Delaware corporation, with offices at One Financial Center, Boston,
Massachusetts 02111-2690, acts as investment adviser to the Fund. The Investment
Manager was founded by Paul Cabot, Richard Saltonstall and Richard Paine to
serve as investment adviser to 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 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.
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 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 Life Insurance Company
("Metropolitan").
The advisory fee payable monthly by the Fund to the Investment Manager is
computed as a percentage of the average of the value of the net assets of the
Fund as determined at the close of regular trading on the New York Stock
Exchange (the "NYSE") on each day the NYSE is open for trading, at the annual
rate of 0.55% of the net assets of the Fund.
The advisory fees paid by the Fund to the Investment Manager for the last
three fiscal years, prior to the assumption of fees or expenses, were as
follows: 1998, $1,527,580; 1997, $1,510,208; and 1996, $1,665,478.
The Advisory Agreement provides that it shall continue in effect from
year to year with respect to the Fund 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.
31
<PAGE>
Under the Code of Ethics of the Investment Manager, investment management
personnel are only permitted to engage in personal securities transactions in
accordance with certain conditions relating to such person's position, the
identity of the security, the timing of the transaction, and similar factors.
Such personnel must report their personal securities transactions quarterly and
supply broker confirmations of such transactions to the Investment Manager.
PURCHASE AND REDEMPTION OF SHARES
Shares of the Fund are distributed by State Street Research Investment
Services, Inc., the Distributor. The Fund offers five classes of shares. Class
A, Class B(1), Class C and Class S shares are available to all eligible
investors. Class B shares are available only to current shareholders through
dividend reinvestment or through exchanges from existing Class B accounts of
State Street Research Funds. Class A, Class B(1), Class C and Class S shares of
the Fund may be purchased at the next determined net asset value per share plus,
in the case of all classes except Class S shares, a sales charge which, at the
election of the investor, may be imposed (i) at the time of purchase (the Class
A shares) or (ii) on a deferred basis (the Class B(1) and Class C shares).
General information on how to buy shares of the Fund, as well as sales charges
involved, are set forth under "Your Investment" 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
regular trading on the NYSE on the day the purchase order is received by State
Street Research Service Center (the "Service Center"), provided that the order
is received prior to the close of regular trading on the NYSE on that day;
otherwise the net asset value used is that determined as of the close of the
NYSE on the next day it is open for unrestricted trading. When a purchase order
is placed through a dealer, that dealer is responsible for transmitting the
order promptly to the Service Center in order to permit the investor to obtain
the current price. Any loss suffered by an investor which results from a
dealer's failure to transmit an order promptly is a matter for settlement
between the investor and the dealer.
Alternative Purchase Program. 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 purchase price invested in the Fund with the investment being
subject thereafter to ongoing service fees and distribution fees.
32
<PAGE>
As described in greater detail below, financial professionals are paid
differing amounts of compensation depending on which class of shares they sell.
33
<PAGE>
The major differences among the various classes of shares are as follows:
<TABLE>
<CAPTION>
Class A Class B(1) Class B Class C Class S
------- ---------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Sales Charges Paid Initial sales charge Contingent deferred Contingent deferred Contingent deferred None
by Investor to at time of sales charge of 5% sales charge of 5% sales charge of 1%
Distributor investment of up to to 1% applies to to 2% applies to applies to any
4.50% depending any shares any shares shares redeemed
on amount of redeemed within redeemed within within one year
investment first six years first five years following their
following their following their purchase
purchase; no purchase; no
contingent deferred contingent deferred
sales charge after sales charge after
six years 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
- ------------------------------------------------------------------------------------------------------------------------------------
Initial Commission Above described 4% 4% 1% None
Paid by initial sales charge
Distributor to less 0.25% to
Financial 0.75% retained by
Professional distributor
On investments of
$1 million or more,
0.25% to 1% paid
to dealer by
Distributor
- ------------------------------------------------------------------------------------------------------------------------------------
Rule 12b-1 Service
Fee
Paid by Fund 0.25% each year 0.25% each year 0.25% each year 0.25% each year None
to Distributor
Paid by 0.25% each year 0.25% each year 0.25% each year 0.25% each year None
Distributor to commencing after commencing after commencing after
Financial one year following one year following one year following
Professional purchase purchase purchase
- ------------------------------------------------------------------------------------------------------------------------------------
Rule 12b-1
Distribution Fee
Paid by Fund None 0.75% for first 0.75% for first 0.75% each year None
to Distributor eight years; Class eight years; Class B
B(1) shares convert shares convert
automatically to automatically to
Class A shares after Class A shares after
eight years eight years
Paid by None None None 0.75% each year None
Distributor to commencing after
Financial one year following
Professional purchase
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
34
<PAGE>
Class A Shares--Reduced Sales Charges. The reduced sales charges set forth
under "Your Investment--Choosing a Share Class" in the Prospectus apply to
purchases made at any one time by any "person," which includes: (i) an
individual, or an individual combining with his or her spouse and their children
and purchasing for his, her or their own account; (ii) a "company" as defined in
Section 2(a)(8) of the 1940 Act; (iii) a trustee or other fiduciary purchasing
for a single trust estate or single fiduciary account (including a pension,
profit sharing or other employee benefit trust created pursuant to a plan
qualified under Section 401 of the Internal Revenue Code); (iv) a tax-exempt
organization under Section 501(c)(3) or (13) of the Internal Revenue Code; and
(v) an employee benefit plan of a single employer or of affiliated employers.
Investors may purchase Class A shares of the Fund at reduced sales charges
by executing a Letter of Intent to purchase no less than an aggregate of
$100,000 of the Fund or any combination of Class A shares of "Eligible Funds"
(which include the Fund and other funds as designated by the Distributor from
time to time) within a 13-month period. The sales charge applicable to each
purchase made pursuant to a Letter of Intent will be that which would apply if
the total dollar amount set forth in the Letter of Intent were being bought in a
single transaction. Purchases made within a 90-day period prior to the execution
of a Letter of Intent may be included therein; in such case the date of the
earliest of such purchases marks the commencement of the 13-month period.
An investor may include toward completion of a Letter of Intent the value
(at the current public offering price) of all of his or her Class A shares of
the Fund and of any of the other Class A shares of Eligible Funds held of record
as of the date of his or her Letter of Intent, plus the value (at the current
offering price) as of such date of all of such shares held by any "person"
described herein as eligible to join with the investor in a single purchase.
Class B(1), Class B, Class C and Class S shares may also be included in the
combination under certain circumstances.
A Letter of Intent does not bind the investor to purchase the specified
amount. Shares equivalent to 5% of the specified amount will, however, be taken
from the initial purchase (or, if necessary, subsequent purchases) and held in
escrow in the investor's account as collateral against the higher sales charge
which would apply if the total purchase is not completed within the allotted
time. The escrowed shares will be released when the Letter of Intent is
completed or, if it is not completed, when the balance of the higher sales
charge is, upon notice, remitted by the investor. All dividends and capital
gains distributions with respect to the escrowed shares will be credited to the
investor's account.
Investors may purchase Class A shares of the Fund or a combination of
Eligible Funds at reduced sales charges pursuant to a Right of Accumulation. The
applicable sales charge under the right is determined on the amount arrived at
by combining the dollar amount of the
35
<PAGE>
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(1), Class B, Class C and Class S shares
may also be included in the combination under certain circumstances. Investors
must submit to the Distributor sufficient information to show that they qualify
for this Right of Accumulation.
Other Programs Related to Class A Shares. Class A shares of the Fund may be
sold or issued in an exchange at a reduced sales charge or without sales charge
pursuant to certain sponsored arrangements, which include programs under which a
company, employee benefit plan or other organization makes recommendations to,
or permits group solicitation of, its employees, members or participants, except
any organization created primarily for the purpose of obtaining shares of the
Fund at a reduced sales charge or without a sales charge. Sales without a sales
charge, or with a reduced sales charge, may also be made through brokers,
registered investment advisers, financial planners, institutions, and others,
under managed fee-based programs (e.g., "wrap fee" or similar programs) which
meet certain requirements established from time to time by the Distributor.
Information on such arrangements and further conditions and limitations is
available from the Distributor.
In addition, no sales charge is imposed in connection with the sale of
Class A shares of the Fund to the following entities and person: (A) the
Investment Manager, Distributor or any affiliated entities, including any direct
or indirect parent companies and other subsidiaries of such parents
(collectively "Affiliated Companies"); (B) employees, officers, sales
representatives or current or retired directors or trustees of the Affiliated
Companies or any investment company managed by any of the Affiliated Companies,
any relatives of any such individuals whose relationship is directly verified by
such individuals to the Distributor, or any beneficial account for such
relatives or individuals; and (C) employees, officers, sales representatives or
directors of dealers and other entities with a selling agreement with the
Distributor to sell shares of any aforementioned investment company, any spouse
or child of such person, or any beneficial account for any of them. The purchase
must be made for investment and the shares purchased may not be resold except
through redemption. This purchase program is subject to such administrative
policies, regarding the qualification of purchasers and any other matters, as
may be adopted by the Distributor from time to time.
Conversion of Class B(1) and Class B Shares to Class A Shares. A
shareholder's Class B(1) and Class B shares of the Fund, including all shares
received as dividends or distributions with respect to such shares, will
automatically convert to Class A shares of the Fund at the end of eight years
following the issuance of such Class B shares; consequently, they will no longer
be subject to the higher expenses borne by Class B(1) and 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(1) shares received in
exchange for Class B(1) shares of other Eligible Funds and for
36
<PAGE>
Class B shares received in exchange for Class B shares of other Eligible Funds,
will be counted toward the eight-year period.
Contingent Deferred Sales Charges. The amount of any contingent deferred
sales charge paid on Class A shares (on sales of $1 million or more and which do
not involve an initial sales charge) or on Class B(1), Class B or Class C shares
of the Fund will be paid to the Distributor. The Distributor will pay dealers at
the time of sale a 4% commission for selling Class B(1) shares and a 1%
commission for selling Class C shares. In certain cases, a dealer may elect to
waive the 4% commission on Class B(1) shares and receive in lieu thereof a an
annual fee, usually 1%, with respect to such outstanding shares. The proceeds of
the contingent deferred sales charges and the distribution fees are used to
offset distribution expenses and thereby permit the sale of Class B(1), Class B
and Class C shares without an initial sales charge.
In determining the applicability and rate of any contingent deferred sales
charge of Class B(1), Class B or Class C shares, it will be assumed that a
redemption of the 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 shareholder
for the longest period of time. Class B(1) shares that are redeemed within a
six-year period after purchase, Class B shares that are redeemed within a
five-year period after their purchase, and Class C shares that are redeemed
within a one-year period after their purchase, will not be subject to a
contingent deferred sales charge to the extent that the value of such shares
represents (1) capital appreciation of Fund assets or (2) reinvestment of
dividends or capital gains distributions. The holding period for purposes of
applying a contingent deferred sales charge for a particular class of shares of
the Fund acquired through an exchange from another Eligible Fund will be
measured from the date that such shares were initially acquired in the other
Eligible Fund, and shares of the same class being redeemed will be considered to
represent, as applicable, capital appreciation or dividend and capital gains
distribution reinvestments in such other Eligible Fund. These determinations
will result in any contingent deferred sales charge being imposed at the lowest
possible rate. For federal income tax purposes, the amount of the contingent
deferred sales charge will reduce the gain or increase the loss, as the case may
be, on the amount realized on redemption.
Contingent Deferred Sales Charge Waivers. With respect to Class A shares
(on sales of $1 million or more and which do not involve an initial sales
charge), and Class B(1), Class B and Class C shares of the Fund, the contingent
deferred sales charge does not apply to exchanges or to redemptions under a
systematic withdrawal plan which meets certain conditions. The contingent
deferred sales charge will be waived for participant initiated distributions
from State Street Research prototype employee retirement plans. In addition, the
contingent deferred sales charge will be waived for: (i) redemptions made within
one year of the death or total disability, as defined by the Social Security
Administration, of all shareholders of an account; (ii) redemptions made after
attainment of a specific age in an amount which represents the minimum
distribution required at such age under Section 401(a)(9) of the Internal
Revenue Code of 1986, as amended, for retirement accounts or plans
37
<PAGE>
(e.g., age 70 1/2 for Individual Retirement Accounts and Section 403(b) plans),
calculated solely on the basis of assets invested in the Fund or other Eligible
Funds; and (iii) a redemption resulting from a tax-free return of an excess
contribution to an Individual Retirement Account. (The foregoing waivers do not
apply to a tax-free rollover or transfer of assets out of the Fund). The Fund
may modify or terminate the waivers at any time; for example, the Fund may limit
the application of multiple waivers and establish other conditions for employee
benefit plans. Certain employee benefit plans sponsored by a financial
professional may be subject to other conditions for waivers under which the
plans may initially invest in class B(1) Shares and subsequently invest in Class
B(1) or Class B shares and then Class A shares of certain funds upon meeting
specific criteria.
Class S Shares. Class S shares are currently available to certain employee
benefit plans such as qualified retirement plans which meet criteria relating to
number of participants, service arrangements, or similar factors; insurance
companies; investment companies; advisory accounts of the Investment Manager;
endowment funds of nonprofit organizations with substantial minimum assets
(currently a minimum of $10 million); and other similar institutional investors.
Class S shares may be acquired through programs or products sponsored by
Metropolitan, its affiliates, or both for which Class S shares have been
designated. In addition, Class S shares are available through programs under
which, for example, investors pay an asset-based fee and/or a transaction fee to
intermediaries. Class S share availability is determined by the Distributor and
intermediaries based on the overall direct and indirect costs of a particular
program, expected assets, account sizes and similar considerations.
Reorganizations. In the event of mergers or reorganizations with other
public or private collective investment entities, including investment companies
as defined in the 1940 Act, the Fund may issue its shares at net asset value (or
more) to such entities or to their security holders.
Redemptions. The Fund reserves the right to pay redemptions in kind with
portfolio securities in lieu of cash. In accordance with its election pursuant
to Rule 18f-1 under the 1940 Act, the Fund may limit the amount of redemption
proceeds paid in cash. Although it has no present intention to do so, the Fund
may, under unusual circumstances, limit redemptions in cash with respect to each
shareholder during any ninety-day period to the lesser of (i) $250,000, or (ii)
1% of the net asset value of the Fund at the beginning of such period. In
connection with any redemptions paid in kind with portfolio securities,
brokerage and other costs may be incurred by the redeeming shareholder in the
sale of the securities received.
Systematic Withdrawal Plan. A shareholder who owns noncertificated Class A
or Class S shares with a value of $5,000 or more, or Class B(1), Class B or
Class C shares with a value of $10,000 or more, may elect, by participating in
the Fund's Systematic Withdrawal Plan, to have periodic checks issued for
specified amounts. These amounts may not be less than certain minimums,
depending on the class of shares held. The Plan provides that all income
dividends and capital gains distributions of the Fund shall be credited to
participating shareholders in
38
<PAGE>
additional shares of the Fund. Thus, the withdrawal amounts paid can only be
realized by redeeming shares of the Fund under the Plan. To the extent such
amounts paid exceed dividends and distributions from the Fund, a shareholder's
investment will decrease and may eventually be exhausted.
In the case of shares otherwise subject to contingent deferred sales
charges, no such charges will be imposed on withdrawals of up to 8% annually of
either (a) the value, at the time the Systematic Withdrawal Plan is initiated,
of the shares then in the account or (b) the value, at the time of a withdrawal,
of the same number of shares as in the account when the Systematic Withdrawal
Plan was initiated, whichever is higher.
Expenses of the Systematic Withdrawal Plan are borne by the Fund. A
participating shareholder may withdraw from the Systematic Withdrawal Plan, and
the Fund may terminate the Systematic Withdrawal Plan at any time on written
notice. Purchase of additional shares while a shareholder is receiving payments
under a Systematic Withdrawal Plan is ordinarily disadvantageous because of
duplicative sales charges. For this reason, a shareholder may not participate in
the Investamatic Program (see "Your Investment--Investor Services--Investamatic
Program" in the Fund's Prospectus) and the Systematic Withdrawal Plan at the
same time.
Request to Dealer to Repurchase. For the convenience of shareholders, the
Fund has authorized the Distributor as its agent to accept orders from dealers
by wire or telephone for the repurchase of shares by the Distributor from the
dealer. The Fund may revoke or suspend this authorization at any time. The
repurchase price is the net asset value for the applicable shares next
determined following the time at which the shares are offered for repurchase by
the dealer to the Distributor. The dealer is responsible for promptly
transmitting a shareholder's order to the Distributor.
Signature Guarantees. Signature guarantees are required for, among other
things: (1) written requests for redemptions for more than $100,000; (2) written
requests for redemptions for any amount if the proceeds are transmitted to other
than the current address of record (unchanged in the past 30 days); (3) written
requests for redemptions for any amount submitted by corporations and certain
fiduciaries and other intermediaries; and (4) requests to transfer the
registration of shares to another owner. Signatures must be guaranteed by a
bank, a member firm of a national stock exchange, or other eligible guarantor
institution. The Transfer Agent will not accept guarantees (or notarizations)
from notaries public. The above requirements may be waived in certain instances.
Dishonored Checks. If a purchaser's check is not honored for its full
amount, the purchaser could be subject to additional charges to cover collection
costs and any investment loss, and the purchase may be canceled.
39
<PAGE>
Processing Charges. Purchases and redemptions processed through securities
dealers may be subject to processing charges imposed by the securities dealer in
addition to sales charges that may be imposed by the Fund or the Distributor.
SHAREHOLDER ACCOUNTS
General information on shareholder accounts is included in the Fund's
Prospectus under "Your Investment." The following supplements that information.
Maintenance Fees and Involuntary Redemption. Because of the relatively high
cost of maintaining small shareholder accounts, the Fund reserves the right to
redeem at its option any shareholder account which remains below $1,500 for a
period of 60 days after notice is mailed to the applicable shareholder, or to
impose a maintenance fee on such account after 60 days' notice. Such involuntary
redemptions will be subject to applicable sales charges, if any. The Fund may
increase such minimum account value above such amount in the future after notice
to affected shareholders. Involuntarily redeemed shares will be priced at the
net asset value on the date fixed for redemption by the Fund, and the proceeds
of the redemption will be mailed to the affected shareholder at the address of
record. Currently, the maintenance fee is $18 annually, which is paid to the
Transfer Agent. The fee does not apply to certain retirement accounts or if the
shareholder has more than an aggregate $50,000 invested in the Fund and other
Eligible Funds combined. Imposition of a maintenance fee on a small account
could, over time, exhaust the assets of such account.
To cover the cost of additional compliance administration, a $20 fee will
be charged against any shareholder account that has been determined to be
subject to escheat under applicable state laws.
The Fund may not suspend the right of redemption or postpone the date of
payment of redemption proceeds for more than seven days, except that (a) it may
elect to suspend the redemption of shares or postpone the date of payment of
redemption proceeds: (1) during any period that the NYSE is closed (other than
customary weekend and holiday closings) or trading on the NYSE is restricted;
(2) during any period in which an emergency exists as a result of which disposal
of portfolio securities is not reasonably practicable or it is not reasonably
practicable to fairly determine the Fund's net asset values; or (3) during such
other periods as the Securities and Exchange Commission (the "SEC") may by order
permit for the protection of investors; and (b) the payment of redemption
proceeds may be postponed as otherwise provided under "Purchase and Redemption
of Shares" in this Statement of Additional Information.
The Open Account System. Under the Open Account System full and
fractional shares of the Fund owned by shareholders are credited to their
accounts by the Transfer Agent, State Street Bank and Trust Company, 225
Franklin Street, Boston, Massachusetts 02110. Certificates representing Class
B(1), Class B or Class C shares will not be issued, while
40
<PAGE>
certificates representing Class A or Class S shares will only be issued if
specifically requested in writing and, in any case, will only be issued for full
shares, with any fractional shares to be carried on the shareholder's account.
Shareholders will receive periodic statements of transactions in their accounts.
The Fund's Open Account System provides the following options:
1. Additional purchases of shares of the Fund may be made through
dealers, by wire or by mailing a check payable to "State Street
Research Funds" under the terms set forth above under "Purchase and
Redemption of Shares" in this Statement of Additional Information.
2. The following methods of receiving dividends from investment income
and distributions from capital gains generally are available:
(a) All income dividends and capital gains distributions reinvested
in additional shares of the Fund.
(b) All income dividends and capital gains distributions in cash.
(c) All income dividends and capital gains distributions invested in
any one available Eligible Fund designated by the shareholder as
described below. See "--Dividend Allocation Plan" herein.
Dividend and distribution selections should be made on the Application
accompanying the initial investment. If no selection is indicated on the
Application, that account will be automatically coded for reinvestment of all
dividends and distributions in additional shares of the same class of the Fund.
Selections may be changed at any time by telephone or written notice to the
Service Center. Dividends and distributions are reinvested at net asset value
without a sales charge.
Exchange Privileges. Shareholders of the Fund may exchange their shares for
available shares with corresponding characteristics of any of the other Eligible
Funds subject to any applicable initial holding period on the basis of the
relative net asset values of the respective shares to be exchanged, subject to
compliance with applicable securities laws. Exchanges into the Fund are
available only to investors who meet the Fund's minimum investment and
eligibility standards. 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(1), Class B and Class C shares may be
redeemed without the payment of any contingent deferred sales charge that might
otherwise be due upon an ordinary redemption of such shares. The State Street
Research Money Market Fund issues Class E shares which are sold without any
sales charge. Exchanges of State Street Research Money Market Fund Class E
shares into
41
<PAGE>
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. Class
A shares acquired through a new investment after January 1, 1999, are subject to
an incremental sales charge if exchanged within 30 days of acquisition for Class
A shares of a fund with a higher applicable sales charge. For purposes of
computing the contingent deferred sales charge that may be payable upon
disposition of any acquired Class A, Class B(1), Class B and Class C shares, the
holding period of the redeemed shares is "tacked" to the holding period of any
acquired shares. No exchange transaction fee is currently imposed on any
exchange.
Shares of the Fund may also be acquired or redeemed in exchange for shares
of the Summit Cash Reserves Fund ("Summit Cash Reserves") by customers of
Merrill Lynch, Pierce, Fenner & Smith Incorporated (subject to completion of
steps necessary to implement the program). The Fund and Summit Cash Reserves are
related mutual funds for purposes of investment and investor services. Upon the
acquisition of shares of Summit Cash Reserves by exchange for redeemed shares of
the Fund, (a) no sales charge is imposed by Summit Cash Reserves, (b) no
contingent deferred sales charge is imposed by the Fund on the Fund shares
redeemed, and (c) any applicable holding period of the Fund shares redeemed is
"tolled," that is, the holding period clock stops running pending further
transactions. Upon the acquisition of shares of the Fund by exchange for
redeemed shares of Summit Cash Reserves, (a) the acquisition of Class A shares
shall be subject to the initial sales charges or contingent deferred sales
charges applicable to an initial investment in such Class A shares, unless a
prior Class A sales charge has been paid indirectly, and (b) the acquisition of
Class B(1), Class B or Class C shares of the Fund shall restart any holding
period previously tolled, or shall be subject to the contingent deferred sales
charge applicable to an initial investment in such shares.
The exchange privilege may be terminated or suspended or its terms changed
at any time, subject, if required under applicable regulations, to 60 days'
prior notice. New accounts established for investments upon exchange from an
existing account in another fund will have the same telephone privileges with
respect to the Fund (see "Your Investment--Account Policies--Telephone Requests"
in the Fund's Prospectus and "--Telephone Privileges," below) as the existing
account unless the Service Center is instructed otherwise. Related
administrative policies and procedures may also be adopted with regard to a
series of exchanges, street name accounts, sponsored arrangements and other
matters.
The exchange privilege is not designed for use in connection with
short-term trading or market timing strategies. To protect the interests of
shareholders, the Fund reserves the right to temporarily or permanently
terminate the exchange privilege for any person who makes more than six
exchanges out of or into the Fund per calendar year. Accounts under common
ownership or control, including accounts with the same taxpayer identification
number, may be aggregated for purposes of the six exchange limit.
Notwithstanding the six exchange limit, the Fund reserves the right to refuse
exchanges by any person or group if, in the Investment Manager's judgment, the
Fund would be unable to invest
42
<PAGE>
effectively in accordance with its investment objective and policies, or would
otherwise potentially be adversely affected. Exchanges may be restricted or
refused if the Fund receives or anticipates simultaneous orders affecting
significant portions of the Fund's assets. In particular, a pattern of exchanges
that coincides with a "market timing" strategy may be disruptive to the Fund.
The Fund may impose these restrictions at any time. The exchange limit may be
modified for accounts in certain institutional retirement plans because of plan
exchange limits, Department of Labor regulations or administrative and other
considerations. Subject to the foregoing, if an exchange request in good order
is received by the Service Center and delivered by the Service Center to the
Transfer Agent by 12 noon Boston time on any business day, the exchange usually
will occur that day. For further information regarding the exchange privilege,
shareholders should contact the Service Center.
Reinvestment Privilege. A shareholder of the Fund who has redeemed shares
or had shares repurchased at his or her request may reinvest all or any portion
of the proceeds (plus that amount necessary to acquire a fractional share to
round off his or her reinvestment to full shares) in shares, of the same class
as the shares redeemed, of the Fund or any other Eligible Fund at net asset
value and without subjecting the reinvestment to an initial sales charge,
provided such reinvestment is made within 120 calendar days after a redemption
or repurchase. Upon such reinvestment, the shareholder will be credited with any
contingent deferred sales charge previously charged with respect to the amount
reinvested. The redemption of shares is, for federal income tax purposes, a sale
on which the shareholder may realize a gain or loss. If a redemption at a loss
is followed by a reinvestment within 30 days, the transaction may be a "wash
sale" resulting in a denial of the loss for federal income tax purposes.
Any reinvestment pursuant to the reinvestment privilege will be subject to
any applicable minimum account standards imposed by the fund into which the
reinvestment is made. Shares are sold to a reinvesting shareholder at the net
asset value thereof next determined following timely receipt by the Service
Center of such shareholder's written purchase request and delivery of the
request by the Service Center to the Transfer Agent. A shareholder may exercise
this reinvestment privilege only once per 12-month period with respect to his or
her shares of the Fund.
Dividend Allocation Plan. The Dividend Allocation Plan allows shareholders
to elect to have all their dividends and any other distributions from the Fund
or any Eligible Fund automatically invested at net asset value in one other such
Eligible Fund designated by the shareholder, provided the account into which the
dividends and distributions are directed is initially funded with the requisite
minimum amount.
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Telephone Privileges. The following telephone privileges are available:
o Telephone Exchange Privilege for Shareholder and Shareholder's
Financial Professional
o Shareholders automatically receive this privilege unless
declined.
o This privilege allows a shareholder or a shareholder's financial
professional to request exchanges into other State Street
Research funds.
o Telephone Redemption Privilege for Shareholder
o Shareholders automatically receive this privilege unless
declined.
o This privilege allows a shareholder to phone requests to sell
shares, with the proceeds sent to the address of record.
o Telephone Redemption Privilege for Shareholder's Financial
Professional (This privilege is not automatic; a shareholder must
specifically elect it)
o This privilege allows a shareholder's financial professional to
phone requests to sell shares, with the proceeds sent to the
address of record on the account.
A shareholder with the above telephone privileges is deemed to authorize
the Service Center and the Transfer Agent to: (1) act upon the telephone
instructions of any person purporting to be any of the shareholders of an
account or a shareholder's financial professional; and (2) honor any written
instructions for a change of address regardless of whether such request is
accompanied by a signature guarantee. All telephone calls will be recorded.
Neither the Fund, the other Eligible Funds, the Transfer Agent, the Investment
Manager nor the Distributor will be liable for any loss, expense or cost arising
out of any request, including any fraudulent or unauthorized requests.
Shareholders assume the risk to the full extent of their accounts that telephone
requests may be unauthorized. Reasonable procedures will be followed to confirm
that instructions communicated by telephone are genuine. The shareholder will
not be liable for any losses arising from unauthorized or fraudulent
instructions if such procedures are not followed.
Alternative Means of Contacting the Fund. It is unlikely, even during
periods of extraordinary market conditions, that a shareholder will have
difficulty in reaching the Service Center. In that event, however, the
shareholder should contact the Service Center at 1-800-562-0032, 1-617-357-7800
or otherwise at its main office at One Financial Center, Boston, Massachusetts
02111-2690.
NET ASSET VALUE
The net asset value of the shares of the Fund is determined once daily as
of the close of regular trading on the NYSE, ordinarily 4 P.M. New York City
time, Monday through Friday,
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on each day during which the NYSE is open for unrestricted trading. The NYSE is
currently closed on New Year's Day, Martin Luther King, Jr. Day, Presidents Day,
Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day.
The net asset value per share of the Fund is computed by dividing the sum
of the value of the securities held by the Fund plus any cash or other assets
minus all liabilities by the total number of outstanding shares of the Fund at
such time. Any expenses, except for extraordinary or nonrecurring expenses,
borne by the Fund, including the investment management fee payable to the
Investment Manager, are accrued daily.
In determining the values of portfolio assets as provided below, the
Trustees utilize one or more pricing services in lieu of market quotations for
certain securities which are not readily available on a daily basis. Such
services utilize information with respect to market transactions, quotations
from dealers and various relationships among securities in determining value and
may provide prices determined as of times prior to the close of the NYSE.
In general, securities are valued as follows. Securities which are listed
or traded on the New York or American Stock Exchange are valued at the price of
the last quoted sale on the respective exchange for that day. Securities which
are listed or traded on a national securities exchange or exchanges, but not on
the New York or American Stock Exchange, are valued at the price of the last
quoted sale on the exchange for that day prior to the close of the NYSE.
Securities not listed on any national securities exchange which are traded "over
the counter" and for which quotations are available on the National Association
of Securities Dealers, Inc.'s (the "NASD"), NASDAQ System are valued at the
closing price supplied through such system for that day at the close of the
NYSE. Other securities are, in general, valued at the mean of the bid and asked
quotations last quoted prior to the close of the NYSE if there are market
quotations readily available, or in the absence of such market quotations, then
at the fair value thereof as determined by or under authority of the Trustees of
the Trust with the use of such pricing services as may be deemed appropriate or
methodologies approved by the Trustees. The Trustees also reserve the right to
adopt other valuations based on fair value in pricing in unusual circumstances
where other methods as discussed in part above, could otherwise have a material
adverse effect on the Fund as a whole.
The Trustees have authorized the use of the amortized cost method to
value short-term debt instruments issued with a maturity of one year or less and
having a remaining maturity of 60 days or less when the value obtained is fair
value, provided that during any period in which more than 25% of the Fund's
total assets is invested in short-term debt securities the current market value
of such securities will be used in calculating net asset value per share in lieu
of the amortized cost method. Under the amortized cost method of valuation, the
security is initially valued at cost on the date of purchase (or in the case of
short-term debt instruments purchased with more than 60 days remaining to
maturity, the market value on the 61st day prior to maturity), and thereafter a
constant amortization to maturity of any discount or premium is assumed
regardless of the impact of fluctuating interest rates on the market value of
the security.
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<PAGE>
PORTFOLIO TRANSACTIONS
Portfolio Turnover
The Fund's portfolio turnover rate is determined by dividing the lesser of
securities purchases or sales for a year by the monthly average value of
securities held by the Fund (excluding, for purposes of this determination,
securities the maturities of which as of the time of their acquisition were one
year or less). The Fund's portfolio turnover rates for the fiscal years ended
December 31, 1997 and 1998 were 60.48% and 36.22%, respectively. The Investment
Manager believes that the portfolio turnover rate was significantly lower in
1998 than for the previous fiscal year because municipal yield volatility was
low in 1998, creating fewer trading opportunities to improve the existing
structure of the portfolios.
Brokerage Allocation
The Investment Manager's policy is to seek for its clients, including the
Fund, what in the Investment Manager's judgment will be the best overall
execution of purchase or sale orders and the most favorable net prices in
securities transactions consistent with its judgment as to the business
qualifications of the various broker or dealer firms with whom the Investment
Manager may do business, and the Investment Manager may not necessarily choose
the broker offering the lowest available commission rate. Decisions with respect
to the market where the transaction is to be completed, to the form of
transaction (whether principal or agency), and to the allocation of orders among
brokers or dealers are made in accordance with this policy. In selecting brokers
or dealers to effect portfolio transactions, consideration is given to their
proven integrity and financial responsibility, their demonstrated execution
experience and capabilities both generally and with respect to particular
markets or securities, the competitiveness of their commission rates in agency
transactions (and their net prices in principal transactions), their willingness
to commit capital, and their clearance and settlement capability. The Investment
Manager makes every effort to keep informed of commission rate structures and
prevalent bid/ask spread characteristics of the markets and securities in which
transactions for the Fund occur. Against this background, the Investment Manager
evaluates the reasonableness of a commission or a net price with respect to a
particular transaction by considering such factors as difficulty of execution or
security positioning by the executing firm. The Investment Manager may or may
not solicit competitive bids based on its judgment of the expected benefit or
harm to the execution process for that transaction.
When it appears that a number of firms could satisfy the required standards
in respect of a particular transaction, consideration may also be given to
services other than execution services which certain of such firms have provided
in the past or may provide in the future. Negotiated commission rates and
prices, however, are based upon the Investment Manager's judgment of the rate
which reflects the execution requirements of the transaction without regard to
whether the broker provides services in addition to execution. Among such other
services are the supplying of supplemental investment research; general
economic, political and business information; analytical and statistical data;
relevant market information, quotation
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<PAGE>
equipment and services; reports and information about specific companies,
industries and securities; purchase and sale recommendations for stocks and
bonds; portfolio strategy services; historical statistical information; market
data services providing information on specific issues and prices; financial
publications; proxy voting data and analysis services; technical analysis of
various aspects of the securities markets, including technical charts; computer
hardware used for brokerage and research purposes; computer software and
databases (including those contained in certain trading systems used for
portfolio analysis and modeling and also including software providing investment
personnel with efficient access tocurrent and historical data from a variety of
internal and external sources); portfolio evaluation services and data relating
to the relative performance of accounts.
In the case of the Fund and other registered investment companies advised
by the Investment Manager or its affiliates, the above services may include data
relating to performance, expenses and fees of those investment companies and
other investment companies; this information is used by the Trustees or
Directors of the investment companies to fulfill their responsibility to oversee
the quality of the Investment Manager's advisory contracts between the
investment companies and the Investment Manager. The Investment Manager
considers these investment company services only in connection with the
execution of transactions on behalf of its investment company clients and not
its other clients.
The Investment Manager regularly reviews and evaluates the services
furnished by broker-dealers. The Investment Manager's investment management
personnel seek to evaluate the quality of the research and other services
provided by various broker-dealer firms, and the results of these efforts are
made available to the equity trading department which uses this information as a
consideration to the extent described above in the selection of brokers to
execute portfolio transactions.
Some services furnished by broker-dealers may be used for research and
investment decision-making purposes, and also for marketing or administrative
purposes. Under these circumstances, the Investment Manager allocates the cost
of the services to determine the proportion which is allocable to research or
investment decision-making and the proportion allocable to other purposes. The
Investment Manager pays directly from its own funds for that portion allocable
to uses other than research or investment decision-making. Some research and
execution services may benefit the Investment Manager's clients as a whole,
while others may benefit a specific segment of clients. Not all such services
will necessarily be used exclusively in connection with the accounts which pay
the commissions to the broker-dealer providing the services.
The Investment Manager has no fixed agreements or understandings with any
broker-dealer as to the amount of brokerage business which the firm may expect
to receive for services supplied to the Investment Manager or otherwise. There
may be, however, understandings with certain firms that in order for such firms
to be able to continuously supply certain services, they need to receive
allocation of a specified amount of brokerage business.
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<PAGE>
These understandings are honored to the extent possible in accordance with the
policies set forth above.
It is not the Investment Manager's policy to intentionally pay a firm a
brokerage commission higher than that which another firm would charge for
handling the same transaction in recognition of services (other than execution
services) provided. However, the Investment Manager is aware that this is an
area where differences of opinion as to fact and circumstances may exist, and in
such circumstances, if any, relies on the provisions of Section 28(e) of the
Securities Exchange Act of 1934. During the fiscal years ended December 31,
1996, 1997 and 1998, 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 commissions and
designations to brokers or dealers which provide the client with research,
performance evaluation, master trustee and other services. In the absence of
instructions from the client, the Investment Manager may make such allocations
to broker-dealers which have provided the Investment Manager with research and
brokerage services.
In some instances, certain clients of the Investment Manager request it to
place all or part of the orders for their account with certain brokers or
dealers, which in some cases provide services to those clients. The Investment
Manager generally agrees to honor these requests to the extent practicable.
Clients may condition their requests by requiring that the Investment Manager
only effect transactions with the specified broker-dealers if the broker-dealers
are competitive as to price and execution. In other cases, the Investment
Manager may be unable to negotiate commissions or obtain volume discounts or
best execution. In addition, a disparity may exist among the commissions charged
to clients who request the Investment Manager to use particular brokers or
dealers, and also between those clients and those who do not make such requests.
A client who requests the use of a particular broker-dealer should understand
that it may lose the possible advantage which non-requesting clients derive from
aggregation of orders for several clients as a single transaction for the
purchase or sale of a particular security. Among other reasons why best
execution may not be achieved with directed brokerage is that, in an effort to
achieve orderly execution of transactions, execution of orders that have been
designated particular brokers may, at the discretion of the trading desk, be
delayed until execution of other non-designated orders have been completed.
When more than one client of the Investment Manager is seeking to buy or
sell the same security, the sale or purchase is carried out in a manner which is
considered fair and equitable to all accounts. In allocating investments among
various clients (including in what sequence orders for trades are placed), the
Investment Manager will use its best business
48
<PAGE>
judgment and will take into account such factors as the investment objectives of
the clients, the amount of investment funds available to each, the size of the
order, the amount already committed for each client to a specific investment and
the relative risks of the investments, all in order to provide on balance a fair
and equitable result to each client over time. Although sharing in large
transactions may sometimes affect price or volume of shares acquired or sold,
overall it is believed there may be an advantage in execution. The Investment
Manager may follow the practice of grouping orders of various clients for
execution to get the benefit of lower prices or commission rates. In certain
cases where the aggregate order may be executed in a series of transactions at
various prices, the transactions are allocated as to amount and price in a
manner considered equitable to each so that each receives, to the extent
practicable, the average price of such transactions. Exceptions may be made
based on such factors as the size of the account and the size of the trade. For
example, the Investment Manager may not aggregate trades where it believes that
it is in the best interests of clients not to do so, including situations 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 elects 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 qualify to 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"); and (b) satisfy certain
diversification requirements on a quarterly basis.
If the Fund should fail to qualify as a regulated investment company in any
year, it would lose the beneficial tax treatment accorded regulated investment
companies under Subchapter M of the Code and all of its taxable income would be
subject to tax at regular corporate rates without any deduction for
distributions to shareholders, and such distributions will be taxable to
shareholders as ordinary income to the extent of the Fund's current or
accumulated earnings and profits. Also, the shareholders, if they received a
distribution in excess of current or accumulated earnings and profits, would
receive a return of capital that would reduce the basis of their shares of the
Fund to the extent thereof. Any distribution in excess of a shareholder's basis
in the shareholder's shares would be taxable as gain realized from the sale of
such shares.
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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. The Fund intends to make sufficient distributions to avoid this 4% excise
tax.
Taxation of the Fund's Investments
Original Issue Discount; Market Discount. For federal income tax purposes,
debt securities purchased by the Fund may be treated as having original issue
discount. Original issue discount represents interest for federal income tax
purposes and can generally be defined as the excess of the stated redemption
price at maturity of a debt obligation over the issue price. Original issue
discount is treated for federal income tax purposes as income earned by the
Fund, whether or not any income is actually received, and therefore is subject
to the distribution requirements of the Code. Generally, the amount of original
issue discount is determined on the basis of a constant yield to maturity which
takes into account the compounding of accrued interest. Under section 1286 of
the Code, an investment in a stripped bond or stripped coupon may result in
original issue discount.
Debt securities may be purchased by the Fund at a discount that exceeds the
original issue discount plus previously accrued original issue discount
remaining on the securities, if any, at the time the Fund purchases the
securities. This additional discount represents market discount for federal
income tax purposes. In the case of any debt security (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 to the
extent it does not exceed the accrued market discount on the security (unless
the Fund elects to include such accrued market discount in income in the tax
year to which it is attributable). Generally, market discount is accrued on a
daily basis. The Fund may be required to capitalize, rather than deduct
currently, part or all of any direct interest expense incurred or continued to
purchase or carry any debt security having market discount, unless the Fund
makes the election to include market discount currently. Because the Fund must
include original issue discount in income, it will be more difficult for the
Fund to make the distributions required for the Fund to maintain its status as a
regulated investment company under Subchapter M of the Code or 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, and require
inclusion of unrealized gains in the Fund's income for purposes of the excise
tax and the distribution requirements applicable to regulated investment
companies; (ii) defer recognition of realized losses; and (iii) characterize
both
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<PAGE>
realized and unrealized gain or loss as short-term and long-term gain. Such
provisions generally apply to, among other investments, options on debt
securities, indices on securities and futures contracts. The Fund will monitor
its transactions and may make certain tax elections available to it in order to
mitigate the impact of these rules and prevent disqualification of the Fund as a
regulated investment company.
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 taxable distribution. The price of shares
purchased at that time includes the amount of any forthcoming distribution.
Those investors purchasing shares just prior to a taxable distribution will then
receive a return of investment upon distribution which will nevertheless be
taxable to them.
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.
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
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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
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(1), Class B and Class C shares). The Distributor may
reallow all or portions of such sales charges as concessions to dealers. For the
fiscal years ended December 31, 1998, 1997 and 1996, total sales charges on
Class A shares paid to the Distributor amounted to $540,127, $417,021 and
$575,326 respectively.
For the same periods, the Distributor retained respectively after
reallowance of concessions to dealers: $68,263; $58,730; and $70,079. The
Distributor may pay its affiliate, MetLife Securities, Inc. additional sales
compensation of up to 0.25% of certain sales or assets.
The differences in the price at which the Fund's Class A shares are offered
due to scheduled variations in sales charges, or Class S shares are offered, as
described in the Fund's Prospectus, result from cost savings inherent in
economies of scale among other factors. 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
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sales of shares at net asset value to certain Directors, Trustees, officers,
employees, their relatives and other persons directly or indirectly related to
the Fund or associated entities. Where shares of the Fund are offered at a
reduced sales charge or without a sales charge pursuant to sponsored
arrangements, managed fee-based programs and so-called "mutual fund
supermarkets", among other special programs, the amount of the sales charge
reduction will similarly reflect the anticipated reduction in sales expenses
associated with such arrangements. The reductions in sales expenses, and
therefore the reduction in sales charges, will vary depending on factors such as
the size and other characteristics of the organization or program, and the
nature of its membership or the participants. The Fund reserves the right to
make variations in, or eliminate, sales charges at any time or to revise the
terms of or to suspend or discontinue sales pursuant to sponsored arrangements
or similar programs at any time.
On any sale of Class A shares to a single investor in the amount of
$1,000,000 or more, the Distributor will pay the authorized securities dealer
making such sale a commission based on the aggregate of such sales. Such
commission also is payable to authorized securities dealers upon sales of Class
A shares made pursuant to a Letter of Intent to purchase shares having a net
asset value of $1,000,000 or more. Shares sold with such commissions payable are
subject to a one-year contingent deferred sales charge of 1.00% on any portion
of such shares redeemed within one year following their sale. After a particular
purchase of Class A shares is made under the Letter of Intent, the commission
will be paid only in respect of that particular purchase of shares. If the
Letter of Intent is not completed, the commission paid will be deducted from any
discounts or commissions otherwise payable to such dealer in respect of shares
actually sold. If an investor is eligible to purchase shares at net asset value
on account of the Right of Accumulation, the commission will be paid only in
respect of the incremental purchase at net asset value.
For the periods shown below, the Distributor received contingent deferred
sales charges upon redemption of Class A, Class B and Class C shares of the Fund
and paid initial commissions to securities dealers for sales of such Class A,
Class B, and Class C shares as follows:
<TABLE>
<CAPTION>
Fiscal Year Fiscal Year Fiscal Year
Ended December 31, 1998 Ended December 31, 1997 Ended December 31, 1996
----------------------- ----------------------- -----------------------
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 $ 471,864 $ 0 $ 358,291 $ 0 $ 505,247
Class B $ 89,197 $ 446,006 $ 163,953 $ 250,218 $ 183,514 $ 371,322
Class C $ 1,045 $ 6,941 $ 5,380 $ 6,959 $ 2,346 $ 6,882
</TABLE>
The Fund has adopted a "Plan of Distribution Pursuant to Rule 12b-1"
(the "General Distribution Plan") under which the Fund may engage, directly or
indirectly, in financing any activities primarily intended to result in the sale
of Class A, Class B and Class C shares, including, but not limited to, (1) the
payment of commissions and/or reimbursement to
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<PAGE>
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, and
(3) reimbursement of expenses incurred by the Distributor in connection with the
servicing of shareholder accounts including payments to securities dealers and
others in consideration of the provision of personal service to investors and/or
the maintenance or servicing of shareholder accounts and expensesassociated with
the provision of personal service by the Distributor directly to investors. In
addition, the General 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 General Distribution Plan may
not exceed (i) with respect to Class A shares, an annual rate of 0.25% of the
average daily value of net assets represented by such Class A shares, and (ii)
with respect to Class B and Class C shares, an annual rate of 0.75% of the
average daily value of the net assets represented by such Class B or Class C
shares (as the case may be) to finance sales or promotion expenses and an annual
rate of 0.25% of the average daily value of the net assets represented by such
Class B or Class C shares (as the case may be) to make payments for personal
services and/or the maintenance or servicing of shareholder accounts.
The Fund also has adopted a "Rule 12b-1 Plan for Distribution of Shares"
(the "Share Distribution Plan") under which the Fund shall pay the Distributor
(a) a service fee at the end of each month at the annual rate of 0.25% of
average daily net assets attributable to the Class B(1) shares to compensate the
Distributor and any securities firms or other third parties who render personal
services to and/or maintain shareholder accounts for the shareholders of the
respective class and (b) a distribution fee at the end of each month at the
annual rate of 0.75% of average daily net assets attributable to the Class B(1)
shares to compensate the Distributor for services provided and expenses incurred
by it in connection with sales, promotional and marketing activities relating to
the respective class. To the extent that any payments made by the Fund to the
Distributor or the Investment Manager, including payment of investment
management fees, should be deemed to be an indirect financing of any activity
primarily resulting in the sale of shares of the Fund within the scope of Rule
12b-1 under the 1940 Act, then such payments shall be deemed to be authorized by
the Share Distribution Plan.
A rule of the National Association of Securities Dealers, Inc. ("NASD")
limits annual expenditures that the Fund may incur to 0.75% for distribution
expenses and
54
<PAGE>
0.25% for service fees. The NASD Rule also limits the aggregate amount that the
Fund may pay for such distribution costs to 6.25% of gross share sales of a
class since the inception of any asset-based sales charge plus interest at the
prime rate plus 1% on unpaid amounts thereof (less any contingent deferred sales
charges). Such limitation does not apply to the service fees. Payments to the
Distributor or to dealers funded under either the General Distribution Plan or
the Share Distribution Plan may be discontinued at any time.
Some or all of the service fees are used to pay or reimburse dealers
(including dealers that are affiliates of the Distributor) or others for
personal services and/or the maintenance of shareholder accounts. A portion of
any initial commission paid to dealers for the sale of shares of the Fund
represents payment for personal services and/or the maintenance or servicing of
shareholder accounts by such dealers. Dealers who have sold Class A shares are
eligible for further reimbursement commencing as of the time of such sale.
Dealers who have sold Class B(1), Class B and Class C shares are eligible for
further reimbursement after the first year during which such shares have been
held of record by such dealer as nominee for its clients (or by such clients
directly).
The distribution fees are used primarily to offset initial and ongoing
commissions paid to dealers for selling such shares and for other sales and
marketing expenditures.
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.
The payment of service and distribution fees may continue even if the Fund
ceases, temporarily or permanently, to sell one or more classes of shares to new
accounts. During the period the Fund is closed to new accounts, the distribution
fee will not be used for promotion expenses. The service and distribution fees
are used during a closed period to cover services provided to current
shareholders and to cover the compensation of financial professionals in
connection with the prior sale of Fund shares, among other non-promotional
distribution expenditures.
The Distributor may pay certain dealers and other intermediaries additional
compensation for sales and administrative services. The Distributor may provide
cash and noncash incentives to intermediaries who, for example, sell significant
amounts of shares or develop particular distribution channels. The Distributor
may compensate dealers with clients who maintain their investments in the Fund
over a period of years. The incentives can include merchandise and trips to, and
attendance at, sales seminars at resorts. The Distributor may pay for
administrative services, such as technological and computer systems support for
the maintenance of pension plan participant records, for subaccounting, and for
distribution through mutual fund supermarkets or similar arrangements.
During the fiscal year ended December 31, 1998, 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:
55
<PAGE>
<TABLE>
<CAPTION>
Class A Class B Class C
-------- -------- -------
<S> <C> <C> <C>
Advertising $ 418 $ 0 $ 586
Printing and mailing of prospectuses 62 0 88
to other than current shareholders
Compensation to dealers 513.596 27.510
Compensation to sales personnel 969 579,441 1,490
Interest 0 0 0
Carrying or other financing charges 0 0 0
Other expenses: marketing;
general 898 0 1,350
-------- -------- ----------
Total Fees $515,943 $579,441 $31,024
======== ======== =======
</TABLE>
No interested Trustee of the Trust has any direct or indirect financial
interest in the operation of the Distribution Plan or any related agreements
thereunder. The Distributor's interest in the Distribution Plan is described
above.
To the extent that the Glass-Steagall Act may be interpreted as prohibiting
banks and other depository institutions from being paid for performing services
under the Distribution Plan, the Fund will make alternative arrangements for
such services for shareholders who acquired shares through such institutions.
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(1), Class B, Class C or Class S shares to the performance 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 or the Bond Buyer Revenue Bond Index and/or to
appropriate rankings and averages such as those compiled by Lipper Analytical
Services, Inc.,
56
<PAGE>
Morningstar, Inc., Money Magazine, Business Week, Forbes Magazine, The Wall
Street Journal and Investor's Daily. For example, the performance of the Fund
might be compared to the Lipper General Municipal Debt Funds Average.
The average annual total return ("standard total return") and yield of the
Class A, Class B(1), Class B, Class C and Class S 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 on June 7, 1993,
when designations were assigned based on the pricing and Rule 12b-1 fees
applicable to shares sold thereafter. The application of the additional Rule
12b-1 fees, if any, of up to 1% will, for periods after June 7, 1993 adversely
affect Fund performance results. Thus, performance data or rankings for a given
class of shares should be interpreted carefully by investors who hold or may
invest in a different class of shares.
All calculations of performance data in this section reflect the voluntary
measures, if any, by the Fund's affiliates to reduce fees or expenses relating
to the Fund; see "--Accrued Expenses and Recurring Charges" later in this
section.
57
<PAGE>
Total Return
The Fund's standard average annual total returns ("standard total
return") of each class of shares were as follows:
<TABLE>
<CAPTION>
Ten Years Five Years One Year
Ended Ended Ended
Fund December 31, 1998 December 31, 1998 December 31, 1998
- ---- ----------------- ----------------- -----------------
<S> <C> <C> <C>
Class A 6.95% 4.45% 1.03%
Class B 7.00% 4.30% 0.01%
Class C 7.00% 4.64% 4.14%
Class S 7.57% 5.69% 6.07%
</TABLE>
Standard total return is computed separately for each class of shares by
determining the average annual compounded rates of return over the designated
periods that, if applied to the initial amount invested, would produce the
ending redeemable value in accordance with the following formula:
P(1+T)(n) = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value at the end of the designated period
assuming a hypothetical $1,000 payment made at the beginning
of the designated period
The calculation is based on the further assumptions that the highest
applicable initial or contingent deferred sales charge is deducted, and that all
dividends and distributions by the Fund are reinvested at net asset value on the
reinvestment dates during the periods. All accrued expenses and recurring
charges are also taken into account as described later herein.
58
<PAGE>
Yield
The annualized yield of each class of shares of the Fund based on the month
of December 1998 was as follows:
Class A 4.21%
Class B 3.65%
Class C 3.58%
Class S 4.66%
Yield for the Fund's Class A, Class B(1), Class B, Class C and Class S
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
59
<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, as applicable, a maximum sales charge of 4.5%.
All accrued expenses and recurring charges 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 often 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, 1998, assuming a federal income tax rate of 28% was as
follows:
Class A 5.85%
Class B 5.07%
Class C 4.97%
Class S 6.47%
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].
60
<PAGE>
Accrued Expenses and Recurring Charges
Accrued expenses include all recurring charges that are charged to all
shareholder accounts in proportion to the length of the base period. The
standard total return 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(1), Class B, Class C and Class S shares for periods which end
no earlier than the most recent calendar quarter end and which begin twelve
months before, five years before and ten years before. In addition, the Fund may
provide nonstandardized total return results for differing periods, such as for
the 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 may not be taken into account and therefore not
deducted from the hypothetical initial payment of $1,000. For example, the
Fund's nonstandardized total returns for the six months ended December 31, 1998,
without taking sales charges into account, were as follows:
Class A 3.36%
Class B 3.09%
Class C 3.09%
Class S 3.50%
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.
61
<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 rate of each class of the Fund, based on the month of
December 1998 was as follows:
Class A 4.43%
Class B 3.87%
Class C 3.87%
Class S 4.91%
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
PricewaterhouseCoopers LLP, 160 Federal Street, Boston, Massachusetts
02110, serves as the Trust's independent accountants, providing professional
services including (1) audits of the Fund's annual financial statements, (2)
assistance and consultation in connection with SEC filings and (3) review of the
annual income tax returns filed on behalf of the Fund.
62
<PAGE>
FINANCIAL STATEMENTS
Each of the Investment Portfolio, Statement of Assets and Liabilities,
Statement of Operations and Statement of Changes in Net Assets included in the
Fund's Annual Report to shareholders as of and for the fiscal year ended
December 31, 1998, including any notes thereto and Report of Independent
Accountants is hereby incorporated by reference from the Fund's Annual Report,
filed with the Securities and Exchange Commission (EDGAR accession number
0000950146-99-000355). Shareholder reports are available without
charge upon request. For more information, call the State Street Research
Service Center at (800) 562-0032.
In addition to the reports provided to holders of record on a semiannual
basis, other supplementary financial reports may be made available from time to
time through electronic or other media. Shareholders with substantial holdings
in one or more State Street Research Funds may also receive reports and other
information which reflect or analyze their positions in a consolidated manner.
DOCSC\359877.11
63
<PAGE>
STATE STREET RESEARCH NEW YORK TAX-FREE FUND
a Series of
STATE STREET RESEARCH TAX-EXEMPT TRUST
STATEMENT OF ADDITIONAL INFORMATION
May 1, 1999
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
INVESTMENT OBJECTIVE...........................................................2
ADDITIONAL INVESTMENT POLICIES AND RESTRICTIONS................................2
NEW YORK MUNICIPAL OBLIGATIONS.................................................5
ADDITIONAL RISKS AND INFORMATION CONCERNING
CERTAIN INVESTMENT TECHNIQUES......................................21
DEBT INSTRUMENTS AND PERMITTED CASH INVESTMENTS...............................31
THE TRUST, THE FUND AND ITS SHARES............................................39
TRUSTEES AND OFFICERS.........................................................40
MANAGEMENT OF THE FUND AND INVESTMENT
ADVISORY SERVICES..................................................45
PURCHASE AND REDEMPTION OF SHARES.............................................46
SHAREHOLDER ACCOUNTS..........................................................53
NET ASSET VALUE...............................................................58
PORTFOLIO TRANSACTIONS........................................................59
CERTAIN TAX MATTERS...........................................................63
DISTRIBUTION OF SHARES OF THE FUND............................................66
CALCULATION OF PERFORMANCE DATA...............................................70
CUSTODIAN ...................................................................75
INDEPENDENT ACCOUNTANTS.......................................................75
FINANCIAL STATEMENTS..........................................................76
</TABLE>
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, 1999, 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.
The Fund's financial statements as of and for the fiscal year ended
December 31, 1998, which are included in the Fund's Annual Report for that year,
are incorporated by reference. The Annual Report is available, without charge,
upon request by calling 1-800-562-0032.
CONTROL NUMBER:
<PAGE>
INVESTMENT OBJECTIVE
As set forth under "The Fund--Goal and Strategies--Fundamental Goal" in the
Prospectus of State Street Research New York Tax-Free Fund (the "Fund"), the
Fund's investment goal, which 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, is fundamental and may not be changed by the Fund except by the
affirmative vote of a majority of the outstanding voting securities of the Fund,
as defined in the Investment Company Act of 1940, as amended (the "1940 Act").
(Under the 1940 Act, a "vote of the majority of the outstanding voting
securities" means the vote, at the annual or a special meeting of security
holders duly called, (i) of 67% or more of the voting securities present at the
meeting if the holders of more than 50% of the outstanding voting securities are
present or represented by proxy or (ii) of more than 50% of the outstanding
voting securities, whichever is less.)
ADDITIONAL INVESTMENT POLICIES AND RESTRICTIONS
As set forth under "The Fund--Principal Risks" and "Other Information-Other
Securities and Risks" in the Fund's Prospectus, the Fund has adopted certain
investment restrictions, and those restrictions are either fundamental or not
fundamental. Fundamental restrictions may not be changed by the Fund except by
the affirmative vote of a majority of the outstanding voting securities of the
Fund. Restrictions that are not fundamental may be changed by a vote of a
majority of the Trustees of the Trust.
The Fund's fundamental investment restrictions are set forth below. Under
these restrictions, it is the Fund's policy:
(1) not to purchase a security of any one issuer (other than securities
issued or guaranteed as to principal or interest by the U.S.
Government or its agencies or instrumentalities or mixed-ownership
Government corporations) if such purchase would, with respect to 75%
of the Fund's total assets, cause more than 5% of the Fund's total
assets to be invested in the securities of such issuer or cause more
than 10% of the voting securities of such issuer to be held by the
Fund;
(2) not to 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;
2
<PAGE>
(4) not to purchase or sell fee simple interests in real estate, although
the Fund may purchase and sell other interests in real estate
including securities which are secured by real estate, or securities
of companies which own or invest or deal in real estate;
(5) not to invest in physical commodities or physical commodity contracts
or options in excess of 10% of the Fund's total assets, except that
investments in essentially financial items or arrangements such as,
but not limited to, swap arrangements, hybrids, currencies, currency
and other forward contracts, delayed delivery and when-issued
contracts, futures contracts and options on futures contracts on
securities, securities indices, interest rates and currencies, shall
not be deemed investments in commodities or commodities contracts;
(6) not to make loans, except that the Fund may lend portfolio securities
and purchase bonds, debentures, notes and similar obligations
(including repurchase agreements with respect thereto);
(7) not to conduct arbitrage transactions (provided that investments in
futures and options shall not be deemed arbitrage transactions);
(8) not to invest in oil, gas or other mineral exploration or development
programs (provided that the Fund may invest in securities issued by
companies which invest in or sponsor such programs and in securities
indexed to the price of oil, gas or other minerals);
(9) not to make any investment which would cause more than 25% of the
value of the Fund's total assets to be invested in securities of
issuers principally engaged in any one industry [for purposes of this
restriction, (a) utilities will be divided according to their services
so that, for example, gas, gas transmission, electric and telephone
companies will each be deemed in a separate industry, (b) oil and oil
related companies will be divided by type so that, for example, oil
production companies, oil service companies and refining and marketing
companies will each be deemed in a separate industry, (c) finance
companies will be classified according to the industries of their
parent companies, (d) securities issued or guaranteed by the U.S.
Government or its agencies or instrumentalities (including repurchase
agreements involving such U.S. Government securities to the extent
excludable under relevant regulatory interpretations) shall be
excluded; (e) industrial development revenue bonds which are based,
directly or indirectly, on the credit of private issuers will be
classified according to the industry of the issuer, and (f) New York
State and other jurisdictions and each of their separate political
subdivisions, agencies, authorities or instrumentalities are treated
as separate issuers and are not regarded as members of any industry];
3
<PAGE>
(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
(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 without shareholder
approval. 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 engage in transactions in options, except in connection with
options on securities and securities indices and options on futures on
securities and securities indices;
(3) not to purchase securities on margin or make short sales of securities
or maintain a short position except for short sales "against the box";
(4) not to hypothecate, mortgage or pledge any of its assets except as may
be necessary in connection with permitted borrowings (for the purpose
of this restriction, futures 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);
(5) not to purchase a security issued by another investment company,
except to the extent permitted under the 1940 Act or except by
purchases in the open market involving only customary brokers'
commissions, or securities acquired as dividends or distributions or
in connection with a merger, consolidation or similar transaction or
other exchange; and
4
<PAGE>
(6) 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 of Additional Information, the
term "New York Municipal Obligations" refers to debt obligations, including
bonds and notes, issued by the State of New York and its political subdivisions,
the interest on which was at the time of issuance, in the opinion of bond
counsel, excluded from gross income for federal income tax purposes and exempt
from New York State and New York City personal income taxes. Like other
tax-exempt bonds, New York Municipal Obligations are issued to obtain funds for
various public purposes, including the construction of a wide range of public
facilities such as airports, bridges, highways, housing, mass transportation,
roads, schools, and water and sewer works. Other public purposes for which New
York Municipal Obligations, like other tax-exempt bonds, may be issued include
refunding outstanding obligations, obtaining funds for general operating
expenses and obtaining funds to lend to other public institutions and
facilities. In addition, certain debt obligations known as industrial
development revenue bonds may be issued by or on behalf of public authorities to
obtain funds to provide privately-operated housing facilities, sports
facilities, conventions or trade show facilities, airport, mass transit, port or
parking facilities, air or water pollution control facilities and certain local
facilities for water supply, gas, electricity or sewage or solid waste disposal.
Such obligations are included within the term New York Municipal Obligations if
the interest paid thereon is, in the opinion of bond counsel at the time of
issuance, excluded from gross income for federal income tax purposes and exempt
from New York State and City personal income taxes. Other industrial development
bonds used to fund the construction, equipment, repair or improvement of
privately-operated industrial or commercial facilities may also be New York
Municipal Obligations, but the size of such issues is limited under current
federal tax law. The Fund may not be a desirable investment for "substantial
users" of facilities financed by industrial development revenue bonds or for
"related persons" of substantial users.
The two principal classifications for tax-exempt bonds are general
obligation bonds and limited obligation (or revenue) bonds. General obligation
bonds are obligations involving the credit of an issuer possessing taxing power
and are payable from the issuer's general unrestricted revenues and not from any
particular fund or source. The characteristics and method of enforcement of
general obligation bonds vary according to the law applicable to the particular
issuer, and payment may be dependent upon appropriation by the issuer's
legislative body. Limited obligation bonds are payable only from the revenues
derived from a particular facility or class of facilities or, in some cases,
from the proceeds of a special excise or other specific revenue source.
Tax-exempt industrial development revenue bonds generally are revenue bonds and
thus not payable from the unrestricted revenues of the issuer. The credit and
quality of industrial development revenue bonds is usually directly related to
the credit of the corporate
5
<PAGE>
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).
Municipal lease obligations, that is, lease obligations or installment
purchase contract obligations supported by lease payments made by a
municipality, 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 based 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.
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 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 ratings of Standard & Poor's Corporation ("S&P") and Moody's Investors
Service, Inc. ("Moody's") represent their opinions and are not absolute
standards of quality. Tax-exempt obligations with the same maturity, interest
rate and rating may have different yields while on
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the other hand tax-exempt obligations with the same maturity and interest rate
but with different ratings may have the same yield.
Obligations of issuers of tax-exempt securities are subject to the
provisions of bankruptcy, insolvency and other laws, such as the Federal
Bankruptcy Reform Act of 1978, affecting the rights and remedies of creditors.
Congress or state legislatures may seek to extend the time for payment of
principal or interest, or both, or to impose other constraints upon enforcement
of such obligations. There is also the possibility that, as a result of
litigation or other conditions, the power or ability of issuers to meet their
obligations to pay interest on and principal of their tax-exempt securities may
be materially impaired or their obligations may be found to be invalid or
unenforceable. Such litigation or conditions may from time to time have the
effect of introducing uncertainties in the market for tax-exempt obligations or
certain segments thereof, or may materially affect the credit risk with respect
to particular bonds or notes. Adverse economic, business, legal or political
developments might affect all or a substantial portion of the Fund's tax-exempt
bonds or notes in the same manner.
From time to time, proposals have been introduced before Congress to
restrict or eliminate the federal income tax exemption for interest on debt
obligations issued by states and their political subdivisions, and similar
proposals may well be introduced in the future. If such a proposal were enacted,
the availability of New York Municipal Obligations for investment by the Fund
and the value of the Fund's portfolio could be materially affected, in which
event the Fund would reevaluate its investment objective and policies and
consider changes in the structure of the Fund or dissolution.
Special Considerations Relating to New York Municipal Obligations
The Fund's ability to achieve its investment objective is dependent upon
the ability of the issuers of New York Municipal Obligations to meet their
continuing obligations for the payment of principal and interest.
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
borrowings and fewer markets for their outstanding debt obligations. Although
several different issues of municipal securities of New York State and its
agencies and instrumentalities and of New York City have been downgraded by
Standard & Poor's and Moody's in recent years, the most recent actions of
Standard & Poor's and Moody's have been to place the debt obligations of New
York State and New York City on CreditWatch with positive implications and to
upgrade the debt obligations of New York City, respectively. Strong demand for
New York Municipal Obligations has also 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
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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 Statement of Additional
Information, 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.
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's location and its excellent air
transport facilities and natural harbors have made it an important link in
international commerce. Travel and tourism constitute an important part of the
economy. Like the rest of the nation, New York has a declining proportion of its
workforce engaged in manufacturing, and an increasing proportion engaged in
service industries.
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. State per capita
personal income has historically been significantly higher than the national
average, although the ratio has varied substantially. Because New York City (the
"City") is a regional employment center for a multi-state region, State personal
income measured on a residence basis understates the relative importance of the
State to the national economy and the size of the base to which State taxation
applies.
The State economic forecast has been raised slightly from the enacted
budget forecast. Continued growth is projected in 1998 and 1999 for employment,
wages, and personal income, although the growth rates of personal income and
wages are expected to be lower than those in 1997. The growth of personal income
is projected to decline from 5.7 percent in 1997 to 4.8 percent in 1998 and 4.2
percent in 1999, in part because growth in bonus payments is expected to slow
down, a distinct shift from the torrid rate of the last few years. Overall
employment growth is expected to be 1.9 percent in 1998, the strongest in a
decade, but will drop to 1.0 percent in 1999, reflecting the slowing growth in
the national economy, continued restraint in governmental spending, and
restructuring in the health care, social service, and banking sectors.
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There can be no assurance that the State economy will not experience
worse-than-predicted results, with corresponding material and adverse effects on
the State's projections of receipts and disbursements.
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.
State law requires the Governor to propose a balanced budget each year. In
recent years, the State has closed projected budget gaps of $5.0 billion
(1995-96), $3.9 billion (1996-97), $2.3 billion (1997-98), and less than $1
billion (1998-99). The State, as a part of the 1998-99 Executive Budget
projections submitted to the Legislature in February 1998, projected a 1999-00
General Fund budget gap of approximately $1.7 billion and a 2000-01 gap of $3.7
billion. As a result of changes made in the 1998-99 enacted budget, the 1999-00
gap is now expected to be roughly $1.3 billion, or about $400 million less than
previously projected, after application of reserves created as part of the
1998-99 budget process. Such reserves would not be available against subsequent
year imbalances.
Sustained growth in the State's economy could contribute to closing
projected budget gaps over the next several years, both in terms of
higher-than-projected tax receipts and in lower-than-expected entitlement
spending. However, the State's projections in 1999-00 currently assume actions
to achieve $600 million in lower disbursements and $250 million in additional
receipts from the settlement of State claims against the tobacco industry.
Consistent with past practice, the projections do not include any costs
associated with new collective bargaining agreements after the expiration of the
current round of contracts at the end of the 1998-99 fiscal year. The State
expects that the 1990-00 Financial Plan will achieve savings from initiatives by
State agencies to deliver services more efficiently, workforce management
efforts, maximization of federal and non-General Fund spending offsets, and
other actions necessary to bring projected disbursements and receipts into
balance.
The State will formally update its outyear projections of receipts and
disbursements for the 2000-01 and 2001-02 fiscal years as a part of the 1999-00
Executive Budget process, as required by law. The revised expectations for years
2000-01 and 2001-02 will reflect the cumulative impact of tax reductions and
spending commitments enacted over the last several years as well as new 1999-00
Executive Budget recommendations. The School Tax Relief Program ("STAR")
program, which dedicates a portion of personal income tax receipts to fund
school tax reductions, has a significant impact on General Fund receipts. STAR
is projected to reduce personal income tax revenues available to the General
Fund by an estimated $1.3 billion in 2000-01. Measured from the 1998-99 base,
scheduled reductions to estate and gift, sales and
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other taxes, reflecting tax cuts enacted in 1997-98 and 1998-99, will lower
General Fund taxes and fees by an estimated $1.8 billion in 2000-01.
Disbursement projections for the outyears currently assume additional outlays
for school aid, Medicaid, welfare reform, mental health community reinvestment,
and other multi-year spending commitments in law.
On September 11, 1997, the New York State Comptroller issued a report which
noted that the ability to deal with future budget gaps could become a
significant issue in the State's 2000-2001 fiscal year, when the cost of tax
cuts increases by $1.9 billion. The report contained projections that, based on
current economic conditions and current law for taxes and spending, showed a gap
in the 2000-2001 State fiscal year of $5.6 billion and of $7.4 billion in the
2001-2002 State fiscal year. The report noted that these gaps would be smaller
if recurring spending reductions produce savings in earlier years. The State
Comptroller has also stated that if Wall Street earnings moderate and the State
experiences a moderate recession, the gap for the 2001-2002 State fiscal year
could grow to nearly $12 billion.
The State's current fiscal year began on April 1, 1998 and ends on March
31, 1999 and is referred to herein as the State's 1998-99 fiscal year. The
Legislature adopted the debt service component of the State budget for the
1998-99 fiscal year on March 30, 1998 and the remainder of the budget on April
18, 1998. In the period prior to adoption of the budget for the current fiscal
year, the Legislature also enacted appropriations to permit the State to
continue its operations and provide for other purposes. On April 25, 1998, the
Governor vetoed certain items that the Legislature added to the Executive
Budget. The Legislature had not overridden any of the Governor's vetoes as of
the start of the legislative recess on June 19, 1998 (under the State
Constitution, the Legislature can override one or more of the Governor's vetoes
with the approval of two-thirds of the members of each house).
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General Fund disbursements in 1998-99 are now projected to grow by $2.43
billion over 1997-98 levels, or $690 million more than proposed in the
Governor's Executive Budget, as amended. The change in General Fund
disbursements from the Executive Budget to the enacted budget reflects
legislative additions (net of the value of the Governor's vetoes), actions taken
at the end of the regular legislative session, as well as spending that was
originally anticipated to occur in 1997-98 but is now expected to occur in
1998-99. The State projects that the 1998-99 State Financial Plan is balanced on
a cash basis, with an estimated reserve for future needs of $761 million.
The State's enacted budget includes several new multi-year tax reduction
initiatives, including acceleration of State-funded property and local income
tax relief for senior citizens under the STAR, expansion of the child care
income-tax credit for middle-income families, a phased-in reduction of the
general business tax, and reduction of several other taxes and fees, including
an accelerated phase-out of assessments on medical providers. The enacted budget
also provides for significant increases in spending for public schools, special
education programs, and for the State and City university systems. It also
allocates $50 million for a new Debt Reduction Reserve Fund ("DRRF") that may
eventually be used to pay debt service costs on or to prepay outstanding
State-supported bonds.
The 1998-99 State Financial Plan projects a closing balance in the General
Fund of $1.42 billion that is comprised of a reserve of $761 million available
for future needs, a balance of $400 million in the Tax Stabilization Reserve
Fund ("TSRF"), a balance of $158 million in the Community Projects Fund ("CPF"),
and a balance of $100 million in the Contingency Reserve Fund ("CRF"). The TSRF
can be used in the event of an unanticipated General Fund cash operating
deficit, as provided under the State Constitution and State Finance Law. The CPF
is used to finance various legislative and executive initiatives. The CRF
provides resource to help finance any extraordinary litigation costs during the
fiscal year.
The forecast of General Fund receipts in 1998-99 incorporates several
Executive Budget tax proposals that, if enacted, would further reduce receipts
otherwise available to the General Fund by approximately $700 million during
1998-99. The Executive Budget proposes accelerating school tax relief for senior
citizens under STAR, which is projected to reduce General Fund receipts by $537
million in 1998-99. The proposed reduction supplements STAR tax reductions
already scheduled in law, which are projected at $187 million in 1998-99. The
Budget also proposes several new tax-cut initiatives and other funding changes
that are projected to further reduce receipts available to the General Fund by
over $200 million. These initiatives include reducing the fee to register
passenger motor vehicles and earmarking a larger portion of such fees to
dedicated funds and other purposes; extending the number of weeks in which
certain clothing purchases are exempt from sales taxes; more fully conforming
State law to reflect recent Federal changes in estate taxes; continuing lower
pari-mutuel tax rates; and accelerating scheduled property tax relief for
farmers from 1999 to 1998. In addition to the specific tax and fee reductions
discussed above, the Executive Budget also proposes establishing a reserve of
$100 million to permit the acceleration into 1998-99 of other tax reductions
that are otherwise scheduled in law for implementation in future fiscal years.
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The Division of the Budget ("DOB") estimates that the 1998-99 Financial
Plan includes approximately $64 million in non-recurring resources, comprising
less than two-tenths of one percent of General Fund disbursements. The
non-recurring resources projected for use in 1998-99 consist of $27 million in
retroactive federal welfare reimbursements for family assistance recipients with
HIV/AIDS, $25 million in receipts from the Housing Finance Agency that were
originally anticipated in 1997-98, and $10 million in other measures, including
$5 million in asset sales.
Disbursements from Capital Projects funds in 1998-99 are estimated at $4.82
billion, or $1.07 billion higher than 1997-98. The proposed spending plan
includes: $2.51 billion in disbursements for transportation purposes, including
the State and local highway and bridge program; $815 million for environmental
activities; $379 million for correctional services; $228 million for the State
University of New York ("SUNY") and the City University of New York ("CUNY");
$290 million for mental hygiene projects; and $375 million for CEFAP.
Approximately 28 percent of capital projects are proposed to be financed by
"pay-as-you-go" resources. State-supported bond issuances finance 46 percent of
capital projects, with federal grants financing the remaining 26 percent.
Many complex political, social and economic forces influence the State's
economy and finances, which may in turn affect the State's Financial Plan. These
forces may affect the State unpredictably from fiscal year to fiscal year and
are influenced by governments, institutions, and organizations that are not
subject to the State's control. The State Financial Plan is also necessarily
based upon forecasts of national and State economic activity. Economic forecasts
have frequently failed to predict accurately the timing and magnitude of changes
in the national and the State economies. The DOB believes that its projections
of receipts and disbursements relating to the current State Financial Plan, and
the assumptions on which they are based, are reasonable. Actual results,
however, could differ materially and adversely from their projections, and those
projections may be changed materially and adversely from time to time.
In the past, the State has taken management actions and made use of
internal sources to address potential State financial plan shortfalls, and the
DOB believes it could take similar actions should variances occur in its
projections for the current fiscal year.
Recent Financial Results. The General Fund is the principal operating fund of
the State and is used to account for all financial transactions, except those
required to be accounted for in another fund. It is the State's largest fund and
receives almost all State taxes and other resources not dedicated to particular
purposes.
On March 31, 1998, the State recorded, on a GAAP-basis, its first-ever,
accumulated positive balance in its General Fund. This "accumulated surplus" was
$567 million. The improvement in the State's GAAP position is attributable, in
part, to the cash surplus recorded at the end of the State's 1997-98 fiscal
year. Much of that surplus is reserved for future requirements, but a portion is
being used to meet spending needs in 1998-99. Thus, the State expects some
deterioration in its GAAP position, but expects to maintain a positive GAAP
balance through the end of the current fiscal year.
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The State completed its 1997-98 fiscal year with a combined Governmental
Funds operating surplus of $1.80 billion, which included an operating surplus in
the General Fund of $1.56 billion, in Capital Projects Funds of $232 million and
in Special Revenue Funds of $49 million, offset in part by an operating deficit
of $43 million in Debt Service Funds.
The State reported a General Fund operating surplus of $1.56 billion for
the 1997-98 fiscal year, as compared to an operating surplus of $1.93 billion
for the 1996-97 fiscal year. As a result, the State reported an accumulated
surplus of $567 million in the General Fund for the first time since it began
reporting its operations on a GAAP-basis. The 1997-98 fiscal year operating
surplus reflects several major factors, including the cash-basis operating
surplus resulting from the higher-than-anticipated personal income tax receipts,
an increase in taxes receivable of $681 million, an increase in other assets of
$195 million and a decrease in pension liabilities of $144 million. This was
partially offset by an increase in payables to local governments of $270 million
and tax refunds payable of $147 million.
Debt Limits and Outstanding Debt. There are a number of methods by which
the State of New York may incur debt. Under the State Constitution, the State
may not, with limited exceptions for emergencies, undertake long-term general
obligation borrowing (i.e., borrowing for more than one year) unless the
borrowing is authorized in a specific amount for a single work or purpose by the
Legislature and approved by the voters. There is no limitation on the amount of
long-term general obligation debt that may be so authorized and subsequently
incurred by the State.
The State may undertake short-term borrowings without voter approval (i) in
anticipation of the receipt of taxes and revenues, by issuing tax and revenue
anticipation notes, and (ii) in anticipation of the receipt of proceeds from the
sale of duly authorized but unissued general obligation bonds, by issuing bond
anticipation notes. The State may also, pursuant to specific constitutional
authorization, directly guarantee certain obligations of the State of New York's
authorities and public benefit corporations ("Authorities"). Payments of debt
service on New York State general obligation and New York State-guaranteed bonds
and notes are legally enforceable obligations of the State of New York.
The State employs additional long-term financing mechanisms, lease-purchase
and contractual-obligation financings, which involve obligations of public
authorities or municipalities that are State-supported but are not general
obligations of the State. Under these financing arrangements, certain public
authorities and municipalities have issued obligations to finance the
construction and rehabilitation of facilities or the acquisition and
rehabilitation of equipment, and expect to meet their debt service requirements
through the receipt of rental or other contractual payments made by the State.
Although these financing arrangements involve a contractual agreement by the
State to make payments to a public authority, municipality or other entity, the
State's obligation to make such payments is generally expressly made subject to
appropriation by the Legislature and the actual availability of money to the
State for making the payments. The State has also entered into a
contractual-obligation financing arrangement with the LGAC to restructure the
way the State makes certain local aid payments.
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In February 1997, the Job Development Authority ("JDA") issued
approximately $85 million of State-guaranteed bonds to refinance certain of its
outstanding bonds and notes in order to restructure and improve JDA's capital
structure. Due to concerns regarding the economic viability of its programs,
JDA's loan and loan guarantee activities had been suspended since the Governor
took office in 1995. As a result of the structural imbalances in JDA's capital
structure, and defaults in its loan portfolio and loan guarantee program
incurred between 1991 and 1996, JDA would have experienced a debt service cash
flow shortfall had it not completed its recent refinancing. JDA anticipates that
it will transact additional refinancings in 1999, 2000 and 2003 to complete its
long-term plan of finance and further alleviate cash flow imbalances which are
likely to occur in future years. JDA recently resumed its lending activities
under a revised set of lending programs and underwriting guidelines.
On January 13, 1992, Standard & Poor's Ratings Services ("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 August 28, 1997,
Standard & Poor's revised its ratings on the State's general obligation bonds
from A- to A and revised its ratings on the State's moral obligation, lease
purchase, guaranteed and contractual obligation debt. On March 2, 1998, Standard
& Poor's affirmed its A rating on the State's outstanding bonds.
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. On March 20,
1998, Moody's assigned the highest commercial paper rating of P-1 to the
short-term notes of the State. On July 6, 1998, Moody's assigned an A2 rating
with a stable outlook to the State's general obligations.
The State anticipates that its capital programs will be financed, in part,
through borrowings by the State and its public authorities in the 1998-99 fiscal
year. Information on the State's five-year Capital Program and Financing Plan
for the 1998-99 through 2002-03 fiscal years, updated to reflect actions taken
in the 1998-99 State budget (the "Plan"), was released on July 30, 1998. The
projection of State borrowings for the 1998-99 fiscal year is subject to change
as market conditions, interest rates and other factors vary throughout the
fiscal year.
The State expects to issue $528 million in general obligation bonds
(including $154 million for purposes of redeeming outstanding BANs) and $154
million in general obligation commercial paper. The State also anticipates the
issuance of up to a total of $419 million in Certificates of Participation to
finance equipment purchases (including costs of issuance, reserve funds, and
other costs) during the 1998-99 fiscal year. Of this amount, it is anticipated
that approximately $191 million will be issued to finance agency equipment
acquisitions, including amounts to address Statewide technology issues related
to Year 2000 compliance. Approximately $228 million will also be issued to
finance equipment acquisitions for welfare reform-related information technology
systems.
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Borrowings by public authorities pursuant to lease-purchase and
contractual-obligation financings for capital programs of the State are
projected to total approximately $2.93 billion, including costs of issuance,
reserve funds, and other costs, net of anticipated refundings and other
adjustments in 1998-99.
As a part of the Plan, changes were proposed to the State's borrowing plan,
including: the delay in the issuance of COPs to finance welfare information
systems until 1998-99 to permit a thorough assessment of needs; and the
elimination of issuances for the CEFAP to reflect the proposed conversion of
that bond-financed program to pay-as-you-go financing.
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) alleged responsibility of New York State officials to assist in
remedying racial segregation in the City of Yonkers; (5) challenges to
regulations promulgated by the Superintendent of Insurance establishing certain
excess medical malpractice premium rates; (6) challenges to the
constitutionality of Public Health Law 2807-d, which imposes a gross receipts
tax from certain patient care services; (7) action seeking enforcement of
certain sales and excise taxes and tobacco products and motor fuel sold to
non-Indian consumers on Indian reservations; and (8) a challenge to the
Governor's application of his constitutional line item veto authority.
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
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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 cure rights, tort, real property and contract claims in which
the State is a defendant and the monetary damages sought are substantial,
generally in excess of $100 million. These proceedings could affect adversely
the financial condition of the State in the 1998-99 fiscal year or thereafter.
Adverse developments in these proceedings, other proceedings for which there are
unanticipated, unfavorable and material judgments, or the initiation of new
proceedings could affect the ability of the State to maintain a balanced
financial plan. An adverse decision in any of these proceedings could exceed the
amount of the reserve established in the State's financial plan for the payment
of judgments and, therefore, could affect the ability of the State to maintain a
balanced financial plan.
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 is
State-supported or State-related.
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.
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New York City and Other Localities. The fiscal health of the State may also be
impacted by the fiscal health of its localities, particularly the City, which
has required and continues to require significant financial assistance from the
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.
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 February 3, 1998 and again on May
27, 1998, Standard & Poor's assigned a BBB+ rating to the City's general
obligation debt and placed the ratings on CreditWatch with positive
implications.
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 February 25, 1998, Moody's
upgraded nearly $28 billion of the City's general obligations from Baa1 to A3.
On June 9, 1998, Moody's again assigned on A3 rating to the City's general
obligations and stated that its outlook was stable.
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.
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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.
On June 10, 1997, the City submitted to the Control Board the Financial
Plan (the "1998-2001 Financial Plan") for the 1998 through 2001 fiscal years,
relating to the City, the Board of Education ("BOE") and CUNY and reflected the
City's expense and capital budgets for the 1998 fiscal year, which were adopted
on June 6, 1997. The 1998-2001 Financial Plan projected revenues and
expenditures for the 1998 fiscal year balanced in accordance with GAAP. The
1998-99 Financial Plan projects General Fund receipts (including transfers from
other funds) of $36.22 billion, an increase of $1.02 billion over the estimated
1997-1998 level. Recurring growth in the State General Fund tax base is
projected to be approximately six percent during 1998-99, after adjusting for
tax law and administrative changes. This growth rate is lower than the rates for
1996-97 or currently estimated for 1997-98, but roughly equivalent to the rate
for 1995-96.
The 1998-99 forecast for user taxes and fees also reflects the impact of
scheduled tax reductions that will lower receipts by $38 million, as well as the
impact of two Executive Budget proposals that are projected to lower receipts by
an additional $79 million. The first proposal would divert $30 million in motor
vehicle registration fees from the General Fund to the Dedicated Highway and
Bridge Trust Fund; the second would reduce fees for motor vehicle registrations,
which would further lower receipts by $49 million. The underlying growth of
receipts in this category is projected at 4 percent, after adjusting for these
scheduled and recommended changes.
In comparison to the current fiscal year, business tax receipts are
projected to decline slightly in 1998-99, falling from $4.98 million to $4.96
billion. The decline in this category is largely attributable to scheduled tax
reductions. In total, collections for corporation and utility taxes and the
petroleum business tax are projected to fall by $107 million from 1997-98. The
decline in receipts in these categories is partially offset by growth in the
corporation franchise, insurance and bank taxes, which are projected to grow by
$88 million over the current fiscal year.
The Financial Plan is projected to show a GAAP-basis surplus of $131
million for 1997-98 and a GAAP-basis deficit of $1.3 billion for 1998-99 in the
General Fund, primarily as a result of the use of the 1997-98 cash surplus. In
1998-99, the General Fund GAAP Financial
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Plan shows total revenues of $34.68 billion, total expenditures of $35.94
billion, and net other financing sources and uses of $42 million.
Although the City has maintained balanced budgets in each of its last
eighteen fiscal years and is projected to achieve balanced operating results for
the 1999 fiscal year, there can be no assurance that the gap-closing actions
proposed in the 1998-2001 Financial Plan can be successfully implemented or that
the City will maintain a balanced budget in future years without additional
State aid, revenue increases or expenditure reductions. Additional tax increases
and reductions in essential City services could adversely affect the City's
economic base.
The projections set forth in the 1998-2001 Financial Plan were 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 1998-2001 Financial Plan, employment growth, the
ability to implement proposed reductions in City personnel and other cost
reduction initiatives, the ability of the Health and Hospitals Corporation 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 1998-2001 Financial Plan is also dependent upon the
City's ability to market its securities successfully. The City's financing
program for fiscal years 1998 through 2001 contemplates the issuance of $5.7
billion of general obligation bonds and $5.7 billion of bonds to be issued by
the proposed New York City Transitional Finance Authority (the "Finance
Authority") to finance City capital projects. The Finance Authority, was created
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. Despite this additional financing mechanism, the
City currently projects that, if no further action is taken, it will reach its
debt limit in City fiscal year 1999-2000. 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. On June 2, 1997, an action was commenced seeking a declaratory
judgment declaring the legislation establishing the Transitional Finance
Authority to be unconstitutional. If such legislation were voided, projected
contracts for the City capital projects would exceed the City's debt limit
during fiscal year 1997-98. Future developments concerning the City or entities
issuing debt for the benefit of the City, and public discussion of such
developments, as well as prevailing market conditions and securities credit
ratings, may affect the ability or cost to sell securities issued by the City or
such entities and may also affect the market for their outstanding securities.
The City Comptroller and other agencies and public officials have issued
reports and made public statements which, among other things, state that
projected revenues and
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expenditures may be different from those forecast in the City's financial plans.
It is reasonable to expect that such reports and statements will continue to be
issued and to engender public comment.
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. Although the City's 1998 fiscal year financial plan projected
$2.4 billion of seasonal financing, the City expected to undertake only
approximately $1.4 billion of seasonal financing. The City issued $2.4 billion
of short-term obligations in fiscal year 1997. 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 in the 1993 fiscal year. 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 years.
Certain localities, in addition to the City, have experienced financial
problems and have requested and received additional New York State assistance
during the last several State fiscal years. The potential impact on the State of
any future requests by localities for additional assistance is not included in
the State's projections of its receipts and disbursements for the 1997-98 fiscal
year.
Fiscal difficulties experienced by the City of Yonkers ("Yonkers") resulted
in the re-establishment 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
State to assist Yonkers could result in increased State expenditures for
extraordinary local assistance.
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. Troy MAC has issued
bonds to effect a restructuring of the City of Troy's obligations.
Eighteen municipalities received extraordinary assistance during the 1996
legislative session through $50 million in special appropriations targeted for
distressed cities, and that was largely continued in 1997. Twenty-eight
municipalities were scheduled to share in more than $32 million in targeted
unrestricted aid allocated in the 1997-98 budget. An additional $21 million will
be dispersed among all cities, towns and villages, a 3.97% increase in General
Purpose State Aid.
The 1998-99 budget includes an additional $29.4 million in unrestricted aid
targeted to 57 municipalities across the State. Other assistance for
municipalities with special needs totals more
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than $25.6 million. Twelve upstate cities will receive $24.2 million in one-time
assistance from a cash flow acceleration of State aid.
Municipalities and school districts have engaged in substantial short-term
and long-term borrowings. In 1996, the total indebtedness of all localities in
the State other than New York City was approximately $20.0 billion. A small
portion (approximately $77.2 million) of that indebtedness represented borrowing
to finance budgetary deficits and was issued pursuant to enabling 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 that are authorized by State law to issue debt to finance
deficits during the period that such deficit financing is outstanding.
From time to time, federal expenditure reductions could reduce, or in some
cases eliminate, federal funding of some local programs and accordingly might
impose substantial increased expenditure requirements on affected localities. If
the State, the City or any of the Authorities were to suffer serious financial
difficulties jeopardizing their respective access to the public credit markets,
the marketability of notes and bonds issued by localities within the State could
be adversely affected. Localities also face anticipated and potential problems
resulting from certain pending litigation, judicial decisions and long-range
economic trends. Long-range potential problems of declining urban population,
increasing expenditures and other economic trends could adversely affect
localities and require increasing the State assistance in the future.
Year 2000 Compliance. The State is currently addressing "Year 2000" data
processing compliance issues. The Year 2000 compliance issue ("Y2K") arises
because most computer software programs allocate two digits to the data field
for "year" on the assumption that the first two digits will be "19". Such
programs will thus interpret the year 2000 as the year 1900 absent
reprogramming. Y2K could impact both the ability to enter data into computer
programs and the ability of such programs to correctly process data.
The Office for Technology is monitoring compliance on a quarterly basis and
is providing assistance and assigning resources to accelerate compliance for
mission critical systems, with most compliance testing expected to be completed
by mid-1999. There can be no guarantee, however, that all of the State's
mission-critical and high-priority computer systems will be Year 2000 compliant
and that there will not be an adverse impact upon State operations or State
finances as a result.
Certain Limitations Relating to New York Municipal Obligations
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.
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ADDITIONAL RISKS AND INFORMATION CONCERNING
CERTAIN INVESTMENT TECHNIQUES
Derivatives
The Fund may buy and sell certain types of derivatives, such as options,
futures contracts, options on futures contracts, and swaps under circumstances
in which such instruments are expected by State Street Research & Management
Company (the "Investment Manager") to aid in achieving the Fund's investment
objective. The Fund may also purchase instruments with characteristics of both
futures and securities (e.g., debt instruments with interest and principal
payments determined by reference to the value of a commodity or a currency at a
future time) and which, therefore, possess the risks of both futures and
securities investments.
Derivatives, such as options, futures contracts, options on futures
contracts, and swaps enable the Fund to take both "short" positions (positions
which anticipate a decline in the market value of a particular asset or index)
and "long" positions (positions which anticipate an increase in the market value
of a particular asset or index). The Fund may also use strategies which involve
simultaneous short and long positions in response to specific market conditions,
such as where the Investment Manager anticipates unusually high or low market
volatility.
The Investment Manager may enter into derivative positions for the Fund for
either hedging or non-hedging purposes. The term hedging is applied to defensive
strategies designed to protect the Fund from an expected decline in the market
value of an asset or group of assets that the Fund owns (in the case of a short
hedge) or to protect the Fund from an expected rise in the market value of an
asset or group of assets which it intends to acquire in the future (in the case
of a long or "anticipatory" hedge). Non-hedging strategies include strategies
designed to produce incremental income (such as the option writing strategy
described below) or "speculative" strategies which are undertaken to profit (i)
from an expected decline in the market value of an asset or group of assets
which the Fund does not own or (ii) expected increases in the market value of an
asset which it does not plan to acquire. Information about specific types of
instruments is provided below.
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
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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.
Futures Contracts. Futures contracts are publicly traded contracts to buy
or sell an underlying asset or group of assets, such as a currency, or an index
of securities, at a future time at a specified price. A contract to buy
establishes a long position while a contract to sell establishes a short
position.
The purchase of a futures contract on an equity security or an index of
equity securities normally enables a buyer to participate in the market movement
of the underlying asset or index after paying a transaction charge and posting
margin in an amount equal to a small percentage of the value of the underlying
asset or index. The Fund will initially be required to deposit with the Trust's
custodian or the futures commission merchant effecting the futures transaction
an amount of "initial margin" in cash or securities, as permitted under
applicable regulatory policies.
Initial margin in futures transactions is different from margin in
securities transactions in that the former does not involve the borrowing of
funds by the customer to finance the transaction. Rather, the initial margin is
like a performance bond or good faith deposit on the contract. Subsequent
payments (called "maintenance margin") to and from the broker will be made on a
daily basis as the price of the underlying asset fluctuates. This process is
known as "marking to market." For example, when the Fund has taken a long
position in a futures contract and the value of the underlying asset has risen,
that position will have increased in value and the Fund will receive from the
broker a maintenance margin payment equal to the increase in value of the
underlying asset. Conversely, when the Fund has taken a long position in a
futures contract and the value of the underlying instrument has declined, the
position would be less valuable, and the Fund would be required to make a
maintenance margin payment to the broker.
At any time prior to expiration of the futures contract, the Fund may elect
to close the position by taking an opposite position which will terminate the
Fund's position in the futures contract. A final determination of maintenance
margin is then made, additional cash is required to be paid by or released to
the Fund, and the Fund realizes a loss or a gain. While futures contracts with
respect to securities do provide for the delivery and acceptance of such
securities, such delivery and acceptance are seldom made.
In transactions establishing a long position in a futures contract, assets
equal to the face value of the futures contract will be identified by the Fund
to the Trust's custodian for maintenance in a separate account to insure that
the use of such futures contracts is unleveraged. Similarly, assets having a
value equal to the aggregate face value of the futures contract will be
identified with respect to each short position. The Fund will utilize such
assets and methods of cover as appropriate under applicable exchange and
regulatory policies.
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Options
The Fund may use options to implement its investment strategy. There are
two basic types of options: "puts" and "calls." Each type of option can
establish either a long or a short position, depending upon whether the Fund is
the purchaser or the writer of the option. A call option on a security, for
example, gives the purchaser of the option the right to buy, and the writer the
obligation to sell, the underlying asset at the exercise price during the option
period. Conversely, a put option on a security gives the purchaser the right to
sell, and the writer the obligation to buy, the underlying asset at the exercise
price during the option period.
Purchased options have defined risk, that is, the premium paid for the
option, no matter how adversely the price of the underlying asset moves, while
affording an opportunity for gain corresponding to the increase or decrease in
the value of the optioned asset. In general, a purchased put increases in value
as the value of the underlying security falls and a purchased call increases in
value as the value of the underlying security rises.
The principal reason to write options is to generate extra income (the
premium paid by the buyer). Written options have varying degrees of risk. An
uncovered written call option theoretically carries unlimited risk, as the
market price of the underlying asset could rise far above the exercise price
before its expiration. This risk is tempered when the call option is covered,
that is, when the option writer owns the underlying asset. In this case, the
writer runs the risk of the lost opportunity to participate in the appreciation
in value of the asset rather than the risk of an out-of-pocket loss. A written
put option has defined risk, that is, the difference between the agreed-upon
price that the Fund must pay to the buyer upon exercise of the put and the
value, which could be zero, of the asset at the time of exercise.
The obligation of the writer of an option continues until the writer
effects a closing purchase transaction or until the option expires. To secure
its obligation to deliver the underlying asset in the case of a call option, or
to pay for the underlying asset in the case of a put option, a covered writer is
required to deposit in escrow the underlying security or other assets in
accordance with the rules of the applicable clearing corporation and exchanges.
Among the options which the Fund may enter are options on securities
indices. In general, options on indices of securities are similar to options on
the securities themselves except that delivery requirements are different. For
example, a put option on an index of securities does not give the holder the
right to make actual delivery of a basket of securities but instead gives the
holder the right to receive an amount of cash upon exercise of the option if the
value of the underlying index has fallen below the exercise price. The amount of
cash received will be equal to the difference between the closing price of the
index and the exercise price of the option expressed in dollars times a
specified multiple. As with options on equity securities, or futures contracts,
a Fund may offset its position in index options prior to expiration by entering
into a closing transaction on an exchange or it may let the option expire
unexercised.
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A securities index assigns relative values to the securities included in
the index and the index options are based on a broad market index. In connection
with the use of such options, the Fund may cover its position by identifying
assets having a value equal to the aggregate face value of the option position
taken.
Options on Futures Contracts
An option on a futures contract gives the purchaser the right, in return
for the premium paid, to assume a position in a futures contract (a long
position if the option is a call and a short position if the option is a put) at
a specified exercise price at any time during the period of the option.
Limitations and Risks of Options and Futures Activity
The Fund may not establish a position in a commodity futures contract or
purchase or sell a commodity option contract for other than bona fide hedging
purposes if immediately thereafter the sum of the amount of initial margin
deposits and premiums required to establish such positions for such nonhedging
purposes would exceed 5% of the market value of the Fund's net assets. The Fund
applies a similar policy to options that are not commodities.
As noted above, the Fund may engage in both hedging and nonhedging
strategies. Although effective hedging can generally capture the bulk of a
desired risk adjustment, no hedge is completely effective. The Fund's ability to
hedge effectively through transactions in futures and options depends on the
degree to which price movements in its holdings correlate with price movements
of the futures and options.
Nonhedging strategies typically involve special risks. The profitability of
the Fund's non-hedging strategies will depend on the ability of the Investment
Manager to analyze both the applicable derivatives market and the market for the
underlying asset or group of assets. Derivatives markets are often more volatile
than corresponding securities markets and a relatively small change in the price
of the underlying asset or group of assets can have a magnified effect upon the
price of a related derivative instrument.
Derivatives markets also are often less liquid than the market for the
underlying asset or group of assets. Some positions in futures and options may
be closed out only on an exchange which provides a secondary market therefor.
There can be no assurance that a liquid secondary market will exist for any
particular futures contract or option at any specific time. Thus, it may not be
possible to close such an option or futures position prior to maturity. The
inability to close options and futures positions also could have an adverse
impact on the Fund's ability to effectively carry out their derivative
strategies and might, in some cases, require 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.
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Swap Arrangements
The Fund may enter into various forms of swap arrangements with
counterparties with respect to interest rates, currency rates or indices,
including purchase of caps, floors and collars as described below. In an
interest rate swap the Fund could agree for a specified period to pay a bank or
investment banker the floating rate of interest on a so-called notional
principal amount (i.e., an assumed figure selected by the parties for this
purpose) in exchange for agreement by the bank or investment banker to pay the
Fund a fixed rate of interest on the notional principal amount. In a currency
swap the Fund would agree with the other party to exchange cash flows based on
the relative differences in values of a notional amount of two (or more)
currencies; in an index swap, the Fund would agree to exchange cash flows on a
notional amount based on changes in the values of the selected indices. Purchase
of a cap entitles the purchaser to receive payments from the seller on a
notional amount to the extent that the selected index exceeds an agreed upon
interest rate or amount whereas purchase of a floor entitles the purchaser to
receive such payments to the extent the selected index falls below an agreed
upon interest rate or amount. A collar combines a cap and a floor.
The Fund may enter credit protection swap arrangements involving the sale
by the Fund of a put option on a debt security which is exercisable by the buyer
upon certain events, such as a default by the referenced creditor on the
underlying debt or a bankruptcy event of the creditor.
Most swaps entered into by the Fund will be on a net basis; for example, in
an interest rate swap, amounts generated by application of the fixed rate and
the floating rate to the notional principal amount would first offset one
another, with the Fund either receiving or paying the difference between such
amounts. In order to be in a position to meet any obligations resulting from
swaps, the Fund will set up a segregated custodial account to hold appropriate
liquid assets, including cash; for swaps entered into on a net basis, assets
will be segregated having a daily net asset value equal to any excess of the
Fund's accrued obligations over the accrued obligations of the other party,
while for swaps on other than a net basis assets will be segregated having a
value equal to the total amount of the Fund's obligations.
These arrangements will be made primarily for hedging purposes, to preserve
the return on an investment or on a portion of the Fund's portfolio. However,
the Fund may, as noted above, enter into such arrangements for income purposes
to the extent permitted by the Commodities Futures Trading Commission for
entities which are not commodity pool operators, such as the Fund. In entering a
swap arrangement, the Fund is dependent upon the creditworthiness and good faith
of the counterparty. The Fund attempts to reduce the risks of nonperformance by
the counterparty by dealing only with established, reputable institutions. The
swap market is still relatively new and emerging; positions in swap arrangements
may become illiquid to the extent that nonstandard arrangements with one
counterparty are not readily transferable to another counterparty or if a market
for the transfer of swap positions does not develop. The use of interest rate
swaps is a highly specialized activity which involves investment techniques and
risks different from those associated with ordinary portfolio securities
transactions. If the Investment Manager is incorrect in its forecasts of market
values, interest
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rates and other applicable factors, the investment performance of the Fund would
diminish compared with what it would have been if these investment techniques
were not used. Moreover, even if the Investment Manager is correct in its
forecasts, there is a risk that the swap position may correlate imperfectly with
the price of the asset or liability being hedged.
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 net assets, except that
repurchase agreements extending for more than seven days when combined with any
other illiquid securities held by the Fund will be limited to 15% of the Fund's
net assets.
Reverse Repurchase Agreements
The Fund may enter into reverse repurchase agreements. However, the Fund
has no present intention of engaging in reverse repurchase agreements in excess
of 5% of the Fund's total assets. In a reverse repurchase agreement the Fund
transfers possession of a portfolio instrument to another person, such as a
financial institution, broker or dealer, in return for a percentage of the
instrument's market value in cash, and agrees that on a stipulated date in the
future the Fund will repurchase the portfolio instrument by remitting the
original consideration plus interest at an agreed upon rate. The ability to use
reverse repurchase agreements may enable, but does not ensure the ability of,
the Fund to avoid selling portfolio instruments at a time when a sale may be
deemed to be disadvantageous.
When effecting reverse repurchase agreements, assets of the Fund in a
dollar amount sufficient to make payment of the obligations to be purchased are
segregated on the Fund's records at the trade date and maintained until the
transaction is settled.
When-Issued Securities
The Fund may purchase "when-issued" securities, which are traded on a price
or yield basis prior to actual issuance. Such purchases will be made only to
achieve the Fund's investment objective and not for leverage. The when-issued
trading period generally lasts from a few days to months, or over a year or
more; during this period dividends or interest on the securities are not
payable. A frequent form of when-issued trading occurs in the U.S. Treasury
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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.
Restricted Securities
It is the Fund's policy not to make an investment in restricted securities,
including restricted securities sold in accordance with Rule 144A under the
Securities Act of 1933 ("Rule 144A Securities") if, as a result, more than 35%
of the Fund's total assets are invested in restricted securities, provided not
more than 10% of the Fund's total assets are invested in restricted securities
other than Rule 144A Securities.
Securities may be resold pursuant to Rule 144A under certain circumstances
only to qualified institutional buyers as defined in the rule, and the markets
and trading practices for such securities are relatively new and still
developing; depending on the development of such markets, Rule 144A Securities
may be deemed to be liquid as determined by or in accordance with methods
adopted by the Trustees. Under such methods the following factors are
considered, among others: the frequency of trades and quotes for the security,
the number of dealers and potential purchasers in the market, market making
activity, and the nature of the security and marketplace trades. Investments in
Rule 144A Securities could have the effect of increasing the level of the Fund's
illiquidity to the extent that qualified institutional buyers become, for a
time, uninterested in purchasing such securities. Also, the Fund may be
adversely impacted by the subjective valuation of such securities in the absence
of a market for them. Restricted securities that are not resalable under Rule
144A may be subject to risks of illiquidity and subjective valuations to a
greater degree than Rule 144A Securities.
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Securities Lending
The Fund may lend portfolio securities with a value of up to 33 1/3% of its
total assets. The Fund will receive cash or cash equivalents (e.g., U.S.
Government obligations) as collateral in an amount equal to at least 100% of the
current market value of any loaned securities plus accrued interest. Collateral
received by the Fund will generally be held in the form tendered, although cash
may be invested in unaffiliated mutual funds with quality short-term portfolios,
securities issued or guaranteed by the U.S. Government or its agencies or
instrumentalities or certain unaffiliated mutual funds, irrevocable stand-by
letters of credit issued by a bank, or repurchase agreements, or other similar
investments. The investing of cash collateral received from loaning portfolio
securities involves leverage which magnifies the potential for gain or loss on
monies invested and, therefore, results in an increase in the volatility of the
Fund's outstanding securities. Such loans may be terminated at any time.
The Fund may receive a lending fee and will retain rights to dividends,
interest or other distributions, on the loaned securities. Voting rights pass
with the lending, although the Fund may call loans to vote proxies if desired.
Should the borrower of the securities fail financially, there is a risk of delay
in recovery of the securities or loss of rights in the collateral. Loans are
made only to borrowers which are deemed by the Investment Manager or its agents
to be of good financial standing.
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Short-Term Trading
The Fund may engage in short-term trading of securities and reserves full
freedom with respect to portfolio turnover. In periods where there are rapid
changes in economic conditions and security price levels or when reinvestment
strategy changes significantly, portfolio turnover may be higher than during
times of economic and market price stability or when investment strategy remains
relatively constant. The Fund's portfolio turnover rate may involve greater
transaction costs relative to other funds in general, and may have tax and other
consequences.
Temporary and Defensive Investments
The Fund may hold up to 100% of its assets in cash or short-term debt
securities for temporary defensive purposes. The Fund will adopt a temporary
defensive position when, in the opinion of the Investment Manager, such a
position is more likely to provide protection against adverse market conditions
than adherence to the Fund's other investment policies. The types of short-term
instruments in which the Fund may invest for such purposes include short-term
New York Municipal Obligations, short-term money market securities, such as
repurchase agreements, and securities issued or guaranteed by the U.S.
Government or its agencies or instrumentalities, certificates of deposit, time
deposits and bankers' acceptances of certain qualified financial institutions
and corporate commercial paper, which at the time of purchase are rated at least
within the "A" major rating category by S&P or the "Prime" major rating category
by Moody's, or, if not rated, issued by companies having an outstanding
long-term unsecured debt issued rated at least within the "A" category by S&P or
Moody's.
The Fund intends that short-term securities acquired for temporary 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 taxes.
Industry Classifications
In determining how much of the Fund's portfolio is invested in a
given industry, the following industry classifications are currently used.
Securities issued or guaranteed as to principal or interest by the U.S.
Government or its agencies or instrumentalities or mixed- ownership Government
corporations or sponsored enterprises (including repurchase agreements involving
U.S. Government securities to the extent excludable under relevant regulatory
interpretations) are excluded. Securities issued by foreign governments are also
excluded. Companies engaged in the business of financing may be classified
according to the industries of their parent or sponsor companies or industries
that otherwise most affect such financing companies. Issuers of asset-backed
pools will be classified as separate industries based on the nature of the
underlying assets, such as mortgages and credit card receivables. "Asset-backed-
Mortgages" includes private pools of nongovernment backed mortgages.
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<TABLE>
<S> <C> <C>
Aerospace Electric Equipment Oil Refining & Marketing
Airline Electronic Components Oil Service
Asset-backed--Mortgages Electronic Equipment Paper Products
Asset-backed--Credit Card Entertainment Personal Care
Receivables Financial Service Photography
Automotive Food & Beverage Plastics
Automotive Parts Forest Products Printing & Publishing
Bank Gaming & Lodging Railroad
Building Gas Real Estate & Building
Business Service Gas Transmission Recreation
Cable Grocery Retail Trade
Capital Goods & Equipment Healthcare & Hospital Savings & Loan
Chemical Management Shipping & Transportation
Computer Software & Service Hospital Supply Technology & Communications
Conglomerate Hotel & Restaurant Telephone
Consumer Goods & Services Insurance Textile & Apparel
Container Machinery Tobacco
Cosmetics Media Truckers
Diversified Metal & Mining Trust Certificates -
Drug Office Equipment Government Related Lending
Electric Oil Production
</TABLE>
Computer-Related Risks
Many mutual funds and other companies that issue securities, as well as
government entities upon whom those mutual funds and companies depend, may be
adversely affected by computer systems (whether their own system or systems of
their service providers) that do not properly process dates beginning with
January 1, 2000 and information related to those dates.
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The Investment Manager currently is in the process of reviewing its
internal computer systems as they relate to the Fund, as well as the computer
systems of those service providers upon which the Fund relies, in order to
obtain reasonable assurances that the Fund will not experience a material
adverse impact related to the problem. The Fund does not currently anticipate
that the problem will have a material adverse impact on its portfolio
investments, taken as a whole. There can be no assurances, however, including
the possibility that the problem could negatively affect the investment markets
or the economy generally.
Other Investment Companies
The Fund may invest in securities of other investment companies, including
affiliated investment companies, such as open- or closed-end management
investment companies, hub and spoke (master/feeder) funds, pooled accounts or
other similar, collective investment vehicles. As a shareholder of an investment
company, a Fund may indirectly bear service and other fees in addition to the
fees the Fund pays its service providers. Similarly, other investment companies
may invest in the Fund. Other investment companies which invest in the Fund may
hold significant portions of the Fund and materially affect the sale and
redemption of Fund shares and the Fund's portfolio transactions.
DEBT INSTRUMENTS AND PERMITTED CASH INVESTMENTS
The Fund may invest in long-term and short-term debt securities. Certain
debt securities and money market instruments in which the Fund may invest are
described below.
Managing Volatility. In administering the Fund's portfolio, the Investment
Manager attempts to manage volatility in part by managing the duration and
weighted average maturity of the Fund's bond position.
Duration is an indicator of the expected volatility of a bond position in
response to changes in interest rates. In calculating duration, the Fund
measures the average time required to receive all cash flows associated with
those debt securities held in the Fund's portfolio -- representing payments of
principal and interest -- by considering the timing, frequency and amount of
payment expected from each portfolio security. The higher the duration, the
greater the gains and losses when interest rates change. Duration generally is a
more accurate measure of potential volatility with a portfolio composed of
high-quality debt securities, such as U.S. government securities, municipal
securities and high-grade U.S. corporate bonds, than with lower-grade
securities.
The Investment Manager may use several methods to manage the duration of
the Fund's bond position in order to increase or decrease its exposure to
changes in interest rates. First, the Investment Manager may adjust portfolio
duration by adjusting the mix of debt securities held by the Fund. For example,
if the Investment Manager intends to shorten duration, it may sell debt
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instruments that individually have a long duration and purchase other debt
instruments that individually have a shorter duration. Among the factors that
will affect a debt security's duration are the length of time to maturity, the
timing of interest and principal payments, and whether the terms of the security
give the issuer of the security the right to call the security prior to
maturity. Second, the Investment Manager may adjust portfolio duration using
derivative transactions, especially with interest rate futures and options
contracts. For example, if the Investment Manager wants to lengthen the duration
of the Fund's bond position, it could purchase interest rate futures contracts
instead of buying longer-term bonds or selling shorter-term bonds. Similarly,
during periods of lower interest rate volatility, the Investment Manager may use
a technique to extend duration in the event rates rise by writing an
out-of-the-money put option and receiving premium income with the expectation
that the option could be exercised. In managing duration, the use of such
derivatives may be faster and more efficient than trading specific portfolio
securities.
Weighted average maturity is another indicator of potential volatility used
by the Investment Manager with respect to the Fund's bond portfolio, although
for certain types of debt securities, such as high quality debt securities, it
is not as accurate as duration in quantifying potential volatility. Weighted
average maturity is the average of all maturities of the individual debt
securities held by the Fund, weighted by the market value of each security.
Generally, the longer the weighted average maturity, the more bond prices will
vary in response to changes in interest rates.
U.S. Government and Related Securities. U.S. Government securities are
securities which are issued or guaranteed as to principal or interest by the
U.S. Government, a U.S. Government agency or instrumentality, or certain
mixed-ownership Government corporations as described herein. The U.S. Government
securities in which the Fund invests include, among others:
o direct obligations of the U.S. Treasury, i.e., U.S. Treasury bills,
notes, certificates and bonds;
o 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
o 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
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<PAGE>
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 Bank, the Federal Farm Credit Bank, the Federal National
Mortgage Association and the Federal Home Loan Mortgage Corporation are backed
by the credit of the agency or instrumentality issuing the obligations. Certain
obligations of Resolution Funding Corporation, a mixed-ownership Government
corporation, are backed with respect to interest payments by the U.S. Treasury,
and with respect to principal payments by U.S. Treasury obligations held in a
segregated account with a Federal Reserve Bank. Except for certain
mortgage-related securities, the Fund will only invest in obligations issued by
mixed-ownership Government corporations where such securities are guaranteed as
to payment of principal or interest by the U.S. Government or a U.S. Government
agency or instrumentality, and any unguaranteed principal or interest is
otherwise supported by U.S. Government obligations held in a segregated account.
U.S. Government securities may be acquired by the Fund in the form of
separately traded principal and interest components of securities issued or
guaranteed by the U.S. Treasury. The principal and interest components of
selected securities are traded independently under the Separate Trading of
Registered Interest and Principal of Securities ("STRIPS") program. Under the
STRIPS program, the principal and interest components are individually numbered
and separately issued by the U.S. Treasury at the request of depository
financial institutions, which then trade the component parts independently.
Obligations of Resolution Funding Corporation are similarly divided into
principal and interest components and maintained as such on the book entry
records of the Federal Reserve Banks.
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
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<PAGE>
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.
Lower Rated Debt Securities ("Junk Bonds")
Lower rated convertible or nonconvertible debt securities generally
involve more credit risk than higher rated securities and are considered by S&P
and Moody's to be speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. Further, such
securities may be subject to greater market fluctuations and risk of loss of
income and principal than lower yielding, higher rated debt securities. Risk of
lower quality debt securities, commonly known as "junk bonds," include (i)
limited liquidity and secondary market support; (ii) substantial market price
volatility resulting from changes in prevailing interest rates and/or investor
perceptions; (iii) subordination to the prior claims of banks and other senior
lenders; (iv) the operation of mandatory sinking fund or call/redemption
provisions during periods of declining interest rates when the Fund may be
required to reinvest premature redemption proceeds in lower yielding portfolio
securities; (v) the possibility that earnings of the issuer may be insufficient
to meet its debt service; and (vi) the issuer's low creditworthiness and
potential for insolvency during period of rising interest rates and economic
downturn. For further information concerning the rating categories of debt
securities, see the Appendix to this Statement of Additional Information.
Zero and Step Coupon Securities
Zero and step coupon securities are debt securities that may pay no
interest for all or a portion of their life but are purchased at a discount to
face value at maturity. Their return consists of the amortization of the
discount between their purchase price and their maturity value, plus in the case
of a step coupon, any fixed rate interest income. Zero coupon securities pay no
interest to holders prior to maturity even though interest on these securities
is reported as income to the Fund. The Fund will be required to distribute all
or substantially all of such amounts annually to its shareholders. These
distributions may cause the Fund to liquidate portfolio assets in order to make
such distributions at a time
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<PAGE>
when the Fund may have otherwise chosen not to sell such securities. The market
value of such securities may be more volatile than that of securities which pay
interest at regular intervals.
Commercial Paper Ratings
Commercial paper investments at the time of purchase will be rated within
the "A" major rating category by S&P or within the "Prime" major rating category
by Moody's, or, if not rated, issued by companies having an outstanding
long-term unsecured debt issue rated at least within the "A" category by S&P or
by Moody's. The money market investments in corporate bonds and debentures
(which must have maturities at the date of settlement of one year or less) must
be rated at the time of purchase at least within the "A" category by S&P or
within the "Prime" category by Moody's, within comparable categories of other
rating agencies or considered to be of comparable quality by the Investment
Manager.
Commercial paper rated within the "A" category (highest quality) by S&P is
issued by entities which have liquidity ratios which are adequate to meet cash
requirements. Long-term senior debt is rated within the "A" category or better,
although in some cases credits within the "BBB" category may be allowed. The
issuer has access to at least two additional channels of borrowing. Basic
earnings and cash flow have an upward trend with allowance made for unusual
circumstances. Typically, the issuer's industry is well established and the
issuer has a strong position within the industry. The reliability and quality of
management are unquestioned. The relative strength or weakness of the above
factors determines whether the issuer's commercial paper is rated A-1, A-2 or
A-3. (Those A-1 issues determined to possess overwhelming safety characteristics
are denoted with a plus (+) sign: A-1+.)
The rating Prime is the highest commercial paper rating category assigned
by Moody's. Among the factors considered by Moody's in assigning ratings are the
following: evaluation of the management of the issuer; economic evaluation of
the issuer's industry or industries and an appraisal of speculative-type risks
which may be inherent in certain areas; evaluation of the issuer's products in
relation to competition and customer acceptance; liquidity; amount and quality
of long-term debt; trend of earnings over a period of 10 years; financial
management of obligations which may be present or may arise as a result of
public interest questions and preparations to meet such obligations. These
factors are all considered in determining whether the commercial paper is rated
Prime-1, Prime-2 or Prime-3.
In the event the lowering of ratings of debt instruments held by the Fund
by applicable rating agencies results in a material decline in the overall
quality of the Fund's portfolio, the Trustees of the Trust will review the
situation and take such action as they deem in the best interests of the Fund's
shareholders, including, if necessary, changing the composition of the
portfolio.
Unrated and Split-Rated 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
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<PAGE>
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.
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
outweighted 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
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<PAGE>
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 CC debt rating. The C rating may be used
to cover a situation where a bankruptcy petition has been filed, but debt
service payments are continued.
CI: The rating CI is reserved for income bonds on which no interest is
being paid.
D: Debt rated D is in payment default. The D rating category is used when
interest payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grace period. The D rating also will be used upon the
filing of a bankruptcy petition if debt service payments are jeopardized.
Plus (+) or Minus (-): The rating from AA to CCC may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
S&P may attach the "r" symbol to derivative, hybrid, and certain other
obligations that S&P believes may experience high volatility or high variability
in expected returns due to noncredit risks created by the terms of the
obligation, such as securities whose principal or interest return is indexed to
equities, commodities, or currencies; certain swaps and options; and interest
only (IO) and principal only (PO) mortgage securities.
SP-1: Notes rated SP-1 are of the highest quality with very strong or
strong capacity to pay principal and interest. Issues determined to possess
overwhelming safety characteristics are given a plus (+) designation.
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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 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.
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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.
THE TRUST, THE FUND AND ITS SHARES
The Fund was organized in 1989 as a separate series of State Street
Research Tax-Exempt Trust, a Massachusetts business trust. A "series" is a
separate pool of assets of the Trust which is separately managed and has
different policies from those of another series. The 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 of the Trust have
authority to issue an unlimited number of shares of beneficial interest of
separate series, $.001 par value per share. The Trustees also have authority,
without the necessity of a shareholder vote, to create any number of new series
or classes or to commence the public offering of shares of any previously
established series or class. The Trustees have authorized shares of the Fund to
be issued in five classes: Class A, Class B, Class B(1), Class C and Class S
shares.
Each share of each class of shares represents an identical legal interest
in the same portfolio of investments of the Fund, has the same rights and is
identical in all respects, except that Class A, Class B, Class B(1) and Class C
shares bear the expenses of the deferred sales arrangement and any expenses
(including the higher service and distribution fees) resulting from such sales
arrangement, and certain other incremental expenses related to a class. Each
class will have exclusive voting rights with respect to provisions of the Rule
12b-1 distribution plan pursuant to which the service and distribution fees, if
any, are paid. Although the legal rights of holders of each class of shares are
identical, it is likely that the different expenses borne by each class will
result in different net asset values and dividends. The different classes of
shares of the Fund also have different exchange privileges. Except for those
differences between classes of shares described above, in the Fund's Prospectus
and otherwise this Statement of Additional Information, each share of the Fund
has equal dividend, redemption and liquidation rights with other shares of the
Fund, and when issued, is fully paid and nonassessable by the Fund.
Shareholder rights granted under the Master Trust Agreement may be modified
by the Trustees provided, however, that the Master Trust Agreement may not be
amended if
39
<PAGE>
amendment (a) repeals the limitation on personal liability of any shreholder,
or repeals the prohibition of assessment upon shareholders, without the express
consent of each shareholder involved or (b) adversely modifies any shareholder
right without the consent of the holders of a majority of the outstanding shares
entitled to vote. On any matter submitted to the shareholders, the holder of a
Fund share is entitled to one vote per share (with proportionate voting for
fractional shares) regardless of the relative net asset value thereof. Except as
provided by law, the Trustees may otherwise modify the rights of shareholders at
any time.
Under the Master Trust Agreement, no annual or regular meeting of
shareholders is required. Thus, there ordinarily will be no shareholder meetings
unless required by the 1940 Act. Except as otherwise provided under the 1940
Act, the Board of Trustees will be a self-perpetuating body until fewer than
two-thirds of the Trustees serving as such are Trustees who were elected by
shareholders of the Trust. In the event less than a majority of the Trustees
serving as such were elected by shareholders of the Trust, a meeting of
shareholders will be called to elect Trustees. Under the Master Trust Agreement,
any Trustee may be removed by vote of two-thirds of the outstanding Trust
shares; holders of 10% or more of the outstanding shares of the Trust can
require that the Trustees call a meeting of shareholders for purposes of voting
on the removal of one or more Trustees. In connection with such meetings called
by shareholders, shareholders will be assisted in shareholder communications to
the extent required by applicable law.
Under Massachusetts law, the shareholders of the Trust could, under certain
circumstances, be held personally liable for the obligations for the Trust.
However, the Master Trust Agreement of the Trust disclaims shareholder liability
for acts or obligations of the Trust and provides for indemnification for all
losses and expenses of any shareholder of the Fund held personally liable for
the obligations of the Trust. Thus, the risk of a shareholder incurring
financial loss on account of shareholder liability is limited to circumstances
in which the Fund would be unable to meet its obligations. The Investment
Manager believes that, in view of the above, the risk of personal liability to
shareholders is remote.
TRUSTEES AND OFFICERS
The Trustees and principal officers of the Trust, their addresses, and
their principal occupations and positions with certain affiliates of the
Investment Manager are set forth below.
*Paul J. Clifford, Jr., One Financial Center, Boston, MA 02111, serves as
Vice President of the Trust. He is 36. 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.
- ----------------
* or +, see footnotes on page 42
40
<PAGE>
+Steve A. Garban, The Pennsylvania State University, 210 Old Main,
University Park, PA 16802, serves as Trustee of the Trust. He is 61. 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 71. 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 58. 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.
*+Gerard P. Maus, One Financial Center, Boston, MA 02111, serves as
Treasurer of the Trust. He is 48. His principal occupation is currently, and
during the past five years has been, Executive Vice President, Treasurer, Chief
Financial Officer, Chief Administrative Officer and Director of State Street
Research & Management Company. Mr. Maus's other principal business affiliations
include Executive Vice President, Treasurer, Chief Financial Officer, Chief
Administrative Officer and Director of State Street Research Investment
Services, Inc.
*+Francis J. McNamara, III, One Financial Center, Boston, MA 02111, serves
as Secretary and General Counsel of the Trust. He is 43. His principal
occupation is Executive Vice President, General Counsel and Secretary of State
Street Research & Management Company. During the past five years he has also
served as Senior Vice President of State Street Research & Management Company
and as Senior Vice President, General Counsel and Assistant Secretary of The
Boston Company, Inc., Boston Safe Deposit and Trust Company and The Boston
Company Advisors, Inc. Mr. McNamara's other principal business affiliations
include Executive Vice President, Clerk and General Counsel of State Street
Research Investment Services, Inc.
+Dean O. Morton, 3200 Hillview Avenue, Palo Alto, CA 94304, serves as
Trustee of the Trust. He is 67. He is retired, and was formerly Executive Vice
President, Chief Operating Officer and Director of Hewlett-Packard Company.
- -------------------
* or +, see footnotes on page 42
41
<PAGE>
+Toby Rosenblatt, 3409 Pacific Avenue, San Francisco, CA 94118, serves as
Trustee of the Trust. He is 60. His principal occupations during the past five
years have been President of The Glen Ellen Company, a private investment
company, and Vice President of Founders Investments Ltd.
+Michael S. Scott Morton, Massachusetts Institute of Technology, 77
Massachusetts Avenue, Cambridge, MA 02139, serves as Trustee of the Trust. He is
61. 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.
*+Susan M. Phillips, The George Washington University, 710 21st Street,
Suite 206, Washington, DC 20052, serves as Trustee of the Trust. She is 55. Her
principal occupation is currently Dean and Professor of Finance and
Administration School of Business and Public Management, The George Washington
University. Previously, she was a member of the Board of Governors of the
Federal Reserve System and Chairman and Commissioner of the Commodity Futures
Trading Commission.
*Thomas A. Shively, One Financial Center, Boston, MA 02111, serves as Vice
President of the Trust. He is 44. His principal occupation is Executive Vice
President, Director and Chief Investment Officer--Fixed Income 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 56. His principal occupation is currently, and during the past five
years has been, Chairman of the Board, President, Chief Executive Officer and
Director of State Street Research & Management Company. Mr. Verni's other
principal business affiliations include Chairman of the Board and Director of
State Street Research Investment Services, Inc. and (until February, 1996, prior
positions as President and Chief Executive Officer of that company)
- -----------------
* These Trustees and/or officers are or may be deemed to be "interested
persons" of the Trust under the 1940 Act because of their affiliations with
the Fund's investment adviser.
+ Serves as a Trustee/Director and/or officer of one or more of the following
investment companies, each of which has an advisory relationship with the
Investment Manager or its parent, Metropolitan Life Insurance Company
("Metropolitan"): State Street Research Equity Trust, State Street Research
Financial Trust, State Street Research Income Trust, State Street Research
Money Market Trust, State Street Research Tax- Exempt Trust, State Street
Research Capital Trust, State Street Research Exchange Trust, State Street
Research Growth Trust, State Street Research Master Investment Trust, State
Street Research Securities Trust, State Street Research Portfolios, Inc.
and Metropolitan Series Fund, Inc.
42
<PAGE>
As of January 31, 1999, the Trustees and principal officers of the Trust as
a group owned none of the Fund's outstanding shares.
Record ownership of shares of the Fund as of January 31, 1999 was as
follows:
<TABLE>
<CAPTION>
% of
Class Holder Class
- ----- ------ -----
<S> <C> <C>
B(1) Metropolitan Life(a) 76.8
E.T. and R.M. Sparano, Jt. Ten.(b) 17.0
B Merrill Lynch(c)
C State Street Research(d) 44.8
Merrill Lynch 42.6
M.M. Rousseau(b) 7.1
</TABLE>
The full name and address of the above institutions are:
(a) Metropolitan Life Insurance Company(a)
One Madison Avenue
New York, NY 10010
(b) E.T. and R.M. Sparano, Jt. Ten.
M.M. Rousseau
c/o State Street Research Service Center
One Financial Center
Boston, MA 02111
(c) Merrill Lynch, Pierce, Fenner & Smith, Inc.(b)
4800 Deerlake Drive E.
Jacksonville, FL 32246
(d) State Street Research & Management Company
One Financial Center
Boston, MA 02111
- -------------------
(a) Metropolitan was the record and/or beneficial owner, directly or
indirectly through its subsidiaries or affiliates, of such shares.
(b) The Fund believes that such entity does not have beneficial ownership of
such shares.
43
<PAGE>
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>
Total
Compensation
Aggregate From Fund and
Name of Compensation Fund Complex Paid
Trustee From Fund(a) to Trustees(b)
---------- -------------- -----------------
<S> <C> <C>
Steve A. Garban $ 2,400 $ 110,300
Malcolm T. Hopkins $ 1,900 $ 97,200
Dean O. Morton $ 2,500 $ 110,700
Susan M. Phillips $ 600 $ 12,145
Toby Rosenblatt $ 2,100 $ 72,600
Michael S. Scott Morton $ 2,700 $ 115,500
Ralph F. Verni $ 0 $ 0
</TABLE>
- -------------------
(a) For the Fund's fiscal year ended December 31, 1998. Includes compensation
received from multiple series of the Trust.
(b) Includes compensation on behalf of all series of 12 investment companies
for which the Investment Manager or its parent, Metropolitan, served as
investment adviser. "Total Compensation from Fund and Fund Complex Paid to
Trustees" for the 12 months ended December 31, 1998. The Fund does not
provide any pension or retirement benefits for the Trustees.
44
<PAGE>
MANAGEMENT OF THE FUND AND INVESTMENT ADVISORY SERVICES
Under the provisions of the Trust's Master Trust Agreement and the laws of
Massachusetts, responsibility for the management and supervision of the Fund
rests with the Trustees. State Street Research & Management Company, the
Investment Manager, a Delaware corporation, with offices at One Financial
Center, Boston, Massachusetts 02111-2690, acts as investment adviser to the
Fund. The Investment Manager was founded by Paul Cabot, Richard Saltonstall and
Richard Paine to serve as investment adviser to 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 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.
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 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 Life Insurance Company
("Metropolitan").
The advisory fee payable monthly by the Fund to the Investment Manager is
computed as a percentage of the average of the value of the net assets of the
Fund as determined at the close of regular trading on the New York Stock
Exchange (the "NYSE") on each day the NYSE is open for trading, at the annual
rate of 0.55% of the net assets of the Fund.
The advisory fees paid by the Fund to the Investment Manager for the last
three fiscal years, prior to the assumption of fees or expenses, were as
follows: 1998, $386,106; 1997, $382,777; and 1996, $391,693.
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. The voluntary reduction of fees or assumption of expenses for the same
periods were as follows: 1998, $94,339; 1997, $113,047; and 1996, $120,150.
The Advisory Agreement provides that it shall continue in effect from year
to year with respect to the Fund 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
45
<PAGE>
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 the Code of Ethics of the Investment Manager, investment management
personnel are only permitted to engage in personal securities transactions in
accordance with certain conditions relating to such person's position, the
identity of the security, the timing of the transaction, and similar factors.
Such personnel must report their personal securities transactions quarterly and
supply broker confirmations of such transactions to the Investment Manager.
PURCHASE AND REDEMPTION OF SHARES
Shares of the Fund are distributed by State Street Research Investment
Services, Inc., the Distributor. The Fund offers five classes of shares. Class
A, Class B(1), Class C and Class S shares are available to all eligible
investors. Class B shares are available only to current shareholders through
dividend reinvestment or through exchanges from existing Class B accounts of
State Street Research Funds. Class A, Class B(1), Class C and Class S shares of
the Fund may be purchased at the next determined net asset value per share plus,
in the case of all classes except Class S shares, a sales charge which, at the
election of the investor, may be imposed (i) at the time of purchase (the Class
A shares) or (ii) on a deferred basis (the Class B(1) and Class C shares).
General information on how to buy shares of the Fund, as well as sales charges
involved, are set forth under "Your Investment" in the Prospectus. The following
supplements that information.
Public Offering Price. The public offering price for each class of shares
is based on their net asset value determined as of the close of regular trading
on the NYSE on the day the purchase order is received by State Street Research
Service Center (the "Service Center"), provided that the order is received prior
to the close of regular trading on the NYSE on that day; otherwise the net asset
value used is that determined as of the close of the NYSE on the next day it is
open for unrestricted trading. When a purchase order is placed through a dealer,
that dealer is responsible for transmitting the order promptly to the Service
Center in order to permit the investor to obtain the current price. Any loss
suffered by an investor which results from a dealer's failure to transmit an
order promptly is a matter for settlement between the investor and the dealer.
Alternative Purchase Program. 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
46
<PAGE>
an initial sales charge and not be subject to certain ongoing charges or to have
their entire 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, financial professionals are
paid differing amounts of compensation depending on which class of shares they
sell.
47
<PAGE>
The major differences among the various classes of shares are as follows:
<TABLE>
<CAPTION>
Class A Class B(1) Class B Class C Class S
------- ---------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Sales Charges Paid Initial sales charge at Contingent deferred Contingent deferred Contingent deferred None
by Investor to time of investment of sales charge of 5% to sales charge of 5% to sales charge of 1%
Distributor up to 4.50% 1% applies to any 2% applies to any applies to any shares
depending on amount shares redeemed shares redeemed redeemed within one
of investment within first six years within first five years year following their
following their following their purchase
purchase; no purchase; no
contingent deferred contingent deferred
sales charge after six sales charge after
years 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
Initial Commission Above described 4% 4% 1% None
Paid by Distributor initial sales charge
to Financial less 0.25% to 0.75%
Professional retained by
distributor
On investments of $1
million or more,
0.25% to 1% paid to
dealer by Distributor
Rule 12b-1 Service
Fee
Paid by Fund 0.25% each year 0.25% each year 0.25% each year 0.25% each year None
to Distributor
Paid by 0.25% each year 0.25% each year 0.25% each year 0.25% each year None
Distributor to commencing after commencing after commencing after
Financial one year following one year following one year following
Professional purchase purchase purchase
Rule 12b-1
Distribution Fee
Paid by Fund None 0.75% for first eight 0.75% for first eight 0.75% each year None
to Distributor years; Class B(1) years; Class B shares
shares convert convert automatically
automatically to to Class A shares
Class A shares after after eight years
eight years
Paid by None None None 0.75% each year None
Distributor to commencing after
Financial one year following
Professional purchase
</TABLE>
48
<PAGE>
Class A Shares--Reduced Sales Charges. The reduced sales charges set forth
under "Your Investment--Choosing a Share Class" in the Prospectus apply to
purchases made at any one time by any "person," which includes: (i) an
individual, or an individual combining with his or her spouse and their children
and purchasing for his, her or their own account; (ii) a "company" as defined in
Section 2(a)(8) of the 1940 Act; (iii) a trustee or other fiduciary purchasing
for a single trust estate or single fiduciary account (including a pension,
profit sharing or other employee benefit trust created pursuant to a plan
qualified under Section 401 of the Internal Revenue Code); (iv) a tax-exempt
organization under Section 501(c)(3) or (13) of the Internal Revenue Code; and
(v) an employee benefit plan of a single employer or of affiliated employers.
Investors may purchase Class A shares of the Fund at reduced sales charges
by executing a Letter of Intent to purchase no less than an aggregate of
$100,000 of the Fund or any combination of Class A shares of "Eligible Funds"
(which include the Fund and other funds as designated by the Distributor from
time to time) within a 13-month period. The sales charge applicable to each
purchase made pursuant to a Letter of Intent will be that which would apply if
the total dollar amount set forth in the Letter of Intent were being bought in a
single transaction. Purchases made within a 90-day period prior to the execution
of a Letter of Intent may be included therein; in such case the date of the
earliest of such purchases marks the commencement of the 13-month period.
An investor may include toward completion of a Letter of Intent the value
(at the current public offering price) of all of his or her Class A shares of
the Fund and of any of the other Class A shares of Eligible Funds held of record
as of the date of his or her Letter of Intent, plus the value (at the current
offering price) as of such date of all of such shares held by any "person"
described herein as eligible to join with the investor in a single purchase.
Class B, Class C and Class S shares may also be included in the combination
under certain circumstances.
A Letter of Intent does not bind the investor to purchase the specified
amount. Shares equivalent to 5% of the specified amount will, however, be taken
from the initial purchase (or, if necessary, subsequent purchases) and held in
escrow in the investor's account as collateral against the higher sales charge
which would apply if the total purchase is not completed within the allotted
time. The escrowed shares will be released when the Letter of Intent is
completed or, if it is not completed, when the balance of the higher sales
charge is, upon notice, remitted by the investor. All dividends and capital
gains distributions with respect to the escrowed shares will be credited to the
investor's account.
Investors may purchase Class A shares of the Fund or a combination of
Eligible Funds at reduced sales charges pursuant to a Right of Accumulation. The
applicable sales charge under the right is determined on the amount arrived at
by combining the dollar amount of the purchase with the value (at the current
public offering price) of all Class A shares of the other Eligible Funds owned
as of the purchase date by the investor plus the value (at the current public
offering price) of all such shares owned as of such date by any "person"
described herein as eligible to join with the investor in a single purchase.
Class B(1), Class B, Class C and Class S shares
49
<PAGE>
may also be included in the combination under certain circumstances. Investors
must submit to the Distributor sufficient information to show that they qualify
for this Right of Accumulation.
Other Programs Related to Class A Shares. Class A shares of the Fund may be
sold or issued in an exchange at a reduced sales charge or without sales charge
pursuant to certain sponsored arrangements, which include programs under which a
company, employee benefit plan or other organization makes recommendations to,
or permits group solicitation of, its employees, members or participants, except
any organization created primarily for the purpose of obtaining shares of the
Fund at a reduced sales charge or without a sales charge. Sales without a sales
charge, or with a reduced sales charge, may also be made through brokers,
registered investment advisers, financial planners, institutions, and others,
under managed fee-based programs (e.g., "wrap fee" or similar programs) which
meet certain requirements established from time to time by the Distributor.
Information on such arrangements and further conditions and limitations is
available from the Distributor.
In addition, no sales charge is imposed in connection with the sale of
Class A shares of the Fund to the following entities and person: (A) the
Investment Manager, Distributor or any affiliated entities, including any direct
or indirect parent companies and other subsidiaries of such parents
(collectively "Affiliated Companies"); (B) employees, officers, sales
representatives or current or retired directors or trustees of the Affiliated
Companies or any investment company managed by any of the Affiliated Companies,
any relatives of any such individuals whose relationship is directly verified by
such individuals to the Distributor, or any beneficial account for such
relatives or individuals; and (C) employees, officers, sales representatives or
directors of dealers and other entities with a selling agreement with the
Distributor to sell shares of any aforementioned investment company, any spouse
or child of such person, or any beneficial account for any of them. The purchase
must be made for investment and the shares purchased may not be resold except
through redemption. This purchase program is subject to such administrative
policies, regarding the qualification of purchasers and any other matters, as
may be adopted by the Distributor from time to time.
Conversion of Class B(1) and Class B Shares to Class A Shares. A
shareholder's Class B(1) Class B shares of the Fund, including all shares
received as dividends or distributions with respect to such shares, will
automatically convert to Class A shares of the Fund at the end of eight years
following the issuance of such Class B shares; consequently, they will no longer
be subject to the higher expenses borne by Class B(1) and 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(1) shares so
converted. As noted above, holding periods for Class B(1) shares received in
exchange for Class B shares of other Eligible Funds and for Class B shares
received in exchange for Class B shares of other Eligible Funds, will be counted
toward the eight-year period.
Contingent Deferred Sales Charges. The amount of any contingent deferred
sales charge paid on Class A shares (on sales of $1 million or more and which do
not involve an initial sales
50
<PAGE>
charge) or on Class B(1), Class B or Class C shares of the Fund will be paid to
the Distributor. The Distributor will pay dealers at the time of sale a 4%
commission for selling Class B(1) shares and a 1% commission for selling Class C
shares. In certain cases, a dealer may elect to waive the 4% commission on Class
B(1) shares and receive in lieu thereof annual fee, usually 1%, with respect to
such outstanding shares. The proceeds of the contingent deferred sales charges
and the distribution fees are used to offset distribution expenses and thereby
permit the sale of Class B(1), Class B and Class C shares without an initial
sales charge.
In determining the applicability and rate of any contingent deferred sales
charge of Class B(1), Class B or Class C shares, it will be assumed that a
redemption of the 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 shareholder
for the longest period of time. Class B(1) shares that are redeemed within a
six-year period after purchase Class B shares that are redeemed within a
five-year period after their purchase, and Class C shares that are redeemed
within a one-year period after their purchase, will not be subject to a
contingent deferred sales charge to the extent that the value of such shares
represents (1) capital appreciation of Fund assets or (2) reinvestment of
dividends or capital gains distributions. The holding period for purposes of
applying a contingent deferred sales charge for a particular class of shares of
the Fund acquired through an exchange from another Eligible Fund will be
measured from the date that such shares were initially acquired in the other
Eligible Fund, and shares of the same class being redeemed will be considered to
represent, as applicable, capital appreciation or dividend and capital gains
distribution reinvestments in such other Eligible Fund. These determinations
will result in any contingent deferred sales charge being imposed at the lowest
possible rate. For federal income tax purposes, the amount of the contingent
deferred sales charge will reduce the gain or increase the loss, as the case may
be, on the amount realized on redemption.
Contingent Deferred Sales Charge Waivers. With respect to Class A shares
(on sales of $1 million or more and which do not involve an initial sales
charge), and Class B(1), Class B and Class C shares of the Fund, the contingent
deferred sales charge does not apply to exchanges or to redemptions under a
systematic withdrawal plan which meets certain conditions. The contingent
deferred sales charge will be waived for participant initiated distributions
from State Street Research prototype employee retirement plans. In addition, the
contingent deferred sales charge will be waived for: (i) redemptions made within
one year of the death or total disability, as defined by the Social Security
Administration, of all shareholders of an account; (ii) redemptions made after
attainment of a specific age in an amount which represents the minimum
distribution required at such age under Section 401(a)(9) of the Internal
Revenue Code of 1986, as amended, for retirement accounts or plans (e.g., age 70
1/2 for Individual Retirement Accounts and Section 403(b) plans), calculated
solely on the basis of assets invested in the Fund or other Eligible Funds; and
(iii) a redemption resulting from a tax-free return of an excess contribution to
an Individual Retirement Account. (The foregoing waivers do not apply to a
tax-free rollover or transfer of assets out of the Fund). The Fund may modify or
terminate the waivers at any time; for example, the Fund may limit the
application of multiple waivers and establish other conditions for employee
benefit plans. Certain employee benefit plans
51
<PAGE>
sponsored by a financial professional may be subject to other conditions for
waivers under which the plans may initially invest Class B(1) shares and
subsequently invest in Class B(1) or Class B shares and then Class A shares of
certain funds upon meeting specific criteria.
Class S Shares. Class S shares are currently available to certain employee
benefit plans such as qualified retirement plans which meet criteria relating to
number of participants, service arrangements, or similar factors; insurance
companies; investment companies; advisory accounts of the Investment Manager;
endowment funds of nonprofit organizations with substantial minimum assets
(currently a minimum of $10 million); and other similar institutional investors.
Class S shares may be acquired through programs or products sponsored by
Metropolitan, its affiliates, or both for which Class S shares have been
designated. In addition, Class S shares are available through programs under
which, for example, investors pay an asset-based fee and/or a transaction fee to
intermediaries. Class S share availability is determined by the Distributor and
intermediaries based on the overall direct and indirect costs of a particular
program, expected assets, account sizes and similar considerations.
Reorganizations. In the event of mergers or reorganizations with other
public or private collective investment entities, including investment companies
as defined in the 1940 Act, the Fund may issue its shares at net asset value (or
more) to such entities or to their security holders.
Redemptions. The Fund reserves the right to pay redemptions in kind with
portfolio securities in lieu of cash. In accordance with its election pursuant
to Rule 18f-1 under the 1940 Act, the Fund may limit the amount of redemption
proceeds paid in cash. Although it has no present intention to do so, the Fund
may, under unusual circumstances, limit redemptions in cash with respect to each
shareholder during any ninety-day period to the lesser of (i) $250,000 or (ii)
1% of the net asset value of the Fund at the beginning of such period. In
connection with any redemptions paid in kind with portfolio securities,
brokerage and other costs may be incurred by the redeeming shareholder in the
sale of the securities received.
Systematic Withdrawal Plan. A shareholder who owns noncertificated Class A
or Class S shares with a value of $5,000 or more, or Class B(1) Class B or Class
C shares with a value of $10,000 or more, may elect, by participating in the
Fund's Systematic Withdrawal Plan, to have periodic checks issued for specified
amounts. These amounts may not be less than certain minimums, depending on the
class of shares held. The Plan provides that all income dividends and capital
gains distributions of the Fund shall be credited to participating shareholders
in additional shares of the Fund. Thus, the withdrawal amounts paid can only be
realized by redeeming shares of the Fund under the Plan. To the extent such
amounts paid exceed dividends and distributions from the Fund, a shareholder's
investment will decrease and may eventually be exhausted.
In the case of shares otherwise subject to contingent deferred sales
charges, no such charges will be imposed on withdrawals of up to 8% annually of
either (a) the value, at the time the Systematic Withdrawal Plan is initiated,
of the shares then in the account or (b) the value, at
52
<PAGE>
the time of a withdrawal, of the same number of shares as in the account when
the Systematic Withdrawal Plan was initiated, whichever is higher.
Expenses of the Systematic Withdrawal Plan are borne by the Fund. A
participating shareholder may withdraw from the Systematic Withdrawal Plan, and
the Fund may terminate the Systematic Withdrawal Plan at any time on written
notice. Purchase of additional shares while a shareholder is receiving payments
under a Systematic Withdrawal Plan is ordinarily disadvantageous because of
duplicative sales charges. For this reason, a shareholder may not participate in
the Investamatic Program (see "Your Investment--Investor Services--Investamatic
Program" in the Fund's Prospectus) and the Systematic Withdrawal Plan at the
same time.
Request to Dealer to Repurchase. For the convenience of shareholders, the
Fund has authorized the Distributor as its agent to accept orders from dealers
by wire or telephone for the repurchase of shares by the Distributor from the
dealer. The Fund may revoke or suspend this authorization at any time. The
repurchase price is the net asset value for the applicable shares next
determined following the time at which the shares are offered for repurchase by
the dealer to the Distributor. The dealer is responsible for promptly
transmitting a shareholder's order to the Distributor.
Signature Guarantees. Signature guarantees are required for, among other
things: (1) written requests for redemptions for more than $100,000; (2) written
requests for redemptions for any amount if the proceeds are transmitted to other
than the current address of record (unchanged in the past 30 days); (3) written
requests for redemptions for any amount submitted by corporations and certain
fiduciaries and other intermediaries; and (4) requests to transfer the
registration of shares to another owner. Signatures must be guaranteed by a
bank, a member firm of a national stock exchange, or other eligible guarantor
institution. The Transfer Agent will not accept guarantees (or notarizations)
from notaries public. The above requirements may be waived in certain instances.
Dishonored Checks. If a purchaser's check is not honored for its full
amount, the purchaser could be subject to additional charges to cover collection
costs and any investment loss, and the purchase may be canceled.
Processing Charges. Purchases and redemptions processed through securities
dealers may be subject to processing charges imposed by the securities dealer in
addition to sales charges that may be imposed by the Fund or the Distributor.
SHAREHOLDER ACCOUNTS
General information on shareholder accounts is included in the Fund's
Prospectus under "Your Investment." The following supplements that information.
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Maintenance Fees and Involuntary Redemption. Because of the relatively high
cost of maintaining small shareholder accounts, the Fund reserves the right to
redeem at its option any shareholder account which remains below $1,500 for a
period of 60 days after notice is mailed to the applicable shareholder, or to
impose a maintenance fee on such account after 60 days' notice. Such
involuntarily redemptions will be subject to applicable sales charges, if any.
The Fund may increase such minimum account value above such amount in the future
after notice to affected shareholders. Involuntarily redeemed shares will be
priced at the net asset value on the date fixed for redemption by the Fund, and
the proceeds of the redemption will be mailed to the affected shareholder at the
address of record. Currently, the maintenance fee is $18 annually, which is paid
to the Transfer Agent. The fee does not apply to certain retirement accounts or
if the shareholder has more than an aggregate $50,000 invested in the Fund and
other Eligible Funds combined. Imposition of a maintenance fee on a small
account could, over time, exhaust the assets of such account.
To cover the cost of additional compliance administration, a $20 fee will
be charged against any shareholder account that has been determined to be
subject to escheat under applicable state laws.
The Fund may not suspend the right of redemption or postpone the date of
payment of redemption proceeds for more than seven days, except that (a) it may
elect to suspend the redemption of shares or postpone the date of payment of
redemption proceeds: (1) during any period that the NYSE is closed (other than
customary weekend and holiday closings) or trading on the NYSE is restricted;
(2) during any period in which an emergency exists as a result of which disposal
of portfolio securities is not reasonably practicable or it is not reasonably
practicable to fairly determine the Fund's net asset values; or (3) during such
other periods as the Securities and Exchange Commission (the "SEC") may by order
permit for the protection of investors; and (b) the payment of redemption
proceeds may be postponed as otherwise provided under "Purchase and Redemption
of Shares" in this Statement of Additional Information.
The Open Account System. Under the Open Account System full and fractional
shares of the Fund owned by shareholders are credited to their accounts by the
Transfer Agent, State Street Bank and Trust Company, 225 Franklin Street,
Boston, Massachusetts 02110. Certificates representing Class B(1), Class B or
Class C shares will not be issued, while certificates representing Class A or
Class S shares will only be issued if specifically requested in writing and, in
any case, will only be issued for full shares, with any fractional shares to be
carried on the shareholder's account. Shareholders will receive periodic
statements of transactions in their accounts.
The Fund's Open Account System provides the following options:
1. Additional purchases of shares of the Fund may be made through
dealers, by wire or by mailing a check payable to "State Street
Research Funds" under the terms set forth above under "Purchase and
Redemption of Shares" in this Statement of Additional Information.
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2. The following methods of receiving dividends from investment income
and distributions from capital gains generally are available:
(a) All income dividends and capital gains distributions reinvested
in additional shares of the Fund.
(b) All income dividends and capital gains distributions in cash.
(c) All income dividends and capital gains distributions invested in
any one available Eligible Fund designated by the shareholder as
described below. See "--Dividend Allocation Plan" herein.
Dividend and distribution selections should be made on the Application
accompanying the initial investment. If no selection is indicated on the
Application, that account will be automatically coded for reinvestment of all
dividends and distributions in additional shares of the same class of the Fund.
Selections may be changed at any time by telephone or written notice to the
Service Center. Dividends and distributions are reinvested at net asset value
without a sales charge.
Exchange Privileges. Shareholders of the Fund may exchange their shares for
available shares with corresponding characteristics of any of the other Eligible
Funds subject to any applicable initial holding period on the basis of the
relative net asset values of the respective shares to be exchanged, subject to
compliance with applicable securities laws. Exchanges into the Fund are
available only to investors who meet the Funds minimum investment and
eligibility standards. 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(1) Class B and Class C shares may be
redeemed without the payment of any contingent deferred sales charge that might
otherwise be due upon an ordinary redemption of such shares. The State Street
Research Money Market Fund issues Class E shares which are sold without any
sales charge. Exchanges of State Street Research Money Market Fund Class E
shares into Class A shares of the Fund or any other Eligible Fund are subject to
the initial sales charge or contingent deferred sales charge applicable to an
initial investment in such Class A shares, unless a prior Class A sales charge
has been paid directly or indirectly with respect to the shares redeemed. Class
A shares acquired through a new investment after January 1, 1999 are subject to
an incremental sales charge if exchanged within 30 days of acquisition for Class
A shares of a Fund with a higher applicable sales charge. For purposes of
computing the contingent deferred sales charge that may be payable upon
disposition of any acquired Class A, Class B and Class C shares, the holding
period of the redeemed shares is "tacked" to the holding period of any acquired
shares. No exchange transaction fee is currently imposed on any exchange.
Shares of the Fund may also be acquired or redeemed in exchange for shares
of the Summit Cash Reserves Fund ("Summit Cash Reserves") by customers of
Merrill Lynch, Pierce,
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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(1),Class B or Class C shares
of the Fund shall restart any holding period previously tolled, or shall be
subject to the contingent deferred sales charge applicable to an initial
investment in such shares.
The exchange privilege may be terminated or suspended or its terms changed
at any time, subject, if required under applicable regulations, to 60 days'
prior notice. New accounts established for investments upon exchange from an
existing account in another fund will have the same telephone privileges with
respect to the Fund (see "Your Investment--Account Policies--Telephone Requests"
in the Fund's Prospectus and "--Telephone Privileges," below) as the existing
account unless the Service Center is instructed otherwise. Related
administrative policies and procedures may also be adopted with regard to a
series of exchanges, street name accounts, sponsored arrangements and other
matters.
The exchange privilege is not designed for use in connection with
short-term trading or market timing strategies. To protect the interests of
shareholders, the Fund reserves the right to temporarily or permanently
terminate the exchange privilege for any person who makes more than six
exchanges out of or into the Fund per calendar year. Accounts under common
ownership or control, including accounts with the same taxpayer identification
number, may be aggregated for purposes of the six exchange limit.
Notwithstanding the six exchange limit, the Fund reserves the right to refuse
exchanges by any person or group if, in the Investment Manager's judgment, the
Fund would be unable to invest effectively in accordance with its investment
objective and policies, or would otherwise potentially be adversely affected.
Exchanges may be restricted or refused if the Fund receives or anticipates
simultaneous orders affecting significant portions of the Fund's assets. In
particular, a pattern of exchanges that coincides with a "market timing"
strategy may be disruptive to the Fund. The Fund may impose these restrictions
at any time. The exchange limit may be modified for accounts in certain
institutional retirement plans because of plan exchange limits, Department of
Labor regulations or administrative and other considerations. Subject to the
foregoing, if an exchange request in good order is received by the Service
Center and delivered by the Service Center to the Transfer Agent by 12 noon
Boston time on any business day, the exchange usually will occur that day. For
further information regarding the exchange privilege, shareholders should
contact the Service Center.
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Reinvestment Privilege. A shareholder of the Fund who has redeemed shares
or had shares repurchased at his or her request may reinvest all or any portion
of the proceeds (plus that amount necessary to acquire a fractional share to
round off his or her reinvestment to full shares) in shares, of the same class
as the shares redeemed, of the Fund or any other Eligible Fund at net asset
value and without subjecting the reinvestment to an initial sales charge,
provided such reinvestment is made within 120 calendar days after a redemption
or repurchase. Upon such reinvestment, the shareholder will be credited with any
contingent deferred sales charge previously charged with respect to the amount
reinvested. The redemption of shares is, for federal income tax purposes, a sale
on which the shareholder may realize a gain or loss. If a redemption at a loss
is followed by a reinvestment within 30 days, the transaction may be a "wash
sale" resulting in a denial of the loss for federal income tax purposes.
Any reinvestment pursuant to the reinvestment privilege will be subject to
any applicable minimum account standards imposed by the fund into which the
reinvestment is made. Shares are sold to a reinvesting shareholder at the net
asset value thereof next determined following timely receipt by the Service
Center of such shareholder's written purchase request and delivery of the
request by the Service Center to the Transfer Agent. A shareholder may exercise
this reinvestment privilege only once per 12-month period with respect to his or
her shares of the Fund.
Dividend Allocation Plan. The Dividend Allocation Plan allows shareholders
to elect to have all their dividends and any other distributions from the Fund
or any Eligible Fund automatically invested at net asset value in one other such
Eligible Fund designated by the shareholder, provided the account into which the
dividends and distributions are directed is initially funded with the requisite
minimum amount.
Telephone Privileges. The following telephone privileges are available:
o Telephone Exchange Privilege for Shareholder and Shareholder's
Financial Professional
o Shareholders automatically receive this privilege unless
declined.
o This privilege allows a shareholder or a shareholder's financial
professional to request exchanges into other State Street
Research funds.
o Telephone Redemption Privilege for Shareholder
o Shareholders automatically receive this privilege unless
declined.
o This privilege allows a shareholder to phone requests to sell
shares, with the proceeds sent to the address of record.
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o Telephone Redemption Privilege for Shareholder's Financial
Professional (This privilege is not automatic; a shareholder must
specifically elect it)
o This privilege allows a shareholder's financial professional to
phone requests to sell shares, with the proceeds sent to the
address of record on the account.
A shareholder with the above telephone privileges is deemed to authorize
the Service Center and the Transfer Agent to: (1) act upon the telephone
instructions of any person purporting to be any of the shareholders of an
account or a shareholder's financial professional; and (2) honor any written
instructions for a change of address regardless of whether such request is
accompanied by a signature guarantee. All telephone calls will be recorded.
Neither the Fund, the other Eligible Funds, the Transfer Agent, the Investment
Manager nor the Distributor will be liable for any loss, expense or cost arising
out of any request, including any fraudulent or unauthorized requests.
Shareholders assume the risk to the full extent of their accounts that telephone
requests may be unauthorized. Reasonable procedures will be followed to confirm
that instructions communicated by telephone are genuine. The shareholder will
not be liable for any losses arising from unauthorized or fraudulent
instructions if such procedures are not followed.
Alternative Means of Contacting the Fund. It is unlikely, even during
periods of extraordinary market conditions, that a shareholder will have
difficulty in reaching the Service Center. In that event, however, the
shareholder should contact the Service Center at 1-800-562-0032, 1-617-357-7800
or otherwise at its main office at One Financial Center, Boston, Massachusetts
02111-2690.
NET ASSET VALUE
The net asset value of the shares of the Fund is determined once daily as
of the close of regular trading on the NYSE, ordinarily 4 P.M. New York City
time, Monday through Friday, on each day during which the NYSE is open for
unrestricted trading. The NYSE is currently closed on New Year's Day, Martin
Luther King, Jr. Day, Presidents Day, Good Friday, Memorial Day, Independence
Day, Labor Day, Thanksgiving Day and Christmas Day.
The net asset value per share of the Fund is computed by dividing the sum
of the value of the securities held by the Fund plus any cash or other assets
minus all liabilities by the total number of outstanding shares of the Fund at
such time. Any expenses, except for extraordinary or nonrecurring expenses,
borne by the Fund, including the investment management fee payable to the
Investment Manager, are accrued daily.
In determining the values of portfolio assets as provided below, the
Trustees utilize one or more pricing services in lieu of market quotations for
certain securities which are not readily available on a daily basis. Such
services utilize information with respect to market transactions, quotations
from dealers and various relationships among securities in determining value and
may provide prices determined as of times prior to the close of the NYSE.
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In general, securities are valued as follows. Securities which are listed
or traded on the New York or American Stock Exchange are valued at the price of
the last quoted sale on the respective exchange for that day. Securities which
are listed or traded on a national securities exchange or exchanges, but not on
the New York or American Stock Exchange, are valued at the price of the last
quoted sale on the exchange for that day prior to the close of the NYSE.
Securities not listed on any national securities exchange which are traded "over
the counter" and for which quotations are available on the National Association
of Securities Dealers, Inc.'s (the "NASD") NASDAQ System are valued at the
closing price supplied through such system for that day at the close of the
NYSE. Other securities are, in general, valued at the mean of the bid and asked
quotations last quoted prior to the close of the NYSE if there are market
quotations readily available, or in the absence of such market quotations, then
at the fair value thereof as determined by or under authority of the Trustees of
the Trust with the use of such pricing services as may be deemed appropriate or
methodologies approved by the Trustees. The Trustees also reserve the right to
adopt other valuations based on fair value in pricing in unusual circumstances
where other methods as discussed in part above, could otherwise have a material
adverse effect on the Fund as a whole.
The Trustees have authorized the use of the amortized cost method to value
short-term debt instruments issued with a maturity of one year or less and
having a remaining maturity of 60 days or less when the value obtained is fair
value, provided that during any period in which more than 25% of the Fund's
total assets is invested in short-term debt securities the current market value
of such securities will be used in calculating net asset value per share in lieu
of the amortized cost method. Under the amortized cost method of valuation, the
security is initially valued at cost on the date of purchase (or in the case of
short-term debt instruments purchased with more than 60 days remaining to
maturity, the market value on the 61st day prior to maturity), and thereafter a
constant amortization to maturity of any discount or premium is assumed
regardless of the impact of fluctuating interest rates on the market value of
the security.
PORTFOLIO TRANSACTIONS
Portfolio Turnover
The Fund's portfolio turnover rate is determined by dividing the lesser of
securities purchases or sales for a year by the monthly average value of
securities held by the Fund (excluding, for purposes of this determination,
securities the maturities of which as of the time of their acquisition were one
year or less). The Fund's portfolio turnover rates for the fiscal years ended
December 31, 1997 and 1998 were as follows: 50.92% and 32.86%. The Investment
Manager believes that the portfolio turnover rate was significantly lower in
1998 than for the previous fiscal year because municipal yield volatility was
low in 1998, creating fewer trading opportunities to improve the existing
structure of the portfolio.
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Brokerage Allocation
The Investment Manager's policy is to seek for its clients, including the
Fund, what in the Investment Manager's judgment will be the best overall
execution of purchase or sale orders and the most favorable net prices in
securities transactions consistent with its judgment as to the business
qualifications of the various broker or dealer firms with whom the Investment
Manager may do business, and the Investment Manager may not necessarily choose
the broker offering the lowest available commission rate. Decisions with respect
to the market where the transaction is to be completed, to the form of
transaction (whether principal or agency), and to the allocation of orders among
brokers or dealers are made in accordance with this policy. In selecting brokers
or dealers to effect portfolio transactions, consideration is given to their
proven integrity and financial responsibility, their demonstrated execution
experience and capabilities both generally and with respect to particular
markets or securities, the competitiveness of their commission rates in agency
transactions (and their net prices in principal transactions), their willingness
to commit capital, and their clearance and settlement capability. The Investment
Manager makes every effort to keep informed of commission rate structures and
prevalent bid/ask spread characteristics of the markets and securities in which
transactions for the Fund occur. Against this background, the Investment Manager
evaluates the reasonableness of a commission or a net price with respect to a
particular transaction by considering such factors as difficulty of execution or
security positioning by the executing firm. The Investment Manager may or may
not solicit competitive bids based on its judgment of the expected benefit or
harm to the execution process for that transaction.
When it appears that a number of firms could satisfy the required standards
in respect of a particular transaction, consideration may also be given to
services other than execution services which certain of such firms have provided
in the past or may provide in the future. Negotiated commission rates and
prices, however, are based upon the Investment Manager's judgment of the rate
which reflects the execution requirements of the transaction without regard to
whether the broker provides services in addition to execution. Among such other
services are the supplying of supplemental investment research; general
economic, political and business information; analytical and statistical data;
relevant market information, quotation equipment and services; reports and
information about specific companies, industries and securities; purchase and
sale recommendations for stocks and bonds; portfolio strategy services;
historical statistical information; market data services providing information
on specific issues and prices; financial publications; proxy voting data and
analysis services; technical analysis of various aspects of the securities
markets, including technical charts; computer hardware used for brokerage and
research purposes; computer software and databases (including those contained in
certain trading systems used for portfolio analysis and modeling and also
including software providing investment personnel with efficient access to
current and historical data from a variety of internal and external sources);
portfolio evaluation services and data relating to the relative performance of
accounts.
In the case of the Fund and other registered investment companies advised
by the Investment Manager or its affiliates, the above services may include data
relating to performance, expenses and fees of those investment companies and
other investment companies; this information is used by the Trustees or
Directors of the investment companies to fulfill their
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responsibility to oversee the quality of the Investment Manager's advisory
contracts between the investment companies and the Investment Manager. The
Investment Manager considers these investment company services only in
connection with the execution of transactions on behalf of its investment
company clients and not its other clients.
The Investment Manager regularly reviews and evaluates the services
furnished by broker-dealers. The Investment Manager's investment management
personnel seek to evaluate the quality of the research and other services
provided by various broker-dealer firms, and the results of these efforts are
made available to the equity trading department which uses this information as
consideration to the extent described above in the selection of brokers to
execute portfolio transactions.
Some services furnished by broker-dealers may be used for research and
investment decision-making purposes, and also for marketing or administrative
purposes. Under these circumstances, the Investment Manager allocates the cost
of the services to determine the proportion which is allocable to research or
investment decision-making and the proportion allocable to other purposes. The
Investment Manager pays directly from its own funds for that portion allocable
to uses other than research or investment decision-making. Some research and
execution services may benefit the Investment Manager's clients as a whole,
while others may benefit a specific segment of clients. Not all such services
will necessarily be used exclusively in connection with the accounts which pay
the commissions to the broker-dealer providing the services.
The Investment Manager has no fixed agreements or understandings with any
broker-dealer as to the amount of brokerage business which the firm may expect
to receive for services supplied to the Investment Manager or otherwise. There
may be, however, understandings with certain firms that in order for such firms
to be able to continuously supply certain services, they need to receive
allocation of a specified amount of brokerage business. These understandings are
honored to the extent possible in accordance with the policies set forth above.
It is not the Investment Manager's policy to intentionally pay a firm a
brokerage commission higher than that which another firm would charge for
handling the same transaction in recognition of services (other than execution
services) provided. However, the Investment Manager is aware that this is an
area where differences of opinion as to fact and circumstances may exist, and in
such circumstances, if any, relies on the provisions of Section 28(e) of the
Securities Exchange Act of 1934, to the extent applicable. During the fiscal
years ended December 31, 1996, 1997 and 1998, 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.
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In the case of the purchase of fixed income securities in underwriting
transactions, the Investment Manager follows any instructions received from its
clients as to the allocation of new issue discounts, selling commissions and
designations to brokers or dealers which provide the client with research,
performance evaluation, master trustee and other services. In the absence of
instructions from the client, the Investment Manager may make such allocations
to broker-dealers which have provided the Investment Manager with research and
brokerage services.
In some instances, certain clients of the Investment Manager request it to
place all or part of the orders for their account with certain brokers or
dealers, which in some cases provide services to those clients. The Investment
Manager generally agrees to honor these requests to the extent practicable.
Clients may condition their requests by requiring that the Investment Manager
only effect transactions with the specified broker-dealers if the broker-dealers
are competitive as to price and execution. In other cases, the Investment
Manager may be unable to negotiate commissions or obtain volume discounts or
best execution. In addition, a disparity may exist among the commissions charged
to clients who request the Investment Manager to use particular brokers or
dealers, and also between those clients and those who do not make such requests.
A client who requests the use of a particular broker-dealer should understand
that it may lose the possible advantage which non-requesting clients derive from
aggregation of orders for several clients as a single transaction for the
purchase or sale of a particular security. Among other reasons why best
execution may not be achieved with directed brokerage is that, in an effort to
achieve orderly execution of transactions, execution of orders that have been
designated particular brokers may, at the discretion of the trading desk, be
delayed until execution of other non-designated orders have been completed.
When more than one client of the Investment Manager is seeking to buy or
sell the same security, the sale or purchase is carried out in a manner which is
considered fair and equitable to all accounts. In allocating investments among
various clients (including in what sequence orders for trades are placed), the
Investment Manager will use its best business judgment and will take into
account such factors as the investment objectives of the clients, the amount of
investment funds available to each, the size of the order, the amount already
committed for each client to a specific investment and the relative risks of the
investments, all in order to provide on balance a fair and equitable result to
each client over time. Although sharing in large transactions may sometimes
affect price or volume of shares acquired or sold, overall it is believed there
may be an advantage in execution. The Investment Manager may follow the practice
of grouping orders of various clients for execution to get the benefit of lower
prices or commission rates. In certain cases where the aggregate order may be
executed in a series of transactions at various prices, the transactions are
allocated as to amount and price in a manner considered equitable to each so
that each receives, to the extent practicable, the average price of such
transactions. Exceptions may be made based on such factors as the size of the
account and the size of the trade. For example, the Investment Manager may not
aggregate trades where it believes that it is in the best interests of clients
not to do so, including situations 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
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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 elects 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 qualify to 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"); and (b) satisfy certain
diversification requirements on a quarterly basis.
If the Fund should fail to qualify as a regulated investment company in any
year, it would lose the beneficial tax treatment accorded regulated investment
companies under Subchapter M of the Code and all of its taxable income would be
subject to tax at regular corporate rates without any deduction for
distributions to shareholders, and such distributions will be taxable to
shareholders as ordinary income to the extent of the Fund's current or
accumulated earnings and profits. Also, the shareholders, if they received a
distribution in excess of current or accumulated earnings and profits, would
receive a return of capital that would reduce the basis of their shares of the
Fund to the extent thereof. Any distribution in excess of a shareholder's basis
in the shareholder's shares would be taxable as gain realized from the sale of
such shares.
The Fund will be liable for a nondeductible 4% excise tax on amounts not
distributed 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. For that purpose, any income or gain retained by the Fund that is subject
to corporate tax will be considered to have been distributed by year-end. The
Fund intends to make sufficient distributions to avoid this 4% excise tax.
Taxation of the Fund's Investments
Original Issue Discount; Market 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.
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Original issue discount is treated for federal income tax purposes as income
earned by the Fund, whether or not any income is actually received, and
therefore is subject to the distribution requirements of the Code. Generally,
the amount of original issue discount is determined on the basis of a constant
yield to maturity which takes into account the compounding of accrued interest.
Under section 1286 of the Code, an investment in a stripped bond or stripped
coupon may result in original issue discount.
Debt securities may be purchased by the Fund at a discount that exceeds the
original issue discount plus previously accrued original issue discount
remaining on the securities, if any, at the time the Fund purchases the
securities. This additional discount represents market discount for federal
income tax purposes. In the case of any debt security issued after July 18,
1984, having a fixed maturity date of more than one year from the date of issue
and having market discount, the gain realized on disposition will be treated as
interest to the extent it does not exceed the accrued market discount on the
security (unless the Fund elects to include such accrued market discount in
income in the tax year to which it is attributable). Generally, market discount
is accrued on a daily basis. The Fund may be required to capitalize, rather than
deduct currently, part or all of any direct interest expense incurred or
continued to purchase or carry any debt security having market discount, unless
the Fund makes the election to include market discount currently. Because the
Fund must include original issue discount in income, it will be more difficult
for the Fund to make the distributions required for the Fund to maintain its
status as a regulated investment company under Subchapter M of the Code or to
avoid the 4% excise tax described above.
Options and Futures Transactions. Certain of the Fund's investments may be
subject to provisions of the Code that (i) require inclusion of unrealized gains
or losses in the Fund's income for purposes of the 90% test, and require
inclusion of the unrealized gains in the Fund's income for purposes of 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 and long-term gain
irrespective of the holding period of the investment. Such provisions generally
apply to, among other investments, options on debt securities, indices on
securities and futures contracts. The Fund will monitor its transactions and may
make certain tax elections available to it in order to mitigate the impact of
these rules and prevent disqualification of the Fund as a regulated investment
company.
Taxation of The Fund's Shareholders
Distributions generally are taxable to shareholders at the time made unless
tax-exempt. However, any dividend declared in October, November or December and
made payable to shareholders of record in any such month is treated as received
by such shareholder on December 31, provided that the Fund pays the dividend
during January of the following calendar year. It is expected that none of the
Fund's distributions will qualify for the corporate dividends-received
deduction.
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<PAGE>
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 taxable distribution. The price of shares
purchased at that time includes the amount of any forthcoming distribution.
Those investors purchasing shares just prior to a taxable distribution will then
receive a return of investment upon distribution which will nevertheless be
taxable to them.
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.
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.
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<PAGE>
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
The Trust has entered into a Distribution Agreement with State Street
Research Investment Services, Inc., as Distributor, whereby the Distributor acts
as agent to sell and distribute shares of the Fund. Shares of the Fund are sold
through dealers who have entered into sales agreements with the Distributor. The
Distributor distributes shares of the Fund on a continuous basis at an offering
price which is based on the net asset value per share of the Fund plus (subject
to certain exceptions) a sales charge which, at the election of the investor,
may be imposed (i) at the time of purchase (the Class A shares) or (ii) on a
deferred basis (Class B and Class C shares). The Distributor may reallow all or
portions of such sales charges as concessions to dealers. For the fiscal years
ended December 31, 1998, 1997 and 1996, total sales charges Class A shares paid
to the Distributor amounted to $133,062, $120,364, and $140,433 respectively.
For the same periods, the Distributor retained respectively after
reallowance of concessions to dealers: $15,690; $14,177; and $17,248. The
Distributor may pay its affiliate, MetLife Securities, Inc. additional sales
compensation of up to 0.25% of certain sales or assets.
The differences in the price at which the Fund's Class A shares are offered
due to scheduled variations in sales charges, as described in the Fund's
Prospectus, result from cost savings inherent in economies of scale. Management
believes that the cost of sales efforts of the Distributor and broker-dealers
tends to decrease as the size of purchases increases, or does not involve any
incremental sales expenses as in the case of, for example, exchanges,
reinvestments or dividend investments at net asset value. Similarly, no
significant sales effort is necessary for sales of shares at net asset value to
certain Directors, Trustees, officers, employees, their relatives and other
persons directly or indirectly related to the Fund or associated entities. Where
shares of the Fund are offered at a reduced sales charge or without a sales
charge pursuant to sponsored arrangements, managed fee-based programs and
so-called "mutual fund supermarkets," among other programs, the amount of the
sales charge reduction will similarly reflect the anticipated reduction in sales
expenses associated with such arrangements. The reductions in sales expenses,
and therefore the reduction in sales charges, will vary depending on factors
such as the size and other characteristics of the organization or program, and
the nature of its membership or the participants. The Fund reserves the right to
make variations in, or
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<PAGE>
eliminate, sales charges at any time or to revise the terms of or to suspend or
discontinue sales pursuant to sponsored arrangements or similar programs at any
time.
On any sale of Class A shares to a single investor in the amount of
$1,000,000 or more, the Distributor will pay the authorized securities dealer
making such sale a commission based on the aggregate of such sales. Such
commission also is payable to authorized securities dealers upon sales of Class
A shares made pursuant to a Letter of Intent to purchase shares having a net
asset value of $1,000,000 or more. Shares sold with such commissions payable are
subject to a one-year contingent deferred sales charge of 1.00% on any portion
of such shares redeemed within one year following their sale. After a particular
purchase of Class A shares is made under the Letter of Intent, the commission
will be paid only in respect of that particular purchase of shares. If the
Letter of Intent is not completed, the commission paid will be deducted from any
discounts or commissions otherwise payable to such dealer in respect of shares
actually sold. If an investor is eligible to purchase shares at net asset value
on account of the Right of Accumulation, the commission will be paid only in
respect of the incremental purchase at net asset value.
For the periods shown below, the Distributor received contingent deferred
sales charges upon redemption of Class A, Class B and Class C shares of the Fund
and paid initial commissions to securities dealers for sales of such Class A,
Class B and Class C shares as follows:
<TABLE>
<CAPTION>
Fiscal Year Ended Fiscal Year Ended Fiscal Year Ended
December 31, 1998 December 31, 1997 December 31, 1996
----------------- ----------------- -----------------
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 $ 117,372 $ 0 $ 106,187 $ 0 $ 123,185
Class B $ 49,228 $ 157,016 $ 43,278 $ 102,457 $ 38,918 $ 154,234
Class C $ 0 $ 3,600 $ 0 $ 1,197 $ 0 $ 171
</TABLE>
The Fund has adopted a "Plan of Distribution Pursuant to Rule 12b-1"
(the "General Distribution Plan") under which the Fund may engage, directly or
indirectly, in financing any activities primarily intended to result in the sale
of Class A, Class B and Class C shares, including, but not limited to, (1) the
payment of commissions and/or reimbursement to underwriters, securities dealers
and others engaged in the sale of shares, including payments to 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, and (3) reimbursement of expenses incurred
by the Distributor in connection with the servicing of shareholder accounts
including payments to securities dealers and others in consideration of the
provision of personal service to investors and/or the maintenance or servicing
of shareholder accounts and expenses associated with the
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<PAGE>
provision of personal service by the Distributor directly to investors. In
addition, the General 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 General Distribution Plan may
not exceed (i) with respect to Class A shares, an annual rate of 0.25% of the
average daily value of net assets represented by such Class A shares, and (ii)
with respect to Class B and Class C shares, an annual rate of 0.75% of the
average daily value of the net assets represented by such Class B or Class C
shares (as the case may be) to finance sales or promotion expenses and an annual
rate of 0.25% of the average daily value of the net assets represented by such
Class B or Class C shares (as the case may be) to make payments for personal
services and/or the maintenance or servicing of shareholder accounts.
The Fund also has adopted a "Rule 12b-1 Plan for Distribution of Shares"
(the "Share Distribution Plan") under which the Fund shall pay the Distributor
(a) a service fee at the end of each month at the annual rate of 0.25% of
average daily net assets attributable to the Class B(1) shares to compensate the
Distributor and any securities firms or other third parties who render personal
services to and/or maintain shareholder accounts for the shareholders of the
respective class and (b) a distribution fee at the end of each month at the
annual rate of 0.75% of average daily net assets attributable to the Class B(1)
shares to compensate the Distributor for services provided and expenses incurred
by it in connection with sales, promotional and marketing activities relating to
the respective class. To the extent that any payments made by the Fund to the
Distributor or the Investment Manager, including payment of investment
management fees, should be deemed to be an indirect financing of any activity
primarily resulting in the sale of shares of the Fund within the scope of Rule
12b-1 under the 1940 Act, then such payments shall be deemed to be authorized by
the Share Distribution Plan.
A rule of the National Association of Securities Dealers, Inc. ("NASD")
limits annual expenditures that the Fund may incur to 0.75% for distribution
expenses and 0.25% for service fees. The NASD Rule also limits the aggregate
amount that the Fund may pay for such distribution costs to 6.25% of gross share
sales of a class since the inception of any asset-based sales charge plus
interest at the prime rate plus 1% on unpaid amounts thereof (less any
contingent deferred sales charges). Such limitation does not apply to the
service fees. Payments to the Distributor or to dealers funded under either the
General Distribution Plan or the Share Distribution Plan may be discontinued at
any time.
Some or all of the service fees are used to pay or reimburse dealers
(including dealers that are affiliates of the Distributor) or others for
personal services and/or the maintenance of shareholder accounts. A portion of
any initial commission paid to dealers for the sale of shares of the Fund
represents payment for personal services and/or the maintenance or servicing of
shareholder accounts by such dealers. Dealers who have sold Class A shares are
eligible for
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<PAGE>
further reimbursement commencing as of the time of such sale. Dealers who have
sold Class B and Class C shares are eligible for further reimbursement after the
first year during which such shares have been held of record by such dealer as
nominee for its clients (or by such clients directly).
The distribution fees are used primarily to offset initial and ongoing
commissions paid to dealers for selling such shares and for other sales and
marketing expenditures.
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.
The payment of service and distribution fees may continue even if the Fund
ceases, temporarily or permanently, to sell one or more classes of shares to new
accounts. During the period the Fund is closed to new accounts, the distribution
fee will not be used for promotion expenses. The service and distribution fees
are used during a closed period to cover services provided to current
shareholders and to cover the compensation of financial professionals in
connection with the prior sale of Fund shares, among other non-promotional
distribution expenditures.
The Distributor may pay certain dealers and other intermediaries additional
compensation for sales and administrative services. The Distributor may provide
cash and noncash incentives to intermediaries who, for example, sell significant
amounts of shares or develop particular distribution channels. The Distributor
may compensate dealers with clients who maintain their investments in the Fund
over a period of years. The incentives can include merchandise and trips to, and
attendance at, sales seminars at resorts. The Distributor may pay for
administrative services, such as technological and computer systems support for
the maintenance of pension plan participant records, for subaccounting, and for
distribution through mutual fund supermarkets or similar arrangements.
During the fiscal year ended December 31, 1998, 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:
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<PAGE>
<TABLE>
<CAPTION>
Class A Class B Class C
------- ------- -------
<S> <C> <C> <C>
Advertising $ 42 $ 0 $ 684
Printing and mailing of prospectuses
to other than current shareholders $ 6 $ 0 $ 102
Compensation to dealers $ 52,001 $181,161 $ 5,060
Compensation to sales personnel $ 104 $ 0 $ 1,747
Interest $ 0 $ 0 $ 0
Carrying or other financing charges $ 0 $ 0 $ 0
Other expenses: marketing; general $ 94 $ 0 $ 1,582
-------- -------- -------
Total Fees $ 52,247 $181,161 $ 9,175
======== ======== =======
</TABLE>
No interested Trustee of the Trust has any direct or indirect financial
interest in the operation of the Distribution Plan or any related agreements
thereunder. The Distributor's interest in the Distribution Plan is described
above.
To the extent that the Glass-Steagall Act may be interpreted as prohibiting
banks and other depository institutions from being paid for performing services
under the Distribution Plan, the Fund will make alternative arrangements for
such services for shareholders who acquired shares through such institutions.
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(1), Class B, Class C or Class S shares to the performance 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
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<PAGE>
and/or to appropriate rankings and averages such as those compiled by Lipper
Analytical Services, Inc., Morningstar, Inc., Money Magazine, Business Week,
Forbes Magazine, The Wall Street Journal and Investor's Daily. For example, the
performance of the Fund might be compared to the Lipper New York Municipal Debt
Funds Average.
The average annual total return ("standard total return") and yield of the
Class A, Class B(1), Class B, Class C and Class S 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. On June 7, 1993,
when designations were assigned based on the pricing and Rule 12b-1 fees
applicable to shares sold thereafter. The application of the additional Rule
12b-1 fees, if any, of up to 1% will, for periods after June 7, 1993, adversely
affect Fund performance results. Thus, performance data or rankings for a given
class of shares should be interpreted carefully by investors who hold or may
invest in a different class of shares.
All calculations of performance data in this section reflect the voluntary
measures, if any, by the Fund's affiliates to reduce fees or expenses relating
to the Fund; see "--Accrued Expenses and Recurring Charges" later in this
section.
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<PAGE>
Total Return
The Fund's standard average annual total returns ("standard total return")
of each class of shares were as follows:
<TABLE>
<CAPTION>
Commencement of
Operations Five Years One Year
(July 5, 1989) Ended Ended
Fund to December 31, 1998 December 31, 1998 December 31, 1998
- ---- -------------------- ----------------- -----------------
<S> <C> <C> <C>
Class A 6.57% 4.38% 1.16%
Class B 6.62% 4.22% 0.14%
Class C 6.62% 4.53% 4.01%
Class S 7.25% 5.60% 6.18%
</TABLE>
Standard total return is computed separately for each class of shares by
determining the average annual compounded rates of return over the designated
periods that, if applied to the initial amount invested, would produce the
ending redeemable value in accordance with the following formula:
P(1+T)(n) = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value at the end of the designated period
assuming a hypothetical $1,000 payment made at the
beginning of the designated period
The calculation is based on the further assumptions that the highest
applicable initial or contingent deferred sales charge is deducted, and that all
dividends and distributions by the Fund are reinvested at net asset value on the
reinvestment dates during the periods. All accrued expenses and recurring
charges are also taken into account as described later herein.
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<PAGE>
Yield
The annualized yield of each class of shares of the Fund based on the month
of December 1998 was as follows:
Class A 3.85%
Class B 3.27%
Class C 3.41%
Class S 4.27%
Yield for each of the Fund's Class A, Class B, Class C and Class S 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
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<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, as applicable, a maximum sales charge of 4.5%.
All accrued expenses and recurring charges 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 often are insured and/or 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, 1998 assuming a combined federal and state maximum effective
marginal income tax rate of 40.00% was as follows:
Class A 6.42%
Class B 5.45%
Class C 5.68%
Class S 7.12%
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 40.00% (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 40.00% is 60.00%, that
is [1.00 - .4000 = .6000].
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<PAGE>
Accrued Expenses and Recurring Charges
Accrued expenses include all recurring charges that are charged to all
shareholder accounts during 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 S 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 the result may or may not be annualized, and as
noted any applicable sales charge may not be taken into account and therefore
not deducted from the hypothetical initial payment of $1,000. For example, the
Fund's nonstandardized total returns for the six months ended December 31, 1998,
without taking sales charges into account, were as follows:
Class A 3.34%
Class B 2.95%
Class C 2.83%
Class S 3.46%
Distribution Rates
The Fund may also quote its distribution rate for each class of shares. The
distribution rate is calculated by annualizing the latest per-share distribution
from ordinary income and dividing the result by the maximum offering price per
share as of the end of the period to which the distribution relates. A
distribution can include gross investment income from debt obligations purchased
at a premium and in effect include a portion of the premium paid. A distribution
can also include nonrecurring, gross short-term capital gains without
recognition of any unrealized capital losses. Further, a distribution can
include income from the sale of options by the Fund even though such option
income is not considered investment income under generally accepted accounting
principles.
Because a distribution can include such premiums, capital gains and option
income, the amount of the distribution may be susceptible to control by the
Investment Manager through
75
<PAGE>
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 rate of each class of the Fund, based on the month ended
December 31, 1998 was as follows:
Class A 4.47%
Class B 3.91%
Class C 3.91%
Class S 4.93%
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
PricewaterhouseCoopers LLP, 160 Federal Street, Boston, Massachusetts
02110, serves as the Trust's independent accountants, providing professional
services including (1) audits of the Fund's annual financial statements, (2)
assistance and consultation in connection with SEC filings and (3) review of the
annual income tax returns filed on behalf of the Fund.
FINANCIAL STATEMENTS
Each of the Investment Portfolio, Statement of Assets and Liabilities,
Statement of Operations and Statement of Changes in Net Assets included in the
Fund's Annual Report to shareholders as of and for the fiscal year ended
December 31, 1998, including any notes thereto and Report of Independent
Accountants is hereby incorporated by reference from the Fund's Annual Report,
filed with the Securities and Exchange Commission (EDGAR accession number
0000950146-99-000355). Shareholder reports are available without charge upon
request. For more information, call the State Street Research Service Center at
(800) 562-0032.
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<PAGE>
In addition to the reports provided to holders of record on a semiannual
basis, other supplementary financial reports may be made available from time to
time through electronic or other media. Shareholders with substantial holdings
in one or more State Street Research Funds may also receive reports and other
information which reflect or analyze their positions in a consolidated manner.
DOCSC\359869.11
77
<PAGE>
STATE STREET RESEARCH TAX-EXEMPT TRUST
PART C
OTHER INFORMATION
Item 23: Exhibit
(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 (20)
(1)(c) Amendment No. 4 to Second Amended and Restated Master
Trust Agreement (20)
(1)(d) Amendment No. 5 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) Deleted
(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 (20)
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)**,****
(8)(g) Data Access Services Addendum to Custodian Contract
(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 PricewaterhouseCoopers LLP
(12) Not applicable
(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)****
(15)(b) Form of Rule 12b-1 Plan for Distribution of Shares
(16)(a) Deleted
(16)(b) Deleted
(16)(d) Deleted
(17)(a) Powers of Attorney (21)
(17)(b) Certificate of Board Resolution Respecting Powers of
Attorney (21)
(17)(c) Power of Attorney for Susan M. Phillips
(17)(d) Certificate of Board Resolution Respecting Power of
Attorney for Susan M. Phillips
(18) First Amended and Restated Multiple Class Expense
Allocation Plan Adopted Pursuant to Rule 18f-3(20)
(18)(b) Form of Addendum to First Amended and Restated Multiple
Class Expense Allocation Plan
(19)(a) Application Form
(19)(b) Additional Services Application Form
(19)(c) MetLife Securities, Inc. New Application Form
(27) Financial Data Schedules
- -------------------------
** The series of the Registrant have changed their names at various times.
Documents in this listing of Exhibits which were effective prior to the
most recent name change accordingly refer to a former name of such series.
*** Filed electronically April 30, 1996.
**** Filed electronically March 2, 1998.
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
20 Post-Effective Amendment No. 20 February 28, 1997
21 Post-Effective Amendment No. 21 March 2, 1998
Item 24. Inapplicable.
C-3
<PAGE>
Item 25. 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 26. 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 Research & Investment Adviser Various investment advisory Boston, MA
Management Company clients
Arpiarian, Tanya None
Vice President
Bangs, Linda L. None
Vice President
Barnwell, Amy F.
Vice President
Beaudry, Matthew F.
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 Boston, MA
Director State Street Research Investment Services, Inc. Boston, MA
Director and Chairman Boston Private Bank & Trust Co. Boston, MA
of Exec. Comm.
Vice President State Street Research Income Trust Boston, MA
Vice President State Street Research Portfolios, Inc. Boston, MA
Vice President State Street Research Securities Trust Boston, MA
President and Director Christian Camps & Conferences, Inc. Boston, MA
Chairman and Trustee Gordon College Wenham, MA
Bochman, Kathleen None
Vice President
Borzilleri, John Vice President Montgomery Securities San Francisco, CA
Senior Vice President (until 6/97)
(Vice President
until 4/98)
Bray, Michael J. None
Senior Vice President
(Vice President
until 4/98)
Brezinski, Karen None
Vice President
Brown, Susan H. None
Vice President
Buffum, Andrea L. None
Burbank, John F. None
Senior Vice President
Cabrera, Jesus A. Vice President State Street Research Capital Trust Boston, MA
Senior Vice President
(Vice President
until 4/98)
C-5
<PAGE>
Principal business
Name Connection Organization address of organization
- ----- ---------- ------------ -----------------------
Calame, Mara D. Vice President and State Street Research Energy, Inc. Boston, MA
Vice President and Assistant Counsel
Assistant Secretary
Canavan, Joseph W. Assistant Treasurer State Street Research Equity Trust Boston, MA
Senior Vice President Assistant Treasurer State Street Research Financial Trust Boston, MA
(Vice President Assistant Treasurer State Street Research Income Trust Boston, MA
until 4/98) 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 Treasurer State Street Research Portfolios, Inc. Boston, MA
Carstens, Linda C. Vice President State Street Research Investment Boston, MA
Vice President Services, Inc.
Clifford, Jr., Paul J. Vice President State Street Research Tax-Exempt Trust Boston, MA
Vice President
Coleman, Thomas J. None
Vice President
Cullen, Terrence J. Vice President Keystone-Evergreen Boston, MA
Vice President and Counsel
and Counsel, and (until 2/98)
Assistant Secretary
D'Vari, Ronald None
Vice President
Depp, Maureen G. Vice President Wellington Management Company Boston, MA
Vice President (until 9/97)
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. Vice President State Street Research Securities Trust Boston, MA
Senior Vice President
Drake, Susan W. None
Vice President
Dudley, Catherine Senior Portfolio Manager Chancellor Capital Management Boston, MA
Senior Vice President (until 2/98)
Duggan, Peter J. None
Senior Vice President
Even, Karen K. None
Vice President
Federoff, Alex G. None
Vice President
Fee, Richard E. Vice President CIGNA Retirement and Investment Services Hartford, CT
Vice President (until 3/97)
Vice President State Street Research Investment Services, Inc. Boston, MA
Feliciano, Rosalina None
Vice President
Ficco, Bonnie A. None
Vice President
Fochtman, Jr., Leo None
Vice President
C-6
<PAGE>
Principal business
Name Connection Organization address of organization
- ----- ---------- ------------ -----------------------
Fromm, Stuart Vice President State Street Research Investment Services, Inc. Boston, MA
Vice President
Gardner, Michael D. None
Senior Vice President
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
Giroux, June M. None
Vice President
Govoni, Electra None
Vice President
Grace, Evan None
Vice President
Granger, Allison None
Vice President
Haggerty, Bryan D. 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. Vice President State Street Research Capital Trust Boston, MA
Senior Vice President
Healy, Laura J. None
Vice President
Heineke, George R. None
Vice President
Hickman, Joanne Managing Director Zurich Investment Management Chicago, IL
Senior Vice President (until 1/98)
Senior Vice President State Street Research Investment Services, Inc. Boston, MA
Huang, Jesse C. None
Vice President
Jackson, Jr., Vice President State Street Research Equity Trust Boston, MA
F. Gardner Trustee Certain trusts of related and
Senior Vice President non-related individuals
Trustee and Chairman of the Vincent Memorial Hospital Boston, MA
Board
Jamieson, Frederick H. Vice President and
Senior Vice President Asst. Treasurer State Street Research Investment Services, Inc. Boston, MA
Vice President and Asst.
Treasurer SSRM Holdings, Inc. Boston, MA
Vice President and MetLife Securities, Inc. New York, NY
Controller (until 1/97)
Jodka, Richard Portfolio Manager Frontier Capital Management Boston, MA
Senior Vice President (until 1/98)
Vice President State Street Research Capital Trust Boston, MA
C-7
<PAGE>
Principal business
Name Connection Organization address of organization
- ----- ---------- ------------ -----------------------
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 Portfolios, Inc. 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.
Kasper, M. Katherine Vice President State Street Research Investment Services, Inc. Boston, MA
Vice President
Kern, Stephen None
Vice President
Kiessling, Dyann H. Vice President State Street Research Money Market Trust Boston, MA
Vice President
King, Stephen Vice President State Street Research Investment Services, Inc. Boston, MA
Vice President
Kluiber, Rudolph K. Vice President State Street Research Capital Trust Boston, MA
Senior Vice President
(Vice President
until 4/98)
Kuhn, Stephen P. None
Vice President
Langholm, Knut Director State Street Research Luxembourg
Vice President
Leary, Eileen M. None
Vice President
Levanson, David E. None
Vice President
Lomasney, Mary T. Business Analyst Fidelity Investments Boston, MA
Vice President (until 6/97)
Marinella, Mark A. Portfolio Manager STW Fixed Income Management, Ltd. Boston, MA
Senior Vice President (Until 8/98)
Maurer, Jacqueline J. None
Vice President
C-8
<PAGE>
Principal business
Name Connection Organization address of organization
- ----- ---------- ------------ -----------------------
McNamara, III, Francis J. Executive Vice President, State Street Research Investment Services, Inc. Boston, MA
Executive Vice Clerk and General Counsel
President, Secretary Secretary and General Counsel State Street Research Master Investment Trust Boston, MA
and General Counsel Secretary and General Counsel State Street Research Capital Trust Boston, MA
Secretary and General Counsel State Street Research Exchange Trust Boston, MA
Secretary and General Counsel State Street Research Growth Trust Boston, MA
Secretary and General Counsel State Street Research Securities Trust Boston, MA
Secretary and General Counsel State Street Research Equity Trust Boston, MA
Secretary and General Counsel State Street Research Financial Trust Boston, MA
Secretary and General Counsel State Street Research Income Trust Boston, MA
Secretary and General Counsel State Street Research Money Market Trust Boston, MA
Secretary and General Counsel State Street Research Tax-Exempt Trust Boston, MA
Secretary and General Counsel State Street Research Portfolios, Inc. Boston, MA
Secretary and General Counsel SSRM Holdings, Inc. Boston, MA
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
Treasurer, Chief Treasurer State Street Research Money Market Trust Boston, MA
Financial Officer and Treasurer State Street Research Tax-Exempt Trust Boston, MA
Chief Administrative Treasurer State Street Research Capital Trust Boston, MA
Officer 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 Portfolios, Inc. Boston, MA
Treasurer State Street Research Securities Trust Boston, MA
Director, Executive Vice State Street Research Investment Services, Inc. Boston, MA
President, Treasurer and
Chief Financial Officer
Director Metric Holdings, Inc. San Francisco, CA
Director Certain wholly-owned subsidiaries
of Metric Holdings, Inc.
Treasurer and Chief SSRM Holdings, Inc. Boston, MA
Financial Officer
Treasurer (until 1/97) MetLife Securities, Inc. New York, NY
Director State Street Research Luxembourg
Milder, Judith J. None
Senior Vice President
Miller, Joan D. Senior Vice President State Street Research Investment Services, Inc. Boston, MA
Senior Vice President
C-9
<PAGE>
Principal business
Name Connection Organization address of organization
- ----- ---------- ------------ -----------------------
Moore, Jr., Thomas P.
Senior Vice Vice President State Street Research Capital Trust Boston, MA
President (until 11/96)
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
Director Hibernia Savings Bank Quincy, MA
Governor on the Board Association for Investment Management Charlottesville, VA
of Governors and Research
Morey, Andrew None
Vice President
Mulligan, JoAnne C. None
Senior Vice President
Orr, Stephen C. Member Technology Analysts of Boston Boston, MA
Vice President Member Electro-Science Analysts (of NYC) New York, NY
Paddon, Steven W. None
Vice President
Pannell, James C. None
Senior Vice President
(Vice President
until 4/97)
Peters, Kim M. Vice President State Street Research Securities Trust Boston, MA
Senior Vice President
Pierce, James D. None
Vice President
Poritzky, Dean E. Portfolio Manager Fidelity Management Boston, MA
Vice President (until 4/97)
Pyle, David J. Analyst Oak Value Capital Management Durham, NC
Vice President (until 4/97)
Ragsdale, E.K. Easton Vice President State Street Research Financial Trust Boston, MA
Senior Vice President
Ransom, Clifford Director of NatWest Markets
Vice President Special Situations
Rawlins, Jeffrey A. None
Senior Vice President
Rice III, Daniel Joseph Vice President State Street Research Equity Trust Boston, MA
Senior Vice President
Richards, Scott None
Vice President
C-10
<PAGE>
Principal business
Name Connection Organization address of organization
- ----- ---------- ------------ -----------------------
Romich, Douglas A. Assistant Treasurer State Street Research Equity Trust Boston, MA
Senior Vice President Assistant Treasurer State Street Research Financial Trust Boston, MA
(Vice President Assistant Treasurer State Street Research Income Trust Boston, MA
until 4/98) 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 Treasurer State Street Research Portfolios, Inc. Boston, MA
Ryan, Michael J. Vice President Delaware Management Philadelphia, PA
Senior Vice President (until 1/98)
Sanderson, Derek Senior Vice President Freedom Capital Management Boston, MA
Senior Vice President (until 10/97)
Saperstone, Paul None
Vice President
Schrage, Michael None
Vice President
Schultz, David C. Director and Treasurer Mafraq Hospital Association Mafraq, Jordan
Executive Vice President Member Association of Investment
Management Sales Executives Atlanta, GA
Member, Investment Committee Lexington Christian Academy Lexington, MA
Shaver, Jr. C. Troy President, Chief State Street Research Investment Services, Inc. Boston, MA
Executive Vice Executive Officer and
President Executive Vice President
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 Boston, MA
President Director State Street Research Investment Services, Inc Boston, MA
Vice President State Street Research Securities Trust Boston, MA
Vice President State Street Research Portfolios, Inc. Boston, MA
Shoemaker, Richard D. None
Senior Vice President
Stambaugh, Kenneth None
Vice President
(Assistant Vice
President until 9/97)
Strelow, Dan R. None
Senior Vice President
C-11
<PAGE>
Principal business
Name Connection Organization address of organization
- ----- ---------- ------------ -----------------------
Stolberg, Thomas None
Vice President
Swanson, Amy McDermott None
Senior Vice President
Trebino, Anne M. Vice President SSRM Holdings, Inc. Boston, MA
Senior Vice President
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 Portfolios, Inc. Boston, MA
Executive Officer and Director
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)
Chairman and Director Metric Holdings, Inc. San Francisco, CA
Director and Officer Certain wholly-owned subsidiaries
of Metric Holdings, Inc.
Chairman of the Board MetLife Securities, Inc. New York, NY
and Director (until 1/97)
President, Chief Executive SSRM Holdings, Inc. Boston, MA
Officer and Director
Director Colgate University Hamilton, NY
Director State Street Research Luxembourg
Chairman and Director SSR Realty Advisors, Inc. San Francisco, CA
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
Walsh, Tucker None
Vice President
Watts, Evan D., Jr. Vice President State Street Research Investment Services, Inc. Boston, MA
Vice President
Weiss, James M. Vice President State Street Research Exchange Trust Boston, MA
Executive Vice President Vice President State Street Research Financial Trust Boston, MA
(Senior Vice President) Vice President State Street Research Growth Trust Boston, MA
until 6/98) Vice President State Street Research Securities Trust Boston, MA
Vice President State Street Research Capital Trust Boston, MA
Vice President State Street Research Equity Trust Boston, MA
Vice President State Street Research Income Trust Boston, MA
Vice President State Street Research Master Investment Trust Boston, MA
Welch, Timothy None
Vice President
Westvold, Vice President State Street Research Securities Trust Boston, MA
Elizabeth McCombs
Senior Vice President
Wilkins, Kevin Senior Vice President State Street Research Investment Boston, MA
Senior Vice President (Vice President until 9/98) Services, Inc.
(Vice President Vice President Fidelity Investments Boston, MA
until 9/98) (until 7/97)
Wilson, John T. Vice President State Street Research Equity Trust Boston, MA
Senior Vice President Vice President State Street Research Master Investment Trust Boston, MA
(Vice President
until 4/98)
C-13
<PAGE>
Principal business
Name Connection Organization address of organization
- ----- ---------- ------------ -----------------------
Wing, Darman A. Senior Vice President and State Street Research Investment Services, Inc. Boston, MA
Senior Vice President, Asst. Clerk
Assistant Secretary Assistant Secretary and State Street Research Capital Trust Boston, MA
and Assistant Assistant General Counsel
General Counsel Assistant Secretary and State Street Research Exchange Trust Boston, MA
(Vice President Assistant General Counsel
until 4/98) Assistant Secretary and State Street Research Growth Trust Boston, MA
Assistant General Counsel
Assistant Secretary and State Street Research Master Investment Trust Boston, MA
Assistant General Counsel
Assistant Secretary and State Street Research Securities Trust Boston, MA
Assistant General Counsel
Assistant Secretary and State Street Research Equity Trust Boston, MA
Assistant General Counsel
Assistant Secretary and State Street Research Financial Trust Boston, MA
Assistant General Counsel
Assistant Secretary and State Street Research Income Trust Boston, MA
Assistant General Counsel
Assistant Secretary and State Street Research Money Market Trust Boston, MA
Assistant General Counsel
Assistant Secretary and State Street Research Tax-Exempt Trust Boston, MA
Assistant General Counsel
Assistant Secretary and State Street Research Portfolios, Inc. Boston, MA
Assistant General Counsel
Assistant Secretary and SSRM Holdings, Inc. Boston, MA
Assistant General Counsel
Woodbury, Robert S. None
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 Vice President State Street Research Securities Trust Boston, MA
Wu, Norman N. Partner Atlantic-Acton Realty Framingham, MA
Senior Vice President Director Bond Analysts Society of Boston Boston, MA
Zuger, Peter A. Vice President State Street Research Equity Trust Boston, MA
Senior Vice Portfolio Manager American Century
President (until 9/98) Investment Management
</TABLE>
C-14
<PAGE>
Item 27. Principal Underwriters
(a) State Street Research Investment Services, Inc. serves 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
One Financial Center Board and Director the Board,
Boston, MA 02111 President,
Chief Executive
Officer and
Trustee
Peter C. Bennett Director None
One Financial Center
Boston, MA 02111
Gerard P. Maus Executive Vice Treasurer
One Financial Center President,
Boston, MA 02111 Chief Financial
Office, Chief
Administrative
Officer, Treasurer
and Director
Thomas A Shively Director Vice President
One Financial Center
Boston, MA 02111
C. Troy Shaver, Jr. President, None
One Financial Center Chief Executive
Boston, MA 02111 Officer and
Executive Vice President
Francis J. McNamara, III Executive Vice Secretary
One Financial Center President, General Counsel
Boston, MA 02111 and Clerk
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
Joanne Hickman Senior Vice President None
One Financial Center
Boston, MA 02111
Russell A. LaBrasca Senior Vice President None
One Financial Center
Boston, MA 02111
Joan D. Miller Senior Vice President None
One Financial Center
Boston, MA 02111
Kevin Wilkins Senior Vice President None
One Financial Center
Boston, MA 02111
C-15
<PAGE>
Darman A. Wing Senior Vice President, Assistant
One Financial Center Assistant General Counsel Secretary
Boston, MA 02111 and Assistant Clerk
Amy F. Barnwell Vice President None
One Financial Center
Boston, MA 02111
Matthew F. Beaudry Vice President None
One Financial Center
Boston, MA 02111
Linda C. Carstens Vice President None
One Financial Center
Boston, MA 02111
Terrence J. Cullen Vice President and None
One Financial Center Counsel
Boston, MA 02111
Richard E. Fee Vice President None
One Financial Center
Boston, MA 02111
Stuart Fromm Vice President None
One Financial Center
Boston, MA 02111
Patricia Howell Vice President None
One Financial Center
Boston, MA 02111
Frederick H. Jamieson Vice President and None
One Financial Center Assistant Treasurer
Boston, MA 02111
Amy L. Simmons Vice President Assistant
One Financial Center Secretary
Boston, MA 02111
M. Katharine Kasper Vice President None
One Financial Center
Boston, MA 02111
Steven R. King Vice President None
One Financial Center
Boston, MA 02111
Evan D. Watts, Jr. Vice President None
One Financial Center
Boston, MA 02111
</TABLE>
Item 28. Location of Accounts and Records
Gerard P. Maus
State Street Research & Management Company
One Financial Center
Boston, MA 02111
Item 29. Management Services
Under a Shareholders' Administrative Services Agreement between the
Registrant 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 series of the
Registrant and received the amounts set forth below:
<TABLE>
<CAPTION>
Estimated
Year-end Year-end Year-end
Fund 12/31/96 12/31/97 12/31/98
- ---- -------- -------- --------
<S> <C> <C> <C>
Tax-Exempt $82,709 $74,752 $105,990
New York Tax-Free $27,020 $23,740 $ 32,029
</TABLE>
Item 30. 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 to do so by the record holders
of not less than 10 per centum of the outstanding shares of the Trust
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 communications.
(g) Deleted.
C-16
<PAGE>
NOTICE
A copy of the Master Trust Agreement of the Registrant 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 Registration Statement and Amendment, shall not
be binding upon any of the Trustees, shareholders, nominees, officers, assistant
officers, agents or employees of the Registrant as individuals or personally,
but shall bind only the property of the series of the Registrant, as provided in
the Master Trust Agreement. Each series of the Registrant shall be solely and
exclusively responsible for all of its direct or indirect debts, liabilities,
and obligations, and no other series 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. 21 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 3rd day of March, 1999.
STATE STREET RESEARCH FINANCIAL TRUST
By: *
-------------------------------------
Ralph F. Verni
Chief Executive Officer and 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:
* Trustee, Chairman of the Board
- ------------------------------------ and Chief Executive Officer
Ralph F. Verni (principal executive officer)
* Treasurer (principal financial
- ------------------------------------ and accounting officer)
Gerard P. Maus
*
- ------------------------------------ Trustee
Steve A. Garban
*
- ------------------------------------ Trustee
Malcolm T. Hopkins
* Trustee
- ------------------------------------
Dean O. Morton
C-18
<PAGE>
* Trustee
- ------------------------------------
Susan M. Phillips
*
- ------------------------------------ Trustee
Toby Rosenblatt
* Trustee
- ------------------------------------
Michael S. Scott Morton
*By: /s/ Francis J. McNamara, III
----------------------------
Francis J. McNamara, III,
Attorney-in-Fact under Powers of
Attorney incorporated by
reference from Post-Effective
Amendment No. 21 filed March 2, 1998,
and under a Power of Attorney filed
herein.
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. 22 [X]
and/or
REGISTRATION STATEMENT
UNDER THE INVESTMENT COMPANY
ACT OF 1940 [ ]
Amendment No. 23 [X]
--------------------
STATE STREET RESEARCH TAX-EXEMPT TRUST
(Exact Name of Registrant as Specified in Charter)
--------------------
EXHIBITS
<PAGE>
INDEX TO EXHIBITS
1(d) Amendment No. 5 to Second Amended and Restated Master Trust Agreement
8(g) Data Access Services Addendum to Custodian Contract
(11) Consent of PricewaterhouseCoopers LLP
(15)(b) Form of Rule 12b-1 Plan for Distribution of Shares
(17)(c) Power of Attorney for Susan M. Phillips
(17)(d) Certificate of Board Resolution Respecting Power of Attorney for
Susan M. Phillips
(18)(b) Form of Addendum to First Amended and Restated Multiple Class Expense
Allocation Plan
(19)(a) Application Form
(19)(b) Additional Services Application Form
(19)(c) MetLife Securities, Inc. Application Form
(27) Financial Data Schedules
STATE STREET RESEARCH TAX-EXEMPT TRUST
Amendment No. 5
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 (the "Master Trust Agreement"), as heretofore
amended, the following actions are taken:
1. The following is added immediately prior to the last sentence of Article V,
Section 5.1:
"Execution of a proxy by a person or organization, which has been
authorized to do so by a Shareholder pursuant to telephonic or
electronically transmitted instructions, shall constitute execution of
such proxy by or on behalf of such Shareholder."
2. 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 at anytime by vote of a majority of the Trustees then in
office subject to the approval of a majority of the outstanding voting
shares of that Sub-Trust or class, as defined in the 1940 Act."
3. Article VII, Section 7.2 of the Master Trust Agreement is deleted and
replaced in its entirety with the following:
Section 7.2 Reorganization. The Trustees may sell, convey, merge and
transfer the assets of the Trust, or the assets belonging to any one
or more Sub-Trusts, to another trust, partnership, association or
corporation organized under the laws of any state of the United
States, or to the Trust to be held as assets belonging to another
Sub-Trust of the Trust, in exchange for cash, shares or other
securities (including, in the case of a transfer to another Sub-Trust
of the Trust, Shares of such other Sub-Trust or any class thereof)
with such transfer either (1) being made subject to, or with the
assumption by the transferee of, the liabilities belonging to each
Sub-Trust the assets of which are so transferred, or (2) not being
made subject to, or not with the assumption of, such liabilities;
provided, however, that no assets belonging to any particular
Sub-Trust shall be so transferred unless the terms of such transfer
shall have first been approved at a meeting called for the purpose by
the affirmative vote of the holders of a majority of the outstanding
voting Shares, as defined in the 1940 Act, of that Sub-
<PAGE>
Trust. Following such transfer, the Trustees shall distribute such
cash, shares or other securities (giving due effect to the assets and
liabilities belonging to and any other differences among the various
Sub-Trusts or classes thereof the assets belonging to which have been
so transferred) among the Shareholders of the Sub-Trust the assets
belonging to which have so been transferred; and if all of the assets
of the Trust have so been transferred, the Trust shall be terminated.
The Trust, or any one or more Sub-Trusts, may, either as the
successor, survivor, or non-survivor, (1) consolidate with one or more
other trusts, partnerships, associations or corporations organized
under the laws of the Commonwealth of Massachusetts or any other state
of the United States, to form a new consolidated trust, partnership,
association or corporation under the laws of which any one of the
constituent entities is organized, or (2) merge into one or more other
trusts, partnerships, associations or corporations organized under the
laws of the Commonwealth of Massachusetts or any other state of the
United States, or have one or more such trusts, partnerships,
associations or corporations merged into it, any such consolidation or
merger to be upon such terms and conditions as are specified in an
agreement and plan of reorganization entered into by the Trust, or one
or more Sub-Trusts as the case may be, in connection therewith. The
terms "merge" or "merger" as used herein shall also include the
purchase or acquisition of any assets of any other trust, partnership,
association or corporation which is an investment company organized
under the laws of the Commonwealth of Massachusetts or any other state
of the United States. Any such consolidation or merger shall require
the affirmative vote of the holders of a majority of the outstanding
voting Shares, as defined in the 1940 Act, of each Sub-Trust affected
thereby.
This Amendment shall be effective as of February 23, 1999.
IN WITNESS WHEREOF, the undersigned assistant officer of the Trust hereby
adopts the foregoing on behalf of the Trust pursuant to authorization by the
Trustees of the Trust.
/s/ Darman A. Wing
------------------------------
Darman A. Wing
Assistant Secretary
EX(8)(g)
DATA ACCESS SERVICES ADDENDUM TO CUSTODIAN AGREEMENT
----------------------------------------------------
AGREEMENT between each fund listed on Appendix A, (individually a "Fund"
and collectively, the "Funds") as amended from time to time, and State Street
Bank and Trust Company ("State Street").
PREAMBLE
WHEREAS, State Street has been appointed as custodian of certain assets
of each Fund pursuant to a certain Custodian Agreement (the "Custodian
Agreement") for each of the respective Funds;
WHEREAS, State Street has developed and utilizes proprietary accounting
and other systems, including State Street's proprietary Multicurrency HORIZON(R)
Accounting System, in its role as custodian of each Fund, and maintains certain
Fund-related data ("Fund Data") in databases under the control and ownership of
State Street (the "Data Access Services"); and
WHEREAS, State Street makes available to each Fund certain Data Access
Services solely for the benefit of the Fund, and intends to provide additional
services, consistent with the terms and conditions of this Agreement.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
herein contained, and for other good and valuable consideration, the parties
agree as follows:
1. SYSTEM AND DATA ACCESS SERVICES
a. System. Subject to the terms and conditions of this Agreement, State
Street hereby agrees to provide each Fund with access to State Street's
Multicurrency HORIZON(R) Accounting System and the other information systems
(collectively, the "System") as described in Attachment A, on a remote basis for
the purpose of obtaining reports, solely on computer hardware, system software
and telecommunication links, as listed in Attachment B (the "Designated
Configuration") of the Fund, or certain third parties approved by State Street
that serve as investment advisors or investment managers (the "Investment
Advisor") or independent auditors (the "Independent Auditors") of a Fund and
solely with respect to the Fund or on any designated substitute or back-up
equipment configuration with State Street's written consent, such consent not to
be unreasonably withheld.
b. Data Access Services. State Street agrees to make available to each
Fund the Data Access Services subject to the terms and conditions of this
Agreement and data access operating standards and procedures as may be issued by
State Street from time to time. The ability of each Fund to originate electronic
instructions to State Street on behalf of each Fund in order to (i) effect the
transfer or movement of cash or securities held under custody by State Street or
(ii) transmit accounting or other information (such transactions are referred to
herein as "Client
<PAGE>
Originated Electronic Financial Instructions"), and (iii) access data for the
purpose of reporting and analysis, shall be deemed to be Data Access Services
for purposes of this Agreement.
c. Additional Services. State Street may from time to time agree to make
available to a Fund additional Systems that are not described in the attachments
to this Agreement. In the absence of any other written agreement concerning such
additional systems, the term "System" shall include, and this Agreement shall
govern, a Fund's access to and use of any additional System made available by
State Street and/or accessed by the Fund.
2. NO USE OF THIRD PARTY SOFTWARE
State Street and each Fund acknowledge that in connection with the Data
Access Services provided under this Agreement, each Fund will have access,
through the Data Access Services, to Fund Data and to functions of State
Street's proprietary systems; provided, however that in no event will the Fund
have direct access to any third party systems-level software that retrieves data
for, stores data from, or otherwise supports the System.
3 . LIMITATION ON SCOPE OF USE
a. Designated Equipment: Designated Location. The System and the
Data Access Services shall be used and accessed solely on and through
the Designated Configuration at the offices of a Fund or the Investment
Advisor or Independent Auditor located in Boston, Massachusetts
("Designated Location").
b. Designated Configuration: Trained Personnel. State Street shall be
responsible for supplying, installing and maintaining the Designated
Configuration at the Designated Location. State Street and each Fund agree that
each will engage or retain the services of trained personnel to enable both
State Street and the Fund to perform their respective obligations under this
Agreement. State Street agrees to use commercially reasonable efforts to
maintain the System so that it remains serviceable, provided, however, that
State Street does not guarantee or assure uninterrupted remote access use of the
System.
c. Scope of Use. Each Fund will use the System and the Data Access
Services only for the processing of securities transactions, the keeping of
books of account for the Fund and accessing data for purposes of reporting and
analysis. Each Fund shall not, and shall cause its employees and agents not to
(i) permit any third party to use the System or the Data Access Services, (ii)
sell, rent, license or otherwise use the System or the Data Access Services in
the operation of a service bureau or for any purpose other than as expressly
authorized under this Agreement, (iii) use the System or the Data Access
Services for any fund, trust or other investment vehicle without the prior
written consent of State Street, (iv) allow access to the System or the Data
Access Services through terminals or any other computer or telecommunications
facilities located outside the Designated Locations, (v) allow or cause any
information (other than portfolio holdings, valuations of portfolio holdings,
and other information reasonably necessary for the management or distribution of
the assets of the Fund) transmitted from State Street's databases, including
data from third party sources, available through use of the
2
<PAGE>
System or the Data Access Services to be redistributed or retransmitted to
another computer, terminal or other device for other than use for or on behalf
of the Fund or (vi) modify the System in any way, including without limitation,
developing any software for or attaching any devices or computer programs to any
equipment, system, software or database which forms a part of or is resident on
the Designated Configuration.
d. Other Locations. Except in the event of an emergency or of a planned
System shutdown, each Fund's access to services performed by the System or to
Data Access Services at the Designated Location may be transferred to a
different location only upon the prior written consent of State Street. In the
event of an emergency or System shutdown, each Fund may use any back-up site
included in the Designated Configuration or any other back-up site agreed to by
State Street, which agreement will not be unreasonably withheld. Each Fund may
secure from State Street the right to access the System or the Data Access
Services through computer and telecommunications facilities or devices complying
with the Designated Configuration at additional locations only upon the prior
written consent of State Street and on terms to be mutually agreed upon by the
parties.
e. Title. Title and all ownership and proprietary rights to the System,
including any enhancements or modifications thereto, whether or not made by
State Street, are and shall remain with State Street.
f. No Modification. Without the prior written consent of State Street, a
Fund shall not modify, enhance or otherwise create derivative works based upon
the System, nor shall the Fund reverse engineer, decompile or otherwise attempt
to secure the source code for all or any part of the System.
g. Security Procedures. Each Fund shall comply with data access operating
standards and procedures and with user identification or other password control
requirements and other security procedures as may be issued from time to time by
State Street for use of the System on a remote basis and to access the Data
Access Services. Each Fund shall have access only to the Fund Data and
authorized transactions agreed upon from time to time by State Street and, upon
notice from State Street, the Fund shall discontinue remote use of the System
and access to Data Access Services for any security reasons cited by State
Street; provided, that, in such event, State Street shall, for a period not less
than 180 days (or such other shorter period specified by the Fund) after such
discontinuance, assume responsibility to provide accounting services under the
terms of the Custodian Agreement.
h. Inspections. State Street shall have the right to inspect the use of
the System and the Data Access Services by the Fund and the Investment Advisor
to ensure compliance with this Agreement. The on-site inspections shall be upon
prior written notice to Fund and the Investment Advisor and at reasonably
convenient times and frequencies so as not to result in an unreasonable
disruption of the Fund's or the Investment Advisor's business.
3
<PAGE>
4. PROPRIETARY INFORMATION
a. Proprietary Information. Each Fund acknowledges and State Street
represents that the System and the databases, computer programs, screen formats,
report formats, interactive design techniques, documentation and other
information made available to the Fund by State Street as part of the Data
Access Services and through the use of the System constitute copyrighted, trade
secret, or other proprietary information of substantial value to State Street.
Any and all such information provided by State Street to each Fund shall be
deemed proprietary and confidential information of State Street (hereinafter
"Proprietary Information"). Each Fund agrees that it will hold such Proprietary
Information in confidence and secure and protect it in a manner consistent with
its own procedures for the protection of its own confidential information and to
take appropriate action by instruction or agreement with its employees who are
permitted access to the Proprietary Information to satisfy its obligations
hereunder. Each Fund further acknowledges that State Street shall not be
required to provide the Investment Advisor or the Investment Auditor with access
to the System unless it has first received from the Investment Advisor of the
Investment Auditor an undertaking with respect to State Street's Proprietary
Information in the form of Attachment C and/or Attachment C-1 to this Agreement.
Each Fund shall use all commercially reasonable efforts to assist State Street
in identifying and preventing any unauthorized use, copying or disclosure of the
Proprietary Information or any portions thereof or any of the logic, formats or
designs contained therein.
b. Cooperation. Without limitation of the foregoing, each Fund shall
advise State Street immediately in the event the Fund learns or has reason to
believe that any person to whom the Fund has given access to the Proprietary
Information, or any portion thereof, has violated or intends to violate the
terms of this Agreement, and each Fund will, at its expense, co-operate with
State Street in seeking injunctive or other equitable relief in the name of the
Fund or State Street against any such person.
c. Injunctive Relief. Each Fund acknowledges that the disclosure of any
Proprietary Information, or of any information which at law or equity ought to
remain confidential, will immediately give rise to continuing irreparable injury
to State Street inadequately, compensable in damages at law. In addition, State
Street shall be entitled to obtain immediate injunctive relief against the
breach or threatened breach of any of the foregoing undertakings, in addition to
any other legal remedies which may be available.
d. Survival. The provisions of this Section 4 shall survive the
termination of this Agreement.
5. LIMITATION ON LIABILITY
a. Limitation on Amount and Time for Bringing Action. Each Fund agrees
any liability of State Street to the Fund or any third party arising out of
State Street's provision of Data Access Services or the System under this
Agreement shall be limited to the amount paid by the Fund for the preceding 24
months for such services. In no event shall State Street be liable to the Fund
or any other party for any special, indirect, punitive or consequential damages
even if
4
<PAGE>
advised of the possibility of such damages. No action, regardless of form,
arising out of this Agreement may be brought by the Fund more than two years
after the Fund has knowledge that the cause of action has arisen.
b. NO OTHER WARRANTIES, WHETHER EXPRESS OR IMPLIED, INCLUDING, WITHOUT
LIMITATION, THE IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A
PARTICULAR PURPOSE, ARE MADE BY STATE STREET. IN NO EVENT WILL STATE STREET BE
LIABLE TO THE FUND OR ANY OTHER PARTY FOR ANY CONSEQUENTIAL OR INCIDENTAL
DAMAGES WHICH MAY ARISE FROM THE FUND'S ACCESS TO THE SYSTEM OR USE OF
INFORMATION OBTAINED THEREBY.
c. Third-Party Data. Organizations from which State Street may obtain
certain data included in the System or the Data Access Services are solely
responsible for the contents of such data, and State Street shall have no
liability for claims arising out of the contents of such third-party data,
including, but not limited to, the accuracy thereof.
d. Regulatory Requirements. As between State Street and each Fund, the
Fund shall be solely responsible for the accuracy of any accounting statements
or reports produced using the Data Access Services and the System and the
conformity thereof with any requirements of law.
e. Force Majeure. Neither State Street or a Fund shall be liable for any
costs or damages due to delay or nonperformance under this Agreement arising out
of any cause or event beyond such party's control, including without limitation,
cessation of services hereunder or any damages resulting therefrom to the other
party, or the Fund as a result of work stoppage, power or other mechanical
failure, computer virus, natural disaster, governmental action, or communication
disruption.
6. INDEMNIFICATION
Each Fund agrees to indemnify and hold State Street harmless from any
loss, damage or expense including reasonable attorney's fees, (a "loss")
suffered by State Street arising from (i) the negligence or willful misconduct
in the use by the Fund of the Data Access Services or the System, including any
loss incurred by State Street resulting from a security breach at the Designated
Location or committed by the Fund's employees or agents or the Investment
Advisor or the Independent Auditor of the Fund and (ii) any loss resulting from
incorrect Client Originated Electronic Financial Instructions. State Street
shall be entitled to rely on the validity and authenticity of Client Originated
Electronic Financial Instructions without undertaking any further inquiry as
long as such instruction is undertaken in conformity with security procedures
established by State Street from time to time.
7. FEES
Fees and charges for the use of the System and the Data Access Services
and related payment terms shall be as set forth in the Custody Fee Schedule in
effect from time to time
5
<PAGE>
between the parties (the "Fee Schedule"). Any tariffs, duties or taxes imposed
or levied by any government or governmental agency by reason of the transactions
contemplated by this Agreement, including, without limitation, federal, state
and local taxes, use, value added and personal property taxes (other than
income, franchise or similar taxes which may be imposed or assessed against
State Street) shall be borne by each Fund. Any claimed exemption from such
tariffs, duties or taxes shall be supported by proper documentary evidence
delivered to State Street.
8. TRAINING, IMPLEMENTATION AND CONVERSION
a. Training. State Street agrees to provide training, at a designated
State Street training facility or at the Designated Location, to the Fund's
personnel in connection with the use of the System on the Designated
Configuration. Each Fund agrees that it will set aside, during regular business
hours or at other times agreed upon by both parties, sufficient time to enable
all operators of the System and the Data Access Services, designated by the
Fund, to receive the training offered by State Street pursuant to this
Agreement.
b. Installation and Conversion. State Street shall be responsible for the
technical installation and conversion ("Installation and Conversion") of the
Designated Configuration. Each Fund shall have the following responsibilities in
connection with Installation and Conversion of the System:
(i) The Fund shall be solely responsible for the timely acquisition and
maintenance of the hardware and software that attach to the
Designated Configuration in order to use the Data Access Services
at the Designated Location.
(ii) State Street and the Fund each agree that they will assign
qualified personnel to actively participate during the Installation
and Conversion phase of the System implementation to enable both
parties to perform their respective obligations under this
Agreement.
9. SUPPORT
During the term of this Agreement, State Street agrees to provide the
support services set out in Attachment D to this Agreement.
6
<PAGE>
10. TERM OF AGREEMENT
a. Term of Agreement. This Agreement shall become effective on the date
of its execution by State Street and shall remain in full force and effect until
terminated as herein provided.
b. Termination of Agreement. Any party may terminate this Agreement (i)
for any reason by giving the other parties at least one-hundred and eighty days'
prior written notice in the case of notice of termination by State Street to the
Fund or thirty days' notice in the case of notice from the Fund to State Street
of termination; or (ii) immediately for failure of the other party to comply
with any material term and condition of the Agreement by giving the other party
written notice of termination. In the event the Fund shall cease doing business,
shall become subject to proceedings under the bankruptcy laws (other than a
petition for reorganization or similar proceeding) or shall be adjudicated
bankrupt, this Agreement and the rights granted hereunder shall, at the option
of State Street, immediately terminate with notice to the Fund. Termination of
this Agreement with respect to any given Fund shall in no way affect the
continued validity of this Agreement with respect to any other Fund. This
Agreement shall in any event terminate as to any Fund within 90 days after the
termination of the Custodian Agreement applicable to such Fund.
c. Termination of the Right to Use. Upon termination of this Agreement
for any reason, any right to use the System and access to the Data Access
Services shall terminate and the Fund shall immediately cease use of the System
and the Data Access Services. Immediately upon termination of this Agreement for
any reason, the Fund shall return to State Street all copies of documentation
and other Proprietary Information in its possession; provided, however, that in
the event that either State Street or the Fund terminates this Agreement or the
Custodian Agreement for any reason other than the Fund's breach, State Street
shall provide the Data Access Services for a period of time and at a price to be
agreed upon by State Street and the Fund.
11. MISCELLANEOUS
a. Assignment; Successors. This Agreement and the rights and obligations
of each Fund and State Street hereunder shall not be assigned by any party
without the prior written consent of the other parties, except that State Street
may assign this Agreement to a successor of all or a substantial portion of its
business, or to a party controlling, controlled by, or under common control with
State Street.
b. Survival. All provisions regarding indemnification, warranty,
liability and limits thereon, and confidentiality and/or protection of
proprietary rights and trade secrets shall survive the termination of this
Agreement.
c. Entire Agreement. This Agreement and the attachments hereto constitute
the entire understanding of the parties hereto with respect to the Data Access
Services and the use of the System and supersedes any and all prior or
contemporaneous representations or agreements, whether oral or written, between
the parties as such may relate to the Data Access Services or the System, and
cannot be modified or altered except in a writing duly executed by the parties.
This
7
<PAGE>
Agreement is not intended to supersede or modify the duties and liabilities of
the parties hereto under the Custodian Agreement or any other agreement between
the parties hereto except to the extent that any such agreement specifically
refers to the Data Access Services or the System. No single waiver or any right
hereunder shall be deemed to be a continuing waiver.
d. Severability. If any provision or provisions of this Agreement shall
be held to be invalid, unlawful, or unenforceable, the validity, legality, and
enforceability of the remaining provisions shall not in any way be affected or
impaired.
e. Governing Law. This Agreement shall be interpreted and construed in
accordance with the internal laws of The Commonwealth of Massachusetts without
regard to the conflict of laws provisions thereof.
8
<PAGE>
IN WITNESS WHEREOF, each of the undersigned Funds severally has
caused this Agreement to be duly executed in its name and through its duly
authorized officer as of the date hereof.
STATE STREET BANK AND TRUST
COMPANY
By: /s/ Ronald E. Logue
------------------------------------
Title: Executive Vice President
------------------------------------
Date:
------------------------------------
EACH FUND LISTED ON APPENDIX A
By: /s/ Joseph W. Canavan
-----------------------------------
Title: Senior Vice President
-----------------------------------
Date: June 5, 1998
-----------------------------------
<PAGE>
APPENDIX A
Funds (each a series of investment company named in bold)
- -----
State Street Research Capital Trust
State Street Research Capital Fund
State Street Research Emerging Growth Fund
(formerly: State Street Research Small Capitalization Growth
Fund)
State Street Research Aurora Fund
(formerly: State Street Research Small Capitalization Value Fund)
State Street Research Equity Trust
State Street Research Equity Investment Fund
State Street Research Alpha Fund
(formerly: State Street Research Equity Income Fund)
State Street Research Global Resources Fund
State Street Research Athletes Fund
State Street Research Exchange Trust
State Street Research Exchange Fund
State Street Research Financial Trust
State Street Research Government Income Fund
State Street Research Strategic Portfolios: Aggressive
State Street Research Strategic Portfolios: Conservative
State Street Research Strategic Portfolios: Moderate
State Street Research Growth Trust
State Street Research Growth Fund
State Street Research Income Trust
State Street Research High Income Fund
State Street Research Managed Assets
State Street Research Master Investment Trust
State Street Research Investment Trust
State Street Research Money Market Trust
State Street Research Money Market Fund
State Street Research Tax-Exempt Trust
State Street Research Tax-Exempt Fund
State Street Research New York Tax-Free Fund
State Street Research Securities Trust
State Street Research Intermediate Bond Fund
State Street Research Strategic Income Fund
State Street Research Legacy Fund
State Street Research Galileo Fund
State Street Research Portfolios, Inc.
State Street Research International Equity Fund
Ap. A-1
<PAGE>
Status of Funds Covered By This Agreement
- -----------------------------------------
(a) Each Fund shall be regarded for all purposes as separate from any of the
other Funds. Each Fund shall be responsible for only its own transactions.
No Fund shall participate in, or effect any transaction in connection with,
any joint enterprise or other joint arrangement or profit-sharing plan.
(b) The use of this single document to memorialize the separate arrangements
under the Agreement for each of the Funds is understood to be for clerical
convenience only and shall not constitute any basis for joining the Funds
in any respect.
(c) Each trust listed above is a Massachusetts business trust. The Master Trust
Agreement of each Massachusetts business trust of which a Fund is a series,
as the same may be amended from time to time, is on file with the Secretary
of State for the Commonwealth of Massachusetts. It is expressly agreed that
the execution and delivery of this Agreement and the obligations of each
trust hereunder shall not be binding upon any of the trustees,
shareholders, nominees, officers, agents or employees of the relevant
trust as individuals, or personally, but shall bind only the trust property
of the trust. The Master Trust Agreement of each trust provides, and it is
expressly agreed, that each Fund of the trust shall be solely and
exclusively responsible for the payment of its debts, liabilities and
obligations, and that no other Funds shall be responsible for same.
Ap. A-2
<PAGE>
ATTACHMENT A
Multicurrency HORIZON(R) Accounting System
System Product Description
I. The Multicurrency HORIZON(R) Accounting System is designed to provide lot
level portfolio and general ledger accounting for SEC and ERISA type
requirements and includes the following services: 1) recording of general ledger
entries; 2) calculation of daily income and expense; 3) reconciliation of daily
activity with the trial balance, and 4) appropriate automated feeding mechanisms
to (i) domestic and international settlement systems, (ii) daily, weekly and
monthly evaluation services, (iii) portfolio performance and analytic services,
(iv) Fund's internal computing systems and (v) various State Street provided
information services products.
II. GlobalQuest(R) GlobalQuest(R) is designed to provide Fund access to the
following information maintained on The Multicurrency HORIZON(R)
Accounting System: 1) cash transactions and balances; 2) purchases and
sales; 3) income receivables; 4) tax refund receivables; 5) daily
priced positions; 6) open trades; 7) settlement status; 8) foreign
exchange transactions; 9) trade history; and 10) daily, weekly and
monthly evaluation services.
III. HORIZON(R) Gateway. HORIZON(R) Gateway provides customers with the ability
to (i) generate reports using information maintained on the Multicurrency
HORIZON(R) Accounting System which may be viewed or printed at the customer's
location; (ii) extract and download data from the Multicurrency HORIZON(R)
Accounting System; and (iii) access previous day and historical data. The
following information which may be accessed for these purposes: 1) holdings; 2)
holdings pricing; 3) transactions, 4) open trades; 5) income; 6) general ledger
and 7) cash.
IV. SaFiRe(SM). SaFiRe(SM) is designed to provide the customer with the ability
to prepare its own financial reports by permitting the customer to access
customer information maintained on the Multicurrency HORIZON(R) Accounting
System, to organize such information in a flexible reporting format and to have
such reports printed on the customer's desktop or by its printing provider.
V. State Street Interchange. State Street Interchange is an open information
delivery architecture wherein proprietary communication products, data formats
and workstation tools are replaced by industry standards and is designed to
enable the connection of State Street's network to customer networks, thereby
facilitating the sharing of information.
<PAGE>
ATTACHMENT B
Designated Configuration
[Designated Configuration Graphic]
<PAGE>
ATTACHMENT C
Undertaking
The undersigned understands that in the course of its employment as
Investment Advisor to each fund listed on Appendix A (individually a, "Fund",
collectively, the "Funds") it will have access to State Street Bank and Trust
Company's ("State Street") Multicurrency HORIZON Accounting System and other
information systems (collectively, the "System").
The undersigned acknowledges that the System and the databases, computer
programs, screen formats, report formats, interactive design techniques,
documentation, and other information made available to the Undersigned by State
Street as part of the Data Access Services provided to the Fund and through the
use of the System constitute copyrighted, trade secret, or other proprietary
information of substantial value to State Street. Any and all such information
provided by State Street to the Undersigned shall be deemed proprietary and
confidential information of State Street (hereinafter "Proprietary
Information"). The Undersigned agrees that it will hold such Proprietary
Information in confidence and secure and protect it in a manner consistent with
its own procedures for the protection of its own confidential information and to
take appropriate action by instruction or agreement with its employees who are
permitted access to the Proprietary Information to satisfy its obligations
hereunder.
The Undersigned will not attempt to intercept data, gain access to data
in transmission, or attempt entry into any system or files for which it is not
authorized. It will not intentionally adversely affect the integrity of the
System through the introduction of unauthorized code or data, or through
unauthorized deletion.
Upon notice by State Street for any reason, any right to use the System
and access to the Data Access Services shall terminate and the Undersigned shall
immediately cease use of the System and the Data Access Services. Immediately
upon notice by State Street for any reason, the Undersigned shall return to
State Street all copies of documentation and other Proprietary Information in
its possession.
STATE STREET RESEARCH &
MANAGEMENT COMPANY
By: /s/ Darman A. Wing
---------------------------------------
Title: Senior Vice President
---------------------------------------
Date: June 4, 1998
---------------------------------------
<PAGE>
ATTACHMENT D
Support
During the term of this Agreement, State Street agrees to provide the
following on-going support services:
a. Telephone Support. The Fund Designated Persons may contact State
Street's HORIZON(R) Help Desk and Fund Assistance Center between the hours of 8
a.m. and 6 p.m. (Eastern time) on all business days for the purpose of obtaining
answers to questions about the use of the System, or to report apparent problems
with the System. From time to time, the Fund shall provide to State Street a
list of persons, not to exceed five in number, who shall be permitted to contact
State Street for assistance (such persons being referred to as "the Fund
Designated Persons").
b. Technical Support. State Street will provide technical support to
assist the Fund in using the System and the Data Access Services. The total
amount of technical support provided by State Street shall not exceed 10
resource days per year. State Street shall provide such additional technical
support as is expressly set forth in the fee schedule in effect from time to
time between the parties (the "Fee Schedule"). Technical support, including
during installation and testing, is subject to the fees and other terms set
forth in the Fee Schedule.
c. Maintenance Support. State Street shall use commercially reasonable
efforts to correct system functions that do not work according to the System
Product Description as set forth on Attachment A in priority order in the next
scheduled delivery release or otherwise as soon as is practicable.
d. System Enhancements. State Street will provide to the Fund any
enhancements to the System developed by State Street and made a part of the
System; provided that, sixty (60) days prior to installing any such enhancement,
State Street shall notify the Fund and shall offer the Fund reasonable training
on the enhancement. Charges for system enhancements shall be as provided in the
Fee Schedule. State Street retains the right to charge for related systems or
products that may be developed and separately made available for use other than
through the System.
e. Custom Modifications. In the event the Fund desires custom
modifications in connection with its use of the System, the Fund shall make a
written request to State Street providing specifications for the desired
modification. Any custom modifications may be undertaken by State Street in its
sole discretion in accordance with the Fee Schedule.
f. Limitation on Support. State Street shall have no obligation to
support the Fund's use of the System: (1) for use on any computer equipment or
telecommunication facilities which does not conform to the Designated
Configuration or (ii) in the event the Fund has modified the System in breach of
this Agreement.
STATE STREET RESEARCH TAX-EXEMPT TRUST
RULE 12b-1 PLAN FOR DISTRIBUTION OF SHARES
WHEREAS, State Street Research Tax-Exempt Trust, an unincorporated
association of the type commonly known as a business trust organized under the
laws of the Commonwealth of Massachusetts (the "Trust"), engages in business as
an open-end management investment company and is registered as such under the
Investment Company Act of 1940, as amended (the "Act");
WHEREAS, the Trust is authorized to (a) issue shares of beneficial interest
in separate series, with the shares of each such series representing the
interests in a separate portfolio of securities and other assets, and (b) divide
the shares within each such series into two or more classes;
WHEREAS, one such class has been designated as Class B(1) (the shares of
such class being hereinafter referred to as "Shares");
WHEREAS, the Trust has established the State Street Research Tax-Exempt
Fund and the State Street Research New York Tax-Free Fund (each such portfolio,
together with all other series made subject to this Rule 12b-1 Plan (this
"Plan"), being referred to herein individually as a "Series" and collectively as
the "Series");
WHEREAS, the Trust may be deemed a distributor of the Shares within the
meaning of Rule 12b-1 under the Act, and desires to adopt this Plan, and has
adopted a related Distribution Agreement (the "Agreement") with State Street
Research Investment Services, Inc., the Trust's principal underwriter (the
"Distributor") pursuant to such Rule; and
WHEREAS, the Board of Trustees as a whole, and the Trustees who are not
interested persons (as defined in the Act) of the Trust and who have no direct
or indirect financial interest in the operation of this Plan or the Agreement
and any agreements relating to it (the "Qualified Trustees"), having determined,
in the exercise of their reasonable business judgment and in light of their
fiduciary duties under state law and under Section 36(a) and (b) of the Act,
that there is a reasonable likelihood that this Plan and the Agreement will
benefit each Series and its shareholders, have accordingly approved this Plan
and the Agreement by votes cast in person at a meeting called for the purpose of
voting on this Plan and the Agreement and any agreements related thereto.
NOW, THEREFORE, the Trust hereby adopts this Plan in accordance with Rule
12b-1 under the Act, on the following terms and conditions:
<PAGE>
SECTION 1. PAYMENTS TO THE DISTRIBUTOR
(a) Service Fees. The Trust shall pay the Distributor a service fee at the
end of each month at the annual rate of 0.25% of average daily net assets
attributable to the Shares of each Series to compensate the Distributor and any
securities firms or other third parties who render personal services to and/or
maintain shareholder accounts for the holders of Shares of such Series.
(b) Distribution Fees. The Trust shall pay the Distributor a distribution
fee under the Plan at the end of each month at the annual rate of 0.75% of
average daily net assets attributable to the Shares of each Series to compensate
the Distributor for services provided and expenses incurred by it in connection
with sales, promotional and marketing activities relating to the Shares of such
Series.
Payment of the distribution fee described in this Paragraph 1(b) shall be
subject to any limitation set forth in any applicable regulation of the National
Association of Securities Dealers, Inc.
SECTION 2. PAYMENTS FROM OTHER SOURCES
To the extent that any payments made by the Trust to the Distributor or
State Street Research & Management Company (the "Adviser"), including payment of
investment management fees, should be deemed to be an indirect financing of any
activity primarily resulting in the sale of Shares within the scope of Rule
12b-1 under the Act, then such payments shall be deemed to be authorized by this
Plan.
SECTION 3. TERM AND TERMINATION
(a) Effectiveness. This Plan shall become effective with respect to each
Series as of the later of (i) the date on which a Registration Statement with
respect to Shares of such Series becomes effective under the Securities Act of
1933, as amended, or (ii) the date on which such Series commences offering its
Shares to the public. This Plan shall continue in effect with respect to each
Series until one (1) year from the date of such effectiveness, unless the
continuation of this Plan shall have been approved with respect to the Series in
accordance with the provisions of Section 3(b) hereof.
(b) Continuation. This Plan and the Agreement shall continue in effect with
respect to each Series thereof subsequent to the initial term specified in
Section 3(a) for so long as such continuance is specifically approved at least
annually by votes of a majority of both (i) the Board of Trustees of the Trust
and (ii) the Qualified Trustees, cast in person at a meeting called for the
purpose of voting on this Plan, subject to any shareholder approval requirements
existing under applicable law.
2
<PAGE>
(c) Termination.
(i) This Plan may be terminated at any time with respect to the Trust
or any Series thereof, as the case may be, by vote of a majority of the
Qualified Trustees, or by vote of a majority of the outstanding voting
securities of the Trust or that Series, as the case may be. This Plan may
remain in effect with respect to a Series thereof even if it has been
terminated in accordance with this Section 3(c) with respect to such Series
or one or more other Series of the Trust.
(ii) The Agreement may be terminated at any time, without penalty, with
respect to the Trust or any Series, as the case may be, by vote of a
majority of the Qualified Trustees or by vote of a majority of the
outstanding voting securities of the Trust or that Series, as the case may
be, on sixty (60) days' written notice to the Distributor. In addition, the
Agreement provides for automatic termination in the event of its
assignment.
SECTION 4. AMENDMENTS
This Plan may be amended with respect to the Trust or a Series thereof in
the manner provided for annual renewal in Section 3(b) hereof; provided,
however, that this Plan may not be amended to increase materially the amount of
distribution expenditures provided for in Section 1 hereof unless such amendment
is approved by a vote of a majority of the outstanding voting securities of each
Series thereof with respect to which a material increase in the amount of
distribution expenditures is proposed.
SECTION 5. INDEPENDENT TRUSTEES
While this Plan is in effect with respect to any Series, the selection and
nomination of Trustees who are not interested persons (as defined in the Act) of
the Trust shall be committed to the discretion of the Trustees who are not
interested persons.
SECTION 6. QUARTERLY REPORTS
The Treasurer of the Trust and the Treasurer of the Distributor shall
provide to the Trustees of the Trust and the Trustees shall review, at least
quarterly, a written report of the amounts expended for distribution pursuant to
this Plan and the purposes for which such expenditures were made.
3
<PAGE>
SECTION 7. RECORD KEEPING
The Trust shall preserve copies of this Plan, the Agreement and any related
agreements and all reports made pursuant to Section 6 hereof, for a period of
not less than six (6) years from the date of this Plan, and the Agreement, the
agreements or such reports, as the case may be, for the first two (2) years in
an easily accessible place.
SECTION 8. LIMITATION OF LIABILITY
The term "State Street Research Tax-Exempt Trust" means and refers to the
Trustees of the Trust from time to time serving under the First Amended and
Restated Master Trust Agreement dated June 5, 1993 (the "Master Trust
Agreement") as the same may subsequently thereto have been, or subsequently
hereto be, amended. It is expressly agreed that the obligations of the Trust
hereunder shall not be binding upon any of the Trustees, shareholders, nominees,
officers, agents or employees of the Trust, personally, but bind only the trust
property of the Trust, as provided in the Master Trust Agreement. This Plan and
its execution and delivery have been authorized by the Trustees of the Trust and
signed by an authorized officer of the Trust, acting as such, and neither such
authorization by such Trustees nor such execution and delivery by such officer
shall be deemed to have been made by any of them individually or to impose any
liability on any of them personally, but shall bind only the trust property of
the Trust as provided in the Master Trust Agreement. The Master Trust Agreement
further provides, and it is expressly agreed, that each Series shall be solely
and exclusively responsible for the payment of its debts, liabilities and
obligations and that no other Series shall be responsible or liable for the
same.
4
<PAGE>
IN WITNESS WHEREOF, the Trust and the Distributor have executed this Rule
12b-1 Plan on the day and year set forth below in Boston, Massachusetts.
ATTEST: STATE STREET RESEARCH
TAX-EXEMPT TRUST
_____________________________ By: ___________________________________
ATTEST: STATE STREET RESEARCH
INVESTMENT SERVICES, INC.
_____________________________ By: ___________________________________
Date: __________ __, ____
POWER OF ATTORNEY
The undersigned, a Trustee of State Street Research Tax-Exempt Trust
("Trust"), a Massachusetts business trust, hereby constitutes and appoints
Francis J. McNamara, III and Darman A. Wing as the true and lawful attorneys of
the undersigned, with full power to each of them alone to sign for the
undersigned, in the name and in the capacity of the undersigned indicated below,
any Registration Statements and any and all amendments thereto of the Trust
filed with the Securities and Exchange Commission and generally to do all such
things in the name and in the indicated capacity of the undersigned as are
required to enable the Trust to comply with provisions of the Securities Act of
1933, as amended, and/or the Investment Company Act of 1940, as amended, and all
requirements and regulations of the Securities and Exchange Commission, hereby
ratifying and confirming the signature of the undersigned as it has been and may
be signed by said attorneys to said Registration Statements, and any and all
amendments thereto.
IN WITNESS WHEREOF, executed the 3rd day of March, 1999.
Signature Capacity
- --------- --------
/s/ Susan M. Phillips Trustee
- ----------------------------------
Susan M. Phillips
STATE STREET RESEARCH TAX-EXEMPT TRUST
Certificate of Resolution
I, the undersigned Amy L. Simmons, hereby certify that I am Assistant
Secretary of State Street Research Tax-Exempt Trust (the "Trust"), a
Massachusetts business trust duly authorized and validly existing under
Massachusetts law, and that the following is a true, correct and complete
statement of a vote duly adopted by the Trustees of said Trust on February 5,
1997:
"VOTED: That Frencis J. McNamara III and Darman A. Wing be, and each hereby
is, authorized and empowered, for an on behalf of the Investment
Company, its principal financial and accounting officer, and in their
name, to execute, and file a Power of Attorney relating to, the
Investment Company's Registration Statements under the Investment
Company's Act of 1940 and/or the Securities Act of 1933, including any
N-14 Registration Statement, and amendments thereto, the execution and
delivery of such Power of Attorney, Registration Statements and
amendments thereto, to constitute conclusive proof of such
authorization."
I further certify that said vote has not been amended or revoked and
that the same is now in full force and effect.
IN WITNESS WHEREOF, I have hereunto set my hand this 3rd day of March,
1999.
/s/ Amy L. Simmons
--------------------------------------
Amy L. Simmons
Assistant Secretary
STATE STREET RESEARCH TAX-EXEMPT TRUST
Addendum
to
First Amended and Restated Multiple Class Expense Allocation Plan
January 1, 1999
WHEREAS, State Street Research Tax-Exempt Trust (the "Trust") has adopted
the First Amended and Restated Multiple Class Expense Allocation Plan dated May
8, 1996 (the "Plan") in accordance with Rule 18f-3 under the Investment Company
Act of 1940, as amended, pursuant to which the Trust, for each of its portfolio
series (each a "Series") and separate classes thereof, may issue multiple
classes of shares representing interests in the same portfolio of securities,
assess a contingent deferred sales charge (the "CDSC") on certain redemptions of
shares and waive the CDSC in certain cases;
WHEREAS, the Trust currently has established one or more Series, and each
such series has established four classes of shares: Class A, Class B, Class C
(formerly Class D) and Class S (formerly Class C), all of which are subject to
the Plan;
WHEREAS, the Trust has established an additional class of shares, Class
B(1), for each Series, and such shares are to be made subject to the Plan;
NOW, THEREFORE, the Trust hereby adopts this Addendum pursuant to the
current terms of the Plan:
1. Class B(1) shares of each Series are made subject to the Plan pursuant to
Section 4(b) of the Plan.
2. All class differences, differences in distribution and shareholder services
and the allocation of expenses between Class B(1) shares and the other
authorized classes of shares of each Series shall be as described in the current
prospectus for such class and such Series or as otherwise described in the Plan.
Exhibit (19)(a)
State Street Research Funds
<TABLE>
<CAPTION>
New Account Application
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C>
[round bullet] Use a pen. Please print in CAPITAL LETTERS.
[round bullet] Use the Additional Services Application to take advantage
of a range of services, including checkwriting and Systematic
Withdrawal Plan.
[ ] Check here if you are including the Additional Services
Application with your New Account Application.
[Graphic: Telephone]
[1] Your Account
- ------------------------------------------------------------------------------------------------------------------------------------
[round bullet] Fill in one account type only.
[round bullet] Individual Retirement Accounts require a different application.
To obtain an IRA application, call 1-800-562-0032.
[square bullet] Individual / Joint Account
[ ][ ][ ][ ][ ][ ][ ][ ] [ ] [ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ]
First name Middle Last name
[ ][ ][ ]-[ ][ ]-[ ][ ][ ][ ] [ ][ ]/[ ][ ]/[ ][ ]
Social Security number Date of birth [month / day / year]
[ ][ ][ ][ ][ ][ ][ ][ ] [ ] [ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ]
Joint owner (if applicable): first name Middle Last name
[ ][ ][ ]-[ ][ ]-[ ][ ][ ][ ] [ ][ ]/[ ][ ]/[ ][ ]
Joint owner's Social Security number Joint owner's date of birth [month / day / year]
Joint owners will be joint tenants with rights of survivorship unless you check a different option:
[ ] Tenants in common [ ] Tenants by entirety [ ] Community property
[square bullet] Gift / Transfer to a Minor (UGMA/UTMA)
[ ][ ][ ][ ][ ][ ][ ][ ] [ ] [ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ]
Custodian's first name Middle Last name
[ ][ ][ ][ ][ ][ ][ ][ ] [ ] [ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ]
As custodian for: first name Middle Last name
Under the [ ][ ] [minor's state of residence] Uniform Gifts / Transfers to Minors Act
[ ][ ][ ]-[ ][ ]-[ ][ ][ ][ ] [ ][ ]/[ ][ ]/[ ][ ]
Minor's Social Security number Minor's date of birth [month / day / year]
[square bullet] Trust Account
[ ][ ][ ][ ][ ][ ][ ][ ] [ ] [ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ]
Trustee's first name Middle Last name
[ ][ ][ ][ ][ ][ ][ ][ ] [ ] [ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ]
Co-trustee (if applicable): first name Middle Last name
[ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ]
As trustees of [name of trust]
[ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ]
For the benefit of [trust beneficiary]
[ ][ ]-[ ][ ][ ][ ][ ][ ][ ] [ ][ ]/[ ][ ]/[ ][ ]
Trust's federal tax identification number Date of trust agreement [month / day / year]
[square bullet] Business / Other Account
[ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ]
Name of entity
[ ][ ][ ][ ][ ][ ][ ][ ][ ]
Federal tax identification or Social Security number
[ ][ ] I / We have included a corporate resolution, as is required to open this account.
Type of entity: [ ] Corporation [ ] Partnership [ ] Estate [ ] Unincorporated association [ ] Guardian
For all other types of accounts, please call 1-800-562-0032 for a different application.
Page 1.
<PAGE>
[2] Your Address
- ------------------------------------------------------------------------------------------------------------------------------------
[ ][ ][ ][ ][ ] [ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ]
Street number / P.O. Box Street name
[ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ] [ ][ ] [ ][ ][ ][ ][ ]
City State Zip code
[ ][ ][ ]-[ ][ ][ ]-[ ][ ][ ][ ] [ ][ ][ ]-[ ][ ][ ]-[ ][ ][ ][ ]
Daytime phone number Evening phone number
Check one: [ ] U.S. citizen [ ] Non-U.S. citizen
Check one: [ ] U.S. resident [ ] Resident of: [ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ]
Country
[3] Your Investment
- ------------------------------------------------------------------------------------------------------------------------------------
[round bullet] Choose one share class and one distribution option for each fund.
[round bullet] Unless noted below, the minimum investment is $2,500 per account ($1,000 using Investamatic).
Please refer to prospectus for details.
Fund Name Amount You Are Investing Share Class All Distributions
- ------------------------------------------------------------------------------------------------------------------------------------
State Street Research: A B C Reinvested In Cash
[ ] Alpha $ [ ] , [ ][ ][ ] , [ ][ ][ ] . [ ][ ] [ ] [ ] [ ] [ ] [ ]
[ ] Aurora(1) $ [ ] , [ ][ ][ ] , [ ][ ][ ] . [ ][ ] [ ] [ ] [ ] [ ] [ ]
[ ] Capital $ [ ] , [ ][ ][ ] , [ ][ ][ ] . [ ][ ] [ ] [ ] [ ] [ ] [ ]
[ ] Emerging Growth $ [ ] , [ ][ ][ ] , [ ][ ][ ] . [ ][ ] [ ] [ ] [ ] [ ] [ ]
[ ] Equity Investment $ [ ] , [ ][ ][ ] , [ ][ ][ ] . [ ][ ] [ ] [ ] [ ] [ ] [ ]
[ ] Galileo(2) $ [ ] , [ ][ ][ ] , [ ][ ][ ] . [ ][ ] [ ] [ ] [ ] [ ] [ ]
[ ] Global Resources $ [ ] , [ ][ ][ ] , [ ][ ][ ] . [ ][ ] [ ] [ ] [ ] [ ] [ ]
[ ] Government Income $ [ ] , [ ][ ][ ] , [ ][ ][ ] . [ ][ ] [ ] [ ] [ ] [ ] [ ]
[ ] Growth $ [ ] , [ ][ ][ ] , [ ][ ][ ] . [ ][ ] [ ] [ ] [ ] [ ] [ ]
[ ] High Income $ [ ] , [ ][ ][ ] , [ ][ ][ ] . [ ][ ] [ ] [ ] [ ] [ ] [ ]
[ ] International Equity $ [ ] , [ ][ ][ ] , [ ][ ][ ] . [ ][ ] [ ] [ ] [ ] [ ] [ ]
[ ] Investment Trust $ [ ] , [ ][ ][ ] , [ ][ ][ ] . [ ][ ] [ ] [ ] [ ] [ ] [ ]
[ ] Legacy(2) $ [ ] , [ ][ ][ ] , [ ][ ][ ] . [ ][ ] [ ] [ ] [ ] [ ] [ ]
[ ] Managed Assets $ [ ] , [ ][ ][ ] , [ ][ ][ ] . [ ][ ] [ ] [ ] [ ] [ ] [ ]
[ ] Money Market $ [ ] , [ ][ ][ ] , [ ][ ][ ] . [ ][ ] Class E only [ ] [ ]
[ ] New York Tax-Free $ [ ] , [ ][ ][ ] , [ ][ ][ ] . [ ][ ] [ ] [ ] [ ] [ ] [ ]
[ ] Strategic Income $ [ ] , [ ][ ][ ] , [ ][ ][ ] . [ ][ ] [ ] [ ] [ ] [ ] [ ]
[ ] Tax-Exempt $ [ ] , [ ][ ][ ] , [ ][ ][ ] . [ ][ ] [ ] [ ] [ ] [ ] [ ]
[ ] Other: ________________ $ [ ] , [ ][ ][ ] , [ ][ ][ ] . [ ][ ] [ ] [ ] [ ] [ ] [ ]
(1) Check with your financial professional about the current availability of this fund. Minimum investment is $100,000.
(2) For these funds, the minimum investment is $25,000 per account ($10,000 using Investamatic).
This investment is being made: [ ] by mail -- make check payable to State Street Research Funds
[ ] by Federal Funds Wire; the control number is: [ ] through a dealer; the wire order confirmation number is:
[ ][ ][ ][ ][ ][ ][ ][ ][ ][ ] [ ][ ][ ][ ][ ][ ][ ][ ][ ][ ]
[4] Options for Reducing Sales Charges
- ------------------------------------------------------------------------------------------------------------------------------------
[square bullet] I wish to apply for reduced Class A sales charges through:
[ ] Right of Accumulation
When calculating my sales charges for this investment, please include the
assets owned by me, my family members or other eligible persons.
[ ] Check here if you have existing accounts.
[ ] Letter of Intent
I plan to invest, without obligation, a total of at least the following
amount in eligible mutual funds over the next 13 months:
[ ] $100,000 [ ] $250,000
[ ] $500,000 [ ] $1 Million
[ ] Please include investments made within the past 90 days
in these accounts.
[ ] Check here if you have existing accounts.
Page 2.
<PAGE>
[5] Telephone Exchanges / Redemptions
- ------------------------------------------------------------------------------------------------------------------------------------
[round bullet] See terms and conditions for telephone requests in current prospectus(es).
[round bullet] Not available for certificate shares.
[square bullet] Telephone Exchange Privilege For You and Your Dealer
[round bullet] You automatically receive this privilege unless you decline it.
[round bullet] Allows you or your dealer to request exchanges into other State Street Research funds
(and assumes you have read the relevant prospectuses).
[ ] I DO NOT want this privilege on my account. [ ]
Initial here
[square bullet] Telephone Redemption Privilege For You
[round bullet] You automatically receive this privilege unless you decline it.
[round bullet] Allows you to phone requests to sell shares, with the proceeds sent to the address of record.
[ ] I DO NOT want this privilege on my account. [ ]
Initial here
[square bullet] Telephone Redemption Privilege For Your Dealer
(This privilege is not automatic; you must specifically select it below).
[ ] I DO NOT want this privilege on my account. [ ]
Initial here
[ ] I DO want this privilege on my account. [ ]
Initial here
[6] Transfers To / From Your Bank
- ------------------------------------------------------------------------------------------------------------------------------------
[round bullet] Convenient services to help you buy or sell fund shares.
[round bullet] Be sure to attach a deposit slip or voided, unsigned check depending on the service(s) you are requesting.
[square bullet] I would like to request one or more of the following services
(Please provide your Bank Account Information below):
[ ] Investamatic
Makes periodic investments in the State Street Research fund of your choice.
I authorize automatic withdrawals from the bank account specified at the bottom
of the page. I request these withdrawals to occur [ ] every month, on the [ ] 5th of the month.
[ ] every quarter, [ ] 20th of the month
[ ] 5th and 20th of the month.
Starting month: [ ][ ]
[ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ]
Fund name
[ ][ ][ ][ ][ ][ ][ ][ ][ ][ ] $ [ ][ ][ ],[ ][ ][ ].[ ][ ]
Account number (if existing account) Investment amount ($50 minimum)
[ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ]
Fund name
[ ][ ][ ][ ][ ][ ][ ][ ][ ][ ] $ [ ][ ][ ],[ ][ ][ ].[ ][ ]
Account number (if existing account) Investment amount ($50 minimum)
[ ] EZ Trader
Allows you to move money between your fund account and bank account by calling State Street Research.
NOTE: Your bank must be a member of the Automated Clearing House (ACH)system.
[ ] Wire Redemption Capability
Lets you designate a bank account to receive proceeds by wire when you sell State Street Research shares.
- ------------------------------------------------------------------------------------------------------------------------------------
[square bullet] Bank Account Information
Please establish the service(s) between my fund account and my:
[ ] Checking account (voided, unsigned check attached)
[ ] NOW / money market / savings account (deposit slip attached)
[ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ]
Bank name
[ ][ ][ ][ ][ ] [ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ]
Street number of bank Street name
[ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ] [ ][ ] [ ][ ][ ][ ][ ]
City State Zip code
[ ][ ][ ][ ][ ][ ][ ][ ][ ] [ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ]
Bank routing number Bank account number
[ ][ ][ ][ ][ ][ ][ ][ ] [ ] [ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ]
Bank account holder's first name Middle Last name (list exactly as on bank statements)
[ ][ ][ ][ ][ ][ ][ ][ ] [ ] [ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ]
Second bank account holder Middle Last name
(if applicable): first name
______________________________________ ______________________________________
[______________________________________] [______________________________________]
Signature of first bank account holder, exactly as on bank statements Signature of second bank account holder (if applicable)
Page 3.
<PAGE>
[7] Your Signature
- ------------------------------------------------------------------------------------------------------------------------------------
[round bullet] All owners listed in Section 1 need to sign this application. [Graphic: Pen]
[round bullet] Please note that the certification below and the provision of your federal tax identification number are
the only portions of this application for which the IRS requires your certification.
I acknowledge that I:
[round bullet] have received current prospectus(es) for all funds in which I am investing.
[round bullet] accept the terms of investment described in the prospectus(es) and this application.
[round bullet] understand that these same terms will also apply to all shares obtained by exchange.
[round bullet] accept responsibility for unauthorized telephone instructions unless the fund's agents are negligent or unless I
declined the privileges in Section 5.
I certify, under penalties of perjury, that:
[round bullet] (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
[round bullet] (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.
______________________________________
[______________________________________] [ ][ ]/[ ][ ]/[ ][ ]
Your signature, exactly as your name appears in Section 1 Date [month / day / year]
______________________________________
[______________________________________] [ ][ ]/[ ][ ]/[ ][ ]
Signature of joint owner (if applicable) exactly as name appears in Section 1 Date [month / day / year]
[8] Signature Guarantee
- ------------------------------------------------------------------------------------------------------------------------------------
[round bullet] If you are investing directly, have Part I completed; if not, have your dealer fill out Part II.
[square bullet] I -- For Direct Investments
[ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ]
Name of bank or other guarantor
[ ][ ][ ][ ][ ] [ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ]
Street number Street name
[ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ] [ ][ ] [ ][ ][ ][ ][ ]
City State Zip code
The bank or guarantor guarantees the owner's legal capacity and all signatures on this application and on related investment
checks and instructions, including the Additional Services Application.
______________________________________
[______________________________________] [ ][ ]/[ ][ ]/[ ][ ]
Signature of bank's or guarantor's authorized representative Date [month / day / year]
[square bullet] II -- For Investments Through a Dealer
[ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ]
Dealer name
[ ][ ][ ][ ][ ] [ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ]
Street number of home office Street name
[ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ] [ ][ ] [ ][ ][ ][ ][ ]
City State Zip code
[ ][ ][ ][ ][ ] [ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ]
Street number of branch office Street name
[ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ] [ ][ ] [ ][ ][ ][ ][ ]
City State Zip code
[ ][ ][ ][ ][ ][ ][ ][ ][ ][ ] [ ][ ][ ]-[ ][ ][ ]-[ ][ ][ ][ ]
Branch office number Branch office phone number
The Dealer:
[round bullet] agrees to the terms of the current prospectus(es), application and
current dealer agreement, which is included by reference.
[round bullet] represents that it has given the owner(s) the relevant prospectus(es).
[round bullet] represents that it has completed this application according to
instructions from the owner(s).
[round bullet] will indemnify the fund, its adviser, distributor or other agents
from any losses resulting from these instructions.
[round bullet] guarantees the owner's legal capacity and all signatures on this
application and on related investment checks and instructions,
including the Additional Services Application.
[ ][ ][ ][ ][ ][ ][ ][ ] [ ] [ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ]
Registered Representative's first name Middle Last name
[ ][ ][ ][ ][ ][ ][ ][ ][ ][ ]
Registered Representative number
______________________________________
[______________________________________] [ ][ ]/[ ][ ]/[ ][ ]
Signature of authorized officer of dealer Date [month / day / year]
[State Street Research logo] Mail this application, along with any other required documents to:
State Street Research Funds, P.O. Box 8408, Boston, MA 02266-8408.
Registered representatives, mail this application to your home office for approval.
Questions? Call 1-800-562-0032.
SSR-760E-0498
</TABLE>
[FRONT SIDE OF CARD] Exhibit 19(b)
STATE STREET RESEARCH FUNDS
- --------------------------------------------------------------------------------
Additional Services Application
[bullet] Use a pen. Please print in CAPITAL LETTERS.
[bullet] Use this application to add any of the features below to a new or
existing State Street Research account.
[bullet] When providing bank information, be sure to attach a deposit slip or
voided, unsigned check
[bullet] Be sure to sign this application.
[bullet] If you are submitting this application with a New Account Application,
you don't need to duplicate any bank information or signature
guarantees that are included with that application.
A Name
- --------------------------------------------------------------------------------
|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|
Name (as it appears on the account)
|_|_|_|_|_|_|_|_|_| |_|_|_|-|_|_|_|-|_|_|_|_|
Federal tax identification or Daytime phone number
Social Security number
B Regular Transfers and Redemptions
- --------------------------------------------------------------------------------
[bullet] Not available on retirement plan accounts.
[bullet] Choose one option only. To add different options to different accounts,
please fill out a separate application.
[bullet] Be sure to attach a deposit slip or voided, unsigned check depending
on the service you are requesting.
[ ] I request the following automatic redemptions or transfers:
[ ] Please deposit my income dividends directly into my bank account.
[ ] Please deposit my income dividends and capital gains distribtions directly
into my bank account.
[ ] Systematic Withdrawal Plan: Please redeem $|_|_|,|_|_|_|.00 ($50 minimum)
from my fund account: [ ] every month [ ] every 3 months
[ ] every 6 months [ ] every 12 months
I would like these redemptions to begin in month number |_|_|.
I would like the money [ ] deposited directly into my bank account
[ ] sent to me by check
[ ] sent by check to the following payee:
|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|
Payee's name
|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|
Payee's street address/P.O. Box
|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_| |_|_| |_|_|_|_|_|-|_|_|_|_|
City State Zip
[] Please make these redemptions or transfers from my accounts in each of the
following State Street Research funds:
|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_| |_|_|_|_|_|_|_|_|_|_|_|_|_|
Fund name Account number
(if existing account)
|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_| |_|_|_|_|_|_|_|_|_|_|_|_|_|
Fund name Account number
(if existing account)
[] Please direct any bank deposits to my:
[ ] Checking account (voided, unsigned check attached)
[ ] NOW / money market / savings account (deposit slip attached)
|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|
Bank name
|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|
Bank address
|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_| |_|_| |_|_|_|_|_|-|_|_|_|_|
City State Zip
|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_| |_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|
Bank routing number Bank account number
|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_| ____________________________________
Name of one bank account holder, Signature
exactly as on bank statements
|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_| ____________________________________
Name of second bank account holder, Signature
if any
C Checkwriting
- --------------------------------------------------------------------------------
[bullet] Available on some funds' Class A shares and on Money Market Fund
Class E shares.
[bullet] For corporate and other accounts, include the appropriate resolution
forms.
[bullet] Please do not detach the perforated card.
[] I request State Street Bank and Trust Company to provide me with
checkwriting on these funds:
|_|_|_|_|_|_|_|_|_|_|
Account number (if existing account)
|_|_|_|_|_|_|_|_|_|_|
Account number (if existing account)
[ ] Government Income
[ ] High Income
[ ] Money Market
[ ] New York Tax-Free
[ ] Strategic Income
[ ] Tax-Exempt
|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|
Your name
|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|
Address
|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|
City
|_|_| |_|_|_|_|_|_|_|_|_|_|
State Zip
|_|_|_|_|_|_|_|_|_|_|_|_|_|_|
Federal tax identification or Social Security number
_______________________________________________________
Your signature exactly as your name appears on your new
account application or your fund statements
(including any capacity)
|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|
Name of joint owner, if any
_______________________________________________________
Signature of joint owner exactly as name appears on
fund statements (including any capacity)
Number of signatures you with to be required on a check:
See reverse side of card for additional terms and conditions.
[REVERSE SIDE OF CARD]
D Dividend Allocation Plan (DAP)
- --------------------------------------------------------------------------------
[] Please collect my dividends and distributions from this fund/account...
|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|
Fund name
|_|_|_|_|_|_|_|_|_|_|_|_|
Account number (if existing account)
[]...and invest them in this fund/account (new accounts must meet initial
investment minimums):
|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|
Fund name
|_|_|_|_|_|_|_|_|_|_|_|_|
Account number (if existing account)
E Signature Guarantee
- --------------------------------------------------------------------------------
[bullet] If you are investing directly, have Part I completed; if not, have your
dealer fill out Part II.
[bullet] If you are submitting this application with a New Account Application,
you don't need to duplicate the signature guarantee if it is included
with that application.
[] I - For Direct Investments
|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|
Name of bank or other guarantor
|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|
Street address
|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_| |_|_| |_|_|_|_|_|-|_|_|_|_|
City State Zip
The bank or guarantor guarantees the owner's legal capacity and all signatures
on this application and on related investment checks and instructions.
_______________________________________ |_|_| / |_|_| / |_|_|
Signature of bank's or guarantor's Date [month/day/year/
authorized representative
[] II - For Investments Through a Dealer
|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|
Dealer Name
|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|
Home office address
|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_| |_|_| |_|_|_|_|_|-|_|_|_|_|
City State Zip
|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_| |_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|
Branch office address City
|_|_| |_|_|_|_|_|-|_|_|_|_| |_|_|_|-|_|_|_|-|_|_|_|_|
State Zip Branch office telephone number
The dealer:
[bullet] Agrees to the terms of the current prospectus(es) and current dealer
agreement, which is included by reference.
[bullet] represents that it has given the owner(s) the relevant prospectus(es).
[bullet] represents that it has completed this application according to
instructions from the owner(s).
[bullet] will indemnify the fund, its adviser, distributor or other agents from
any losses resulting from these instructions.
[bullet] guarantees the owner's legal capacity and all signatures on this
application and on related investment checks and instructions.
|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_| |_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|
Registered Representative Registered Representative number
_________________________________________ |_|_| / |_|_| / |_|_|
Signature of authorized officer or dealer Date [month/day/year/
F Your Signature
- --------------------------------------------------------------------------------
[bullet] All owners whose names are on the account [graphic of a pen]
need to sign this application.
I acknowledge that I:
[bullet] am authorizing the additional services described above.
[bullet] have received current prospectus(es) for all funds in which I am
investing.
[bullet] have the right to cancel any service at any time by writing to
State Street Research.
___________________________________________
Your signature exactly as your name appears
on your New Account Application or your
fund statements
___________________________________________
Signature of joint owner (if any) exactly
as anem appears on fund application or
statements
|_|_| / |_|_| / |_|_|
Date [month/day/year/
By signing this form, I agree to all of the provisions and applicable rules
under the Massachusetts Uniform Commercial Code and to any conditions on
redeeming shares from the State Street Research funds.
I also agree that:
[bullet] this form applies to any other identically registered State Street
Research fund account with the checkwriting privilege I establish
later.
[bullet] if I am subject to IRS backup withholding, I may write checks only on
money fund accounts;
[bullet] State Street Bank and Trust Company and the fund reserve the right to
terminate my checkwriting privelege.
I represent that the signatures are authentic, and, for organizations, I have
submitted a certified resolution authorizing the individuals with legal capacity
to sign and act on behlaf of the organization.
I understand that I am authorizing the bank to instruct State Street Research
to sell sufficient shares in my mutual fund account to honor the check.
[Logo: State Street Research] State Street Research
Mail this application, along with any other required documents to:
State Street Research Funds
P.O. Box 8408, Boston, MA 02266-8408.
Questions? Call 1-800-562-0032.
SSR-759E-1097
State Street Reserach is not affiliated with State Street Bank and Trust
Company.
Exhibit 19(c)
[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 #____________________________
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
c _____________________________________ 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>
Fund Name Class 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>
_________________ [ ] [ ] $_____ [ ] [ ] [ ] [ ]
_________________ [ ] [ ] $_____ [ ] [ ] [ ] [ ]
_________________ [ ] [ ] $_____ [ ] [ ] [ ] [ ]
_________________ [ ] [ ] $_____ [ ] [ ] [ ] [ ]
</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 meet Account
minimum investment requirements) Number (if
existing
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 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 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,
[ ] Quarterly Investment Date: [ ] 5th or [ ] 20th the 5th will be chosen
automatically.
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.
Check applicable Fund(s) TO: State Street Bank and Trust Company ("Bank")
[ ] Money Market, Class E ________________________________________________
[ ] High Income Name (please print)
[ ] Tax-Exempt ________________________________________________
[ ] Government Income Name (please print)
[ ] NY Tax-Free ________________________________________________
[ ] 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
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>
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
<TABLE>
<CAPTION>
5 Main Investment Objective (select one) Secondary Investment Objective (optional)
<S> <C> <C> <C> <C> <C>
[ ] Aggressive Growth [ ] Growth & Income [ ] Tax Advantages [ ] Aggressive Growth [ ] Growth & Income [ ] Tax Advantages
[ ] Growth [ ] Current Income [ ] Growth [ ] Current Income
</TABLE>
<TABLE>
<CAPTION>
6 Source of Funds for This Investment
<S> <C> <C>
[ ] 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 ___________________________________
</TABLE>
7 This account was: [ ] Solicited [ ] Unsolicited
8 Tax Status of These Funds: [ ] Qualified [ ] Non-Qualified
9 Prior Investment Experience: Stocks ___ yrs. Bonds ___ yrs.
(complete all that apply) 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 your Registered Representative's Signature
name appears in Section 1)
/s/ Elaine S. Stevenson
_______________________________________ ________________________________________
Customer Signature MetLife Securities, Inc.; by:
Elaine S. Stevenson, President
_______________________________________ ________________________________________
Capacity
<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 your Registered Representative's Signature
name appears in Section 1)
/s/ Elaine S. Stevenson
_______________________________________ ________________________________________
Customer Signature MetLife Securities, Inc.;
by: Elaine S. Stevenson, President
_______________________________________
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 Dealer Registered Representative's
- 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: 3672-970214(0398)SSR-LD
ML-598E-297
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000787978
<NAME> STATE STREET RESEARCH TAX-EXEMPT TRUST
<SERIES>
<NUMBER> 011
<NAME> STATE STREET RESEARCH TAX-EXEMPT FUND CLASS A
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<INVESTMENTS-AT-COST> 269,768,427
<INVESTMENTS-AT-VALUE> 293,486,656
<RECEIVABLES> 8,021,715
<ASSETS-OTHER> 54,648
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 301,563,019
<PAYABLE-FOR-SECURITIES> 16,817,517
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 833,337
<TOTAL-LIABILITIES> 17,650,854
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 260,202,165
<SHARES-COMMON-STOCK> 24,085,262
<SHARES-COMMON-PRIOR> 24,634,800
<ACCUMULATED-NII-CURRENT> 137,940
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> (146,169)
<ACCUM-APPREC-OR-DEPREC> 23,718,229
<NET-ASSETS> 283,912,165
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 15,828,476
<OTHER-INCOME> 0
<EXPENSES-NET> 3,252,280
<NET-INVESTMENT-INCOME> 12,576,196
<REALIZED-GAINS-CURRENT> 1,905,433
<APPREC-INCREASE-CURRENT> 983,601
<NET-CHANGE-FROM-OPS> 15,465,230
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (9,924,767)
<DISTRIBUTIONS-OF-GAINS> (994,207)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2,384,602
<NUMBER-OF-SHARES-REDEEMED> (3,876,779)
<SHARES-REINVESTED> 942,639
<NET-CHANGE-IN-ASSETS> 8,614,483
<ACCUMULATED-NII-PRIOR> 487,464
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> (683,961)
<GROSS-ADVISORY-FEES> 1,527,580
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 3,288,700
<AVERAGE-NET-ASSETS> 277,741,818
<PER-SHARE-NAV-BEGIN> 8.51
<PER-SHARE-NII> 0.40
<PER-SHARE-GAIN-APPREC> 0.08
<PER-SHARE-DIVIDEND> (0.41)
<PER-SHARE-DISTRIBUTIONS> (0.04)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 8.54
<EXPENSE-RATIO> 1.03
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000787978
<NAME> STATE STREET RESEARCH TAX-EXEMPT TRUST
<SERIES>
<NUMBER> 012
<NAME> STATE STREET RESEARCH TAX-EXEMPT FUND CLASS B
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<INVESTMENTS-AT-COST> 269,768,427
<INVESTMENTS-AT-VALUE> 293,486,656
<RECEIVABLES> 8,021,715
<ASSETS-OTHER> 54,648
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 301,563,019
<PAYABLE-FOR-SECURITIES> 16,817,517
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 833,337
<TOTAL-LIABILITIES> 17,650,854
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 260,202,165
<SHARES-COMMON-STOCK> 7,427,938
<SHARES-COMMON-PRIOR> 6,359,801
<ACCUMULATED-NII-CURRENT> 137,940
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> (146,169)
<ACCUM-APPREC-OR-DEPREC> 23,718,229
<NET-ASSETS> 283,912,165
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 15,828,476
<OTHER-INCOME> 0
<EXPENSES-NET> 3,252,280
<NET-INVESTMENT-INCOME> 12,576,196
<REALIZED-GAINS-CURRENT> 1,905,433
<APPREC-INCREASE-CURRENT> 983,601
<NET-CHANGE-FROM-OPS> 15,465,230
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (2,352,161)
<DISTRIBUTIONS-OF-GAINS> (303,093)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,950,304
<NUMBER-OF-SHARES-REDEEMED> (1,115,290)
<SHARES-REINVESTED> 233,123
<NET-CHANGE-IN-ASSETS> 8,614,483
<ACCUMULATED-NII-PRIOR> 487,464
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> (683,961)
<GROSS-ADVISORY-FEES> 1,527,580
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 3,288,700
<AVERAGE-NET-ASSETS> 277,741,818
<PER-SHARE-NAV-BEGIN> 8.51
<PER-SHARE-NII> 0.34
<PER-SHARE-GAIN-APPREC> 0.08
<PER-SHARE-DIVIDEND> (0.35)
<PER-SHARE-DISTRIBUTIONS> (0.04)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 8.54
<EXPENSE-RATIO> 1.78
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000787978
<NAME> STATE STREET RESEARCH TAX-EXEMPT TRUST
<SERIES>
<NUMBER> 014
<NAME> STATE STREET RESEARCH TAX-EXEMPT FUND CLASS C
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<INVESTMENTS-AT-COST> 269,768,427
<INVESTMENTS-AT-VALUE> 293,486,656
<RECEIVABLES> 8,021,715
<ASSETS-OTHER> 54,648
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 301,563,019
<PAYABLE-FOR-SECURITIES> 16,817,517
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 833,337
<TOTAL-LIABILITIES> 17,650,854
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 260,202,165
<SHARES-COMMON-STOCK> 466,312
<SHARES-COMMON-PRIOR> 333,565
<ACCUMULATED-NII-CURRENT> 137,940
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> (146,169)
<ACCUM-APPREC-OR-DEPREC> 23,718,229
<NET-ASSETS> 283,912,165
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 15,828,476
<OTHER-INCOME> 0
<EXPENSES-NET> 3,252,280
<NET-INVESTMENT-INCOME> 12,576,196
<REALIZED-GAINS-CURRENT> 1,905,433
<APPREC-INCREASE-CURRENT> 983,601
<NET-CHANGE-FROM-OPS> 15,465,230
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (125,835)
<DISTRIBUTIONS-OF-GAINS> (18,821)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 334,346
<NUMBER-OF-SHARES-REDEEMED> (210,631)
<SHARES-REINVESTED> 9,032
<NET-CHANGE-IN-ASSETS> 8,614,483
<ACCUMULATED-NII-PRIOR> 487,464
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<OVERDIST-NET-GAINS-PRIOR> (683,961)
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<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 3,288,700
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<PER-SHARE-NAV-BEGIN> 8.50
<PER-SHARE-NII> 0.33
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<PER-SHARE-DIVIDEND> (0.35)
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<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000787978
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<SERIES>
<NUMBER> 013
<NAME> STATE STREET RESEARCH TAX-EXEMPT FUND CLASS S
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<INVESTMENTS-AT-COST> 269,768,427
<INVESTMENTS-AT-VALUE> 293,486,656
<RECEIVABLES> 8,021,715
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<OTHER-ITEMS-LIABILITIES> 833,337
<TOTAL-LIABILITIES> 17,650,854
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 260,202,165
<SHARES-COMMON-STOCK> 1,256,960
<SHARES-COMMON-PRIOR> 1,038,945
<ACCUMULATED-NII-CURRENT> 137,940
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> (146,169)
<ACCUM-APPREC-OR-DEPREC> 23,718,229
<NET-ASSETS> 283,912,165
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 15,828,476
<OTHER-INCOME> 0
<EXPENSES-NET> 3,252,280
<NET-INVESTMENT-INCOME> 12,576,196
<REALIZED-GAINS-CURRENT> 1,905,433
<APPREC-INCREASE-CURRENT> 983,601
<NET-CHANGE-FROM-OPS> 15,465,230
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (522,957)
<DISTRIBUTIONS-OF-GAINS> (51,520)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 574,641
<NUMBER-OF-SHARES-REDEEMED> (390,950)
<SHARES-REINVESTED> 34,324
<NET-CHANGE-IN-ASSETS> 8,614,483
<ACCUMULATED-NII-PRIOR> 487,464
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> (683,961)
<GROSS-ADVISORY-FEES> 1,527,580
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 3,288,700
<AVERAGE-NET-ASSETS> 277,741,818
<PER-SHARE-NAV-BEGIN> 8.49
<PER-SHARE-NII> 0.42
<PER-SHARE-GAIN-APPREC> 0.08
<PER-SHARE-DIVIDEND> (0.43)
<PER-SHARE-DISTRIBUTIONS> (0.04)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 8.52
<EXPENSE-RATIO> 0.78
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000787978
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<SERIES>
<NUMBER> 021
<NAME> STATE STREET RESEARCH NEW YORK TAX-FREE FUND CLASS A
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<INVESTMENTS-AT-COST> 66,915,000
<INVESTMENTS-AT-VALUE> 72,551,038
<RECEIVABLES> 1,290,548
<ASSETS-OTHER> 190,766
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 74,032,352
<PAYABLE-FOR-SECURITIES> 2,044,210
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 257,228
<TOTAL-LIABILITIES> 2,301,438
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 65,871,316
<SHARES-COMMON-STOCK> 2,562,679
<SHARES-COMMON-PRIOR> 2,381,068
<ACCUMULATED-NII-CURRENT> 7,643
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 215,917
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 5,636,038
<NET-ASSETS> 71,730,914
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 3,973,873
<OTHER-INCOME> 0
<EXPENSES-NET> 841,412
<NET-INVESTMENT-INCOME> 3,132,461
<REALIZED-GAINS-CURRENT> 698,887
<APPREC-INCREASE-CURRENT> 38,972
<NET-CHANGE-FROM-OPS> 3,870,320
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (979,607)
<DISTRIBUTIONS-OF-GAINS> (106,242)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 657,773
<NUMBER-OF-SHARES-REDEEMED> (576,644)
<SHARES-REINVESTED> 100,482
<NET-CHANGE-IN-ASSETS> 1,547,216
<ACCUMULATED-NII-PRIOR> 115,721
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> (132,986)
<GROSS-ADVISORY-FEES> 386,106
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 948,218
<AVERAGE-NET-ASSETS> 70,201,091
<PER-SHARE-NAV-BEGIN> 8.48
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