<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
FOR
STATE STREET RESEARCH PORTFOLIOS, INC.
March 1, 1995
As supplemented May 4, 1995
This Statement of Additional Information is not a prospectus. It should be
read in conjunction with the Prospectus of State Street Research International
Equity Fund and State Street Research International Fixed Income Fund dated
March 1, 1995. A copy of the Prospectus may be obtained without charge from the
offices of State Street Research Portfolios, Inc. ("Portfolios") or State
Street Research Investment Services, Inc. (the "Investment Manager" or the
"Distributor"), One Financial Center, Boston, Massachusetts 02111.
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TABLE OF CONTENTS
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Investment Practices and Policies......................................... B-1
Money Market Instruments................................................ B-1
Description of Certain Corporate Bond and Debenture Ratings of Moody's
Investors Service, Inc................................................. B-4
Description of Certain Corporate Bond and Debenture Ratings of Standard
and Poor's Ratings Group............................................... B-4
Description of Commercial Paper
Ratings................................................................ B-4
Certain Investment Limitations............................................ B-5
Certain Investment Practices.............................................. B-7
Lending of Portfolio Securities......................................... B-7
Options and Futures..................................................... B-7
Limitations on the Use of Futures Contracts and Options Thereon and Op-
tions on Indices....................................................... B-14
Forward Foreign Currency Exchange Contracts............................. B-14
Directors and Officers.................................................... B-16
Control Persons........................................................... B-17
Investment Management Arrangements........................................ B-17
Investment Management Agreements and Sub-Investment Management Agree-
ments.................................................................. B-17
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TABLE OF CONTENTS (CONT'D)
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Allocation of Portfolio Brokerage......................................... B-19
Purchase of Shares.......................................................... B-20
Redemption In Kind.......................................................... B-22
Net Asset Value............................................................. B-22
Portfolio Transactions...................................................... B-23
Portfolio Turnover........................................................ B-23
Certain Tax Matters......................................................... B-23
Taxation of the Funds--in General......................................... B-23
Taxation of the Funds' Investments........................................ B-24
Taxation of the Funds' Shareholders....................................... B-25
Distribution of Shares of the Funds......................................... B-26
Calculation of Performance Data............................................. B-28
Total Return.............................................................. B-29
Yield..................................................................... B-29
Accrued Expenses.......................................................... B-30
Nonstandardized Total Return.............................................. B-30
Distribution Rates........................................................ B-31
Custodian................................................................... B-31
Independent Accountants..................................................... B-31
Financial Statements........................................................ B-31
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INVESTMENT PRACTICES AND POLICIES
MONEY MARKET INSTRUMENTS:
Certain money market instruments are described below. The International Equity
and International Fixed Income Funds may invest in such instruments to the ex-
tent otherwise consistent with their investment objectives.
United States Treasury Securities: These consist of various types of market-
able securities issued by the United States Treasury: i.e. bills, notes and
bonds. Such securities are direct obligations of the United States Government
and differ mainly in the length of their maturity. Treasury bills, the most
frequently issued marketable government security, have a maturity of up to one
year and are issued on a discount basis.
B-1
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Government Agency Securities:
These consist of debt securities issued by agencies and instrumentalities of
the United States Government, including the various types of instruments cur-
rently outstanding or which may be offered in the future. Agencies include,
among others, the Federal Housing Administration, Government National Mortgage
Association, Farmers Home Administration, Export-Import Bank of the United
States, Maritime Administration, General Services Administration and Tennessee
Valley Authority. Instrumentalities include, for example, the National Bank of
Cooperatives, each of the Federal Home Loan Banks, Federal Home Loan Mortgage
Corporation, Farm Credit Banks, Federal National Mortgage Association and the
United States Postal Service. Such securities are backed by the full faith and
credit of the United States (e.g., U.S. Treasury Bills), guaranteed by the
United States Treasury (e.g. Government National Mortgage Association mortgage-
backed securities), supported by the issuing agency's or instrumentality's
right to borrow from the United States Treasury (e.g. Federal National Mortgage
Association Discount Notes) or supported by the issuing agency's or
instrumentality's credit.
Bank Money Market Instruments:
These include certificates of deposit and bankers' acceptances. Certificates
of deposit are generally short-term, interest-bearing negotiable certificates
issued by commercial banks or savings and loan associations against funds de-
posited 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). The borrower is liable for payment as well as the bank, which uncondi-
tionally 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 sec-
ondary markets prior to maturity. A Fund will not invest in any security issued
by a commercial bank or a savings and loan association unless the bank or asso-
ciation is organized and located in the United States, has total assets of at
least $1 billion and is a member of the Federal Deposit Insurance Corporation;
provided that this limitation shall not prohibit investments in foreign
branches of banks or agencies which meet the foregoing requirements. No Fund
will invest in non-negotiable time deposits maturing in more than seven days.
These time deposits are considered illiquid and subject to each Fund's 10% lim-
itation on illiquid investments. No Fund invests in negotiable time deposits
maturing in more than 30 days.
Short-Term Corporate Debt Instruments:
These include commercial paper (including variable amount master demand
notes): i.e., short-term, unsecured promissory notes issued by corporations to
finance short-term credit needs. Commercial paper is usually sold on a discount
basis and has a maturity at the time of issuance not exceeding nine months.
Variable amount master demand notes are obligations of companies that permit
the Funds to invest fluctuating amounts at varying rates of interest pursuant
to arrangements between the Funds as lenders, and the companies, as borrowers.
The Funds will have the right, at any time, to increase the amount lent up to
the full amount provided by a note or to decrease the amount. The borrower will
have the right, at any time, to prepay up to the full amount of the amount bor-
rowed without penalty. Because the notes are direct lending obligations between
the Funds and borrowers, they are generally not traded and there is no second-
ary market. However, the Funds will have the right to redeem a note at any time
and receive face value plus accrued interest. Consequently, the Funds' ability
to receive repayment will depend upon the borrower's ability to pay principal
and interest on the Funds' demand. The Funds will invest only in either notes
that have the ratings described below for commercial paper, or (because notes
are not typically rated by credit rating agencies) unrated notes that are is-
sued by companies that have the ratings described below for issuers of commer-
cial paper. GFM International Investors Limited ("GFM" or "Sub-Investment Man-
ager") does not expect that the notes will be backed by bank letters of credit.
The Funds' Investment Manager and Sub-Investment Manager will value the notes
held by the Funds taking into account such factors as the issuer's earning pow-
er, cash flows and other liquidity ratios.
B-2
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Also included are non-convertible corporate debt securities (e.g. bonds and
debentures) with no more than two years remaining to maturity at the date of
settlement. Corporate debt securities with a remaining maturity of less than
one year are liquid (and tend to become more liquid as their maturities lessen)
and are traded as money market securities. Issues with between one and two
years remaining to maturity tend to have greater liquidity and considerably
less market value fluctuation than longer term issues.
Repurchase Agreements:
Under these arrangements, a Fund invests in securities subject to repurchase
agreements with a bank or dealer. A repurchase agreement is an instrument under
which the purchaser (i.e., the Fund) acquires ownership of an obligation (debt
security) and the seller agrees, at the time of the sale, to repurchase the ob-
ligation at a mutually agreed upon time and price, thereby determining the
yield during the purchaser's holding period. This results in a fixed rate of
return insulated from market fluctuations during such period, unless the seller
defaults on its repurchase obligations.
The underlying securities will consist only of U.S. Government or government
agency securities, certificates of deposit, commercial paper or banker's ac-
ceptances. Repurchase agreements will be collateralized by the purchased secu-
rities, and, during the term of a repurchase agreement, the seller will be re-
quired to provide such additional collateral as is necessary to maintain the
value of all of the collateral at a level at least equal to the repurchase
price. Repurchase agreements usually are for short periods, such as under one
week. Repurchase agreements will be entered into with primary dealers for peri-
ods not to exceed 30 days and only with respect to underlying money market se-
curities in which a Fund may otherwise invest as described above. Repurchase
agreements will not be entered into for a duration of more than seven days if,
as a result, more than 10% of the value of a Fund's total assets would be in-
vested in such agreements or other illiquid securities.
Repurchase agreements could be viewed as a form of loan made by a Fund to the
seller of the agreement, with the security subject to repurchase, in effect,
serving as "collateral" for the loan. A Fund will in all cases seek to assure
that the amount of collateral with respect to any repurchase agreement is ade-
quate. As with a true extension of credit, however, there is risk of delay in
recovery or inadequacy of the "collateral", should the seller of the repurchase
agreement fail financially. Also, a Fund could incur disposition costs in con-
nection with disposition of the collateral if the seller defaults. The Funds
will enter into repurchase agreements only with sellers deemed to be credit-
worthy and only when the economic benefit to the Funds is believed to justify
the attendant risks. Portfolios has adopted standards for the sellers with whom
it will enter into repurchase agreements which it believes are reasonably de-
signed to assure that such a party presents no serious risk of becoming in-
volved in bankruptcy proceedings within the time frame contemplated by the re-
purchase agreement.
Zero Coupon Bonds
Zero coupon bonds do not require the periodic payment of interest and are is-
sued at a significant discount from face value. The discount approximates the
total amount of interest the bonds will accrue and compound over the period un-
til maturity at a rate of interest reflecting the market rate of the security
at the time of issuance. Such investments benefit the issuer by mitigating its
need for cash to meet debt service, but also require a higher rate of return to
attract investors who are willing to defer receipt of such cash. Such invest-
ments may experience greater volatility in market value than debt obligations
which make regular payments of interest. The Funds will accrue income on such
investments for tax and accounting purposes, which is distributable to share-
holders. When distributed to shareholders, any such income resulting from zero
coupon bonds will be paid from a Fund's cash assets, or, if necessary to pay
the distribution, from the proceeds of sales of portfolio securities held by a
Fund. Furthermore, a Fund will be unable to purchase additional portfolio secu-
rities with any cash used to make such distributions and its current income may
be reduced.
B-3
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Debt Instrument Ratings
The ratings of certain debt instruments in which the Funds may invest are de-
scribed below.
DESCRIPTION OF CERTAIN CORPORATE BOND AND DEBENTURE RATINGS OF MOODY'S
INVESTORS SERVICE, INC.:
Aaa-Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edge." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa--Bonds which are rated Aa are judged to be of high quality by all stan-
dards. 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 protec-
tive elements may be of greater amplitude or there may be other elements pres-
ent which make the long term risks appear somewhat greater than in Aaa securi-
ties.
A--Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper-medium grade obligations. Factors giving security
to principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future.
Baa--Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba--Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position charac-
terizes bonds in this class.
B--Bonds which are rated B generally lack characteristics of the desirable in-
vestment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
DESCRIPTION OF CERTAIN CORPORATE BOND AND DEBENTURE RATINGS OF STANDARD &
POOR'S RATINGS GROUP:
AAA--This is the highest rating assigned by Standard & Poor's to a debt obliga-
tion and indicates an extremely strong capacity to pay principal and interest.
AA--Bonds rated AA also qualify as high-quality debt obligations. Capacity to
pay principal and interest is very strong, and in the majority of instances
they differ from AAA issues only in small degree.
A--Bonds rated A have a strong capacity to pay principal and interest, al-
though they are somewhat 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 parame-
ters, 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.
BB or B--Bonds rated BB or B are regarded, on balance, as predominantly specu-
lative with respect to capacity to pay interest and repay principal in accor-
dance with the terms of the obligation. BB indicates the lowest degree of spec-
ulation and B a relatively higher degree of speculation. While such bonds will
likely have some quality and protective characteristics, these are outweighted
by large uncertainties or major risk exposures to adverse conditions.
DESCRIPTION OF COMMERCIAL PAPER RATINGS:
Commercial paper rated A (highest quality) by Standard & Poor's has the follow-
ing characteristics: Liquidity ratios are adequate to meet cash requirements.
Long-term senior debt is rated A or better, although in some cases BBB credits
may
B-4
<PAGE>
be allowed. The issuer has access to at least two additional channels of bor-
rowing. 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 determine whether the issuer's commercial paper is rated A-1,
A-2 or A-3. (Those A-1 issues determined to possess overwhelming safety charac-
teristics are denoted with a plus (+) sign: A-1+.)
The rating Prime is the highest commercial paper rating assigned by Moody's.
Among the factors considered by Moody's in assigning ratings are the following:
evaluation of the management of the issuer; economic evaluation of the issuer's
industry or industries and an appraisal of speculative-type risks which may be
inherent in certain areas; evaluation of the issuer's products in relation to
competition and customer acceptance; liquidity; amount and quality of long-term
debt; trend of earnings over a period of 10 years; financial strength of any
parent company and the relationships which exist with the issuer; and recogni-
tion by the 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.
CERTAIN INVESTMENT LIMITATIONS
The investment limitations not described in the Prospectus and generally common
to the Funds are described below. The following four fundamental policies may
not be changed without approval of holders of a majority of the outstanding
voting shares of each Fund affected (which for this purpose and under the In-
vestment Company Act of 1940, as amended (the "1940 Act") means the lesser of
(i) 67% of the shares represented at a meeting at which more than 50% of the
outstanding shares are represented or (ii) more than 50% of the outstanding
shares).
No Fund may:
1. borrow money or purchase securities on margin, provided, however, that
this restriction shall not prohibit a Fund from (a) obtaining such short-
term credits as are necessary for the clearance of portfolio transactions,
(b) temporarily borrowing up to 5% of the value of a Fund's total assets
for extraordinary or emergency purposes, such as for permitting redemption
requests to be honored which might otherwise require the sale of securi-
ties at a time when it is not in the Fund's best interests, or (c) pur-
chasing securities on a "when-issued" or "forward commitment" basis. Col-
lateral arrangements entered into by the Fund to make margin deposits in
connection with futures contracts, including options on futures contracts,
are not for these purposes deemed to be the purchase of a security on mar-
gin. The aggregate amount of obligations identified in (a), (b) and (c)
above, when incurred, will not exceed one-third of the amount by which the
Fund's total assets exceed its total liabilities (excluding the liabili-
ties represented by such obligations). If at any time a Fund's obligations
of such type exceed the foregoing limitation, such obligations will be
promptly reduced to the extent necessary to comply with the limitation.
The Funds will not issue senior securities, other than those which repre-
sent obligations under (a), (b), and (c). For purposes hereof, writing
covered call and put options and entering into futures contracts and op-
tions thereon to the extent permitted by the investment policies described
in the Prospectus shall not be deemed to involve the issuance of senior
securities or borrowings;
2. engage in the underwriting of securities of other issuers, except to the
extent that in selling portfolio securities, it may be deemed to be a
"statutory" underwriter for purposes of the Securities Act of 1933; or
3. purchase or sell real estate or real estate or real estate interests (ex-
cept that the Fund may invest up to 10% of its total assets in: (i) read-
ily marketable securities of issuers which deal in real estate or mort-
gages; and (ii) readily marketable securities which are secured by real
estate or interests therein, and the Fund reserves freedom of action to
hold and to sell
B-5
<PAGE>
real estate acquired as a result of the Fund's ownership of such securi-
ties.)
4. acquire securities for the purpose of exercising control over the manage-
ment of any company or if such acquisition would thereupon cause more than
25% of the value of the Fund's total assets to consist of (1) securities
(other than securities issued or guaranteed by the United States govern-
ment, its agencies and instrumentalities) which, together with other secu-
rities of the same issuer, constitute more than 5% of the value of the
Fund's total assets and (2) voting securities of issuers more than 10% of
whose outstanding voting securities are owned by Portfolios.
The International Equity Fund may not:
1. make any investment which would thereupon cause more than 25% of the value
of the total assets of the Fund to be invested in securities issued by
companies principally engaged in any one industry, provided, however, that
(a) utilities will be divided according to their services so that, for
example, gas, gas transmission, electric and telephone will each be deemed
a separate industry, (b) oil and oil related companies will be divided by
type so that, for example, domestic crude oil and gas producers, domestic
integrated oil companies, international oil companies and oil service
companies will each be deemed a separate industry, and (c) savings and
loan associations and finance companies will each be deemed a separate
industry. To the extent that 25% of the total assets of the Fund may
become invested in the four oil related industries listed above in the
aggregate, such fact will be disclosed. For purposes of this limitation,
all debt securities issued by foreign governments, their agencies or
instrumentalities will be treated as foreign government debt and all debt
securities issued by supranational organizations will be treated as
supranational debt.
The following investment restrictions may be changed without approval of
shareholders.
1. No Fund will purchase securities of other investment companies if such
purchase would thereupon cause more than 10% of the value of the total as-
sets in the Fund to be invested in the securities of investment companies
or more than 5% of such value to be invested in the securities of any one
investment company, or would cause Portfolios to own more than 3% of the
total outstanding voting stock of any such company (or together with other
investment companies having the same investment adviser to own more than
10% of the total outstanding voting stock of any closed-end investment
company). Securities of investment companies may also be acquired as part
of a merger, consolidation, acquisition of assets or reorganization.
2. No Fund will make any investment in repur-chase agreements having a matu-
rity of more than seven days or any other illiquid assets if, as a result,
more than 10% of the Fund's total assets would be invested in illiquid as-
sets or more than 5% of the Fund's total assets would be invested in re-
stricted securities. For purposes of this limitation, privately placed se-
curities that are not registered under the Securities Act of 1933, but
that can be offered and sold to qualified institutional buyers under Rule
144A under that Act are not considered restricted securities.
3. Portfolios will not make any short sale or participate on a joint or joint
and several basis in any trading account in securities. The latter policy,
however, does not prohibit combining orders for portfolio securities as
described in "Investment Management Agreements and Sub-Investment Manage-
ment Agreements," on page B-16.
4. No Fund will invest in oil, gas or other mineral exploration or develop-
ment programs (although it may invest in issuers which own or invest in
such interests).
5. No Fund will purchase securities of any issuer with a record of less than
three years continuous operations, including predecessors, except obliga-
tions issued or guaranteed by the U.S. Government or by any foreign gov-
ernment or their agencies or instrumentalities, if such purchase would
cause the investments of the Fund in all such issuers to exceed 5% of the
total assets of the Fund taken at market value.
B-6
<PAGE>
6. No Fund will purchase or retain securities of an issuer any of whose offi-
cers, directors, trustees or security holders is an officer, director or
trustee of the Fund or a member, officer, director or trustee of the in-
vestment adviser of the Fund if one or more of such individuals owns bene-
ficially more than one-half of one percent ( 1/2%) of the outstanding
shares or securities or both (taken at market value) of such issuer and
such individuals owning more than one-half of one percent ( 1/2%) of such
shares or securities together own beneficially more than 5% of such shares
or securities or both.
The investment restrictions set forth in the Pro- spectus contain an exception
that permits the Funds to purchase securities pursuant to the exercise of sub-
scription rights, subject to the condition that such purchase will not result
in a Fund ceasing to be a diversified investment company. Japanese and European
corporations frequently issue additional capital stock by means of subscription
rights offerings to existing shareholders at a price substantially below the
market price of the shares.
The failure to exercise such rights would result in a Fund's interest in the
issuing company being diluted. The market for such rights is not well developed
and, accordingly, a Fund may not always realize full value of the sale of
rights. Therefore, the exception applies in cases where the limits set forth in
the investment restrictions in the Prospectus would otherwise be exceeded by
exercising rights or have already been exceeded as a result of fluctuations in
the market value of a Fund's portfolio securities with the result that a Fund
would otherwise be forced either to sell securities at a time when it might not
otherwise have done so, or to forego exercising the rights.
CERTAIN INVESTMENT PRACTICES
LENDING OF PORTFOLIO SECURITIES:
Subject to Portfolios' fundamental investment restrictions, each Fund from time
to time may lend some of its securities to brokers, dealers and financial in-
stitutions and receive as collateral cash or United States Treasury securities
which at all times while the loan is outstanding will be maintained by the bor-
rower in amounts equal to at least 100% of the current market value of the
loaned securities. Any cash collateral will be invested in short-term high-
grade securities, which can increase the current income of the Fund lending its
securities, since the Fund continues to receive interest and dividends on the
loaned securities during the period of the loan. Any gain or loss in the market
value of loaned securities or securities in which cash collateral is invested
during the term of the loan would also inure to the Fund.
Loans of portfolio securities will not have terms longer than 30 days and will
be terminable at any time. The Funds will have the right to retain record own-
ership of loaned securities to exercise beneficial rights such as voting
rights, subscription rights and rights to dividends, interest or other distri-
butions. Portfolios on behalf of the Funds may pay reasonable finders, adminis-
trative and custodial fees to persons unaffiliated with the Funds for services
in connection with such loans.
The dividends, interest, and other distributions received by a Fund on loaned
securities may, for tax purposes, be treated as income other than qualified in-
come for the 90% test discussed under "Certain Tax Matters," on page B-22. The
Funds intend to lend portfolio securities only to the extent that such activity
does not jeopardize the Funds' qualification as regulated investment companies
under the Internal Revenue Code of 1986, as amended (the "Code").
If the borrower fails to maintain the requisite amount of collateral, the loan
automatically terminates, and the Fund could use the collateral to replace the
securities, while holding the borrower liable for any excess of the replacement
cost over the amount of collateral. As with any extension of credit, there are
risks of delay in recovery, and in some cases even loss of rights in the col-
lateral, should the borrower of the securities fail financially. However, loans
of portfolio securities will be made only to firms deemed to be creditworthy
and only when the economic benefit to the Funds is believed to justify the at-
tendant risks. On termination of a loan, the borrower is required to return the
loaned securities to the Fund.
OPTIONS AND FUTURES:
Options on Portfolio Securities and Currencies: Subject to the fundamental in-
vestment restrictions,
B-7
<PAGE>
all the Funds may write (sell) covered call options and may purchase put op-
tions with respect to securities in their portfolio. The Funds may also pur-
chase call options and may write covered put options on securities or curren-
cies.
A call option gives the purchaser of such option, in exchange for the option
premium, the right to buy (and obligates the writer to sell) the underlying se-
curity or currency at the price specified in the option (the "exercise price")
at any time until the option expires, generally within three to nine months.
The exercise price, plus the option premium paid, will always be greater than
the market price of the underlying security or currency at the time the option
is written. A put option gives the purchaser of such option, in exchange for
the option premium, the right to sell (and obligates the writer to purchase)
the underlying security or currency at the exercise price at any time before
the option expires.
If a covered call or put option written by a Fund expires unexercised, the
Fund will realize as income, in the form of a short-term capital gain, the pre-
mium it received for the sale of the option, less the brokerage commission it
paid i.e., the "net premium." If a call option written by a Fund is exercised,
a decision over which the Fund has no control, the Fund must sell the under-
lying security or currency to the option holder at the exercise price. By writ-
ing a covered call option, the Fund foregoes, in exchange for the net premium,
the opportunity to profit from any increase in the value of the underlying se-
curity or currency above the exercise price plus the premium paid. Therefore,
call options may be written when GFM believes that the security or currency
should be held, but no increase in price or only a moderate increase within the
option period is expected.
By writing a covered put option, a Fund receives premium income but obligates
itself to purchase from the option holder, at the price specified in the op-
tion, the particular security or currency underlying the option at any time
prior to the expiration of the option period, regardless of the market value of
the security or currency during the option period. Therefore, put options will
be written when GFM believes that the security's or currency's price will rise
during the exercise period and, consequently, the option will not be exercised.
If an option purchased by a Fund expires unexercised, the Fund will experience
a loss in the amount of the premium paid for the option. The Fund will gener-
ally decide to exercise a put option if the market price of the underlying se-
curity or currency falls below the exercise price plus the premium paid; it
will generally decide to exercise a call option if the market price of the un-
derlying security or currency exceeds the exercise price plus the premium paid.
Therefore, options may be purchased when GFM believes that, in the case of a
put, the security or currency should be held but its market price may fall, or,
in the case of a call, the security or currency should be purchased in the fu-
ture and its market price may rise.
In order to reduce the risk of loss, the Funds will not purchase options un-
less GFM believes the market is sufficiently developed. The Funds will not sell
the securities or currencies against which options have been written until af-
ter the option period has expired, a closing purchase transaction, if avail-
able, has been executed, a corresponding put or call option has been purchased
or the written option is otherwise covered.
Options are traded or on certain recognized securities exchanges including the
following United States and foreign exchanges: the Chicago Board Options Ex-
change, American Stock Exchange, New York Stock Exchange, Pacific Stock Ex-
change and Philadelphia Stock Exchange, the Toronto Stock Exchange, Montreal
Stock Exchange, European Options Exchange (in the Netherlands) and London Stock
Exchange.
A Fund may terminate its obligation as the writer of an option by purchasing
an option with the same exercise price and expiration date as the option previ-
ously written (a "closing purchase transaction"). If a Fund cannot enter into a
closing purchase transaction (for example, because no such options are avail-
able for purchase), the Fund will continue to bear the risk of loss of the ap-
preciation, if any, in the price of the underlying security or currency during
the remaining term of the option, if it has written a call option, or the Fund
will continue to be obligated to purchase the specified securities or curren-
cies at the exercise price, regardless of the market value or exchange rate, if
it has written a put option.
B-8
<PAGE>
Both sales and purchases of options require the Funds to pay brokerage commis-
sions. To the extent that an option sold by the Funds is exercised, the Funds
may incur brokerage commissions or other transaction costs in reinvesting the
proceeds received upon such exercise. Also, writing covered call options can
increase a Fund's turnover rate.
When a Fund sells a covered call or put option, an amount equal to the net
premium (the premium less the commission) received by the Fund is included in
the liability section of the Fund's statement of assets and liabilities as a
deferred credit. The amount of the deferred credit subsequently will be marked-
to-market to reflect the current value of the option written. If an option ex-
pires on its stipulated expiration date or if the Fund enters into a closing
purchase transaction, the Fund will realize a gain (or loss, if the cost of a
closing purchase transaction exceeds the net premium received when the option
was sold), and the deferred credit related to such option will be eliminated.
If a call option sold by the Fund is exercised, the Fund will realize a long-
term or short-term gain or loss from the sale of the underlying security or
currency, and the proceeds of the sale will be increased by the premium previ-
ously received on the option. The writing of such call options will not affect
the holding period of the underlying security. If a put option sold by the Fund
is exercised, the Fund's cost for the security or currency purchased will be
reduced by the premium previously received on the option written.
Options on Indices:
The Funds intend to utilize options on stock indices. Options on stock indi-
ces are similar to options on stock, except that all settlements are made in
cash rather than by delivery of the stock, and gains or losses depend on price
movements in the stock market generally (or in a particular industry or segment
of the market represented by the index) rather than price movements in individ-
ual stocks.
Upon payment of a specified premium at the time an option on a stock index is
entered into, the purchaser of a call option on a stock index obtains the right
to receive, upon exercise of the option, a sum of money equal to a multiple of
any excess of the value of the specified stock index, on the exercise date,
over the exercise or "strike" price specified by the option. The purchaser of a
put option on a stock index obtains the right to receive, upon exercise of the
option, a sum of money equal to a multiple of any excess of the strike price
over the value of the stock index.
The writer of a stock index option has obligations which correspond to the
purchaser's rights. Thus, for example, the writer of a call option on a stock
index, in consideration of the option premium received, has the obligation to
pay, upon exercise, a dollar amount equal to a multiple of any excess of the
value of the specified stock index on the date of exercise over the strike
price specified in the option. The writer of a put option on a stock index, in
consideration of the option pre-mium received, has the obligation to pay, upon
exercise, a dollar amount equal to a multiple of any excess of the value of the
strike price specified in the option over the value of the specified stock in-
dex on the date of exercise.
The Funds will cover call options on a stock index written by, for example,
holding in a segregated account, with the custodian for Portfolios, portfolio
securities that substantially replicate the movement of the particular index
upon which the call option was written or sufficient cash or liquid assets to
cover the outstanding position. In addition, the Funds may also choose to cover
call options written by holding a separate call option permitting the purchase
of the same stock index at the same strike price. The Funds will cover put op-
tions on a stock index written by, for example, holding in a segregated ac-
count, with the custodian for Portfolios, cash or liquid assets equal to the
strike price of the put option or by holding a separate put option permitting
the purchase of the same stock index at the same strike price.
The Funds intend to write covered call and put options on a stock index for
the same purposes as they might write covered call and put options on their
portfolio securities.
A securities index fluctuates with changes in the market values of the securi-
ties included in the index. For example, some options on securities indices are
based on a broad market index such as the Nikkei Index of 225 Japanese stocks
traded on the Singapore International Monetary Exchange
B-9
<PAGE>
("Nikkei Index") or the Standard & Poor's 500 Index, or a narrower market index
such as the Standard & Poor's 100 or the Osaka Index of 50 Japanese Stocks
traded on the Osaka Exchange. Indices may also be based on an industry or mar-
ket segment such as the AMEX Oil and Gas Index or the Computer and Business
Equipment Index. Options on stock indices are currently traded on the following
exchanges, among others: the London Traded Options Market, The Chicago Board
Options Exchange; New York Stock Exchange; and American Stock Exchange. Options
on other types of securities indices, which do not currently exist, may be in-
troduced and traded on exchanges in the future.
Options on indices relating to certain debt securities, referred to as inter-
est rate indices, may be introduced in the future. In the event that a liquid
market develops for options on an interest rate index, and the Board of Direc-
tors of Portfolios authorizes a particular Fund to use such an option, the Fund
may do so. Where permitted, each Fund intends to utilize options on interest
rate indices in a manner similar to that described above with respect to op-
tions on stock indices.
The Funds' purchase and sale of options on indices will be subject to the same
risks as those applicable to options on individual securities. In addition, the
distinctive characteristics of options on indices create certain risks that are
not present with options on individual securities. For example, index prices
may be distorted if trading of certain securities included in the index is in-
terrupted. Trading in the index options also may be interrupted in certain cir-
cumstances, such as, for example, if trading were halted in a substantial num-
ber of securities included in the index. If this occurred, the Fund would not
be able to close out options which it had purchased or written and, if restric-
tions on exercise were imposed, would be unable to exercise an option it holds,
which could result in substantial losses to the Fund. The Funds intend to pur-
chase or write options only on indices which include a sufficient number of se-
curities to minimize the likelihood of a trading halt in such options. In addi-
tion, the ability to establish and close out positions on options on indices
will be subject to the development and maintenance of a liquid secondary market
for such options. The Funds will not purchase or sell any option on an index
unless and until, in the opinion of GFM, the market for such options has devel-
oped sufficiently that the risk in connection with such transactions is accept-
able.
The effectiveness of hedging through the purchase of options on indices will
depend upon the extent to which price movements in the portion of the securi-
ties portfolio being hedged correlate with price movements in the selected in-
dex. Perfect cor-relation is not possible because the securities held or to be
acquired by a Fund will not exactly match the composition of the indices on
which options are written. In the purchase of options on indices, the principal
risk is that the premium and transaction costs paid by a Fund in purchasing an
option will be lost as a result of unanticipated movements in the price of the
securities comprising the index for which the option has been purchased. In
writing call options on indices, the principal risks are the inability to ef-
fect closing transactions at fav-orable prices and the inability to participate
in the appreciation of the underlying securities. In writing put options on in-
dices, the principal risks are the inability to effect closing transactions at
favorable prices and the obligation to make a cash settlement relating to the
stock index at prices which may not reflect current market values.
Futures Transactions:
A futures contract is an agreement to buy or sell a security or currency (or
deliver a final cash settlement price, in the case of a contract relating to an
index or otherwise not calling for physical delivery at the end of trading in
the contract) for a set price in the future. Trading in futures is regulated
under the Commodity Exchange Act by the Commodity Futures Trading Commission
("CFTC"). Futures contracts trade on certain regulated contract markets through
an open outcry auction on the exchange floor. The Funds, as described more
fully below, may purchase or sell futures contracts to effect hedging transac-
tions. A hedge, as defined by the CFTC, is a transaction in which the Funds
utilize futures contracts in order to protect the value of underlying portfolio
securities or the currencies in which they are denominated from adverse fluctu-
ations in the financial markets.
B-10
<PAGE>
Positions taken in the futures markets are not normally held until delivery or
cash settlement is required, but instead are liquidated through offsetting
transactions that may result in a gain or a loss. While futures positions taken
by a Fund will usually be liquidated in this manner, the Fund may instead make
or take delivery of underlying securities or currencies whenever it appears ec-
onomically advantageous for the Fund to do so. A clearing organization associ-
ated with the exchange on which futures are traded assumes responsibility for
closing out transactions and guarantees that, as between the clearing members
of an exchange, the sale and purchase obligations will be performed with regard
to all positions that remain open at the termination of the contract.
Upon entering into a futures contract, a Fund is required to deposit with a
futures commission merchant or in a segregated custodial account a certain per-
centage (presently less than ten percent) of the futures contract's market
value as "initial margin." Initial margin is in the nature of a performance
bond or good faith deposit on the contract which is returned upon termination
of the futures contract if all contractual obligations have been satisfied. The
initial margin in most cases consists of cash or U.S. Government securities.
Subsequent cash payments, called "variation margin," may be required as a re-
sult of marking the contracts to market on a daily basis as the contract value
fluctuates.
The use of futures contracts entails certain risks in addition to those stated
below, including but not limited to; possible reduction in the Fund's income
due to the use of hedging; possible reduction in value of both securities or
currencies hedged and the futures contract; and potential losses in excess of
the amount initially invested in the futures contracts themselves. The use of
futures contracts requires special skills in addition to those needed to select
portfolio securities or currencies.
Stock Index Futures Contracts:
The Funds, consistent with their investment objectives and policies, may at-
tempt to reduce the risk of investments in equity securities by hedging por-
tions of its underlying portfolio through the use of standardized stock index
futures contracts. These contracts currently are actively traded on the Chicago
Board of Trade, the Chicago Mercantile Exchange, the New York Futures Exchange
and the Kansas City Board of Trade. Foreign stock index futures traded outside
the United States include the Nikkei Index traded on the Singapore Interna-
tional Monetary Exchange, Osaka Index traded on the Osaka Exchange, Financial
Times Stock Exchange Index of the 100 largest stocks on the London Stock Ex-
change traded on the London International Financial Futures Exchange, the All
Ordinaries Share Price Index of 307 stocks on the Sydney, Melbourne Exchanges,
Hang Seng Index of 33 stocks on the Hong Kong Stock Exchange, Barclays Share
Price Index of 40 stocks on the New Zealand Stock Exchange and Toronto Index of
35 stocks on the Toronto Stock Exchange. Futures and futures options on the
Nikkei Index are traded on the Chicago Mercantile Exchange. U.S. commodity ex-
changes may develop futures and futures options on other indices of foreign se-
curities; futures and options on a U.S. devised in-dex of foreign stocks are
also being developed. A stock index futures contract is an agreement in which
the seller of the contract agrees to deliver to the buyer an amount of cash
equal to a specific dollar amount times the difference between the value of a
specific stock index at the close of the last trading day of the contract and
the price at which the agreement is made. No physical delivery of the under-
lying stocks in the index is made.
The Funds intend to engage in stock index futures transactions as a hedge
against market risk resulting from market conditions and over-all economic
prospects with respect to the value of portfolio securities held by the Funds
or which the Funds intend to purchase, as distinguished from stock-specific
risk resulting from the market's evaluation of the merits of a particular secu-
rity. For example, a Fund might sell stock index futures contracts to hedge
against a decline in the value of securities held in that Fund. Alternatively,
a Fund might buy stock index futures contracts to hedge against a rise in the
value of securities the Fund intends to acquire.
A Fund's successful use of stock index futures contracts depends upon the
ability of GFM to ac-
B-11
<PAGE>
curately assess the direction of the stock market and is subject to various ad-
ditional risks. The correlation between movement in the price of the stock in-
dex futures contract and the price of the securities being hedged is imperfect
and the risk from imperfect correlation increases as the composition of the
Fund portfolio diverges from the composition of the relevant index. In addi-
tion, the ability of a Fund to close out a futures position
depends on a liquid secondary market. There is no assurance that liquid second-
ary markets will exist for any particular futures contract at any particular
time. See also the risks noted above under "Futures Transactions."
Interest Rate Futures Contracts:
Each of the Funds, consistent with its investment objective and policies, may
buy and sell futures contracts on interest-bearing securities (such as U.S.
Treasury Bonds, U.S. Treasury Notes, three-month U.S. Treasury Bills, Eurodol-
lar Certificates of Deposit and GNMA Certificates) for hedging purposes.
Futures contracts on interest-bearing securities are actively traded on the
Chicago Board of Trade, London International Financial Futures Exchange, Tokyo
Stock Exchange, Paris Stock Exchange and International Monetary Market at the
Chicago Merchantile Exchange. Further, in the event that a liquid market devel-
ops for futures contracts based on an interest rate index, and the Board of Di-
rectors of Portfolios authorizes a particular Fund to use such futures con-
tracts, the Fund may do so. Futures contracts on interest-bearing securities
and interest rate indices are referred to collectively as "interest rate
futures contracts." The Funds will engage in transactions in only those inter-
est rate futures contracts that are traded on a commodities exchange or a board
of trade and are standardized as to maturity date and the underlying financial
instrument.
For example, a Fund might sell an interest rate futures contract to hedge
against a decline in the market value of debt securities the Fund owns. A Fund
might also purchase an interest rate futures contract to hedge against an an-
ticipated increase in the value of debt securities the Fund intends to acquire.
The risks of interest rate futures contracts are briefly described above in
connection with the proposed use of stock index futures contracts and in the
general description of "Futures Transactions." In addition, a Fund's successful
use of interest rate futures contracts depends upon the ability of GFM to accu-
rately assess interest rate moves. Further, because there are a limited number
of types of interest rate futures contracts, it is likely that the financial
futures contracts available to a Fund will not exactly match the debt securi-
ties the Fund intends to hedge or acquire. To compensate for differences in
historical volatility between securities a Fund intends to hedge or acquire and
the interest rate futures contracts available to it, the Fund could purchase or
sell futures contracts with a greater or lesser value than the debt securities
it wished to hedge or intended to purchase. This imperfect correlation between
the interest rate futures contract and the debt securities being hedged is an-
other risk.
Currency Futures Contracts:
The Funds may buy and sell futures contracts on currencies. The Funds will en-
gage in transactions in only those currency futures contracts that are traded
on a national or foreign commodities exchange or a board of trade and are stan-
dardized as to maturity date and the underlying financial instrument.
Currency futures contracts may be used on currencies as a hedge against
changes in prevailing currency exchange rates in order to establish more defin-
itively the return on foreign securities held or intended to be acquired by the
Funds. In this regard, the Funds could sell currency futures contracts to off-
set the effect of expected decreases in currency exchange rates and purchase
such contracts to offset the effect of expected increases in currency exchange
rates. Although techniques other than the sale and purchase of currency futures
contracts could be used for these purposes, currency futures contracts may be
an effective and relatively low cost means of implementing these strategies.
Options on Futures:
The Funds may purchase put and call options on stock index futures contracts,
write (i.e., sell) covered call options on stock index futures con-
B-12
<PAGE>
tracts and enter into closing transactions with respect to such options. The
Funds may also write covered put options on stock index futures options or cur-
rency futures contracts and may enter into closing transactions with respect to
such options. In addition, the Funds are permitted to purchase or write covered
put and call options on interest rate futures with respect to such options.
Such transactions will only be for bona fide hedging purposes, as defined by
the CFTC. A call option on a futures contract gives the purchaser the right, in
return for the premium paid, to purchase a futures contract (assume a "long"
position) at a specified exercise price at any time before the option expires.
A put option gives the purchaser the right, in return for the premium paid, to
sell a futures contract (assume a "short" position), for a specified exercise
price, at any time before the option expires. Upon the exercise of a call, the
writer of the option is obligated to sell the futures contract (to deliver a
"long" position to the option holder) at the option exercise price, which will
presumably be lower than the current market price of the contract in the
futures market. Upon exercise of a put, the writer of the option is obligated
to purchase the futures contract (to deliver a "short" position to the option
holder) at the option exercise price, which will presumably be higher than the
current market price of the contract in the futures market.
When a Fund as a purchaser of an option on a futures contract exercises such
option and assumes a long futures position in the case of a call, or a short
futures position in the case of a put, its gain will be credited to its futures
margin account. Any loss suffered by the writer of the option on a futures con-
tract will be debited to its futures variation margin account. However, as with
the trading of futures, most participants in the options markets do not seek to
realize their gains or losses by exercise of their option rights. Instead, the
holder of an option will usually realize a gain or loss by buying or selling an
offsetting option (i.e., entering into a closing transaction) at a market price
that will reflect an increase or a decrease from the premium originally paid as
a purchaser or required as a writer.
Options on futures contracts can be used by a Fund to hedge the same risks as
might be addressed by the direct purchase or sale of the underlying futures
contracts themselves. Depending on the pricing of the option, compared to ei-
ther the futures contract upon which it is based or upon the price of the un-
derlying securities or currencies themselves, it may or may not be less risky
than direct ownership of the futures contract or the underlying securities or
currencies.
In contrast to a futures transaction, in which only transaction costs are in-
volved, benefits received by a Fund as a purchaser in an option transaction
will be reduced by the amount of the pre-mium paid as well as by transaction
costs. In the event of an adverse market movement, however, a Fund which pur-
chased an option will not be subject to a risk of loss on the option transac-
tion beyond the price of the premium it paid plus its transaction costs. Pur-
chasers of options who do not exercise their options prior to the expiration
date will suffer a loss of the entire premium.
If a Fund writes covered call or put options on futures contracts, the Fund
will receive a premium but will assume a risk of adverse movement in the price
of the underlying futures contract comparable to that involved in holding a
futures position. If the option is not exercised, the Fund will realize a gain
in the amount of the premium, which may partially offset unfavorable changes in
the value of securities held in the Fund or to be acquired for the Fund. If the
option is exercised, the Fund will incur a loss in the option transaction,
which will be reduced by the amount of the premium it has received, but which
may also partially offset favorable changes in the value of its securities or
currencies. For example, the writing of a call option on a futures contract
constitutes a partial hedge against declining prices of the underlying securi-
ties or currencies. If the futures price at expiration is below the exercise
price, the Fund will retain the full amount of the option premium, which pro-
vides a partial hedge against any decline that may have occurred in the value
of the Fund's holdings of securities or currencies.
While the purchaser or writer of an option on a futures contract may normally
terminate its posi-tion by selling or purchasing an offsetting option of the
same series, a Fund's ability to establish and close out options at fairly es-
tablished prices will be
B-13
<PAGE>
subject to the existence of a liquid market. The Funds will not purchase or
write options on futures contracts unless, in the opinion of GFM, the market
for such options has sufficient liquidity that the risks associated with such
options transactions are not unacceptable.
LIMITATIONS ON THE USE OF FUTURES CONTRACTS AND OPTIONS THEREON AND OPTIONS ON
INDICES:
Regulations of the CFTC currently require certain limits to be placed on the
use of futures contracts and options thereon. To ensure that the transactions
constitute bona fide hedges, in instances involving the purchase or sale of a
futures contract or the writing of covered call options on futures contracts,
each Fund will be required to either (i) segregate sufficient cash or liquid
assets to cover the outstanding position or (ii) cover the futures contract or
option written on such contract by owning the instruments or currency under-
lying the futures contract or option thereon or by holding a separate option
permitting it to purchase or sell the same futures contract or option at the
same strike price or better. In instances involving the writing of covered put
options on futures contracts, the Funds will be required to (i) segregate suf-
ficient cash or liquid assets equal to the strike price of the put options
written or (ii) purchase a put option on the same futures contract at the same
strike price as that written by the Funds. Where such positions are covered by
the segregation of sufficient cash, cash equivalents or underlying securities,
such amounts will be held in a segregated account with Portfolios' custodian to
collateralize the position, thereby insuring that the use of such futures con-
tracts and options thereon is unleveraged. A Fund may not establish a position
in a futures contract or purchase an option thereon if immediately thereafter
the sum of the amount of initial margin deposits on all open futures contracts
and premiums paid for unexpired options on futures contracts would exceed 5% of
the market value of that Fund's total assets; provided however, that in the
case of an option that is "in-the-money" at the time of the purchase, the "in-
the-money" amount may be excluded in calculating the 5% limitation. In addi-
tion, shares of the Funds may not be sold or advertised as a participation in a
commodity pool or other vehicle for trading in the commodity futures or options
markets. Finally, the Funds must agree to submit information to the CFTC, as
requested, to demonstrate compliance with applicable regulations and to assist
the CFTC in collecting data and refining its hedging standards.
With respect to options on indices, in order to insure that call options writ-
ten by the Funds on indices are covered and, therefore, unleveraged, the Funds
would be required to: (i) hold in a segregated account, with Portfolios' custo-
dian, portfolio securities that substantially replicate the movement of the
particular index upon which the call option was written or sufficient cash or
liquid assets to cover the outstanding position, or (ii) hold a separate option
permitting the purchase or sale of the same stock index at the same strike
price or better. With respect to put options written on stock indices, the
Funds will (i) segregate sufficient cash or liquid assets equal to the strike
price of the put option written or (ii) purchase a put option on the same index
at the same strike price as that written by the Funds.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS:
Each Fund may use forward foreign currency exchange contracts ("forward cur-
rency contracts") to hedge the currency risk relating to the non-U.S. dollar-
denominated securities purchased, sold, or held by that Fund.
A forward currency contract involves an obligation to purchase or sell a spe-
cific currency at a future date, which may be any fixed number of days from the
date of the contract as agreed by the parties, at a price set at the time of
the contract. In the case of a cancelable forward currency contract, the holder
has the unilateral right to cancel the contract at maturity by paying a speci-
fied fee. Forward currency contracts are traded in the interbank market con-
ducted directly between currency traders (usually large commercial banks) and
their customers. They generally have no deposit requirement, and no commissions
are charged at any stage for trades. Although foreign exchange traders do not
charge a fee for currency conversion, they do realize a profit based on the
difference (the "spread") between prices at which they are buying and selling
various currencies.
B-14
<PAGE>
Thus, a trader may offer to sell a foreign currency to a Fund at one rate,
while offering a lower rate of exchange should the Fund desire to resell that
currency to the trader.
At the maturity of a forward currency contract, a Fund may either accept or
make delivery of the currency specified in the contract, or at or prior to ma-
turity, a Fund may enter into a closing transaction involving the purchase or
sale of an offsetting contract. Closing transactions with respect to forward
currency contracts are usually effected with the currency trader that is a
party to the original forward contract.
As described in the Prospectus, each Fund may enter into a forward currency
contract under two circumstances. First, when a Fund has entered into a con-
tract to purchase or sell a non-U.S. security, it may protect itself against a
possible loss between the trade date and the settlement date resulting from an
adverse change in the relationship be-tween the U.S. dollar and the foreign
currency in which such security is denominated by entering into a forward cur-
rency contract in U.S. dollars for the purchase or sale of the amount of the
foreign currency involved in the underlying security transaction. Second, when
management of a Fund believes a particular foreign currency may suffer or enjoy
a substantial movement against the U.S. dollar, the Fund may enter into a for-
ward currency contract to sell or buy an amount of such currency (or another
currency in a cross hedging transaction) approximating the value of some or all
of the Fund's securities denominated in such foreign currency. However, the
precise matching of the amounts of forward currency contracts and the value of
the portfolio securities being hedged will not generally be possible, because
the future value of such securities in foreign currencies will change as a con-
sequence of movements in the market value of those securities between the dates
the forward currency contracts are entered into and the dates they mature.
Since it is impossible to forecast with precision the market value of portfo-
lio securities at the expiration or maturity of a forward currency contract, it
may be necessary for a Fund to purchase additional foreign currency on the spot
(i.e. cash) market (and bear the expense of such purchase) if the market value
of the securities being hedged is less than the amount of foreign currency the
Fund would be obligated to deliver upon the sale of such securities. Converse-
ly, it may be necessary for the Fund to sell some of the foreign currency re-
ceived upon the sale of portfolio securities on the spot market if the market
value of such securities exceeds the amount of foreign currency the Fund is ob-
ligated to deliver.
Each Fund may enter into forward currency contracts or maintain a net exposure
on such contracts only if (i) the consummation of the contracts would not obli-
gate the Fund to deliver an amount of foreign currency in excess of the value
of the Fund's securities or other assets denominated in that currency or (ii)
the Fund maintains with its custodian cash, U.S. government securities, or liq-
uid cash in a segregated account in an amount not less than the value of the
Fund's total assets committed to the consummation of the contracts.
The use of forward currency contracts involves various risks. A Fund may not
always be able to enter into a forward currency contract when management deems
it advantageous to do so, for instance, if the Fund is unable to find a
counterparty to the transaction at an attractive price. Furthermore, a Fund may
not be able to purchase forward currency contracts with respect to all of the
foreign currencies in which its portfolio securities may be denominated. In
those circumstances, and in a cross hedging forward currency contract, the cor-
relation between the movements in the exchange rates of the subject currency
and the currency in which the portfolio security is denominated may not be pre-
cise. Forward currency contracts are not guaranteed by a third party and, ac-
cordingly, each party to a forward currency contract is dependent upon the
creditworthiness and good faith of the other party. A default on the contract
would deprive a Fund of unrealized profits or force the Fund to cover its com-
mitments for purchase or sale of currency, if any, at the current market price.
Finally, the cost of purchasing forward currency contracts in a particular cur-
rency will reflect, in part, the rate of return available on instruments denom-
inated in that currency. The cost of purchasing forward currencies that gener-
ally yield high rates of return may thus tend to reduce the rate of return to-
ward the rate of return that would be earned on assets denominated in U.S. dol-
lars.
B-15
<PAGE>
DIRECTORS AND OFFICERS
The directors and officers of Portfolios and their principal occupations for
at least the last five years are set forth below. Unless otherwise noted, the
address of each executive officer and director is One Madison Avenue, New
York, New York 10010.
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION(S)
NAME, (AGE) AND ADDRESS POSITION(S) DURING PAST 5 YEARS
----------------------- ----------- ------------------------
<C> <S> <C>
Steve A. Garban (57)+....... Director Senior Vice-President Finance and
The Pennsylvania State Uni- Operations
versity and Treasurer, The Pennsylvania
208 Old Main State University
University Park, PA 16802
Jeffrey J. Hodgman (51)(*)+. Chairman of the Board, Senior Vice President, Metropolitan
President, Chief Life Insurance Company
Executive Officer and ("Metropolitan Life")
Director
Malcolm T. Hopkins (66)+.... Director Former Vice-Chairman of the Board
14 Brookside Road and Chief Financial Officer, St.
Biltmore Forest Regis Corp.
Asheville, NC 28803
Robert A. Lawrence (68)+.... Director Partner, Saltonstall & Co.
50 Congress Street
Boston, MA 02109
Dean O. Morton (62)+........ Director Retired; formerly Executive Vice-
3200 Hillview Avenue President, Chief Operating Officer
Palo Alto, CA 94304 and Director, Hewlett--Packard
Company
Michael S. Scott Morton Director Jay W. Forrester Professor of
(57)+....................... Management at Sloan School of
Massachusetts Institute of Management, MIT
Technology ("MIT")
77 Massachusetts Avenue
Cambridge, MA 02139
John H. Tweedie (49)(*)+.... Director Executive Vice President,
Metropolitan Life since 1993;
President and Chief Executive
Officer of Metropolitan Life's
Canadian Operations 1990-1993; prior
thereto, Senior Vice President and
Chief Actuary
Gary Lineberry (44)......... Vice President Vice-President, Metropolitan since
1994; prior thereto National
Director, 1992-1994; prior thereto
Vice President, Mutual of New York
Ronald Zito (36)+........... Controller Director-Accounting and Financial
Controls-Pensions, Metropolitan Life
since 1995; Director-Retirement
Savings Center, 1993-1994; prior
thereto, Manager
Christopher P. Nicholas Secretary Associate General Counsel,
(45)+....................... Metropolitan Life since 1990; prior
thereto, Assistant General Counsel.
Elliot Reiter (43).......... Treasurer Vice-President, Metropolitan Life
Albert Rosenthal (63)+...... Vice-President and Assistant Vice-President
Chief Operating Officer Metropolitan Life since 1993;
Director-Personal Insurance,
Advanced Markets, 1991-1993; prior
thereto, Manager
</TABLE>
- -------
(*) Interested Person, as defined in the Investment Company Act of 1940 ("1940
Act"), of the Funds.
(+) Serves as a trustee, director and/or officer of one or more of the
following investment companies, each of which has an advisory relationship
with the Investment Manager or its affiliates: MetLife--State Street
Financial Trust, MetLife--State Street Income Trust, MetLife-- State Street
Money Market Trust, MetLife--State Street Tax-Exempt Trust, State Street
Research Capital Trust, State Street Master Investment Trust, MetLife--State
Street Equity Trust, State Street Research Securities Trust, State Street
Growth Trust, State Street Exchange Trust and Metropolitan Series Fund, Inc.
B-16
<PAGE>
During the last fiscal year of the Funds, the Directors were compensated as
follows:
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(5)
(3) TOTAL
PENSION OR COMPENSATION
RETIREMENT (4) FROM
(2) BENEFITS ESTIMATED PORTFOLIOS
AGGREGATE ACCRUED AS ANNUAL AND FUND
(1) COMPENSATION PART OF BENEFITS COMPLEX PAID
NAME OF FROM PORTFOLIOS UPON TO DIRECTORS
DIRECTOR PORTFOLIOS EXPENSE RETIREMENT (A)
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Jeffrey J. Hodgman............. 0 0 0 0
Steve A. Garban................ $5,750 0 0 $22,750
Malcolm T. Hopkins............. $5,750 0 0 $22,750
Robert A. Lawrence............. $5,250 0 0 $70,775
Dean O. Morton................. $5,750 0 0 $81,275
Michael S. Scott Morton........ $5,500 0 0 $83,025
John H. Tweedie................ 0 0 0 0
</TABLE>
- -------
(a) Complex is comprised of 10 trusts and two corporations with a total of 32
funds and/or series.
(b) Directors and officers who are affiliated with the Investment Manager or
Sub-Investment Manager or their affiliates ("interested persons" as defined
under the Investment Company Act of 1940) do not receive any compensation for
services rendered to Portfolios in addition to their compensation for
services rendered to Metropolitan Life or such affiliated companies. The
Directors who are not affiliated with the Investment Manager or Sub-
Investment Manager or their affiliates are paid a fee of $3,000 for each full
calendar year during which services are rendered to Portfolios. In addition,
they are paid a fee of $500 for attending each of the directors' meetings and
$250 for attending each audit committee meeting and are reimbursed for out-
of-pocket expenses.
As of January 31, 1995, the Directors and officers of Portfolios as a group
owned approximately 2% of the outstanding shares of the International Equity
Fund and owned no shares of the International Fixed Income Fund.
CONTROL PERSONS
As of January 31, 1995, the following persons or entities were the record
and/or beneficial owners of the approximate amount of each Class of shares of
each Fund as set forth beside their names:
<TABLE>
<CAPTION>
PERCENTAGE
SHAREHOLDER ADDRESS OWNERSHIP
----------- ------- ----------
INTERNATIONAL EQUITY FUND
-------------------------
<C> <S> <C> <C>
Class A....... none
Class B....... Merrill Lynch 8.3%
Pierce One Liberty Plaza
Fenner & Smith, 165 Broadway
Inc.(b) New York, NY 10080
Class C....... United States Trust 770 Broadway 10th Fl.
Company(c) New York, NY 10003 36.7%
Class D....... Wachovia Bank of 301 N. Main Street
North Carolina(b) Winston Salem, NC 27150 13.6%
Metropolitan Life One Madison Avenue
New York, NY 10010 17.4%
</TABLE>
B-17
<PAGE>
<TABLE>
<CAPTION>
PERCENTAGE
SHAREHOLDER ADDRESS OWNERSHIP
----------- ------- ----------
INTERNATIONAL FIXED INCOME FUND
-------------------------------
<C> <S> <C> <C>
Class A....... State Street Bank 225 Franklin Street 7.4%
and Trust Boston, MA 02110
Company(d)
Metropolitan One Madison Avenue 45.7%
Life(a) New York, NY 10010
Class B....... State Street Bank 225 Franklin Street 17.9%
and Trust Boston, MA 02110
Company(d)
Metropolitan One Madison Avenue 32.4%
Life(a) New York, NY 10010
Class C....... Metropolitan One Madison Avenue 90.3%
Life(a) New York, NY 10010
Class D....... Metropolitan One Madison Avenue 92.1%
Life(a) New York, NY 10010
</TABLE>
- -------
(a) Metropolitan Life was the record and/or beneficial owner, directly or
indirectly through its subsidiaries or affiliates, of such shares.
(b) Portfolios believes that the entity does not have beneficially ownership of
such shares.
(c) United States Trust Company holds the shares as trustee for various
employee benefit plans and Portfolios believes that United States Trust does
not have beneficial ownership of such shares.
(d) State Street Bank and Trust Company holds such shares as custodian for
individual retirement accounts and Portfolios believes that State Street Bank
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 the Fund's 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.
INVESTMENT MANAGEMENT ARRANGEMENTS
INVESTMENT MANAGEMENT AGREEMENTS AND SUB-INVESTMENT MANAGEMENT AGREEMENTS:
Portfolios has entered into separate Investment Management Agreements with the
Investment Manager (State Street Research Investment Services, Inc., One Finan-
cial Center, Boston, MA 02111) with respect to each Fund and separate Sub-In-
vestment Management Agreements with the Investment Manager and GFM, the Sub-In-
vestment Manager, with respect to each Fund. GFM has overall responsibility for
the investment management, and provides the portfolio managers for the Funds.
The portfolio managers consider analyses from various sources, make the neces-
sary investment decisions and effect transactions accordingly. State Street Re-
search Investment Services, Inc. is an indirect wholly-owned subsidiary of Met-
ropolitan Life. State Street Research & Management Company, another indirect
wholly-owned Metropolitan Life subsidiary, is the investment manager of the
other MetLife-State Street mutual funds.
Securities held by any Fund may also be held by other accounts managed by the
Investment Man-ager, by Metropolitan Life, by State Street Research & Manage-
ment Company and by GFM, including Metropolitan Life's general and separate ac-
counts, the other Funds of Portfolios, Metropolitan Life advisory clients, the
advisory clients of the Investment Manager and the advisory clients of State
Street Research & Management Company and GFM. When selecting securities for
purchase or sale for a Fund, the Investment Manager and GFM may at the same
time be purchasing or selling the same securities for one or more of such other
accounts. It is the policy of the Investment Manager and GFM not to favor any
one account over the other, and any purchase or sale orders executed contempo-
raneously are allocated at the average price and as nearly as practicable on a
pro-rata basis in proportion to the amounts desired to be purchased or sold by
each account. While it is conceivable that in certain instances this procedure
could adversely affect the price or number of shares involved in a Fund's
transactions, it is believed that the procedure generally contributes to better
overall execution of portfolio transactions. The Board of Directors has adopted
guidelines governing the procedure and will monitor the procedure to determine
that the guidelines are being fol-
B-18
<PAGE>
lowed and that the procedure continues to be in the best interests of the Funds
and their shareholders.
Portfolios compensates the Investment Manager at the annual rate of 0.95% of
the average daily value of the net assets of the International Equity Fund and
0.75% of the average daily value of the net assets of the International Fixed
Income Fund, respectively. For providing sub-investment management services for
the International Equity and International Fixed Income Funds, GFM receives
from the Investment Manager a monthly fee equal to 0.75% (on an annual basis)
of the average daily value of the net assets of the International Equity Fund
and 0.55% (on an annual basis) of the average daily value of the net assets of
the International Fixed Income Fund. Portfolios has no responsibility for the
payment of fees to GFM. For the period January 22, 1992 (commencement of opera-
tions) through October 31, 1992, and the fiscal years ending October 31, 1993
and October 31, 1994, the investment advisory fees for the International Equity
Fund were $75,517, $152,114 and $597,501, respectively. For the period January
22, 1992, through October 31, 1992, and the fiscal years ending October 31,
1993 and October 31, 1994, the investment advisory fees for the International
Fixed Income Fund were $122,315, $172,435 and $188,723, respectively. For the
same periods, the voluntary reduction of management fees and assumption of ex-
penses by the Investment Manager/Distributor or its affiliates amounted to
$148,461, $240,442 and $386,279 for the International Equity Fund and $107,307,
$100,743 and $85,904 for the International Fixed Income Fund. For the period
January 22, 1992, through October 31, 1992, and the fiscal years ending October
31, 1993 and October 31, 1994, sub-investment management fees for the Interna-
tional Equity and International Fixed Income Funds were $59,618, $120,090 and
$471,711, and $89,698, $126,452 and $138,397 , respectively.
The Investment Management Agreements relating to the International Equity and
International Fixed Income Funds and the Sub-Investment Management Agreements
relating to the Funds were approved by the shareholders of the Funds at the
first annual meeting of shareholders held on April 28, 1993. Unless earlier
terminated, each Agreement will continue in effect from year to year with re-
spect to each Fund, if approved annually (a) by the Board of Directors of Port-
folios or by a majority of the outstanding shares of that Fund (as determined
pursuant to the 1940 Act), and (b) by a majority of the Board of Directors who
are not "interested persons" (within the meaning of the 1940 Act) of any party
of such Agreement. The Agreements are not assignable and may be terminated
without penalty on 60 days' written notice at the option of either party or,
with respect to any Fund, by the requisite vote of the shareholders of that
Fund.
To the extent required under applicable state regulatory requirements, the In-
vestment Manager will reduce its management fee payable by Portfolios with re-
spect to a Fund up to the amount of any expenses (excluding Rule 12b-1 Distri-
bution Plan payments, brokerage commissions, interest, taxes and litigation ex-
penses) paid or incurred by such Fund in any fiscal year which exceed specified
percentages of the average daily net assets of such Fund for such fiscal year.
The most restrictive of such percentage limitations is currently 2.5% of the
first $30 million of average net assets, 2.0% of the next $70 million of aver-
age net assets and 1.5% of the remaining average net assets. These commitments
may be amended or rescinded in response to changes in the requirements of the
various states by the Directors without shareholder approval.
No person other than Portfolios and the Investment Manager pays any of the
fees, expenses or costs of the Funds. Under a Shareholders' Administrative
Services Agreement between Portfolios and the Investment Manager, the Invest-
ment Manager provides shareholders' administrative services, such as responding
to inquiries and instructions from shareholders respecting the purchase and re-
demption of shares of the Funds, and is entitled to reimbursement of its costs
for providing such services subject to the limitations described below. Under a
Sub-Administration Agreement between the Funds' transfer agent and dividend
disbursing agent, State Street Bank and Trust Company and Metropolitan Life In-
surance Company, Metropoli-
B-19
<PAGE>
tan Life Insurance Company receives a fee for the maintenance of certain share
ownership records for participants in sponsored arrangements, such as employee
benefit plans, through or under which a Fund's shares may be purchased. The
Funds' liability for all of the fees and costs payable by the Funds for serv-
ices provided by the Funds' transfer agent and dividend disbursing agent, the
fees for shareholders' administrative services, paid by the Funds, and any
other fees or costs under any sub-administration agreements entered on behalf
of the Funds in the aggregate, is limited to 0.30% of the average daily net as-
sets of the Funds. Any excess is a liability of the Investment Manager as pro-
vided under the Shareholders' Administrative Ser- vices Agreement, which may be
terminated by Portfolios upon 60 days notice and by the Investment Manager upon
six months notice.
ALLOCATION OF PORTFOLIO BROKERAGE:
Under the Investment Management Agreements, the Investment Manager has ultimate
responsibility for selecting broker-dealers through which investments are to be
purchased and sold for Portfolios. Under the Sub-Investment Management Agree-
ments, GFM has day-to-day responsibility for selecting broker-dealers through
which securities or other investments are to be purchased and sold for the
Funds.
In selecting brokers or dealers to effect portfolio transactions for the
Funds, GFM seeks the best available combination of execution and over-all price
(which includes the cost of the transaction). GFM will utilize brokers which
provide it solely with brokerage services, as well as brokers which provide GFM
with such research services as economic, political and social trend analysis
and reports on the equity and credit markets and analyses of industries and in-
dividual companies. GFM is authorized, pursuant to the Sub-Investment Manage-
ment Agreement with respect to the Funds, to cause Portfolios on behalf of the
Funds to pay to the brokers that furnish brokerage and research services (as
such services are defined under Section 28(e) of the 1934 Act) a brokerage com-
mission in excess of that which another broker might have charged for effecting
the same transaction, in recognition of the value of research services provided
by the broker. However, such higher commissions must be deemed by GFM to be
reasonable in relation to the brokerage and research services provided by the
broker-dealer, viewed in terms of either that particular transaction or the
overall decision-making responsibilities of GFM with respect to the Funds or
other accounts, if any, as to which it exercises investment discretion (as such
term is defined under Section 3(a)(35) of the 1934 Act).
In all transactions, GFM seeks on behalf of the Funds brokerage commissions at
least as reasonable as those generally secured by those advisers that generate
annually comparable amounts of commissions paid to brokers that provide broker-
age and research services to those advisers.
Research services rendered to GFM by brokers selected to execute transactions
for the Funds may be used in providing service to all of GFM's clients. Also
all research services may not be utilized by GFM in connection with the client
accounts which paid commissions to the broker providing such services.
On the basis of the best service provided for the benefit of the Funds in
terms of execution capability, execution cost, and research, GFM will allocate
business proportionally among a number of brokers and will regularly review
such allocations. During the period January 22, 1992 (commencement of opera-
tions) through October 31, 1992, and the fiscal years ending October 31, 1993
and October 31, 1994, the dollar amount of brokerage commissions paid by the
International Equity Fund was $86,217, $171,198 and $391,200, respectively. The
International Fixed Income Fund did not incur any brokerage commissions for the
same periods. Substantially all commissions were paid to firms which provided
research and statistical services either to Metropolitan Life, State Street Re-
search & Management Company or GFM.
Brokerage agency transactions for Portfolios may be executed by The First Bos-
ton Corporation ("First Boston"). Metropolitan Life, an affiliate of the Funds
by virtue of ownership of shares of the Funds, could theoretically have been
deemed an indirect affiliate of First Boston by virtue of certain business re-
lationships between Metropolitan Life
B-20
<PAGE>
and the parent of First Boston. During fiscal year 1994, Metropolitan Life
ended certain business relations with the parent of First Boston. Portfolios
nevertheless took the position that Metropolitan Life was not an indirect af-
filiate of First Boston for purposes of the Portfolios' brokerage transactions
through First Boston. However, the Board of Directors of Portfolios adopted
procedures requiring regular reports to the Board detailing any transactions
with First Boston and demonstrating that commissions paid to First Boston by
Portfolios were fair and reasonable. No brokerage commissions were paid by
Portfolios to First Boston during the period January 22, 1992 (commencement of
operations) through October 31, 1992 and for the fiscal year ending October 31,
1993. Brokerage commissions for the fiscal year ending October 31, 1994 paid by
Portfolios to First Boston were $4,500.
Subject to the policy of seeking best overall price and execution, sales of
shares of the Funds may be considered in the selection of broker or dealer
firms for the Funds' portfolio transactions.
PURCHASE OF SHARES
Shares of the Funds are distributed by the Distributor. The Funds offer four
classes of shares which may be purchased at the next determined net asset value
per share plus, in the case of all classes except Class C shares, a sales
charge which, at the election of the investor, may be imposed (i) at the time
of purchase (the Class A shares) or (ii) on a deferred basis (the Class B and
Class D shares). General information on how to buy shares of the Funds, as well
as sales charges involved, are set forth under "Purchase of Shares" in the Pro-
spectus. The following supplements that information.
Public Offering Price--The public offering price for each class of shares of
the Funds is based on their net asset value determined as of the close of the
New York Stock Exchange ("NYSE") on the day the purchase order is received by
State Street Research Shareholder Services provided that the order is received
prior to the close of the NYSE on that day; otherwise the net asset value used
is that determined as of the close of the NYSE on the next day it is open for
unrestricted trading. When a purchase order is placed through a dealer, that
dealer is responsible for transmitting the order promptly to State Street Re-
search Shareholder Services in order to permit the investor to obtain the cur-
rent price. Any loss suffered by an investor which results from a dealer's
failure to transmit an order promptly is a matter for settlement between the
investor and the dealer.
Reduced Sales Charges--For purposes of determining whether a purchase of Class
A shares qualifies for reduced sales charges, the term "person" includes: (1)
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-ex-
empt 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 employ-
ers.
Investors may purchase Class A shares of the Funds at reduced sales charges by
executing a Letter of Intent to purchase no less than an aggregate of $100,000
of a Fund or any combination of Class A shares of Eligible Funds as designated
by the Distributor within a 13-month period. The sales charge applicable to
each purchase made pursuant to a Letter of Intent will be that which would ap-
ply if the total dollar amount set forth in the Letter of Intent were being
bought in a single transaction. Purchases made within a 90-day period prior to
the execution of a Letter of Intent may be included therein; in such case the
date of the earliest of such purchases marks the commencement of the 13-month
period.
An investor may include toward completion of a Letter of Intent the value (at
the current public offering price) of all of his or her Class A shares of the
Funds and of any of the other Class A shares of Eligible Funds held of record
as of the date of his or her Letter of Intent, plus the value (at the current
offering price) as of such date of all of such shares held by any "person" de-
scribed herein as eligible to join with the investor in a single pur-
B-21
<PAGE>
chase. Class B, Class C and Class D shares may also be included in the combina-
tion 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 com-
pleted 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 dis-
tributions with respect to the escrowed shares will be credited to the invest-
or's account.
Investors may purchase Class A shares of the Funds or a combination of Eligi-
ble Funds at reduced sales charges pursuant to a Right of Accumulation. The ap-
plicable 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 pub-
lic 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 of-
fering price) of all such shares owned as of such date by any "person" de-
scribed herein as eligible to join with the investor in a single purchase.
Class B, Class C and Class D shares may also be included in the combination un-
der certain circumstances. Investors must submit to the Distributor sufficient
information to show that they qualify for this Right of Accumulation.
Class C Shares--Class C shares are currently available to (i) benefit plans
such as qualified retirement plans, other than individual retirement accounts
and self-employed retirement plans, which meet certain criteria relating to
minimum assets, minimum participants, service agreements, or similar factors;
(ii) tax-exempt retirement plans of the Investment Manager and its affiliates,
including the retirement plans of the Investment Manager's affiliated brokers;
(iii) unit investment trusts sponsored by the Investment Manager or its affili-
ates; (iv) banks and insurance companies purchasing for their own accounts; (v)
investment companies not affiliated with the Investment Manager; and (vi) en-
dowment funds of nonprofit organizations with substantial minimum assets. The
entities included in categories (i), (iv) and (vi) may not be affiliates of the
Investment Manager.
Reorganizations--In the event of mergers or reorganizations with other public
or private collective investment entities, including investment companies as
defined in the 1940 Act, as amended, a Fund may issue its shares at net asset
value (or more) to such entities or to their security holders.
REDEMPTION IN KIND
Portfolios reserves the right to pay redemptions in kind with portfolio secu-
rities in lieu of cash. In accordance with its election pursuant to Rule 18f-1
under the 1940 Act, a Fund may limit the amount of redemption proceeds paid in
cash. Although it has no present intention to do so, a Fund may, under unusual
circumstances, limit redemptions in cash with respect to each shareholder dur-
ing any ninety-day period to the lesser of (i) $250,000 or (ii) 1% of the net
asset value of such 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 securi-
ties received.
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, ordinarily 4 P.M. New York City time,
Monday through Friday, on each day during which the NYSE is open for unre-
stricted trading. The NYSE is currently closed on New Year's Day, Presidents'
Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day
and Christmas Day.
The net asset value per share of a Fund is computed by dividing the sum of the
value of the secu-rities held by the Fund plus any cash or other assets minus
all liabilities by the total number of out standing shares of the Fund at such
time. Any expenses, except for extraordinary or nonrecurring expenses, borne by
a Fund, including the investment management fee payable to the Investment Man-
ager, are accrued daily.
B-22
<PAGE>
Securities held by each Fund will be valued as follows. Portfolio securities
which are traded on domestic stock exchanges are valued at the last sale price
as of the close of business on the day the securities are being valued, or,
lacking any sales, at the mean between closing bid and asked prices. Portfolio
securities which are traded on NASDAQ, or other system, are valued at the last
reported sales price. Each portfolio security which is primarily traded on non-
domestic securities exchanges is generally valued at the preceding closing
value of such security on the exchange where it is primarily traded. A security
that is listed or traded on more than one exchange is valued at the quotation
on the exchange determined to be the primary market for such security by the
Board of Directors or its delegates. If no closing price is available, then
such security is valued first by using the mean between the last current bid
and asked prices or, second, by using the last available closing price. Domes-
tic securities traded in the over-the-counter market are valued at the mean be-
tween the bid and asked prices or yield equivalent as obtained from two or more
dealers which make markets in the securities. All non-U.S. securities traded in
the over-the-counter securities market are valued at the last sale quote, if
market quotations are available, or the last closing bid price, if there is no
active trading in a particular security for a given day. Where market quota-
tions are not readily available for such non-domestic over-the-counter securi-
ties, then such securities will be valued in good faith by a method that the
Board of Directors, or its delegates, believe accurately reflects fair value.
Portfolio securities which are traded both in the over-the-counter market and
on a securities exchange are valued according to the broadest and most repre-
sentative market, and it is expected that for debt securities this ordinarily
will be the over-the-counter market. Securities and assets for which market
quotations are not readily available, e.g. certain long-term bonds and notes,
are valued at fair value as determined in good faith by or under the direction
of the Board of Directors of Portfolios.
In determining the values of portfolio assets as provided below, the Directors
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 may
provide prices determined as of times prior to the close of the NYSE.
The Directors have determined that unless the particular circumstances other-
wise indicate, the fair value of short-term instruments with a remaining matu-
rity of sixty days or less is their amortized cost value. If for any reason the
fair value of any security is not fairly reflected by such method, such secu-
rity will be valued by the same methods as securities having a maturity of more
than sixty days.
Options, whether on securities, indices, or futures contracts, are valued at
the last sales price available as of the close of business on the day of valua-
tion or, if no sale, at the mean between the bid and asked prices. Options on
currencies are valued at the spot price each day. As a general matter, futures
contracts are marked-to-market daily. The value of futures contracts will be
the sum of the margin deposit plus or minus the difference between the value of
the futures contract on each day the net asset value is calculated and the
value on the date the futures contract originated, value being that established
on a recognized commodity exchange, or by reference to other customary sources,
with gain or loss being recognized when the futures contract closes or expires.
Generally, trading in foreign securities, as well as corporate bonds, United
States Government securities and money market instruments, is substantially
completed each day at various times prior to the close of regular trading on
the NYSE. The values of such securities used in computing the net asset value
of the Funds' shares are determined as of such times. Foreign currency exchange
rates are also generally determined prior to the close of regular trading on
the NYSE. Occasionally, events affecting the values of such securities and such
exchange rates may occur between the times at which they are determined and the
close of regular trading on the NYSE which will not be reflected in the compu-
tation of the Funds' net asset value. If events materially affecting the value
of such securities occur during such period, then these securities will be val-
ued at their fair value as determined in good faith by the Directors.
B-23
<PAGE>
PORTFOLIO TRANSACTIONS
PORTFOLIO TURNOVER:
A Fund's turnover rate is determined by dividing the lesser of securities pur-
chases or sales for a year by the monthly average value of securities held by
the Fund (excluding securities whose maturities or expiration date at the time
of their acquisition were one year or less).
The International Equity Fund's turnover rates for the fiscal years ending Oc-
tober 31, 1993 and October 31, 1994, were 116.12% and 80.60%, respectively. The
International Fixed Income Fund's turnover rates for the same periods were
20.44% and 38.84%. Each Fund reserves full freedom with respect to portfolio
turnover. In periods when there are rapid changes in economic conditions or se-
curity price levels, portfolio turnover may be significantly higher than during
times of economic and market price stability or when investment strategy re-
mains relatively constant. A high rate of portfolio turnover will result in in-
creased transaction costs for the Fund.
CERTAIN TAX MATTERS
TAXATION OF THE FUNDS--IN GENERAL:
Each Fund intends to qualify and elect to be treated each taxable year as a
"regulated invest-ment company" under Subchapter M of the Internal Revenue Code
of 1986, as amended (the "Code"), although they cannot give complete assurance
that they will qualify to do so. Accordingly, a Fund must, among other things,
(a) derive at least 90% of its gross income in each taxable year from divi-
dends, interest, payments with respect to securities loans, gains from the sale
or other disposition of stock, securities or foreign currencies, or other in-
come (including, but not limited to, gains from options, futures or forward
contracts) derived with respect to its business of investing in such stock, se-
curities or currencies (the "90% test"); (b) derive less than 30% of its gross
income in each taxable year from the sale or other disposition of any of the
following held for less than three months (the "30% test"): (i) stock or secu-
rities; (ii) options, futures or forward contracts (other than options, futures
or forward contracts on foreign currencies) or (iii) foreign currencies (or op-
tions, futures or forward contracts on foreign currencies) but only if such
currencies (or options, futures or forward contracts) are not directly related
to the Fund's principal business of investing in stocks or securities (or op-
tions and futures with respect to stocks or securities); and (c) satisfy cer-
tain diversification requirements.
The 30% test will limit the extent to which a Fund may sell securities held
for less than three months; write options which expire in less than three
months; and effect closing transactions with respect to call or put options
that have been written or purchased within the preceding three months. (If a
Fund purchases a put option for the purpose of hedging an underlying portfolio
security, the acquisition of the option is treated as a short sale of the un-
derlying security unless, for purposes only of the 30% test, the option and the
security are acquired on the same date.) Finally, as discussed below, this re-
quirement may also limit investments by a Fund in options on stock indices,
listed options on nonconvertible debt securities, futures contracts, options on
interest rate futures contracts and certain foreign currency contracts.
If a Fund should fail to qualify as a regulated investment company in any
year, it would lose the beneficial tax treatment accorded regulated investment
companies under Subchapter M of the Code and all of its taxable income would be
subject to tax at regular corporate rates without any deduction for distribu-
tions to shareholders, and such distributions will be taxable to shareholders
as ordinary income to the extent of such Fund's current or accumulated earnings
and profits. Also, the shareholders, if they received a distribution in excess
of current or accumulated earnings and profits, would receive a return of capi-
tal that would reduce the basis of their shares of such Fund to the extent
thereof. Any distribution in excess of a shareholder's basis in the sharehold-
er's shares would be taxable as gain realized from the sale of such shares.
A Fund will be liable for a nondeductible 4% excise tax on amounts not dis-
tributed on a timely basis in accordance with a calendar year distribution re-
quirement. To avoid the tax, during each cal-
B-24
<PAGE>
endar year a 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 end-
ing on October 31, in addition to any undistributed portion of the respective
balances from the prior year. Each Fund intends to make sufficient distribu-
tions to avoid this 4% excise tax.
TAXATION OF THE FUNDS' INVESTMENTS:
Original Issue Discount; Market Discount:
For federal income tax purposes, debt securities purchased by a Fund may be
treated as having original issue discount. Original issue discount represents
interest for federal income tax purposes and can generally be defined as the
excess of the stated redemption price at maturity of a debt obligation over the
issue price. Original issue discount is treated for federal income tax purposes
as income earned by a Fund, whether or not any income is actually received, and
therefore is subject to the distribution requirements of the Code. Generally,
the amount of original issue discount is determined on the basis of a constant
yield to maturity which takes into account the compounding of accrued interest.
Under section 1286 of the Code, an investment in a stripped bond or stripped
coupon may result in original issue discount.
Debt securities may be purchased by a Fund at a discount that exceeds the
original issue discount, if any, at the time a Fund purchases the securities.
This additional discount represents market discount for income tax purposes. In
the case of any debt security having a fixed maturity date of more than one
year from the date of issue and having market discount, the gain realized on
disposition will be treated as interest to the extent it does not exceed the
accrued market discount on the security (unless a Fund elects to include such
accrued market discount in income in the tax year to which it is attributable).
For debt securities acquired before May 1, 1993, this rule applies only if the
debt security was issued after July 18, 1984. Generally, market discount is ac-
crued on a daily basis. A Fund may be required to capitalize, rather than de-
duct currently, part or all of any direct interest expense incurred to purchase
or carry any debt security having market discount, unless a Fund makes the
election to include market discount in income currently. Because each Fund must
include original issue discount in income, it will be more difficult for such
Fund to make the distributions required for such Fund to maintain its status as
a regulated investment company under Subchapter M of the Code or to avoid the
4% excise tax described above.
Options and Futures Transactions:
Certain of a Fund's investments may be subject to provisions of the Code that
(i) require inclusion of unrealized gains or losses in a Fund's income for pur-
poses of the 90% test, the 30% test, the excise tax and the distribution re-
quirements applicable to regulated investment companies; (ii) defer recognition
of realized losses; and (iii) characterize both realized and unrealized gain or
loss as short-term or long-term gain or loss. Such provisions generally apply
to, among other investments, options on debt securities, indices on securities
and futures contracts. Each 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 compa-
ny. The ability of a Fund to engage in option and futures transactions may be
limited by the 30% test.
Gains or losses attributable to foreign currency contracts or fluctuations in
exchange rates that occur between the time a Fund accrues income or expenses
denominated in a foreign currency and the time the Fund actually collects such
income or pays such expenses are treated as ordinary income or loss. The por-
tion of any gain or loss on the disposition of a debt security denominated in a
foreign currency that is attributable to fluctuations in the value of the for-
eign currency during the holding period of the debt security will likewise be
treated as ordinary income or loss. Such ordinary income or loss will increase
or decrease the amount of the Fund's net investment income.
If a Fund invests in the stock of certain "passive foreign investment compa-
nies" ("PFICs"), income of such companies may become taxable to the
B-25
<PAGE>
Fund prior to its distribution to the Fund or, alter- natively, ordinary income
taxes and interest charges may be imposed on the Fund on "excess distributions"
received by the Fund or on gain from the disposition of such investments by the
Fund. Neither Fund intends to invest in PFICs. Because of the broad scope of
the PFIC rules, however, there can be no assurance that they can avoid doing
so.
TAXATION OF THE FUNDS' SHAREHOLDERS:
A Fund may be subject to foreign taxes, including foreign income taxes. If so,
each Fund intends to meet the requirements of the Code for passing through to
its shareholders the tax benefit of foreign income taxes paid, although there
is no assurance that it will be able to do so. Under this provision, if more
than half of the value of the total assets of a Fund at the close of its tax-
able year consists of stock or securities of foreign corporations, the Fund
will be eligible and intends to elect to pass through to its shareholders the
amount of foreign taxes it paid if such amounts are material. Pursuant to this
election, a United States shareholder will, in general, be required to (i) in-
clude in gross income, in addition to taxable distributions actually received,
his or her pro rata share of the foreign taxes paid by the Fund, (ii) treat
that share of taxes as having been paid directly by him or her, and (iii) ei-
ther deduct such share of taxes or treat such share of taxes as a credit
against United States income tax liability. A tax exempt share holder will or-
dinarily not benefit from this election.
Generally, a credit for foreign taxes paid by the Funds may not exceed a
shareholder's United States income tax attributable to the shareholder's for-
eign source income. This limitation applies separately to different categories
of income, one of which is foreign-source passive income, which is likely to
include all of the foreign-source income of a Fund. As a result of these limi-
tations, some shareholders may not be able to utilize fully any foreign tax
credits generated by an investment in a Fund. Each Fund will provide its share-
holders with information about the source of its income and the for-eign taxes
it has paid for use in preparing the shareholder's United States income tax re-
turn.
Dividends from domestic corporations are not expected to comprise a substan-
tial part of the income of either Fund. If such dividends are earned by a Fund,
then a portion of the dividends paid by that Fund may qualify for the 70% de-
duction for dividends received which is available to corporate shareholders of
the Fund. Shareholders will be informed of any portion of the dividends paid by
a Fund which qualifies for this deduction. The dividends-received deduction is
reduced to the extent the dividends received are treated as debt-financed, un-
der the Code, and is eliminated if the stock is held for less than 46 days.
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 share-
holder on December 31, provided that such Fund pays the dividend during January
of the following calendar year.
Distributions by a Fund result in a reduction in the fair market value of such
Fund's shares. Should a distribution reduce the fair market value below a
shareholder's cost basis, such distribution nevertheless may be taxable to the
shareholder as ordinary income or long-term capital gain, even though, from an
investment standpoint, it may constitute a partial return of capital. In par-
ticular, 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 re-
turn of investment upon distribution which will nevertheless be taxable to
them.
The foregoing discussion of United States federal income tax law relates
solely to the application of that law to United States persons, that is, United
States citizens and residents and United States corporations, partnerships,
trusts and estates. Each shareholder who is not a United States person should
consider the United States and foreign tax consequences of ownership of shares
of the Funds, including the possibility that such a shareholder may be subject
to United States withholding at a rate of 30% (or at a lower rate under an ap-
plicable treaty) on amounts constituting ordi-
B-26
<PAGE>
nary income received by him or her, where such amounts are treated as income
from United States sources under the Code.
Shareholders should consult their tax advisers about the application of the
provisions of tax law described in this Statement of Additional Information in
light of their particular tax situations.
DISTRIBUTION OF SHARES OF THE FUNDS:
Portfolios is currently comprised of the following series: International Equity
Fund and International Fixed Income Fund. The Directors of Portfolios have au-
thorized shares of the Funds to be issued in four classes: Class A, Class B,
Class C and Class D shares. The Directors of Portfolios have authority to issue
an unlimited number of shares of each series, $.01 par value per share. A "se-
ries" is a separate pool of assets of Portfolios which is separately managed
and has a different investment objective and different investment policies from
those of another series. The Directors have authority, without the necessity of
a shareholder vote, to create any number of new series or classes or to com-
mence the public offering of shares of any previously established series or
class.
The Funds have entered into a Distribution Agreement with State Street Re-
search Investment Services, Inc., as Distributor, whereby the Distributor acts
as agent to sell and distribute shares of the Funds. Shares of the Funds are
sold through dealers who have entered into sales agreements with the Distribu-
tor. The Distributor distributes shares of the Funds on a continuous basis at
an offering price which is based on the net asset value per share of the appli-
cable Fund plus (subject to certain exceptions) a sales charge which, at the
election of the investor, may be imposed (i) at the time of purchase (the Class
A shares) or (ii) on a deferred basis (the Class B or Class D shares). The Dis-
tributor may reallow all or portions of such sales charges as concessions to
dealers. For the period January 22, 1992 (commencement of operations) through
October 31, 1992, and the fiscal year ending October 31, 1993 and for the pe-
riod November 1, 1993 through February 28, 1994, total sales charges amounted
to $42,467, $271,323 and $215,107, respectively, for the International Equity
Fund and $29,512, $42,560 and $10,346, respectively, for the International
Fixed Income Fund. For the same periods, $4,902, $31,551 and $24,764 was re-
tained by the Distributor after reallowance of concessions to dealers for the
International Equity Fund and $3,394, $4,804 and $1,306 for the International
Fixed Income Fund. For the period March 1, 1994 (commencement of share class
designation) through October 31, 1994, total sales charges for the Class A
shares amounted to $411,711 and $9,827 for the International Equity Fund and
the International Fixed Income Fund. For this period, $91,079 and $4,121 was
retained by the Distributor after reallowance of concessions to dealers for the
International Equity Fund and the International Fixed Income Fund. No informa-
tion is presented for Class A, Class B and Class D shares for the period Janu-
ary 22, 1992 (commencement of operations) through October 31, 1992, the fiscal
year ended October 31, 1993, and the period ended November 1, 1993 through Feb-
ruary 28, 1993, because no shares of those classes were outstanding during
those periods. For the period March 1, 1994 (commencement of share class desig-
nation) through October 31, 1994, commissions paid by the Distributor to deal-
ers for shares sold on Class B and Class D shares were $617,850 and $15,663 for
the International Equity Fund, respectively, and $30,667 and $163 for the In-
ternational Fixed Income Fund, respectively. There were no contingent deferred
sales charges paid during the same period.
Differences in the price at which the Funds' Class A shares are offered due to
scheduled variations in sales charges, as described in the Funds' Prospectus,
result from cost savings inherent in economies of scale. Management believes
that the cost of sales efforts of the Distributor and broker-dealers tends to
decrease as the size of purchases increases, or does not involve any incremen-
tal sales expenses as in the case of, for example, exchanges, reinvestments or
dividend investments at net asset value. Similarly, no significant sales effort
will be necessary for sales of shares at net asset value to certain Directors,
officers, employees, their relatives and other persons directly or indirectly
related to the Funds or associated entities. Where shares of the Funds are of-
fered at a reduced sales charge or without a sales charge pursuant to sponsored
arrangements, the amount of
B-27
<PAGE>
the sales charge reduction will similarly reflect the anticipated reduction in
sales expenses associated with such sponsored arrangements. The reductions in
sales expenses, and therefore the reduction in sales charges, will vary depend-
ing on factors such as the size and stability of the organization, the term of
the organization's existence and certain characteristics of its members. Port-
folios reserves the right to make variations in, or eliminate, sales charges at
any time or to revise the terms of or to suspend or discontinue sales pursuant
to sponsored arrangements at any time.
On any sale of Class A shares of $1,000,000 or more, the Distributor will pay
the authorized securities dealer making such sale commission on the shares
sold. Such commission also is payable to authorized securities dealers upon
sales of Class A shares made pursuant to a Letter of Intent to purchase shares
having a net asset value of $1,000,000 or more. Shares sold with such commis-
sions payable are subject to a one-year contingent deferred sales charge of
1.00% on any portion (excluding capital appreciation and dividends) of such
shares redeemed within one year following their sale. After a particular pur-
chase 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 dis-
counts or commissions otherwise payable to such dealer in respect of shares ac-
tually sold. If an in-vestor 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.
Portfolios has adopted a "Plan of Distribution Pursuant to Rule 12b-1" (the
"Distribution Plan") under which the Funds may engage, directly or indirectly,
in financing any activities primarily intended to result in the sale of Class
A, Class B and Class D shares, including, but not limited to, (1) the payment
of commissions and/or reimbursement of expenses to underwriters, securities
dealers and others engaged in the sale of shares, including payments to the
Distributor to be used to pay commissions and/or reimbursement of expenses to
securities dealers (which securities dealers may be affiliates of the Distribu-
tor) engaged in the distribution and marketing of shares and furnishing ongoing
assistance to investors, (2) reimbursement of direct out-of-pocket expenditures
incurred by the Distributor in connection with the distribution and marketing
of shares and the servicing of investor accounts including expenses relating to
the formulation and implementation of marketing strategies and promotional ac-
tivities such as direct mail promotions and television, radio, newspaper, maga-
zine and other mass media advertising, the preparation, printing and distribu-
tion of Prospectuses of the Funds and reports for recipients other than exist-
ing shareholders of the Funds, and obtaining such information, analyses and re-
ports with respect to marketing and promotional activities and investor ac-
counts as the Funds may, from time to time, deem advisable, and (3) reimburse-
ment of expenses incurred by the Distributor in connection with the servicing
of shareholder accounts including payments to securities dealers and others in
consideration of the provision of personal services to investors and/or the
maintenance of shareholder accounts and expenses associated with the provision
of personal services by the Distributor directly to investors. In addition, the
Distribution Plan is deemed to authorize the Distributor/ Investment Manager to
make payments out of general profits, revenues or other sources to underwrit-
ers, securities dealers and others in connection with sales of shares, to the
extent, if any, that such payments may be deemed to be within the scope of Rule
12b-1 under the 1940 Act.
The expenditures to be made pursuant to the Distribution Plan may not exceed
(i) with respect to Class A shares, an annual rate of 0.25% of the average
daily value of net assets represented by such Class A shares, and (ii) with re-
spect to Class B and Class D shares, an annual rate of 0.75% of the average
daily value of the net assets represented by such Class B or Class D shares (as
the case may be) to finance sales or promotion expenses and an annual rate of
0.25% of the average daily value of the net assets represented by such Class B
or Class D shares (as the case may be) to make payments for personal services
and/or the maintenance of share-holder accounts. Proceeds from the service fee
will be used by the Distributor
B-28
<PAGE>
to compensate securities dealers and others selling shares of the Funds for
rendering service to shareholders on an ongoing basis. Such amounts are based
on the net asset value of shares of the Funds held by such dealers as nominee
for their customers or which are owned directly by such customers for so long
as such shares are outstanding and the Distribution Plan remains in effect with
respect to the Funds. Any amounts received by the Distributor and not so allo-
cated may be applied by the Distributor as reimbursement for expenses incurred
in connection with the servicing of investor accounts. The distribution and
servicing expenses of a particular class will be borne solely by that class.
During the fiscal year ended October 31, 1994, the Funds paid the Distributor
fees under the Distribution Plan and the Distributor used all of such payments
for expenses incurred on behalf of the Fund as follows:
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS D
------- ------- -------
<S> <C> <C> <C>
INTERNATIONAL EQUITY FUND
Advertising............................................ $ 0 $ 0 $ 0
Printing and mailing of prospectuses to other than
current shareholders.................................. 0 0 0
Compensation to dealers................................ 22,201 64,167 8,396
Compensation to sales personnel........................ 0 0 0
Interest............................................... 0 0 0
Carrying or other financing charges.................... 0 0 0
Other expenses......................................... 0 0 0
------- ------- ------
Total fees............................................. $22,201 $64,167 $8,396
======= ======= ======
</TABLE>
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS D
------- ------- -------
<S> <C> <C> <C>
INTERNATIONAL FIXED INCOME FUND
Advertising............................................ $ 146 $ 0 $ 850
Printing and mailing of prospectuses to other than
current shareholders.................................. 40 0 233
Compensation to dealers................................ 837 7,215 161
Compensation to sales personnel........................ 248 0 1,452
Interest............................................... 0 0 0
Carrying or other financing charges.................... 0 0 0
Other expenses......................................... 125 0 727
------ ------ ------
Total fees............................................. $1,396 $7,215 $3,423
====== ====== ======
</TABLE>
The Distributor may also use additional resources of its own for further ex-
penses on behalf of the Funds.
No interested Director of Portfolios has any direct or indirect financial in-
terest in the operation of the Distribution Plan or any related agreements
thereunder. The Distributor's interest in the Distribution Plan is described
above.
To the extent that the Glass-Steagall Act may be interpreted as prohibiting
banks and other depository institutions from being paid for performing services
under the Distribution Plan, the Funds will make alternative arrangements for
such services for shareholders who acquired shares through such institutions.
CALCULATION OF PERFORMANCE DATA
The average annual total return ("standard total return") and yield of the
Class A, Class B, Class C and Class D shares of the Funds will be calculated as
set forth below. Total return and yield are computed separately for each class
of shares of the Funds. Performance data for a specified class includes periods
prior to the adoption of class designations. Shares of the Funds had no class
designations until March 1, 1994, when designations were assigned based on the
pricing and Rule 12b-1 fees applicable to shares sold thereafter.
The performance data reflects Rule 12b-1 fees and sales charges as set forth
below:
<TABLE>
<CAPTION>
RULE 12B-1 FEES
----------------------
CLASS AMOUNT PERIOD SALES CHARGES
- ----- ------ -------------- ---------------
<S> <C> <C> <C>
A 0.25% March 1, 1994 Maximum 4.5%
to present sales charge
reflected
B 1.00% March 1, 1994 1- and 5-year
to present; periods reflect
fee will a 5% and a 2%
reduce contingent
performance deferred sales
for periods charge,
after March 1, respectively
1994
C 0.00% Since None
commence-ment
of operations
to present
D 1.00% March 1, 1994 1-year period
to present; reflects a 1%
fee will contingent
reduce deferred sales
performance charge
for periods
after March 1,
1994
</TABLE>
All calculations of performance data in this section reflect the voluntary
measures by the Funds' affiliates to reduce fees or expenses relating to the
Funds; see "Accrued Expenses" later in this section. Without such measures,
performance would be lower. Performance data is based on historical figures;
past performance is not a guarantee of future returns.
B-29
<PAGE>
TOTAL RETURN:
The average annual total returns ("standard total return") of each class of
each Fund's shares were as follows:
<TABLE>
<CAPTION>
COMMENCEMENT OF
OPERATIONS
(JANUARY 22, 1992) ONE YEAR ENDED
TO OCTOBER 31, 1994 OCTOBER 31, 1994
--------------------- ------------------
WITH WITHOUT WITH WITHOUT
FUND SUBSIDY SUBSIDY SUBSIDY SUBSIDY
---- ---------- --------- -------- --------
<S> <C> <C> <C> <C>
International Equity Fund
Class A............................. 16.30% 14.89% 16.89% 15.99%
Class B............................. 17.24% 15.80% 16.84% 15.90%
Class C............................. 18.36% 16.93% 22.73% 21.79%
Class D............................. 18.05% 16.62% 20.84% 19.90%
International Fixed Income Fund
Class A............................. 6.72% 6.21% 2.68% 2.30%
Class B............................. 7.34% 6.81% 1.92% 1.52%
Class C............................. 8.57% 8.05% 7.72% 7.32%
Class D............................. 8.31% 7.79% 6.00% 5.60%
</TABLE>
Standard total return is computed by determining the average annual compounded
rates of return over the designated periods that, if applied to the initial
amount invested would produce the ending redeemable value, according to the
following formula:
P(1+T) to the nth power = 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 as-
suming a hypothetical $1,000 payment made at the beginning of the
designated period
The calculation is based on the further assumptions that the maximum initial
or contingent deferred sales charge applicable to the investment is deducted
and that all dividends and distributions by a Fund are reinvested at net asset
value on the reinvestment dates during the periods. All accrued expenses are
also taken into account as described later herein.
YIELD:
The annualized yield for the International Fixed Income Fund's Class A, Class
B, Class C and Class D based on the month of October 1994 was as follows:
<TABLE>
<CAPTION>
WITH WITHOUT
SUBSIDY SUBSIDY
------- -------
<S> <C> <C>
Class A......................................................... 2.84% 2.43%
Class B......................................................... 2.61% 2.19%
Class C......................................................... 3.09% 2.67%
Class D......................................................... 2.60% 2.18%
</TABLE>
Yield for the International Fixed Income Fund's Class A, Class B, Class C and
Class D shares is computed by dividing the net investment income per share
earned during a recent month or other specified 30-day period by the maximum
offering price per share on the last day of the period and annualizing the re-
sult, according to the following formula:
YIELD = 2[(a-b+1) to the 6th power - 1]
---
cd
Where: a
= dividends and interest earned during the period
b = expenses accrued for the period (net of voluntary expense reduc-
tions 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 peri-
od.
To calculate interest earned (for the purpose of "a" above) on debt obliga-
tions, a Fund computes the yield to maturity of each obligation held by such
Fund based on the market value of the obligation (including actual accrued in-
terest) at the close of the last business day of the preceding period, or, with
respect to obligations purchased during the period, the purchase price (plus
actual accrued interest). The yield to maturity is then divided by 360 and the
quotient is multiplied by the market value of the obligation (including actual
accrued interest) to determine the interest income on the obligation for each
day of the period that the obligation is in the portfolio. Dividend income is
recognized daily based on published rates.
Undeclared earned income, computed in accordance with generally accepted ac-
counting princi-
B-30
<PAGE>
ples, may be subtracted from the maximum offering price. Undeclared earned in-
come is the net investment income which, at the end of the base period, has not
been declared as a dividend, but is reasonably expected to be declared as a
dividend shortly thereafter. The maximum offering price includes a maximum
sales charge of 4.5% with respect to Class A shares.
All accrued expenses are taken into account as described later herein.
Yield information is useful in reviewing a Fund's performance, but because
yields fluctuate, such information cannot necessarily be used to compare an in-
vestment in a 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 remem-
ber that yield is a function of the kind and quality of the instruments in a
Fund's portfolio, portfolio maturity and operating expenses and
marketconditions.
ACCRUED EXPENSES:
Accrued expenses include all recurring expenses that are charged to all share-
holder 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 $5 fee for certain reinvestments, the $7.50
fee for wire orders, the $15 annual fee for administration of an IRA account,
the $15 annual fee for a participant in a prototype pension plan, the $10 fee
for special requests or photocopies of paid checks and the $20 fee applied to a
shareholder account that has been determined to be escheatable under applicable
state laws.
Accrued expenses reflect the Investment Manager's/Distributor's or its affili-
ates' voluntary reduction of management fees and assumption of a portion of ex-
penses relating to a Fund during the subject period. Such reductions in manage-
ment fees and assumption of expenses by the Investment Manager/Distributor or
its affiliates amounted to $148,461, $240,442 and $386,279 for the Interna-
tional Equity Fund and $107,307, $100,743 and $85,904 for the International
Fixed Income Fund for the period January 22, 1992 (commencement of operations)
through October 31, 1992, and the fiscal years ending October 31, 1993 and Oc-
tober 31, 1994, respectively. These reductions were $95,795 for the Interna-
tional Equity Fund and $18,387 for the International Fixed Income Fund for the
month of October 1994.
Each Fund will be responsible for payment of expenses directly attributable to
it, while indirect expenses are allocated among all Funds in Portfolios.
NONSTANDARDIZED TOTAL RETURN:
A Fund may provide the above described standard total return results for Class
A, Class B, Class C and Class D shares for periods which end no earlier than
the most recent calendar quarter end and which begin twelve months before and
at the time of commencement of such Fund's operations. In addition, a Fund may
provide nonstandardized total return results for differing periods, such as for
the most recent six months, and/or without taking sales charges into account.
Such nonstandardized total return is computed as otherwise described under "To-
tal Return" except that the result may or may not be annualized, and as noted
any applicable sales charge may not be taken into account and therefore not de-
ducted from the hypothetical initial payment of $1,000. The International Eq-
uity Fund's and International Fixed Income Fund's nonstandardized total return
for Class A, Class B, Class C and Class D shares for the six months ended Octo-
ber 31, 1994 were as follows:
<TABLE>
<CAPTION>
WITH WITHOUT
INTERNATIONAL EQUITY FUND SUBSIDY SUBSIDY
- ------------------------- ------- -------
<S> <C> <C>
Class A........................................................ 3.49% 3.27%
Class B........................................................ 3.11% 2.90%
Class C........................................................ 3.57% 3.19%
Class D........................................................ 3.11% 2.90%
<CAPTION>
INTERNATIONAL FIXED INCOME FUND
- -------------------------------
<S> <C> <C>
Class A........................................................ 5.25% 5.15%
Class B........................................................ 4.83% 4.64%
Class C........................................................ 5.42% 5.23%
Class D........................................................ 4.93% 4.83%
</TABLE>
B-31
<PAGE>
DISTRIBUTION RATES:
A Fund may also quote its distribution rate for each class of shares. The dis-
tribution rate is calculated by annualizing the latest per-share distribution
from ordinary income and dividing the result by the maximum offering price per
share as of the end of the period to which the distribution relates. A distri-
bution can include gross investment income from debt obligations purchased at a
premium and in effect include a portion of the premium paid. A distribution can
also include nonrecurring, gross short-term capital gains without recognition
of any unrealized capital losses. Further, a distribution can include income
from the sale of options by a Fund even though such option income is not con-
sidered investment income under generally accepted accounting principles.
Because a distribution can include such premiums, capital gains and option in-
come, the amount of the distribution may be susceptible to control by the In-
vestment Manager through transactions designed to increase the amount of such
items. Also, because the distribution rate is calculated in part by dividing
the latest distribution by the offering price, which is based on net asset
value plus a sales charge, the distribution rate will increase as the net asset
value declines. A distribution rate can be greater than the yield rate calcu-
lated as described above.
The distribution rates for Class A, Class B, Class C and Class D shares based
on the quarter ended October 31, 1994 for the International Fixed Income Fund
were 6.25%, 5.94%, 6.73% and 5.84%, respectively.
CUSTODIAN
State Street Bank and Trust Company, 225 Franklin Street, Boston, Massachusetts
02110, is Portfo- lios' custodian. As custodian, State Street Bank and Trust
Company is responsible for, among other things, safeguarding and controlling
the Funds' cash and securities, handling the receipt and delivery of securities
and collecting interest and dividends on the Funds' investments. State Street
Bank and Trust Company is not an affiliate of the Investment Manager or its af-
filiates.
INDEPENDENT ACCOUNTANTS
Deloitte & Touche LLP, 125 Summer Street, Boston, Massachusetts 02110, are
Portfolios' independent accountants, providing professional services including
(1) audit of the Funds' annual statements, (2) assistance and consultation in
connection with Securities and Exchange Commission filings and (3) review of
the annual income tax returns filed on behalf of the Funds.
FINANCIAL STATEMENTS
The following financial statements of the International Equity Fund and the In-
ternational Fixed Income Fund are for the fiscal year ending October 31, 1994.
B-32
<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 22, 1995
REGISTRATION NOS. 33-42129/811-6375
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM N-1A
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
PRE-EFFECTIVE AMENDMENT NO.
POST-EFFECTIVE AMENDMENT NO. 5 [X]
AND/OR
REGISTRATION STATEMENT
UNDER
THE INVESTMENT COMPANY ACT OF 1940 [X]
AMENDMENT NO. 7
(CHECK APPROPRIATE BOX OR BOXES)
----------------
STATE STREET RESEARCH PORTFOLIOS, INC.
(Exact name of registrant as specified in charter)
One Madison Avenue 10010
New York, New York (Zip code)
(Address of principal executive office)
Registrant's Telephone Number, Including Area Code:
212-578-5997
----------------
RICHARD M. BLACKWELL, ESQ.
One Madison Avenue
New York, New York 10010
(Name and address of agent for service)
----------------
Copy to:
JOHN A. DUDLEY, ESQ.
SULLIVAN & WORCESTER
1025 Connecticut Avenue, N.W.
Washington, D.C. 20036
----------------
It is proposed that the filing will become effective:
[_] immediately upon filing pursuant to paragraph (b) of Rule 485
[X] on March 1, 1995 pursuant to paragraph (b) of Rule 485
[_] 60 days after filing pursuant to paragraph (a)(1) of Rule 485
[_] on (date) pursuant to paragraph (a)(1) of Rule 485
[_] 75 days after filing pursuant to paragraph (a)(2) of Rule 485
[_] on (date) pursuant to paragraph (a)(2) of Rule 485
Pursuant to Rule 24f-2 under the Investment Company Act of 1940, the
Registrant has registered an indefinite amount of Class A, Class B, Class C and
Class D shares. The Registrant's Rule 24f-2 Notice for the fiscal year ended
October 31, 1994 was filed with the Commission on or about December 31, 1994.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
STATE STREET RESEARCH PORTFOLIOS, INC.
CROSS REFERENCE SHEET
PURSUANT TO RULE 481(a)
<TABLE>
<CAPTION>
N-1A ITEM NO. PROSPECTUS HEADING
------------- ------------------
<S> <C>
1. Cover.......................... Cover Page
2. Synopsis....................... Table of Expenses
3. Condensed Financial Informa-
tion........................... Financial Highlights; Calculation of Per-
formance Data
4. General Description of Regis-
trant.......................... The Funds' Investments; Limiting Investment
Risk; The Funds and Their Shares
5. Management of the Fund......... The Funds and Their Shares; Management of
the Funds; Purchase of Shares; Redemption
of Shares
6. Capital Stock and other Securi-
ties........................... The Funds and Their Shares; Dividends and
Distributions; Taxes; Shareholder Services
7. Purchase of Securities Being
Offered........................ Purchase of Shares
8. Redemption or Repurchase....... Redemption of Shares
9. Pending Legal Proceedings...... Not Applicable
<CAPTION> STATEMENT OF ADDITIONAL
N-1A ITEM NO. INFORMATION HEADING
------------- -------------------
<S> <C>
10. Cover Page..................... Cover Page
11. Table of Contents.............. Table of Contents
12. General Information and Histo-
ry............................. Not Applicable
13. Investment Objectives and Poli-
cies........................... Investment Practices and Policies; Portfo-
lio Transactions
14. Management of the Registrant... Directors and Officers
15. Control Persons and Principal
Holders of Securities.......... Control Persons
16. Investment Advisory and Other
Services....................... Investment Management Arrangements;
Custodian; Independent Accountants
17. Brokerage Allocation........... Investment Management Agreements and Sub-
Investment Management Agreements;
Allocation of Portfolio Brokerage
18. Capital Stock and Other Securi-
ties........................... Distribution of Shares of the Funds
19. Purchase, Redemption and Pric-
ing of Securities Being Of-
fered.......................... Purchase of Shares; Redemption In-Kind; Net
Asset Value
20. Tax Status..................... Certain Tax Matters
21. Underwriters................... Distribution of Shares of the Funds
22. Calculations of Performance Da-
ta............................. Calculation of Performance Data
23. Financial Statements........... Financial Statements
</TABLE>
<PAGE>
STATE STREET RESEARCH
INTERNATIONAL EQUITY FUND
STATE STREET RESEARCH
INTERNATIONAL FIXED INCOME
FUND
Prospectus
March 1, 1995
STATE STREET RESEARCH INTERNATIONAL EQUITY FUND, formerly known as MetLife In-
ternational Equity Fund (the "International Equity Fund" or "Fund"), seeks to
achieve long-term growth of capital by investing primarily in common stock and
equity-related securities of non-U.S. companies. Current income is not a
specific prerequisite in the selection of portfolio securities.
STATE STREET RESEARCH INTERNATIONAL FIXED INCOME FUND, formerly known as
MetLife International Fixed Income Fund (the "International Fixed Income Fund"
or "Fund"), seeks to achieve the highest possible total return, consisting of
income and realized and unrealized capital gains, consistent with prudent in-
vestment risk and preservation of capital, by investing primarily in high qual-
ity debt securities of non-U.S. issuers.
Management will measure growth in connection with both Funds in U.S. dollars.
See pp. 5, 6.
Each Fund is a diversified series of State Street Research Portfolios, Inc.,
formerly known as MetLife Portfolios, Inc. ("Portfolios"), an open-end manage-
ment investment company.
State Street Research Investment Services, Inc. (the "Investment Manager" or
the "Distributor") serves as the investment adviser and distributor for the
Funds. GFM International Investors Limited ("GFM" or "Sub-Investment Manager")
is the sub-investment adviser of the Funds. The Investment Manager is an indi-
rect wholly-owned subsidiary and the Sub-Investment Manager is substantially a
wholly-owned indirect subsidiary of Metropolitan Life Insurance Company, the
nation's second largest insurer.
Shareholders may redeem their shares directly from the Funds at net asset
value less the applicable contingent deferred sales charge, if any; redemptions
processed through securities dealers may be subject to processing charges.
There are risks in any investment program, including the risk of changing eco-
nomic and market conditions, and there is no assurance that a Fund will achieve
its investment objective. The net asset value of a share of a Fund will fluctu-
ate as market conditions change.
This Prospectus sets forth concisely the information a prospective investor
ought to know about the Funds before investing. It should be retained for fu-
ture reference. A Statement of Additional Information about the Funds dated
March 1, 1995 has been filed with the Securities and Exchange Commission and is
incorporated by reference in this Prospectus. It is available, at no charge,
upon request to Portfolios at the address indicated on the back cover or by
calling 1-800-562-0032.
<TABLE>
<CAPTION>
TABLE OF CONTENTS PAGE
- --------------------------------------------------------------------------------
<S> <C>
Table of Expenses.......................................................... 2
Financial Highlights....................................................... 4
The Funds' Investments..................................................... 5
Risk Factors............................................................... 12
Limiting Investment Risk................................................... 13
Purchase of Shares......................................................... 14
Redemption of Shares....................................................... 22
Shareholder Services....................................................... 24
The Funds and Their Shares................................................. 27
Management of the Funds.................................................... 28
Dividends and Distributions; Taxes......................................... 29
Calculation of Performance Data............................................ 30
- --------------------------------------------------------------------------------
</TABLE>
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED ON THE ACCU-
RACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<PAGE>
The Fund offers four classes of shares which may be purchased at the next de-
termined net asset value per share plus, in the case of all classes except
Class C shares, a sales charge which, at the election of the investor, may be
imposed (i) at the time of purchase (the Class A shares) or (ii) on a deferred
basis (the Class B and Class D shares).
Class A shares are subject to (i) an initial sales charge of up to 4.5% and
(ii) an annual service fee of 0.25% of the average daily net asset value of the
Class A shares.
Class B shares are subject (i) to a contingent deferred sales charge (declin-
ing from 5% to 2%), which will be imposed on most redemptions made within five
years of purchase and (ii) annual distribution and service fees of 1% of the
average daily net asset value of these shares. Class B shares automatically
convert into Class A shares (which pay lower ongoing expenses) at the end of
eight years after purchase. No contingent deferred sales charge applies after
the fifth year following the purchase of Class B shares.
Class C shares are offered only to certain employee benefit plans and large
institutions. No sales charge is imposed at the time of purchase or redemption
of Class C shares. Class C shares do not pay any distribution or service fees.
Class D shares are subject to (i) a contingent deferred sales charge of 1% if
redeemed within one year following purchase and (ii) annual distribution and
service fees of 1% of the average daily net asset value of these shares.
TABLE OF EXPENSES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS D
------- ------- ------- -------
<S> <C> <C> <C> <C>
Shareholder Transaction Expenses(1)
Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price)........ 4.5% None None None
Maximum Sales Charge Imposed on Reinvested
Dividends (as a percentage of offering
price)..................................... None None None None
Maximum Deferred Sales Charge (as a percent-
age of original purchase price or redemp-
tion proceeds, as applicable).............. None(2) 5% None 1%
Redemption Fees (as a percentage of amount
redeemed, if applicable)................... None None None None
Exchange Fees............................... None None None None
</TABLE>
- -------
(1) Reduced sales charge purchase plans are available for Class A shares. The
maximum 5% contingent deferred sales charge on Class B shares applies to
redemptions during the first year after purchase; the charge declines
annually through the fifth year, and no contingent deferred sales charge is
imposed after the fifth year. Class D shares are subject to a 1% contingent
deferred sales charge on any portion of the purchase redeemed within one
year of the sale. Long-term investors in a class of shares with a
distribution fee may, over a period of years, pay more than the economic
equivalent of the maximum sales charge permissible under applicable rules
of the National Association of Securities Dealers, Inc. See "Purchase of
Shares."
(2) Purchases of Class A shares of $1 million or more are not subject to a
sales charge. If such shares are redeemed within 12 months of purchase, a
contingent deferred sales charge of 1% will be applied to the redemption.
See "Purchase of Shares."
- --------------------------------------------------------------------------------
2
<PAGE>
<TABLE>
<CAPTION>
INTERNATIONAL EQUITY FUND CLASS A CLASS B CLASS C CLASS D
------------------------- ------- ------- ------- -------
<S> <C> <C> <C> <C>
Annual Fund Operating Expenses (as a percent-
age of average net assets)
Management Fees............................ 0.95% 0.95% 0.95% 0.95%
12b-1 Fees................................. 0.25% 1.00% None 1.00%
Other Expenses............................. 1.30% 1.30% 1.30% 1.30%
Less Voluntary Reduction................. (0.60%) (0.60%) (0.60%) (0.60%)
------ ------ ------ ------
Total Fund Operating Expenses.......... 1.90% 2.65% 1.65% 2.65%
<CAPTION>
INTERNATIONAL FIXED INCOME FUND CLASS A CLASS B CLASS C CLASS D
------------------------------- ------- ------- ------- -------
<S> <C> <C> <C> <C>
Annual Fund Operating Expenses (as a percent-
age of average net assets)
Management Fees............................ 0.75% 0.75% 0.75% 0.75%
12b-1 Fees................................. 0.25% 1.00% None 1.00%
Other Expenses............................. 1.10% 1.10% 1.10% 1.10%
Less Voluntary Reduction................. (0.35%) (0.35%) (0.35%) (0.35%)
------ ------ ------ ------
Total Fund Operating Expenses.......... 1.75% 2.50% 1.50% 2.50%
</TABLE>
EXAMPLE:
You would pay the following expenses on a $1,000 investment assuming a 5%
annual return and (1) redemption at the end of each time period or (2) no
redemption at the end of each time period.
<TABLE>
<CAPTION>
INTERNATIONAL EQUITY FUND 1 YEAR 3 YEARS 5 YEARS 10 YEARS
------------------------- ------- ------- ------- ---------
(1) (2) (1) (2) (1) (2) (1) (2)
--- --- --- --- --- --- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Class A shares............................... 63 63 102 102 143 143 257 257
Class B shares (1)........................... 77 27 112 82 161 141 280 280
Class C shares............................... 17 17 52 52 90 90 195 195
Class D shares............................... 37 27 82 82 141 141 298 298
<CAPTION>
INTERNATIONAL FIXED INCOME FUND
-------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Class A shares............................... 62 62 98 98 136 136 242 242
Class B shares (1)........................... 75 25 108 78 153 133 265 265
Class C shares............................... 15 15 47 47 82 82 179 179
Class D shares............................... 35 25 78 78 133 133 284 284
</TABLE>
- -------
(1) Ten-year figure assumes conversion of Class B shares to Class A shares at
the end of eight years.
THE EXAMPLE SHOULD NOT BE CONSIDERED AS A REPRESENTATION OF PAST OR FUTURE
RETURN OR EXPENSES. ACTUAL RETURN OR EXPENSES MAY BE GREATER OR LESS THAN
SHOWN.
The purpose of the table above is to assist the investor in understanding the
various costs and expenses that an investor will bear directly or indirectly.
The percentage expense levels shown in the table above are based on experience
with expenses for the fiscal year ended October 31, 1994; actual expense levels
for the current fiscal year and future years may vary from the amounts shown.
The table does not reflect charges for optional services elected by certain
shareholders, such as the $7.50 fee for remittance of redemption proceeds by
wire. For further information on sales charges, see "Purchase of Shares--Alter-
native Purchase Program"; for further information on management fees, see "Man-
agement of the Funds"; and for further information on 12b-1 fees, see "Purchase
of Shares--Distribution Plan."
The Funds have been advised that the Investment Manager/Distributor or its af-
filiates may from time to time and in varying amounts voluntarily assume some
portion of fees or expenses relating to the Funds. For the fiscal year ended
October 31, 1994, Total Fund Operating Expenses as a percentage of average net
assets of Class A, Class B, Class C and Class D shares, respectively, would
have been 2.55%, 3.30%, 2.25% and 3.30% of the International Equity Fund; and
1.97%, 2.71%, 1.82% and 2.73% of the International Fixed Income Fund, in the
absence of the
3
<PAGE>
voluntary assumption of fees or expenses by the Investment Manager/Distributor.
Such assumption of fees or expenses, as a percentage of average net assets
amounted to 0.65%, 0.65%, 0.60% and 0.65% of the Class A, Class B, Class C and
Class D, respectively, of the International Equity Fund; and 0.28%, 0.28%,
0.35% and 0.28% of Class A, Class B, Class C and Class D, respectively, of the
International Fixed Income Fund. The amount of fees or expenses assumed during
the fiscal year ended October 31, 1994 differed among classes because of fluc-
tuations during the year in relative levels of assets in each class and in ex-
penses before reimbursement. The Funds expect the assumption of fees or ex-
penses to continue in the current year, although they cannot give complete as-
surance that such assistance will be received.
FINANCIAL HIGHLIGHTS
The data set forth below has been audited by Deloitte & Touche LLP, independent
accountants, whose report thereon is included in the Statement of Additional
Information. For further information about the performance of the Funds, see
the Funds' Annual Reports which appear under the caption "Financial Statements"
in the Statement of Additional Information.
INTERNATIONAL EQUITY FUND
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS D
------- ------- --------------------------------------- --------
YEAR ENDED JANUARY 22, 1992
OCTOBER 31 (COMMENCEMENT
------------------ OF OPERATIONS) TO
1994** 1994** 1994 1993 OCTOBER 31, 1992 1994**
------- ------- ------- ------- ----------------- -------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, begin-
ning of period......... $ 10.54 $ 10.54 $ 9.56 $ 6.50 $ 7.40 $10.54
Net investment income
(loss)*................ (.04) (.06) (.07) (.02) .04 (.07)
Net realized and
unrealized gain (loss)
on investments......... .48 .45 2.09 3.17 (.94) .46
Dividends from net in-
vestment income........ -- -- (.05) (.04) -- --
Distributions from net
realized gains......... -- -- (.52) (.05) -- --
------- ------- ------- ------- ------- ------
Net asset value, end of
period................. $ 10.98 $ 10.93 $ 11.01 $ 9.56 $ 6.50 $10.93
======= ======= ======= ======= ======= ======
Total return............ 4.17 %++ 3.70 %++ 22.73 %+ 48.95 %+ (12.16)%++ 3.70 %++
Net assets at end of pe-
riod (000s)............ $22,579 $18,904 $54,631 $27,767 $10,418 $2,134
Ratio of operating ex-
penses to average net
assets*................ 1.90 %++ 2.65 %++ 1.65 % 1.65 % 1.65 %++ 2.65 %++
Ratio of net investment
income (loss) to aver-
age net assets*........ (0.87)%++ (1.61)%++ (0.75)% (0.37)% 0.79 %++ (1.62)%++
Portfolio turnover rate. 80.60 % 80.60 % 80.60 % 116.12 % 77.83 % 80.60 %
*Reflects voluntary as-
sumption of fees or ex-
penses per share in
each period............ $ .03 $ .03 $ .05 $ .08 $ .10 $ .03
INTERNATIONAL FIXED INCOME FUND
<CAPTION>
CLASS A CLASS B CLASS C CLASS D
------- ------- --------------------------------------- -------
YEAR ENDED JANUARY 22, 1992
OCTOBER 31 (COMMENCEMENT
------------------ OF OPERATIONS) TO
1994** 1994** 1994 1993 OCTOBER 31, 1992 1994**
------- ------- ---- ------- ----------------- -------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, begin-
ning of period......... $ 7.99 $ 7.99 $ 8.24 $ 7.85 $ 7.40 $ 7.99
Net investment income
(loss)*................ .30 .27 .14 .41 .32 .27
Net realized and
unrealized gain (loss)
on investments......... .27 .26 .46 .34 .13 .26
Dividends from net in-
vestment income........ (.25) (.24) (.49) (.36) -- (.23)
Distributions from net
realized gains......... -- -- (.03) -- -- --
------- ------- ------- ------- ------- ------
Net asset value, end of
period................. $ 8.31 $ 8.28 $ 8.32 $ 8.24 $ 7.85 $ 8.29
======= ======= ======= ======= ======= ======
Total return............ 7.33 %++ 6.73 %++ 7.72 %+ 9.98 %+ 6.08 %++ 6.81 %++
Net assets at end of pe-
riod (000s)............ $ 1,079 $ 1,439 $23,319 $24,965 $22,299 $ 536
Ratio of operating ex-
penses to average net
assets*................ 1.69 %++ 2.43 %++ 1.47 % 1.50 % 1.50 %++ 2.45 %++
Ratio of net investment
income to average net
assets*................ 5.79 %++ 5.06 %++ 5.62 % 5.48 % 5.63 %++ 4.98 %++
Portfolio turnover rate. 38.84 % 38.84 % 38.84 % 20.44 % 56.31 % 38.84 %
* Reflects voluntary as-
sumption of fees or
expenses per share in
each period........... $ .01 $ .02 $ .03 $ .03 $ .04 $ .01
</TABLE>
** March 1, 1994 (commencement of share class designations) to October 31,
1994.
++Annualized.
+ Total return figures do not reflect any front-end or contingent deferred
sales charges.
++ Represents aggregate return for the period without annualization and does
not reflect any front-end or contingent deferred sales charges.
4
<PAGE>
THE FUNDS' INVESTMENTS
Each of the International Equity Fund and the International Fixed Income Fund
has its own investment objective and policies, as described below. These in-
vestment objectives and policies are not fundamental and may be changed by the
Board of Directors without shareholder approval. If the Directors should deter-
mine that a change in the investment objective of either Fund is in the best
interests of the Fund and its shareholders, the Fund will provide shareholders
with advance written notice of the change so that each shareholder will have an
opportunity to consider whether the Fund continues to be an appropriate invest-
ment in light of his or her then current needs and financial position.
INTERNATIONAL EQUITY FUND
The investment objective of the International Equity Fund is to achieve long-
term growth of capi-
tal by investing primarily in common stocks and equity-related securities of
non-U.S. companies. Non-U.S. companies for these purposes are companies domi-
ciled outside the United States. Equity-related securities in which the Inter-
national Equity Fund may invest are: preferred stocks, securities convertible
into or exchangeable for common stocks and warrants. Current income is not a
specific prerequisite in the selection of International Equity Fund securities.
The performance of the International Equity Fund is measured in U.S. dollars.
To achieve its objective, the International Equity Fund, under normal circum-
stances, invests at least 65% of its net assets in common stocks and equity-re-
lated securities of non-U.S. companies which GFM believes to be either trading
at a discount to fair value or having attractive long-term prospects for growth
of capital. Under normal circumstances, the Fund has at least three different
countries represented in its portfolio. The International Equity Fund may also
invest its net assets in common stocks and equity-related securities of emerg-
ing growth companies that GFM expects will achieve above-average long-term
earnings growth. See "Foreign Securities" below for information concerning
emerging growth companies.
The common stocks and equity-related securities purchased by the International
Equity Fund generally are traded on a non-U.S. stock exchange or on an estab-
lished over-the-counter market outside the United States. The Fund may invest
in common stocks and equity-related securities of non-U.S. companies through
the purchase of American Depositary Receipts ("ADRs"), European Depositary Re-
ceipts ("EDRs"), and International Depositary Receipts ("IDRs"). See "Foreign
Securities" below for information concerning ADRs, EDRs and IDRs.
Although the International Equity Fund is primarily invested in common stocks
and equity-related securities of non-U.S. companies, it may invest up to 35% of
its net assets in (i) high and medium quality debt securities of domestic and
non-U.S. issuers rated at least Baa or its equivalent by a nationally recog-
nized securities rating organization ("NRSRO") or, if unrated, of comparable
investment quality as determined by GFM and (ii) high-quality domestic and non-
U.S. money market instruments, including repurchase agreements with non-U.S.
banks and broker-dealers and "synthetic" money market positions. Generally,
debt securities rated Baa have speculative elements as well as investment grade
characteristics. These speculative features include a lack of protective ele-
ments or a characteristically unreliability of such elements over any great
length of time which would threaten the ability to make interest and principal
payments. See "Other Investment Practices" for information concerning repur-
chase agreements and synthetic money market positions. See the Statement of Ad-
ditional Information for a description of the debt ratings of Moody's Investor
Services, Inc. and Standard & Poor's Ratings Group.
Under normal market and economic conditions, the International Equity Fund in-
vests primarily in non-U.S. securities. Nevertheless, if in GFM's view, current
or anticipated political, market, or economic conditions warrant, the Interna-
tional Equity Fund may for temporary defensive purposes invest in domestic
money market instruments, debt securities, and equity securities without limi-
tation. During those time periods when the Fund has assumed a temporary defen-
sive position, the Fund will not be pursuing its investment objective.
5
<PAGE>
The International Equity Fund intends to invest in a number of companies and
countries. The Fund also has no set limits related to the geography of its in-
vestments and expects to invest in companies located in Europe, the Pacific Ba-
sin, and Latin America. Direct European investments are primarily in Western
European countries, direct Latin American investments are primarily in Mexico
and direct Pacific Basin investments are primarily in Australia, China, Hong
Kong, Japan, Indonesia, Malaysia, New Zealand, Philippines, Singapore, Taiwan
and Thailand. Additionally, the Fund may make investments in companies, such as
those located in Canada, which have operations in developing or emerging econo-
mies. The Fund may also invest indirectly in non-U.S. securities in other geo-
graphical areas through the purchase of ADRs. See "Foreign Securities" below
for more information concerning ADRs. When allocating investments among geo-
graphic regions and individual countries, GFM considers various factors, such
as: prospects for relative economic growth among countries, regions or geo-
graphic areas; expected levels of inflation; government policies influencing
business conditions; and the outlook for currency relationships.
INTERNATIONAL FIXED INCOME FUND
The investment objective of the International Fixed Income Fund is to achieve
the highest possible total return, consisting of income and realized and
unrealized capital gains, consistent with prudent investment risk and preserva-
tion of capital, by investing primarily in high quality debt securities of non-
U.S. issuers. Non-U.S. issuers for these purposes are those domiciled outside
the United States. The performance of the International Fixed Income Fund is
measured in U.S. dollars. The type of securities (fixed income) in which the
Fund primarily invests may preclude it from achieving its objective of highest
total return under certain market conditions. The International Fixed Income
Fund has no policy which limits the range of maturities of the debt obligations
it will purchase. Because the Fund seeks the highest total return, the Fund
maintains the flexibility to invest in debt securities at all maturity levels.
To achieve its objective, the International Fixed Income Fund, under normal
circumstances, invests at least 65% of its assets in high quality debt securi-
ties. Under normal circumstances, the Fund has at least three different coun-
tries represented in its portfolio. High quality debt securities of non-U.S.
issuers are those rated at least AA- or its equivalent by an NRSRO, or, if
unrated, of comparable investment quality as determined by GFM. See the State-
ment of Additional Information for a description of the debt ratings of Moody's
Investor Services, Inc. and Standard & Poor's Ratings Group. GFM will not pur-
chase securities consisting of new long-term debt issues for the International
Fixed Income Fund where those offerings are less than $100 million or its
equivalent. Should any of the Fund's securities become rerated below AA--or its
equivalent by an NRSRO, GFM has the freedom to sell the securities or to retain
the securities in the Fund's portfolio if, in GFM's view, such investment is
considered appropriate under the circumstances.
Because of the high credit standards established for the International Fixed
Income Fund, it is currently expected that investments in debt obligations is-
sued or guaranteed by foreign national governments, their agencies, instrumen-
talities or political subdivisions ("foreign government debt") will constitute
over 25% of the value of the Fund's assets. However, if these securities are
impacted by adverse economic conditions, the Fund may temporarily have less
than 25% of the value of its assets invested in foreign government or govern-
ment agency debt. The Fund may also invest in debt obligations issued or guar-
anteed by international organizations ("supranational debt"), or issued by non-
U.S. corporations or financial institutions. Securities of corporations and fi-
nancial institutions in which the Fund may invest include corporate and commer-
cial obligations, such as medium-term notes. For more information concerning
foreign government debt or supranational debt, see "Foreign Securities."
Under normal circumstances, when in GFM's view prevailing market or economic
conditions warrant, the International Fixed Income Fund may be invested in
short-term instruments, including repurchase agreements with non-U.S. banks and
broker-
6
<PAGE>
dealers and "synthetic money market positions", such as described in "Other In-
vestment Practices" below. Shorter-term investments in the Fund's portfolio may
also include short-term foreign government debt, certificates of deposit, bank-
ers' acceptances and deposit notes and certain other short-term obligations
such as commercial paper with nine months or less remaining until maturity. For
more information concerning bank money market instruments, see "Foreign Securi-
ties."
Although the International Fixed Income Fund does not intend to invest in eq-
uity or equity-related securities, such as preferred stocks or securities con-
vertible into or exchangeable for common stocks, the Fund retains the freedom
to invest up to 35% of its assets in equity or equity-related securities under
normal circumstances, when such securities provide significant opportunities,
especially when the yields in the debt market are deemed to be unattractive.
The International Fixed Income Fund intends to achieve its objective by in-
vesting in a number of foreign issuers to take advantage of opportunities that
may exist world-wide for its investors, including those opportunities that will
enhance the value and increase the protection of their investment against in-
flation. By investing in a number of different countries, it is believed that
the Fund will not be affected by events in any one country. Nevertheless, if in
GFM's view, current or anticipated political, market, or economic conditions
warrant, the International Fixed Income Fund may for temporary defensive pur-
poses invest in domestic money market instruments, debt securities and equity
securities without limitation. During those time periods when the Fund has as-
sumed a temporary defensive position, the Fund will not be pursuing its invest-
ment objective.
Where appropriate, to enhance return, the International Fixed Income Fund pur-
chases foreign securities where the general economic climate and interest rate
environment provide an opportunity for capital appreciation. Fixed income secu-
rities appreciate in value where interest rates decline. If the currency in
which the investment is held appreciates relative to the U.S. dollar, the In-
ternational Fixed Income Fund's total investment will also appreciate. However,
if interest rates rise or the currency in which the investment is held depreci-
ates relative to the dollar, the Fund's total investment would be negatively
affected. When allocating investments among particular countries, GFM considers
primarily the interest rate environment and the strength of the currency rela-
tive to the dollar. The strength of currency is weighed by considering the
prospects for relative economic growth, relative levels of inflation and
trends, government economic policies and balance of payments. For more informa-
tion concerning currency transactions, see "Other Investment Practices--Cur-
rency Exchange Transactions."
FOREIGN SECURITIES
Emerging Growth Companies
Investment in the securities of emerging growth companies involves greater risk
than investment in more established companies. Such risks include the fact that
securities of emerging growth companies may be subject to more abrupt or er-
ratic market movements than more established companies or the market generally.
Also, these companies may have limited product lines, markets or financial re-
sources, or they may be dependent on a limited management group.
ADRs, EDRs and IDRs
ADRs are U.S. dollar-denominated certificates issued by U.S. banks or trust
companies and represent the right to receive securities of a foreign issuer de-
posited in a domestic bank or foreign branch of a U.S. bank. EDRs and IDRs are
receipts issued in Europe, generally by non-U.S. banks or trust companies, that
evidence ownership of non-U.S. securities. ADRs are traded on domestic ex-
changes or in the U.S. over-the-counter market and, generally, are in regis-
tered form. EDRs and IDRs are traded on non-U.S. exchanges or in non-U.S. over-
the-counter markets and, generally, are in bearer form. Investment in ADRs has
certain advantages over direct investment in the underlying non-U.S. securities
because (i) ADRs are U.S. dollar-denominated investments which are registered
domestically, easily transferable, and for which market quotations are readily
available, and (ii) issuers whose securities are represented by
7
<PAGE>
ADRs are generally subject to the same auditing, accounting, and financial re-
porting standards as domestic issuers. There may be less information concerning
foreign issuers whose securities are represented by ADRs that are sponsored by
U.S. banks or trust companies rather than by the issuers themselves
("unsponsored ADRs").
Privately Placed Securities
The Funds may acquire privately placed equity securities including securities
that are not registered under the Securities Act of 1933, but that can be of-
fered and sold to qualified institutional buyers under Rule 144A under that Act
("144A securities"). However, a Fund will not invest more than 10% of its total
assets in illiquid investments, which includes securities for which there is no
readily available market. The Board of Directors may adopt guidelines and dele-
gate to GFM the daily function of determining and monitoring the liquidity of
144A securities. Since the institutional market for 144A securities is not
fully developed, the Board of Directors will carefully monitor the Funds' in-
vestments in these securities, focusing on such factors, among others, as valu-
ation, liquidity and availability of information.
Foreign Government Debt
The obligations of foreign governmental entities have various kinds of govern-
ment support and include obligations issued or guaranteed by foreign governmen-
tal entities with taxing powers. These obligations may or may not be supported
by the full faith and credit of a foreign government. The Funds will invest in
foreign government securities of issuers considered stable by GFM, based on its
analysis of factors such as general political or economic conditions relating
to the government and the likelihood of expropriation, nationalization, freezes
or confiscation of private property. GFM does not believe that the credit risk
inherent in the obligations of stable foreign governments is significantly
greater than that of U.S. Government securities.
Supranational Debt
Supranational debt may be denominated in U.S. dollars, a foreign currency or a
multi-national currency unit. Examples of supranational entities include World
Bank, the European Investment Bank, the Asian Development Bank and the Inter-
American Development Bank. The governmental members, or "stockholders", usually
make initial capital contributions to the supranational entity and in many
cases are committed to make additional capital contributions if the suprana-
tional entity is unable to repay its borrowings.
Foreign Currency Units
The Funds may invest in securities denominated in a multi-national currency
unit. An illustration of a multi-national currency unit is the European Cur-
rency Unit (the "ECU"), which is a "basket" consisting of specified amounts of
the currencies of the member states of the European Community, a Western Euro-
pean economic cooperative organization that includes France, Germany, The Neth-
erlands and the United Kingdom. The specific amounts of currencies comprising
the ECU may be adjusted by the Council of Ministers of the European Community
to reflect changes in relative values of the underlying currencies. GFM does
not believe that such adjustments will adversely affect holders of ECU-denomi-
nated obligations or the marketability of such securities. European suprana-
tional entities, in particular, issue ECU-denominated obligations. The Funds
may invest in securities denominated in the currency of one nation although is-
sued by a governmental entity, corporation or financial institution of another
nation. For example, the Funds may invest in a British pound sterling-denomi-
nated obligation issued by a United States corporation. Such investments in-
volve credit risks associated with the issuer and currency risks associated
with the currency in which the obligation is denominated.
Bank Money Market Instruments
Bank money market instruments may be Eurodollar obligations issued by foreign
banks or by foreign branches or subsidiaries of U.S. banks or Yankeedollar ob-
ligations issued by U.S. branches or subsidiaries of foreign banks. Eurodollar
and Yankeedollar obligations may be general obliga-
8
<PAGE>
tions of the parent bank or may be limited to the issuing branch or subsidiary
by the terms of the specific obligations or by government regulation.
OTHER INVESTMENT PRACTICES
Currency Exchange Transactions
Both Funds intend to invest in securities denominated in currencies other than
the U.S. dollar, may temporarily hold funds in bank deposits or money market
investments denominated in non-U.S. currencies, and may receive interest, divi-
dends, and sale proceeds in non-U.S. currencies. As a result, the Funds will
engage in currency exchange transactions to convert currencies to or from U.S.
dollars. These currency transactions may be on a spot (e. g., cash) basis at
the spot rate prevailing in the non-U.S. exchange market. To reduce risks asso-
ciated with currency fluctuations, each Fund may also enter into forward for-
eign currency exchange contracts to purchase or sell selected currencies, may
write covered put and call options on selected currencies, may purchase put or
call options on selected currencies, may sell or purchase currency futures con-
tracts, and may sell or purchase put or call options on currency futures con-
tracts. Such transactions will be used for hedging purposes, but in no event
for speculation.
Writing Covered Put and Call Options and Purchasing Put and Call Options
In order to earn additional income or as a hedge against or to minimize antici-
pated declines in the value of its securities, each Fund may write (sell) cov-
ered call options on securities and stock indices and may purchase call options
to close out covered call options previously entered into. In addition, to earn
additional income, the Funds may write covered put options on securities and
stock indices and may purchase put options to close out such covered put op-
tions previously written. The Funds also may write covered call and covered put
options on currencies and may purchase call and put options to close out cov-
ered put and covered call options previously written. The Funds may write cov-
ered call and covered put options on currencies to hedge against anticipated
declines in the exchange rate of the currencies in which the Funds' securities
held or to be purchased are denominated or to earn additional income for the
Funds. The International Fixed Income Fund may also write covered call and put
options on the yield "spread" or the difference in yield between two securi-
ties, rather than prices of individual securities or indices. These transac-
tions may be done for hedging purposes and also to earn additional income.
These transactions involve greater risk than other hedging transactions.
As a general matter, a call option gives the holder (purchaser) the right to
buy and obligates the writer (seller) to sell, in return for a premium paid,
the underlying security or currency at the exercise price during the option pe-
riod. As a general matter, a put option gives the holder (purchaser) the right
to sell and obligates the writer (seller) to purchase, in return for a premium
paid, the underlying security or currency at the exercise price during the op-
tion period. In economic effect, a stock index call or put option is similar to
an option on a particular security, except that the value of the option depends
on the weighted value of the group of securities comprising the index, rather
than a particular security, and settlements are made in cash rather than by de-
livery of a particular security. Each Fund will write covered call options only
with respect to equity securities, bonds, and stock and bond indices which cor-
relate with that Fund's particular portfolio securities and the Fund may write
covered put and covered call options only on currencies that correlate with
that Fund's investments. The Funds will write only covered options that are
listed on recognized securities exchanges.
Each Fund may also purchase put and call options with respect to securities
and indices that correlate with each Fund's particular securities, and the
Funds may also purchase put and call options on currencies that correlate with
each Fund's investment. A Fund may purchase put options for defensive purposes
in order to protect against an anticipated decline in the value of its portfo-
lio securities, or the currencies in which its securities are denominated. As
the holder of a put option with respect to individual securities or currencies,
a Fund has the right to sell the securities or currencies underlying the op-
tions and to receive a cash
9
<PAGE>
payment at the exercise price at any time during the option period. As the
holder of a put option on an index, a Fund has the right to receive, upon exer-
cise of the option, a cash payment equal to a multiple of any excess of the
strike price specified by the option over the value of the index. A Fund may
purchase call options in order to acquire the securities or currencies under-
lying the option or, with respect to options on indices, to receive income
equal to the value of such index over the strike price. As the holder of a call
option with respect to individual securities or currencies, a Fund obtains the
right to purchase the underlying security or currency at the exercise price at
any time during the option period. With respect to options on an index, the
holder of a call option obtains the right to receive, upon exercise of the op-
tion, a cash payment equal to the multiple of any excess of the value of the
index on the exercise date over the strike price specified in the option.
Although these investment practices will be used to generate additional income
and to attempt to reduce the effect of any adverse price movement in the secu-
rity or currency subject to the option, they do involve certain risks that are
different in some respects from investment risks associated with similar funds
which do not engage in such activities. These risks include the following:
writing covered call options--the inability to effect closing transactions at
favorable prices and the inability to participate in the appreciation of the
underlying securities or currencies above the exercise price; writing covered
put options--the inability to effect closing transactions at favorable prices
and the obligation to purchase the specified securities or currencies or to
make a cash settlement on the stock index at prices which may not reflect cur-
rent market values or exchange rates; and purchasing put and call options--pos-
sible loss of the entire premium paid. In addition, the effectiveness of hedg-
ing through the purchase or sale of index options will depend upon the extent
to which price movements in the portion of the securities portfolios being
hedged correlate with price movements in the selected index. Perfect correla-
tion may not be possible because the securities held or to be acquired by a
Fund may not exactly match the composition of the index on which options are
written. If the forecasts of GFM regarding movements in securities prices, in-
terest rates or exchange rates are incorrect, a Fund's investment results may
have been better without the hedge. A more thorough description of these in-
vestment practices, their associated risks and the covering of certain of these
obligations by depositing cash and other liquid assets in a segregated account
is contained in the Statement of Additional Information.
Futures Contracts and Options on Futures Contracts
Each Fund may purchase and sell futures contracts on debt securities and indi-
ces of debt securities (i.e. interest rate futures contracts) as a hedge
against or to minimize adverse principal fluctuations resulting from antici-
pated interest rate changes or as an efficient means to adjust its exposure to
the bond market. The Fund may, where appropriate, enter into stock index
futures contracts to provide a hedge for a portion of that particular Fund's
equity holdings. Stock index futures contracts may be used as a way to imple-
ment either an increase or decrease in portfolio exposure to the equity markets
in response to changing market conditions. The Funds may also purchase and sell
currency futures contracts as a hedge to protect against anticipated changes in
currency rates or as an efficient means to adjust its exposure to the currency
market. Each Fund may also write (sell) covered call options on futures con-
tracts, purchase put and call options on futures contracts of the type which
that Fund is permitted to purchase or sell, and may enter into closing transac-
tions with respect to such options on futures contracts purchased or sold. The
Fund may also write covered put options on futures contracts and may enter into
closing transactions with respect to such options on futures contracts. When a
Fund purchases a futures contract, or writes a put option or purchases a call
option thereon, an amount of cash and liquid assets will be deposited in a seg-
regated account with Portfolios' custodian so that the segregated amount, plus
the amount of initial margin deposits held in the account of its broker, equals
the market value of the futures contract, thereby ensuring that the use of the
futures is unleveraged. The Funds will not enter into futures contracts for
speculation and will only enter into futures con-
10
<PAGE>
tracts that are traded on a recognized futures exchange. No Fund will enter
into futures contracts or options thereon if immediately thereafter the sum of
the amounts of initial margin deposits on the Fund's open futures contracts and
premiums paid for unexpired options on futures contracts would exceed 5% of the
value of that Fund's total assets; provided, however, that in the case of an
option that is "in-the-money" at the time of purchase, the "in-the-money"
amount may be excluded in calculating the 5% limitation.
The use of futures contracts by the Funds entails certain risks, including but
not limited to the following: no assurance that futures contracts transactions
can be offset at favorable prices; possible reduction of a Fund's income due to
the use of hedging; possible reduction in value of both the security or cur-
rency hedged and the hedging instrument; possible lack of liquidity due to
daily limits on price fluctuations; imperfect correlation between the contract
and the security or currency being hedged; and potential losses in excess of
the amount initially invested in futures contracts themselves. If the expecta-
tions of GFM regarding movements in securities prices, interest rates or ex-
change rates are incorrect, a Fund may have experienced better investment re-
sults without hedging. The use of futures contracts and options on futures con-
tracts requires special skills in addition to those needed to select portfolio
securities. A further discussion of futures contracts and their associated
risks is contained in the Statement of Additional Information.
Securities Purchased on "When-Issued" or "Forward Commitment" Basis
These transactions, which are made directly with another party, involve a com-
mitment by a Fund to purchase or sell particular securities with payment and
delivery taking place at a future date (ordinarily within ten days, although in
some countries settlement may be as much as a month or two later). These trans-
actions allow the Fund to lock in an attractive price or yield on a security
the Fund owns or intends to purchase, regardless of future changes in interest
rates. The Fund bears the risk, however, that the particular securities may de-
cline in value between the trade and settlement dates. After a Fund enters into
an agreement to purchase a security, however, no income will accrue to the Fund
until delivery of the security. These transactions could be viewed as a form of
borrowing by a Fund and are, therefore, subject to the Funds' restrictions with
respect to borrowing generally. To ensure against the risk that the Funds will
have insufficient assets to effect transactions subject to such commitments,
cash and other liquid assets equal in value to the specified transaction price
will be maintained in a segregated account on behalf of the Funds.
Repurchase Agreements
Each Fund may invest in securities pursuant to repurchase agreements.
Repurchase agreements may be entered into only with a member bank of the
Federal Reserve System or primary dealer in U.S. Government securities. Under
such agreements, the bank or primary dealer agrees, upon entering into the
contract, to repurchase the security at a mutually agreed upon time and price
in a specified currency, thereby determining the yield during the term of the
agreement. This results in a fixed rate of return insulated from market
fluctuations during such period although it may be affected by currency
fluctuations. In effect, a repurchase agreement may be seen as a loan made by
the Fund to the bank or dealer with the security that is the subject of the
repurchase agreement acting as "collateral". If the bank or dealer were to
become bankrupt, the Fund may be delayed in recovering its "collateral" or may
lose its rights to its "collateral". Repurchase agreements maturing in more
than seven days are considered illiquid and subject to each Fund's limiting its
investments in illiquid securities to no more than 10% of the Fund's total
assets. In all instances, the Funds take possession of the underlying
securities when investing in repurchase agreements. A further discussion of
repurchase agreements and their associated risks is contained in the Statement
of Additional Information.
Forward Foreign Currency Exchange Contracts
When a Fund invests in securities denominated in currencies other than U.S.
dollars, such securities may be affected favorably or unfavorably by
11
<PAGE>
changes in currency rates. Each Fund may use forward foreign currency exchange
contracts ("forward currency contracts") to hedge the currency risk relating to
the non-U.S. dollar-denominated securities purchased, sold, or held by that
Fund. A forward currency contract involves an obligation to purchase or sell a
specific currency at a future date, which may be any fixed number of days from
the date of the forward currency contract agreed upon by the parties, at a
price set at the time of the contract. These forward currency contracts are
principally traded in the inter-bank market conducted directly between currency
traders (usually large commercial banks) and their customers. The Funds may
enter into forward currency contracts only under two circumstances. First, when
a Fund has entered into a contract to purchase or sell a security denominated
in a foreign currency or anticipates receiving a dividend on a security in the
Fund's portfolio, that Fund may be able to protect itself against a possible
loss, between the trade date and the settlement date or date on which the
dividend is paid for such security, resulting from an adverse change in the
relationship between the U.S. dollar and the foreign currency in which such
security is denominated, by entering into a forward currency contract in U.S.
dollars for the purchase or sale of the amount of the foreign currency involved
in the underlying security transaction. However, this practice may limit
potential gains which might result from a positive change in such currency
relationships. Second, when GFM believes that the currency of a particular
country may suffer or enjoy a substantial movement against the U.S. dollar (or
another currency), a Fund may enter into a forward currency contract to sell or
buy an amount of foreign currency approximating the value of some or all of
that Fund's securities denominated in such foreign currency. The forecasting of
short-term currency market movements is extremely difficult and whether such a
short-term hedging strategy will be successful is highly uncertain.
Synthetic Non-U.S. Money Market Positions
Money market securities denominated in foreign currencies are permissible
investments of the Funds. In addition to, or in lieu of direct investment in
such securities, the Funds may construct a synthetic non-U.S. money market
position by (i) purchasing a money market instrument denominated in U.S.
dollars and (ii) concurrently entering into a forward currency contract to
deliver a corresponding amount of U.S. dollars in exchange for a foreign
currency on a future date and a specified rate of exchange. Because of the
availability of a variety of highly liquid short-term U.S. dollar-denominated
money market instruments, a synthetic money market position utilizing such U.S.
dollar-denominated instruments may offer greater liquidity than direct
investment in a money market instrument denominated in a foreign currency.
Lending of Portfolio Securities
From time to time, the Funds may lend some of their portfolio securities to
third parties such as brokers, dealers and other financial institutions. In re-
turn the Funds receive collateral in the form of cash or United States Treasury
securities that is maintained by the borrower at all times while the loan is
outstanding in an amount equal to 100% of the current market value of the
loaned securities. The Funds continue to have full ownership rights in the
loaned securities and still bear market risks while the securities are in the
hands of these third parties. The collateral may also be invested and such
gains or losses would also inure to the Funds. The Funds bear the risk that
borrowers may default on their obligation and that income from the loaned secu-
rities may not be "qualified" under the tax laws. The Funds do not intend to
loan their securities in any transaction which would jeopardize their tax sta-
tus or in which the borrowers are not judged to be creditworthy. A further dis-
cussion of loans of portfolio securities is contained in the Statement of Addi-
tional Information.
RISK FACTORS
Investments in securities of foreign issuers, particularly non-governmental
issuers, involve risks which are not ordinarily associated with investments in
domestic issuers. The securities of non-U.S. issuers held by the Funds gener-
ally will not be registered under, nor will the issuers thereof be
12
<PAGE>
subject to, the reporting requirements of the U.S. Securities and Exchange Com-
mission. Accordingly, there may be less publicly available information about
the securities and about the foreign company or government issuing them than is
available about a domestic company or government entity. Companies outside the
United States are not subject to the same accounting, auditing, and financial
reporting standards, practices, and requirements applicable to domestic compa-
nies. Stock markets outside the United States may not be as developed or as ef-
ficient as those in the United States, and government supervision and regula-
tion of those stock markets and brokers is not identical to that in the United
States. The securities of some non-U.S. companies may be less liquid and more
volatile than securities of comparable U.S. companies, and settlement of trans-
actions with respect to such securities may sometimes be delayed beyond periods
customary in the United States, which might present liquidity concerns. Fur-
ther, fixed brokerage commissions on certain non-U.S. stock exchanges are gen-
erally higher than negotiated commissions on United States exchange-listed se-
curities, and custodial costs with respect to these securities generally exceed
domestic costs. Enforcing obligations in other countries may be difficult. In
addition, the tax authorities of some countries impose restrictions on the pay-
ment of dividends and require the Funds to file claims for payment of certain
withheld dividends. With respect to some countries, there is the possibility of
unfavorable changes in investment or exchange control regulations, expropria-
tion, or confiscatory taxation, limitations on the removal of funds or other
assets of the Funds, political or social instability, or diplomatic develop-
ments that could adversely affect investments in those countries. In addition,
some markets trade at considerably higher valuation levels than in the United
States. This condition results in markets with greater potential for volatility
and which are more susceptible to the influence of events which may generally
affect the markets and to the trades of large blocks of securities by large in-
vestors. Some countries are also heavily dependent on international trade and
can be affected by retaliatory or protectionist trade measures instituted by
their trading partners and by the economic conditions of these partners. Fur-
ther, the value of each Fund's securities denominated in foreign currencies
will be affected favorably or unfavorably by changes in currency exchange rates
and exchange control regulations, and the Funds may incur costs in connection
with conversions between various currencies. Some of these risks are heightened
for investments in Latin America. For example, governments of many Latin Ameri-
can countries exercise substantial influence over the private sector through
their own investments in various companies, and the actions of these govern-
ments could have a significant effect on economic conditions in any particular
country in the region.
LIMITING INVESTMENT RISK
Portfolios has adopted the following fundamental investment restrictions relat-
ing to the investment of assets of each Fund and its activities. Additional
fundamental investment restrictions are described in the Statement of Addi-
tional Information, at "Investment Practices and Policies." The fundamental in-
vestment restrictions discussed below and in the Statement of Additional Infor-
mation, unlike a Fund's investment objective, may not be changed without ap-
proval by the requisite vote of the outstanding voting shares of each Fund af-
fected.
No Fund may:
(1) write call options which are not covered options;
(2) write put options, except covered put options or put options to close out
option positions previously entered into;
(3) invest in commodities or commodity contracts, except that: both Funds may
purchase stock index, interest rate, and currency futures contracts, may
write covered stock index, interest rate and currency futures contracts,
may write covered put and call options on such futures contracts, may pur-
chase put and call options on such futures contracts, and may enter into
closing transactions with respect to options on such futures contracts; or
(4) make loans, provided, however, that this restriction shall not prohibit a
Fund from (a) entering into repurchase agreements (see "In-
13
<PAGE>
vestment Practices and Policies," in the Statement of Additional Informa-
tion), (b) purchasing bonds, notes, debentures or other obligations of a
character customarily purchased by institutional or individual investors
(whether or not publicly distributed) and (c) making loans of its portfolio
securities which do not thereupon cause in excess of 20% of the value of the
Fund's total assets to consist of loaned securities (see "Lending of Portfo-
lio Securities," in this Prospectus and in the Statement of Additional In-
formation for a discussion of risks associated with such practice).
Nothing in the foregoing investment restrictions shall be deemed to prohibit
either Fund from purchasing the securities of any issuer pursuant to the
exercise of subscription rights distributed to the Fund by the issuer, except
that no such purchase may be made if as a result the Fund will no longer be a
diversified investment company as defined in the Investment Company Act of 1940
or fail to meet the diversification requirements of the
Internal Revenue Code of 1986, as amended.
Information on the PURCHASE OF SHARES, REDEMPTION OF SHARES and SHAREHOLDER
SERVICES is set forth on pages 14 to 27 below.
A Fund is available for investment by many kinds of investors including
participants investing through 401(k) or other retirement plan sponsors,
employees investing through savings plans sponsored by employers, Individual
Retirement Accounts ("IRAs"), trusts, corporations, individuals, etc. THE
APPLICABILITY OF THE GENERAL INFORMATION AND ADMINISTRATIVE PROCEDURES SET
FORTH BELOW ACCORDINGLY WILL VARY DEPENDING ON THE INVESTOR AND THE RECORD-
KEEPING SYSTEM ESTABLISHED FOR A SHAREHOLDER'S INVESTMENT IN A FUND. PARTICI-
PANTS IN 401(K) AND OTHER PLANS SHOULD FIRST CONSULT WITH THE APPROPRIATE
PERSON AT THEIR EMPLOYER OR REFER TO THE PLAN MATERIALS BEFORE FOLLOWING ANY
OF THE PROCEDURES BELOW. FOR MORE INFORMATION OR ASSISTANCE, ANYONE MAY CALL
1-800-562-0032.
PURCHASE OF SHARES
METHODS OF PURCHASE
Through Dealers
Shares of the Funds are continuously offered through securities dealers who
have entered into sales agreements with the Distributor. Purchases through
dealers are confirmed at the offering price, which is the net asset value plus
the applicable sales charge, next determined after the order is duly received
as defined herein by State Street Research Shareholder Services ("Shareholder
Services"), a division of the Distributor, from the dealer. ("Duly received"
for purposes herein means in accordance with the conditions of the applicable
method of purchase as described below.) The dealer is responsible for transmit-
ting the order promptly to Shareholder Services in order to permit the investor
to obtain the current price. See "Purchase of Shares--Net Asset Value" herein.
By Mail
Initial investments in a Fund may be made by mailing or delivering to the in-
vestor's securities dealer a completed Application (accompanying this Prospec-
tus), together with a check for the total purchase price payable to the appli-
cable Fund. The dealer must forward the Application and check in accordance
with the instructions on the Application.
Additional shares may be purchased by mailing to Shareholder Services a check
payable to the Fund in the amount of the total purchase price together with any
one of the following: (i) an Application; (ii) the stub from a shareholder's
account statement; or (iii) a letter setting forth the name of the Fund, the
class of shares and the shareholder's account name and number. Shareholder
Services will deliver the purchase order to the transfer agent and dividend
paying agent, State Street Bank and Trust Company (the "Transfer Agent").
If a check is not honored for its full amount, the purchaser could be subject
to additional charges to cover collection costs and any investment loss, and
the purchase may be cancelled.
By Wire
An investor may purchase shares by wiring Federal funds of not less than $5,000
to State Street
14
<PAGE>
Bank and Trust Company, which also serves as Portfolios' custodian (the "Custo-
dian"), as set forth below. Prior to making an investment by wire, an investor
must notify Shareholder Services at 1-800-521-6548 and obtain a control number
and instructions. Following such notification, Federal funds should be wired
through the Federal Reserve System to:
ABA #011000028
State Street Bank and Trust Company
Boston, MA
BNF=Name of Fund and class of shares (A, B, C or D)
AC=99029761
OBI=Shareholder Name
Shareholder Account Number
Control #K (assigned by State Street Research Shareholder Services)
In order for a wire investment to be processed on the same day (i) the in-
vestor must notify Shareholder Services of his or her intention to make such
investment by 12 noon Boston time on the day of his or her investment; and (ii)
the wire must be received by 4 P.M. Boston time that same day.
An investor making an initial investment by wire must promptly complete the
Application accompanying this Prospectus and deliver it to his or her securi-
ties dealer, who should forward it as required. No redemptions will be effected
until the Application has been duly processed.
Portfolios may in its discretion discontinue, suspend or change the practice
of accepting orders by any of the methods described above. Orders for the pur-
chase of shares are subject to acceptance by Portfolios. Portfolios reserves
the right to reject any purchase order, including orders in connection with ex-
changes, for any reason which Portfolios in its sole discretion deems appropri-
ate. Portfolios reserves the right to suspend the sale of shares of either
Fund.
MINIMUM INVESTMENT
<TABLE>
<CAPTION>
CLASS OF SHARES
---------------------------
A B C D
---------------------------
<S> <C> <C> <C> <C>
Minimum Initial Investment
By Wire............................................ $5,000 $5,000 (a) $5,000
IRAs............................................... $2,000 $2,000 (a) $2,000
All other.......................................... $2,500 $2,500 (a) $2,500
Minimum Subsequent Investment
By Wire............................................ $5,000 $5,000 $5,000 $5,000
All other.......................................... $ 50 $ 50 $ 50 $ 50
</TABLE>
- -------
(a) Special conditions apply; contact Distributor.
Portfolios reserves the right to vary the minimums for initial or subsequent
investments for each Fund from time to time as in the case of, for example, ex-
changes and investments pursuant to various retirement, dividend and other in-
vestment plans, or sponsored arrangements involving group solicitations of the
members of an organization. Portfolios also reserves the right at any time to
suspend the offering of shares or to reject any specific purchase order for
shares.
ALTERNATIVE PURCHASE PROGRAM
General
Alternative classes of shares permit investors to select a purchase program
which they believe will be the most advantageous for them, given the amount of
their purchase, the length of time they anticipate holding Fund shares, or the
flexibility they desire in this regard, and other relevant circumstances. In-
vestors will be able to determine whether in their particular circumstances it
is more advantageous to incur an initial sales charge and not be subject to
certain ongoing charges or to have their entire initial purchase price invested
in a Fund with the investment being subject thereafter to ongoing service fees
and distribution fees.
As described in greater detail below, securities dealers are paid differing
amounts of commissions and other compensation depending on which class of
shares they sell.
15
<PAGE>
The major differences among the various classes of shares are as follows:
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS D
------- ------- ------- -------
<S> <C> <C> <C> <C>
SALES CHARGES Initial sales Contingent None Contingent
charge at time deferred sales deferred sales
of investment charge of 5% charge of 1%
of up to 4.5% to 2% applies applies to any
depending on to any shares shares
amount of redeemed redeemed
investment within first within one
five years year following
following their purchase
their
purchase; no
contingent
deferred sales
charge after
five years
On investments
of $1 million
or more, no
initial sales
charge; but
contingent
deferred sales
charge of 1%
applies to any
shares
redeemed
within one
year following
their purchase
DISTRIBUTION FEE None 0.75% for None 0.75% each
first eight year
years; Class B
shares convert
automatically
to Class A
shares after
eight years
SERVICE FEE 0.25% each 0.25% each None 0.25% each
year year year
INITIAL COMMISSION RE- Above 4% None 1%
CEIVED BY SELLING SECU- described
RITIES DEALER initial sales
charge less
0.25% to 0.50%
retained by
Distributor
On investments
of $1 million
or more, 0.25%
to 1% paid to
dealer by
Distributor
</TABLE>
16
<PAGE>
In deciding which class of shares to purchase, the investor should consider
the amount of the investment, the length of time the investment is expected to
be held, and the ongoing service fee and distribution fee, among other factors.
Class A shares are sold at net asset value plus an initial sales charge of up
to 4.5% of the public offering price. Because of the sales charge, not all of
an investor's purchase amount is invested unless the purchase equals $1,000,000
or more. Class B shareholders pay no initial sales charge, but a contingent de-
ferred sales charge of up to 5% generally applies to shares redeemed within
five years of purchase. Class D shareholders also pay no initial sales charge,
but a contingent deferred sales charge of 1% generally applies to redemptions
made within one year of purchase. For Class B and Class D shareholders, there-
fore, the entire purchase amount is immediately invested in a Fund.
An investor who qualifies for a significantly reduced initial sales charge, or
a complete waiver of the sales charge on investments of $1,000,000 or more, on
the purchase of Class A shares, might elect that option to take advantage of
the lower ongoing service and distribution fees that characterize Class A
shares compared with Class B or Class D shares.
Class A, Class B and Class D shares are assessed an annual service fee of
0.25% of average daily net assets. Class B shares are assessed an annual dis-
tribution fee of 0.75% of daily net assets for an eight-year period following
the date of purchase and are then automatically converted to Class A shares.
Class D shares are assessed an annual distribution fee of 0.75% of daily net
assets for as long as the shares are held. The prospective investor should con-
sider these fees plus the initial or contingent deferred sales charges in esti-
mating the costs of investing in the various classes of a Fund's shares.
Only certain employee benefit plans and large institutions may make invest-
ments in Class C shares.
Some of the service and distribution fees are allocated to dealers (see "Dis-
tribution Plan" below). In addition, the Distributor may, at its expense, pro-
vide additional cash and noncash incentives to securities dealers that sell
shares. Such incentives may be extended only to those dealers who have sold or
may sell significant amounts of shares and/or meet other conditions established
by the Distributor; for example, the Distributor may sponsor special promotions
to develop particular distribution channels or to reach certain investor
groups. The incentives may include merchandise and trips to and attendance at
sales seminars at resorts.
CLASS A SHARES--INITIAL SALES CHARGES
Sales Charges
The purchase price of a Class A share of a Fund is the Fund's per share net as-
set value next determined after the purchase order is duly received, as defined
herein, plus a sales charge which varies depending on the dollar amount of the
shares purchased as set forth in the table below. A major portion of this sales
charge is reallowed by the Distributor to the securities dealer responsible for
the sale.
<TABLE>
<CAPTION>
SALES SALES
CHARGE CHARGE
PAID BY PAID BY DEALER
DOLLAR INVESTOR INVESTOR CONCESSION
AMOUNT OF AS % OF AS % OF AS % OF
PURCHASE PURCHASE NET ASSET PURCHASE
TRANSACTION PRICE VALUE PRICE
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Less than
$100,000 4.50% 4.71% 4.00%
- ---------------------------------------------------------------------------------------------
$100,000 or above
but less than
$250,000 3.50% 3.63% 3.00%
- ---------------------------------------------------------------------------------------------
$250,000 or above
but less than
$500,000 2.50% 2.56% 2.00%
- ---------------------------------------------------------------------------------------------
$500,000 or above
but less than
$1 million 2.00% 2.04% 1.75%
- ---------------------------------------------------------------------------------------------
See
$1 million and following
above 0% 0% discussion
</TABLE>
17
<PAGE>
On any sale of International Equity Fund Class A shares to a single investor
in the amount of $1,000,000 or more, the Distributor will pay the authorized
securities dealer a commission as follows:
<TABLE>
<CAPTION>
AMOUNT OF SALE COMMISSION
- -------------- ----------
<S> <C>
(a)$1 million to $3 million.......................................... 1.00%
(b)Next $2 million................................................... 0.50%
(c)Amount over $5 million............................................ 0.25%
</TABLE>
On any sale of International Fixed Income Fund Class A shares to a single in-
vestor in the amount of $1,000,000 or more, the Distributor will pay the autho-
rized securities dealer a commission as follows:
<TABLE>
<CAPTION>
AMOUNT OF SALE COMMISSION
- -------------- ----------
<S> <C>
(a)$1 million to $3 million.......................................... 0.70%
(b)Next $2 million................................................... 0.50%
(c)Amount over $5 million............................................ 0.25%
</TABLE>
On such sales of $1,000,000 or more, the investor is subject to a 1% contin-
gent deferred sales charge on any portion of the purchase redeemed within one
year of the sale. However, such redeemed shares will not be subject to the con-
tingent deferred sales charge to the extent that their value represents (1)
capital appreciation or (2) reinvestment of dividends or capital gains distri-
butions. In addition, the contingent deferred sales charge will be waived for
certain other redemptions as described under "Contingent Deferred Sales Charge
Waivers" below (as otherwise applicable to Class B shares.)
Class A shares of a Fund that are purchased without a sales charge may be ex-
changed for Class A shares of certain other Eligible Funds, as defined below,
without the imposition of a contingent deferred sales charge, although contin-
gent deferred sales charges may apply upon a subsequent redemption within one
year of the Class A shares which are acquired through such exchange. For fed-
eral income tax purposes, the amount of the contingent deferred sales charge
will reduce the gain or increase the loss, as the case may be, on the amount
realized on redemption. The amount of any contingent deferred sales charge will
be paid to the Distributor.
REDUCED SALES CHARGES
The reduced sales charges set forth in the table above are applicable to pur-
chases made at any one time by any "person," as defined in the Statement of Ad-
ditional Information, of $100,000 or more of Class A shares of a Fund or a com-
bination of "Eligible Funds." "Eligible Funds" include the Funds and other
funds so designated by the Distributor from time to time. Class B, Class C and
Class D shares may also be included in the combination under certain circum-
stances. Securities dealers should call Shareholder Services for details con-
cerning the other Eligible Funds and any persons who may qualify for reduced
sales charges and related information. See the Statement of Additional Informa-
tion.
Letter of Intent
Any investor who provides a Letter of Intent may qualify for a reduced sales
charge on purchases of no less than an aggregate of $100,000 of Class A shares
of the Funds and any other Eligible Funds within a 13-month period. Class B,
Class C and Class D shares may also be included in the combination under cer-
tain circumstances. Additional information on a Letter of Intent is available
from dealers, or from the Distributor, and also appears in the Statement of Ad-
ditional Information.
Right of Accumulation
Investors may purchase Class A shares of a Fund or a combination of shares of
the Funds and other Eligible Funds at reduced sales charges pursuant to a Right
of Accumulation. Under the Right of Accumulation, the sales charge is deter-
mined by combining the current purchase with the value of the Class A shares of
other Eligible Funds held at the time of purchase. Class B, Class C and Class D
shares may also be included in the combination under certain circumstances. See
the Statement of Additional Information and call Shareholder Services for de-
tails concerning the Right of Accumulation.
Other Programs
Class A shares of the Funds may be sold or issued in an exchange at a reduced
sales charge or without a sales charge pursuant to certain sponsored arrange-
ments, which include programs under
18
<PAGE>
which a company, employee benefit plan or other organization makes recommenda-
tions to, or permits group solicitation of, its employees, members or partici-
pants, except any organization created primarily for the purpose of obtaining
shares of the Funds at a reduced sales charge or without a sales charge. Infor-
mation on such arrangements and further conditions and limitations is available
from the Distributor.
In addition, no sales charge is imposed in connection with the sale of Class A
shares of a Fund to the following entities and persons: (A) the Investment Man-
ager, Distributor, or any affiliated entities, including any direct or indirect
parent companies and other subsidiaries of such parents (collectively "Affili-
ated Companies"); (B) employees, officers, sales representatives or current or
retired directors or trustees of the Affiliated Companies or any investment
company managed by any of the Affiliated Companies, any relatives of any such
individuals whose relationship is directly verified by such individuals to the
Distributor, or any beneficial account for such relatives or individuals; and
(C) employees, officers, sales representatives or directors of dealers and
other entities with a selling agreement with the Distributor to sell shares of
any aforementioned investment company, any spouse or child of such person, or
any beneficial account for any of them. The purchase must be made for invest-
ment and the shares purchased may not be resold except through redemption. This
purchase program is subject to such administrative policies, regarding the
qualification of purchasers and any other matters, as may be adopted by the
Distributor from time to time.
CLASS B SHARES--CONTINGENT DEFERRED SALES CHARGES
Contingent Deferred Sales Charges
The public offering price of Class B shares is the net asset value per share
next determined after the purchase order is duly received, as defined herein.
No sales charge is imposed at the time of purchase; thus the full amount of the
investor's purchase payment will be invested in the Funds. However, a contin-
gent deferred sales charge may be imposed upon certain redemptions of Class B
shares as described below.
The Distributor will pay securities dealers at the time of sale a 4% commis-
sion for selling Class B shares. The proceeds of the contingent deferred sales
charge and the distribution fee are used to offset distribution expenses and
thereby permit the sale of Class B shares without an initial sales charge.
Class B shares that are redeemed within a five-year period after their pur-
chase 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 as-
sets or (2) reinvestment of dividends or capital gains distributions. The
amount of any applicable contingent deferred sales charge will be calculated by
multiplying the net asset value of such shares at the time of redemption or at
the time of purchase, whichever is lower, by the applicable percentage shown in
the table below:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED
SALES CHARGE
AS A PERCENTAGE OF
NET ASSET VALUE
REDEMPTION DURING AT REDEMPTION
- ----------------- -------------------
<S> <C>
1st Year Since Purchase..................................... 5%
2nd Year Since Purchase..................................... 4
3rd Year Since Purchase..................................... 3
4th Year Since Purchase..................................... 3
5th Year Since Purchase..................................... 2
6th Year Since Purchase and Thereafter...................... None
</TABLE>
In determining the applicability and rate of any contingent deferred sales
charge, it will be assumed that a redemption of Class B shares is made first of
those shares having the greatest capital appreciation, next of shares repre-
senting reinvestment of dividends and capital gains distributions and finally
of remaining shares held by the shareholder for the longest period of time. The
holding period for purposes of applying a contingent deferred sales charge on
Class B shares of a 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 Funds, and Class B shares being redeemed will be considered
to represent, as applicable, capital appreciation or dividend and capital gains
distribution reinvestments in such other Eligible Fund. These determinations
will result in any contingent deferred sales charge being imposed at the lowest
19
<PAGE>
possible rate. For federal income tax purposes, the amount of the contingent
deferred sales charge will reduce the gain or increase the loss, as the case
may be, on the amount realized on redemption. The amount of any contingent de-
ferred sales charge will be paid to the Distributor.
Contingent Deferred Sales Charge Waivers
The contingent deferred sales charge does not apply to exchanges, or to redemp-
tions under a systematic withdrawal plan which meets certain conditions. In ad-
dition, the contingent deferred sales charge will be waived for: (i) redemp-
tions made within one year of the death or total disability, as defined by the
Social Security Administration, of all shareholders of an account; (ii) redemp-
tions 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 Inter-
nal Revenue Code for retirement accounts or plans (e.g., age 70 1/2 for IRAs
and Section 403(b) plans), calculated solely on the basis of assets invested in
the Funds or other Eligible Funds; and (iii) a redemption resulting from a tax-
free return of an excess contribution to an IRA. (The foregoing waivers do not
apply to a tax-free rollover or transfer of assets out of a Fund.) The Funds
have reserved the right to change, modify or terminate the waivers described
above at any time.
Conversion of Class B Shares to Class A Shares
A shareholder's Class B shares, including all shares received as dividends or
distributions with respect to such shares, will automatically convert to Class
A shares of a Fund at the end of eight years following the issuance of such
Class B shares; consequently, they will no longer be subject to the higher ex-
penses borne by Class B shares. The conversion rate will be determined on the
basis of the relative per share net asset values of the two classes and may re-
sult in a shareholder receiving either a greater or fewer number of Class A
shares than the Class B shares so converted. As noted above, holding periods
for Class B shares received in exchange for Class B shares of other Eligible
Funds will be counted toward the eight-year period.
CLASS C SHARES--INSTITUTIONAL; NO SALES CHARGE
The purchase price of a Class C share of a Fund is the Fund's per share net as-
set value next determined after the purchase order is duly received, as defined
herein. No sales charge is imposed at the time of purchase or redemption. The
Funds will receive the full amount of the investor's purchase payment.
Class C shares are only available for new investments by certain employee
benefit plans and large institutions. See the Statement of Additional Informa-
tion. Information on the availability of Class C shares and further conditions
and limitations with respect thereto is available from the Distributor.
Class C shares may also be issued in connection with mergers and acquisitions
involving a Fund, and under certain other circumstances as described in this
Prospectus (e.g., see "Shareholder Services--Exchange Privilege").
Class C shares may have also been issued directly or through exchanges to
those shareholders of the Funds and other Eligible Funds who previously held
shares not subject to any future sales charge or service fees or distribution
fees.
CLASS D SHARES--SPREAD SALES CHARGES
The purchase price of a Class D share of a Fund is the Fund's per share net as-
set value next determined after the purchase order is duly received, as defined
herein. No sales charge is imposed at the time of purchase; thus the full
amount of the investor's purchase payment will be invested in the Funds. Class
D shares are subject to a 1% contingent deferred sales charge on any portion of
the purchase redeemed within one year of the sale. The contingent deferred
sales charge will be 1% of the lesser of the net asset value of the shares at
the time of purchase or at the time of redemption. The Distributor pays securi-
ties dealers a 1% commission for selling Class D shares at the time of pur-
chase. The proceeds of the contingent deferred sales charge and the distribu-
tion fee are used to offset distribution expenses and thereby permit the sale
of Class D shares without an initial sales charge.
Class D shares that are redeemed within one year after purchase will not be
subject to the con-
20
<PAGE>
tingent deferred sales charge to the extent that the value of the such shares
represents (1) capital appreciation of Fund assets or (2) reinvestment of divi-
dends or capital gains distributions. For federal income tax purposes, the
amount of the contingent deferred sales charge will reduce the gain or increase
the loss, as the case may be, on the amount realized on redemption. The amount
of any contingent deferred sales charge will be paid to the Distributor.
NET ASSET VALUE
Each Fund's per share net asset values are determined Monday through Friday as
of the close of the New York Stock Exchange ("NYSE") exclusive of days on which
the NYSE is closed. The NYSE ordinarily closes at 4 P.M., New York City time.
Assets held by a Fund are valued on the basis of the last reported sale price
or quotations as of the close of business on the valuation date, except that
securities and assets for which market quotations are not readily available are
valued as determined in good faith by or under the authority of the Directors
of Portfolios. In determining the value of certain assets for which market quo-
tations are not readily available, Portfolios may use one or more pricing serv-
ices. The pricing services utilize information with respect to market transac-
tions, 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. The Directors 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 ob-
tained is fair value. Further information with respect to the valuation of each
Fund's assets is included in the Statement of Additional Information.
DISTRIBUTION PLAN
Portfolios has adopted a Plan of Distribution Pursuant to Rule 12b-1 (the "Dis-
tribution Plan") in accordance with the regulations under the Investment Com-
pany Act of 1940, as amended (the "1940 Act"). Under the provisions of the Dis-
tribution Plan, each Fund makes payments to the Distributor based on an annual
percentage of the average daily value of the net assets of each class of shares
as follows:
<TABLE>
<CAPTION>
DISTRIBUTION
CLASS SERVICE FEE FEE
- ----- ----------- ------------
<S> <C> <C>
A 0.25% None
B 0.25% 0.75%
C None None
D 0.25% 0.75%
</TABLE>
Some or all of the service fees are used to reimburse securities dealers (in-
cluding securities dealers that are affiliates of the Distributor) for personal
services and/or the maintenance of shareholder accounts. A portion of any ini-
tial commission paid to dealers for the sale of shares of a Fund represents
payment for personal services and/or the maintenance of shareholder accounts by
such dealers. Dealers who have sold Class A shares are eligible for further re-
imbursement commencing as of the time of such sale. Dealers who have sold Class
B and Class D shares are eligible for further reimbursement after the first
year during which such shares have been held of record by such dealer as nomi-
nee for its clients (or by such clients directly). Any service fees received by
the Distributor and not allocated to dealers may be applied by the Distributor
in reduction of expenses incurred by it directly for personal services and the
maintenance of shareholder accounts.
The distribution fees are used primarily to offset initial and ongoing commis-
sions paid to securities dealers for selling such shares. Any distribution fees
received by the Distributor and not allocated to dealers may be applied by the
Distributor in connection with sales or marketing efforts, including special
promotional fees and cash and noncash incentives based upon sales by securities
dealers.
The Distributor provides distribution services on behalf of other funds having
distribution plans and receives similar payments from, and incurs similar ex-
penses on behalf of, such other funds. When expenses of the Distributor cannot
be identified as relating to a specific fund, the Distributor allocates ex-
penses among the funds in a manner deemed fair and equitable to each fund. Such
allocations are subject to review by Portfolios' Directors.
Commissions and other cash and noncash incentives and payments to dealers, to
the extent pay-
21
<PAGE>
able out of the general profits, revenues or other sources of the Distributor
(including the advisory fees paid by the Funds), have also been authorized pur-
suant to the Distribution Plan.
A rule of the National Association of Securities Dealers, Inc. ("NASD") limits
the annual expenditures which a Fund may incur under the Distribution Plan to
1%, of which 0.75% may be used to pay distribution expenses and 0.25% may be
used to pay shareholder service fees. The NASD rule also limits the aggregate
amount which a 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 in-
terest at the prime rate plus 1% on unpaid amounts thereof (less any contingent
deferred sales charges). Such limitation does not apply to shareholder service
fees. Payments to the Distributor or to dealers funded under the Distribution
Plan may be discontinued at any time by the Directors of Portfolios.
REDEMPTION OF SHARES
Shareholders may redeem all or any portion of their accounts on any day the
NYSE is open for business. Redemptions will be effective at the net asset value
per share next determined (see "Purchase of Shares--Net Asset Value" herein)
after the receipt of the redemption request in accordance with the requirements
described below, by Shareholder Services and delivery of the request by Share-
holder Services to the Transfer Agent. To allow time for the clearance of
checks used for the purchase of any shares which are tendered for redemption
shortly after purchase, the remittance of the redemption proceeds for such
shares could be delayed for 15 days or more after the purchase. Shareholders
who anticipate a potential need for immediate access to their investments
should, therefore, purchase shares by wire. Except as noted, redemption pro-
ceeds are normally remitted within seven days after receipt of the redemption
request and any necessary documents in good order.
METHODS OF REDEMPTION
Request By Mail
A shareholder may request redemption of shares, with proceeds to be mailed to
the shareholder or wired to a predesignated bank account (see "Proceeds By
Wire" below), by sending to State Street Research Shareholder Services, P.O.
Box 8408, Boston, Massachusetts 02266-8408: (1) a written request for redemp-
tion signed by the registered owner(s) of the shares, exactly as the account is
registered; (2) an endorsed stock power in good order with respect to the
shares or, if issued, the share certificates for the shares endorsed for trans-
fer or accompanied by an endorsed stock power; (3) any required signature guar-
antees (see "Redemption of Shares--Signature Guarantees" below); and (4) any
additional documents which may be required for redemption in the case of corpo-
rations, trustees, etc., such as certified copies of corporate resolutions,
governing instruments, powers of attorney and the like. The Transfer Agent will
not process requests for redemption until it has received all necessary docu-
ments in good order. A shareholder will be notified promptly if a redemption
request cannot be accepted. Shareholders having any questions about the re-
quirements for redemption should call Shareholder Services toll-free at 1-800-
562-0032.
Request By Telephone
Shareholders may request redemption by telephone with proceeds to be transmit-
ted by check or by wire (see "Proceeds By Wire" below). A shareholder can re-
quest a redemption for $50,000 or less to be transmitted by check. Such check
for the proceeds will be made payable to the shareholder of record and will be
mailed to the address of record. There is no fee for this service. It is not
available for shares held in certificate form or if the address of record has
been changed within 30 days of the redemption request. Portfolios may revoke or
suspend the telephone redemption privilege at any time and without notice. See
"Shareholder Services--Telephone Services" for a discussion of the conditions
and possible risks associated with Telephone Privileges.
Proceeds By Wire
Upon a shareholder's written request or by telephone if the shareholder has
Telephone Privileges (see "Shareholder Services--Telephone Services" herein),
Portfolios' custodian will wire redemption proceeds to the shareholder's
predesignated bank
22
<PAGE>
account. To make the request, the shareholder should call 1-800-521-6548 prior
to 4 P.M. Boston time. A $7.50 charge against the shareholder's account will be
imposed for each wire redemption. This charge is subject to change without no-
tice. The shareholder's bank may also impose a charge for receiving wires of
redemption proceeds. The minimum redemption by wire is $5,000.
Request to Dealer to Repurchase
For the convenience of shareholders, Portfolios has authorized the Distributor
as its agent to accept orders from dealers by wire or telephone for the repur-
chase of shares by the Distributor from the dealer. Portfolios may revoke or
suspend this authorization at any time. The repurchase price is the net asset
value for the applicable shares next determined following the time at which the
shares are offered for repurchase by the dealer to the Distributor. The dealer
is responsible for promptly transmitting a shareholder's order to the Distribu-
tor. Payment of the repurchase proceeds is made to the dealer who placed the
order promptly upon delivery of certificates for shares in proper form for
transfer or, for Open Accounts, upon the receipt of a stock power with signa-
tures guaranteed as described below, and, if required, any supporting docu-
ments. Neither Portfolios nor the Distributor imposes any charge upon such a
repurchase. However, a dealer may impose a charge as agent for a shareholder in
the repurchase of his or her shares.
Portfolios has reserved the right to change, modify or terminate the services
described above at any time.
ADDITIONAL INFORMATION
Because of the relatively high cost of maintaining small shareholder accounts,
Portfolios reserves the right to involuntarily redeem at its option any share-
holder account which, as a result of redemptions, falls and remains below
$1,500 for a period of 60 days after notice is mailed to the applicable share-
holder. Such involuntary redemptions will be subject to applicable sales
charges, if any. Portfolios may increase such minimum account value above such
amount in the future after notice to affected shareholders. Involuntarily re-
deemed shares will be priced at the net asset value on the date fixed for re-
demption by Portfolios, and the proceeds of the redemption will be mailed
promptly to the affected shareholder at the address of record.
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.
Portfolios may not suspend the right of redemption or postpone the date of
payment of redemption proceeds for a Fund for more than seven days, except that
(a) it may elect to suspend the redemption of shares or postpone the date of
payment of redemption proceeds: (1) during any period that the NYSE is closed
(other than customary weekend and holiday closings) or regular trading on the
NYSE is restricted; (2) during any period in which an emergency exists as a re-
sult of which disposal of portfolio securities is not reasonably practicable or
it is not reasonably practicable to fairly determine a Fund's net asset value;
or (3) during such other periods as the Securities and Exchange Commission may
by order permit for the protection of investors; and (b) payment of redemption
proceeds may be postponed as provided under "Redemption of Shares." Portfolios
retains the right to redeem the shares of a Fund for other than cash. Any re-
demptions other than in cash will be made subject to the provisions of Securi-
ties and Exchange Commission rules. (See discussion of redemptions in kind in
the Statement of Additional Information.)
SIGNATURE GUARANTEES
To protect shareholder accounts, the Transfer Agent, Portfolios, the Investment
Manager and the Distributor from possible fraud, signature guarantees are re-
quired for certain redemptions. Signature guarantees enable the Transfer Agent
to be certain that the person who has authorized a redemption from the account
is, in fact, the shareholder. Signature guarantees are required for: (1) all
redemptions requested by mail; and (2) 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 pub-
lic. The above requirements may be waived by Portfolios in certain instances.
23
<PAGE>
SHAREHOLDER SERVICES
THE OPEN ACCOUNT SYSTEM
Under the Open Account System full and fractional shares of each 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. Cer-
tificates representing Class B or Class D shares will not be issued, while cer-
tificates representing Class A or Class C shares will only be issued if specif-
ically requested by shareholders in writing and, in any case, will only be is-
sued for full shares, with any fractional shares to be carried on the share-
holder's account. Shareholders will receive periodic statements of transactions
on their accounts.
Portfolios' Open Account System provides the following options:
1. Additional purchases of shares of any Fund may be made through dealers, by
wire or by mailing a check, payable to the applicable Fund, to Shareholder
Services under the terms set forth above under "Purchase of Shares."
2. The following methods of receiving dividends from investment income and
distributions from capital gains are available:
(a) All income dividends and capital gains distributions reinvested in ad-
ditional shares of the applicable Fund.
(b) All income dividends in cash; all capital gains distributions rein-
vested in additional shares of the applicable Fund.
(c) All income dividends and capital gains distributions in cash.
(d) All income dividends and capital gains distributions invested in any
one available Eligible Fund designated by the shareholder as described
below. See "Dividend Allocation Plan" herein.
Dividend and distribution selections should be made on the Application accom-
panying the initial investment. If no selection is indicated on the Applica-
tion, that account will be automatically coded for reinvestment of all divi-
dends and distributions in additional shares of the same class of the applica-
ble Fund. Selections may be changed at any time by telephone or written notice
to Shareholder Services. Dividends and distributions are reinvested at net as-
set value without a sales charge.
EXCHANGE PRIVILEGE
Shareholders of a Fund may exchange their shares for available shares with cor-
responding characteristics of any of the other Eligible Funds at any time on
the basis of the relative net asset values of the respective shares to be ex-
changed, 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 exchang-
ing. Under the Direct Program, subject to certain conditions, shareholders may
make arrangements for regular exchanges from a Fund into other Eligible Funds.
To effect an exchange, Class A, Class B and Class D shares may be redeemed
without the payment of any contingent deferred sales charge that might other-
wise be due upon an ordinary redemption of such shares. The MetLife-State
Street Research Money Market Fund issues Class E shares which are sold without
any sales charge. Exchanges of MetLife-State Street Research Money Market Fund
Class E shares into Class A shares of the Funds or any other Eligible Fund are
subject to the initial sales charge or contingent deferred sales charge appli-
cable to an initial investment in such Class A shares, unless a prior Class A
sales charge has been paid directly or indirectly with respect to the shares
redeemed. For purposes of computing the contingent deferred sales charge that
may be payable upon disposition of the acquired Class A, Class B and Class D
shares, the holding period of the redeemed shares is "tacked" to the holding
period of the acquired shares. The period any Class E shares are held is not
tacked to the holding period of any acquired shares. No exchange transaction
fee is currently imposed on any exchange.
For the convenience of the shareholders who have Telephone Privileges, Portfo-
lios permits ex changes by telephone request from either the shareholder or his
or her dealer. Shares may be exchanged by telephone provided that the registra-
24
<PAGE>
tion of the two accounts is the same. The toll-free number for exchanges is 1-
800-521-6548. See "Telephone Services" herein for a discussion of conditions
and risks associated with Telephone Privileges.
The exchange privilege may be exercised only in those states where shares of
the relevant other Eligible Fund may legally be sold. For tax purposes, each
exchange actually represents the sale of shares of one fund and the purchase of
shares of another. Accordingly, exchanges may produce a capital gain or loss
for tax purposes. The exchange privilege may be terminated or suspended or its
terms changed at any time, subject, if required under applicable regulations,
to 60 days' prior notice. New accounts established for investments upon ex-
change from an existing account in another fund will have the same Telephone
Privileges as the existing account, unless Shareholder Services is instructed
otherwise. Related administrative policies and procedures may also be adopted
with regard to a series of exchanges, street name accounts, sponsored arrange-
ments and other matters.
The exchange privilege is not designed for use in connection with short-term
trading or market timing strategies. In order to limit exchange activity where
Portfolios believes doing so would be in the best interest of a Fund, it re-
serves the right to revise or terminate the exchange privilege, limit the
amount or number of exchanges or reject any exchange for any person. These mea-
sures may be imposed at any time. Subject to the foregoing, if an exchange re-
quest in good order is received by Shareholder Services and delivered by Share-
holder Services to the Transfer Agent by 12 noon Boston time on any business
day, the exchange usually will occur that day. Consult Shareholders Services
before requesting an exchange or for further information.
REINVESTMENT PRIVILEGE
A shareholder of a 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 rein-
vestment to full shares) in shares, of the same class as the shares redeemed,
of a 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 30 calendar days after a redemption or repurchase. Upon such reinvest-
ment, 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 rein-
vestment 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 rein-
vestment is made. Shares are sold to a reinvesting shareholder at the net asset
value thereof next determined following timely receipt by Shareholder Services
of such shareholder's written purchase request and delivery of the request by
Shareholder Services to the Transfer Agent. A shareholder may exercise this re-
investment privilege only once with respect to his or her shares of a Fund. No
charge is imposed by Portfolios for such reinvestment; however, dealers may
charge fees in connection with the reinvestment privilege. The reinvestment
privilege may be exercised with respect to an Eligible Fund only in those
states where shares of the relevant other Eligible Fund may be legally sold.
INVESTMENT PLANS
Portfolios offers Class A, Class B and Class D shareholders the Investamatic
Check Program. Under this Program, shareholders may make regular investments by
authorizing withdrawals from their bank accounts each month or quarter on the
Investamatic application form available from Shareholder Services. The
Investamatic Check Program is subject to the same minimum initial investment
and subsequent investment requirements for accounts as applicable otherwise.
Portfolios also offers tax-sheltered retirement plans, including prototype and
other employee benefit plans for employees, sole proprietors, partnerships and
corporations and IRAs. Details of these
25
<PAGE>
investment plans and their availability may be obtained from securities dealers
or from Shareholder Services.
SYSTEMATIC WITHDRAWAL PLAN
A shareholder who owns noncertificated Class A or Class C shares with a value
of $5,000 or more, or Class B or Class D shares with a value of $10,000 or
more, may elect, by participating in the Funds' 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 des-
ignated Fund shall be credited to participating shareholders in additional
shares of that 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 relevant Fund or Funds, a share-
holder's investment will decrease and may eventually be exhausted.
In the case of shares otherwise subject to contingent deferred sales charges,
no such charges will be imposed on withdrawals of up to 8% annually of either
(a) the value, at the time the Plan is initiated, of the shares then in the ac-
count or (b) the value, at the time of a withdrawal, of the same number of
shares as in the account when the Plan was initiated, whichever is higher.
Expenses of the Plan are borne by the Funds. A participating shareholder may
withdraw from the Plan and Portfolios may terminate the Plan at any time on
written notice. Purchase of additional shares while a shareholder is receiving
payments under the Plan is ordinarily disadvantageous because of duplicative
sales charges. For this reason, a shareholder may not participate in the
Investamatic Check Program and the Systematic Withdrawal Plan at the same time.
DIVIDEND ALLOCATION PLAN
The Dividend Allocation Plan allows shareholders to elect to have all of their
dividends and any other distributions from a Fund or any Eligible Fund automat-
ically invested at net asset value in one other such Eligible Fund designated
by the shareholder, provided the account into which the investment is made is
initially funded with the requisite minimum amount. The number of shares pur-
chased will be determined as of the dividend payment date. The Dividend Alloca-
tion Plan is subject to state securities law requirements, to suspension at any
time, and to such policies, limitations and restrictions, as for instance, may
be applicable to street name or master accounts, that may be adopted from time
to time.
AUTOMATIC BANK CONNECTION
A shareholder may elect, by participating in Portfolios' Automatic Bank Connec-
tion ("ABC"), to have dividends and other distributions, including Systematic
Withdrawal Plan payments, automati- cally deposited in the shareholder's bank
account by electronic funds transfer. Some contingent deferred sales charges
may apply. See "Systematic Withdrawal Plan" herein.
REPORTS
Reports for each Fund will be sent to shareholders of record at least
semiannually. These reports will include a list of the securities owned by the
applicable Fund as well as the Fund's financial statements.
SHAREHOLDER SERVICES--TELEPHONE SERVICES
The following telephone privileges ("Telephone Privileges") can be used:
(1) the privilege allowing the shareholder to make telephone redemptions for
amounts up to $50,000 to be mailed to the shareholder's address of record
is available automatically;
(2) the privilege allowing the shareholder or his or her dealer to make tele-
phone exchanges is available automatically; and
(3) the privilege allowing the shareholder to make telephone redemptions for
amounts over $5,000, to be remitted by wire to the shareholder's
predesignated bank account, is available by election on the Application
accompanying this Prospectus. A current shareholder who did not previ-
ously request such telephone wire privilege on his or her
26
<PAGE>
original Application may request the privilege by completing a Telephone
Redemption-by-Wire Form which may be obtained by calling 1-800-521-6548.
The Telephone Redemption-by-Wire Form requires a signature guarantee.
A SHAREHOLDER MAY DECLINE THE AUTOMATIC TELEPHONE PRIVILEGES SET FORTH IN (1)
AND (2) ABOVE BY SO INDICATING ON THE APPLICATION ACCOMPANYING THIS PROSPECTUS.
A shareholder may discontinue any Telephone Privilege at any time by advising
Shareholder Services that the shareholder wishes to discontinue the use of such
privileges in the future.
Unless such Telephone Privileges are declined, a shareholder is deemed to au-
thorize Shareholder Services and the Transfer Agent to: (1) act upon the tele-
phone instructions of any person purporting to be the shareholder to redeem, or
purporting to be the shareholder or the shareholder's dealer to exchange,
shares from any account; and (2) honor any written instructions for a change of
address regardless of whether such request is accompanied by a signature guar-
antee. All telephone calls will be recorded. None of the Fund(s), the other El-
igible Funds, the Transfer Agent, the Investment Manager or the Distributor
will be liable for any loss, expense or cost arising out of any request, in-
cluding any fraudulent or unauthorized requests. Shareholders assume the risk
to the full extent of their accounts that telephone requests may be unautho-
rized. Reasonable procedures will be followed to confirm that instructions com-
municated by telephone are genuine. The shareholder will not be liable for any
losses arising from unauthorized or fraudulent instructions if such procedures
are not followed.
Shareholders may redeem or exchange shares by calling toll-free 1-800-521-
6548. Although it is unlikely, during periods of extraordinary market condi-
tions, a shareholder may have difficulty in reaching Shareholder Services at
such telephone number. In that event, the shareholder should contact Share-
holder Services at 1-800-562-0032, 1-617-357-7805 or otherwise at its main of-
fice at One Financial Center, Boston, Massachusetts 02111-2690.
SHAREHOLDER ACCOUNT INQUIRIES:
PLEASE CALL 1-800-562-0032
Call this number for assistance in answering general questions on your account,
including account balance, available shareholder services, statement informa-
tion and performance of the Funds. Account inquiries may also be made in writ-
ing to State Street Research Shareholder Services, P.O. Box 8408, Boston, Mas-
sachusetts 02266-8408. A fee of up to $10 will be charged against an account
for providing additional account transcripts or photocopies of paid redemption
checks or for researching records in response to special requests.
SHAREHOLDER TELEPHONE TRANSACTIONS
PLEASE CALL 1-800-521-6548
Call this number for assistance in purchasing shares by wire, and for telephone
redemptions or telephone exchange transactions. Shareholder Services will re-
quire some form of personal identification prior to acting upon instructions
received by telephone. Written confirmation of the transactions will be provid-
ed.
THE FUNDS AND THEIR SHARES
Portfolios was organized as a Maryland corporation on April 29, 1991 under the
name MetLife Portfolios, Inc. and is registered with the Securities and Ex-
change Commission as an open-end diversified management investment company. On
February 17, 1995, Portfolios filed an amendment to its charter changing its
name to State Street Research Portfolios, Inc. The fiscal year end of Portfo-
lios is October 31. The authorized capital stock of Portfolios consists of 2
billion shares common stock, par value $0.01 per share. The shares of common
stock are presently divided into two series: International Equity Fund common
stock and International Fixed Income Fund common stock. Each series currently
consists of 100,000,000 shares. The Directors have authorized shares of the
Funds to be issued in four classes: Class A, Class B, Class C and Class D
shares. Portfolios reserves the right later to issue additional classes of
shares without the consent of shareholders, and may allocate its remaining un-
classified shares or reallocate any unissued classified shares.
27
<PAGE>
The Funds have received an order from the Securities and Exchange Commission
permitting the issuance and sale of multiple classes of shares representing in-
terests in the existing portfolio of any series of Portfolios. Except for those
differences between the classes of shares described below and elsewhere in the
Prospectus, each share of a Fund has equal dividend, redemption and liquidation
rights with other shares of the Fund and when issued is fully paid and nonas-
sessable. The Board of Directors have authorized the Funds to offer four clas-
ses of shares as described above. In the future, certain classes may be
redesignated, for administrative purposes only, to conform to standard class
designations and common usage of terms which may develop in the mutual fund in-
dustry. For example, Class C shares may be redesignated as Class Y shares and
Class D shares may be redesignated as Class C shares. Any redesignation would
not affect any substantive rights respecting the shares.
The shares of each class of a Fund represent the same interest in the Fund and
have identical voting, dividend, liquidation and other rights with any other
shares of that Fund, except that the shares of each class may be issued and
sold subject to different sales loads or charges, that expenses related solely
to a particular class (including service and distribution fees) are borne only
by that class and are reflected in the dividends and net asset value of the
shares of that class, that the Class B shares have conversion rights, and that
the shareholders of a particular class are not entitled to vote with respect to
any matter which does not affect the interest of that class, unless required
otherwise by applicable law. The different classes of shares of the Funds also
have different exchange privileges.
As a Maryland corporation, Portfolios is not required to hold regular annual
meetings of shareholders. Thus, there will ordinarily be no shareholder meet-
ings unless required by the 1940 Act or Maryland law or requested by sharehold-
ers holding 10% or more of the outstanding shares of Portfolios. In the event
that less than a majority of the Directors serving as such have been elected by
shareholders of Portfolios, a meeting of shareholders will be called to elect
Directors. A Director may be removed at a special meeting of shareholders by a
vote of a majority of the votes entitled to be cast for the election of Direc-
tors. In connection with such meetings called by shareholders, the relevant
Fund or Funds will assist shareholders in shareholder communications to the ex-
tent required by applicable law. On any matter submitted to the shareholders,
the holder of each Fund share is entitled to one vote per share (with propor-
tionate voting for fractional shares) regardless of the relative net asset
value thereof.
As of January 31, 1995, Metropolitan Life Insurance Company ("Metropolitan"),
was the record and/or beneficial owner, directly or indirectly through its sub-
sidiaries or affiliates, of approximately 46%, 32%, 90% and 92% of the out-
standing Class A, Class B, Class C and Class D shares, respectively of the In-
ternational Fixed Income Fund, and may be deemed to be in control of such clas-
ses of the Fund. Ownership of 25% or more of a voting security is deemed "con-
trol" as defined in the 1940 Act. So long as 25% of a class of shares is so
owned, such owners will be presumed to be in control of such class of shares
for purposes of voting on certain matters, such as any Distribution Plan for a
given class.
MANAGEMENT OF THE FUNDS
Under the provisions of Portfolios' Articles of Incorporation and the laws of
Maryland, responsibility for the management and supervision of Portfolios and
its Funds rests with the Directors.
The Funds' Investment Manager and principal underwriter is State Street Re-
search Investment Services, Inc., One Financial Center, Boston, Massachusetts
02111-2690. The Investment Manager is an indirect wholly-owned subsidiary of
Metropolitan.
The Investment Manager has entered into Sub-Investment Management Agreements
with Portfolios and GFM with respect to each Fund, pursuant to which GFM has
assumed the overall responsibility for managing the investments of the Funds,
subject to the supervision of the Investment Manager and the authority of the
Board of Directors. GFM receives a fee from the Investment Manager. Formed in
1990, GFM is an English corporation and an indirect subsidiary of Metropolitan.
Its address is 5 Upper St. Martins Lane, London WC2H 9EA England. The firm was
formed to provide pen-
28
<PAGE>
sion funds, 401(k) plans, foundations, endowments, corporations and financial
institutions with a range of investment management services related to the in-
ternational marketplace. On December 31, 1994, GFM had investment management
arrangements in effect for over $1.346 billion in assets.
Under the Investment Management Agreements with Portfolios on behalf of each
Fund, the Investment Manager receives a monthly management fee equal to 0.95%
(on an annual basis) of the average daily value of the net assets of the Inter-
national Equity Fund and 0.75% (on an annual basis) of the average daily value
of the net assets of the International Fixed Income Fund. Each Fund bears all
costs of its operation other than those incurred by the Investment Manager un-
der the Investment Management Agreements. Management fees for the International
Equity and International Fixed Income Funds are higher than those of most mu-
tual funds, but are not necessarily higher than other funds with comparable in-
vestment objectives and policies. In particular, the Funds pay, among other ex-
penses, investment advisory fees, certain distribution expenses under the
Funds' Distribution Plan and the compensation and expenses of the Directors who
are not otherwise currently affiliated with the Investment Manager or any of
its affiliates. The Investment Manager will reduce the management fee payable
by each Fund up to the amount of any expenses (excluding permissible items,
such as brokerage commissions, Rule 12b-1 payments, interest, taxes and litiga-
tion expenses) paid or incurred in any year in excess of the most restrictive
expense limitation imposed by any state in which the Fund sells shares, if any.
Under the Investment Management Agreements, the Investment Manager provides
Portfolios with office space, facilities and personnel.
Under its Sub-Investment Management Agreements, the Sub-Investment Manager re-
ceives from the Investment Manager a monthly fee equal to 0.75% (on an annual
basis) of the average daily value of the net assets of the International Equity
Fund and 0.55% (on an annual basis) of the average daily value of the net as-
sets of the International Fixed Income Fund. Portfolios has no responsibility
for payment of fees to GFM.
Subject to the policy of seeking best overall price and execution, sales of
shares of a Fund may be considered by the Sub-Investment Manager in the selec-
tion of broker or dealer firms for the Funds' portfolio transactions.
The International Equity Fund is managed by Stephen J. Bamford, Rosamunde M.
Price, Steven J. Brunnock and Ian R. Vose. Mrs. Price's, Mr. Brunnock's and Mr.
Vose's principal occupation is as a portfolio manager with GFM. They have man-
aged the Fund since its inception in January 1992 and have been with GFM since
its formation in 1990. Mr. Bamford's principal occupation is Chief Executive
and Chief Investment Officer of GFM. For the five years prior to joining GFM,
he served as Investment Director of Aetna International (UK) Ltd. from 1986 be-
fore which he was Investment Director of County Bank Unit Trusts from 1976. For
the five years prior to joining GFM, Mrs. Price served as Chief Investment Man-
ager (Equities) at Deutsche Bank Capital Management (UK) Ltd. Senior Fund Man-
ager at Nippon Credit International Ltd. and Investment Director of the Civil
Aviation Authority Pension Fund. For the five years prior to joining GFM, Mr.
Brunnock served as United Kingdom Portfolio Manager of MGM Assurance plc. be-
fore which he was a Portfolio Manager for Philips Electronics Pension Fund. For
the five years prior to joining GFM, Mr. Vose served as Director of MG Interna-
tional Fund Management and Chief Investment Officer of MG-Tokai Bank Fund
Management.
The International Fixed Income Fund is managed by Nicholas Sanjana. Mr.
Sanjana's principal occupation is as a portfolio manager with GFM. He has man-
aged the Fund since its inception in January 1992. For the five years prior to
joining GFM, he served as Associate Director at Chase Investment Management
Group from 1989, before which he was Senior Portfolio Manager of Deutsche Bank
Capital Management (UK) Ltd.
DIVIDENDS AND DISTRIBUTIONS; TAXES
Each Fund is treated as a separate entity for federal tax purposes. Each Fund
qualified and elected to be treated as a regulated investment company under
Subchapter M of the Internal Revenue Code for its most recent fiscal year and
intends to qual-
29
<PAGE>
ify as such in future fiscal years, although it cannot give complete assurance
that it will do so. As long as a Fund so qualifies and satisfies certain dis-
tribution requirements, it will not be subject to federal income tax on its
taxable income (including capital gains, if any) distributed to its sharehold-
ers. Consequently, each Fund intends to distribute annually to its shareholders
substantially all of its net investment income and any capital gains net income
(capital gains net of capital loss). Certain gains and losses from fluctuations
in currency exchange rates are treated as ordinary income or loss and are in-
cluded in the net income of a Fund.
Dividends from net investment income, if any, normally will be paid or dis-
tributed annually for the International Equity Fund and quarterly for the In-
ternational Fixed Income Fund. Distributions of capital gain net income, if
any, will generally be made after the end of the fiscal year or as otherwise
required for compliance with applicable tax regulations. Both dividends from
net investment income and distributions of capital gain net income for each
Fund will be declared and paid to shareholders in additional shares of the rel-
evant Fund at net asset value (except in the case of shareholders who elect a
different available distribution method). In certain foreign countries, inter-
est and dividends are subject to a tax which is withheld by the issuer. U.S.
income tax treaties with certain countries reduce the rates of these withhold-
ing taxes. The Funds intend to provide the documentation necessary to achieve
the lower treaty rate of withholding whenever applicable or to seek refund of
amounts withheld in excess of the treaty rate. Moreover, the Funds intend to
qualify under the Internal Revenue Code so that their U.S. shareholders may re-
duce their U.S. tax liability by claiming a foreign tax credit for their share
of foreign income taxes withheld, to the extent allowed by the Code, if the
amount withheld is material.
Each Fund will provide its shareholders of record with annual information on a
timely basis concerning the federal tax status of dividends and distributions
during the preceding calendar year.
Dividends paid by a Fund from net taxable investment income and distributions
of net short-term capital gains, whether paid in cash or reinvested in addi-
tional shares, will be taxable for federal income tax purposes to shareholders
as ordinary income. Distributions of net capital gains (the excess of net long-
term capital gains over net short-term capital losses) which are designated as
capital gains distributions, whether paid in cash or reinvested in additional
shares, will be taxable for federal income tax purposes to shareholders as
long-term capital gains, regardless of how long shareholders have held their
shares. If shares of a Fund which are sold at a loss have been held six months
or less, the loss will be considered as a long-term capital loss to the extent
of any capital gains distributions received.
Dividends and other distributions and the proceeds of redemption of Fund
shares paid to individuals and other nonexempt payees will be subject to a 31%
federal backup withholding tax if the Transfer Agent is not provided with the
shareholder's correct taxpayer identification number or certifi- cation that
the shareholder is not subject to such backup withholding.
The foregoing discussion relates only to generally applicable federal income
tax provisions in effect as of the date of this Prospectus. Therefore, prospec-
tive investors are urged to consult their own tax advisers regarding tax mat-
ters, including state and local tax consequences.
CALCULATION OF PERFORMANCE DATA
From time to time, in advertisements or in communications to shareholders or
prospective investors, a Fund may compare the performance of its Class A, Class
B, Class C or Class D shares to that of other mutual funds with similar invest-
ment objectives, to certificates of deposit and/or to other financial alterna-
tives. A Fund may also compare its performance to appropriate indices, such as
Standard & Poor's 500 Index, Consumer Price Index, Dow Jones Industrial Aver-
age, The Morgan Stanley Capital International, Europe, Australia, Far East
(EAFE) Index, J. P. Morgan Global Traded Bond Index and Salomon Brothers Non-
U.S. Dollar World Government Bond Index and/or to appropriate rankings and av-
erages 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 perfor-
30
<PAGE>
mance of the International Equity Fund might be compared to the Lipper Interna-
tional Funds Group and the performance of the International Fixed Income Fund
might be compared to the Lipper General World Income Funds Group.
Total return is computed separately for each class of shares of the Funds. The
average annual total return ("standard total return") for shares of a Fund is
computed by determining the average annual compounded rate of return for a des-
ignated period that, if applied to a hypothetical $1,000 initial investment
(less the maximum initial or contingent deferred sales charge, if applicable),
would produce the redeemable value of that investment at the end of the period,
assuming reinvestment of all dividends and distributions and with recognition
of all recurring charges. Standard total return may be accompanied with non-
standard total return information computed in the same manner, for differing
periods and with or without annualizing the total return or taking sales
charges into account.
A Fund's yield is computed separately for each class of shares by dividing the
net investment income, after recognition of all recurring charges, per share
earned during the most recent month or other specified 30-day period by the ap-
plicable maximum offering price per share on the last day of such period and
annualizing the result.
The standard total return and yield results take sales charges into account,
if applicable, but do not take into account recurring and nonrecurring charges
for optional services which only certain shareholders elect and which involve
nominal fees, such as the $7.50 fee for remittance of redemption proceeds by
wire. Where sales charges are not applicable and therefore not taken into ac-
count in the calculation of standard total return and yield, the results will
be increased. Any voluntary waiver of fees or assumption of expenses by the
Funds' affiliates will also increase performance results.
A Fund's distribution rate is calculated separately for each class of shares
by annualizing the latest distribution and dividing the result by the maximum
offering price per share as of the end of the period to which the distribution
relates. The distribution rate is not computed in the same manner as the above
described yield, and therefore, can be significantly different from it. In its
supplemental sales literature, a Fund may quote its distribution rate together
with the above described standard total return and yield information. The use
of such distribution rates would be subject to an appropriate explanation of
how the components of the distribution rate differ from the above described
yield.
Performance information may be useful in evaluating a Fund and for providing a
basis for comparison with other financial alternatives. Since the performance
of a Fund changes in response to fluctuations in economic and market condi-
tions, interest rates and Fund expenses, among other things, no performance
quotation should be considered a representation as to a Fund's performance for
any future period. In addition, the net asset value of shares of a Fund will
fluctuate with the result that shares of a Fund when redeemed, may be worth
more or less than their original cost. Neither an investment in a Fund nor its
performance is insured or guaranteed; such lack of insurance or guarantees
should accordingly be given appropriate consideration when comparing a Fund to
financial alternatives which have such features.
Shares of the Funds had no class designations until March 1, 1994, when desig-
nations were assigned based on the pricing and Rule 12b-1 fees applicable to
shares sold thereafter. Performance data for a specified class includes periods
prior to the adoption of class designations. Performance data for periods prior
to March 1, 1994 will not reflect additional Rule 12b-1 Distribution Plan fees,
if any, of up to 1% per year depending on the class of shares, which will ad-
versely affect performance results for periods after such date. Performance
data or rankings for a given class of shares should be interpreted carefully by
investors who hold or may invest in a different class of shares.
31
<PAGE>
[LOGO] State Street Research
State Street Research
Portfolios, Inc.
International Equity Fund
International Fixed Income Fund
STATE STREET RESEARCH
PORTFOLIOS, INC.
ONE MADISON AVENUE
NEW YORK, NY 10010
INVESTMENT MANAGER
DISTRIBUTOR
STATE STREET RESEARCH
INVESTMENT SERVICES, INC.
ONE FINANCIAL CENTER
BOSTON, MA 02111
SUB-INVESTMENT MANAGER
GFM INTERNATIONAL
INVESTORS LIMITED
5 UPPER ST. MARTINS LANE
LONDON, WC2H 9EA
ENGLAND
SHAREHOLDER SERVICES
STATE STREET RESEARCH
SHAREHOLDER SERVICES
P.O. BOX 8408
BOSTON, MA 02266
1-800-562-0032
CUSTODIAN
STATE STREET BANK AND
TRUST COMPANY
225 FRANKLIN STREET
BOSTON, MA 02110
LEGAL COUNSEL
SULLIVAN & WORCESTER
1025 CONNECTICUT AVENUE, N.W.
WASHINGTON, DC 20036
INDEPENDENT ACCOUNTANTS
DELOITTE & TOUCHE LLP
125 SUMMER STREET
BOSTON, MA 02110
MARCH 1, 1995
PROSPECTUS
IE/F-446D-395IBS
CONTROL NUMBER: 2181-950227(0396)SSR-LD
<PAGE>
STATEMENT OF ADDITIONAL
INFORMATION FOR
STATE STREET RESEARCH
PORTFOLIOS, INC.
March 1, 1995
This Statement of Additional Information is not a prospectus. It should be
read in conjunction with the Prospectus of State Street Research International
Equity Fund and State Street Research International Fixed Income Fund dated
March 1, 1995. A copy of the Prospectus may be obtained without charge from the
offices of State Street Research Portfolios, Inc. ("Portfolios") or State
Street Research Investment Services, Inc. (the "Investment Manager" or the
"Distributor"), One Financial Center, Boston, Massachusetts 02111.
<TABLE>
<CAPTION>
TABLE OF CONTENTS
- -------------------------------------------------------------------------------
<S> <C>
Investment Practices and Policies......................................... B-1
Money Market Instruments................................................ B-1
Description of Certain Corporate Bond and Debenture Ratings of Moody's
Investors Service, Inc................................................. B-4
Description of Certain Corporate Bond and Debenture Ratings of Standard
and Poor's Ratings Group............................................... B-4
Description of Commercial Paper
Ratings................................................................ B-4
Certain Investment Limitations............................................ B-5
Certain Investment Practices.............................................. B-7
Lending of Portfolio Securities......................................... B-7
Options and Futures..................................................... B-7
Limitations on the Use of Futures Contracts and Options Thereon and Op-
tions on Indices....................................................... B-14
Forward Foreign Currency Exchange Contracts............................. B-14
Directors and Officers.................................................... B-16
Control Persons........................................................... B-17
Investment Management Arrangements........................................ B-17
Investment Management Agreements and Sub-Investment Management Agree-
ments.................................................................. B-17
</TABLE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS (CONT'D)
- ---------------------------------------------------------------------------------
<S> <C>
Allocation of Portfolio Brokerage......................................... B-19
Purchase of Shares.......................................................... B-20
Redemption In Kind.......................................................... B-22
Net Asset Value............................................................. B-22
Portfolio Transactions...................................................... B-23
Portfolio Turnover........................................................ B-23
Certain Tax Matters......................................................... B-23
Taxation of the Funds--in General......................................... B-23
Taxation of the Funds' Investments........................................ B-24
Taxation of the Funds' Shareholders....................................... B-25
Distribution of Shares of the Funds......................................... B-26
Calculation of Performance Data............................................. B-28
Total Return.............................................................. B-29
Yield..................................................................... B-29
Accrued Expenses.......................................................... B-30
Nonstandardized Total Return.............................................. B-30
Distribution Rates........................................................ B-31
Custodian................................................................... B-31
Independent Accountants..................................................... B-31
Financial Statements........................................................ B-31
</TABLE>
INVESTMENT PRACTICES AND POLICIES
MONEY MARKET INSTRUMENTS:
Certain money market instruments are described below. The International Equity
and International Fixed Income Funds may invest in such instruments to the ex-
tent otherwise consistent with their investment objectives.
United States Treasury Securities: These consist of various types of market-
able securities issued by the United States Treasury: i.e. bills, notes and
bonds. Such securities are direct obligations of the United States Government
and differ mainly in the length of their maturity. Treasury bills, the most
frequently issued marketable government security, have a maturity of up to one
year and are issued on a discount basis.
B-1
<PAGE>
Government Agency Securities:
These consist of debt securities issued by agencies and instrumentalities of
the United States Government, including the various types of instruments cur-
rently outstanding or which may be offered in the future. Agencies include,
among others, the Federal Housing Administration, Government National Mortgage
Association, Farmers Home Administration, Export-Import Bank of the United
States, Maritime Administration, General Services Administration and Tennessee
Valley Authority. Instrumentalities include, for example, the National Bank of
Cooperatives, each of the Federal Home Loan Banks, Federal Home Loan Mortgage
Corporation, Farm Credit Banks, Federal National Mortgage Association and the
United States Postal Service. Such securities are backed by the full faith and
credit of the United States (e.g., U.S. Treasury Bills), guaranteed by the
United States Treasury (e.g. Government National Mortgage Association mortgage-
backed securities), supported by the issuing agency's or instrumentality's
right to borrow from the United States Treasury (e.g. Federal National Mortgage
Association Discount Notes) or supported by the issuing agency's or
instrumentality's credit.
Bank Money Market Instruments:
These include certificates of deposit and bankers' acceptances. Certificates
of deposit are generally short-term, interest-bearing negotiable certificates
issued by commercial banks or savings and loan associations against funds de-
posited 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). The borrower is liable for payment as well as the bank, which uncondi-
tionally 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 sec-
ondary markets prior to maturity. A Fund will not invest in any security issued
by a commercial bank or a savings and loan association unless the bank or asso-
ciation is organized and located in the United States, has total assets of at
least $1 billion and is a member of the Federal Deposit Insurance Corporation;
provided that this limitation shall not prohibit investments in foreign
branches of banks or agencies which meet the foregoing requirements. No Fund
will invest in non-negotiable time deposits maturing in more than seven days.
These time deposits are considered illiquid and subject to each Fund's 10% lim-
itation on illiquid investments. No Fund invests in negotiable time deposits
maturing in more than 30 days.
Short-Term Corporate Debt Instruments:
These include commercial paper (including variable amount master demand
notes): i.e., short-term, unsecured promissory notes issued by corporations to
finance short-term credit needs. Commercial paper is usually sold on a discount
basis and has a maturity at the time of issuance not exceeding nine months.
Variable amount master demand notes are obligations of companies that permit
the Funds to invest fluctuating amounts at varying rates of interest pursuant
to arrangements between the Funds as lenders, and the companies, as borrowers.
The Funds will have the right, at any time, to increase the amount lent up to
the full amount provided by a note or to decrease the amount. The borrower will
have the right, at any time, to prepay up to the full amount of the amount bor-
rowed without penalty. Because the notes are direct lending obligations between
the Funds and borrowers, they are generally not traded and there is no second-
ary market. However, the Funds will have the right to redeem a note at any time
and receive face value plus accrued interest. Consequently, the Funds' ability
to receive repayment will depend upon the borrower's ability to pay principal
and interest on the Funds' demand. The Funds will invest only in either notes
that have the ratings described below for commercial paper, or (because notes
are not typically rated by credit rating agencies) unrated notes that are is-
sued by companies that have the ratings described below for issuers of commer-
cial paper. GFM International Investors Limited ("GFM" or "Sub-Investment Man-
ager") does not expect that the notes will be backed by bank letters of credit.
The Funds' Investment Manager and Sub-Investment Manager will value the notes
held by the Funds taking into account such factors as the issuer's earning pow-
er, cash flows and other liquidity ratios.
B-2
<PAGE>
Also included are non-convertible corporate debt securities (e.g. bonds and
debentures) with no more than two years remaining to maturity at the date of
settlement. Corporate debt securities with a remaining maturity of less than
one year are liquid (and tend to become more liquid as their maturities lessen)
and are traded as money market securities. Issues with between one and two
years remaining to maturity tend to have greater liquidity and considerably
less market value fluctuation than longer term issues.
Repurchase Agreements:
Under these arrangements, a Fund invests in securities subject to repurchase
agreements with a bank or dealer. A repurchase agreement is an instrument under
which the purchaser (i.e., the Fund) acquires ownership of an obligation (debt
security) and the seller agrees, at the time of the sale, to repurchase the ob-
ligation at a mutually agreed upon time and price, thereby determining the
yield during the purchaser's holding period. This results in a fixed rate of
return insulated from market fluctuations during such period, unless the seller
defaults on its repurchase obligations.
The underlying securities will consist only of U.S. Government or government
agency securities, certificates of deposit, commercial paper or banker's ac-
ceptances. Repurchase agreements will be collateralized by the purchased secu-
rities, and, during the term of a repurchase agreement, the seller will be re-
quired to provide such additional collateral as is necessary to maintain the
value of all of the collateral at a level at least equal to the repurchase
price. Repurchase agreements usually are for short periods, such as under one
week. Repurchase agreements will be entered into with primary dealers for peri-
ods not to exceed 30 days and only with respect to underlying money market se-
curities in which a Fund may otherwise invest as described above. Repurchase
agreements will not be entered into for a duration of more than seven days if,
as a result, more than 10% of the value of a Fund's total assets would be in-
vested in such agreements or other illiquid securities.
Repurchase agreements could be viewed as a form of loan made by a Fund to the
seller of the agreement, with the security subject to repurchase, in effect,
serving as "collateral" for the loan. A Fund will in all cases seek to assure
that the amount of collateral with respect to any repurchase agreement is ade-
quate. As with a true extension of credit, however, there is risk of delay in
recovery or inadequacy of the "collateral", should the seller of the repurchase
agreement fail financially. Also, a Fund could incur disposition costs in con-
nection with disposition of the collateral if the seller defaults. The Funds
will enter into repurchase agreements only with sellers deemed to be credit-
worthy and only when the economic benefit to the Funds is believed to justify
the attendant risks. Portfolios has adopted standards for the sellers with whom
it will enter into repurchase agreements which it believes are reasonably de-
signed to assure that such a party presents no serious risk of becoming in-
volved in bankruptcy proceedings within the time frame contemplated by the re-
purchase agreement.
Zero Coupon Bonds
Zero coupon bonds do not require the periodic payment of interest and are is-
sued at a significant discount from face value. The discount approximates the
total amount of interest the bonds will accrue and compound over the period un-
til maturity at a rate of interest reflecting the market rate of the security
at the time of issuance. Such investments benefit the issuer by mitigating its
need for cash to meet debt service, but also require a higher rate of return to
attract investors who are willing to defer receipt of such cash. Such invest-
ments may experience greater volatility in market value than debt obligations
which make regular payments of interest. The Funds will accrue income on such
investments for tax and accounting purposes, which is distributable to share-
holders. When distributed to shareholders, any such income resulting from zero
coupon bonds will be paid from a Fund's cash assets, or, if necessary to pay
the distribution, from the proceeds of sales of portfolio securities held by a
Fund. Furthermore, a Fund will be unable to purchase additional portfolio secu-
rities with any cash used to make such distributions and its current income may
be reduced.
B-3
<PAGE>
Debt Instrument Ratings
The ratings of certain debt instruments in which the Funds may invest are de-
scribed below.
DESCRIPTION OF CERTAIN CORPORATE BOND AND DEBENTURE RATINGS OF MOODY'S
INVESTORS SERVICE, INC.:
Aaa-Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edge." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa--Bonds which are rated Aa are judged to be of high quality by all stan-
dards. 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 protec-
tive elements may be of greater amplitude or there may be other elements pres-
ent which make the long term risks appear somewhat greater than in Aaa securi-
ties.
A--Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper-medium grade obligations. Factors giving security
to principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future.
Baa--Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba--Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position charac-
terizes bonds in this class.
B--Bonds which are rated B generally lack characteristics of the desirable in-
vestment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
DESCRIPTION OF CERTAIN CORPORATE BOND AND DEBENTURE RATINGS OF STANDARD &
POOR'S RATINGS GROUP:
AAA--This is the highest rating assigned by Standard & Poor's to a debt obliga-
tion and indicates an extremely strong capacity to pay principal and interest.
AA--Bonds rated AA also qualify as high-quality debt obligations. Capacity to
pay principal and interest is very strong, and in the majority of instances
they differ from AAA issues only in small degree.
A--Bonds rated A have a strong capacity to pay principal and interest, al-
though they are somewhat 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 parame-
ters, 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.
BB or B--Bonds rated BB or B are regarded, on balance, as predominantly specu-
lative with respect to capacity to pay interest and repay principal in accor-
dance with the terms of the obligation. BB indicates the lowest degree of spec-
ulation and B a relatively higher degree of speculation. While such bonds will
likely have some quality and protective characteristics, these are outweighted
by large uncertainties or major risk exposures to adverse conditions.
DESCRIPTION OF COMMERCIAL PAPER RATINGS:
Commercial paper rated A (highest quality) by Standard & Poor's has the follow-
ing characteristics: Liquidity ratios are adequate to meet cash requirements.
Long-term senior debt is rated A or better, although in some cases BBB credits
may
B-4
<PAGE>
be allowed. The issuer has access to at least two additional channels of bor-
rowing. 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 determine whether the issuer's commercial paper is rated A-1,
A-2 or A-3. (Those A-1 issues determined to possess overwhelming safety charac-
teristics are denoted with a plus (+) sign: A-1+.)
The rating Prime is the highest commercial paper rating assigned by Moody's.
Among the factors considered by Moody's in assigning ratings are the following:
evaluation of the management of the issuer; economic evaluation of the issuer's
industry or industries and an appraisal of speculative-type risks which may be
inherent in certain areas; evaluation of the issuer's products in relation to
competition and customer acceptance; liquidity; amount and quality of long-term
debt; trend of earnings over a period of 10 years; financial strength of any
parent company and the relationships which exist with the issuer; and recogni-
tion by the 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.
CERTAIN INVESTMENT LIMITATIONS
The investment limitations not described in the Prospectus and generally common
to the Funds are described below. The following four fundamental policies may
not be changed without approval of holders of a majority of the outstanding
voting shares of each Fund affected (which for this purpose and under the In-
vestment Company Act of 1940, as amended (the "1940 Act") means the lesser of
(i) 67% of the shares represented at a meeting at which more than 50% of the
outstanding shares are represented or (ii) more than 50% of the outstanding
shares).
No Fund may:
1. borrow money or purchase securities on margin, provided, however, that
this restriction shall not prohibit a Fund from (a) obtaining such short-
term credits as are necessary for the clearance of portfolio transactions,
(b) temporarily borrowing up to 5% of the value of a Fund's total assets
for extraordinary or emergency purposes, such as for permitting redemption
requests to be honored which might otherwise require the sale of securi-
ties at a time when it is not in the Fund's best interests, (c) entering
into reverse repurchase agreements with banks or (d) purchasing securities
on a "when-issued" or "forward commitment" basis. Collateral arrangements
entered into by the Fund to make margin deposits in connection with
futures contracts, including options on futures contracts, are not for
these purposes deemed to be the purchase of a security on margin. The ag-
gregate amount of obligations identified in (a), (b), (c) and (d) above,
when incurred, will not exceed one-third of the amount by which the Fund's
total assets exceed its total liabilities (excluding the liabilities rep-
resented by such obligations). If at any time a Fund's obligations of such
type exceed the foregoing limitation, such obligations will be promptly
reduced to the extent necessary to comply with the limitation. The Funds
will not issue senior securities, other than those which represent the
above described obligations. For purposes hereof, writing covered call and
put options and entering into futures contracts and options thereon to the
extent permitted by the investment policies described in the Prospectus
shall not be deemed to involve the issuance of senior securities or
borrowings;
2. engage in the underwriting of securities of other issuers, except to the
extent that in selling portfolio securities, it may be deemed to be a
"statutory" underwriter for purposes of the Securities Act of 1933; or
3. make any investment in real estate or real estate interests that would
cause more than 10% of the value of a Fund's total assets to be invested
in real estate interests including real estate mortgage loans, but this
policy shall not be deemed to restrict investment in real estate invest-
ment trusts listed on stock exchanges,
B-5
<PAGE>
shares of real estate companies or mortgage-related securities.
4. acquire securities for the purpose of exercising control over the manage-
ment of any company or if such acquisition would thereupon cause more than
25% of the value of the Fund's total assets to consist of (1) securities
(other than securities issued or guaranteed by the United States govern-
ment, its agencies and instrumentalities) which, together with other secu-
rities of the same issuer, constitute more than 5% of the value of the
Fund's total assets and (2) voting securities of issuers more than 10% of
whose outstanding voting securities are owned by Portfolios.
The International Equity Fund may not:
1. make any investment which would thereupon cause more than 25% of the value
of the total assets of the Fund to be invested in securities issued by
companies principally engaged in any one industry, provided, however, that
(a) utilities will be divided according to their services so that, for
example, gas, gas transmission, electric and telephone will each be deemed
a separate industry, (b) oil and oil related companies will be divided by
type so that, for example, domestic crude oil and gas producers, domestic
integrated oil companies, international oil companies and oil service
companies will each be deemed a separate industry, and (c) savings and
loan associations and finance companies will each be deemed a separate
industry. To the extent that 25% of the total assets of the Fund may
become invested in the four oil related industries listed above in the
aggregate, such fact will be disclosed. For purposes of this limitation,
all debt securities issued by foreign governments, their agencies or
instrumentalities will be treated as foreign government debt and all debt
securities issued by supranational organizations will be treated as
supranational debt.
The following investment restrictions may be changed without approval of
shareholders.
1. No Fund will purchase securities of other investment companies if such
purchase would thereupon cause more than 10% of the value of the total as-
sets in the Fund to be invested in the securities of investment companies
or more than 5% of such value to be invested in the securities of any one
investment company, or would cause Portfolios to own more than 3% of the
total outstanding voting stock of any such company (or together with other
investment companies having the same investment adviser to own more than
10% of the total outstanding voting stock of any closed-end investment
company). Securities of investment companies may also be acquired as part
of a merger, consolidation, acquisition of assets or reorganization.
2. No Fund will make any investment in repur-chase agreements having a matu-
rity of more than seven days or any other illiquid assets if, as a result,
more than 10% of the Fund's total assets would be invested in illiquid as-
sets or more than 5% of the Fund's total assets would be invested in re-
stricted securities. For purposes of this limitation, privately placed se-
curities that are not registered under the Securities Act of 1933, but
that can be offered and sold to qualified institutional buyers under Rule
144A under that Act are not considered restricted securities.
3. Portfolios will not make any short sale or participate on a joint or joint
and several basis in any trading account in securities. The latter policy,
however, does not prohibit combining orders for portfolio securities as
described in "Investment Management Agreements and Sub-Investment Manage-
ment Agreements," on page B-16.
4. No Fund will invest in oil, gas or other mineral exploration or develop-
ment programs (although it may invest in issuers which own or invest in
such interests).
5. No Fund will purchase securities of any issuer with a record of less than
three years continuous operations, including predecessors, except obliga-
tions issued or guaranteed by the U.S. Government or by any foreign gov-
ernment or their agencies or instrumentalities, if such purchase would
cause the investments of the Fund in all such issuers to exceed 5% of the
total assets of the Fund taken at market value.
B-6
<PAGE>
6. No Fund will purchase or retain securities of an issuer any of whose offi-
cers, directors, trustees or security holders is an officer, director or
trustee of the Fund or a member, officer, director or trustee of the in-
vestment adviser of the Fund if one or more of such individuals owns bene-
ficially more than one-half of one percent ( 1/2%) of the outstanding
shares or securities or both (taken at market value) of such issuer and
such individuals owning more than one-half of one percent ( 1/2%) of such
shares or securities together own beneficially more than 5% of such shares
or securities or both.
The investment restrictions set forth in the Pro- spectus contain an exception
that permits the Funds to purchase securities pursuant to the exercise of sub-
scription rights, subject to the condition that such purchase will not result
in a Fund ceasing to be a diversified investment company. Japanese and European
corporations frequently issue additional capital stock by means of subscription
rights offerings to existing shareholders at a price substantially below the
market price of the shares.
The failure to exercise such rights would result in a Fund's interest in the
issuing company being diluted. The market for such rights is not well developed
and, accordingly, a Fund may not always realize full value of the sale of
rights. Therefore, the exception applies in cases where the limits set forth in
the investment restrictions in the Prospectus would otherwise be exceeded by
exercising rights or have already been exceeded as a result of fluctuations in
the market value of a Fund's portfolio securities with the result that a Fund
would otherwise be forced either to sell securities at a time when it might not
otherwise have done so, or to forego exercising the rights.
CERTAIN INVESTMENT PRACTICES
LENDING OF PORTFOLIO SECURITIES:
Subject to Portfolios' fundamental investment restrictions, each Fund from time
to time may lend some of its securities to brokers, dealers and financial in-
stitutions and receive as collateral cash or United States Treasury securities
which at all times while the loan is outstanding will be maintained by the bor-
rower in amounts equal to at least 100% of the current market value of the
loaned securities. Any cash collateral will be invested in short-term high-
grade securities, which can increase the current income of the Fund lending its
securities, since the Fund continues to receive interest and dividends on the
loaned securities during the period of the loan. Any gain or loss in the market
value of loaned securities or securities in which cash collateral is invested
during the term of the loan would also inure to the Fund.
Loans of portfolio securities will not have terms longer than 30 days and will
be terminable at any time. The Funds will have the right to retain record own-
ership of loaned securities to exercise beneficial rights such as voting
rights, subscription rights and rights to dividends, interest or other distri-
butions. Portfolios on behalf of the Funds may pay reasonable finders, adminis-
trative and custodial fees to persons unaffiliated with the Funds for services
in connection with such loans.
The dividends, interest, and other distributions received by a Fund on loaned
securities may, for tax purposes, be treated as income other than qualified in-
come for the 90% test discussed under "Certain Tax Matters," on page B-22. The
Funds intend to lend portfolio securities only to the extent that such activity
does not jeopardize the Funds' qualification as regulated investment companies
under the Internal Revenue Code of 1986, as amended (the "Code").
If the borrower fails to maintain the requisite amount of collateral, the loan
automatically terminates, and the Fund could use the collateral to replace the
securities, while holding the borrower liable for any excess of the replacement
cost over the amount of collateral. As with any extension of credit, there are
risks of delay in recovery, and in some cases even loss of rights in the col-
lateral, should the borrower of the securities fail financially. However, loans
of portfolio securities will be made only to firms deemed to be creditworthy
and only when the economic benefit to the Funds is believed to justify the at-
tendant risks. On termination of a loan, the borrower is required to return the
loaned securities to the Fund.
OPTIONS AND FUTURES:
Options on Portfolio Securities and Currencies: Subject to the fundamental in-
vestment restrictions,
B-7
<PAGE>
all the Funds may write (sell) covered call options and may purchase put op-
tions with respect to securities in their portfolio. The Funds may also pur-
chase call options and may write covered put options on securities or curren-
cies.
A call option gives the purchaser of such option, in exchange for the option
premium, the right to buy (and obligates the writer to sell) the underlying se-
curity or currency at the price specified in the option (the "exercise price")
at any time until the option expires, generally within three to nine months.
The exercise price, plus the option premium paid, will always be greater than
the market price of the underlying security or currency at the time the option
is written. A put option gives the purchaser of such option, in exchange for
the option premium, the right to sell (and obligates the writer to purchase)
the underlying security or currency at the exercise price at any time before
the option expires.
If a covered call or put option written by a Fund expires unexercised, the
Fund will realize as income, in the form of a short-term capital gain, the pre-
mium it received for the sale of the option, less the brokerage commission it
paid i.e., the "net premium." If a call option written by a Fund is exercised,
a decision over which the Fund has no control, the Fund must sell the under-
lying security or currency to the option holder at the exercise price. By writ-
ing a covered call option, the Fund foregoes, in exchange for the net premium,
the opportunity to profit from any increase in the value of the underlying se-
curity or currency above the exercise price plus the premium paid. Therefore,
call options may be written when GFM believes that the security or currency
should be held, but no increase in price or only a moderate increase within the
option period is expected.
By writing a covered put option, a Fund receives premium income but obligates
itself to purchase from the option holder, at the price specified in the op-
tion, the particular security or currency underlying the option at any time
prior to the expiration of the option period, regardless of the market value of
the security or currency during the option period. Therefore, put options will
be written when GFM believes that the security's or currency's price will rise
during the exercise period and, consequently, the option will not be exercised.
If an option purchased by a Fund expires unexercised, the Fund will experience
a loss in the amount of the premium paid for the option. The Fund will gener-
ally decide to exercise a put option if the market price of the underlying se-
curity or currency falls below the exercise price plus the premium paid; it
will generally decide to exercise a call option if the market price of the un-
derlying security or currency exceeds the exercise price plus the premium paid.
Therefore, options may be purchased when GFM believes that, in the case of a
put, the security or currency should be held but its market price may fall, or,
in the case of a call, the security or currency should be purchased in the fu-
ture and its market price may rise.
In order to reduce the risk of loss, the Funds will not purchase options un-
less GFM believes the market is sufficiently developed. The Funds will not sell
the securities or currencies against which options have been written until af-
ter the option period has expired, a closing purchase transaction, if avail-
able, has been executed, a corresponding put or call option has been purchased
or the written option is otherwise covered.
Options are traded or on certain recognized securities exchanges including the
following United States and foreign exchanges: the Chicago Board Options Ex-
change, American Stock Exchange, New York Stock Exchange, Pacific Stock Ex-
change and Philadelphia Stock Exchange, the Toronto Stock Exchange, Montreal
Stock Exchange, European Options Exchange (in the Netherlands) and London Stock
Exchange.
A Fund may terminate its obligation as the writer of an option by purchasing
an option with the same exercise price and expiration date as the option previ-
ously written (a "closing purchase transaction"). If a Fund cannot enter into a
closing purchase transaction (for example, because no such options are avail-
able for purchase), the Fund will continue to bear the risk of loss of the ap-
preciation, if any, in the price of the underlying security or currency during
the remaining term of the option, if it has written a call option, or the Fund
will continue to be obligated to purchase the specified securities or curren-
cies at the exercise price, regardless of the market value or exchange rate, if
it has written a put option.
B-8
<PAGE>
Both sales and purchases of options require the Funds to pay brokerage commis-
sions. To the extent that an option sold by the Funds is exercised, the Funds
may incur brokerage commissions or other transaction costs in reinvesting the
proceeds received upon such exercise. Also, writing covered call options can
increase a Fund's turnover rate.
When a Fund sells a covered call or put option, an amount equal to the net
premium (the premium less the commission) received by the Fund is included in
the liability section of the Fund's statement of assets and liabilities as a
deferred credit. The amount of the deferred credit subsequently will be marked-
to-market to reflect the current value of the option written. If an option ex-
pires on its stipulated expiration date or if the Fund enters into a closing
purchase transaction, the Fund will realize a gain (or loss, if the cost of a
closing purchase transaction exceeds the net premium received when the option
was sold), and the deferred credit related to such option will be eliminated.
If a call option sold by the Fund is exercised, the Fund will realize a long-
term or short-term gain or loss from the sale of the underlying security or
currency, and the proceeds of the sale will be increased by the premium previ-
ously received on the option. The writing of such call options will not affect
the holding period of the underlying security. If a put option sold by the Fund
is exercised, the Fund's cost for the security or currency purchased will be
reduced by the premium previously received on the option written.
Options on Indices:
The Funds intend to utilize options on stock indices. Options on stock indi-
ces are similar to options on stock, except that all settlements are made in
cash rather than by delivery of the stock, and gains or losses depend on price
movements in the stock market generally (or in a particular industry or segment
of the market represented by the index) rather than price movements in individ-
ual stocks.
Upon payment of a specified premium at the time an option on a stock index is
entered into, the purchaser of a call option on a stock index obtains the right
to receive, upon exercise of the option, a sum of money equal to a multiple of
any excess of the value of the specified stock index, on the exercise date,
over the exercise or "strike" price specified by the option. The purchaser of a
put option on a stock index obtains the right to receive, upon exercise of the
option, a sum of money equal to a multiple of any excess of the strike price
over the value of the stock index.
The writer of a stock index option has obligations which correspond to the
purchaser's rights. Thus, for example, the writer of a call option on a stock
index, in consideration of the option premium received, has the obligation to
pay, upon exercise, a dollar amount equal to a multiple of any excess of the
value of the specified stock index on the date of exercise over the strike
price specified in the option. The writer of a put option on a stock index, in
consideration of the option pre-mium received, has the obligation to pay, upon
exercise, a dollar amount equal to a multiple of any excess of the value of the
strike price specified in the option over the value of the specified stock in-
dex on the date of exercise.
The Funds will cover call options on a stock index written by, for example,
holding in a segregated account, with the custodian for Portfolios, portfolio
securities that substantially replicate the movement of the particular index
upon which the call option was written or sufficient cash or liquid assets to
cover the outstanding position. In addition, the Funds may also choose to cover
call options written by holding a separate call option permitting the purchase
of the same stock index at the same strike price. The Funds will cover put op-
tions on a stock index written by, for example, holding in a segregated ac-
count, with the custodian for Portfolios, cash or liquid assets equal to the
strike price of the put option or by holding a separate put option permitting
the purchase of the same stock index at the same strike price.
The Funds intend to write covered call and put options on a stock index for
the same purposes as they might write covered call and put options on their
portfolio securities.
A securities index fluctuates with changes in the market values of the securi-
ties included in the index. For example, some options on securities indices are
based on a broad market index such as the Nikkei Index of 225 Japanese stocks
traded on the Singapore International Monetary Exchange
B-9
<PAGE>
("Nikkei Index") or the Standard & Poor's 500 Index, or a narrower market index
such as the Standard & Poor's 100 or the Osaka Index of 50 Japanese Stocks
traded on the Osaka Exchange. Indices may also be based on an industry or mar-
ket segment such as the AMEX Oil and Gas Index or the Computer and Business
Equipment Index. Options on stock indices are currently traded on the following
exchanges, among others: the London Traded Options Market, The Chicago Board
Options Exchange; New York Stock Exchange; and American Stock Exchange. Options
on other types of securities indices, which do not currently exist, may be in-
troduced and traded on exchanges in the future.
Options on indices relating to certain debt securities, referred to as inter-
est rate indices, may be introduced in the future. In the event that a liquid
market develops for options on an interest rate index, and the Board of Direc-
tors of Portfolios authorizes a particular Fund to use such an option, the Fund
may do so. Where permitted, each Fund intends to utilize options on interest
rate indices in a manner similar to that described above with respect to op-
tions on stock indices.
The Funds' purchase and sale of options on indices will be subject to the same
risks as those applicable to options on individual securities. In addition, the
distinctive characteristics of options on indices create certain risks that are
not present with options on individual securities. For example, index prices
may be distorted if trading of certain securities included in the index is in-
terrupted. Trading in the index options also may be interrupted in certain cir-
cumstances, such as, for example, if trading were halted in a substantial num-
ber of securities included in the index. If this occurred, the Fund would not
be able to close out options which it had purchased or written and, if restric-
tions on exercise were imposed, would be unable to exercise an option it holds,
which could result in substantial losses to the Fund. The Funds intend to pur-
chase or write options only on indices which include a sufficient number of se-
curities to minimize the likelihood of a trading halt in such options. In addi-
tion, the ability to establish and close out positions on options on indices
will be subject to the development and maintenance of a liquid secondary market
for such options. The Funds will not purchase or sell any option on an index
unless and until, in the opinion of GFM, the market for such options has devel-
oped sufficiently that the risk in connection with such transactions is accept-
able.
The effectiveness of hedging through the purchase of options on indices will
depend upon the extent to which price movements in the portion of the securi-
ties portfolio being hedged correlate with price movements in the selected in-
dex. Perfect cor-relation is not possible because the securities held or to be
acquired by a Fund will not exactly match the composition of the indices on
which options are written. In the purchase of options on indices, the principal
risk is that the premium and transaction costs paid by a Fund in purchasing an
option will be lost as a result of unanticipated movements in the price of the
securities comprising the index for which the option has been purchased. In
writing call options on indices, the principal risks are the inability to ef-
fect closing transactions at fav-orable prices and the inability to participate
in the appreciation of the underlying securities. In writing put options on in-
dices, the principal risks are the inability to effect closing transactions at
favorable prices and the obligation to make a cash settlement relating to the
stock index at prices which may not reflect current market values.
Futures Transactions:
A futures contract is an agreement to buy or sell a security or currency (or
deliver a final cash settlement price, in the case of a contract relating to an
index or otherwise not calling for physical delivery at the end of trading in
the contract) for a set price in the future. Trading in futures is regulated
under the Commodity Exchange Act by the Commodity Futures Trading Commission
("CFTC"). Futures contracts trade on certain regulated contract markets through
an open outcry auction on the exchange floor. The Funds, as described more
fully below, may purchase or sell futures contracts to effect hedging transac-
tions. A hedge, as defined by the CFTC, is a transaction in which the Funds
utilize futures contracts in order to protect the value of underlying portfolio
securities or the currencies in which they are denominated from adverse fluctu-
ations in the financial markets.
B-10
<PAGE>
Positions taken in the futures markets are not normally held until delivery or
cash settlement is required, but instead are liquidated through offsetting
transactions that may result in a gain or a loss. While futures positions taken
by a Fund will usually be liquidated in this manner, the Fund may instead make
or take delivery of underlying securities or currencies whenever it appears ec-
onomically advantageous for the Fund to do so. A clearing organization associ-
ated with the exchange on which futures are traded assumes responsibility for
closing out transactions and guarantees that, as between the clearing members
of an exchange, the sale and purchase obligations will be performed with regard
to all positions that remain open at the termination of the contract.
Upon entering into a futures contract, a Fund is required to deposit with a
futures commission merchant or in a segregated custodial account a certain per-
centage (presently less than ten percent) of the futures contract's market
value as "initial margin." Initial margin is in the nature of a performance
bond or good faith deposit on the contract which is returned upon termination
of the futures contract if all contractual obligations have been satisfied. The
initial margin in most cases consists of cash or U.S. Government securities.
Subsequent cash payments, called "variation margin," may be required as a re-
sult of marking the contracts to market on a daily basis as the contract value
fluctuates.
The use of futures contracts entails certain risks in addition to those stated
below, including but not limited to; possible reduction in the Fund's income
due to the use of hedging; possible reduction in value of both securities or
currencies hedged and the futures contract; and potential losses in excess of
the amount initially invested in the futures contracts themselves. The use of
futures contracts requires special skills in addition to those needed to select
portfolio securities or currencies.
Stock Index Futures Contracts:
The Funds, consistent with their investment objectives and policies, may at-
tempt to reduce the risk of investments in equity securities by hedging por-
tions of its underlying portfolio through the use of standardized stock index
futures contracts. These contracts currently are actively traded on the Chicago
Board of Trade, the Chicago Mercantile Exchange, the New York Futures Exchange
and the Kansas City Board of Trade. Foreign stock index futures traded outside
the United States include the Nikkei Index traded on the Singapore Interna-
tional Monetary Exchange, Osaka Index traded on the Osaka Exchange, Financial
Times Stock Exchange Index of the 100 largest stocks on the London Stock Ex-
change traded on the London International Financial Futures Exchange, the All
Ordinaries Share Price Index of 307 stocks on the Sydney, Melbourne Exchanges,
Hang Seng Index of 33 stocks on the Hong Kong Stock Exchange, Barclays Share
Price Index of 40 stocks on the New Zealand Stock Exchange and Toronto Index of
35 stocks on the Toronto Stock Exchange. Futures and futures options on the
Nikkei Index are traded on the Chicago Mercantile Exchange. U.S. commodity ex-
changes may develop futures and futures options on other indices of foreign se-
curities; futures and options on a U.S. devised in-dex of foreign stocks are
also being developed. A stock index futures contract is an agreement in which
the seller of the contract agrees to deliver to the buyer an amount of cash
equal to a specific dollar amount times the difference between the value of a
specific stock index at the close of the last trading day of the contract and
the price at which the agreement is made. No physical delivery of the under-
lying stocks in the index is made.
The Funds intend to engage in stock index futures transactions as a hedge
against market risk resulting from market conditions and over-all economic
prospects with respect to the value of portfolio securities held by the Funds
or which the Funds intend to purchase, as distinguished from stock-specific
risk resulting from the market's evaluation of the merits of a particular secu-
rity. For example, a Fund might sell stock index futures contracts to hedge
against a decline in the value of securities held in that Fund. Alternatively,
a Fund might buy stock index futures contracts to hedge against a rise in the
value of securities the Fund intends to acquire.
A Fund's successful use of stock index futures contracts depends upon the
ability of GFM to ac-
B-11
<PAGE>
curately assess the direction of the stock market and is subject to various ad-
ditional risks. The correlation between movement in the price of the stock in-
dex futures contract and the price of the securities being hedged is imperfect
and the risk from imperfect correlation increases as the composition of the
Fund portfolio diverges from the composition of the relevant index. In addi-
tion, the ability of a Fund to close out a futures position
depends on a liquid secondary market. There is no assurance that liquid second-
ary markets will exist for any particular futures contract at any particular
time. See also the risks noted above under "Futures Transactions."
Interest Rate Futures Contracts:
Each of the Funds, consistent with its investment objective and policies, may
buy and sell futures contracts on interest-bearing securities (such as U.S.
Treasury Bonds, U.S. Treasury Notes, three-month U.S. Treasury Bills, Eurodol-
lar Certificates of Deposit and GNMA Certificates) for hedging purposes.
Futures contracts on interest-bearing securities are actively traded on the
Chicago Board of Trade, London International Financial Futures Exchange, Tokyo
Stock Exchange, Paris Stock Exchange and International Monetary Market at the
Chicago Merchantile Exchange. Further, in the event that a liquid market devel-
ops for futures contracts based on an interest rate index, and the Board of Di-
rectors of Portfolios authorizes a particular Fund to use such futures con-
tracts, the Fund may do so. Futures contracts on interest-bearing securities
and interest rate indices are referred to collectively as "interest rate
futures contracts." The Funds will engage in transactions in only those inter-
est rate futures contracts that are traded on a commodities exchange or a board
of trade and are standardized as to maturity date and the underlying financial
instrument.
For example, a Fund might sell an interest rate futures contract to hedge
against a decline in the market value of debt securities the Fund owns. A Fund
might also purchase an interest rate futures contract to hedge against an an-
ticipated increase in the value of debt securities the Fund intends to acquire.
The risks of interest rate futures contracts are briefly described above in
connection with the proposed use of stock index futures contracts and in the
general description of "Futures Transactions." In addition, a Fund's successful
use of interest rate futures contracts depends upon the ability of GFM to accu-
rately assess interest rate moves. Further, because there are a limited number
of types of interest rate futures contracts, it is likely that the financial
futures contracts available to a Fund will not exactly match the debt securi-
ties the Fund intends to hedge or acquire. To compensate for differences in
historical volatility between securities a Fund intends to hedge or acquire and
the interest rate futures contracts available to it, the Fund could purchase or
sell futures contracts with a greater or lesser value than the debt securities
it wished to hedge or intended to purchase. This imperfect correlation between
the interest rate futures contract and the debt securities being hedged is an-
other risk.
Currency Futures Contracts:
The Funds may buy and sell futures contracts on currencies. The Funds will en-
gage in transactions in only those currency futures contracts that are traded
on a national or foreign commodities exchange or a board of trade and are stan-
dardized as to maturity date and the underlying financial instrument.
Currency futures contracts may be used on currencies as a hedge against
changes in prevailing currency exchange rates in order to establish more defin-
itively the return on foreign securities held or intended to be acquired by the
Funds. In this regard, the Funds could sell currency futures contracts to off-
set the effect of expected decreases in currency exchange rates and purchase
such contracts to offset the effect of expected increases in currency exchange
rates. Although techniques other than the sale and purchase of currency futures
contracts could be used for these purposes, currency futures contracts may be
an effective and relatively low cost means of implementing these strategies.
Options on Futures:
The Funds may purchase put and call options on stock index futures contracts,
write (i.e., sell) covered call options on stock index futures con-
B-12
<PAGE>
tracts and enter into closing transactions with respect to such options. The
Funds may also write covered put options on stock index futures options or cur-
rency futures contracts and may enter into closing transactions with respect to
such options. In addition, the Funds are permitted to purchase or write covered
put and call options on interest rate futures with respect to such options.
Such transactions will only be for bona fide hedging purposes, as defined by
the CFTC. A call option on a futures contract gives the purchaser the right, in
return for the premium paid, to purchase a futures contract (assume a "long"
position) at a specified exercise price at any time before the option expires.
A put option gives the purchaser the right, in return for the premium paid, to
sell a futures contract (assume a "short" position), for a specified exercise
price, at any time before the option expires. Upon the exercise of a call, the
writer of the option is obligated to sell the futures contract (to deliver a
"long" position to the option holder) at the option exercise price, which will
presumably be lower than the current market price of the contract in the
futures market. Upon exercise of a put, the writer of the option is obligated
to purchase the futures contract (to deliver a "short" position to the option
holder) at the option exercise price, which will presumably be higher than the
current market price of the contract in the futures market.
When a Fund as a purchaser of an option on a futures contract exercises such
option and assumes a long futures position in the case of a call, or a short
futures position in the case of a put, its gain will be credited to its futures
margin account. Any loss suffered by the writer of the option on a futures con-
tract will be debited to its futures variation margin account. However, as with
the trading of futures, most participants in the options markets do not seek to
realize their gains or losses by exercise of their option rights. Instead, the
holder of an option will usually realize a gain or loss by buying or selling an
offsetting option (i.e., entering into a closing transaction) at a market price
that will reflect an increase or a decrease from the premium originally paid as
a purchaser or required as a writer.
Options on futures contracts can be used by a Fund to hedge the same risks as
might be addressed by the direct purchase or sale of the underlying futures
contracts themselves. Depending on the pricing of the option, compared to ei-
ther the futures contract upon which it is based or upon the price of the un-
derlying securities or currencies themselves, it may or may not be less risky
than direct ownership of the futures contract or the underlying securities or
currencies.
In contrast to a futures transaction, in which only transaction costs are in-
volved, benefits received by a Fund as a purchaser in an option transaction
will be reduced by the amount of the pre-mium paid as well as by transaction
costs. In the event of an adverse market movement, however, a Fund which pur-
chased an option will not be subject to a risk of loss on the option transac-
tion beyond the price of the premium it paid plus its transaction costs. Pur-
chasers of options who do not exercise their options prior to the expiration
date will suffer a loss of the entire premium.
If a Fund writes covered call or put options on futures contracts, the Fund
will receive a premium but will assume a risk of adverse movement in the price
of the underlying futures contract comparable to that involved in holding a
futures position. If the option is not exercised, the Fund will realize a gain
in the amount of the premium, which may partially offset unfavorable changes in
the value of securities held in the Fund or to be acquired for the Fund. If the
option is exercised, the Fund will incur a loss in the option transaction,
which will be reduced by the amount of the premium it has received, but which
may also partially offset favorable changes in the value of its securities or
currencies. For example, the writing of a call option on a futures contract
constitutes a partial hedge against declining prices of the underlying securi-
ties or currencies. If the futures price at expiration is below the exercise
price, the Fund will retain the full amount of the option premium, which pro-
vides a partial hedge against any decline that may have occurred in the value
of the Fund's holdings of securities or currencies.
While the purchaser or writer of an option on a futures contract may normally
terminate its posi-tion by selling or purchasing an offsetting option of the
same series, a Fund's ability to establish and close out options at fairly es-
tablished prices will be
B-13
<PAGE>
subject to the existence of a liquid market. The Funds will not purchase or
write options on futures contracts unless, in the opinion of GFM, the market
for such options has sufficient liquidity that the risks associated with such
options transactions are not unacceptable.
LIMITATIONS ON THE USE OF FUTURES CONTRACTS AND OPTIONS THEREON AND OPTIONS ON
INDICES:
Regulations of the CFTC currently require certain limits to be placed on the
use of futures contracts and options thereon. To ensure that the transactions
constitute bona fide hedges, in instances involving the purchase or sale of a
futures contract or the writing of covered call options on futures contracts,
each Fund will be required to either (i) segregate sufficient cash or liquid
assets to cover the outstanding position or (ii) cover the futures contract or
option written on such contract by owning the instruments or currency under-
lying the futures contract or option thereon or by holding a separate option
permitting it to purchase or sell the same futures contract or option at the
same strike price or better. In instances involving the writing of covered put
options on futures contracts, the Funds will be required to (i) segregate suf-
ficient cash or liquid assets equal to the strike price of the put options
written or (ii) purchase a put option on the same futures contract at the same
strike price as that written by the Funds. Where such positions are covered by
the segregation of sufficient cash, cash equivalents or underlying securities,
such amounts will be held in a segregated account with Portfolios' custodian to
collateralize the position, thereby insuring that the use of such futures con-
tracts and options thereon is unleveraged. A Fund may not establish a position
in a futures contract or purchase an option thereon if immediately thereafter
the sum of the amount of initial margin deposits on all open futures contracts
and premiums paid for unexpired options on futures contracts would exceed 5% of
the market value of that Fund's total assets; provided however, that in the
case of an option that is "in-the-money" at the time of the purchase, the "in-
the-money" amount may be excluded in calculating the 5% limitation. In addi-
tion, shares of the Funds may not be sold or advertised as a participation in a
commodity pool or other vehicle for trading in the commodity futures or options
markets. Finally, the Funds must agree to submit information to the CFTC, as
requested, to demonstrate compliance with applicable regulations and to assist
the CFTC in collecting data and refining its hedging standards.
With respect to options on indices, in order to insure that call options writ-
ten by the Funds on indices are covered and, therefore, unleveraged, the Funds
would be required to: (i) hold in a segregated account, with Portfolios' custo-
dian, portfolio securities that substantially replicate the movement of the
particular index upon which the call option was written or sufficient cash or
liquid assets to cover the outstanding position, or (ii) hold a separate option
permitting the purchase or sale of the same stock index at the same strike
price or better. With respect to put options written on stock indices, the
Funds will (i) segregate sufficient cash or liquid assets equal to the strike
price of the put option written or (ii) purchase a put option on the same index
at the same strike price as that written by the Funds.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS:
Each Fund may use forward foreign currency exchange contracts ("forward cur-
rency contracts") to hedge the currency risk relating to the non-U.S. dollar-
denominated securities purchased, sold, or held by that Fund.
A forward currency contract involves an obligation to purchase or sell a spe-
cific currency at a future date, which may be any fixed number of days from the
date of the contract as agreed by the parties, at a price set at the time of
the contract. In the case of a cancelable forward currency contract, the holder
has the unilateral right to cancel the contract at maturity by paying a speci-
fied fee. Forward currency contracts are traded in the interbank market con-
ducted directly between currency traders (usually large commercial banks) and
their customers. They generally have no deposit requirement, and no commissions
are charged at any stage for trades. Although foreign exchange traders do not
charge a fee for currency conversion, they do realize a profit based on the
difference (the "spread") between prices at which they are buying and selling
various currencies.
B-14
<PAGE>
Thus, a trader may offer to sell a foreign currency to a Fund at one rate,
while offering a lower rate of exchange should the Fund desire to resell that
currency to the trader.
At the maturity of a forward currency contract, a Fund may either accept or
make delivery of the currency specified in the contract, or at or prior to ma-
turity, a Fund may enter into a closing transaction involving the purchase or
sale of an offsetting contract. Closing transactions with respect to forward
currency contracts are usually effected with the currency trader that is a
party to the original forward contract.
As described in the Prospectus, each Fund may enter into a forward currency
contract under two circumstances. First, when a Fund has entered into a con-
tract to purchase or sell a non-U.S. security, it may protect itself against a
possible loss between the trade date and the settlement date resulting from an
adverse change in the relationship be-tween the U.S. dollar and the foreign
currency in which such security is denominated by entering into a forward cur-
rency contract in U.S. dollars for the purchase or sale of the amount of the
foreign currency involved in the underlying security transaction. Second, when
management of a Fund believes a particular foreign currency may suffer or enjoy
a substantial movement against the U.S. dollar, the Fund may enter into a for-
ward currency contract to sell or buy an amount of such currency (or another
currency in a cross hedging transaction) approximating the value of some or all
of the Fund's securities denominated in such foreign currency. However, the
precise matching of the amounts of forward currency contracts and the value of
the portfolio securities being hedged will not generally be possible, because
the future value of such securities in foreign currencies will change as a con-
sequence of movements in the market value of those securities between the dates
the forward currency contracts are entered into and the dates they mature.
Since it is impossible to forecast with precision the market value of portfo-
lio securities at the expiration or maturity of a forward currency contract, it
may be necessary for a Fund to purchase additional foreign currency on the spot
(i.e. cash) market (and bear the expense of such purchase) if the market value
of the securities being hedged is less than the amount of foreign currency the
Fund would be obligated to deliver upon the sale of such securities. Converse-
ly, it may be necessary for the Fund to sell some of the foreign currency re-
ceived upon the sale of portfolio securities on the spot market if the market
value of such securities exceeds the amount of foreign currency the Fund is ob-
ligated to deliver.
Each Fund may enter into forward currency contracts or maintain a net exposure
on such contracts only if (i) the consummation of the contracts would not obli-
gate the Fund to deliver an amount of foreign currency in excess of the value
of the Fund's securities or other assets denominated in that currency or (ii)
the Fund maintains with its custodian cash, U.S. government securities, or liq-
uid cash in a segregated account in an amount not less than the value of the
Fund's total assets committed to the consummation of the contracts.
The use of forward currency contracts involves various risks. A Fund may not
always be able to enter into a forward currency contract when management deems
it advantageous to do so, for instance, if the Fund is unable to find a
counterparty to the transaction at an attractive price. Furthermore, a Fund may
not be able to purchase forward currency contracts with respect to all of the
foreign currencies in which its portfolio securities may be denominated. In
those circumstances, and in a cross hedging forward currency contract, the cor-
relation between the movements in the exchange rates of the subject currency
and the currency in which the portfolio security is denominated may not be pre-
cise. Forward currency contracts are not guaranteed by a third party and, ac-
cordingly, each party to a forward currency contract is dependent upon the
creditworthiness and good faith of the other party. A default on the contract
would deprive a Fund of unrealized profits or force the Fund to cover its com-
mitments for purchase or sale of currency, if any, at the current market price.
Finally, the cost of purchasing forward currency contracts in a particular cur-
rency will reflect, in part, the rate of return available on instruments denom-
inated in that currency. The cost of purchasing forward currencies that gener-
ally yield high rates of return may thus tend to reduce the rate of return to-
ward the rate of return that would be earned on assets denominated in U.S. dol-
lars.
B-15
<PAGE>
DIRECTORS AND OFFICERS
The directors and officers of Portfolios and their principal occupations for
at least the last five years are set forth below. Unless otherwise noted, the
address of each executive officer and director is One Madison Avenue, New
York, New York 10010.
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION(S)
NAME, (AGE) AND ADDRESS POSITION(S) DURING PAST 5 YEARS
----------------------- ----------- ------------------------
<C> <S> <C>
Steve A. Garban (57)+....... Director Senior Vice-President Finance and
The Pennsylvania State Uni- Operations
versity and Treasurer, The Pennsylvania
208 Old Main State University
University Park, PA 16802
Jeffrey J. Hodgman (51)(*)+. Chairman of the Board, Senior Vice President, Metropolitan
President, Chief Life Insurance Company
Executive Officer and ("Metropolitan Life")
Director
Malcolm T. Hopkins (66)+.... Director Former Vice-Chairman of the Board
14 Brookside Road and Chief Financial Officer, St.
Biltmore Forest Regis Corp.
Asheville, NC 28803
Robert A. Lawrence (68)+.... Director Partner, Saltonstall & Co.
50 Congress Street
Boston, MA 02109
Dean O. Morton (62)+........ Director Retired; formerly Executive Vice-
3200 Hillview Avenue President, Chief Operating Officer
Palo Alto, CA 94304 and Director, Hewlett--Packard
Company
Michael S. Scott Morton Jay W. Forrester Professor of
(57)+....................... Director Management at Sloan School of
Massachusetts Institute of Management, MIT
Technology ("MIT")
77 Massachusetts Avenue
Cambridge, MA 02139
John H. Tweedie (49)(*)+.... Director Executive Vice President,
Metropolitan Life since 1993;
President and Chief Executive
Officer of Metropolitan Life's
Canadian Operations 1990-1993; prior
thereto, Senior Vice President and
Chief Actuary
Gary Lineberry (44)......... Vice President Vice-President, Metropolitan since
1994; prior thereto National
Director, 1992-1994; prior thereto
Vice President, Mutual of New York
Ronald Zito (36)+........... Controller Director-Accounting and Financial
Controls-Pensions, Metropolitan Life
since 1995; Director-Retirement
Savings Center, 1993-1994; prior
thereto, Manager
Christopher P. Nicholas Associate General Counsel,
(45)+....................... Secretary Metropolitan Life since 1990; prior
thereto, Assistant General Counsel.
Elliot Reiter (43).......... Treasurer Vice-President, Metropolitan Life
Albert Rosenthal (63)+...... Vice-President and Assistant Vice-President
Chief Operating Officer Metropolitan Life since 1993;
Director-Personal Insurance,
Advanced Markets, 1991-1993; prior
thereto, Manager
</TABLE>
- -------
(*) Interested Person, as defined in the Investment Company Act of 1940 ("1940
Act"), of the Funds.
(+) Serves as a trustee, director and/or officer of one or more of the
following investment companies, each of which has an advisory relationship
with the Investment Manager or its affiliates: MetLife--State Street
Financial Trust, MetLife--State Street Income Trust, MetLife-- State Street
Money Market Trust, MetLife--State Street Tax-Exempt Trust, State Street
Research Capital Trust, State Street Master Investment Trust, MetLife--State
Street Equity Trust, State Street Research Securities Trust, State Street
Growth Trust, State Street Exchange Trust and Metropolitan Series Fund, Inc.
B-16
<PAGE>
During the last fiscal year of the Funds, the Directors were compensated as
follows:
<TABLE>
- -------------------------------------------------------------------------------
<CAPTION>
(5)
(3) TOTAL
PENSION OR COMPENSATION
RETIREMENT (4) FROM
(2) BENEFITS ESTIMATED PORTFOLIOS
AGGREGATE ACCRUED AS ANNUAL AND FUND
(1) COMPENSATION PART OF BENEFITS COMPLEX PAID
NAME OF FROM PORTFOLIOS UPON TO DIRECTORS
DIRECTOR PORTFOLIOS EXPENSE RETIREMENT (A)
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Jeffrey J. Hodgman............. 0 0 0 0
Steve A. Garban................ $5,750 0 0 $22,750
Malcolm T. Hopkins............. $5,750 0 0 $22,750
Robert A. Lawrence............. $5,250 0 0 $70,775
Dean O. Morton................. $5,750 0 0 $81,275
Michael S. Scott Morton........ $5,500 0 0 $83,025
John H. Tweedie................ 0 0 0 0
</TABLE>
- -------
(a) Complex is comprised of 10 trusts and two corporations with a total of 32
funds and/or series.
(b) Directors and officers who are affiliated with the Investment Manager or
Sub-Investment Manager or their affiliates ("interested persons" as defined
under the Investment Company Act of 1940) do not receive any compensation for
services rendered to Portfolios in addition to their compensation for
services rendered to Metropolitan Life or such affiliated companies. The
Directors who are not affiliated with the Investment Manager or Sub-
Investment Manager or their affiliates are paid a fee of $3,000 for each full
calendar year during which services are rendered to Portfolios. In addition,
they are paid a fee of $500 for attending each of the directors' meetings and
$250 for attending each audit committee meeting and are reimbursed for out-
of-pocket expenses.
As of January 31, 1995, the Directors and officers of Portfolios as a group
owned approximately 2% of the outstanding shares of the International Equity
Fund and owned no shares of the International Fixed Income Fund.
CONTROL PERSONS
As of January 31, 1995, the following persons or entities were the record
and/or beneficial owners of the approximate amount of each Class of shares of
each Fund as set forth beside their names:
<TABLE>
<CAPTION>
PERCENTAGE
SHAREHOLDER ADDRESS OWNERSHIP
----------- ------- ----------
<C> <S> <C> <C>
INTERNATIONAL EQUITY FUND
-------------------------
Class A....... none
Class B....... Merrill Lynch 8.3%
Pierce One Liberty Plaza
Fenner & Smith, 165 Broadway
Inc.(b) New York, NY 10080
Class C....... United States Trust 770 Broadway 10th Fl.
Company(c) New York, NY 10003 36.7%
Class D....... Wachovia Bank of 301 N. Main Street
North Carolina(b) Winston Salem, NC 27150 13.6%
Metropolitan Life One Madison Avenue
New York, NY 10010 17.4%
</TABLE>
B-17
<PAGE>
<TABLE>
<CAPTION>
PERCENTAGE
SHAREHOLDER ADDRESS OWNERSHIP
----------- ------- ----------
<C> <S> <C> <C>
INTERNATIONAL FIXED INCOME FUND
-------------------------------
Class A....... State Street Bank 225 Franklin Street 7.4%
and Trust Boston, MA 02110
Company(d)
Metropolitan One Madison Avenue 45.7%
Life(a) New York, NY 10010
Class B....... State Street Bank 225 Franklin Street 17.9%
and Trust Boston, MA 02110
Company(d)
Metropolitan One Madison Avenue 32.4%
Life(a) New York, NY 10010
Class C....... Metropolitan One Madison Avenue 90.3%
Life(a) New York, NY 10010
Class D....... Metropolitan One Madison Avenue 92.1%
Life(a) New York, NY 10010
</TABLE>
- -------
(a) Metropolitan Life was the record and/or beneficial owner, directly or
indirectly through its subsidiaries or affiliates, of such shares.
(b) Portfolios believes that the entity does not have beneficially ownership of
such shares.
(c) United States Trust Company holds the shares as trustee for various
employee benefit plans and Portfolios believes that United States Trust does
not have beneficial ownership of such shares.
(d) State Street Bank and Trust Company holds such shares as custodian for
individual retirement accounts and Portfolios believes that State Street Bank
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 the Fund's 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.
INVESTMENT MANAGEMENT ARRANGEMENTS
INVESTMENT MANAGEMENT AGREEMENTS AND SUB-INVESTMENT MANAGEMENT AGREEMENTS:
Portfolios has entered into separate Investment Management Agreements with the
Investment Manager (State Street Research Investment Services, Inc., One Finan-
cial Center, Boston, MA 02111) with respect to each Fund and separate Sub-In-
vestment Management Agreements with the Investment Manager and GFM, the Sub-In-
vestment Manager, with respect to each Fund. GFM has overall responsibility for
the investment management, and provides the portfolio managers for the Funds.
The portfolio managers consider analyses from various sources, make the neces-
sary investment decisions and effect transactions accordingly. State Street Re-
search Investment Services, Inc. is an indirect wholly-owned subsidiary of Met-
ropolitan Life. State Street Research & Management Company, another indirect
wholly-owned Metropolitan Life subsidiary, is the investment manager of the
other MetLife-State Street mutual funds.
Securities held by any Fund may also be held by other accounts managed by the
Investment Man-ager, by Metropolitan Life, by State Street Research & Manage-
ment Company and by GFM, including Metropolitan Life's general and separate ac-
counts, the other Funds of Portfolios, Metropolitan Life advisory clients, the
advisory clients of the Investment Manager and the advisory clients of State
Street Research & Management Company and GFM. When selecting securities for
purchase or sale for a Fund, the Investment Manager and GFM may at the same
time be purchasing or selling the same securities for one or more of such other
accounts. It is the policy of the Investment Manager and GFM not to favor any
one account over the other, and any purchase or sale orders executed contempo-
raneously are allocated at the average price and as nearly as practicable on a
pro-rata basis in proportion to the amounts desired to be purchased or sold by
each account. While it is conceivable that in certain instances this procedure
could adversely affect the price or number of shares involved in a Fund's
transactions, it is believed that the procedure generally contributes to better
overall execution of portfolio transactions. The Board of Directors has adopted
guidelines governing the procedure and will monitor the procedure to determine
that the guidelines are being fol-
B-18
<PAGE>
lowed and that the procedure continues to be in the best interests of the Funds
and their shareholders.
Portfolios compensates the Investment Manager at the annual rate of 0.95% of
the average daily value of the net assets of the International Equity Fund and
0.75% of the average daily value of the net assets of the International Fixed
Income Fund, respectively. For providing sub-investment management services for
the International Equity and International Fixed Income Funds, GFM receives
from the Investment Manager a monthly fee equal to 0.75% (on an annual basis)
of the average daily value of the net assets of the International Equity Fund
and 0.55% (on an annual basis) of the average daily value of the net assets of
the International Fixed Income Fund. Portfolios has no responsibility for the
payment of fees to GFM. For the period January 22, 1992 (commencement of opera-
tions) through October 31, 1992, and the fiscal years ending October 31, 1993
and October 31, 1994, the investment advisory fees for the International Equity
Fund were $75,517, $152,114 and $597,501, respectively. For the period January
22, 1992, through October 31, 1992, and the fiscal years ending October 31,
1993 and October 31, 1994, the investment advisory fees for the International
Fixed Income Fund were $122,315, $172,435 and $188,723, respectively. For the
same periods, the voluntary reduction of management fees and assumption of ex-
penses by the Investment Manager/Distributor or its affiliates amounted to
$148,461, $240,442 and $386,279 for the International Equity Fund and $107,307,
$100,743 and $85,904 for the International Fixed Income Fund. For the period
January 22, 1992, through October 31, 1992, and the fiscal years ending October
31, 1993 and October 31, 1994, sub-investment management fees for the Interna-
tional Equity and International Fixed Income Funds were $59,618, $120,090 and
$471,711, and $89,698, $126,452 and $138,397 , respectively.
The Investment Management Agreements relating to the International Equity and
International Fixed Income Funds and the Sub-Investment Management Agreements
relating to the Funds were approved by the shareholders of the Funds at the
first annual meeting of shareholders held on April 28, 1993. Unless earlier
terminated, each Agreement will continue in effect from year to year with re-
spect to each Fund, if approved annually (a) by the Board of Directors of Port-
folios or by a majority of the outstanding shares of that Fund (as determined
pursuant to the 1940 Act), and (b) by a majority of the Board of Directors who
are not "interested persons" (within the meaning of the 1940 Act) of any party
of such Agreement. The Agreements are not assignable and may be terminated
without penalty on 60 days' written notice at the option of either party or,
with respect to any Fund, by the requisite vote of the shareholders of that
Fund.
To the extent required under applicable state regulatory requirements, the In-
vestment Manager will reduce its management fee payable by Portfolios with re-
spect to a Fund up to the amount of any expenses (excluding Rule 12b-1 Distri-
bution Plan payments, brokerage commissions, interest, taxes and litigation ex-
penses) paid or incurred by such Fund in any fiscal year which exceed specified
percentages of the average daily net assets of such Fund for such fiscal year.
The most restrictive of such percentage limitations is currently 2.5% of the
first $30 million of average net assets, 2.0% of the next $70 million of aver-
age net assets and 1.5% of the remaining average net assets. These commitments
may be amended or rescinded in response to changes in the requirements of the
various states by the Directors without shareholder approval.
No person other than Portfolios and the Investment Manager pays any of the
fees, expenses or costs of the Funds. Under a Shareholders' Administrative
Services Agreement between Portfolios and the Investment Manager, the Invest-
ment Manager provides shareholders' administrative services, such as responding
to inquiries and instructions from shareholders respecting the purchase and re-
demption of shares of the Funds, and is entitled to reimbursement of its costs
for providing such services subject to the limitations described below. Under a
Sub-Administration Agreement between the Funds' transfer agent and dividend
disbursing agent, State Street Bank and Trust Company and Metropolitan Life In-
surance Company, Metropoli-
B-19
<PAGE>
tan Life Insurance Company receives a fee for the maintenance of certain share
ownership records for participants in sponsored arrangements, such as employee
benefit plans, through or under which a Fund's shares may be purchased. The
Funds' liability for all of the fees and costs payable by the Funds for serv-
ices provided by the Funds' transfer agent and dividend disbursing agent, the
fees for shareholders' administrative services, paid by the Funds, and any
other fees or costs under any sub-administration agreements entered on behalf
of the Funds in the aggregate, is limited to 0.30% of the average daily net as-
sets of the Funds. Any excess is a liability of the Investment Manager as pro-
vided under the Shareholders' Administrative Ser- vices Agreement, which may be
terminated by Portfolios upon 60 days notice and by the Investment Manager upon
six months notice.
ALLOCATION OF PORTFOLIO BROKERAGE:
Under the Investment Management Agreements, the Investment Manager has ultimate
responsibility for selecting broker-dealers through which investments are to be
purchased and sold for Portfolios. Under the Sub-Investment Management Agree-
ments, GFM has day-to-day responsibility for selecting broker-dealers through
which securities or other investments are to be purchased and sold for the
Funds.
In selecting brokers or dealers to effect portfolio transactions for the
Funds, GFM seeks the best available combination of execution and over-all price
(which includes the cost of the transaction). GFM will utilize brokers which
provide it solely with brokerage services, as well as brokers which provide GFM
with such research services as economic, political and social trend analysis
and reports on the equity and credit markets and analyses of industries and in-
dividual companies. GFM is authorized, pursuant to the Sub-Investment Manage-
ment Agreement with respect to the Funds, to cause Portfolios on behalf of the
Funds to pay to the brokers that furnish brokerage and research services (as
such services are defined under Section 28(e) of the 1934 Act) a brokerage com-
mission in excess of that which another broker might have charged for effecting
the same transaction, in recognition of the value of research services provided
by the broker. However, such higher commissions must be deemed by GFM to be
reasonable in relation to the brokerage and research services provided by the
broker-dealer, viewed in terms of either that particular transaction or the
overall decision-making responsibilities of GFM with respect to the Funds or
other accounts, if any, as to which it exercises investment discretion (as such
term is defined under Section 3(a)(35) of the 1934 Act).
In all transactions, GFM seeks on behalf of the Funds brokerage commissions at
least as reasonable as those generally secured by those advisers that generate
annually comparable amounts of commissions paid to brokers that provide broker-
age and research services to those advisers.
Research services rendered to GFM by brokers selected to execute transactions
for the Funds may be used in providing service to all of GFM's clients. Also
all research services may not be utilized by GFM in connection with the client
accounts which paid commissions to the broker providing such services.
On the basis of the best service provided for the benefit of the Funds in
terms of execution capability, execution cost, and research, GFM will allocate
business proportionally among a number of brokers and will regularly review
such allocations. During the period January 22, 1992 (commencement of opera-
tions) through October 31, 1992, and the fiscal years ending October 31, 1993
and October 31, 1994, the dollar amount of brokerage commissions paid by the
International Equity Fund was $86,217, $171,198 and $391,200, respectively. The
International Fixed Income Fund did not incur any brokerage commissions for the
same periods. Substantially all commissions were paid to firms which provided
research and statistical services either to Metropolitan Life, State Street Re-
search & Management Company or GFM.
Brokerage agency transactions for Portfolios may be executed by The First Bos-
ton Corporation ("First Boston"). Metropolitan Life, an affiliate of the Funds
by virtue of ownership of shares of the Funds, could theoretically have been
deemed an indirect affiliate of First Boston by virtue of certain business re-
lationships between Metropolitan Life
B-20
<PAGE>
and the parent of First Boston. During fiscal year 1994, Metropolitan Life
ended certain business relations with the parent of First Boston. Portfolios
nevertheless took the position that Metropolitan Life was not an indirect af-
filiate of First Boston for purposes of the Portfolios' brokerage transactions
through First Boston. However, the Board of Directors of Portfolios adopted
procedures requiring regular reports to the Board detailing any transactions
with First Boston and demonstrating that commissions paid to First Boston by
Portfolios were fair and reasonable. No brokerage commissions were paid by
Portfolios to First Boston during the period January 22, 1992 (commencement of
operations) through October 31, 1992 and for the fiscal year ending October 31,
1993. Brokerage commissions for the fiscal year ending October 31, 1994 paid by
Portfolios to First Boston were $4,500.
Subject to the policy of seeking best overall price and execution, sales of
shares of the Funds may be considered in the selection of broker or dealer
firms for the Funds' portfolio transactions.
PURCHASE OF SHARES
Shares of the Funds are distributed by the Distributor. The Funds offer four
classes of shares which may be purchased at the next determined net asset value
per share plus, in the case of all classes except Class C shares, a sales
charge which, at the election of the investor, may be imposed (i) at the time
of purchase (the Class A shares) or (ii) on a deferred basis (the Class B and
Class D shares). General information on how to buy shares of the Funds, as well
as sales charges involved, are set forth under "Purchase of Shares" in the Pro-
spectus. The following supplements that information.
Public Offering Price--The public offering price for each class of shares of
the Funds is based on their net asset value determined as of the close of the
New York Stock Exchange ("NYSE") on the day the purchase order is received by
State Street Research Shareholder Services provided that the order is received
prior to the close of the NYSE on that day; otherwise the net asset value used
is that determined as of the close of the NYSE on the next day it is open for
unrestricted trading. When a purchase order is placed through a dealer, that
dealer is responsible for transmitting the order promptly to State Street Re-
search Shareholder Services in order to permit the investor to obtain the cur-
rent price. Any loss suffered by an investor which results from a dealer's
failure to transmit an order promptly is a matter for settlement between the
investor and the dealer.
Reduced Sales Charges--For purposes of determining whether a purchase of Class
A shares qualifies for reduced sales charges, the term "person" includes: (1)
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-ex-
empt 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 employ-
ers.
Investors may purchase Class A shares of the Funds at reduced sales charges by
executing a Letter of Intent to purchase no less than an aggregate of $100,000
of a Fund or any combination of Class A shares of Eligible Funds as designated
by the Distributor within a 13-month period. The sales charge applicable to
each purchase made pursuant to a Letter of Intent will be that which would ap-
ply if the total dollar amount set forth in the Letter of Intent were being
bought in a single transaction. Purchases made within a 90-day period prior to
the execution of a Letter of Intent may be included therein; in such case the
date of the earliest of such purchases marks the commencement of the 13-month
period.
An investor may include toward completion of a Letter of Intent the value (at
the current public offering price) of all of his or her Class A shares of the
Funds and of any of the other Class A shares of Eligible Funds held of record
as of the date of his or her Letter of Intent, plus the value (at the current
offering price) as of such date of all of such shares held by any "person" de-
scribed herein as eligible to join with the investor in a single pur-
B-21
<PAGE>
chase. Class B, Class C and Class D shares may also be included in the combina-
tion 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 com-
pleted 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 dis-
tributions with respect to the escrowed shares will be credited to the invest-
or's account.
Investors may purchase Class A shares of the Funds or a combination of Eligi-
ble Funds at reduced sales charges pursuant to a Right of Accumulation. The ap-
plicable 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 pub-
lic 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 of-
fering price) of all such shares owned as of such date by any "person" de-
scribed herein as eligible to join with the investor in a single purchase.
Class B, Class C and Class D shares may also be included in the combination un-
der certain circumstances. Investors must submit to the Distributor sufficient
information to show that they qualify for this Right of Accumulation.
Class C Shares--Class C shares are currently available to (i) benefit plans
such as qualified retirement plans, other than individual retirement accounts
and self-employed retirement plans, which meet certain criteria relating to
minimum assets, minimum participants, service agreements, or similar factors;
(ii) tax-exempt retirement plans of the Investment Manager and its affiliates,
including the retirement plans of the Investment Manager's affiliated brokers;
(iii) unit investment trusts sponsored by the Investment Manager or its affili-
ates; (iv) banks and insurance companies purchasing for their own accounts; (v)
investment companies not affiliated with the Investment Manager; and (vi) en-
dowment funds of nonprofit organizations with substantial minimum assets. The
entities included in categories (i), (iv) and (vi) may not be affiliates of the
Investment Manager.
Reorganizations--In the event of mergers or reorganizations with other public
or private collective investment entities, including investment companies as
defined in the 1940 Act, as amended, a Fund may issue its shares at net asset
value (or more) to such entities or to their security holders.
REDEMPTION IN KIND
Portfolios reserves the right to pay redemptions in kind with portfolio secu-
rities in lieu of cash. In accordance with its election pursuant to Rule 18f-1
under the 1940 Act, a Fund may limit the amount of redemption proceeds paid in
cash. Although it has no present intention to do so, a Fund may, under unusual
circumstances, limit redemptions in cash with respect to each shareholder dur-
ing any ninety-day period to the lesser of (i) $250,000 or (ii) 1% of the net
asset value of such 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 securi-
ties received.
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, ordinarily 4 P.M. New York City time,
Monday through Friday, on each day during which the NYSE is open for unre-
stricted trading. The NYSE is currently closed on New Year's Day, Presidents'
Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day
and Christmas Day.
The net asset value per share of a Fund is computed by dividing the sum of the
value of the secu-rities held by the Fund plus any cash or other assets minus
all liabilities by the total number of out standing shares of the Fund at such
time. Any expenses, except for extraordinary or nonrecurring expenses, borne by
a Fund, including the investment management fee payable to the Investment Man-
ager, are accrued daily.
B-22
<PAGE>
Securities held by each Fund will be valued as follows. Portfolio securities
which are traded on domestic stock exchanges are valued at the last sale price
as of the close of business on the day the securities are being valued, or,
lacking any sales, at the mean between closing bid and asked prices. Portfolio
securities which are traded on NASDAQ, or other system, are valued at the last
reported sales price. Each portfolio security which is primarily traded on non-
domestic securities exchanges is generally valued at the preceding closing
value of such security on the exchange where it is primarily traded. A security
that is listed or traded on more than one exchange is valued at the quotation
on the exchange determined to be the primary market for such security by the
Board of Directors or its delegates. If no closing price is available, then
such security is valued first by using the mean between the last current bid
and asked prices or, second, by using the last available closing price. Domes-
tic securities traded in the over-the-counter market are valued at the mean be-
tween the bid and asked prices or yield equivalent as obtained from two or more
dealers which make markets in the securities. All non-U.S. securities traded in
the over-the-counter securities market are valued at the last sale quote, if
market quotations are available, or the last closing bid price, if there is no
active trading in a particular security for a given day. Where market quota-
tions are not readily available for such non-domestic over-the-counter securi-
ties, then such securities will be valued in good faith by a method that the
Board of Directors, or its delegates, believe accurately reflects fair value.
Portfolio securities which are traded both in the over-the-counter market and
on a securities exchange are valued according to the broadest and most repre-
sentative market, and it is expected that for debt securities this ordinarily
will be the over-the-counter market. Securities and assets for which market
quotations are not readily available, e.g. certain long-term bonds and notes,
are valued at fair value as determined in good faith by or under the direction
of the Board of Directors of Portfolios.
In determining the values of portfolio assets as provided below, the Directors
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 may
provide prices determined as of times prior to the close of the NYSE.
The Directors have determined that unless the particular circumstances other-
wise indicate, the fair value of short-term instruments with a remaining matu-
rity of sixty days or less is their amortized cost value. If for any reason the
fair value of any security is not fairly reflected by such method, such secu-
rity will be valued by the same methods as securities having a maturity of more
than sixty days.
Options, whether on securities, indices, or futures contracts, are valued at
the last sales price available as of the close of business on the day of valua-
tion or, if no sale, at the mean between the bid and asked prices. Options on
currencies are valued at the spot price each day. As a general matter, futures
contracts are marked-to-market daily. The value of futures contracts will be
the sum of the margin deposit plus or minus the difference between the value of
the futures contract on each day the net asset value is calculated and the
value on the date the futures contract originated, value being that established
on a recognized commodity exchange, or by reference to other customary sources,
with gain or loss being recognized when the futures contract closes or expires.
Generally, trading in foreign securities, as well as corporate bonds, United
States Government securities and money market instruments, is substantially
completed each day at various times prior to the close of regular trading on
the NYSE. The values of such securities used in computing the net asset value
of the Funds' shares are determined as of such times. Foreign currency exchange
rates are also generally determined prior to the close of regular trading on
the NYSE. Occasionally, events affecting the values of such securities and such
exchange rates may occur between the times at which they are determined and the
close of regular trading on the NYSE which will not be reflected in the compu-
tation of the Funds' net asset value. If events materially affecting the value
of such securities occur during such period, then these securities will be val-
ued at their fair value as determined in good faith by the Directors.
B-23
<PAGE>
PORTFOLIO TRANSACTIONS
PORTFOLIO TURNOVER:
A Fund's turnover rate is determined by dividing the lesser of securities pur-
chases or sales for a year by the monthly average value of securities held by
the Fund (excluding securities whose maturities or expiration date at the time
of their acquisition were one year or less).
The International Equity Fund's turnover rates for the fiscal years ending Oc-
tober 31, 1993 and October 31, 1994, were 116.12% and 80.60%, respectively. The
International Fixed Income Fund's turnover rates for the same periods were
20.44% and 38.84%. Each Fund reserves full freedom with respect to portfolio
turnover. In periods when there are rapid changes in economic conditions or se-
curity price levels, portfolio turnover may be significantly higher than during
times of economic and market price stability or when investment strategy re-
mains relatively constant. A high rate of portfolio turnover will result in in-
creased transaction costs for the Fund.
CERTAIN TAX MATTERS
TAXATION OF THE FUNDS--IN GENERAL:
Each Fund intends to qualify and elect to be treated each taxable year as a
"regulated invest-ment company" under Subchapter M of the Internal Revenue Code
of 1986, as amended (the "Code"), although they cannot give complete assurance
that they will qualify to do so. Accordingly, a Fund must, among other things,
(a) derive at least 90% of its gross income in each taxable year from divi-
dends, interest, payments with respect to securities loans, gains from the sale
or other disposition of stock, securities or foreign currencies, or other in-
come (including, but not limited to, gains from options, futures or forward
contracts) derived with respect to its business of investing in such stock, se-
curities or currencies (the "90% test"); (b) derive less than 30% of its gross
income in each taxable year from the sale or other disposition of any of the
following held for less than three months (the "30% test"): (i) stock or secu-
rities; (ii) options, futures or forward contracts (other than options, futures
or forward contracts on foreign currencies) or (iii) foreign currencies (or op-
tions, futures or forward contracts on foreign currencies) but only if such
currencies (or options, futures or forward contracts) are not directly related
to the Fund's principal business of investing in stocks or securities (or op-
tions and futures with respect to stocks or securities); and (c) satisfy cer-
tain diversification requirements.
The 30% test will limit the extent to which a Fund may sell securities held
for less than three months; write options which expire in less than three
months; and effect closing transactions with respect to call or put options
that have been written or purchased within the preceding three months. (If a
Fund purchases a put option for the purpose of hedging an underlying portfolio
security, the acquisition of the option is treated as a short sale of the un-
derlying security unless, for purposes only of the 30% test, the option and the
security are acquired on the same date.) Finally, as discussed below, this re-
quirement may also limit investments by a Fund in options on stock indices,
listed options on nonconvertible debt securities, futures contracts, options on
interest rate futures contracts and certain foreign currency contracts.
If a Fund should fail to qualify as a regulated investment company in any
year, it would lose the beneficial tax treatment accorded regulated investment
companies under Subchapter M of the Code and all of its taxable income would be
subject to tax at regular corporate rates without any deduction for distribu-
tions to shareholders, and such distributions will be taxable to shareholders
as ordinary income to the extent of such Fund's current or accumulated earnings
and profits. Also, the shareholders, if they received a distribution in excess
of current or accumulated earnings and profits, would receive a return of capi-
tal that would reduce the basis of their shares of such Fund to the extent
thereof. Any distribution in excess of a shareholder's basis in the sharehold-
er's shares would be taxable as gain realized from the sale of such shares.
A Fund will be liable for a nondeductible 4% excise tax on amounts not dis-
tributed on a timely basis in accordance with a calendar year distribution re-
quirement. To avoid the tax, during each cal-
B-24
<PAGE>
endar year a 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 end-
ing on October 31, in addition to any undistributed portion of the respective
balances from the prior year. Each Fund intends to make sufficient distribu-
tions to avoid this 4% excise tax.
TAXATION OF THE FUNDS' INVESTMENTS:
Original Issue Discount; Market Discount:
For federal income tax purposes, debt securities purchased by a Fund may be
treated as having original issue discount. Original issue discount represents
interest for federal income tax purposes and can generally be defined as the
excess of the stated redemption price at maturity of a debt obligation over the
issue price. Original issue discount is treated for federal income tax purposes
as income earned by a Fund, whether or not any income is actually received, and
therefore is subject to the distribution requirements of the Code. Generally,
the amount of original issue discount is determined on the basis of a constant
yield to maturity which takes into account the compounding of accrued interest.
Under section 1286 of the Code, an investment in a stripped bond or stripped
coupon may result in original issue discount.
Debt securities may be purchased by a Fund at a discount that exceeds the
original issue discount, if any, at the time a Fund purchases the securities.
This additional discount represents market discount for income tax purposes. In
the case of any debt security having a fixed maturity date of more than one
year from the date of issue and having market discount, the gain realized on
disposition will be treated as interest to the extent it does not exceed the
accrued market discount on the security (unless a Fund elects to include such
accrued market discount in income in the tax year to which it is attributable).
For debt securities acquired before May 1, 1993, this rule applies only if the
debt security was issued after July 18, 1984. Generally, market discount is ac-
crued on a daily basis. A Fund may be required to capitalize, rather than de-
duct currently, part or all of any direct interest expense incurred to purchase
or carry any debt security having market discount, unless a Fund makes the
election to include market discount in income currently. Because each Fund must
include original issue discount in income, it will be more difficult for such
Fund to make the distributions required for such Fund to maintain its status as
a regulated investment company under Subchapter M of the Code or to avoid the
4% excise tax described above.
Options and Futures Transactions:
Certain of a Fund's investments may be subject to provisions of the Code that
(i) require inclusion of unrealized gains or losses in a Fund's income for pur-
poses of the 90% test, the 30% test, the excise tax and the distribution re-
quirements applicable to regulated investment companies; (ii) defer recognition
of realized losses; and (iii) characterize both realized and unrealized gain or
loss as short-term or long-term gain or loss. Such provisions generally apply
to, among other investments, options on debt securities, indices on securities
and futures contracts. Each 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 compa-
ny. The ability of a Fund to engage in option and futures transactions may be
limited by the 30% test.
Gains or losses attributable to foreign currency contracts or fluctuations in
exchange rates that occur between the time a Fund accrues income or expenses
denominated in a foreign currency and the time the Fund actually collects such
income or pays such expenses are treated as ordinary income or loss. The por-
tion of any gain or loss on the disposition of a debt security denominated in a
foreign currency that is attributable to fluctuations in the value of the for-
eign currency during the holding period of the debt security will likewise be
treated as ordinary income or loss. Such ordinary income or loss will increase
or decrease the amount of the Fund's net investment income.
If a Fund invests in the stock of certain "passive foreign investment compa-
nies" ("PFICs"), income of such companies may become taxable to the
B-25
<PAGE>
Fund prior to its distribution to the Fund or, alter- natively, ordinary income
taxes and interest charges may be imposed on the Fund on "excess distributions"
received by the Fund or on gain from the disposition of such investments by the
Fund. Neither Fund intends to invest in PFICs. Because of the broad scope of
the PFIC rules, however, there can be no assurance that they can avoid doing
so.
TAXATION OF THE FUNDS' SHAREHOLDERS:
A Fund may be subject to foreign taxes, including foreign income taxes. If so,
each Fund intends to meet the requirements of the Code for passing through to
its shareholders the tax benefit of foreign income taxes paid, although there
is no assurance that it will be able to do so. Under this provision, if more
than half of the value of the total assets of a Fund at the close of its tax-
able year consists of stock or securities of foreign corporations, the Fund
will be eligible and intends to elect to pass through to its shareholders the
amount of foreign taxes it paid if such amounts are material. Pursuant to this
election, a United States shareholder will, in general, be required to (i) in-
clude in gross income, in addition to taxable distributions actually received,
his or her pro rata share of the foreign taxes paid by the Fund, (ii) treat
that share of taxes as having been paid directly by him or her, and (iii) ei-
ther deduct such share of taxes or treat such share of taxes as a credit
against United States income tax liability. A tax exempt share holder will or-
dinarily not benefit from this election.
Generally, a credit for foreign taxes paid by the Funds may not exceed a
shareholder's United States income tax attributable to the shareholder's for-
eign source income. This limitation applies separately to different categories
of income, one of which is foreign-source passive income, which is likely to
include all of the foreign-source income of a Fund. As a result of these limi-
tations, some shareholders may not be able to utilize fully any foreign tax
credits generated by an investment in a Fund. Each Fund will provide its share-
holders with information about the source of its income and the for-eign taxes
it has paid for use in preparing the shareholder's United States income tax re-
turn.
Dividends from domestic corporations are not expected to comprise a substan-
tial part of the income of either Fund. If such dividends are earned by a Fund,
then a portion of the dividends paid by that Fund may qualify for the 70% de-
duction for dividends received which is available to corporate shareholders of
the Fund. Shareholders will be informed of any portion of the dividends paid by
a Fund which qualifies for this deduction. The dividends-received deduction is
reduced to the extent the dividends received are treated as debt-financed, un-
der the Code, and is eliminated if the stock is held for less than 46 days.
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 share-
holder on December 31, provided that such Fund pays the dividend during January
of the following calendar year.
Distributions by a Fund result in a reduction in the fair market value of such
Fund's shares. Should a distribution reduce the fair market value below a
shareholder's cost basis, such distribution nevertheless may be taxable to the
shareholder as ordinary income or long-term capital gain, even though, from an
investment standpoint, it may constitute a partial return of capital. In par-
ticular, 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 re-
turn of investment upon distribution which will nevertheless be taxable to
them.
The foregoing discussion of United States federal income tax law relates
solely to the application of that law to United States persons, that is, United
States citizens and residents and United States corporations, partnerships,
trusts and estates. Each shareholder who is not a United States person should
consider the United States and foreign tax consequences of ownership of shares
of the Funds, including the possibility that such a shareholder may be subject
to United States withholding at a rate of 30% (or at a lower rate under an ap-
plicable treaty) on amounts constituting ordi-
B-26
<PAGE>
nary income received by him or her, where such amounts are treated as income
from United States sources under the Code.
Shareholders should consult their tax advisers about the application of the
provisions of tax law described in this Statement of Additional Information in
light of their particular tax situations.
DISTRIBUTION OF SHARES OF THE FUNDS:
Portfolios is currently comprised of the following series: International Equity
Fund and International Fixed Income Fund. The Directors of Portfolios have au-
thorized shares of the Funds to be issued in four classes: Class A, Class B,
Class C and Class D shares. The Directors of Portfolios have authority to issue
an unlimited number of shares of each series, $.01 par value per share. A "se-
ries" is a separate pool of assets of Portfolios which is separately managed
and has a different investment objective and different investment policies from
those of another series. The Directors have authority, without the necessity of
a shareholder vote, to create any number of new series or classes or to com-
mence the public offering of shares of any previously established series or
class.
The Funds have entered into a Distribution Agreement with State Street Re-
search Investment Services, Inc., as Distributor, whereby the Distributor acts
as agent to sell and distribute shares of the Funds. Shares of the Funds are
sold through dealers who have entered into sales agreements with the Distribu-
tor. The Distributor distributes shares of the Funds on a continuous basis at
an offering price which is based on the net asset value per share of the appli-
cable Fund plus (subject to certain exceptions) a sales charge which, at the
election of the investor, may be imposed (i) at the time of purchase (the Class
A shares) or (ii) on a deferred basis (the Class B or Class D shares). The Dis-
tributor may reallow all or portions of such sales charges as concessions to
dealers. For the period January 22, 1992 (commencement of operations) through
October 31, 1992, and the fiscal year ending October 31, 1993 and for the pe-
riod November 1, 1993 through February 28, 1994, total sales charges amounted
to $42,467, $271,323 and $215,107, respectively, for the International Equity
Fund and $29,512, $42,560 and $10,346, respectively, for the International
Fixed Income Fund. For the same periods, $4,902, $31,551 and $24,764 was re-
tained by the Distributor after reallowance of concessions to dealers for the
International Equity Fund and $3,394, $4,804 and $1,306 for the International
Fixed Income Fund. For the period March 1, 1994 (commencement of share class
designation) through October 31, 1994, total sales charges for the Class A
shares amounted to $411,711 and $9,827 for the International Equity Fund and
the International Fixed Income Fund. For this period, $91,079 and $4,121 was
retained by the Distributor after reallowance of concessions to dealers for the
International Equity Fund and the International Fixed Income Fund. No informa-
tion is presented for Class A, Class B and Class D shares for the period Janu-
ary 22, 1992 (commencement of operations) through October 31, 1992, the fiscal
year ended October 31, 1993, and the period ended November 1, 1993 through Feb-
ruary 28, 1993, because no shares of those classes were outstanding during
those periods. For the period March 1, 1994 (commencement of share class desig-
nation) through October 31, 1994, commissions paid by the Distributor to deal-
ers for shares sold on Class B and Class D shares were $617,850 and $15,663 for
the International Equity Fund, respectively, and $30,667 and $163 for the In-
ternational Fixed Income Fund, respectively. There were no contingent deferred
sales charges paid during the same period.
Differences in the price at which the Funds' Class A shares are offered due to
scheduled variations in sales charges, as described in the Funds' Prospectus,
result from cost savings inherent in economies of scale. Management believes
that the cost of sales efforts of the Distributor and broker-dealers tends to
decrease as the size of purchases increases, or does not involve any incremen-
tal sales expenses as in the case of, for example, exchanges, reinvestments or
dividend investments at net asset value. Similarly, no significant sales effort
will be necessary for sales of shares at net asset value to certain Directors,
officers, employees, their relatives and other persons directly or indirectly
related to the Funds or associated entities. Where shares of the Funds are of-
fered at a reduced sales charge or without a sales charge pursuant to sponsored
arrangements, the amount of
B-27
<PAGE>
the sales charge reduction will similarly reflect the anticipated reduction in
sales expenses associated with such sponsored arrangements. The reductions in
sales expenses, and therefore the reduction in sales charges, will vary depend-
ing on factors such as the size and stability of the organization, the term of
the organization's existence and certain characteristics of its members. Port-
folios reserves the right to make variations in, or eliminate, sales charges at
any time or to revise the terms of or to suspend or discontinue sales pursuant
to sponsored arrangements at any time.
On any sale of Class A shares of $1,000,000 or more, the Distributor will pay
the authorized securities dealer making such sale commission on the shares
sold. Such commission also is payable to authorized securities dealers upon
sales of Class A shares made pursuant to a Letter of Intent to purchase shares
having a net asset value of $1,000,000 or more. Shares sold with such commis-
sions payable are subject to a one-year contingent deferred sales charge of
1.00% on any portion (excluding capital appreciation and dividends) of such
shares redeemed within one year following their sale. After a particular pur-
chase 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 dis-
counts or commissions otherwise payable to such dealer in respect of shares ac-
tually sold. If an in-vestor 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.
Portfolios has adopted a "Plan of Distribution Pursuant to Rule 12b-1" (the
"Distribution Plan") under which the Funds may engage, directly or indirectly,
in financing any activities primarily intended to result in the sale of Class
A, Class B and Class D shares, including, but not limited to, (1) the payment
of commissions and/or reimbursement of expenses to underwriters, securities
dealers and others engaged in the sale of shares, including payments to the
Distributor to be used to pay commissions and/or reimbursement of expenses to
securities dealers (which securities dealers may be affiliates of the Distribu-
tor) engaged in the distribution and marketing of shares and furnishing ongoing
assistance to investors, (2) reimbursement of direct out-of-pocket expenditures
incurred by the Distributor in connection with the distribution and marketing
of shares and the servicing of investor accounts including expenses relating to
the formulation and implementation of marketing strategies and promotional ac-
tivities such as direct mail promotions and television, radio, newspaper, maga-
zine and other mass media advertising, the preparation, printing and distribu-
tion of Prospectuses of the Funds and reports for recipients other than exist-
ing shareholders of the Funds, and obtaining such information, analyses and re-
ports with respect to marketing and promotional activities and investor ac-
counts as the Funds may, from time to time, deem advisable, and (3) reimburse-
ment of expenses incurred by the Distributor in connection with the servicing
of shareholder accounts including payments to securities dealers and others in
consideration of the provision of personal services to investors and/or the
maintenance of shareholder accounts and expenses associated with the provision
of personal services by the Distributor directly to investors. In addition, the
Distribution Plan is deemed to authorize the Distributor/ Investment Manager to
make payments out of general profits, revenues or other sources to underwrit-
ers, securities dealers and others in connection with sales of shares, to the
extent, if any, that such payments may be deemed to be within the scope of Rule
12b-1 under the 1940 Act.
The expenditures to be made pursuant to the Distribution Plan may not exceed
(i) with respect to Class A shares, an annual rate of 0.25% of the average
daily value of net assets represented by such Class A shares, and (ii) with re-
spect to Class B and Class D shares, an annual rate of 0.75% of the average
daily value of the net assets represented by such Class B or Class D shares (as
the case may be) to finance sales or promotion expenses and an annual rate of
0.25% of the average daily value of the net assets represented by such Class B
or Class D shares (as the case may be) to make payments for personal services
and/or the maintenance of share-holder accounts. Proceeds from the service fee
will be used by the Distributor
B-28
<PAGE>
to compensate securities dealers and others selling shares of the Funds for
rendering service to shareholders on an ongoing basis. Such amounts are based
on the net asset value of shares of the Funds held by such dealers as nominee
for their customers or which are owned directly by such customers for so long
as such shares are outstanding and the Distribution Plan remains in effect with
respect to the Funds. Any amounts received by the Distributor and not so allo-
cated may be applied by the Distributor as reimbursement for expenses incurred
in connection with the servicing of investor accounts. The distribution and
servicing expenses of a particular class will be borne solely by that class.
During the fiscal year ended October 31, 1994, the Funds paid the Distributor
fees under the Distribution Plan and the Distributor used all of such payments
for expenses incurred on behalf of the Fund as follows:
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS D
------- ------- -------
<S> <C> <C> <C>
INTERNATIONAL EQUITY FUND
Advertising............................................ $ 0 $ 0 $ 0
Printing and mailing of prospectuses to other than
current shareholders.................................. 0 0 0
Compensation to dealers................................ 22,201 64,167 8,396
Compensation to sales personnel........................ 0 0 0
Interest............................................... 0 0 0
Carrying or other financing charges.................... 0 0 0
Other expenses......................................... 0 0 0
------- ------- ------
Total fees............................................. $22,201 $64,167 $8,396
======= ======= ======
</TABLE>
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS D
------- ------- -------
<S> <C> <C> <C>
INTERNATIONAL FIXED INCOME FUND
Advertising............................................ $ 146 $ 0 $ 850
Printing and mailing of prospectuses to other than
current shareholders.................................. 40 0 233
Compensation to dealers................................ 837 7,215 161
Compensation to sales personnel........................ 248 0 1,452
Interest............................................... 0 0 0
Carrying or other financing charges.................... 0 0 0
Other expenses......................................... 125 0 727
------ ------ ------
Total fees............................................. $1,396 $7,215 $3,423
====== ====== ======
</TABLE>
The Distributor may also use additional resources of its own for further ex-
penses on behalf of the Funds.
No interested Director of Portfolios has any direct or indirect financial in-
terest in the operation of the Distribution Plan or any related agreements
thereunder. The Distributor's interest in the Distribution Plan is described
above.
To the extent that the Glass-Steagall Act may be interpreted as prohibiting
banks and other depository institutions from being paid for performing services
under the Distribution Plan, the Funds will make alternative arrangements for
such services for shareholders who acquired shares through such institutions.
CALCULATION OF PERFORMANCE DATA
The average annual total return ("standard total return") and yield of the
Class A, Class B, Class C and Class D shares of the Funds will be calculated as
set forth below. Total return and yield are computed separately for each class
of shares of the Funds. Performance data for a specified class includes periods
prior to the adoption of class designations. Shares of the Funds had no class
designations until March 1, 1994, when designations were assigned based on the
pricing and Rule 12b-1 fees applicable to shares sold thereafter.
The performance data reflects Rule 12b-1 fees and sales charges as set forth
below:
<TABLE>
<CAPTION>
RULE 12B-1 FEES
---------------------------------------------------
CLASS AMOUNT PERIOD SALES CHARGES
- ----- ------ -------------- ---------------
<S> <C> <C> <C>
A 0.25% March 1, 1994 Maximum 4.5%
to present sales charge
reflected
B 1.00% March 1, 1994 1- and 5-year
to present; periods reflect
fee will a 5% and a 2%
reduce contingent
performance deferred sales
for periods charge,
after March 1, respectively
1994
C 0.00% Since None
commence-ment
of operations
to present
D 1.00% March 1, 1994 1-year period
to present; reflects a 1%
fee will contingent
reduce deferred sales
performance charge
for periods
after March 1,
1994
</TABLE>
All calculations of performance data in this section reflect the voluntary
measures by the Funds' affiliates to reduce fees or expenses relating to the
Funds; see "Accrued Expenses" later in this section. Without such measures,
performance would be lower. Performance data is based on historical figures;
past performance is not a guarantee of future returns.
B-29
<PAGE>
TOTAL RETURN:
The average annual total returns ("standard total return") of each class of
each Fund's shares were as follows:
<TABLE>
<CAPTION>
COMMENCEMENT OF
OPERATIONS
(JANUARY 22, 1992) ONE YEAR ENDED
TO OCTOBER 31, 1994 OCTOBER 31, 1994
--------------------- ------------------
WITH WITHOUT WITH WITHOUT
FUND SUBSIDY SUBSIDY SUBSIDY SUBSIDY
---- ---------- --------- -------- --------
<S> <C> <C> <C> <C>
International Equity Fund
Class A............................. 16.30% 14.89% 16.89% 15.99%
Class B............................. 17.24% 15.80% 16.84% 15.90%
Class C............................. 18.36% 16.93% 22.73% 21.79%
Class D............................. 18.05% 16.62% 20.84% 19.90%
International Fixed Income Fund
Class A............................. 6.72% 6.21% 2.68% 2.30%
Class B............................. 7.34% 6.81% 1.92% 1.52%
Class C............................. 8.57% 8.05% 7.72% 7.32%
Class D............................. 8.31% 7.79% 6.00% 5.60%
</TABLE>
Standard total return is computed by determining the average annual compounded
rates of return over the designated periods that, if applied to the initial
amount invested would produce the ending redeemable value, according to the
following formula:
P(1+T) to the power of 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 as-
suming a hypothetical $1,000 payment made at the beginning of the
designated period
The calculation is based on the further assumptions that the maximum initial
or contingent deferred sales charge applicable to the investment is deducted
and that all dividends and distributions by a Fund are reinvested at net asset
value on the reinvestment dates during the periods. All accrued expenses are
also taken into account as described later herein.
YIELD:
The annualized yield for the International Fixed Income Fund's Class A, Class
B, Class C and Class D based on the month of October 1994 was as follows:
<TABLE>
<CAPTION>
WITH WITHOUT
SUBSIDY SUBSIDY
------- -------
<S> <C> <C>
Class A......................................................... 2.84% 2.43%
Class B......................................................... 2.61% 2.19%
Class C......................................................... 3.09% 2.67%
Class D......................................................... 2.60% 2.18%
</TABLE>
Yield for the International Fixed Income Fund's Class A, Class B, Class C and
Class D shares is computed by dividing the net investment income per share
earned during a recent month or other specified 30-day period by the maximum
offering price per share on the last day of the period and annualizing the re-
sult, according to the following formula:
( a-b ) to the power of 6
YIELD = 2[(-----+1) - 1]
( cd )
Where: a = dividends and interest earned during the period
b = expenses accrued for the period (net of voluntary expense reduc-
tions 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 peri-
od.
To calculate interest earned (for the purpose of "a" above) on debt obliga-
tions, a Fund computes the yield to maturity of each obligation held by such
Fund based on the market value of the obligation (including actual accrued in-
terest) at the close of the last business day of the preceding period, or, with
respect to obligations purchased during the period, the purchase price (plus
actual accrued interest). The yield to maturity is then divided by 360 and the
quotient is multiplied by the market value of the obligation (including actual
accrued interest) to determine the interest income on the obligation for each
day of the period that the obligation is in the portfolio. Dividend income is
recognized daily based on published rates.
Undeclared earned income, computed in accordance with generally accepted ac-
counting princi-
B-30
<PAGE>
ples, may be subtracted from the maximum offering price. Undeclared earned in-
come is the net investment income which, at the end of the base period, has not
been declared as a dividend, but is reasonably expected to be declared as a
dividend shortly thereafter. The maximum offering price includes a maximum
sales charge of 4.5% with respect to Class A shares.
All accrued expenses are taken into account as described later herein.
Yield information is useful in reviewing a Fund's performance, but because
yields fluctuate, such information cannot necessarily be used to compare an in-
vestment in a 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 remem-
ber that yield is a function of the kind and quality of the instruments in a
Fund's portfolio, portfolio maturity and operating expenses and
marketconditions.
ACCRUED EXPENSES:
Accrued expenses include all recurring expenses that are charged to all share-
holder 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 $5 fee for certain reinvestments, the $7.50
fee for wire orders, the $15 annual fee for administration of an IRA account,
the $15 annual fee for a participant in a prototype pension plan, the $10 fee
for special requests or photocopies of paid checks and the $20 fee applied to a
shareholder account that has been determined to be escheatable under applicable
state laws.
Accrued expenses reflect the Investment Manager's/Distributor's or its affili-
ates' voluntary reduction of management fees and assumption of a portion of ex-
penses relating to a Fund during the subject period. Such reductions in manage-
ment fees and assumption of expenses by the Investment Manager/Distributor or
its affiliates amounted to $148,461, $240,442 and $386,279 for the Interna-
tional Equity Fund and $107,307, $100,743 and $85,904 for the International
Fixed Income Fund for the period January 22, 1992 (commencement of operations)
through October 31, 1992, and the fiscal years ending October 31, 1993 and Oc-
tober 31, 1994, respectively. These reductions were $95,795 for the Interna-
tional Equity Fund and $18,387 for the International Fixed Income Fund for the
month of October 1994.
Each Fund will be responsible for payment of expenses directly attributable to
it, while indirect expenses are allocated among all Funds in Portfolios.
NONSTANDARDIZED TOTAL RETURN:
A Fund may provide the above described standard total return results for Class
A, Class B, Class C and Class D shares for periods which end no earlier than
the most recent calendar quarter end and which begin twelve months before and
at the time of commencement of such Fund's operations. In addition, a Fund may
provide nonstandardized total return results for differing periods, such as for
the most recent six months, and/or without taking sales charges into account.
Such nonstandardized total return is computed as otherwise described under "To-
tal Return" except that the result may or may not be annualized, and as noted
any applicable sales charge may not be taken into account and therefore not de-
ducted from the hypothetical initial payment of $1,000. The International Eq-
uity Fund's and International Fixed Income Fund's nonstandardized total return
for Class A, Class B, Class C and Class D shares for the six months ended Octo-
ber 31, 1994 were as follows:
<TABLE>
<CAPTION>
WITH WITHOUT
INTERNATIONAL EQUITY FUND SUBSIDY SUBSIDY
- ------------------------- ------- -------
<S> <C> <C>
Class A........................................................ 3.49% 3.27%
Class B........................................................ 3.11% 2.90%
Class C........................................................ 3.57% 3.19%
Class D........................................................ 3.11% 2.90%
<CAPTION>
INTERNATIONAL FIXED INCOME FUND
- -------------------------------
<S> <C> <C>
Class A........................................................ 5.25% 5.15%
Class B........................................................ 4.83% 4.64%
Class C........................................................ 5.42% 5.23%
Class D........................................................ 4.93% 4.83%
</TABLE>
B-31
<PAGE>
DISTRIBUTION RATES:
A Fund may also quote its distribution rate for each class of shares. The dis-
tribution rate is calculated by annualizing the latest per-share distribution
from ordinary income and dividing the result by the maximum offering price per
share as of the end of the period to which the distribution relates. A distri-
bution can include gross investment income from debt obligations purchased at a
premium and in effect include a portion of the premium paid. A distribution can
also include nonrecurring, gross short-term capital gains without recognition
of any unrealized capital losses. Further, a distribution can include income
from the sale of options by a Fund even though such option income is not con-
sidered investment income under generally accepted accounting principles.
Because a distribution can include such premiums, capital gains and option in-
come, the amount of the distribution may be susceptible to control by the In-
vestment Manager through transactions designed to increase the amount of such
items. Also, because the distribution rate is calculated in part by dividing
the latest distribution by the offering price, which is based on net asset
value plus a sales charge, the distribution rate will increase as the net asset
value declines. A distribution rate can be greater than the yield rate calcu-
lated as described above.
The distribution rates for Class A, Class B, Class C and Class D shares based
on the quarter ended October 31, 1994 for the International Fixed Income Fund
were 6.25%, 5.94%, 6.73% and 5.84%, respectively.
CUSTODIAN
State Street Bank and Trust Company, 225 Franklin Street, Boston, Massachusetts
02110, is Portfo- lios' custodian. As custodian, State Street Bank and Trust
Company is responsible for, among other things, safeguarding and controlling
the Funds' cash and securities, handling the receipt and delivery of securities
and collecting interest and dividends on the Funds' investments. State Street
Bank and Trust Company is not an affiliate of the Investment Manager or its af-
filiates.
INDEPENDENT ACCOUNTANTS
Deloitte & Touche LLP, 125 Summer Street, Boston, Massachusetts 02110, are
Portfolios' independent accountants, providing professional services including
(1) audit of the Funds' annual statements, (2) assistance and consultation in
connection with Securities and Exchange Commission filings and (3) review of
the annual income tax returns filed on behalf of the Funds.
FINANCIAL STATEMENTS
The following financial statements of the International Equity Fund and the In-
ternational Fixed Income Fund are for the fiscal year ending October 31, 1994.
B-32
<PAGE>
PART C. OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(a) FINANCIAL STATEMENTS:
(1)Financial Statements in Part A (Prospectus) of this Registration
Statement:
Financial Highlights for International Equity Fund and International
Fixed Income Fund for the period January 22, 1992 (commencement of
operations) through October 31, 1994.
(2) Financial Statements included in Part B (Statement of Additional
Information) of this Registration Statement:
For International Equity Fund and International Fixed Income Fund
for the fiscal year ended October 31, 1994 (except as provided
below):
Investment Portfolio
Statement of Assets and Liabilities
Statement of Operations
Statement of Changes in Net Assets (for the period January 22, 1992
(commencement of operations) to October 31, 1994)
Notes to Financial Statements
Independent Auditors' Report
Management's Discussion of Fund Performance
(b) EXHIBITS:
<TABLE>
<CAPTION>
EXHIBIT PAGE
NUMBER NUMBER
- ------- ------
<S> <C> <C>
1 --Amended and restated Articles of Incorporation of Registrant./2/
1(a) --Articles Supplementary./8/
1(b) --Articles Supplementary.
2 --Amended By-Laws of Registrant./2/
3 --None
4 --Specimen certificates for shares of common stock of Registrant./7/
5(a) --Investment Management Agreements relating to the MetLife International Equity
and MetLife International Fixed Income Funds between MetLife-State Street
Investment Services, Inc. and MetLife Portfolios, Inc./4/
(b) --Sub-Investment Management Agreements relating to the MetLife International
Equity and MetLife International Fixed Income Funds among MetLife-State Street
Investment Services, Inc., GFM International Investors Limited, and MetLife
Portfolios, Inc./4/
6(a) --Distribution Agreement with MetLife-State Street Investment Services, Inc./4/
(b) --Form of Selected Dealer Agreement.
(c) --Form of Bank and Bank Affiliated Broker-Dealer Agreement.
7 --Not Applicable.
8(a) --Custodian Contract with State Street Bank and Trust Company./4/
(b) --Form of Transfer Agent and Service Agreement with State Street Bank and Trust
Company./7/
(c) --Shareholders' Administrative Services Agreement with MetLife-State Street
Investment Services, Inc./4/
(d) --Service Agreement among MetLife Portfolios, Inc., Metropolitan Life Insurance
Company, and MetLife-State Street Investment Services, Inc./4/
(e) --Sub-Administration Agreement with State Street Bank and Trust Company,
Metropolitan Life Insurance Company and State Street Research Investment
Services, Inc./8/
9 --License Agreement with Metropolitan Life Insurance Company./4/
10 --Opinion and consent of counsel./8/
</TABLE>
C-1
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT PAGE
NUMBER NUMBER
- ------- ------
<S> <C> <C>
11 --Consent of Deloitte & Touche.
12 --None
13 --Purchase Agreement and Investment Letter./3/
14(b) --Prototype Individual Retirement Account Terms and Conditions, Individual
Retirement Account Disclosure Statement, Individual Retirement Account
Application And Agreement, Direct Rollover of Assets Form and IRA Systematic
Withdrawal Plan Application.
14(c) --State Street Research 403(b): Brochure, Account Agreement, Maximum Salary
Reduction Worksheet, Account Application, Salary Reduction Agreement and
Direct Rollover of Assets Form.
15 --Distribution Plan./7/
16 --Schedule of Performance Data./6/
17(a) --Powers of Attorney./5/,/7/
17(b) --Power of Attorney for John H. Tweedie.
</TABLE>
- --------
1. Filed with initial filing of this Registration Statement on August 7, 1991.
2. Filed with Pre-Effective Amendment Number 1 to this Registration Statement
on October 18, 1991.
3. Filed with Pre-Effective Amendment Number 2 to this Registration Statement
on January 15, 1992.
4. Filed with Post-Effective Amendment Number 1 to this Registration Statement
on July 15, 1992.
5. Powers of Attorney for signatories other than Robert Lawrence, Dean O.
Morton, Michael S. Scott Morton and Robert G. Schwartz filed with Pre-Effective
Amendment Number 2 to this Registration Statement on January 15, 1992.
6. Filed with Post-Effective Amendment Number 2 to this Registration Statement
on February 24, 1993.
7. Filed with Post-Effective Amendment Number 3 to this Registration Statement
on December 22, 1993. Powers of Attorney for Messrs. Lawrence, Morton, Scott
Morton and Schwartz filed with Post-Effective Amendment Number 3.
8. Filed with Post-Effective Amendment Number 4 to this Registration Statement
on February 25, 1994.
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
(REST OF PAGE LEFT INTENTIONALLY BLANK)
C-2
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
C-3
<PAGE>
ORGANIZATIONAL STRUCTURE OF METROPOLITAN AND SUBSIDIARIES
AS OF DECEMBER 31, 1994
The following is a list of subsidiaries of Metropolitan Life Insurance Company
("Metropolitan") as of December 31, 1994. Those entities which are listed at
the left margin (labelled with capital letters) are direct subsidiaries of
Metropolitan. Unless otherwise indicated, each entity which is indented under
another entity is a subsidiary of such indented entity and, therefore, an
indirect subsidiary of Metropolitan. The voting securities (excluding
directors' qualifying shares, if any) of the subsidiaries listed are 100% owned
by their respective parent corporations, unless otherwise indicated. The
jurisdiction of domicile of each subsidiary listed is set forth in the
parenthetical following such subsidiary.
A. Metropolitan Tower Corp. (Delaware)
1. Metropolitan Property and Casualty Insurance Company (Delaware)
a. Metropolitan Group Property and Casualty Insurance Company
(Delaware)
i. Metropolitan Reinsurance Company (U.K.) Limited (Great
Britain)
b. Metropolitan Casualty Insurance Company (Delaware)
c. Metropolitan General Insurance Company (Delaware)
d. First General Insurance Company (Georgia)
e. Metropolitan P&C Insurance Services, Inc. (California)
f. Metropolitan Lloyds, Inc. (Texas)
2. Metropolitan Insurance and Annuity Company (Delaware)
a. MetLife Europe I, Inc. (Delaware)
b. MetLife Europe II, Inc. (Delaware)
c. MetLife Europe III, Inc. (Delaware)
d. MetLife Europe IV, Inc. (Delaware)
e. MetLife Europe V, Inc. (Delaware)
3. MetLife General Insurance Agency, Inc. (Delaware)
a. MetLife General Insurance Agency of Alabama, Inc. (Alabama)
b. MetLife General Insurance Agency of Kentucky, Inc. (Kentucky)
c. MetLife General Insurance Agency of Mississippi, Inc.
(Mississippi)
d. MetLife General Insurance Agency of Texas, Inc. (Texas)
e. MetLife General Insurance Agency of North Carolina, Inc. (North
Carolina)
C-4
<PAGE>
4. MetLife HealthCare Management Corporation (Delaware)
a. MetLife HealthCare Network of Kansas City, Inc. (Missouri)
b. MetLife HealthCare Network of Northern New Jersey, Inc. (New
Jersey)
c. Metlife HealthCare Network of New York, Inc. (New York)
d. MetLife HealthCare Network of Ohio, Inc. (Ohio)
e. MetLife HealthCare Network of Wisconsin, Inc. (Wisconsin)
f. MetLife HealthCare Network, Inc. (Delaware)
g. MetLife HealthCare Network of Georgia, Inc. (Georgia)
h. MetLife HealthCare Network of Illinois, Inc. (Delaware)
i. MetLife HealthCare Network of Arizona, Inc. (Arizona)
j. MetLife HealthCare Network of Kentucky, Inc. (Kentucky)
k. MetLife HealthCare Network of Massachusetts, Inc. (Massachusetts)
l. MetLife HealthCare Network of Texas, Inc. (Texas)
m. MetLife HealthCare Network of Florida, Inc. (Florida)
n. MetLife HealthCare Network of Colorado, Inc. (Colorado)
o. MetLife HealthCare Network of California, Inc. (California)
5. Corporate Health Strategies, Inc. (Delaware)
6. Metropolitan Asset Management Corporation (Delaware)
a. MetLife Capital Holdings, Inc. (Delaware)
i. MetLife Capital Corporation (Delaware)
(1) Searles Cogeneration, Inc. (Delaware)
(2) MLYC Cogen, Inc. (Delaware)
(3) MCC Yerkes Inc. (Washington)
(4) MetLife Capital, Limited Partnership (Delaware).
Partnership interests in MetLife Capital, Limited
Partnership are held by Metropolitan (90%) and MetLife
Capital Corporation (10%).
(5) MCC Investment Corporation (Delaware)
(a) MetLife Capital Credit L.P. (Delaware).
Partnership interests in MetLife Capital Credit
L.P. are held by Metropolitan (90%) and MCC
Investment Corporation (10%).
(6) MetLife Capital Portfolio Investments, Inc. (Nevada)
(a) MetLife Capital Funding Corp. (Delaware)
ii. MetLife Capital Financial Corporation (Delaware)
C-5
<PAGE>
iii. MetLife Financial Acceptance Corporation (Delaware).
MetLife Capital Holdings, Inc. holds 100% of the voting
preferred stock of MetLife Financial Acceptance Corporation.
Metropolitan Property and Casualty Insurance Company holds
100% of the common stock of MetLife Financial Acceptance
Corporation.
b. MetLife Investment Management Corporation (Delaware)
i. MetLife Investments Limited (United Kingdom). 23rd Street
Investments, Inc. holds one share of MetLife Investments
Limited.
c. MetLife Realty Group, Inc. (Delaware)
d. GFM International Investors Limited (United Kingdom). The common
stock of GFM International Investors Limited ("GFM") is held by
Metropolitan (99.5%) and by an employee of GFM (.5%). GFM is a
sub-investment manager for the International Stock Portfolio of
Metropolitan Series Fund, Inc.
i. GFM Investments Limited (United Kingdom)
7. SSRM Holdings, Inc. (Delaware)
a. State Street Research & Management Company (Delaware). Is a sub-
investment manager for the Growth, Income, Diversified and
Aggressive Growth Portfolios of Metropolitan Services Fund, Inc.
i. State Street Research Energy, Inc. (Massachusetts)
ii. State Street Research Investment Services, Inc.
(Massachusetts)
b. Metric Holdings, Inc. (Delaware)
i. Metric Management Inc. (Delaware)
ii. Metric Realty Corp. (Delaware)
iii. Metric Realty (Illinois). Metric Realty Corp. and Metric
Holdings, Inc. each holds 50% of the common stock of Metric
Realty.
(1) Metric Capital Corporation (California)
(2) Metric Assignor, Inc. (California)
(3) Metric Institutional Realty Advisors, Inc. (California)
(4) Metric Institutional Realty Advisors, L.P.
(California).
Metric Realty holds a 99% limited partnership interest
and Metric Institutional Realty Advisors, Inc. holds a
1%
C-6
<PAGE>
interest as general partner in Metric Institutional
Realty Advisors, L.P.
(5) Metric Realty Services, Inc. (Delaware)
(6) Metric Institutional Apartment Fund II, L.P.
(California). Metric Realty holds a 1% interest as
general partner and Metropolitan holds an approximately
14.6% limited partnership interest in Metric
Institutional Apartment Fund II, L.P.
8. MetLife Holdings, Inc. (Delaware)
a. MetLife Funding, Inc. (Delaware)
b. MetLife Credit Corp. (Delaware)
9. Metropolitan Tower Realty Company, Inc. (Delaware)
10. MetLife Real Estate Advisors, Inc. (California)
B. Metropolitan Tower Life Insurance Company (Delaware)
C. MetLife Security Insurance Company of Louisiana (Louisiana)
D. MetLife Texas Holdings, Inc. (Delaware)
1. Texas Life Insurance Company (Texas)
a. Texas Life Agency Services, Inc. (Texas)
E. MetLife Securities, Inc. (Delaware)
F. 23rd Street Investments, Inc. (Delaware)
G. Metropolitan Life Holdings Limited (Ontario, Canada)
1. Metropolitan Life Financial Services Limited (Ontario, Canada)
a. 810597 Ontario, Inc. (Ontario, Canada)
b. 810660 Ontario Inc. (Canada)
c. 478077 Alberta Ltd. (Alberta, Canada)
2. Metropolitan Life Financial Management Limited (Ontario, Canada)
a. Metropolitan Life Insurance Company of Canada (Canada)
b. Metropolitan Life Operations Limited (Canada)
i. Metropolitan Trust Company of Canada (Canada)
C-7
<PAGE>
3. Morguard Investments Limited (Ontario, Canada)
Shares of Morguard Investments Limited ("Morguard") are held by
Metropolitan Life Holdings Limited (82%) and by employees of Morguard
(18%).
4. Services La Metropolitaine Quebec, Inc. (Quebec, Canada)
5. 167080 Canada, Inc. (Canada)
a. 446068 B.C. Ltd. (British Columbia, Canada)
H. MetLife (UK) Limited (Great Britain)
1. Albany Life Assurance Company Limited (Great Britain)
a. Albany Pension Managers and Trustees Limited (Great Britain)
2. Albany Home Loans Limited (Great Britain)
3. ACFC Corporate Finance Limited (Great Britain)
4. Metropolitan Unit Trust Managers Limited (Great Britain)
5. Albany International Assurance Limited (Isle of Man)
6. MetLife Group Services Limited (Great Britain)
I. Santander Met, S.A. (Spain). Shares of Santander Met, S.A. are held by
Metropolitan (50%) and by an entity (50%) unaffiliated with Metropolitan.
1. Seguros Genesis, S.A. (Spain)
2. Genesis Seguros Generales, Sociedad Anomina de Seguros y Reaseguros
(Spain)
J. Kolon-Met Life Insurance Company (Korea). Shares of Kolon-MetLife Insurance
Company are held by Metropolitan (51%) and by an entity (49%) unaffiliated
with Metropolitan.
C-8
<PAGE>
K. Genesis Seguros de Vida S.A. (Argentina)
L. Genesis Seguros de Retiro S.A. (Argentina). Shares of Genesis Seguros de
Retiro S.A. are held by Metropolitan (10%) and by an entity (90%)
unaffiliated with Metropolitan.
M. 161397 Canada Inc. (Canada)
N. 2945835 Canada Inc. (Canada)
O. Metropolitan Marine Way Investments Limited (British Columbia, Canada)
P. Met Life Holdings Luxembourg (Luxembourg)
Q. Metropolitan Life Holdings, Netherlands BV (Netherlands)
R. MetLife International Holdings, Inc. (Delaware)
S. Century 21 Real Estate Corporation (Delaware)
1. Century 21 of the Pacific, Inc. (California)
2. Century 21 of the West, Inc. (California)
3. Century 21 Great Lakes, Inc. (Michigan)
4. Century 21 of the Southeast, Inc. (Florida)
5. Century 21 Australasia Pty. Ltd. (Australia)
6. Century 21 North Central, Inc. (Illinois)
7. Century 21 South Central States, Inc. (Texas)
8. Western Relocation Management, Inc. (California)
9. Century 21 United Kingdom Limited (United Kingdom)
10. Century 21 of the Northeast, Inc. (New Jersey)
C-9
<PAGE>
T. Metmor Financial, Inc. (California)
1. MetFirst Insurance Agency, Inc. (Delaware)
U. Metropolitan Realty Management, Inc. (Delaware)
1. Edison Supply and Distribution, Inc. (Delaware)
2. Cross & Brown Company (New York)
a. Cross & Brown Residentials, Inc. (New York)
b. Cross & Brown Company of Florida, Inc. (Florida)
c. Cross & Brown Associates of New York, Inc. (New York)
d. Cross & Brown Associates of New Jersey, Inc. (New Jersey)
e. Subrown Corp. (New York)
f. Cross & Brown Construction Corp. (New York)
g. CBNJ, Inc. (New Jersey)
h. Cross & Brown of Connecticut, Inc. (Connecticut)
V. MetPark Funding, Inc. (Delaware)
W. 2154 Trading Corporation (New York)
X. Transmountain Land & Livestock Company (Montana)
Y. Met West Agribusiness, Inc. (Delaware)
Z. Farmers National Company (Nebraska)
1. Farmers National Commodities, Inc. (Nebraska)
C-10
<PAGE>
AA. Nebraska Farms, Inc. (Nebraska)
AB. MetFarm and Ranch Properties, Inc. (Delaware)
AC. MetLife Group Administrator, Inc.
AD. The MetraHealth Companies, Inc. (Delaware). Shares of The Metra Health
Companies, Inc. are held by Metropolitan (50%) and by an entity (50%)
unaffiliated with Metropolitan.
In addition to the entities listed above, Metropolitan (or where indicated an
affiliate) also owns an interest in the following entities, among others:
1) CP&S Communications, Inc., a New York corporation, holds federal radio
communications licenses for equipment used in Metropolitan owned facilities and
airplanes. It is not engaged in any business.
C-11
<PAGE>
2) Quadreal Corp., a New York corporation, is the fee holder of a parcel of
real property subject to a 999 year prepaid lease. It is wholly-owned by
Metropolitan, having been acquired by a wholly-owned subsidiary of Metropolitan
in 1973 for $10 in connection with a real estate investment and transferred to
Metropolitan in 1988.
3) Met Life International Real Estate Equity Shares, Inc., a Delaware
corporation, is a real estate investment trust. Metropolitan owns approximately
18.4% of the outstanding common stock of this company and has the right to
designate 2 of the 5 members of its Board of Directors.
4) Metropolitan Structures is a general partnership in which Metropolitan owns
a 50% interest. Metropolitan Structures owns 100% of the common stock of
Cicero/Cermak Corporation, an Illinois corporation, which owns and manages a
shopping center in Illinois. Metropolitan Structures, Inc., an Illinois
corporation, is a property manager. Metropolitan Structures, Inc. is wholly
owned by Metropolitan Structures. Metropolitan Structures, Inc. is the sole
general partner of MS Management Services, L.P., an Illinois limited partnership
in which Metropolitan has a 49.5% interest as a limited partner.
5) Metropolitan Structures West, Inc. (doing business as MS Management
Services), a California corporation, is a property manager in California.
Metropolitan owns 50% of the capital stock of Metropolitan Structures West, Inc.
6) Seguros Genesis, S.A. (Mexico), is a Mexican insurer in which Metropolitan
and two of its subsidiaries collectively own a 24.5% interest and have the right
to designate 2 of the 9 members of the Board of Directors.
C-12
<PAGE>
7) Interbroker, Correduria de Reaseguros, S.A., is a Spanish insurance brokerage
company in which Santander Met, S.A., a subsidiary of Metropolitan in which
Metropolitan owns a 50% interest, owns a 50% interest and has the right to
designate 2 of the 4 members of the Board of Directors.
8) Met Life Agricultural Limited Partnership, is an Illinois limited
partnership of which Met Farm and Ranch Properties, Inc. has a 1% interest as
general partner and a 57.28% interest as limited partner.
9) Metropolitan owns varying interests in certain mutual funds distributed by
its affiliates. These ownership interests are generally expected to decrease as
shares of the funds are purchased by unaffiliated investors.
10) Metropolitan Lloyds Insurance Company of Texas, an affiliated association,
provides homeowner and related insurance for the Texas market. It is an
association of individuals designated as underwriters. Metropolitan Lloyds,
Inc., a subsidiary of Metropolitan Property and Casualty Insurance Company,
serves as the attorney-in-fact and manages the association.
11) Mezzanine Investment Limited Partnerships ("MILPs"), Delaware limited
partnerships, are investment vehicles through which investments in certain
entities are held. A wholly-owned subsidiary of Metropolitan serves as the
general partner of the limited partnerships and Metropolitan directly owns a 99%
limited partnership interest therein. The MILPs have various ownership interests
in certain companies. The various MILPs own, directly or indirectly, more than
50% of the common stock of the following companies: Braelan Corp., and its
subsidiary, Dan River, Inc.; Lincoln Group Holding Corp.; Igloo Holdings, Inc.
and its subsidiary, Igloo Products Corporation; Blodgett Holdings, Inc., and its
subsidiaries, GS Blodgett Corporation, GS Blodgett International Ltd., GS
Blodgett Inc., Pitco Frialator, Inc., Magikitch'n, Inc., and Cloverleaf
Properties, Inc.; and Briggs Holdings, Inc., and its subsidiary, Briggs Plumbing
Products, Inc.
C-13
<PAGE>
In addition to the entities shown on the organizational chart, Metropolitan
(or where indicated a subsidiary) also directly owns an interest in the
following entities:
(1) CP&S Communications, Inc., a New York corporation, holds federal
radio-communications licenses for equipment used in Metropolitan owned
facilities and airplanes. It is not engaged in any business.
(2) Quadreal Corp., a New York corporation, is the fee holder of a parcel
of real property subject to a 999 year prepaid lease. It is wholly-owned by
Metropolitan, having been acquired by a wholly-owned subsidiary of
Metropolitan in 1973 for $10 in connection with a real estate investment
and transferred to Metropolitan in 1988.
(3) Met Life International Real Estate Equity Shares, Inc., a Delaware
corporation, is a real estate investment trust. Metropolitan owns
approximately 18.4% of the outstanding common stock of this company and has
the right to designate 2 of the 5 members of its Board of Directors.
(4) Metropolitan Structures West, Inc. (doing business as MS Management
Services), a California corporation, is a property manager in California.
Metropolitan owns 50% of the capital stock of Metropolitan Structures West,
Inc.
(5) Seguros Genesis, S.A. (Mexico), is a Mexican insurer in which
Metropolitan and two of its subsidiaries collectively own a 24.5% interest
and have the right to designate 2 of the 9 members of the Board of
Directors.
(6) Interbroker, Correduria de Reaseguros, S.A., is a Spanish insurance
brokerage company in which Santander Met, S.A., a subsidiary of
Metropolitan in which Metropolitan owns a 50% interest, owns a 50% interest
and has the right to designate 2 of the 4 members of the Board of
Directors.
(7) Metropolitan owns varying interests in certain mutual funds
distributed by its affiliates. These ownership interests are generally
expected to decrease as shares of the funds are purchased by unaffiliated
investors.
(8) Metropolitan Structures is a general partnership in which
Metropolitan owns a 50% interest. Metropolitan Structures owns 100% of the
common stock of Cicero/Cermak Corporation, an Illinois corporation, which
owns and manages a shopping center in Illinois. Metropolitan Structures,
Inc., an Illinois corporation is a property manager. Metropolitan
Structures, Inc. is wholly owned by Metropolitan Structures.
(9) MetLife Agricultural Limited Partnership, is an Illinois limited
partnership of which Met Farm and Ranch Properties, Inc. has a 1% interest
as general partner and a 57% interest as limited partner.
(10) Metropolitan Lloyds Insurance Company of Texas, an affiliated
association, provides homeowner and related insurance for the Texas market.
It is an association of individuals designated as underwriters.
Metropolitan Lloyds, Inc., a subsidiary of Metropolitan Property and
Casualty Insurance Company, serves as the attorney-in-fact and manages the
association.
(11) Mezzanine Investment Limited Partnerships ("MILPs"), Delaware
limited partnerships, are investment vehicles through which investments in
certain entities are held. A wholly-owned subsidiary of Metropolitan serves
as the general partner of the limited partnerships and Metropolitan
directly owns a 99% limited partnership interest therein. The MILPs have
various ownership interests in certain companies. The various MILPs own,
directly or indirectly, 50% of the common stock of the following companies:
Braelan Corp., and its subsidiary, Dan River Inc.; Lincoln Group Holding
Corp.; Igloo Holdings, Inc. and its subsidiary, Igloo Products Corporation;
Blodgett Holdings, Inc., and its subsidiaries, GS Blodgett Corporation, GS
Blodgett International Ltd., GS Blodgett Inc., Pitco Frialator, Inc.,
Magikitch'n, Inc., and Cloverleaf Properties, Inc.; and Briggs Holdings,
Inc., and its subsidiary, Briggs Plumbing Products, Inc.
C-14
<PAGE>
ITEM 26. NUMBER OF HOLDERS OF SECURITIES
<TABLE>
<CAPTION>
NUMBER OF
RECORD HOLDERS
TITLE OF CLASS AS OF JANUARY 31, 1995
-------------- ----------------------
<S> <C>
International Equity Fund Common Stock, par value
$0.01 per share
Class A........................................... 6,939
Class B........................................... 3,719
Class C........................................... 5,101
Class D........................................... 257
International Fixed Income Fund Common Stock, par
value $0.01 per share
Class A........................................... 233
Class B........................................... 117
Class C........................................... 479
Class D........................................... 11
</TABLE>
ITEM 27. INDEMNIFICATION.
(a) MARYLAND LAW AND BY-LAWS.
The Registrant is required by Article V of its By-Laws to indemnify or
advance expenses to directors and officers (or former directors and officers)
to the extent permitted or required by the Maryland General Corporation Law
("MGCL") and, in the case of officers (or former officers), only to the extent
specifically authorized by resolution of the Board of Directors. Section 2-418
of the MGCL permits indemnification of a director against judgments, penalties,
fines, settlements and reasonable expenses actually incurred in connection with
any proceeding to which he has been made a party by reason of service as a
director, unless it is established that (i) the directors's act or omission was
material to the matter giving rise to the proceeding and was committed in bad
faith or was the result of active or deliberate dishonesty; (ii) the director
actually received an improper personal benefit; or (iii) in the case of a
criminal proceeding, the director had reasonable cause to believe that the act
or omission was unlawful. However, indemnification may not be made in any
proceeding by or in the right of the corporation in which the director has been
adjudged to be liable to the corporation. Section 2-418 of the MGCL also
requires a corporation, unless limited by its charter, to indemnify a director
who has been successful in the defense of a proceeding against reasonable
expenses incurred. In addition, reasonable expenses incurred by a director may
be paid or reimbursed by a corporation in advance the final disposition of a
proceeding upon the receipt of certain written affirmations and undertakings
required by Section 2-418. A Maryland corporation may indemnify and advance
expenses to an officer to the same extent it may indemnify a director, and is
required to indemnify an officer to the extent required for a director.
Notwithstanding the foregoing, Article V of the Registrant's By-Laws provides
that nothing contained therein shall be construed to protect any director or
officer against any liability to the Registrant or its security holders to
which he would otherwise by reason of willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of his
office.
(b) Under the Distribution Agreement between the Registrant and State Street
Research Investment Services, Inc., the Registrant's investment manager and
distributor, the Registrant has agreed to indemnify and hold harmless State
Street Research Investment Services, Inc. and each person who has been, is, or
may hereafter be an officer, director, employee or agent of State Street
Research Investment Services, Inc. against any loss, damage or expense
reasonably incurred by any of them in connection with any claim or in
connection with any action, suit or proceeding to which any of them may be a
party, which arises out of or is alleged to arise out of or is based upon a
violation of any of its covenants herein contained or any untrue or
C-15
<PAGE>
alleged untrue statement of material fact, or the omission or alleged omission
to state a material fact necessary to make the statements made not misleading,
in a Registration Statement or Prospectus of the Registrant, or any amendment
or supplement thereto, unless such statement or omission was made in reliance
upon written information furnished by State Street Research Investment
Services, Inc.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
Reference is made to the section captioned "Directors and Officers" in the
Statement of Additional Information for additional information concerning
certain affiliations of Directors and Officers which information is
incorporated herein by reference. Information concerning certain other
affiliations of the other officers and directors of State Street Research
Investment Services, Inc., the Registrant's investment adviser, and GFM
International Investors Limited, the Registrant's sub-investment manager,
during the past two years, is set forth below.
<TABLE>
<CAPTION>
PRINCIPAL BUSINESS
ADDRESS OF
NAME CONNECTION ORGANIZATION ORGANIZATION
---- ---------- ------------ ------------------
<C> <C> <S> <C>
Barghaan, Dennis C. ..... Assistant Vice Metropolitan Life Insurance New York, NY
Senior Vice President President (until Company
12/94)
Bennett, Peter Christian. Vice President State Street Capital Trust Boston, MA
Director Vice President State Street Exchange Trust Boston, MA
Vice President State Street Growth Trust Boston, MA
Vice President State Street Master Boston, MA
Investment Trust
Vice President MetLife-State Street Equity Boston, MA
Trust
Director and Executive State Street Research & Boston, MA
Vice President Management Company
Director Boston Private Bank & Trust Boston, MA
Co.
President and Director Christian Camps & Boston, MA
Conferences, Inc.
Director (until 12/93) Gefinor Securities S.A. Geneva,
Switzerland
Chairman and Trustee Gordon College Wenham, MA
Director (until 3/93) Mac-Gray Company, Inc. Cambridge, MA
Borghi, Peter............ Senior Vice President Massachusetts Boston, MA
Senior Vice President (until 6/93) Financial Services Company
Daly, Paul V. ........... None
Senior Vice President
DiFazio, Susan M.W....... Vice President State Street Research & Boston, MA
Senior Vice President Management Company
(Vice President until
8/93)
Evans, Gordon............ Vice President State Street Research & Boston, MA
Vice President Management Company
Grasso, Linda............ None
Vice President
Haeusler, Robert ........ Assistant Vice Metropolitan Life Insurance New York, NY
President
Senior Vice President (until 12/94) Company
</TABLE>
C-16
<PAGE>
<TABLE>
<CAPTION>
PRINCIPAL BUSINESS
ADDRESS OF
NAME CONNECTION ORGANIZATION ORGANIZATION
---- ---------- ------------ ------------------
<S> <C> <C> <C>
Hutchins, Jr., Constantine Senior Vice President, State Street Research & Boston, MA
Senior Vice President, Secretary & General Management Company
Clerk & General Counsel Counsel
Secy & General Counsel State Street Capital Trust Boston, MA
Secy & General Counsel State Street Exchange Trust Boston, MA
Secy & General Counsel State Street Fund for Boston, MA
Foundations and Endowments
Secy & General Counsel State Street Growth Trust Boston, MA
Secy & General Counsel State Street Master Boston, MA
Investment Trust
Secy & General Counsel MetLife--State Street Boston, MA
Equity Trust
Secy & General Counsel MetLife--State Street Boston, MA
Financial Trust
Secy & General Counsel MetLife--State Street Boston, MA
Income Trust
Secy & General Counsel MetLife--State Street Money Boston, MA
Market Trust
Secy & General Counsel MetLife--State Street Tax- Boston, MA
Exempt Trust
Secy & General Counsel State Street Research Boston, MA
Securities Trust
Secy & General Counsel SSRM Holdings, Inc. Boston, MA
Jamieson, Frederick H... Vice President State Street Research & Boston, MA
Vice President and Management Company
Assistant Treasurer Vice President and SSRM Holdings, Inc. Boston, MA
Asistant Treasurer
Kilkuskie, Jr., Theo- Vice President Metropolitan Life New York, NY
dore.................. (until 12/94) Insurance Company
Executive Vice Presi- President MetLife Securities, Inc. New York, NY
dent
(Senior Vice President
until 12/94)
Maus, Gerard P.......... Treasurer MetLife--State Street Boston, MA
Director, Executive Equity Trust
Vice President, Trea- Treasurer MetLife--State Street Boston, MA
surer and Chief Finan- Financial Trust Boston, MA
cial Treasurer MetLife--State Street
Officer Income Trust
Treasurer MetLife--State Street Money Boston, MA
Market Trust
Treasurer MetLife--State Street Tax- Boston, MA
Exempt Trust
Treasurer State Street Capital Trust Boston, MA
Treasurer State Street Exchange Trust Boston, MA
Treasurer State Street Fund for Boston, MA
Foundations and Endowments
Treasurer State Street Growth Trust Boston, MA
</TABLE>
C-17
<PAGE>
<TABLE>
<CAPTION>
PRINCIPAL BUSINESS
ADDRESS OF
NAME CONNECTION ORGANIZATION ORGANIZATION
---- ---------- ------------ ------------------
<S> <C> <C> <C>
Treasurer State Street Master Boston, MA
Investment Trust
Treasurer State Street Research Boston, MA
Securities Trust
Director, Executive State Street Research & Boston, MA
Vice President and Management Company
Treasurer
Director Metric Holdings, Inc. San
Francisco, CA
Director Certain wholly-owned
subsidiaries of Metric
Holdings, Inc.
Director (until 12/94) GFM International London,
Investors Limited England
Treasurer and Chief SSRM Holdings, Inc. Boston, MA
Financial Officer
McMahan, Gregory R...... None
Senior Vice President
McGrail, Rebecca P. .... None
Vice President
Naughton, James A. ..... None
Senior Vice President
Samartin, Richard P. ... None
Senior Vice President
(Vice President until
3/93)
Shields, John L. ....... None
Senior Vice President
and Chief Administra-
tive Officer (Senior
Vice President and
Chief Financial Officer
until 3/93)
Shively, Thomas A. ..... Vice President MetLife--State Street Boston, MA
Director Financial Trust
Vice President MetLife--State Street Boston, MA
Money Market Trust
Vice President MetLife--State Street Boston, MA
Tax-Exempt Trust
Vice President State Street Research Boston, MA
Securities Trust
Executive Vice State Street Research & Boston, MA
President Management Company
and Director, (Senior
Vice President
until 6/93)
Trotta, George B. ...... Senior Vice President Metropolitan Life New York, NY
Executive Vice Presi- Insurance Company
dent
</TABLE>
C-18
<PAGE>
<TABLE>
<CAPTION>
PRINCIPAL BUSINESS
ADDRESS OF
NAME CONNECTION ORGANIZATION ORGANIZATION
---- ---------- ------------ ------------------
<C> <C> <S> <C>
Verni, Ralph F.......... Chairman, President, State Street Capital Boston, MA
Chairman of the Board, Chief Executive Trust
President, Chief Officer and Trustee
Executive Officer and Chairman, President, Boston, MA
Director Chief Executive State Street Exchange
Officer and Trustee Trust
Chairman, President, State Street Growth Boston, MA
Chief Executive Trust
Officer and Trustee
Chairman, President, State Street Master Boston, MA
Chief Executive Investment Trust
Officer and Trustee
Chairman, President, State Street Fund for Boston, MA
Chief Executive Foundations and
Officer and Trustee Endowments
Chairman, President, MetLife--State Street Boston, MA
Chief Executive Equity Trust
Officer and Trustee
Chairman, President, MetLife--State Street Boston, MA
Chief Executive Financial Trust
Officer and Trustee
Chairman, President, MetLife--State Street Boston, MA
Chief Executive Income Trust
Officer and Trustee
Chairman, President, MetLife--State Street Boston, MA
Chief Executive Money Market Trust
Officer and Trustee
Chairman, President, MetLife--State Street Boston, MA
Chief Executive Tax-Exempt Trust
Officer and Trustee
Chairman, President, State Street Research Boston, MA
Chief Executive Securities Trust
Officer and Trustee
Chairman, President, State Street Research & Boston, MA
Chief Executive Management Company
Officer and Director
Chairman and Director Metric Holdings, Inc. San
Francisco, CA
Director and Officer Certain wholly-owned
subsidiaries of Metric
Holdings, Inc.
Director MetLife Securities, Inc. New York, NY
Chairman and Director GFM International London,
(until 12/94) Investors Limited England
President, Chief SSRM Holdings, Inc. Boston, MA
Executive
Officer and Director
</TABLE>
C-19
<PAGE>
<TABLE>
<CAPTION>
PRINCIPAL BUSINESS
ADDRESS OF
NAME CONNECTION ORGANIZATION ORGANIZATION
---- ---------- ------------ ------------------
<C> <C> <S> <C>
Wing, Darman A.......... Vice President, State Street Research & Boston, MA
Vice President, Assistant Secretary Management Company
Assistant Clerk and Assistant
and Assistant General Counsel
General Counsel
Assistant Secretary State Street Capital Boston, MA
Trust
Assistant Secretary State Street Exchange Boston, MA
Trust
Assistant Secretary State Street Fund for Boston, MA
Foundations and
Endowments
Assistant Secretary State Street Growth Boston, MA
Trust
Assistant Secretary State Street Master Boston, MA
Investment Trust
Assistant Secretary State Street Research Boston, MA
Securities Trust
Assistant Secretary MetLife--State Street Boston, MA
Equity Trust
Assistant Secretary MetLife--State Street Boston, MA
Financial Trust
Assistant Secretary MetLife--State Street Boston, MA
Income Trust
Assistant Secretary MetLife--State Street Boston, MA
Money Market Trust
Assistant Secretary MetLife--State Street Boston, MA
Tax-Exempt Trust
Assistant Secretary SSRM Holdings, Inc. Boston, MA
and Assistant General
Counsel
</TABLE>
The business of GFM International Investors Limited is summarized under
"Management of the Funds", in the prospectus constituting Part A of this
Registration Statement, which summarization is incorporated herein by
reference.
Set forth below is a list of each director and certain officers of GFM
International Investors Limited indicating any other business, profession,
vocation or employment of a substantial nature in which each such person is or
has been, at any time during the past two fiscal years, engaged for his or her
own account or in the capacity of director, officer, employee, partner or
trustee.
<TABLE>
<CAPTION>
ORGANIZATION AND PRINCIPAL
NAME POSITION BUSINESS ADDRESS OF ORGANIZATION
---- -------- --------------------------------
<S> <C> <C>
Stephen J. Bamford.......... Director, President and GFM Investments Limited
Chief Executive Chief Executive Officer London, England
Officer & Director
Gerald Clark ............... Executive Vice Metropolitan Life Insurance
Director President, Chief Company, New York, NY
Investment Officer
Advisory Board AIG Asian Infrastructure Fund,
L.P.
Director Century 21 Real Estate
Corporation
Irvine, CA
Chairman GFM Investments Limited
London, England
Director, Chief Metropolitan Asset Management
Executive Officer, Corporation
President, Officer New York, NY
</TABLE>
C-20
<PAGE>
<TABLE>
<CAPTION>
ORGANIZATION AND PRINCIPAL
NAME POSITION BUSINESS ADDRESS OF ORGANIZATION
---- -------- --------------------------------
<S> <C> <C>
Director MetFirst Insurance Agency, Inc.
Overland Park, KS
Chairman, Director, MetLife Investment Management
Officer Corporation
New York, NY
Chairman, Director MetLife Capital Holdings, Inc.
Newark, DE
Director Metropolitan Life Financial
Services Limited
Ontario, Canada
Director Metropolitan Life Holdings
Limited Ontario, Canada
Director MetLife International Holdings,
Inc.
New York, NY
Chairman, Director, MetLife Realty Group
Officer New York, NY
Director MetLife Securities Inc.
New York, NY
Chairman, Director Metmor Financial, Inc.
Overland Park, KS
Director SSRM Holdings, Inc.
Boston, MA
C. Robert Henrikson......... Executive Vice President Metropolitan Life Insurance
Director Company, New York, NY
Director MetLife Investment Management
Corporation
New York, NY
Director MetLife Security Insurance
Company of Louisiana
East Hanover, NJ
Director MBL Life Assurance Corporation
Newark, NJ
Director (until 12/93) AMI Partners, Inc.
Toronto, Canada
Director GFM Investments Limited
London, England
John C. Morrison, Jr........ Senior Vice President Metropolitan Life Insurance
Director Company New York, NY
Director MetLife Investment Management
Corporation
New York, NY
Director MetLife Realty Group, Inc.
New York, NY
</TABLE>
C-21
<PAGE>
<TABLE>
<CAPTION>
ORGANIZATION AND PRINCIPAL
NAME POSITION BUSINESS ADDRESS OF ORGANIZATION
---- -------- --------------------------------
<S> <C> <C>
Director GFM Investments Limited
London, England
Vice President and MetLife Securities, Inc.
Treasurer New York, NY
Director AMI Partners, Inc.
Toronto, Canada
President, Director MetLife Capital Holdings, Inc.
New York, NY
Chairman, Director MetLife Capital Corporation
Bellevue, WA
Director Metmor Financial, Inc.
Overland Park, KS
Director MetFirst Insurance Agency, Inc.
Overland Park, KS
Chairman, Director MetLife Capital Financial
Corporation
Bellevue, WA
Director MCC Investments Corporation
Bellevue, WA
Director MLYC Cogeneration, Inc.
Bellevue, WA
Director Searles Cogeneration, Inc.
Bellevue, WA
Director MCC Yerkes, Inc.
Bellevue, WA
John H. Tweedie............. Executive Vice President Metropolitan Life Insurance
Director Company New York, NY
Chairman, Director Texas Life Insurance Company
Waco, TX
Director Metropolitan Property and
Casualty
Insurance Company
Warwick, RI
Director Metropolitan Group Property and
Casualty Insurance Company
Warwick, RI
Arthur Typermass............ Senior Vice President, Metropolitan Life Insurance
Director Treasurer Company New York, NY
Director (until 1993) Pueblo International
New York, NY
</TABLE>
C-22
<PAGE>
ITEM 29. PRINCIPAL UNDERWRITERS
(a) State Street Research Investment Services, Inc., Registrant's principal
underwriter, also acts as principal underwriter for MetLife--State Street
Financial Trust, MetLife--State Street Income Trust, MetLife--State Street
Money Market Trust, MetLife--State Street Tax-Exempt Trust, State Street
Research Capital Trust, State Street Master Investment Trust, MetLife--State
Street Equity Trust, State Street Research Securities Trust and State Street
Growth Trust.
(b) Directors and Officers of State Street Research Investment Services, Inc.
are as follows:
<TABLE>
<CAPTION>
(1)
NAME AND
PRINCIPAL (2) (3)
BUSINESS POSITIONS AND OFFICES POSITIONS AND OFFICES
ADDRESS WITH UNDERWRITER WITH REGISTRANT
--------- -------------------------- ---------------------
<S> <C> <C>
Ralph F. Verni................ Chairman of the Board, None
One Financial Center President, Chief Executive
Boston, MA 02111 Officer and Director
Peter C. Bennett.............. Director None
One Financial Center
Boston, MA 02111
Gerald P. Maus................ Executive Vice President, None
One Financial Center Treasurer, Chief Financial
Boston, MA 02111 Officer and Director
Thomas A. Shively............. Director None
One Financial Center
Boston, MA 02111
Theodore Kilkuskie, Jr. ...... Executive Vice President None
One Financial Center
Boston, MA 02111
George B. Trotta.............. Executive Vice President None
One Madison Avenue
New York, NY 10010
Dennis C. Barghaan............ Senior Vice President None
One Financial Center
Boston, MA 02111
Peter Borghi.................. Senior Vice President None
One Financial Center
Boston, MA 02111
Paul V. Daly.................. Senior Vice President None
One Financial Center
Boston, MA 02111
Susan M.W. DiFazio............ Senior Vice President None
One Financial Center
Boston, MA 02111
Robert Haeusler............... Senior Vice President None
One Financial Center
Boston, MA 02111
Constantine Hutchins, Jr...... Senior Vice President and None
One Financial Center Clerk
Boston, MA 02111
Gregory R. McMahan............ Senior Vice President None
One Financial Center
Boston, MA 02111
</TABLE>
C-23
<PAGE>
<TABLE>
<CAPTION>
(1)
NAME AND
PRINCIPAL (2) (3)
BUSINESS POSITIONS AND OFFICES POSITIONS AND OFFICES
ADDRESS WITH UNDERWRITER WITH REGISTRANT
--------- -------------------------- ---------------------
<S> <C> <C>
James A. Naughton............. Senior Vice President None
One Financial Center
Boston, MA 02111
Richard P. Samartin........... Senior Vice President None
One Financial Center
Boston, MA 02111
John L. Shields............... Senior Vice President None
One Financial Center and Chief Administrative
Boston, MA 02111 Officer
Gordon Evans.................. Vice President None
One Financial Center
Boston, MA 02111
Linda Grasso.................. Vice President None
One Financial Center
Boston, MA 02111
Frederick H. Jamieson......... Vice President and None
One Financial Center Assistant Treasurer
Boston, MA 02111
Rebecca P. McGrail............ Vice President None
One Financial Center
Boston, MA 02111
Darman A. Wing................ Vice President and None
One Financial Center Assistant Clerk
Boston, MA 02111
</TABLE>
(c) Not Applicable.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
State Street Research Portfolios, Inc. c/o Metropolitan Life Insurance
Company One Madison Avenue New York, NY 10010
State Street Bank and Trust Company 225 Franklin Street Boston, MA 02110
State Street Research Investment Services, Inc. One Financial Center
Boston, MA 02111
ITEM 31. MANAGEMENT SERVICES
Inapplicable
ITEM 32. UNDERTAKINGS
(a) Inapplicable
(b) Inapplicable
(c) Inapplicable
(d) The Registrant hereby undertakes to call a meeting of shareholders for
the purpose of voting upon the question of removal of a director if requested
to do so by the holders of at least 10% of Portfolios' outstanding shares.
(e) The Registrant hereby undertakes to furnish a copy of the Registrant's
latest annual report to shareholders without charge upon the request of each
person to whom a prospectus is delivered.
C-24
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933 AND THE INVESTMENT
COMPANY ACT OF 1940, THE REGISTRANT CERTIFIES THAT IT MEETS ALL OF THE
REQUIREMENTS FOR EFFECTIVENESS OF THIS REGISTRATION STATEMENT PURSUANT TO RULE
485(B) UNDER THE SECURITIES ACT OF 1933 AND HAS DULY CAUSED THIS REGISTRATION
STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THERETO DULY
AUTHORIZED, IN THE CITY OF NEW YORK, AND STATE OF NEW YORK, ON THE 21ST DAY OF
FEBRUARY 1995.
State Street Research Portfolios,
Inc.
(Registrant)
/s/ Jeffrey J. Hodgman
By: _________________________________
(JEFFREY J. HODGMAN, CHAIRMAN OF
THE BOARD, PRESIDENT)
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS REGISTRATION
STATEMENT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS IN THE CAPACITIES AND
ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
*
- ------------------------------------
JEFFREY J. HODGMAN Chairman of the Board,
President (Principal
Executive Officer and
Director)
* Treasurer (Principal
- ------------------------------------ Financial Officer)
ELLIOT REITER
* Director
- ------------------------------------
STEVE A. GARBAN
* Director
- ------------------------------------
MALCOLM T. HOPKINS
* Director
- ------------------------------------
ROBERT A. LAWRENCE
* Director
- ------------------------------------
DEAN O. MORTON
* Director
- ------------------------------------
MICHAEL S. SCOTT MORTON
* Director
- ------------------------------------
JOHN H. TWEEDIE
</TABLE>
/s/ Christopher P. Nicholas
*By__________________________________ February 21, 1995
Christopher P. Nicholas, Esq.
Attorney-in-fact
C-25
<PAGE>
INDEPENDENT AUDITORS' CONSENT
State Street Research Portfolios, Inc.
We consent to the use in Post-Effective Amendment No. 5 to Registration
Statement No. 33-42129 of State Street Research Portfolios, Inc. ("Portfolios")
(formerly MetLife Portfolios, Inc.) of our reports dated December 13, 1994
appearing in the Statement of Additional Information, which is a part of such
Registration Statement, and to the reference to us under the caption
"Independent Accountants" in such Statement of Additional Information and to
the reference to us under the caption "Financial Highlights" appearing in the
Prospectus, which is also a part of such Registration Statement.
Deloitte & Touche LLP
Boston, Massachusetts
February 21, 1995
C-26
