[LOGO] STATE STREET RESEARCH
Tax-Exempt Fund
[GRAPHIC OF CLOCK]
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This prospectus has information you should know before you invest. Please read
it carefully and keep it with your investment records.
As with all mutual funds, the Securities and Exchange Commission has not
approved or disapproved these securities or determined if this prospectus is
truthful or complete. Any representation to the contrary is a criminal offense.
A municipal bond fund
seeking income free
from federal taxes.
Prospectus
May 1, 2000
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<PAGE>
Contents
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1 The Fund
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1 Goal and Strategies
3 Principal Risks
4 Volatility and Performance
6 Investor Expenses
8 Investment Management
9 Your Investment
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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
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22 Other Securities and Risks
24 Financial Highlights
27 Board of Trustees
Back Cover For Additional Information
<PAGE>
The Fund 1
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Goal and Strategies
[Graphic: Chess Piece] 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
[Graphic: Magnifying Glass] Who May Want to Invest
State Street Research Tax-Exempt Fund is designed for investors who seek one or
more of the following:
o current income that is exempt from federal income tax
o a diversified portfolio of municipal securities
o a fund to complement a portfolio of more aggressive investments
The fund is not appropriate for investors who:
o want an investment for a tax-advantaged account such as an IRA or 401(k)
o do not pay U.S. income taxes
o want to avoid even moderate volatility or possible losses
o are seeking high growth or maximum income
o are investing emergency reserve money
<PAGE>
2 The Fund continued
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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.
[Graphic: Magnifying Glass] Municipal Bonds and Taxes
The municipal bond category is defined as including securities issued by munici
palities 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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[Graphic: Stop Sign] 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 bond
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).
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
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<TABLE>
<CAPTION>
Years ended December 31
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Year-by-Year Total Return (Class A) 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
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<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
4.84 11.81 9.34 12.12 (6.90) 16.58 2.93 10.17 5.79 (4.34)
</TABLE>
Best quarter: first quarter 1995, up 6.08%
Worst quarter: first quarter 1994, down 6.02%
Return from 1/1/00 - 3/31/00 (not annualized): up 2.67%
<TABLE>
<CAPTION>
As of December 31, 1999
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Average Annual Total Return (at maximum applicable sales charge) 1 Year 5 Years 10 Years
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<S> <C> <C> <C>
Class A (%) (8.65) 5.02 5.50
Class B(1) (%)(a) (9.61) 4.88 5.47
Class B (%) (9.62) 4.88 5.47
Class C (%) (5.96) 5.21 5.47
Class S (%) (4.11) 6.24 6.14
Lehman Brothers Municipal Bond Index (%) (2.06) 6.91 6.89
Lipper General Municipal Debt Funds Index (%) (4.07) 6.14 6.29
</TABLE>
(a) Performance for Class B(1) reflects Class B performance through December
31, 1998. Class B(1) was introduced on January 1, 1999.
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5
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[Graphic: Magnifying Glass] Understanding Volatility and Performance
The chart and table on the opposite page are designed to show two aspects of the
fund's track record:
o 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.
o 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
service/distribution (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.
<PAGE>
6 Investor Expenses
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<TABLE>
<CAPTION>
Class descriptions begin on page 9
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Shareholder Fees (% of offering price) Class A Class B(1) Class B Class C Class S
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<S> <C> <C> <C> <C> <C>
Maximum front-end sales charge (load) 4.50(a) 0.00 0.00 0.00 0.00
Maximum deferred sales charge (load) 0.00(a) 5.00 5.00 1.00 0.00
<CAPTION>
Annual Fund Operating Expenses (% of average net assets) Class A Class B(1) Class B Class C Class S
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<S> <C> <C> <C> <C> <C>
Management fee 0.55 0.55 0.55 0.55 0.55
Service/distribution (12b-1) fees 0.30(b) 1.00 1.00 1.00 0.00
Other expenses 0.35 0.35 0.35 0.35 0.35
---- ---- ---- ---- ----
Total annual fund operating expenses 1.20 1.90 1.90 1.90 0.90
==== ==== ==== ==== ====
<CAPTION>
Example Year Class A Class B(1) Class B Class C Class S
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<S> <C> <C> <C> <C> <C> <C>
1 $567 $693/$193 $693/$193 $293/$193 $92
3 $814 $897/$597 $897/$597 $597 $287
5 $1,080 $1,226/$1,026 $1,226/$1,026 $1,026 $498
10 $1,839 $2,040 $2,040 $2,222 $1,108
</TABLE>
(a) Except for investments of $1 million or more; see page 10.
(b) Reflects fee schedule that became effective May 1, 2000 as if it had been
in place during the fund's previous fiscal year. The Trustees may increase
the current fees shown for Class A shares at any time, provided that the
fees do not exceed a maximum of 0.40%.
<PAGE>
7
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[Graphic: Magnifying Glass] 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.
o Shareholder Fees are costs that are charged to you directly. These fees
are not charged on reinvestments or exchanges.
o Annual Fund Expenses are deducted from the fund's assets every year, and
are thus paid indirectly by all fund investors.
o 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 shares after eight years.
When 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.
<PAGE>
8 The Fund continued
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[Graphic: Thinker] 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 $55 billion in assets under management (as of March 31, 2000),
including $19 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 average
net 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 senior vice president, he joined the firm in
1989 and has worked as an investment professional since 1986.
<PAGE>
Your Investment 9
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[Graphic: Key] 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.
[Graphic: Check List] 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 the 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
financial professionals, 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
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Class A -- Front Load
o Initial sales charge of 4.5% or less
o Lower sales charges for larger investments; see sales charge schedule at
right
o Lower annual expenses than Class B(1) or Class C shares because of lower
service/distribution (12b-1) fee of up to 0.40%
Class B(1) -- Back Load
o No initial sales charge
o Deferred sales charge of 5% or less on shares you sell within six years
o Annual service/distribution (12b-1) fee of 1.00%
o Automatic conversion to Class A shares after eight years, reducing future
annual expenses
Class B -- Back Load
o Available only to current Class B shareholders; see page 11 for details.
Class C -- Level Load
o No initial sales charge
o Deferred sales charge of 1%, paid if you sell shares within one year of
purchase
o Lower deferred sales charge than Class B(1) shares
o Annual service/distribution (12b-1) fee of 1.00%
o No conversion to Class A shares after eight years, so annual expenses do
not decrease
Class S -- Special Programs
o Available only through certain advisory accounts of the investment manager
and other special programs, including programs through financial
professionals with recordkeeping and other services; these programs
usually involve special conditions and separate fees (consult your
financial professional or your program materials)
o No sales charges of any kind
o No service/distribution (12b-1) fees; annual expenses are lower than other
share classes
Sales Charges
Class A -- Front Load
when you invest this % is which equals
this amount deducted this % of
for sales your net
charges investment
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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
With Class A shares, you pay a sales charge 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 up to 1% if you sell any shares within one year of
purchasing them. See "Other CDSC Policies" on page 12.
<PAGE>
11
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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
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
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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
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;
Class A shares have lower annual expenses.
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
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
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First year 1.00
Second year or later None
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
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Class C shares currently have the same annual expenses as Class B(1) shares, but
never convert to Class A 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.
[Graphic: Magnifying Glass] Understanding Service/Distribution Fees
As noted in the descriptions on pages 10 through 12 all share classes except
Class S have an annual service/distribution fee, also called a 12b-1 fee.
Under its current 12b-1 plans, the fund may pay certain service and distribution
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 fees are used to compensate those financial professionals who
sell fund shares and provide ongoing service to shareholders. The table on page
13 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.
<PAGE>
13
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[Graphic: Check] Dealer Compensation
Financial professionals who sell shares of State Street Research funds and
perform services for fund investors may receive sales commissions, annual fees
and other compensation. These are paid by the fund's distributor, using money
from sales charges, service/distribution (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.
Dealer Commissions (%) Class A Class B(1) Class B Class C Class S
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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
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 the sale of shares of the State Street Research
funds by the broker.
(a) If your financial professional declines this commission, the one-year CDSC
on your investment is waived.
<PAGE>
14 Buying and Selling Shares
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[Graphic: Cash Register] 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:
o $1,000 for accounts that use the Investamatic program
o $2,500 for all other accounts
Minimum Additional Investments:
o $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
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<TABLE>
<CAPTION>
To Open an Account To Add to an Account
<S> <C> <C>
[Graphic: Briefcase] Through a Consult your financial Consult your financial
Professional or professional or your program professional or your program
Program materials. materials.
By Mail [Graphic: Mailbox] Make your check payable to Fill out an investment slip from
"State Street Research Funds." an account statement, or
Forward the check and your indicate the fund name and
application to State Street account number on your check.
Research. Make your check payable to
"State Street Research Funds."
Forward the check and slip to
State Street Research.
[Graphic: Capital Building] By Federal Call to obtain an account number Call State Street Research to
Funds Wire and forward your application to obtain a control number.
State Street Research, then wire Instruct your bank to wire funds
funds using the instructions at to:
right. o State Street Bank and Trust
Company, Boston, MA
o ABA: 011000028
o BNF: fund name and share class
you want to buy
o AC: 99029761
o OBI: your name and your
account number
o Control: the number given to
you by State Street Research
By Electronic [Graphic: Plug] Verify that your bank is a Call State Street Research to
Funds Transfer member of the ACH (Automated verify that the necessary bank
(ACH) Clearing House) system. Forward information is on file for your
your application to State Street account. If it is, you may
Research. Please be sure to request a transfer by telephone
include the appropriate bank or Internet. If not, please ask
information. Call State Street State Street Research to provide
Research to request a purchase. you with an EZ Trader
application.
[Graphic: Calendar] By Investamatic Forward your application, with Call State Street Research to
all appropriate sections verify that Investamatic is in
completed, to State Street place on your account, or to
Research, along with a check for request a form to add it.
your initial investment payable Investments are automatic once
to "State Street Research Investamatic is in place.
Funds."
By Exchange [Graphic: Arrows Going in Read the prospectus for the fund Read the prospectus for the fund
Opposite Directions] into which you are exchanging. into which you are exchanging.
Call State Street Research or Call State Street Research or
visit our Web site. visit our 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
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[Graphic: Cash Register] Policies for Selling Shares
Circumstances that Require Written Requests Please submit instructions in
writing when any of the following apply:
o you are selling more than $100,000 worth of shares
o the name or address on the account has changed within the last 30 days
o you want the proceeds to go to a name or address not on the account
registration
o you are transferring shares to an account with a different registration or
share class
o 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
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<TABLE>
<S> <C>
[Graphic: Briefcase] Through a Consult your financial professional or your
Professional program materials.
or Program
By Mail [Graphic: 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: Capital Building] By Federal Check with State Street Research to make sure that
Funds Wire a wire redemption privilege, 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.
(See "Wire Transactions" on facing page.)
By Electronic [Graphic: Plug] Check with State Street Research to make sure that
Funds Transfer the EZ Trader feature, including a bank
(ACH) 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 sent to your pre-designated bank account.
[Graphic: Computer] By Internet Visit our Web site. Certain limitations may apply.
By Telephone [Graphic: Telephone] As long as the transaction does not require a
written request (see facing page), 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.
[Graphic: Arrows Going in Read the prospectus for the fund into which you
Opposite Directions] By Exchange are exchanging. Call State Street Research or
visit our Web site.
By Systematic [Graphic: Calendar] See plan information on page 21.
Withdrawal Plan
[Graphic: Check] By Check The checkwriting privilege is available for Class
A shares only. If you have requested 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: Policies] Account Policies
Telephone and Internet 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.
You may also use our Web site for submitting certain requests over the Internet.
As long as State Street Research takes certain measures to authenticate requests
over the telephone or Internet for 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. Similarly, you may choose not to use the Internet for your account.
The fund may suspend or eliminate the telephone or Internet privileges 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 may
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
<PAGE>
19
-----
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).
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 (but not later than 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:
o Requirements for initial or additional investments, reinvestments,
periodic investment plans, sponsored arrangements and other similar
programs may be changed from time to time without further notice or
supplement to this prospectus
o All orders to purchase shares are subject to acceptance by the fund
o 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
o The fund may delay sending you redemption proceeds for up to seven days,
or longer, if permitted by the SEC
o 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
- --------------------------------------------------------------------------------
[Graphic: Magnifying Glass] 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.
[Graphic: "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. To comply with tax regulations, the fund may be
required to pay an additional capital gains distribution.
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 long-term capital
gains are generally taxable as capital gains--in most cases, at a different rate
from that which applies to ordinary income.
The tax you pay on a given capital gains distribution generally depends on how
long the fund has held the portfolio
<PAGE>
21
-----
securities it sold. It does not depend on how 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,
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.
[Graphic: 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 12% of your fund assets a year (minimum $50 per
withdrawal) 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 or over the Internet 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: Policies] 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:
o lease obligations and installment contracts: issued by government entities
to obtain funds to lease or acquire equipment and other property
o project finance obligations: issued in connection with the financing of
infrastructure projects, such as toll roads or housing projects
o 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 certain 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 any time 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.
<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(1)
------------------------------------------------------------------------------------
Years ended December 31 Year ended December 31,
Per Share Data 1995 1996 1997 1998 1999 1999(b)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of year ($) 7.46 8.26 8.10 8.51 8.54 8.54
----- ----- ----- ----- ----- -----
Net investment income ($) 0.39 0.39 0.40 0.40 0.39 0.32
Net realized and unrealized gain (loss) on
investments and futures contracts ($) 0.82 (0.16) 0.40 0.08 (0.75) (0.74)
----- ----- ----- ----- ----- -----
Total from investment operations ($) 1.21 0.23 0.80 0.48 (0.36) (0.42)
----- ----- ----- ----- ----- -----
Dividends from net investment income ($) (0.41) (0.39) (0.39) (0.41) (0.39) (0.33)
Distributions from capital gains ($) -- -- -- (0.04) (0.00) (0.00)
----- ----- ----- ----- ----- -----
Total distributions ($) (0.41) (0.39) (0.39) (0.45) (0.39) (0.33)
----- ----- ----- ----- ----- -----
Net asset value, end of year ($) 8.26 8.10 8.51 8.54 7.79 7.79
===== ===== ===== ===== ===== =====
Total return (%)(a) 16.58 2.93 10.17 5.79 (4.34) (5.05)
Ratios/Supplemental Data
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets at end of year ($ thousands) 253,402 223,407 209,552 205,773 174,256 7,428
Expense ratio (%) 1.13 1.04 1.08 1.03 1.15 1.90
Expense ratio after expense reductions (%) 1.13 1.04 1.08 1.02 1.15 1.90
Ratio of net investment income to
average net assets (%) 4.95 4.82 4.91 4.69 4.64 3.89
Portfolio turnover rate (%) 97.32 125.24 60.48 36.22 24.60 24.60
</TABLE>
<PAGE>
25
-----
<TABLE>
<CAPTION>
Class B
----------------------------------------------------
Years ended December 31
Per Share Data 1995 1996 1997 1998 1999
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year ($) 7.46 8.26 8.10 8.51 8.54
----- ----- ----- ----- -----
Net investment income ($) 0.33 0.32 0.34 0.34 0.32
Net realized and unrealized gain (loss) on
investments and futures contracts ($) 0.82 (0.15) 0.40 0.08 (0.74)
----- ----- ----- ----- -----
Total from investment operations ($) 1.15 0.17 0.74 0.42 (0.42)
----- ----- ----- ----- -----
Dividends from net investment income ($) (0.35) (0.33) (0.33) (0.35) (0.33)
Distributions from capital gains ($) -- -- -- (0.04) (0.00)
----- ----- ----- ----- -----
Total distributions ($) (0.35) (0.33) (0.33) (0.39) (0.33)
----- ----- ----- ----- -----
Net asset value, end of year ($) 8.26 8.10 8.51 8.54 7.79
===== ===== ===== ===== =====
Total return (%)(a) 15.72 2.15 9.35 5.01 (5.05)
Ratios/Supplemental Data
- -------------------------------------------------------------------------------------------------------
Net assets at end of year ($ thousands) 51,827 51,710 54,093 63,445 49,002
Expense ratio (%) 1.88 1.79 1.83 1.78 1.90
Expense ratio after expense reductions (%) 1.88 1.79 1.83 1.77 1.90
Ratio of net investment income to
average net assets (%) 4.19 4.07 4.15 3.93 3.88
Portfolio turnover rate (%) 97.32 125.24 60.48 36.22 24.60
<CAPTION>
Class C
------------------------------------------------------
Years ended December 31
Per Share Data 1995 1996 1997 1998 1999
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year ($) 7.46 8.25 8.10 8.50 8.54
----- ----- ----- ----- -----
Net investment income ($) 0.33 0.32 0.34 0.33 0.32
Net realized and unrealized gain (loss) on
investments and futures contracts ($) 0.81 (0.14) 0.39 0.10 (0.74)
----- ----- ----- ----- -----
Total from investment operations ($) 1.14 0.18 0.73 0.43 (0.42)
----- ----- ----- ----- -----
Dividends from net investment income ($) (0.35) (0.33) (0.33) (0.35) (0.33)
Distributions from capital gains ($) -- -- -- (0.04) (0.00)
----- ----- ----- ----- -----
Total distributions ($) (0.35) (0.33) (0.33) (0.39) (0.33)
----- ----- ----- ----- -----
Net asset value, end of year ($) 8.25 8.10 8.50 8.54 7.79
===== ===== ===== ===== =====
Total return (%)(a) 15.58 2.28 9.23 5.14 (5.04)
Ratios/Supplemental Data
- --------------------------------------------------------------------------------------------------------
Net assets at end of year ($ thousands) 5 4,183 2,889 2,836 3,982 2,046
Expense ratio (%) 1.88 1.79 1.83 1.78 1.90
Expense ratio after expense reductions (%) 1.88 1.79 1.83 1.77 1.90
Ratio of net investment income to
average net assets (%) 4.13 4.06 4.16 3.86 3.88
Portfolio turnover rate (%) 97.32 125.24 60.48 36.22 24.60
</TABLE>
(a) Does not reflect any front-end or contingent deferred sales charges.
(b) January 1, 1999 (commencement of share class) to December 31, 1999.
<PAGE>
26 Financial Highlights continued
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class S
---------------------------------------------------------
Years ended December 31
Per Share Data 1995 1996 1997 1998 1999
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year ($) 7.45 8.24 8.09 8.49 8.52
----- ----- ----- ----- -----
Net investment income ($) 0.40 0.39 0.42 0.42 0.40
Net realized and unrealized gain (loss) on
investments and futures contracts ($) 0.81 (0.13) 0.39 0.08 (0.74)
----- ----- ----- ----- -----
Total from investment operations ($) 1.21 0.26 0.81 0.50 (0.34)
----- ----- ----- ----- -----
Dividends from net investment income ($) (0.42) (0.41) (0.41) (0.43) (0.41)
Distributions from capital gains ($) -- -- -- (0.04) (0.00)
----- ----- ----- ----- -----
Total distributions ($) (0.42) (0.41) (0.41) (0.47) (0.41)
----- ----- ----- ----- -----
Net asset value, end of year ($) 8.24 8.09 8.49 8.52 7.77
===== ===== ===== ===== =====
Total return (%)(a) 16.76 3.30 10.33 6.07 (4.11)
Ratios/Supplemental Data
- ------------------------------------------------------------------------------------------------------------
Net assets at end of year ($ thousands) 22,614 8,990 8,817 10,713 9,021
Expense ratio (%) 0.88 0.79 0.83 0.78 0.90
Expense ratio after expense reductions (%) 0.88 0.79 0.83 0.77 0.90
Ratio of net investment income
to average net assets (%) 4.85 5.04 5.15 4.93 4.88
Portfolio turnover rate (%) 97.32 125.24 60.48 36.22 24.60
</TABLE>
(a) Does not reflect any front-end or contingent deferred sales charge.
<PAGE>
Board of Trustees 27
- --------------------------------------------------------------------------------
[Graphic: Columns] 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
Bruce R. Bond
Former Chairman of the Board,
Chief Executive Officer and President,
PictureTel Corporation
Steve A. Garban
Former Senior Vice President for Finance
and Operations and Treasurer,
The Pennsylvania State University
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, Founders Investments Ltd.
President, The Glen Ellen Company
Michael S. Scott Morton
Jay W. Forrester Professor of
Management, Sloan School of
Management, Massachusetts
Institute of Technology
<PAGE>
28 Notes
- --------------------------------------------------------------------------------
<PAGE>
Notes 29
- --------------------------------------------------------------------------------
<PAGE>
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.
[Graphic: LOGO] STATE STREET RESEARCH
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 SEC's EDGAR database on the Internet at
www.sec.gov, by electronic request at [email protected], in person at the SEC's
Public Reference Room in Washington, DC (telephone 1-202-942-8090) or by mail by
sending your request, along with a duplicating fee, to the SEC's Public
Reference Section, Washington, DC 20549-0102.
prospectus
- ------------------------------
SEC File Number: 811-4558
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 on the fund's financial statements.
Ticker Symbols
- --------------------------------------------------------------------------------
Class A SSATX
Class B(1) (proposed) SSTPX
Class B SSXBX
Class C SSTDX
Class S SSXCX
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).
TE-1630-0500
Control Number: (exp0501) SSR-LD
<PAGE>
[LOGO] STATE STREET RESEARCH
New York Tax-Free Fund
[Graphic of Clock]
- --------------------------------------------------------------------------------
This prospectus has information you should know before you invest. Please read
it carefully and keep it with your investment records.
As with all mutual funds, the Securities and Exchange Commission has not
approved or disapproved these securities or determined if this prospectus is
truthful or complete. Any representation to the contrary is a criminal offense.
A municipal bond fund
seeking tax-free income for
New York State taxpayers.
Prospectus
May 1, 2000
- --------------------------------------------------------------------------------
<PAGE>
Contents
- --------------------------------------------------------------------------------
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
27 Board of Trustees
Back Cover For Additional Information
<PAGE>
The Fund 1
- --------------------------------------------------------------------------------
[Graphic: Chess Piece] 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.
[Graphic: Magnifying Glass] 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:
o current income that is exempt from federal, New York State and City income
taxes
o a portfolio of municipal securities
o a fund to complement a portfolio of more aggressive investments
The fund is not appropriate for investors who:
o want an investment for a tax-advantaged account such as an IRA or 401(k)
o do not pay personal income taxes in New York State
o want to avoid even moderate volatility or potential losses
o are seeking high growth or maximum income
o are investing emergency reserve money
<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.
[Graphic: Magnifying Glass] 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
-----
[Graphic: Stop Sign] 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 bond
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>
Years ended December 31
----------------------------------------------------------------------------------------------
Year-by-Year Total Return (Class A) 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
3.32 13.88 9.08 13.19 (6.04) 15.11 3.68 9.22 5.92 (4.87)
</TABLE>
Best Quarter: First Quarter 1995, up 5.64%
Worst Quarter: First Quarter 1994, down 5.30%
Return from 1/1/00 - 3/31/00 (not annualized): up 2.64%
<TABLE>
<CAPTION>
As of December 31, 1999
-------------------------------------------------
Average Annual Total Return (at maximum applicable sales charge) 1 Year 5 Years 10 Years
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Class A (%) (9.15) 4.64 5.52
Class B(1) (%)(a) (10.11) 4.49 5.49
Class B (%) (10.11) 4.49 5.49
Class C (%) (6.37) 4.84 5.50
Class S (%) (4.63) 5.86 6.19
Lehman Brothers Municipal Bond Index (%) (2.06) 6.91 6.89
Lipper New York Municipal Debt Funds Index (%) (4.96) 5.82 6.13
</TABLE>
(a) Performance for Class B(1) reflects Class B performance through December
31, 1998. Class B(1) was introduced on January 1, 1999.
<PAGE>
5
-----
[Graphic: Magnifying Glass] Understanding Volatility and Performance
The chart and table on the opposite page are designed to show two aspects of the
fund's track record:
o 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.
o 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 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 A, Class B and Class C from before 1993 had reflected their current
service/distribution (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.
<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(a) 0.00 0.00 0.00 0.00
Maximum deferred sales charge (load) 0.00(a) 5.00 5.00 1.00 0.00
<CAPTION>
Annual Fund Operating Expenses (% of average net assets) Class A Class B(1) Class B Class C Class S
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Management fee 0.55 0.55 0.55 0.55 0.55
Service/distribution (12b-1) fees 0.30(b) 1.00 1.00 1.00 0.00
Other expenses 0.48 0.48 0.48 0.48 0.48
---- ---- ---- ---- ----
Total annual fund operating expenses* 1.33 2.03 2.03 2.03 1.03
==== ==== ==== ==== ====
*Because some of the fund's expenses
have been subsidized or reduced
through expense offset arrangements,
actual total operating expenses for
the prior year were: 1.15 1.85 1.85 1.85 0.85
---- ---- ---- ---- ----
The fund expects the expense subsidy
to continue through the current fiscal
year, although there is no guarantee
that it will.
<CAPTION>
Example Year Class A Class B(1) Class B Class C Class S
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1 $579 $706/$206 $706/$206 $306/$206 $105
3 $859 $937/$637 $937/$637 $637 $328
5 $1,146 $1,293/$1,093 $1,293/$1,093 $1,093 $569
10 $1,979 $2,179 $2,179 $2,358 $1,259
</TABLE>
(a) Except for investments of $1 million or more; see page 10.
(b) Reflects fee schedule that became effective May 1, 2000 as if it had been
in place during the fund's previous fiscal year. The Trustees may increase
the current fees shown for Class A shares at any time, provided that the
fees do not exceed a maximum of 0.40%.
<PAGE>
7
-----
[Graphic: Magnifying Glass] 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:
o Shareholder Fees are costs that are charged to you directly. These fees
are not charged on reinvestments or exchanges.
o Annual Fund Operating Expenses are deducted from the fund's assets every
year, and are thus paid indirectly by all fund investors.
o 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 ClassB(1)
and Class B shares, it also assumes the automatic conversion to Class A
shares 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.
The figures in the example assume full annual expenses, and would be lower if
they reflected the various expense reductions that may have been taken.
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.
<PAGE>
8 The Fund continued
- --------------------------------------------------------------------------------
[Graphic: Thinker] 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 $55 billion in assets under management (as of March 31, 2000),
including $19 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 average
net 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 senior vice president, he joined the firm in 1989
and has worked as an investment professional since 1986.
<PAGE>
Your Investment 9
- --------------------------------------------------------------------------------
[Graphic: Key] 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.
[Graphic: Check List] 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 the 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
financial professionals, 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
o Initial sales charge of 4.5% or less
o Lower sales charges for larger investments; see sales charge schedule at
right
o Lower annual expenses than Class B(1) or Class C shares because of lower
service/distribution (12b-1) fee of up to 0.40%
Class B(1) -- Back Load
o No initial sales charge
o Deferred sales charge of 5% or less on shares you sell within six years
o Annual service/distribution (12b-1) fee of 1.00%
o Automatic conversion to Class A shares after eight years, reducing future
annual expenses
Class B -- Back Load
o Available only to current Class B shareholders; see page 11 for details
Class C -- Level Load
o No initial sales charge
o Deferred sales charge of 1%, paid if you sell shares within one year of
purchase
o Lower deferred sales charge than Class B(1) shares
o Annual service/distribution (12b-1) fee of 1.00%
o No conversion to Class A shares after eight years, so annual expenses do
not decrease
Class S -- Special Programs
o Available only through certain advisory accounts of the investment manager
and other special programs, including programs through financial
professionals with recordkeeping and other services; these programs
usually involve special conditions and separate fees (consult your
financial professional or your program materials)
o No sales charges of any kind
o No service/distribution (12b-1) fees; annual expenses are lower than other
share classes
Sales Charges
Class A -- Front Load
when you invest this % is which equals
this amount deducted this % of
for sales your net
charges investment
- --------------------------------------------------------------------------------
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
With Class A shares, you pay a sales charge 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 up to 1% if you
<PAGE>
11
-----
sell 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
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
- --------------------------------------------------------------------------------
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
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;
Class A shares have lower annual expenses.
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
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
- --------------------------------------------------------------------------------
First year 1.00
Second year or later None
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" below. Class C shares currently have the same annual expenses as Class
B(1) shares, but never convert to Class A 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.
[Graphic: Magnifying Glass] Understanding Service/Distribution Fees
As noted in the descriptions on pages 9 through 12, all share classes except
Class S have an annual service/distribution fee, also called a 12b-1 fee.
Under its current 12b-1 plans, the fund may pay certain service and distribution
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 fees are used to compensate those financial professionals who
sell fund shares and provide ongoing service to shareholders. The table on page
13 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.
<PAGE>
13
-----
[Graphic: Check] Dealer Compensation
Financial professionals who sell shares of State Street Research funds and
perform services for fund investors may receive sales commissions, annual fees
and other compensation. These are paid by the fund's distributor, using money
from sales charges, service/distribution (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.
Dealer Commissions (%) Class A Class B(1) Class B Class C Class S
- --------------------------------------------------------------------------------
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
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 the sale of shares of the State Street Research
funds by the broker.
(a) If your financial professional declines this commission, the one-year CDSC
on your investment is waived.
<PAGE>
14 Buying and Selling Shares
- --------------------------------------------------------------------------------
[Graphic: Cash Register] 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:
o $1,000 for accounts that use the Investamatic program
o $2,500 for all other accounts
Minimum Additional Investments:
o $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: Briefcase] Through a Consult your financial Consult your financial
Professional or professional or your program professional or your program
Program materials. materials.
By Mail [Graphic: Mailbox] Make your check payable to Fill out an investment slip from
"State Street Research Funds." an account statement, or
Forward the check and your indicate the fund name and
application to State Street account number on your check.
Research. Make your check payable to
"State Street Research Funds."
Forward the check and slip to
State Street Research.
[Graphic: Capital Building] By Federal Call to obtain an account number Call State Street Research to
Funds Wire and forward your application to obtain a control number.
State Street Research, then wire Instruct your bank to wire funds
funds using the instructions at to:
right. o State Street Bank and Trust
Company, Boston, MA
o ABA: 011000028
o BNF: fund name and share class
you want to buy
o AC: 99029761
o OBI: your name and your
account number
o Control: the number given to
you by State Street Research
By Electronic [Graphic: Plug] Verify that your bank is a Call State Street Research to
Funds Transfer member of the ACH (Automated verify that the necessary bank
(ACH) Clearing House) system. Forward information is on file for your
your application to State Street account. If it is, you may
Research. Please be sure to request a transfer by telephone
include the appropriate bank or Internet. If not, please ask
information. Call State Street State Street Research to provide
Research to request a purchase. you with an EZ Trader
application.
[Graphic: Calendar] By Investamatic Forward your application, with Call State Street Research to
all appropriate sections verify that Investamatic is in
completed, to State Street place on your account, or to
Research, along with a check for request a form to add it.
your initial investment payable Investments are automatic once
to "State Street Research Investamatic is in place.
Funds."
By Exchange [Graphic: Arrows Going in Read the prospectus for the fund Read the prospectus for the fund
Opposite Directions] into which you are exchanging. into which you are exchanging.
Call State Street Research or Call State Street Research or
visit our Web site. visit our 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: Cash Register] Policies for Selling Shares
Circumstances that Require Written Requests Please submit instructions in
writing when any of the following apply:
o you are selling more than $100,000 worth of shares
o the name or address on the account has changed within the last 30 days
o you want the proceeds to go to a name or address not on the account
registration
o you are transferring shares to an account with a different registration or
share class
o 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>
<CAPTION>
To Sell Some or All of Your Shares
<S> <C>
[Graphic: Briefcase] Through a Consult your financial professional or your
Professional program materials.
or Program
By Mail [Graphic: 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: Capital Building] By Federal Check with State Street Research to make sure that
Funds Wire a wire redemption privilege, 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.
(See "Wire Transactions" on facing page.)
By Electronic [Graphic: Plug] Check with State Street Research to make sure that
Funds Transfer the EZ Trader feature, including a bank
(ACH) 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 sent to your pre-designated bank account.
[Graphic: Computer] By Internet Visit our Web site. Certain limitations may apply.
By Telephone [Graphic: Telephone] As long as the transaction does not require a
written request (see facing page), 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.
[Graphic: Arrows Going in Read the prospectus for the fund into which you
Opposite Directions] By Exchange are exchanging. Call State Street Research or
visit our Web site.
By Systematic [Graphic: Calendar] See plan information on page 21.
Withdrawal Plan
[Graphic: Check] By Check The checkwriting privilege is available for Class
A shares only. If you have requested 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: Policies] Account Policies
Telephone and Internet 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.
You may also use our Web site for submitting certain requests over the Internet.
As long as State Street Research takes certain measures to authenticate
requests over the telephone or Internet for 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. Similarly, you may choose not to use the Internet
for your account. The fund may suspend or eliminate the telephone or Internet
privileges 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 may
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
<PAGE>
19
-----
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).
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 (but not later than 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:
o Requirements for initial or additional investments, reinvestments,
periodic investment plans, sponsored arrangements and other similar
programs may be changed from time to time without further notice or
supplement to this prospectus
o All orders to purchase shares are subject to acceptance by the fund
o 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
o The fund may delay sending you redemption proceeds for up to seven days,
or longer if permitted by the SEC
o 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
- --------------------------------------------------------------------------------
[Graphic: Magnifying Glass] 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.
[Graphic: "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. To comply with tax regulations, the fund may be
required to pay an additional capital gains distribution.
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 long-term capital
gains are generally taxable as capital gains - in most cases, at a different
rate from that which applies to ordinary income.
The tax you pay on a given capital gains distribution generally depends on how
<PAGE>
21
-----
long the fund has held the portfolio securities it sold. It does not depend on
how 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: 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 12% of your fund assets a year (minimum $50 per withdrawal) 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 or over the Internet 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: Policies] 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:
o lease obligations and installment contracts: issued by government entities
to obtain funds to lease or acquire equipment and other property
o project finance obligations: issued in connection with the financing of
infrastructure projects, such as toll roads or housing projects
o 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 certain
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 any time 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.
<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(1)
-----------------------------------------------------------------------
Years ended December 31 Year ended December 31
Per Share Data 1995 1996 1997 1998 1999 1999(b)
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of year ($) 7.53 8.23 8.13 8.48 8.52 8.52
------ ------ ------ ------ ------ -----
Net investment income ($)* 0.40 0.38 0.39 0.39 0.40 0.34
Net realized and unrealized gain (loss) on
investments and futures contracts ($) 0.71 (0.09) 0.35 0.09 (0.77) (0.77)
------ ------ ------ ------ ------ -----
Total from investment operations ($) 1.11 0.29 0.74 0.48 (0.37) (0.43)
------ ------ ------ ------ ------ -----
Dividends from net investment income ($) (0.41) (0.39) (0.39) (0.40) (0.40) (0.34)
Distributions from capital gains ($) -- -- -- (0.04) (0.03) (0.03)
------ ------ ------ ------ ------ -----
Total distributions ($) (0.41) (0.39) (0.39) (0.44) (0.43) (0.37)
------ ------ ------ ------ ------ -----
Net asset value, end of year ($) 8.23 8.13 8.48 8.52 7.72 7.72
====== ====== ====== ====== ====== =====
Total return (%)(a) 15.11 3.68 9.22 5.92 (4.87) (5.58)
Ratios/Supplemental Data
- -----------------------------------------------------------------------------------------------------------------------
Net assets at end of year ($ thousands) 20,043 19,636 20,193 21,831 20,158 3,797
Expense ratio (%)* 1.10 1.10 1.10 1.12 1.11 1.86
Expense ratio after expense reductions (%)* 1.10 1.10 1.10 1.10 1.10 1.85
Ratio of net investment income to
average net assets (%)* 5.07 4.76 4.88 4.55 4.54 3.88
Portfolio turnover rate (%) 109.74 89.14 50.92 32.86 43.02 43.02
*Reflects voluntary reduction of expenses
per share of these amounts ($) 0.02 0.01 0.01 0.01 0.02 0.02
</TABLE>
<PAGE>
25
-----
<TABLE>
<CAPTION>
Class B Class C
-------------------------------------------------------------------------------------
Years ended December 31 Years ended December 31
Per Share Data 1995 1996 1997 1998 1999 1995 1996 1997 1998 1999
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of year ($) 7.53 8.23 8.13 8.48 8.52 7.53 8.23 8.13 8.49 8.52
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Net investment income ($)* 0.34 0.32 0.33 0.32 0.34 0.35 0.32 0.34 0.32 0.35
Net realized and unrealized gain (loss) on
investments and futures contracts ($) 0.71 (0.09) 0.35 0.10 (0.77) 0.70 (0.09) 0.35 0.09 (0.77)
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Total from investment operations ($) 1.05 0.23 0.68 0.42 (0.43) 1.05 0.23 0.69 0.41 (0.42)
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Dividends from net investment income ($) (0.35) (0.33) (0.33) (0.34) (0.34) (0.35) (0.33) (0.33) (0.34) (0.34)
Distributions from capital gains ($) -- -- -- (0.04) (0.03) -- -- -- (0.04) (0.03)
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Total distributions ($) (0.35) (0.33) (0.33) (0.38) (0.37) (0.35) (0.33) (0.33) (0.38) (0.37)
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Net asset value, end of year ($) 8.23 8.13 8.48 8.52 7.72 8.23 8.13 8.49 8.52 7.73
===== ===== ===== ===== ===== ===== ===== ===== ===== =====
Total return (%)(a) 14.26 2.91 8.41 5.14 (5.58) 14.25 2.90 8.53 5.01 (5.46)
Ratios/Supplemental Data
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets at end of year ($ thousands) 15,084 16,824 17,426 19,273 14,957 651 622 805 1,122 731
Expense ratio (%)* 1.85 1.85 1.85 1.87 1.86 1.85 1.85 1.85 1.87 1.86
Expense ratio after expense reductions (%)* 1.85 1.85 1.85 1.85 1.85 1.85 1.85 1.85 1.85 1.85
Ratio of net investment income to
average net assets (%)* 4.32 4.01 4.12 3.81 3.78 4.35 4.03 4.11 3.80 3.78
Portfolio turnover rate (%) 109.74 89.14 50.92 32.86 43.02 109.74 89.14 50.92 32.86 43.02
*Reflects voluntary reduction of expenses
per share of these amounts ($) 0.02 0.01 0.01 0.01 0.02 0.02 0.01 0.01 0.01 0.02
</TABLE>
(a) Does not reflect any front-end or contingent deferred sales charges. Total
return would be lower if the distributor and its affiliates had not
voluntarily reduced the fund's expenses.
(b) January 1, 1999 (commencement of share class) to December 31, 1999.
<PAGE>
26
- -----
<TABLE>
<CAPTION>
Class S
-----------------------------------------------
Years ended December 31
Per Share Data 1995 1996 1997 1998 1999
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year ($) 7.54 8.24 8.14 8.49 8.53
------ ------ ------ ------ ------
Net investment income ($)* 0.42 0.40 0.43 0.41 0.42
Net realized and unrealized gain (loss) on investments and futures contracts ($) 0.71 (0.09) 0.33 0.09 (0.77)
------ ------ ------ ------ ------
Total from investment operations ($) 1.13 0.31 0.76 0.50 (0.35)
------ ------ ------ ------ ------
Dividends from net investment income ($) (0.43) (0.41) (0.41) (0.42) (0.42)
Distributions from capital gains ($) -- -- -- (0.04) (0.03)
------ ------ ------ ------ ------
Total distributions ($) (0.43) (0.41) (0.41) (0.46) (0.45)
------ ------ ------ ------ ------
Net asset value, end of year ($) 8.24 8.14 8.49 8.53 7.73
====== ====== ====== ====== ======
Total return (%)(a) 15.37 3.93 9.48 6.18 (4.63)
Ratios/Supplemental Data
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets at end of year ($ thousands) 38,757 34,050 31,759 29,505 27,579
Expense ratio (%)* 0.85 0.85 0.85 0.87 0.86
Expense ratio after expense reductions (%)* 0.85 0.85 0.85 0.85 0.85
Ratio of net investment income to average net assets (%)* 5.33 5.01 5.13 4.81 4.79
Portfolio turnover rate (%) 109.74 89.14 50.92 32.86 43.02
*Reflects voluntary reduction of expenses per share of these amounts ($) 0.02 0.01 0.01 0.01 0.02
</TABLE>
(a) Does not reflect any front-end or contingent deferred sales charges. Total
return would be lower if the distributor and its affiliates had not
voluntarily reduced the fund's expenses.
<PAGE>
Board of Trustees 27
- --------------------------------------------------------------------------------
[Graphic: Columns] 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
Bruce R. Bond
Former Chairman of the Board,
Chief Executive Officer and President,
PictureTel Corporation
Steve A. Garban
Former Senior Vice President for Finance
and Operations and Treasurer,
The Pennsylvania State University
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, Founders Investments Ltd.
President, The Glen Ellen Company
Michael S. Scott Morton
Jay W. Forrester Professor of
Management, Sloan School of
Management, Massachusetts
Institute of Technology
<PAGE>
28 Notes
- --------------------------------------------------------------------------------
<PAGE>
Notes 29
- --------------------------------------------------------------------------------
<PAGE>
For Additional Information
- --------------------------------------------------------------------------------
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.
[LOGO] STATE STREET RESEARCH
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 SEC's EDGAR database on the Internet at
www.sec.gov, by electronic request at [email protected], in person at the SEC's
Public Reference Room in Washington, DC (telephone 1-202-942-8090) or by mail by
sending your request, along with a duplicating fee, to the SEC's Public
Reference Section, Washington, DC 20549-0102.
prospectus
- -------------------------
SEC File Number: 811-4558
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 on the fund's financial statements.
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).
NYTF-1632-0500
Control Number: (exp0501) SSR-LD
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
for
STATE STREET RESEARCH TAX-EXEMPT FUND
STATE STREET RESEARCH NEW YORK TAX-FREE FUND
Series of State Street Research Tax-Exempt Trust
May 1, 2000
This Statement of Additional Information is divided into two sections.
Section One contains information which is specific to each fund identified
above. Section Two contains information which generally is shared by the mutual
funds.
The Statement of Additional Information is not a Prospectus. It should be
read in conjunction with current Prospectuses of each fund specified above. The
date of the current prospectus of each fund specified above is:
State Street Research Tax-Exempt Fund May 1, 2000
State Street Research New York Tax-Free Fund May 1, 2000
Financial statements for each fund specified above, as of and for the most
recently completed fiscal year, are included in its Annual Report to
Shareholders for that year. The financial statements include The Fund's
Accounting Policies, Portfolio Holdings, Statement of Assets and Liabilities,
Statement of Operations, Statement of Changes in Net Assets, Financial
Highlights and Report of Independent Accountants. The financial statements are
hereby incorporated by reference from the following Annual Reports.
EDGAR
Annual Report Fiscal Year Ended Accession Number
- ------------- ----------------- ----------------
State Street Research Tax-Exempt Fund December 31, 1999 0000950156-00-000140
State Street Research
New York Tax-Free Fund December 31, 1999 0000950156-00-000140
Management's Discussion of Fund Performance for each Fund's latest fiscal
year ended December 31, 1999 is also included in the Annual Reports.
Each Prospectus and shareholder report may be obtained without charge from
State Street Research Investment Services, Inc., One Financial Center, Boston,
Massachusetts 02111-2690 or by calling 1-800-562-0032.
Control Number: (exp0501)SSR-LD SSR-1631-0400
<PAGE>
TABLE OF CONTENTS
Page
----
SECTION I...............................................................I, 1-1
1. STATE STREET RESEARCH TAX-EXEMPT FUND.......................I, 1-1
A. The Fund..............................................I, 1-1
B. Investment Objective..................................I, 1-1
C. Fundamental and Nonfundamental Restrictions...........I, 1-1
D. Restricted Securities.................................I, 1-3
E. Foreign Investments...................................I, 1-4
F. Industry Classifications..............................I, 1-5
G. Investment Advisory Fee...............................I, 1-6
H. Portfolio Turnover....................................I, 1-6
I. Brokerage Commissions.................................I, 1-6
J. Sales Charges on Shares...............................I, 1-7
K. Rule 12b-1 Fees.......................................I, 1-7
L. Performance...........................................I, 1-8
2. STATE STREET RESEARCH NEW YORK TAX-FREE FUND................I, 2-1
A. The Fund..............................................I, 2-1
B. Investment Objective..................................I, 2-1
C. Fundamental and Nonfundamental Restrictions...........I, 2-1
D. Restricted Securities.................................I, 2-4
E. Industry Classifications..............................I, 2-4
F. Control Persons and Principal Holders of Securities...I, 2-5
G. Trustee Compensation..................................I, 2-7
H. Investment Advisory Fee...............................I, 2-8
I. Portfolio Turnover....................................I, 2-9
J. Brokerage Commissions.................................I, 2-9
K. Sales Charges on Shares...............................I, 2-10
L. Rule 12b-1 Fees.......................................I, 2-10
M. Performance...........................................I, 2-11
N. New York Municipal Obligations........................I, 2-13
(i)
<PAGE>
Page
----
SECTION II..............................................................II-1
A. Additional Information Concerning Investment
Restrictions, Certain Risks and Investment
Techniques............................................II-1
B. Debt Instruments and Permitted Cash Investments.......II-9
C. The Trusts, the Trustees and Officers and Fund
Shares................................................II-18
D. Investment Advisory Services..........................II-26
E. Purchase and Redemption of Shares.....................II-27
F. Shareholder Accounts..................................II-35
G. Net Asset Value.......................................II-40
H. Portfolio Transactions................................II-41
I. Certain Tax Matters...................................II-44
J. Distribution of Fund Shares...........................II-47
K. Calculation of Performance Data.......................II-50
L. Custodian.............................................II-53
M. Independent Accountants...............................II-54
N. Financial Reports.....................................II-54
(ii)
<PAGE>
Definitions
Each of the following terms used in this Statement of Additional
Information has the meaning set forth below.
"1940 Act" means the Investment Company Act of 1940, as amended.
"Distributor" means State Street Research Investment Services, Inc., One
Financial Center, Boston, Massachusetts 02111-2690.
"Investment Manager" means State Street Research & Management Company, One
Financial Center, Boston, Massachusetts 02111-2690.
"MetLife" means Metropolitan Life Insurance Company.
"NYSE" means the New York Stock Exchange, Inc.
"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.
(iii)
<PAGE>
SECTION I
1. STATE STREET RESEARCH TAX-EXEMPT FUND
A. The Fund
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 Fund is an "open-end" management investment company and is a
"diversified company" as those terms are defined in the 1940 Act. Among other
things, a diversified fund must, with respect to 75% of its total assets, not
invest more than 5% of its total assets in any one issuer.
B. Investment Objective
The investment objective of State Street Research Tax-Exempt Fund 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.
C. Fundamental and Nonfundamental Investment Restrictions
The Tax-Exempt 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 without a shareholder vote.
Fundamental Investment Restrictions.
It is the Tax-Exempt 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;
I, 1-1
<PAGE>
(3) not to underwrite or participate in the marketing of securities of
other issuers, although the Fund may, acting alone or in syndicates
or groups, if determined by the Trust's Board of Trustees, purchase
or otherwise acquire securities of other issuers for investment,
either from the issuers or from persons in a control relationship
with the issuers or from underwriters of such securities; [as a
matter of interpretation, which is not part of the fundamental
policy, this restriction does not apply to the extent that, in
connection with the disposition of the Fund's securities, the Fund
may be deemed to be an underwriter under certain federal securities
laws];
(4) not to purchase or sell real estate in fee simple;
(5) not to invest in physical commodities or physical commodity
contracts or options in excess of 10% of the Fund's total assets,
except that investments in essentially financial items or
arrangements such as, but not limited to, swap arrangements,
hybrids, currencies, currency and other forward contracts, delayed
delivery and when-issued contracts, futures contracts and options on
futures contracts on securities, securities indices, interest rates
and currencies, shall not be deemed investments in commodities or
commodities contracts;
(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
I, 1-2
<PAGE>
and interest payment. The Fund would use the proceeds from the
transaction to buy other money market securities, which are either
maturing or under the terms of a resale agreement, on the same day
as (or day prior to) the expiration of the reverse repurchase
agreement, and would employ a reverse repurchase agreement when
interest income from investing the proceeds of the transaction is
greater than the interest expense of the reverse repurchase
agreement.
Nonfundamental Investment Restrictions.
It is the Tax-Exempt 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); and
(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.
D. 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.
I, 1-3
<PAGE>
E. Control Persons and Principal Holders of Securities
As of March 31, 2000, 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, B(1), C and S shares.
Record ownership of shares of the Fund as of March 31, 2000 was as
follows:
<TABLE>
<CAPTION>
% of
Class Holder Class
- ----- ------ -----
<S> <C> <C>
B(1) Metropolitan Life 6.3
B Merrill Lynch 5.4
C Merrill Lynch 54.7
Donaldson Lufkin Jenrette 5.1
S Turtle & Co. 31.8
</TABLE>
The full name and address of the above institutions are:
Metropolitan Life Insurance Company(a)
One Madison Avenue
New York, NY 10010
Merrill Lynch, Pierce, Fenner & Smith, Inc.(b)
4800 Deerlake Drive E.
Jacksonville, FL 32246
Donaldson Lufkin Jenrette(b)
Securities Corporation Inc.
P.O. Box 2052
Jersey City, NJ 07303-2052
Turtle & Co.(c)
c/o State Street Research Service Center
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 each named recordholder does not have beneficial
ownership of such shares
(c) Turtle & Co. is a nominee name for shares held in private advisory accounts
managed by the Investment Manager, which has discretion to vote any Fund
shares in such accounts.
- ------------------
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.
I, 1-4
<PAGE>
F. Trustee Compensation
The Trustees of State Street Research Tax-Exempt Fund were compensated as
follows:
Total Compensation
From All State
Total Compensation Street Research
Aggregate From All State Funds and
Compensation Street Research Metropolitan Series
From Fund Funds Paid to Fund, Inc. Paid to
Name of Trustee (a)(b) Trustees (c) Trustees (d)
--------------- ------ ------------ ------------
Bruce R. Bond $ 2,323 $ 55,495 $ 55,495
Steve A. Garban $ 3,904 $ 80,150 $ 110,900
Dean O. Morton $ 3,948 $ 81,150 $ 108,900
Susan M. Phillips $ 3,623 $ 57,150 $ 57,150
Toby Rosenblatt $ 3,323 $ 67,900 $ 67,900
Michael S. Scott Morton $ 4,098 $ 85,250 $ 113,000
Ralph F. Verni $ 0 $ 0 $ 0
- ----------------
(a) For the Fund's fiscal year ended December 31, 1999.
(b) The Fund does not provide any pension or retirement benefits for the
Trustees.
(c) Includes compensation on behalf of all series of 11 investment companies
for which the Investment Manager has served as sole investment adviser.
The figure in this column is for the 12 months ended December 31, 1999.
(d) Includes compensation on behalf of all series of 11 investment companies
for which the Investment Manager has served as sole investment adviser and
all series of Metropolitan Series Fund, Inc. The primary adviser to
Metropolitan Series Fund, Inc. is Metropolitan Life Insurance Company,
which has retained State Street Research & Management Company as
sub-adviser to certain series of Metropolitan Series Fund, Inc. The figure
indicated in this column includes compensation relating to series of
Metropolitan Series Fund, Inc. which are not advised by State Street
Research & Management Company. "Total Compensation from All State Street
Research Funds and Metropolitan Series Fund, Inc. Paid to Trustees" is
for the 12 months ended December 31, 1999.
I, 1-5
<PAGE>
G. Investment Advisory Fee
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.
The annual percentage rate: 0.55%.
Advisory Fee Paid
-----------------
Fiscal year ended December 31, 1999 $ 1,498,106
Fiscal year ended December 31, 1998 $ 1,527,580
Fiscal year ended December 31, 1997 $ 1,510,208
For more information on the investment advisory arrangements, see section
II, D of this Statement of Additional Information.
H. 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).
Portfolio Turnover Rates
------------------------
Fiscal year ended December 31, 1999 24.60%
Fiscal year ended December 31, 1998 36.22%
For more information on portfolio turnover, see Section II, H of this
Statement of Additional Information.
I. Brokerage Commissions
During the fiscal years ended December 31, 1999, 1998 and 1997, 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.
For more information on brokerage commissions, see Section II, H of this
Statement of Additional Information.
I, 1-6
<PAGE>
J. Sales Charges on Shares
Front-end Sales Charges (Class A)
<TABLE>
<CAPTION>
Retained by Distributor
After Reallowance of
Total Sales Charges Concessions to Dealers
------------------- ----------------------
<S> <C> <C>
Fiscal year ended December 31, 1999 $ 725,094 $ 101,969
Fiscal year ended December 31, 1998 $ 540,127 $ 68,263
Fiscal year ended December 31, 1997 $ 417,021 $ 58,730
</TABLE>
Contingent Deferred Sales Charges (Classes A, B(1), B and C)
<TABLE>
<CAPTION>
Fiscal Year Fiscal Year Fiscal Year
Ended December 31, 1999 Ended December 31, 1998 Ended December 31, 1997
----------------------- ----------------------- -----------------------
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 $623,125 $ 0 $471,864 $ 0 $358,291
Class B(1)* $ 20,853 $501,381 $ 0 $ 0 $ 0 $ 0
Class B $ 86,755 $ 20,409 $ 89,197 $446,006 $163,953 $250,218
Class C $ 1,429 $ 4,489 $ 1,045 $ 6,941 $ 5,380 $ 6,959
</TABLE>
- ----------------
*Class B(1) was introduced January 1, 1999.
For more information about sales charges, see Section II, E of this
Statement of Additional Information.
K. Rule 12b-1 Fees
The Tax-Exempt Fund has adopted plans of distribution pursuant to Rule
12b-1 under the 1940 Act ("Distribution Plan(s)"). Under the Distribution Plans,
the Fund may engage, directly or indirectly, in financing any activities
primarily intended to result in the sale of shares of the Fund. Under the
Distribution Plans, the Fund provides the Distributor with a service fee at an
annual rate of 0.25% on the average daily net assets of Class A, Class B(1),
Class B and Class C shares. The Fund also provides a distribution fee at an
annual rate of (i) up to 0.15% on the average daily net assets of Class A
shares, and (ii) 0.75% on the average daily net assets of Class B(1), Class B
and Class C shares. The service and distribution fees are used to cover personal
services and/or the maintenance of shareholder accounts provided by the
Distributor, brokers, dealers, financial professionals or others, and sales,
promotional and marketing activities relating to the respective classes.
Under the Distribution Plan covering Class A, Class B and Class C shares,
the Fund's payments are intended to reimburse the Distributor for expenditures
incurred under the plan, and any unused payments are returnable to the Fund.
I, 1-7
<PAGE>
Under the Distribution Plan covering Class B(1) shares, the Fund's
payments compensate the Distributor for services and expenditures incurred under
the plan, and none of the payments are returnable to the Fund.
During the fiscal year ended December 31, 1999, the Tax-Exempt Fund paid
the fees under the Distribution Plans and the fees were used as set forth below.
The Distributor may have also used additional resources of its own for further
expenses on behalf of the Fund.
<TABLE>
<CAPTION>
Class A Class B(1) Class B Class C
------- ---------- ------- -------
<S> <C> <C> <C> <C>
Advertising $ 0 $ 3,585 $ 0 $ 965
Printing and mailing of prospectuses 0 694 0 187
to other than current shareholders
Compensation to dealers 493,398 27,937 355,838 22,228
Compensation to sales personnel 0 8,321 0 2,168
Interest 0 0 0 0
Carrying or other financing charges 0 0 0 0
Other expenses: marketing; general 0 8,056 26,726 1,949
Fees to offset carryforwards* 0 0 186,287 0
-------- -------- ---------- ----------
Total Fees $493,398 $ 48,593 $ 568,851 $ 27,497
======== ======== ========== ==========
Unreimbursed expenses carried forward $ - $162,447 $1,657,597 $1,324,697
</TABLE>
- --------------------------------
* Net fees result from the timing of expenditures and are used against expense
carry forwards.
For more information about Rule 12b-1 fees, see Section II, J of this
Statement of Additional Information.
L. Performance
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 Tax-Exempt Fund.
I, 1-8
<PAGE>
Standard Total Return
The average annual total return ("standard total return") of each class of
shares of the Tax-Exempt Fund was as follows:
Ten Years Five Years One Year
Ended Ended Ended
December 31, 1999 December 31, 1999 December 31, 1999
----------------- ----------------- -----------------
Class A 5.50% 5.02% -8.65%
Class B(1) 5.47% 4.88% -9.61%
Class B 5.47% 4.88% -9.62%
Class C 5.47% 5.21% -5.96%
Class S 6.14% 6.24% -4.11%
Yield
The annualized yield of each class of shares of the Tax-Exempt Fund based
on the month of December, 1999 was as follows:
Class A 4.67%
Class B(1) 4.13%
Class B 4.13%
Class C 4.13%
Class S 5.14%
For more information about performance, see Section II, K of this
Statement of Additional Information.
I, 1-9
<PAGE>
SECTION I
1. STATE STREET RESEARCH NEW YORK TAX-FREE FUND
A. The Fund
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 Fund is an "open-end" management investment company and is a
"diversified company" as those terms are defined in the 1940 Act. Among other
things, a diversified fund must, with respect to 75% of its total assets, not
invest more than 5% of its total assets in any one issuer.
B. Investment Objective
The investment objective of the State Street Research New York Tax-Free
Fund 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.
C. Fundamental and Nonfundamental Investment Restrictions
The New York Tax-Free 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 without a shareholder vote.
Fundamental Investment Restrictions.
It is the New York Tax-Free 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;
I, 2-1
<PAGE>
(3) not to underwrite or participate in the marketing of securities of
other issuers, except (a) the Fund may, acting alone or in
syndicates or groups, if determined by the Trust's Board of
Trustees, purchase or otherwise acquire securities of other issuers
for investment, either from the issuers or from persons in a control
relationship with the issuers or from underwriters of such
securities; and (b) to the extent that, in connection with the
disposition of the Fund's securities, the Fund may be deemed to be
an underwriter under certain federal securities laws;
(4) not to purchase or sell fee simple interests in real estate,
although the Fund may purchase and sell other interests in real
estate including securities which are secured by real estate, or
securities of companies which own or invest or deal in real estate;
(5) not to invest in physical commodities or physical commodity
contracts or options in excess of 10% of the Fund's total assets,
except that investments in essentially financial items or
arrangements such as, but not limited to, swap arrangements,
hybrids, currencies, currency and other forward contracts, delayed
delivery and when-issued contracts, futures contracts and options on
futures contracts on securities, securities indices, interest rates
and currencies, shall not be deemed investments in commodities or
commodities contracts;
(6) not to make loans, except that the Fund may lend portfolio
securities and purchase bonds, debentures, notes and similar
obligations (including repurchase agreements with respect thereto);
(7) not to conduct arbitrage transactions (provided that investments in
futures and options shall not be deemed arbitrage transactions);
(8) not to invest in oil, gas or other mineral exploration or
development programs (provided that the Fund may invest in
securities issued by companies which invest in or sponsor such
programs and in securities indexed to the price of oil, gas or other
minerals);
(9) not to make any investment which would cause more than 25% of the
value of the Fund's total assets to be invested in securities of
issuers principally engaged in any one industry [for purposes of
this restriction, (a) utilities will be divided according to their
services so that, for example, gas, gas transmission, electric and
telephone companies will each be deemed in a separate industry, (b)
oil and oil related companies will be divided by type so that, for
example, oil production companies, oil service companies and
refining and marketing companies will each be deemed in a separate
industry, (c) finance companies will be classified according to the
industries of their parent companies, (d) securities issued or
guaranteed by the U.S. Government or its agencies or
instrumentalities (including repurchase agreements involving such
U.S. Government securities to the extent excludable under relevant
regulatory interpretations) shall be excluded; (e) industrial
development revenue
I, 2-2
<PAGE>
bonds which are based, directly or indirectly, on the credit of
private issuers will be classified according to the industry of the
issuer, and (f) New York State and other jurisdictions and each of
their separate political subdivisions, agencies, authorities or
instrumentalities are treated as separate issuers and are not
regarded as members of any industry];
(10) not to borrow money except for borrowings from banks for
extraordinary and emergency purposes, such as permitting redemption
requests to be honored, and then not in an amount in excess of 25%
of the value of its total assets, and except insofar as reverse
repurchase agreements may be regarded as borrowing. As a matter of
current operating, but not fundamental, policy, the Fund will not
purchase additional portfolio securities at any time when it has
outstanding money borrowings in excess of 5% of the Fund's total
assets (taken at current value); and
(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.
Nonfundamental Investment Restrictions.
It is the New York Tax-Free 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); and
I, 2-3
<PAGE>
(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.
D. 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.
E. Industry Classifications
In determining how much of the Fund's portfolio is invested in a given
industry, the following industry classifications are currently used. Industry
classifications are subject to change from time to time. 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.
I, 2-4
<PAGE>
Airport
Co-Generation
College
Certificate of Participation
Economic Development
Education
Escrowed
Forwards
Futures
General Obligation - Local
General Obligation - State
General Obligation - City
General Obligation - County
Higher Education
Hospital
Industrial Development Revenue/Pollution Control Revenue
Insured
Lease Revenue
Life Care
Multi-Family
Power
Pre-refunded
Resource Recovery
Revenue
Single Family
Special Tax
Structured Finance
Toll Road
Transportation
Water/Sewer
F. Control Persons and Principal Holders of Securities
Trustees and Officers
As of March 31, 2000, the Trustees and principal officers of the Trust
as a group owned none of the Fund's outstanding shares.
Other Persons
The following persons or entities were the record and/or beneficial owners
of the following approximate percentages of the New York Tax-Free Fund's
outstanding shares. All information is as of March 31, 2000.
I, 2-5
<PAGE>
% of
Class Holder Class
- ----- ------ -----
B(1) Metropolitan Life 12.1
E.M. Burke 9.9
H.E. Wilton 6.3
B Merrill Lynch 6.3
C S.T. and R. Iovino, Jt. Ten. 6.2
State Street Research 61.2
Merrill Lynch 16.3
M.M. Rousseau 10.2
D.R. and W. Caesar-Dare, 6.2
Jt . Ten.
The full name and address of the above institutions are:
Metropolitan Life Insurance Company(a)
Securities Accounting & Reporting
303 Perimeter Center North
Atlanta, GA 30346-0412
Merrill, Lynch, Pierce, Fenner & Smith, Inc.(b)
(for the sole benefit of its customers)
4800 Deerlake Drive East
Jacksonville, FL 32246
E.M. Burke
H.E. Wilton
M.M. Rousseau
D.R. and W. Caesar-Dare, Jt. Ten.
S.T. and R. Iovino, Jt. Ten.
c/o State Street Research Service Center
One Financial Center
Boston, MA 02111
State Street Research
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.
- -----------------------------
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.
I, 2-6
<PAGE>
G. Trustee Compensation
The Trustees of State Street Research New York Tax-Free Fund were
compensated as follows:
<TABLE>
<CAPTION>
Total
Compensation
Total From All State Research
Compensation Funds and
Aggregate from All State Metropolitan Series
Name of Compensation Street Research Funds Fund, Inc. Paid
Trustee From Fund(a)(b) Paid to Trustees(c) to Trustees(d)
------- --------------- ------------------- --------------
<S> <C> <C> <C>
Bruce R. Bond $ 1,289 $ 55,495 $ 55,495
Steve A. Garban $ 2,122 $ 80,150 $ 110,900
Dean O. Morton $ 2,152 $ 81,150 $ 108,900
Susan M. Phillips $ 1,864 $ 57,150 $ 57,150
Toby Rosenblatt $ 1,764 $ 67,900 $ 67,900
Michael S. Scott Morton $ 2,302 $ 85,250 $ 113,000
Ralph F. Verni $ 0 $ 0 $ 0
</TABLE>
- -------------------
(a) For the Fund's fiscal year ended December 31, 1999.
(b) The Fund does not provide any pension or retirement benefits for the
Trustees.
(c) Includes compensation on behalf of all series of 11 investment companies
for which the Investment Manager has served as sole investment adviser.
The figure in this column is for the 12 months ended December 31, 1999.
(d) Includes compensation on behalf of all series of 11 investment companies
for which the Investment Manager has served as sole investment adviser and
all series of Metropolitan Series Fund, Inc. The primary adviser to
Metropolitan Series Fund, Inc. is Metropolitan Life Insurance Company,
which has retained State Street Research & Management Company as
sub-adviser to certain series of Metropolitan Series Fund, Inc. The figure
indicated in this column includes compensation relating to series of
Metropolitan Series Fund, Inc. which are not advised by State Street
Research & Management Company. "Total Compensation from All State Street
Research Funds and Metropolitan Series Fund, Inc. Paid to Trustees" is for
the 12 months ended December 31, 1999.
I, 2-7
<PAGE>
H. Investment Advisory Fee
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. The Distributor
and its affiliates have from time to time and in varying amounts voluntarily
assumed some portion of the fees or expenses relating to the New York Tax-Free
Fund.
The annual percentage rate: 0.55%
Fees Waived
Advisory Fee Paid or Expenses Assumed
----------------- -------------------
Fiscal year ended December 31, 1999 $ 379,165 $ 118,819
Fiscal year ended December 31, 1998 $ 386,106 $ 94,339
Fiscal year ended December 31, 1997 $ 382,777 $ 113,047
For more information on the investment advisory arrangements, see Section
II, D of this Statement of Additional Information.
I. 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).
Portfolio Turnover Rates
------------------------
Fiscal year ended December 31, 1999 43.02%
Fiscal year ended December 31, 1998 32.86%
For more information on portfolio turnover, see Section II, H of this
Statement of Additional Information.
J. Brokerage Commissions
During the fiscal years ended December 31, 1997, 1998 and 1999, 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.
I, 2-8
<PAGE>
For more information on brokerage commissions, see Section II, H of this
Statement of Additional Information.
K. Sales Charges on Shares
Front-end Sales Charges (Class A)
<TABLE>
<CAPTION>
Retained by Distributor
After Reallowance of
Total Sales Charges Concessions to Dealers
------------------- ----------------------
<S> <C> <C>
Fiscal year ended December 31, 1999 $ 150,340 $ 20,025
Fiscal year ended December 31, 1998 $ 133,062 $ 15,690
Fiscal year ended December 31, 1997 $ 120,364 $ 14,177
</TABLE>
Contingent Deferred Sales Charges (Classes A, B(1), B and C)
<TABLE>
<CAPTION>
Fiscal Year Fiscal Year Fiscal Year
Ended December 31, 1999 Ended December 31, 1998 Ended December 31, 1997
----------------------- ----------------------- -----------------------
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 $130,315 $ 0 $117,372 $ 0 $106,187
Class B(1)* $ 260 $252,045 $ 0 $ 0 $ 0 $ 0
Class B $ 37,088 $ 6,520 $ 49,228 $157,016 $ 43,278 $102,457
Class C $ 98 $ 2,500 $ 0 $ 3,600 $ 0 $ 1,197
</TABLE>
- ----------------
*Class B(1) was introduced January 1, 1999.
For more information about sales charges, see Section II, E of this
Statement of Additional Information.
L. Rule 12b-1 Fees
The New York Tax-Free Fund has adopted plans of distribution pursuant to
Rule 12b-1 under the 1940 Act ("Distribution Plan(s)"). Under the Distribution
Plans, the Fund may engage, directly or indirectly, in financing any activities
primarily intended to result in the sale of shares of the Fund. Under the
Distribution Plans, the Fund provides the Distributor with a service fee at an
annual rate of 0.25% on the average daily net assets of Class A, Class B(1),
Class B and Class C shares. The Fund also provides a distribution fee at an
annual rate of (i) up to 0.15% on the average daily net assets of Class A
shares, and (ii) 0.75% on the average daily net assets of Class B(1), Class B
and Class C shares. The service and distribution fees are used to cover personal
services and/or the maintenance of shareholder accounts provided by the
Distributor, brokers, dealers, financial professionals or others, and sales,
promotional and marketing activities relating to the respective classes.
I, 2-9
<PAGE>
Under the Distribution Plan covering Class A, Class B and Class C shares,
the Fund's payments are intended to reimburse the Distributor for expenditures
incurred under the plan, and any unused payments are returnable to the Fund.
Under the Distribution Plan covering Class B(1) shares, the Fund's
payments compensate the Distributor for services and expenditures incurred under
the plan, and none of the payments are returnable to the Fund.
During the fiscal year ended December 31, 1999, the New York Tax-Free Fund
paid the fees under the Distribution Plans and the fees were used as set forth
below. The Distributor may have also used additional resources of its own for
further expenses on behalf of the Fund.
<TABLE>
<CAPTION>
Class A Class B(1) Class B Class C
------- ---------- ---------- --------
<S> <C> <C> <C> <C>
Advertising $ 0 $ 2,021 $ 0 $ 867
Printing and mailing of prospectuses 0 392 0 168
to other than current shareholders
Compensation to dealers 53,142 10,860 171,089 4,168
Compensation to sales personnel 0 4,616 0 1,942
Interest 0 0 0 0
Carrying or other financing charges 0 0 0 0
Other expenses: marketing; general 0 4,320 0 1,738
Fees to offset carryforwards 0 0 0 0
-------- -------- ---------- --------
Total Fees $ 53,142 $ 22,209 $ 171,089 $ 8,883
======== ======== ========== ========
Unreimbursed expenses carried forward $ -- $122,981 $1,201,666 $850,451
</TABLE>
For more information about Rule 12b-1 fees, see Section II, J of this
Statement of Additional Information.
M. Performance
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 New York Tax-Free Fund.
I, 2-10
<PAGE>
Standard Total Return
The average annual total return ("standard total return") of each class of
shares of the New York Tax-Free Fund was as follows:
Ten Years Five Years One Year
Ended Ended Ended
Fund December 31, 1999 December 31, 1999 December 31, 1999
- ---- ----------------- ----------------- -----------------
Class A 5.52% 4.64% -9.15%
Class B(1) 5.49% 4.49% -10.11%
Class B 5.49% 4.49% -10.11%
Class C 5.50% 4.84% -6.37%
Class S 6.19% 5.86% -4.63%
Yield
The annualized yield of each class of shares of the New York Tax-Free Fund
based on the month of December, 1999 was as follows:
Class A 4.68%
Class B(1) 4.13%
Class B 4.13%
Class C 4.13%
Class S 5.14%
For more information about performance, see Section II, K of this
Statement of Additional Information.
N. 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. New York State
and New York City face long-term economic problems that could seriously affect
their ability and that of other issuers of New York Municipal Obligations to
meet their financial obligations.
Certain substantial issuers of New York Municipal Obligations (including
issuers whose obligations may be acquired by the Fund) have previously
experienced serious financial difficulties. 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 New York Tax-Free Fund's
investments in New York Municipal Securities are summarized below. This summary
I, 2-11
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information is not intended to be a complete description and is principally
derived from the Annual Information Statement of the State of New York as
supplemented and contained in official statements relating to issues of New York
Municipal Securities 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 one of the most populous states 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.
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 economic forecast of the State has also been modified for 2000 and
2001 from the mid-year forecast to reflect a stronger-than-expected economy.
Continued growth is projected for 2000 and 2001 for employment, wages, and
personal income, although the growth in employment will moderate from the 1999
pace. Personal income is estimated to have grown by 4.7 percent in 1999, fueled
in part by a large increase in financial sector bonus payments at the year's
end. Personal income is projected to grow 5.5 percent in 2000 and 4.8 percent in
2001. Total bonus payments are projected to increase by 11 percent in 2000 and
10.5 percent in 2001. Overall employment growth is expected to continue at a
more modest pace than in 1999, reflecting the slower growth in the national
economy, continued spending restraint by government employers, and restructuring
in the manufacturing, health care, social service, and banking sectors.
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.
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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). On March 31, 1999, the State adopted the debt service portion
of the State budget for the 1999-2000 fiscal year; four months later, on August
4, 1999, it enacted the remainder of the budget. The Governor approved the
budget as passed by the Legislature. Prior to passing the budget in its entirety
for the current fiscal year, the State enacted appropriations that permitted the
State to continue its operations.
The State revised the cash-basis 1999-2000 State Financial Plan on January
11, 2000, with the release of the 2000-01 Executive Budget. The State updated
the Financial Plan on January 31, 2000 to reflect the Governor's amendments to
his Executive Budget. After these changes, the Division of the Budget ("DOB")
now expects the State to close the 1999-2000 fiscal year with an available cash
surplus of $758 million in the General Fund, an increase of $733 million over
the surplus estimate in the mid-year update. The larger projected surplus
derives from $499 million in net higher projected receipts and $259 million in
net lower estimated disbursements. DOB revised both its projected receipts and
disbursements based on a review of actual operating results through December
1999, as well as an analysis of underlying economic and programmatic trends it
believes may affect the Financial Plan for the balance of the year.
The State plans to use the entire $758 million surplus to make additional
deposits to reserve funds. At the close of the current fiscal year, the State
expects to deposit $75 million from the surplus into the State's Tax
Stabilization Reserve Fund ("TSRF") - the fifth consecutive annual deposit. In
the 2000-01 Executive Budget, as amended, the Governor is proposing to use the
remaining $683 million from the 1999-2000 surplus to fully finance the estimated
2001-02 and 2002-03 costs of his proposed tax reduction package ($433 million)
and to increase the Debt Reduction Reserve Fund ("DRRF") ($250 million).
DOB projects total General Fund disbursements of $37.06 billion in
1999-2000, a decline of $282 million from the October estimate. Of this amount,
$33 million is related to the timing of spending and accounting adjustments and
therefore does not contribute to the surplus projected by DOB. The $33 million
consists of lower timing-related spending of $65 million from the Community
Projects Fund ("CPF") and $50 million from the Collective Bargaining Reserve,
offset by the Medicaid reclassification of $82 million described above.
Accordingly, lower disbursements since October contribute $249 million to the
1999-2000 surplus, which, when combined with the $10 million in lower
disbursements recognized in the mid-year update, produce a total reduction in
estimated disbursements of $259 million for the current year.
State Operations spending is now projected to total $6.63 billion in
1999-2000. In the revised Financial Plan, $50 million of an original $100
million for new collective bargaining costs is set aside in a reserve to cover
the cost of labor agreements in 1999-2000, and the balance is transferred to
General State Charges in the current year to pay for the recently approved labor
contract with State University employees and other labor costs. The remaining
revisions to the State Operations estimate are comprised of savings from agency
efficiencies and timing-related changes that do not affect the surplus.
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The State projects a closing balance of $1.17 billion in the General Fund,
after the tax refund reserve transaction. The balance is comprised of $548
million in the Tax Stabilization Reserve Fund ("TSRF") after a $75 million
deposit in 1999-2000; $265 million in the CPF, which pays for Legislative
initiatives; $250 million in the DRRF; and $107 million in the Contingency
Reserve Fund ("CRF") (which guards against litigation risks).
In addition to the General Fund closing balance of $1.17 billion, the
State will have a projected $3.09 billion in the tax refund reserve account at
the end of 1999-2000. The refund reserve account is used to adjust personal
income tax collections across fiscal years to pay for tax refunds, as well as to
accomplish other Financial Plan objectives. The projected balance of $3.09
billion is comprised of $1.82 billion in tax reduction reserves from the 1998-99
surplus; $683 million from the 1999-2000 surplus; $521 million from LGAC that
may be used to pay tax refunds during 2000-01 but must be on deposit at the
close of the fiscal year; $50 million in collective bargaining reserves from
1999-2000; and $25 million in reserves for tax credits.
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 received almost all State
taxes and other resources not dedicated to particular purposes. General Fund
moneys are also transferred to other funds, primarily to support certain capital
projects and debt service payments in other fund types.
The Governor presented his 2000-01 Executive Budget to the Legislature on
January 10, 2000. The Executive Budget contains financial projections for the
State's 1999-2000 through 2002-03 fiscal years, a detailed explanation of
receipts estimates and the economic forecast on which it is based, and proposed
Capital Program and Financing Plan for the 2000-01 through 2004-05 fiscal years.
On January 31, 2000, the Governor submitted amendments to his Executive Budget,
the most significant of which recommends eliminating all gross receipts taxes on
energy providers.
There can be no assurance that the Legislature will enact into law the
Governor's Executive Budget, as amended, or that the State's adopted budget
projections will not differ materially and adversely from the projections set
forth therein.
The 2000-01 Financial Plan is projected to have receipts in excess of
disbursements on a cash basis in the General Fund, after accounting for the
transfer of available receipts from 1999-2000 to 2000-01. Under the Governor's
Executive Budget, as amended, total General Fund receipts, including transfers
from other funds, are projected at $38.62 billion, an increase of $1.28 billion
(3.4 percent) over the current fiscal year. General Fund disbursements,
including transfers to other funds, are recommended to grow by 2.3 percent to
$37.93 billion, an increase of $869 million over 1999-2000. State Funds spending
(the portion of the budget supported exclusively by State taxes, fees, and
revenues) is projected to total $52.46 billion, an increase of $2.57 billion or
5.1 percent. Spending from All Government Funds is expected to grow by 5.5
percent, increasing by $4.0 billion to $76.82 billion.
The State projects a closing balance of $1.61 billion in the General Fund
at the end of 2000-01. This balance is comprised of a $433 million reserve set
aside from the 1999-2000 surplus to finance the estimated costs of the
Governor's proposed tax reduction package in 2001-
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02 and 2002-03, $475 million in cumulative reserves for collective bargaining
($425 million from 2000-01 plus $50 million from 1999-2000), $548 million in the
TSRF, and $150 million in the CRF after a proposed $43 million deposit in
2000-01. The change in the closing fund balance compared to 1999-2000 results
from the planned use in 2000-01 of $265 million for existing legislative
initiatives financed from the CPF and the reclassification of DRRF into the CPF,
offset by increased reserves for collective bargaining, tax reduction, and
litigation discussed above.
In addition to the General Fund closing balance of $1.61 billion, the
State will have a projected $567 million in the tax refund reserve at the end of
2000-01. Also, $1.2 billion is proposed to be on deposit in the Star Special
Revenue Fund to be used in 2001-02 for State-funded local tax reductions and
$250 million is proposed to be on deposit in the DRRF. The balance in the DRRF
is projected to be used in 2001-02 to retire existing high-cost State-supported
debt and increase pay-as-you-go financing of capital projects.
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. The projections assume
no changes in federal tax law, which could substantially alter the current
receipts forecast. In addition, these projections do not include funding for new
collective bargaining agreements after the current contracts expire. Actual
results, however, could differ materially and adversely from their projections,
and those projections may be changed materially and adversely from time to time.
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.
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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.
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. The State assumes that the 2000-01 Financial Plan will achieve $500
million in 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 help bring
projected disbursements and receipts into balance. The projections do not assume
any gap-closing benefit from the potential settlement of State claims against
the tobacco industry.
On January 13, 1992, S&P reduced its ratings on the State's general
obligation bonds from A to A- and, in addition, reduced its ratings on the
State's moral obligation, lease purchase, guaranteed and contractual obligation
debt. On August 28, 1997, S&P 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
5, 1999, S&P affirmed its A rating on the State's outstanding bonds. Subsequent
to that time, the State's general obligations have not been downgraded by S&P.
On January 6, 1992, Moody's reduced its ratings on outstanding
limited-liability State lease purchase and contractual obligations from A to
Baa1. On February 28, 1994, Moody's reconfirmed its A rating on the State's
general obligation long-term indebtedness. On March 20, 1998, Moody's assigned
the highest commercial paper rating of P-1 to the short-term notes of the State.
On March 5, 1999, Moody's affirmed its A2 rating with a stable outlook to the
State's general obligations.
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,
I, 2-16
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regulations and procedures; (3) action seeking enforcement of certain sales and
excise taxes and tobacco products and motor fuel sold to non-Indian consumers on
Indian reservations; and (4) 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 Supplemental Reserve Fund previously credited by the State
against prior State and local pension contributions were 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 current 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.
On November 23, 1998, the attorneys general for forty-six states
(including New York) entered into a master settlement agreement ("MSA") with the
nation's largest tobacco manufacturers. Under the terms of the MSA, the states
agreed to release the manufacturers from all smoking-related claims in exchange
for specified payments and the imposition of restrictions on tobacco advertising
and marketing. New York is projected to receive $25 billion over 25 years under
the MSA, with payments apportioned among the State (51 percent), counties (22
percent), and New York City (27 percent). The projected payments are an estimate
and subject
I, 2-17
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to adjustments for, among other things, the annual change in the volume of
cigarette shipments and the rate of inflation.
From 1999-2000 through 2002-03, the State expects to receive $1.54 billion
under the nationwide settlement with cigarette manufacturers. Counties,
including New York City, will receive settlement payments of $1.47 billion over
the same period.
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.
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 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.
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
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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, S&P suspended its A
rating of City bonds. This suspension remained in effect until March 1981, at
which time the City received an investment grade rating of BBB from S&P.
On July 2, 1985, S&P revised its rating of City bonds upward to BBB+ and
on November 19, 1987, to A-. On February 3, 1998 and again on May 27, 1998, S&P
assigned a BBB+ rating to the City's general obligation debt and placed the
ratings on CreditWatch with positive implications. On March 9, 1999, S&P
assigned its A- rating to Series 1999H of New York City general obligation bonds
and affirmed the A- rating on various previously issued New York City bonds.
Subsequent to that time, the City's general obligation bonds have not been
downgraded by S&P.
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 approximately $28 billion of the City's general obligations from Baa1
to A3. On June 9, 1998, Moody's affirmed its A3 rating to the City's general
obligations and stated that its outlook was stable.
On March 8, 1999, Fitch IBCA upgraded New York City's $26 billion
outstanding general obligation bonds from A- to A. Subsequent to that time, the
City's general obligation bonds have not been downgraded by Fitch IBCA.
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
I, 2-19
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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.
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.
Although the City has consistently maintained balanced budgets and is
projected to achieve balanced operating results for the current fiscal year,
there can be no assurance that the gap-closing actions proposed in its 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 City's 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 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.
To successfully implement its Financial Plan, the City and certain
entities issuing debt for the benefit of the City must market their securities
successfully. The City issues securities to finance the rehabilitation of its
infrastructure and other capital needs and to refinance existing debt, as well
as for seasonal financing needs. In fiscal year 1998 and again in fiscal year
2000, the State constitutional debt limit would have prevented the City from
entering into new capital contracts. To prevent these disruptions in the capital
program, two entities were created to issue debt to increase the City's capital
financing capacity: (i) the State Legislature created the Transitional Finance
Authority ("TFA") in 1997, and (ii) the City created the Tobacco Settlement
Asset Securitization Corporation in 1999. Despite these actions, the City, in
order to continue its capital program, will need additional financing capacity
in fiscal year 2002, which
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could be provided through increasing the borrowing authority of the TFA or
amending the State constitutional debt limit.
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 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. 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 fiscal year.
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.
Municipalities and school districts have engaged in substantial short-term and
long-term borrowings. 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. To date, the State has experienced no significant
Year 2000 computer disruptions. Monitoring will continue over the next few
months to identify and correct any problems that may arise. However, there can
be no assurance that outside parties who provide goods and services to the State
will not experience computer problems related to Year
I, 2-21
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2000 programming in the future, or that such disruptions, if they occur, will
not have an adverse impact on State operations or finances.
I, 2-22
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STATEMENT OF ADDITIONAL INFORMATION
SECTION II
This Section II contains general information applicable to the fund(s)
identified on the cover page of this Statement of Additional Information. (If
more than one Fund is identified, each is referred to as "the Fund.")
A. Additional Information Concerning Investment Restrictions, Certain
Risks and Investment Techniques
The Fund follows certain fundamental and nonfundamental investment
restrictions. The fundamental and nonfundamental investment restrictions for the
Fund identified on the cover page of this Statement of Additional Information
are included in Section I of this Statement of Additional Information.
In addition, the Fund may invest in the following instruments, use the
following investment techniques or be exposed to the following investment risks.
Please note that not all of the instruments, techniques and risks described in
this part apply uniformly to the Funds identified on the cover page of this
Statement of Additional Information. The extent to which a Fund may engage in
the following practices depends on its investment strategy. However, since the
Fund generally reserves the flexibility to invest to some degree in ways which
are outside its primary focus, it is possible for the Fund to engage in all the
described practices.
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 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
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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 from (i) 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 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 broker 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
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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.
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
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<PAGE>
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 non-hedging
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.
Non-hedging 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.
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<PAGE>
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 a 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.
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
(the "CFTC") for entities which are not commodity
II-5
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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 limitations on the Fund's total assets which may be invested in one issuer
or industry.
Reverse Repurchase Agreements
The Fund may enter into reverse repurchase agreements. In a reverse
repurchase agreement the Fund transfers possession of a portfolio instrument to
another person, such as a financial institution, broker or dealer, in return for
a percentage of the instrument's market value in cash, and agrees that on a
stipulated date in the future the Fund will repurchase the portfolio instrument
by remitting the original consideration plus interest at an agreed-upon rate.
The ability to use reverse repurchase agreements may enable, but does not ensure
the ability of, the Fund to avoid selling portfolio instruments at a time when a
sale may be deemed to be disadvantageous.
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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 custodian holding Fund assets 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
The Fund may invest in restricted securities, including restricted
securities sold in accordance with Rule 144A under the Securities Act of 1933
("Rule 144A Securities"). Securities may be resold pursuant to Rule 144A under
certain circumstances only to qualified institutional buyers as defined in the
rule, and the markets and trading practices for such securities are relatively
new and still developing; depending on the development of such markets, Rule
144A Securities may be deemed to be liquid as determined by or in accordance
with methods adopted by the Trustees for the Fund. 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, 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.
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 high-quality 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
high-quality instruments in which the Fund may invest for such purposes include
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.
The Fund intends that short-term securities acquired for temporary
purposes will be exempt from income taxes. However, if suitable short-term
securities are not available or if
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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.
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, the 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 that 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.
B. Debt Instruments And Permitted Cash Investments
The Fund may invest in long-term and short-term debt securities. Certain
investment practices in which the Fund may engage, and 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
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
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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:
1. direct obligations of the U.S. Treasury, i.e., U.S. Treasury bills,
notes, certificates and bonds;
2. 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
3. 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
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
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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.
II-11
<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, among others, (a) corporations and (b) domestic or foreign bank holding
companies or 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.
II-12
<PAGE>
Lower Rated Debt Securities
The Fund may invest in debt securities within the BB major rating category
or lower by S&P or the Ba major rating category or lower by Moody's or debt
securities that are unrated but considered by the Investment Manager to be of
equivalent investment quality to comparable rated securities. Such securities
generally involve more credit risk than higher rated securities and are
considered by S&P and Moody's to be predominantly speculative with respect to
capacity to pay interest and repay principal in accordance with the terms of the
obligation. 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. Risks of lower quality debt securities include (i)
limited liquidity and secondary market support, (ii) substantial market price
volatility resulting from changes in prevailing interest rates and/or investor
perception, (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; (vi) the issuer's low creditworthiness and potential
for insolvency during periods of rising interest rates and economic downturn;
and (viii) the realization of taxable income for shareholders without the
corresponding receipt of cash in connection with investments in "zero coupon" or
"pay-in-kind" securities. Growth in the market for this type of security has
paralleled a general expansion in certain sectors in the U.S. economy, and the
effects of adverse economic changes (including a recession) are unclear. For
further information concerning the ratings of debt securities, see "--Commercial
Paper Ratings" and "--Rating Categories of Debt Securities," below. In the event
the rating of a security is downgraded, the Investment Manager will determine
whether the security should be retained or sold depending on an assessment of
all facts and circumstances at that time.
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 and step 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 amount of the discount
fluctuates with the market value of such securities, which may be more volatile
than that of securities which pay interest at regular intervals.
Master Loan Participation Agreements
The Fund may invest in loan participations. These investments represent
interests in floating or variable rate loans to foreign countries, corporations
and other entities. Loan
II-13
<PAGE>
participations will generally be acquired by the Fund from a lender, usually a
bank or other similar financial services entity. The underlying loans may pay
interest at rates which are periodically redetermined on the basis of a base
lending rate plus a premium. These base lending rates are generally the Prime
Rate offered by a major U.S. bank, the London InterBank Offered Rate or other
base rates used by commercial lenders.
The Fund may invest in loans which are not secured by any collateral.
Uncollateralized loans pose a greater risk of nonpayment of interest or loss of
principal than do collateralized loans. Interest and principal payments on these
loan participations may be reduced, deferred, suspended or eliminated. While
loan participations generally trade at par value, the fund will also be able to
acquire loan participations that sell at a discount because of the borrower's
credit standing.
The loan participations generally are not rated by nationally recognized
statistical rating organizations. Participation interests generally are not
listed on any national securities exchange and no regular market has developed
for such interests. The loans may be subject to restrictions on resale and any
secondary purchases and sales generally are conducted in private transactions.
When acquiring a loan participation, the Fund will have a contractual
relationship only with the lender, not with the borrower. The Fund has the right
to receive payments of principal and interest only from the lender selling the
loan participation and only upon receipt by such lender of such payments from
the borrower. As a result, the Fund may assume the credit risk of both the
borrower and the lender selling the loan participation.
Certain Ratings Categories
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.
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+.)
II-14
<PAGE>
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.
Standard & Poor's Corporation Municipal Debt Ratings.
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 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.
II-15
<PAGE>
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.
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
II-16
<PAGE>
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.
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.
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
II-17
<PAGE>
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.
Ratings Downgrades.
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.
C. The Trusts, the Trustees and Officers and Fund Shares
The Trustees of a 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 classes. The Trustees have
authorized shares of each Fund to be issued in multiple classes.
Each share of each class of shares represents an identical legal interest
in the same portfolio of investments of a Fund, has the same rights and is
identical in all respects, except that Class A, Class B(1), 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.
II-18
<PAGE>
The rights of holders of shares may be modified by the Trustees at any
time, so long as such modifications do not have an adverse effect on the rights
of any shareholder. 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.
Under each Trust's 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 a Trust could, under certain
circumstances, be held personally liable for the obligations for the Trust.
However, each Master Trust Agreement 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.
The Trustees and officers of each Trust are identified below, together
with biographical information.
II-19
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
Master
STATE STREET Capital Equity Exchange Financial Growth Income Investment
RESEARCH: Trust Trust Trust Trust Trust Trust Trust
- -------------------------------------------------------------------------------------------------------------------------
TRUSTEES AND
PRINCIPAL
OFFICERS
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Peter C. Bennett Vice President Vice President Vice President Vice President Vice Vice Vice
President President President
- -------------------------------------------------------------------------------------------------------------------------
Bruce R. Bond Trustee Trustee Trustee Trustee Trustee Trustee Trustee
- -------------------------------------------------------------------------------------------------------------------------
John R. Borzilleri Vice President
- -------------------------------------------------------------------------------------------------------------------------
Paul J. Clifford, Jr.
- -------------------------------------------------------------------------------------------------------------------------
Thomas J. Dillman
- -------------------------------------------------------------------------------------------------------------------------
Catherine Dudley Vice
President
- -------------------------------------------------------------------------------------------------------------------------
Steve A. Garban Trustee Trustee Trustee Trustee Trustee Trustee Trustee
- -------------------------------------------------------------------------------------------------------------------------
Bartlett R. Geer Vice President Vice
President
- -------------------------------------------------------------------------------------------------------------------------
Lawrence J. Haverty, Vice President
Jr.
- -------------------------------------------------------------------------------------------------------------------------
F. Gardner Jackson, Vice President
Jr.
- -------------------------------------------------------------------------------------------------------------------------
John H. Kallis Vice President Vice
President
- -------------------------------------------------------------------------------------------------------------------------
Dyann H. Kiessling
- -------------------------------------------------------------------------------------------------------------------------
<CAPTION>
- ----------------------------------------------------------------------------
Money
STATE STREET Market Securities Tax-Exempt
RESEARCH: Trust Trust Trust
- ----------------------------------------------------------------------------
TRUSTEES AND
PRINCIPAL
OFFICERS
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Peter C. Bennett Vice President
- ----------------------------------------------------------------------------
Bruce R. Bond Trustee Trustee Trustee
- ----------------------------------------------------------------------------
John R. Borzilleri
- ----------------------------------------------------------------------------
Paul J. Clifford, Jr. Vice President
- ----------------------------------------------------------------------------
Thomas J. Dillman Vice President
- ----------------------------------------------------------------------------
Catherine Dudley
- ----------------------------------------------------------------------------
Steve A. Garban Trustee Trustee Trustee
- ----------------------------------------------------------------------------
Bartlett R. Geer Vice President
- ----------------------------------------------------------------------------
Lawrence J. Haverty,
Jr.
- ----------------------------------------------------------------------------
F. Gardner Jackson,
Jr.
- ----------------------------------------------------------------------------
John H. Kallis Vice President Vice President Vice President
- ----------------------------------------------------------------------------
Dyann H. Kiessling Vice President
- ----------------------------------------------------------------------------
</TABLE>
II-20
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
Master
STATE STREET Capital Equity Exchange Financial Growth Income Investment
RESEARCH: Trust Trust Trust Trust Trust Trust Trust
- -------------------------------------------------------------------------------------------------------------------------
TRUSTEES AND
PRINCIPAL
OFFICERS
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Rudolph K. Kluiber Vice President
- -------------------------------------------------------------------------------------------------------------------------
Francis J. McNamara, Secretary Secretary Secretary Secretary Secretary Secretary Secretary
III
- -------------------------------------------------------------------------------------------------------------------------
Gerard P. Maus Treasurer Treasurer Treasurer Treasurer Treasurer Treasurer Treasurer
- -------------------------------------------------------------------------------------------------------------------------
Thomas P. Moore, Jr. Vice President Vice President
- -------------------------------------------------------------------------------------------------------------------------
Dean O. Morton Trustee Trustee Trustee Trustee Trustee Trustee Trustee
- -------------------------------------------------------------------------------------------------------------------------
Brian P. O'Dell Vice President
- -------------------------------------------------------------------------------------------------------------------------
Kim M. Peters
- -------------------------------------------------------------------------------------------------------------------------
Susan M. Phillips Trustee Trustee Trustee Trustee Trustee Trustee Trustee
- -------------------------------------------------------------------------------------------------------------------------
E.K. Easton Vice President
Ragsdale, Jr.
- -------------------------------------------------------------------------------------------------------------------------
Daniel J. Rice III Vice President
- -------------------------------------------------------------------------------------------------------------------------
Toby Rosenblatt Trustee Trustee Trustee Trustee Trustee Trustee Trustee
- -------------------------------------------------------------------------------------------------------------------------
Michael S. Scott Trustee Trustee Trustee Trustee Trustee Trustee Trustee
Morton
- -------------------------------------------------------------------------------------------------------------------------
Thomas A. Shively Vice President Vice
President
- -------------------------------------------------------------------------------------------------------------------------
<CAPTION>
- ----------------------------------------------------------------------------
Money
STATE STREET Market Securities Tax-Exempt
RESEARCH: Trust Trust Trust
- ----------------------------------------------------------------------------
TRUSTEES AND
PRINCIPAL
OFFICERS
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Rudolph K. Kluiber
- ----------------------------------------------------------------------------
Francis J. McNamara, Secretary Secretary Secretary
III
- ----------------------------------------------------------------------------
Gerard P. Maus Treasurer Treasurer Treasurer
- ----------------------------------------------------------------------------
Thomas P. Moore, Jr.
- ----------------------------------------------------------------------------
Dean O. Morton Trustee Trustee Trustee
- ----------------------------------------------------------------------------
Brian P. O'Dell
- ----------------------------------------------------------------------------
Kim M. Peters Vice President
- ----------------------------------------------------------------------------
Susan M. Phillips Trustee Trustee Trustee
- ----------------------------------------------------------------------------
E.K. Easton
Ragsdale, Jr.
- ----------------------------------------------------------------------------
Daniel J. Rice III
- ----------------------------------------------------------------------------
Toby Rosenblatt Trustee Trustee Trustee
- ----------------------------------------------------------------------------
Michael S. Scott Trustee Trustee Trustee
Morton
- ----------------------------------------------------------------------------
Thomas A. Shively Vice President Vice President Vice President
- ----------------------------------------------------------------------------
</TABLE>
II-21
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
Master
STATE STREET Capital Equity Exchange Financial Growth Income Investment
RESEARCH: Trust Trust Trust Trust Trust Trust Trust
- -------------------------------------------------------------------------------------------------------------------------
TRUSTEES AND
PRINCIPAL
OFFICERS
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Ralph F. Verni Trustee, Trustee, Trustee, Trustee, Trustee, Trustee, Trustee,
Chairman of Chairman of Chairman of Chairman of Chairman Chairman Chairman
the Board, the Board, the Board, the Board, of the of the of the
President & President & President & President & Board, Board, Board,
Chief Executive Chief Chief Chief President President President
Officer Executive Executive Executive & Chief & Chief & Chief
Officer Officer Officer Executive Executive Executive
Officer Officer Officer
- -------------------------------------------------------------------------------------------------------------------------
Tucker Walsh Vice President
- -------------------------------------------------------------------------------------------------------------------------
James M. Weiss Vice President Vice President Vice President Vice President Vice Vice Vice
President President President
- -------------------------------------------------------------------------------------------------------------------------
Elizabeth M. Westvold
- -------------------------------------------------------------------------------------------------------------------------
John T. Wilson Vice President Vice
President
- -------------------------------------------------------------------------------------------------------------------------
Kennard Woodworth, Vice President Vice President Vice
Jr. President
- -------------------------------------------------------------------------------------------------------------------------
Peter A. Zuger Vice President
- -------------------------------------------------------------------------------------------------------------------------
<CAPTION>
- ----------------------------------------------------------------------------
Money
STATE STREET Market Securities Tax-Exempt
RESEARCH: Trust Trust Trust
- ----------------------------------------------------------------------------
TRUSTEES AND
PRINCIPAL
OFFICERS
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Ralph F. Verni Trustee, Trustee, Trustee,
Chairman of Chairman of Chairman of
the Board, the Board, the Board,
President & President & President &
Chief Chief Executive Chief Executive
Executive Officer Officer
Officer
- ----------------------------------------------------------------------------
Tucker Walsh
- ----------------------------------------------------------------------------
James M. Weiss Vice President
- ----------------------------------------------------------------------------
Elizabeth M. Westvold Vice President
- ----------------------------------------------------------------------------
John T. Wilson
- ----------------------------------------------------------------------------
Kennard Woodworth, Vice President
Jr.
- ----------------------------------------------------------------------------
Peter A. Zuger
- ----------------------------------------------------------------------------
</TABLE>
II-22
<PAGE>
Additional information on the Trustees, Directors and principal officers
of the State Street Research Funds is provided below. The address for each
person is One Financial Center, Boston, Massachusetts 02111.
*Peter C. Bennett: He is 61 and his principal occupation is currently, and
during the past five years has been, Executive Vice President of the Investment
Manager. Mr. Bennett is also a Director of the Investment Manager. Mr. Bennett's
other principal business affiliations include Director, State Street Research
Investment Services, Inc.
Bruce R. Bond: He is 53. During the past five years, Mr. Bond has also
served as Chairman of the Board, Chief Executive Officer and President of
PictureTel Corporation, Chief Executive Officer of ANS Communications (a
communications networking company) and as managing director of British
Telecommunications PLC.
*John R. Borzilleri, MD: He is 41 and his principal occupation is Senior
Vice President of the Investment Manager. During the past five years he has also
served as a Vice President of the Investment Manager, as a Vice President of
Montgomery Securities and as an equity analyst at Dean Witter.
*Paul J. Clifford, Jr.: He is 37 and his principal occupation is Senior
Vice President of the Investment Manager. During the past five years he has also
served as Vice President of the Investment Manager.
*Thomas J. Dillman: He is 50 and his principal occupation is Senior Vice
President of the Investment Manager. During the past five years he has also
served as research director at Bank of New York.
*Catherine Dudley: She is 40 and her principal occupation is senior Vice
President of the Investment Manager. During the past five years she has also
served as a senior portfolio manager at Chancellor Capital Management and as a
portfolio manager at Phoenix Investment Council.
+Steve A. Garban: He is 62 and he is retired and was formerly Senior Vice
President for Finance and Operations and Treasurer of The Pennsylvania State
University. Mr. Garban is also a Director of Metropolitan Series Fund, Inc. (an
investment company).
*Bartlett R. Geer: He is 44 and his principal occupation is currently, and
during the past five years has been, Senior Vice President of the Investment
Manager.
*Lawrence J. Haverty, Jr.: He is 55 and his principal occupation is
currently, and during the past five years has been, Senior Vice President of the
Investment Manager.
*F. Gardner Jackson, Jr.: He is 57 and his principal occupation is
currently, and during the past five years has been Senior Vice President of the
Investment Manager.
II-23
<PAGE>
*John H. Kallis: He is 59 and his principal occupation is currently, and
during the past five years has been, Senior Vice President of the Investment
Manager.
*Dyann H. Kiessling: She is 36 and her principal occupation is Vice
President of the Investment Manager. During the past five years she has also
served as a fixed income trader for the Investment Manager.
*Rudolph K. Kluiber: He is 40 and his principal occupation currently is
Senior Vice President of the Investment Manager. During the past five years he
has also served as a Vice President of the Investment Manager.
*Gerard P. Maus: He is 49 and his principal occupation is Executive Vice
President, Treasurer, Chief Financial Officer, Chief Administrative Officer, and
Director of the Investment Manager. Mr. Maus's other principal business
affiliations include Executive Vice President, Chief Financial Officer, Chief
Administrative Officer, Treasurer and Director of State Street Research
Investment Services, Inc.; Treasurer and Chief Financial Officer of SSRM
Holdings, Inc.; and Director of SSR Realty Advisors, Inc.
*Francis J. McNamara, III: He is 44 and his principal occupation is
Executive Vice President, General Counsel and Secretary of the Investment
Manager. During the past five years he has also served as Senior Vice President
of the Investment Manager and as Senior Vice President and General Counsel 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, General Counsel and Clerk of State Street
Research Investment Services, Inc.; and Secretary and General Counsel of SSRM
Holdings, Inc.
*Thomas P. Moore, Jr.: He is 61 and his principal occupation is currently,
and during the past five years has been, Senior Vice President of the Investment
Manager.
+Dean O. Morton: He is 68 and he is retired and was formerly Executive
Vice President, Chief Operating Officer and Director of Hewlett-Packard Company.
Mr. Morton is also a Director of Metropolitan Series Fund, Inc. (an investment
company).
*Brian P. O'Dell: He is 34 and his principal occupation is currently
Assistant Portfolio Manager for the Investment Manager. During the past five
years he has also served as a portfolio manager and analyst at Freedom Capital
Management Corporation.
*Kim M. Peters: He is 47 and his principal occupation is Senior Vice
President of the Investment Manager. During the past five years he has also
served as Vice President of the Investment Manager.
Susan M. Phillips: She is 55 and her principal occupation is currently
Dean of the School of Business and Public Management at George Washington
University and Professor of Finance. 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.
II-24
<PAGE>
*E.K. Easton Ragsdale, Jr.: He is 48 and his principal occupation is
Senior Vice President of the Investment Manager. During the past five years he
has also served as Vice President of the Investment Manager and as Senior Vice
President and Chief Quantitative Analyst for Kidder Peabody & Co.
*Daniel J. Rice III: He is 48 and his principal occupation is currently
Senior Vice President of the Investment Manager. During the past five years he
has also served as Vice President of the Investment Manager.
Toby Rosenblatt: He is 61 and his principal occupations during the past
five years have been President of Founders Investments Ltd. and President of The
Glen Ellen Company, a private investment company.
+Michael S. Scott Morton: He is 62 and 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. Dr. Scott Morton is
also a Director of Metropolitan Series Fund, Inc. (an investment company).
*Thomas A. Shively: He is 45 and his principal occupation is currently,
and during the past five years has been, Executive Vice President of the
Investment Manager. Mr. Shively is also a Director of the Investment Manager.
Mr. Shively's other principal business affiliations include Director of State
Street Research Investment Services, Inc.
*Ralph F. Verni: He is 57 and 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).
*Tucker Walsh: He is 30 and his principal occupation is Vice President of
the Investment Manager. During the past five years he has been an analyst of the
Investment Manager and also at Chilton Investment Partners. Prior to that he was
employed at Merrill Lynch and Cowen Asset Management.
*James M. Weiss: He is 53 and his principal occupation is Executive Vice
President of the Investment Manager. During the past five years he has also
served as Senior Vice President of the Investment Manager and as President and
Chief Investment Officer of IDS Equity Advisors.
*Elizabeth M. Westvold: She is 39 and her principal occupation is Senior
Vice President of the Investment Manager. During the past five years she has
also served as Vice President and as an analyst for the Investment Manager.
*John T. Wilson: He is 36 and his principal occupation is Senior Vice
President of the Investment Manager. During the past five years he has also
served as a Vice President of the
II-25
<PAGE>
Investment Manager, as an analyst and portfolio manager at Phoenix Home Life
Mutual Insurance Company and as a Vice President of Phoenix Investment Counsel
Inc.
*Kennard Woodworth, Jr.: He is 61 and his principal occupation is
currently, and during the past five years has been, Senior Vice President of the
Investment Manager.
*Peter A. Zuger: He is 51. His principal occupation is Senior Vice
President of State Street Research & Management Company. During the past five
years he has also served as Vice President of American Century Investment
Management Company.
- -----------------
* These Trustees and/or Officers are 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 Director of Metropolitan Series Fund, Inc., which has an
advisory relationship with the Investment Manager or its parent,
Metropolitan Life Insurance Company.
D. Investment Advisory Services
Under the provisions of each 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 each Fund, subject to the
authority of the Board of Trustees. Each Advisory Agreement provides that the
Investment Manager shall furnish the applicable Funds 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 each
Trust if such persons are employees of the Investment Manager or its affiliates.
The Investment Manager is an indirect wholly owned subsidiary of MetLife.
II-26
<PAGE>
Each Advisory Agreement provides that it shall continue in effect with
respect to a Fund for a period of two years after its initial effectiveness and
will continue from year to year thereafter 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.
Information about rates at which fees are calculated under the Advisory
Agreement with respect to the Funds identified on the cover page of the
Statement of Additional Information, as well as the fees paid to the Investment
Manager in previous years, is included in Section I of this Statement of
Additional Information.
The Fund, the Investment Manager, and the Distributor have adopted a Code
of Ethics pursuant to the requirement of the 1940 Act. Under the Code of Ethics,
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.
Transactions in securities that may be held by the Fund are permitted, subject
to compliance with applicable provisions of the Code. Personal securities
transactions must be reported quarterly and broker confirmations of such
transactions must be provided for review.
E. Purchase and Redemption of Shares
Shares of each Fund are distributed by State Street Research Investment
Services, Inc., the Distributor. Class A, Class B(1), Class B, 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), Class
B and Class C shares). Class B shares are available only to current Class B
shareholders through reinvestment of dividends and capital gains distributions
or through exchanges from existing Class B accounts of the State Street Research
Funds. 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, but not later than 4 p.m. eastern time, 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 broker-dealer,
that broker-dealer is responsible for transmitting the
II-27
<PAGE>
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
broker-dealer's failure to transmit an order promptly is a matter for settlement
between the investor and the broker-dealer. Under certain pre-established
operational arrangements, the price may be determined as of the time the order
is received by the broker-dealer or its designee.
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.
As described in greater detail below, financial professionals are paid
differing amounts of compensation depending on which class of shares they sell.
II-28
<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 by Initial sales Contingent Contingent Contingent None
Investor to Distributor charge at time deferred sales deferred sales deferred sales
of investment of charge of 5% to 1% charge of 5% to charge of 1%
up to 5.75%* applies to any 2% applies to any applies to any
depending on shares redeemed shares redeemed shares redeemed
amount of within first six within first five within one year
investment years following years following following their
their purchase; no their purchase; purchase
contingent no contingent
deferred sales deferred sales
charge after six charge after five
years years
- --------------------------------------------------------------------------------------------------------------------
On investments of
$1 million or
more, no initial
sales charge; but
contingent
deferred sales
charge of up to
1% may apply to
any shares
redeemed within
one year
following their
purchase
- --------------------------------------------------------------------------------------------------------------------
Initial Commission Above described 4% 4% 1% None
Paid by Distributor to initial sales
Financial Professional charge less
0.25% to 0.75%
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 to 0.25% each year 0.25% each year 0.25% each year 0.25% each year None
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 one year
Professional purchase following purchase following
purchase
- --------------------------------------------------------------------------------------------------------------------
Rule 12b-1
Distribution Fee
- --------------------------------------------------------------------------------------------------------------------
Paid by Fund to Up to 0.15% each 0.75% for first 0.75% for first 0.75% each year None
Distributor year eight years; Class eight years;
B(1) shares Class B shares
convert convert
automatically to automatically to
Class A shares Class A shares
after eight years after eight years
- --------------------------------------------------------------------------------------------------------------------
Paid by Up to 0.15% each None None 0.75% each year None
Distributor to year commencing after
Financial one year
Professional following
purchase
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
- -----------------
* or up to 4.50% for State Street Research Government Income Fund, State
Street Research High Income Fund, State Street Research Strategic Income
Fund, State Street Research Tax-Exempt Fund and State Street Research
New York Tax Free Fund.
II-29
<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 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
II-30
<PAGE>
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 a sales
charge pursuant to certain sponsored arrangements for designated classes of
investors. These arrangements include programs sponsored by the Distributor or
others under which, for example, a company, employee benefit plan or other
organization makes recommendations to, or permits group solicitation of, its
employees, members or participants to purchase Fund shares. (These arrangements
are not available to any organization created primarily for the purpose of
obtaining shares of the Fund at a reduced sales charge or without a sales
charge.) Sponsored arrangements may be established for non-profit organizations,
holders of individual retirement accounts or participants in limited promotional
campaigns, such as a special offering to shareholders of funds in other
complexes that may be liquidating. 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 by the Distributor. Information on such arrangements and further
conditions and limitations is available from the Distributor.
The entire sales charge on Class A shares may be reallowed to financial
professionals who sell shares during certain special promotional periods which
may be instituted from time to time. The Fund reserves the right to have such
promotions without further supplement to the Prospectus or Statement of
Additional Information. The financial professionals who receive the entire sales
charge may be deemed to be underwriters of the Fund's shares under the
Securities Act of 1933 during such promotions.
In addition, no sales charge is imposed in connection with the sale of
Class A shares of the Fund to the following entities and persons: (A) the
Investment Manager, Distributor or any affiliated entities, including any direct
or indirect parent companies and other subsidiaries of such parents
(collectively "Affiliated Companies"); (B) employees, officers, sales
representatives or current or retired directors or trustees of the Affiliated
Companies or any investment company managed by any of the Affiliated Companies,
any relatives of any such individuals whose relationship is directly verified by
such individuals to the Distributor, or any beneficial account for such
relatives or individuals; (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; and (D)
others who because of their business relationship with the Fund, the Distributor
or its affiliates, and because of their knowledge of the Fund, do not require
any significant sales effort or expense to educate them about the Fund. The
purchase must be made for investment and the shares purchased may not be resold
except through redemption. This purchase program is subject to such
administrative policies, regarding the qualification of purchasers, minimum
investments by various groups and any other matters, as may be adopted by the
Distributor from time to time.
II-31
<PAGE>
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(1) or 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)
or 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 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) and Class B 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) and Class B shares and receive in lieu
thereof 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
II-32
<PAGE>
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
contingent deferred sales charge may also be waived on Class A shares under
certain exchange arrangements for selected brokers with substantial asset
allocation programs. The Fund may waive the contingent deferred sales charge on
any class, or modify or terminate any waivers, at any time. 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) 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
MetLife, 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. For
information on different conditions that may apply to certain Funds, see Section
I for the relevant Fund.
In the discretion of the Distributor, Class S shares may be made available
to (a) current and former employees, officers and directors of the Investment
Manager and Distributor; (b) current and former directors or trustees of the
investment companies for which the Investment Manager serves as the primary
investment adviser; and (c) relatives of any such individuals, provided that the
relationship is directly verified by such individuals to the Distributor, and
any beneficial account for such relatives or individuals. Class A shares
acquired by such individuals and relatives may, in the discretion of the
Distributor, be converted into Class S shares. 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.
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
II-33
<PAGE>
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 12% annually
(minimum $50 per withdrawal) 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
broker-dealers by wire or telephone for the repurchase of shares by the
Distributor from the broker-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 broker-dealer to the Distributor. The
broker-dealer is responsible for promptly transmitting a shareholder's order to
the Distributor. Under certain pre-established
II-34
<PAGE>
operational arrangements, the price may be determined as of the time the order
is received by the broker-dealer or its designee.
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.
F. 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
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
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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.
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 on the basis of the
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relative net asset values of the respective shares to be exchanged, and subject
to compliance with applicable securities laws. Shareholders of any other
Eligible Fund may similarly exchange their shares for Fund shares with
corresponding characteristics. Prior to making an exchange, shareholders should
obtain the Prospectus of the Eligible Fund into which they are exchanging. Under
the Direct Program, subject to certain conditions, shareholders may make
arrangements for regular exchanges from the Fund into other Eligible Funds. To
effect an exchange, Class A, Class B(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(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.
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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. The exchange limit
may also be modified under certain exchange arrangements for selected brokers
with substantial asset allocation programs. 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 and Internet Privileges. The following 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.
o Internet Privilege for Shareholder
o Shareholders may access the Fund's Web-site to enter
transactions and for other purposes, subject to acceptance of
the important conditions set forth on the Web-site.
A shareholder with the above privileges is deemed to authorize the Fund's
agents 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; (2) act upon the Internet instructions of any person purporting to
be any of the shareholders of an account; and (3) honor any written instructions
for a change of address. All telephone calls will be recorded. Neither the Fund,
any other State Street Research Fund, the Investment Manager, the Distributor,
nor any of their agents 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 or Internet
requests may be unauthorized. Reasonable procedures will be followed to confirm
that instructions communicated by telephone or Internet 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 a Fund. It is unlikely, during periods of
extraordinary market conditions, that a shareholder may 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.
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<PAGE>
G. Net Asset Value
The net asset value of the shares of each Fund is determined once daily as
of the close of regular trading on the NYSE, but not later than 4 P.M. eastern
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 each Fund is computed by dividing the sum
of the value of the securities held by the Fund plus any cash or other assets
minus all liabilities by the total number of outstanding shares of the Fund at
such time. Any expenses, except for extraordinary or nonrecurring expenses,
borne by the Fund, including the investment management fee payable to the
Investment Manager, are accrued daily.
In determining the values of portfolio assets 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 authorized by the Trustees. The Trustees also reserve the right to
adopt other valuations based on fair value in pricing in unusual circumstances
where use of 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
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<PAGE>
assumed regardless of the impact of fluctuating interest rates on the market
value of the security.
H. Portfolio Transactions
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).
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 by the Investment Manager 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
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<PAGE>
charts; computer hardware used for brokerage and research purposes; computer
software and databases (including those contained in certain trading systems and
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) and portfolio evaluation services and
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. Certain of the nonexecution services provided by
broker-dealers may in turn be obtained by the broker-dealers from third parties
who are paid for such services by the broker-dealers.
The Investment Manager 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 an
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
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Manager is aware that this is an area where differences of opinion as to fact
and circumstances may exist, and in such circumstances, if any, the Investment
Manager relies on the provisions of Section 28(e) of the Securities Exchange Act
of 1934.
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 request that the Investment Manager only effect transactions with
the specified broker-dealers if the broker-dealers are competitive as to price
and execution. Where the request is not so conditioned, the Investment Manager
may be unable to negotiate commissions or obtain volume discounts or best
execution. In cases where the Investment Manager is requested to use a
particular broker-dealer, different commissions may be charged to clients making
the 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
designated particular brokers may, at the discretion of the trading desk, be
delayed until execution of other non-designated orders has 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
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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.
Information about portfolio turnover rates and certain brokerage
commissions paid by the Funds identified on the cover page of this Statement of
Additional Information is included in Section I of this Statement of Additional
Information.
I. 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.
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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 cash 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 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 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 other than a tax-exempt obligation
purchased before May 1, 1993, 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 accrue such market discount as interest
income in the tax year to which it is attributable).
Because the Fund must treat original issue discount as interest income
when it accrues, it will be more difficult for the Fund to make the
distributions required for the Fund to maintain its status as a regulated
investment company under Subchapter M of the Code, and, with respect to debt
securities that are not tax-exempt, to avoid the 4% excise tax described above.
The Fund may be required to liquidate investments at a time when it is not
advantageous to do so in order to meet its distribution requirements.
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 the 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.
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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.
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.
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.
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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.
J. Distribution of Fund Shares
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 broker-dealers who have entered into sales agreements with the
Distributor. The Fund has authorized certain broker-dealers to receive on its
behalf purchase and redemption orders, and such broker-dealers are authorized to
designate other intermediaries to receive orders on the Fund's behalf. The Fund
will be deemed to have received a purchase or redemption order when such
broker-dealer, or, if applicable, the broker-dealer's designee, receives the
order. In such case, orders will be priced at the Fund's net asset value next
computed after the orders are received by an authorized broker-dealer or its
designee. 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
broker-dealers. The Distributor may also 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 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 may pay the authorized securities dealer
making such sale a commission based
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on the aggregate of such sales. Such commission may also be paid 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 up to 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.
Plan(s) of Distribution Pursuant to Rule 12b-1
The Fund may have one or more Distribution Plans under Rule 12b-1, as set
forth in Section I of this Statement of Additional Information for the Fund.
Under the Fund's Distribution Plans, the Fund may engage, directly or
indirectly, in financing any activities primarily intended to result in the sale
of shares, including, but not limited to, (1) the payment of commissions to
underwriters, securities dealers and others engaged in the sale of shares,
including payments to the Distributor to be used to pay commissions to
securities dealers (which securities dealers may be affiliates of the
Distributor), (2) expenditures incurred by the Distributor in connection with
the distribution and marketing of shares and the servicing of investor accounts,
and (3) expenses incurred by the Distributor in connection with the servicing of
shareholder accounts including payments to securities dealers and others for the
provision of personal service to investors and/or the maintenance or servicing
of shareholder accounts. In addition, the Distribution Plans authorize the
Distributor and the Investment Manager to make payments out of management fees,
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 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. Payments by the Fund under the Distribution Plan may be
discontinued at any time. The Distributor may also voluntarily waive receipt of
payments from the Fund from time to time.
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.
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. The distribution fees are used primarily
to offset initial and ongoing commissions paid to dealers for selling such
shares and for other sales and
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marketing expenditures. Dealers who have sold Class A shares are eligible for
ongoing payments commencing as of the time of such sale. Dealers who have sold
Class B(1), Class B and Class C shares are eligible for ongoing payments 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 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.
No interested Trustee of the Trust has any direct or indirect financial
interest in the operation of the Distribution Plans. The Distributor's interest
in the Distribution Plans is described above.
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<PAGE>
K. 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 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.
Total Return
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
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Fund are reinvested at net asset value on the reinvestment dates during the
periods. All accrued expenses and recurring charges are also taken into account
as described later herein.
Yield
Yield for each class of the Fund'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 effective 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 effective
maturity is then divided by 360 and the quotient is multiplied by the market
value of the obligation (including actual accrued interest) to determine the
interest income on the obligation for each day of the period that the obligation
is in the portfolio. Dividend income is recognized daily based on published
rates.
In the case of a tax-exempt obligation issued without original issue
discount and having a current market discount, the coupon rate of interest is
used in lieu of the yield to maturity. Where, in the case of a tax-exempt
obligation with original issue discount, the discount based on the current
market value exceeds the then-remaining portion of original issue discount
(market discount), the yield to maturity is the imputed rate based on the
original issue discount calculation. Where, in the case of a tax-exempt
obligation with original issue discount, the discount based on the current
market value is less than the then-remaining portion of original issue discount
(market premium), the yield to maturity is based on the market value. Dividend
income is recognized daily based on published rates.
With respect to the treatment of discount and premium on mortgage or other
receivables-backed obligations which are expected to be subject to monthly
payments of principal and interest ("paydowns"), the Fund accounts for gain or
loss attributable to actual
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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 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.
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].
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. Subsidization can include the
Investment Manager's waiver of a portion of its advisory fee, the Distributor's
waiver of a portion of its Rule 12b-1 fee, or the assumption of a portion of the
Fund's expenses by either of them or their affiliates. In the absence of such
subsidization, the performance of the Fund would have been lower.
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Nonstandardized Total Return
Each 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 (or the commencement of
the Fund's operations, whichever is earlier). In addition, the Fund may provide
nonstandardized total return results for differing periods, such as for the most
recent six months, and/or without taking sales charges into account. Such
nonstandardized total return is computed as otherwise described under "Total
Return" except the result may or may not be annualized, and as noted any
applicable sales charge, if any, may not be taken into account and therefore not
deducted from the hypothetical initial payment of $1,000.
Distribution Rates
Each 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 offering price
per share as of the end of the period to which the distribution relates. A
distribution can include gross investment income from debt obligations purchased
at a premium and in effect include a portion of the premium paid. A distribution
can also include nonrecurring, gross short-term capital gains without
recognition of any unrealized capital losses. Further, a distribution can
include income from the sale of options by the Fund even though such option
income is not considered investment income under generally accepted accounting
principles.
Because a distribution can include such premiums, capital gains and option
income, the amount of the distribution may be susceptible to control by the
Investment Manager through transactions designed to increase the amount of such
items. Also, because the distribution rate is calculated in part by dividing the
latest distribution by the offering price, which is based on net asset value
plus any applicable sales charge, the distribution rate will increase as the net
asset value declines. A distribution rate can be greater than the yield rate
calculated as described above.
L. Custodian
State Street Bank and Trust Company, 225 Franklin Street, Boston,
Massachusetts 02110, is the custodian for Fund assets. 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 each Fund's investments.
State Street Bank and Trust Company is not an affiliate of the Investment
Manager or its affiliates.
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M. Independent Accountants
PricewaterhouseCoopers LLP, 160 Federal Street, Boston, Massachusetts
02110, serves as the Trusts' independent accountants, providing professional
services including (1) audits of each 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 each Fund.
N. Financial Reports
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.
For more information, call State Street Research Service Center.
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