[GRAPHIC: STATE STREET RESEARCH LOGO]
International Equity Fund
This prospectus has information you should know before you invest. Please read
it carefully and keep it with your investment records.
Although these securities have been registered with the Securities and Exchange
Commission, the commission has not judged them for investment merit and does not
guarantee the accuracy or adequacy of the information in this prospectus. Anyone
who informs you otherwise is committing a federal crime.
An aggressive growth
fund investing in stocks
of foreign companies
Prospectus
March 1, 1998
<PAGE>
Who May Want to Invest
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State Street Research International Equity Fund is
designed for investors who seek one or more of the
following:
o an aggressive stock fund for a long-term goal
o a fund to complement a portfolio of more conservative investments
o a fund to complement a portfolio of U.S. investments
o an investment that offers exposure to a variety of foreign markets
The fund is NOT appropriate for investors who:
o want to avoid high volatility or possible losses
o are making short-term investments
o are investing emergency reserve money
o are seeking regular income
The fund's shares will rise and fall in value. There is a risk that you could
lose money by investing in the fund.
The fund cannot be certain that it will achieve its goal.
Fund shares are not bank deposits and are not guaranteed, endorsed or insured by
any financial institution, government entity or the FDIC.
<PAGE>
Contents 1
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2 The Fund
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The fund's goal and strategy, main
risks, expenses and performance,
plus financial highlights
12 Your Account
-------------------------
Managing your State Street Research
investments
12 Opening an Account
12 Choosing a Share Class
14 Sales Charges
16 Policies for Buying Shares
18 Policies for Selling Shares
20 Account Policies
21 Distributions and Taxes
23 Investor Services
24 Fund Details
-------------------------
The fund's business structure
and dealer compensation, plus
additional policies
26 Other Securities and Risks
---------------------------------------
Information on additional
portfolio securities and
practices, and the risks
associated with them
Back Cover For Additional Information
<PAGE>
2 The Fund
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Goal and Strategy
[GRAPHIC: KNIGHT HORSE CHESS GAME PIECE]
Goal The fund seeks to provide long-term growth of capital by investing
primarily in common stocks and equity-related securities of non-U.S. companies.
Strategy Under normal market conditions, the fund invests at least 65% of total
assets in foreign stocks and other securities as described above, including
preferred stocks, convertible securities, warrants and depositary receipts. The
fund may invest in companies established anywhere in the world (except the
U.S.), and it expects to invest in a mix of developed and emerging markets.
In managing its portfolio, the fund allocates assets among geographic regions
and individual countries, based on analysis of global economic and financial
conditions. This analysis may include an examination of the outlook for various
regions and countries, encompassing such factors as growth, inflation,
government policies and currency exchange rates.
In selecting individual stocks, the fund applies elements of growth investing
and value investing to international markets. It looks for companies of any size
that appear to offer the potential for above-average growth or to be
undervalued. The fund may also consider emerging growth companies: companies
that may be less mature and appear to have the potential for rapid growth. The
fund uses research to identify attractive companies, examining such features as
a firm's financial condition, business prospects, competitive position and
business strategy. The fund looks for companies that have good current or
prospective earnings and strong management teams. At any given time, the fund
may emphasize a particular region of the world, industry or company size.
The fund reserves the right to invest up to 35% of total assets in other
securities and instruments of U.S. and foreign issuers. These may include bonds
rated investment-grade at the time of purchase and their unrated equivalents, as
well as money market instruments. The fund may buy and sell foreign currencies,
either for immediate or future delivery, to hedge its positions in foreign
securities or enhance returns.
<PAGE>
3
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The fund may adjust the composition of its portfolio as market conditions and
economic outlooks change. For more information about the fund's investments and
practices, see page 26.
Portfolio Risks
[GRAPHIC: ARROWED STREET SIGN]
Because the fund invests primarily in stocks that are publicly traded outside
the U.S., its major risks are those of stock investing, including sudden,
unpredictable drops in value resulting from market fluctuations and the
potential for periods of lackluster or negative performance.
Foreign securities present additional risks beyond those of U.S. securities. In
particular, they are generally more volatile and less liquid than their
counterparts in the U.S., for reasons
Currency Fluctuations and Performance
[GRAPHIC: MAGNIFYING GLASS AND PAPER]
When a U.S. investor buys a U.S. stock, there's no currency exchange involved,
so the performance of the stock is the factor that determines the investor's
return. But when a U.S. investor buys a foreign stock, the investor's return is
determined not only by the performance of the stock, but also by changes in
currency exchange rates.
Let's say a mutual fund based in the U.S. buys a foreign stock and sells it
after one year. The fund will first exchange some U.S. dollars into the local
currency, then buy the foreign stock in that currency. If the stock rises 8% in
that one-year period and the exchange rate between the foreign currency and the
dollar remains the same, then the fund will earn an 8% return (minus transaction
costs).
Now let's say the exchange rate fell by 3% during that period. The fund would
have made 8% on the stock, but the drop in currency would have reduced this
gain. Conversely, if the exchange rate rose by 3%, the fund would see a larger
gain, because both the stock and the currency would have gone up.
Foreign stock prices and currency exchange rates can move in the same direction
or in different directions during any given period. So currency risk can
sometimes increase gains in or reduce losses from a stock's performance, and
sometimes reduce gains and increase losses.
<PAGE>
4 The Fund continued
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that may include unstable political and economic climates, lack of standardized
accounting practices and markets that are smaller and therefore more sensitive
to trading activity. Changes in currency exchange rates have the potential to
reduce or eliminate certain gains achieved in securities markets or create net
losses. All of these risks are usually higher in emerging markets, such as most
countries in Southeast Asia, Eastern Europe, Latin America and Africa. The
success of the fund's investment strategy depends largely on the portfolio
manager's skill in allocating assets geographically and in assessing the
potential of the stocks the fund buys.
Because of the fund's management approach, which may include short-term trading,
the fund's portfolio turnover rate may be above-average for a stock fund. High
turnover can increase the fund's brokerage costs and may increase your tax
liability. In addition, foreign securities generally involve higher brokerage
costs per share traded than comparable U.S. securities.
Information on other securities and risks appears on page 26.
A "snapshot" of the fund's investments may be found in the current annual or
semiannual report (see back cover).
Investment Management
[GRAPHIC: MAN SITTING, THINKING]
The fund's investment manager is State Street Research & Management Company. The
manager has engaged a subadviser, GFM International Investors, Inc., to be
responsible for day-to-day management of the fund's portfolio. Ian R. Vose leads
the portfolio management team and has been a member of the team since the
fund's inception in January 1992. A senior vice president and the chief
investment officer of GFM, he joined the firm in 1990 and has worked as an
investment professional since 1983.
State Street Research traces its heritage back to 1924 and the founding of one
of America's first mutual funds. Today the firm has more than $47 billion in
assets under management as of December 31, 1997, including more than $14
billion in mutual funds.
<PAGE>
Investor Expenses 5
-----
Shareholder fees are paid directly by investors.
Annual fund expenses are deducted from fund assets.
Example Here is what you would pay if you invested $1,000 over the years
indicated. The example is for comparison only and does not represent the fund's
actual expenses, either past or future(6).
<TABLE>
<CAPTION>
Class descriptions begin on page 12
----------------------------------------------------
Shareholder Fees (% of offering price)(1) Class A Class B Class C(2) Class S(2)
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Maximum front-end sales charge 4.50 0.00 0.00 0.00
Maximum deferred sales charge 0.00(3) 5.00 1.00 0.00
Annual Fund Expenses (% of average net assets) Class A Class B Class C Class S
- --------------------------------------------------------------------------------------------------------
Management fee 0.95 0.95 0.95 0.95
Marketing/Service (12b-1) fees(4) 0.25 1.00 1.00 0.00
Other expenses, after voluntary reduction(5) 0.70 0.70 0.70 0.70
---- ---- ---- ----
Total annual fund expenses,
after voluntary reduction(5) 1.90 2.65 2.65 1.65
==== ==== ==== ====
Year Class A Class B(7) Class C(7) Class S
- --------------------------------------------------------------------------------------------------------
1 $63 $77/$27 $37/$27 $17
3 $102 $112/$82 $82/$82 $52
5 $143 $161/$141 $141/$141 $90
10 $257 $280/$280 $298/$298 $195
</TABLE>
(1) Not charged on reinvestments or exchanges.
(2) Before November 1, 1997, Class C shares were designated Class D and Class S
shares were designated Class C.
(3) Except for investments of $1 million or more; see page 14.
(4) For share classes that have 12b-1 fees, long-term shareholders may pay more
than the equivalent of the regulatory maximum sales charge.
(5) Without reduction, other expenses would have been 1.15%, 1.15%, 1.17% and
1.15%, and total expenses would have been 2.35%, 3.10%, 3.12% and 2.10% for
Class A, B, C and S, respectively. If the subsidy is reduced or eliminated,
which could happen at any time, performance would be reduced accordingly.
(6) Example assumes dividend reinvestment, hypothetical 5% annual return,
maximum applicable sales charges and conversion of Class B shares to Class A
after eight years.
(7) The first number assumes you sold all your shares at the end of the period,
the second assumes you stayed in the fund.
<PAGE>
6 Financial Highlights
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The information in these tables has been audited by Deloitte & Touche LLP, the
fund's independent accountants. The top section of each table shows information
for a single share of the fund. Total return figures assume reinvestment of all
distributions.
<TABLE>
<CAPTION>
Years ended October 31
------------------------------------------------
Class A 1994(1) 1995(2) 1996(2) 1997(2)
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value, beginning of year ($) 10.54 10.98 9.34 9.22
----- ----- ---- ----
Net investment loss ($)* (0.04) (0.08) (0.04) (0.02)
Net realized and unrealized gain (loss) on
investments and foreign currency ($) 0.48 (1.04) (0.08) 0.22
----- ----- ---- ----
Total from investment operations ($) 0.44 (1.12) (0.12) 0.20
----- ----- ---- ----
Distributions from capital gains ($) -- (0.52) -- --
----- ----- ---- ----
Total distributions ($) -- (0.52) -- --
----- ----- ---- ----
Net asset value, end of year ($) 10.98 9.34 9.22 9.42
===== ==== ==== ====
Total return (%)(3) 4.17(4) (10.38) (1.28) 2.17
Ratios/Supplemental Data:
Net assets at end of year ($ thousands) 22,579 22,497 21,116 16,346
Expense ratio (%)* 1.90(5) 1.90 1.90 1.90
Ratio of net investment loss to
average net assets (%)* (0.87)(5) (0.82) (0.37) (0.18)
Portfolio turnover rate (%) 80.60 100.68 132.36 174.69
Average commission rate ($)(6) n/a n/a 0.0069 0.0140
*Reflects voluntary assumption of fees
or expenses per share in each year ($) 0.03 0.06 0.05 0.04
</TABLE>
<PAGE>
7
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<TABLE>
<CAPTION>
Years ended October 31
------------------------------------------------
Class B 1994(1) 1995(2) 1996(2) 1997(2)
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value, beginning of year ($) 10.54 10.93 9.22 9.04
Net investment loss ($)* (0.06) (0.15) (0.11) (0.09)
Net realized and unrealized gain (loss) on
investments and foreign currency ($) 0.45 (1.04) (0.07) 0.21
----- ----- ---- ----
Total from investment operations ($) 0.39 (1.19) (0.18) 0.12
----- ----- ---- ----
Distributions from capital gains ($) -- (0.52) -- --
----- ----- ---- ----
Total distributions ($) -- (0.52) -- --
----- ----- ---- ----
Net asset value, end of year ($) 10.93 9.22 9.04 9.16
===== ==== ==== ====
Total return (%)(3) 3.70(4) (11.09) (1.95) 1.33
Ratios/Supplemental Data:
Net assets at end of year ($ thousands)
18,904 27,614 28,971 21,914
Expense ratio (%)* 2.65(5) 2.65 2.65 2.65
Ratio of net investment loss
to average net assets (%)* (1.61)(5) (1.54) (1.13) (0.94)
Portfolio turnover rate (%) 80.60 100.68 132.36 174.69
Average commission rate ($)(6) n/a n/a 0.0069 0.0140
*Reflects voluntary assumption of fees
or expenses per share in each year ($) 0.03 0.06 0.05 0.04
</TABLE>
(1) March 1, 1994 (commencement of share class designations) to October 31,
1994.
(2) Per-share figures have been calculated using the average shares method.
(3) Does not reflect any front-end or contingent deferred sales charge. Total
return would be lower if the distributor and its affiliates had not
voluntarily assumed a portion of the fund's expenses.
(4) Not annualized.
(5) Annualized.
(6) Average commission rate per share paid for security trades beginning with
the fiscal year ended October 31, 1996.
<PAGE>
8 Financial Highlights continued
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<TABLE>
<CAPTION>
Years ended October 31
-----------------------------------------------------
Class C (Formerly Class D) 1994(1) 1995(2) 1996(2) 1997(2)
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value, beginning of year ($) 10.54 10.93 9.22 9.03
----- ----- ---- ----
Net investment loss ($)* (0.07) (0.15) (0.11) (0.09)
Net realized and unrealized gain (loss) on
investments and foreign currency ($) 0.46 (1.04) (0.08) 0.22
----- ----- ---- ----
Total from investment operations ($) 0.39 (1.19) (0.19) 0.13
----- ----- ---- ----
Distributions from capital gains ($) -- (0.52) -- --
----- ----- ---- ----
Total distributions ($) -- (0.52) -- --
----- ----- ---- ----
Net asset value, end of year ($) 10.93 9.22 9.03 9.16
===== ==== ==== ====
Total return (%)(3) 3.70(4) (11.09) (2.06) 1.44
Ratios/Supplemental Data:
Net assets at end of year ($ thousands) 2,134 5,674 5,324 2,469
Expense ratio (%)* 2.65(5) 2.65 2.65 2.65
Ratio of net investment loss to
average net assets (%)* (1.62)(5) (1.55) (1.10) (0.97)
Portfolio turnover rate (%) 80.60 100.68 132.36 174.69
Average commission rate ($)(6) n/a n/a 0.0069 0.0140
*Reflects voluntary assumption of fees
or expenses per share in each year ($) 0.03 0.06 0.05 0.04
</TABLE>
<PAGE>
9
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<TABLE>
<CAPTION>
Years ended October 31
-------------------------------------------------------------------------
Class S (Formerly Class C) 1992(1) 1993 1994 1995(2) 1996(2) 1997(2)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of year ($) 7.40 6.50 9.56 11.01 9.39 9.29
----- ------ ----- ----- ------ ------
Net investment income (loss) ($)* 0.04 (0.02) (0.07) (0.05) (0.02) 0.01
Net realized and unrealized gain (loss)
on investments and foreign currency ($) (0.94) 3.17 2.09 (1.05) (0.08) 0.21
----- ------ ----- ----- ------ ------
Total from investment operations ($) (0.90) 3.15 2.02 (1.10) (0.10) 0.22
----- ------ ----- ----- ------ ------
Dividends from net investment income ($) -- (0.04) (0.05) -- -- --
Distributions from capital gains ($) -- (0.05) (0.52) (0.52) -- --
----- ------ ----- ----- ------ ------
Total distributions ($) -- (0.09) (0.57) (0.52) -- --
----- ------ ----- ----- ------ ------
Net asset value, end of year ($) 6.50 9.56 11.01 9.39 9.29 9.51
===== ====== ===== ====== ====== ======
Total return (%)(3) (12.16)(4) 48.95 22.73 (10.16) (1.06) 2.37
Ratios/Supplemental Data:
Net assets at end of year ($ thousands) 10,418 27,767 54,631 33,883 26,649 21,230
Expense ratio (%)* 1.65(5) 1.65 1.65 1.65 1.65 1.65
Ratio of net investment income (loss)
to average net assets (%)* 0.79(5) (0.37) (0.75) (0.51) (0.16) 0.06
Portfolio turnover rate (%) 77.83 116.12 80.60 100.68 132.36 174.69
Average commission rate ($)(6) n/a n/a n/a n/a 0.0069 0.0140
*Reflects voluntary assumption of fees
or expenses per share in each year ($) 0.10 0.08 0.05 0.06 0.05 0.04
</TABLE>
(1) March 1, 1994 (commencement of share class designations) to October 31, 1994
for Class C. January 22, 1992 (commencement of operations) to October 31,
1992 for Class S.
(2) Per-share figures have been calculated using the average shares method.
(3) Does not reflect any front-end or contingent deferred sales charge. Total
return would be lower if the distributor and its affiliates had not
voluntarily assumed a portion of the fund's expenses.
(4) Not annualized.
(5) Annualized.
(6) Average commission rate per share paid for security trades beginning with
the fiscal year ended October 31, 1996.
<PAGE>
10 Performance and Volatility
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
As of October 31, 1997
-------------------------------------
Average Annual Total Return(1) 1 Year 5 Years Since Inception*
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Class A (%) (2.43) 9.38 5.67
Class B (%) (3.67) 9.50 6.00
Class C (%) 0.44 9.78 6.00
Class S (%) 2.37 10.60 6.68
Morgan Stanley EAFE Index (%) 4.63 11.75 7.82
Lipper International Funds Index (%) 13.35 13.69 10.41
</TABLE>
[GRAPHIC: DESCRIPTION OF BAR CHART]
<TABLE>
<CAPTION>
Years ended October 31
------------------------------------------------
Class A Year-by-Year Total Return(1) 1992* 1993 1994 1995 1996 1997
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
50% 48.95
40%
30%
20% 22.39
10%
0% 2.17
---------------------------------------------------------
(10%) (10.38) (1.28)
(15%) (12.16)
</TABLE>
*Since Inception (1/22/92)
(1) Fund returns include performance from before the creation of share classes
in 1994. Because Classes A, B and C involve higher marketing/service (12b-1)
fees (as described on page 5), performance since that time is somewhat lower
for these classes.
<PAGE>
11
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Understanding Performance and Volatility
[GRAPHIC: MAGNIFYING GLASS WITH PAPER]
The information on the opposite page is designed to show two aspects of the
fund's track record:
o Average annual total return is a measure of the fund's performance over time.
It is determined by taking the fund's performance over a given period and
expressing it as an average annual rate. Average annual total return includes
the effects of fund expenses and maximum sales charges for each class, and
assumes that you sold your shares at the end of the period.
o The graph of year-by-year returns shows how volatile the fund has been: how
much the difference has been, historically, between its best years and worst
years. In general, funds with higher average annual total returns will also
have higher volatility. The graph includes the effects of fund expenses, but
not sales charges.
Also included are two independent measures of performance. The Morgan Stanley
EAFE Index is an unmanaged index of stocks from Europe, Australia and the Far
East. The Lipper International Funds Index, which is also unmanaged, shows you
how well the fund has done compared to competing funds.
While the fund does not seek to match the returns or volatility of any index,
these indices can be used as rough guides when gauging the return of this and
other investments. When making comparisons, keep in mind that none of the
indices includes the effects of sales charges. Also, even if your stock
portfolio were identical to the Morgan Stanley index, your returns would always
be lower, because that index does not include brokerage or administrative
expenses.
<PAGE>
12 Your Account
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Opening an Account
[GRAPHIC: KEY]
If you are opening an account through a financial professional, he or she can
assist you with all phases of your investment.
If you are investing through a large retirement plan or other special program,
follow the instructions in your program materials.
To open an account without the help of a financial professional, please use the
instructions on these pages.
Choosing a Share Class
[GRAPHIC: PENCIL WITH PAPER SHOWING DIFFERENT CLASSES TO CHECK]
The fund offers four share classes, each with its own sales charge and expense
structure.
If you are investing a substantial amount and plan to hold your shares for a
long period, Class A shares may make the most sense for you. If you are
investing a lesser amount, you
Class A -- Front Load
o Initial sales charge of 4.5% or less; schedule on page 14
o Lower sales charges for larger investments; see sidebar on facing page and
sales charge schedule
o Lower annual expenses than Class B or C shares due to lower marketing/service
(12b-1) fee of 0.25%
Class B -- Back Load
o No initial sales charge
o Deferred sales charge of 5% or less on shares you sell within five years;
schedule on page 14
o Annual marketing/service (12b-1) fee
o Automatic conversion to Class A shares after eight years, reducing future
annual expenses
Class C(1) -- Level Load
o No initial sales charge
o Deferred sales charge of 1%, paid if you sell shares within one year of
purchase
o Lower deferred sales charge than Class B shares
o Annual marketing/service (12b-1) fee
o No conversion to Class A shares after eight years, so annual expenses do not
decrease
(1) Before November 1, 1997, these were designated Class D.
<PAGE>
13
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may want to consider Class B shares (if investing for at least five years) or
Class C shares (if investing for less than five years). If you are investing
through a special program, such as a large employer-sponsored retirement plan or
certain programs available through brokers, you may be eligible to purchase
Class S shares.
Because all future investments in your account will be made in the share class
you designate when opening the account, you should make your decision carefully.
Your financial professional can help you choose the share class that makes the
most sense for you.
Class S(2) -- No Load
o No sales charges of any kind
o No marketing/service (12b-1) fees; annual expenses are lower than other
share classes
o Available through certain retirement accounts, advisory accounts of the
investment manager and special programs, including broker programs with
record-keeping and other services; these programs usually involve special
conditions and separate fees (contact your financial professional for
information)
(2) Before November 1, 1997, these were designated Class C.
Class A Sales Charge Reductions and Waivers
[GRAPHIC: MAGNIFYING GLASS WITH PAPER]
o Substantial investments receive lower sales charge rates; see information on
the following page.
o The "right of accumulation" allows you to include your existing State Street
Research investments (except Money Market Fund Class E shares) as part of your
current investment for sales charge purposes.
o A "letter of intent" allows you to count all investments in this or other
State Street Research funds over the next 13 months as if you were making them
all at once, for purposes of calculating sales charges.
To take advantage of right of accumulation or letter of intent waivers, consult
your financial professional or State Street Research.
<PAGE>
14 Your Account continued
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Sales Charges
Class A -- Front Load
when you invest this % is which equals
this amount deducted this % of
for sales your net
charges investment
- ----------------------------------------------------------------
Up to $99,999 4.50 4.71
$100,000 - $249,999 3.50 3.63
$250,000 - $499,999 2.50 2.56
$500,000 - $999,999 2.00 2.04
$1 million or more see next column
With Class A shares, you pay a sales charge only when you buy shares.
If you are investing $1 million or more (either as a lump sum or through any of
the methods described on the previous page), you can purchase Class A shares
without any sales charge. However, you may be charged a "contingent deferred
sales charge" (CDSC) if you sell any shares you have held for less than one
year. Policies regarding the calculation of the CDSC are the same as for Class
B.
Class A shares are also offered with low or no sales charges through various
wrap-fee programs and other sponsored arrangements (contact your financial
professional for information).
Class B -- Back Load
this % of net asset value
when you sell shares at the time of purchase (or
in this year after you of sale, if lower) is deduct-
bought them ed from your proceeds
- ------------------------------------------------------------------
First year 5.00
Second year 4.00
Third year 3.00
Fourth year 3.00
Fifth year 2.00
Sixth year or later None
With Class B shares, you pay no sales charge when you invest, but you are
charged a "contingent deferred sales charge" (CDSC) when you sell shares you
have held for five years or less, as described in the table above. Any shares
acquired through reinvestment are not subject to the CDSC. There is no CDSC on
exchanges into other State Street Research funds, and the
<PAGE>
15
-----
date of your initial investment will continue to be used as the basis for CDSC
calculations when you exchange. To ensure that you pay the lowest CDSC possible,
the fund will always use the shares with the lowest CDSC to fill your sell
requests.
The CDSC is waived on shares sold for mandatory retirement distributions or
because of disability or death. Consult your financial professional or the
State Street Research Service Center.
Class B shares automatically convert to Class A shares after eight years,
lowering your annual expenses from that time on.
Class C (Formerly Class D) -- Level Load
this % of net asset value
when you sell shares at the time of purchase (or
in this year after you of sale, if lower) is deduct-
bought them ed from your proceeds
- -----------------------------------------------------------------
First year 1.00
Second year or later None
With Class C shares, you pay no sales charge when you invest, but you are
charged a "contingent deferred sales charge" (CDSC) when you sell shares you
have held for one year or less, as described in the table above. Policies
regarding the calculation of the CDSC are the same as for Class B.
Class C shares currently have the same annual expenses as Class B shares, but
never convert to Class A shares (with their lower annual expenses).
Class S (Formerly Class C) -- No Load
Class S shares have no sales charges or CDSC.
<PAGE>
16 Your Account continued
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Policies for Buying Shares
[GRAPHIC: CASH REGISTER]
Once you have chosen a share class, the next step is to determine the amount you
want to invest.
Minimum Initial Investments:
o $1,000 for accounts that use the Investamatic program
o $2,000 for Individual Retirement Accounts
o $2,500 for all other accounts
Minimum Additional Investments:
o $50 for any account
Complete the enclosed application. You can avoid future inconvenience by signing
up now for any services you might later use.
Timing of Requests All requests received by State Street Research before 4:00
p.m. eastern time will be executed the same day, at that day's closing share
price. Orders received after 4:00 p.m. will be executed the following day, at
that day's closing share price.
Wire Transactions Funds may be wired between 8:00 a.m. and 4:00 p.m. eastern
time. To make a same-day wire investment, please notify State Street Research by
12:00 noon of your intention to wire funds, and make sure your wire arrives by
4:00 p.m. Your bank may charge a fee for wiring money.
<PAGE>
Buying Shares 17
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<TABLE>
<CAPTION>
To Open an Account To Add to an Account
<S> <C> <C>
[GRAPHIC: Through a Contact your financial professional. Contact your financial professional.
BRIEFCASE] Financial
Professional
By Mail [GRAPHIC: Make your check payable to "State Street Fill out the investment stub from an
MAIL BOX] Research Funds." Forward the check and account statement, or indicate the fund
your application to State Street name and account number on your check.
Research. Make your check payable to "State Street
Research Funds." Forward the check and
stub to State Street Research.
[GRAPHIC OF By Federal Forward your application to State Street Call State Street Research to obtain a
FEDERAL Funds Wire Research, then call to obtain an account control number. Instruct your bank to
BUILDING] number. Wire funds using the wire funds to:
instructions at right. o State Street Bank and Trust Company, Boston, MA
o ABA: 011000028
o BNF: fund name and share class you want to buy
o AC: 99029761
o OBI: your name and your account number
o Control: the number given to you by
State Street Research
By Electronic [GRAPHIC: Verify that your bank is a member of the Call State Street Research to verify
Funds Transfer ELECTRIC ACH (Automated Clearing House) system. that the necessary bank information is
(ACH) PLUG] Forward your application to State Street on file for your account. If it is, you
Research. Please be sure to include the may request a transfer with the same
appropriate bank information. Call State phone call. If not, please ask State
Street Research to request a purchase. Street Research to provide you with an
EZ Trader application.
[GRAPHIC: By
CALENDAR] Investamatic Forward your application, with all Call State Street Research to verify
appropriate sections completed, to State that Investamatic is in place on your
Street Research, along with a check for account, or to request a form to add it.
your initial investment payable to Investments are automatic once
"State Street Research Funds." Investamatic is in place.
By Exchange [GRAPHIC: Call State Street Research or visit our Call State Street Research or visit our
TWO ARROWS; Web site. Web site.
ONE POINTING
LEFT, ONE
POINTING
RIGHT]
</TABLE>
State Street Research Service Center
PO Box 8408, Boston, MA 02266-8408 Internet www.ssrfunds.com
Call toll-free:
1-800-562-0032 (business days 8:00 a.m. - 6:00 p.m., eastern time)
<PAGE>
18 Your Account continued
- --------------------------------------------------------------------------------
Policies for Selling Shares
[GRAPHIC: REGISTER WITH RECEIPT]
Circumstances that Require Written Requests Please submit instructions in
writing when any of the following apply:
o you are selling more than $100,000 worth of shares
o the name or address on the account has changed within the last 30 days
o you want the proceeds to go to a name or address not on the account
registration
o you are transferring shares to an account with a different registration or
share class
o you are selling shares held in a corporate or fiduciary account; for these
accounts, additional documents are required:
corporate accounts: certified copy of a corporate resolution
fiduciary accounts: copy of power of attorney or other governing document
To protect your account against fraud, all signatures on these documents must be
guaranteed. You may obtain a signature guarantee at most banks and securities
dealers. A notary public cannot provide a signature guarantee.
Incomplete Sell Requests State Street Research will attempt to notify you
promptly if any information necessary to process your request is missing.
Timing of Requests All requests received in good order by State Street Research
before 4:00 p.m. eastern time will be executed the same day, at that day's
closing share price. Requests received after 4:00 p.m. will be executed the
following day, at that day's closing share price.
Wire Transactions Proceeds sent by federal funds wire must total at least
$5,000. A fee of $7.50 will be deducted from all proceeds sent by wire, and your
bank may charge an additional fee to receive wired funds.
Selling Recently Purchased Shares If you sell shares before the check or
electronic funds transfer (ACH) for those shares has been collected, you will
not receive the proceeds until your initial payment has cleared. This may take
up to 15 days after your purchase was recorded (in rare cases, longer). If you
open an account with shares purchased by wire, you cannot sell those shares
until your application has been processed.
<PAGE>
Selling Shares 19
- --------------------------------------------------------------------------------
To Sell Some or All of Your Shares
[GRAPHIC: Through a Contact your financial professional.
BRIEFCASE] Financial
Professional
By Mail [GRAPHIC: Send a letter of instruction, an endorsed stock
MAIL BOX] power or share certificates (if you hold
certificate shares) to State Street Research.
Specify the fund, the account number and the
dollar value or number of shares. Be sure to
include all necessary signatures and any
additional documents, as well as signature
guarantees if required (see facing page).
[GRAPHIC: By Federal Check with State Street Research to make sure that
FEDERAL Funds Wire a wire redemption privilege including a bank
BUILDING] designation is in place on your account. Once
this is established, you may place your request
to sell shares with State Street Research.
Proceeds will be wired to your pre-designated
bank account. (See "Wire Transactions" on
facing page.)
By Electronic [GRAPHIC: Check with State Street Research to make sure that
Funds Transfer ELECTRIC the EZ Trader feature, including a bank
(ACH) PLUG] designation is in place on your account. Once this
is established, you may place your request to sell
shares with State Street Research. Proceeds will
be sent to your pre-designated bank account.
[GRAPHIC: By As long as the transaction does not require a
TELEPHONE] Telephone written request (see facing page), you or your
financial professional can sell shares by
calling State Street Research. A check will be
mailed to you on the following business day.
By Exchange [GRAPHIC: Read the prospectus for the fund into which you
TWO ARROWS; are exchanging. Call State Street Research or
ONE POINTING visit our Web site.
LEFT, ONE
POINTING
RIGHT]
[GRAPHIC: See plan information on page 23.
CALENDAR] By Systematic
Withdrawal Plan
State Street Research Service Center
PO Box 8408, Boston, MA 02266-8408 Internet www.ssrfunds.com
Call toll-free:
1-800-562-0032 (business days 8:00 a.m. - 6:00 p.m., eastern time)
<PAGE>
20 Your Account continued
- --------------------------------------------------------------------------------
Account Policies
[GRAPHIC: SHEETS OF PAPER]
The Fund's Business Hours The fund is open the same days as the New York Stock
Exchange (generally Monday through Friday). Fund representatives are available
from 8:00 a.m. to 6:00 p.m. eastern time on these days.
Calculating Share Price The fund calculates its net asset value per share (NAV)
every business day at the close of regular trading on the New York Stock
Exchange (usually at 4:00 p.m. eastern time). Each class's share price is
calculated by dividing its net assets by the number of its shares outstanding.
Telephone Requests When you open an account you automatically receive telephone
privileges, allowing you to place requests on your account by telephone. Your
financial professional can also use these privileges to request exchanges on
your account, and with your written permission, redemptions. For your
protection, all telephone calls are recorded.
As long as State Street Research takes certain measures to authenticate
telephone requests on your account, you may be held responsible for unauthorized
requests. Unauthorized telephone requests are rare, but if you want to protect
yourself completely, you can decline the telephone privilege on your
application. The fund may suspend or eliminate the telephone privilege at any
time.
Exchange Privileges There is no fee to exchange shares among State Street
Research funds. Your new fund shares will be the equivalent class as your
current shares. Any contingent deferred sales charges will continue to be
calculated from the date of your initial investment.
Frequent exchanges can interfere with fund management and drive up costs for all
shareholders. Because of this, the fund currently limits each account, or group
of accounts under common ownership or control, to six exchanges per calendar
year. The fund may change or eliminate the exchange privilege at any time, may
limit or cancel any shareholder's exchange privilege and may refuse to
<PAGE>
21
-----
accept any exchange request, particularly those associated with "market timing"
strategies.
For Merrill Lynch customers, exchange privileges extend to Summit Cash Reserves
Fund, which is related to the fund for purposes of investment and investor
services.
Accounts with Low Balances If the value of your account falls below $1,500,
State Street Research may mail you a notice asking you to bring the account back
up to $1,500 or close it out. If you do not take action within 60 days, State
Street Research may either sell your shares and mail the proceeds to you at the
address of record or may deduct an annual maintenance fee (currently $18).
Reinstating Recently Sold Shares For 120 days after you sell shares, you have
the right to "reinstate" your investment by putting some or all of the proceeds
into any currently available State Street Research fund at net asset value. Any
CDSC you paid on the amount you are reinstating will be credited to your
account. You may only use this privilege once in any twelve-month period with
respect to your shares of a given fund.
Distributions and Taxes
[GRAPHIC: UNCLE SAM]
Income and Capital Gains Distributions The fund typically distributes any net
income and net capital gains to shareholders in December, after the end of the
fund's fiscal year, which is October 31.
You may have your distributions reinvested in the fund, invested in a different
State Street Research fund, deposited in a bank account or mailed out by check.
If you do not give State Street Research other instructions, your distributions
will automatically be reinvested in the fund.
<PAGE>
22 Your Account continued
- --------------------------------------------------------------------------------
Tax Considerations
[GRAPHIC: MAGNIFYING GLASS WITH PAPER]
Unless your investment is in a tax-deferred account, you may want to avoid:
o investing a large amount in the fund close to the end of its fiscal year (if
the fund makes a capital gains distribution, you will receive some of your
investment back as a taxable distribution)
o selling shares at a loss for tax purposes and investing in a substantially
identical investment within 30 days before or after that sale (such a
transaction is usually considered a "wash sale," and you will not be allowed
to claim a tax loss)
Tax Effects of Distributions and Transactions In general, any dividends and
short-term capital gain distributions you receive from the fund are taxable as
ordinary income. Distributions of other net capital gains are generally taxable
as capital gains. This is true no matter how long you have owned your shares and
whether you reinvest your distributions or take them in cash.
Foreign investments pose special tax issues for the fund and its shareholders.
For example, certain gains and losses from currency fluctuations may be taxable
as ordinary income. Also, certain foreign countries withhold some interest and
dividends that otherwise would be payable to the fund. If the amount withheld is
material, shareholders may be able to claim a foreign tax credit.
Every year, the fund will send you information detailing the amount of ordinary
income and capital gains distributed to you for the previous year. The sale of
shares in your account may produce a gain or loss, and is a taxable event. For
tax purposes, an exchange is the same as a sale.
Your investment in the fund could have additional tax consequences. Please
consult your tax professional for assistance.
Backup Withholding By law, the fund must withhold 31% of your distributions and
proceeds if you have not provided complete, correct taxpayer information.
<PAGE>
23
-----
Investor Services
[GRAPHIC: TWO HANDS SHAKING]
Investamatic Program Use Investamatic to set up regular automatic investments in
the fund from your bank account. You determine the frequency and amount of your
investments, and you can skip an investment with three days notice. Not
available with Class S shares.
Systematic Withdrawal Plan This plan is designed for retirees and other
investors who want regular withdrawals from a fund account. The plan is free and
allows you to withdraw up to 8% of your fund assets a year without incurring any
contingent deferred sales charges. Certain terms and minimums apply.
Dividend Allocation Plan This plan automatically invests your distributions from
the fund into another fund of your choice, without any fees or sales charges.
Automatic Bank Connection This plan lets you route any distributions or
Systematic Withdrawal Plan payments directly to your bank account.
State Street Research also offers a full range of prototype retirement plans for
individuals, sole proprietors, partnerships, corporations and employees. Call
1-800-562-0032 for information on retirement plans or any of the services
described above.
<PAGE>
24 Fund Details
- --------------------------------------------------------------------------------
Business Structure
[GRAPHIC: PILLAR]
Formed in 1992, the fund is a diversified series of State Street Research
Portfolios, Inc., an open-end management investment company that is organized as
a Maryland corporation. A board of directors representing shareholder interests
oversees the fund's operations, including the hiring of the investment manager,
subadviser and other service providers.
The fund does not hold regular shareholder meetings, but may call meetings when
matters arise that require shareholder approval. These may include amendments to
the investment management and subadvisory agreements, the election of directors
or proposed changes in the fund's investment policies. The fund's goal, which is
not fundamental, may be changed without shareholder approval.
GFM has overall responsibility for managing the fund's investments, under the
supervision of the investment manager. The investment manager receives the
management fee (0.95% of fund assets, annually) and from this pays GFM the
subadvisory fee (0.75% of fund assets, annually). The investment manager,
subadviser and distributor are all subsidiaries of Metropolitan Life Insurance
Company.
Brokers for Portfolio Trades When placing trades for the fund's portfolio, GFM
chooses brokers that provide the best execution (a term defined by service as
well as price), but may also consider a broker's sales of fund shares.
Investment Manager
State Street Research & Management Company
One Financial Center, Boston, MA 02111
Distributor
State Street Research Investment Services, Inc.
One Financial Center,
Boston, MA 02111
Service Center
State Street Research Service Center
P.O. Box 8408, Boston, MA 02266
Custodian
State Street Bank and Trust Company
225 Franklin Street, Boston, MA 02110
<PAGE>
25
-----
Dealer Compensation
[GRAPHIC: CHECK]
Dealers who sell shares of the fund and perform services for fund investors
receive sales commissions and annual fees. These are paid by the fund's
distributor, using money from sales charges, marketing/service (12b-1) fees
and its other resources.
Maximum Dealer Compensation Class A Class B Class C Class S
- --------------------------------------------------------------------------
Initial commission (%) -- 4.00 1.00 0.00
Investments up to $100,000 (%) 4.00 -- -- --
$100,000 - $249,999 (%) 3.00 -- -- --
$250,000 - $499,999 (%) 2.00 -- -- --
$500,000 - $999,999 (%) 1.75 -- -- --
First $1-3 million (%) 1.00(1) -- -- --
Next $2 million (%) 0.50(1) -- -- --
Next $1 and above (%) 0.25(1) -- -- --
Annual fee (%) 0.25 0.25 0.90 0.00
(1) If your broker declines this commission, the one-year CDSC on your
investment is waived.
Additional Policies Please note that the fund maintains additional policies and
reserves certain rights, including:
o The fund may vary its initial or additional investments in the case of
exchanges, reinvestments, periodic investment plans, retirement and employee
benefit plans, sponsored arrangements and other similar programs.
o All orders to purchase shares are subject to acceptance by the fund.
o At any time, the fund may change or discontinue its sales charge waivers and
any of its order acceptance practices, and may suspend the sale of its shares.
o To permit investors to obtain the current price, dealers are responsible for
transmitting all orders to the State Street Research Service Center promptly.
o Dealers may impose a transaction fee on the purchase or sale of shares by
shareholders.
o The distributor may pay its affiliate MetLife Securities, Inc. additional
compensation of up to 0.25% of certain sales or assets.
<PAGE>
26 Other Securities and Risks
- --------------------------------------------------------------------------------
Other Securities and Risks
[GRAPHIC: CERTIFICATES]
Each of the fund's portfolio securities and investment practices offers certain
opportunities and carries various risks. Major investments and risk factors are
outlined in the fund description starting on page 2. Below are brief
descriptions of other securities and practices, along with their associated
risks.
Restricted and Illiquid Securities Any securities that are thinly traded or
whose resale is restricted can be difficult to sell at a desired time and price.
Some of these securities are new and complex, and trade only among institutions;
the markets for these securities are still developing, and may not function as
efficiently as established markets. Owning a large percentage of restricted and
illiquid securities could hamper the fund's ability to raise cash to meet
redemptions. Also, because there may not be an established market price for
these securities, the fund may have to estimate their value, which means that
their valuation (and, to a much smaller extent, the valuation of the fund) may
have a subjective element.
Derivatives Derivatives, a category that includes options and futures, are
financial instruments whose value derives from one or more securities, indices
or currencies. The fund may use derivatives for hedging (attempting to offset a
potential loss in one position by establishing an interest in an opposite
position). This includes the
<PAGE>
27
-----
use of currency-based derivatives for hedging its positions in foreign
securities. The fund may also use derivatives for speculation (investing for
potential income or capital gain).
While hedging can guard against potential risks, it adds to the fund's expenses
and can eliminate some opportunities for gains. There is also a risk that a
derivative intended as a hedge may not perform as expected.
The main risk with derivatives is that some types can amplify a gain or loss,
potentially earning or losing substantially more money than the actual cost of
the derivative.
With all derivatives, whether used for hedging or speculation, there is also the
risk that the counterparty may fail to honor its contract terms, causing a loss
for the fund.
Securities Lending The fund may seek additional income by lending portfolio
securities to qualified institutions. By reinvesting collateral it receives in
these transactions, the fund could magnify any gain or loss it realizes on the
underlying investment. If the borrower fails to return the securities and the
collateral is insufficient to cover the loss, the fund could lose money.
When-issued Securities The fund may invest in securities prior to their date of
issue. These securities could fall in value by the time they are actually
issued, which may be any time from a few days to over a year.
Country Diversification The fund generally includes stocks from at least three
different countries, other than the U.S., at any given time.
Repurchase Agreements The fund may buy securities with the understanding that
the seller will buy them back with interest at a later date. If the seller is
unable to honor its commitment to repurchase the securities, the fund could lose
money.
Bonds The value of any bonds held by the fund is likely to decline when interest
rates rise; this risk is greater for bonds with longer maturities. A less
significant risk is that a bond issuer could default on principal or interest
payments, causing a loss for the fund.
Defensive Investing During unusual market conditions, the fund may place up to
100% of assets in cash, quality short-term U.S. securities or U.S. stocks.
<PAGE>
28 Other Securities and Risks continued
- --------------------------------------------------------------------------------
Investment Limitations
<TABLE>
<CAPTION>
Limitation at the time of investment
------------------------------------
Practice % of total assets % of net assets
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Investing in securities of any given issuer (other
than the U.S. government and its agencies)(1) 5(2) --
Investing in any given industry(1) 25 --
Lending securities 20 --
Lending money prohibited --
Repurchase agreements -- 30
Swap arrangements -- 5
Security
- -------------------------------------------------------------------------------------------
Commodity futures contracts and options contracts
(for non-hedging purposes) -- 5(3)
Other options contracts (for non-hedging purposes) -- 5(3)
Illiquid securities -- 15(4)
Restricted securities 10(5) --
</TABLE>
(1) Fundamental policy; may not be changed without shareholder approval.
(2) Applies only to 75% of fund's total assets. The fund is also prohibited from
investing in more than 10% of an issuer's voting securities.
(3) Initial margin deposits plus premiums may not exceed 5% of the market value
of the fund's net assets in non-hedging transactions. No limits apply when
used in hedging strategies.
(4) Includes repurchase agreements extending over more than seven days.
(5) Does not include Rule 144A securities.
<PAGE>
Notes 29
- --------------------------------------------------------------------------------
<PAGE>
For Additional Information
- --------------------------------------------------------------------------------
You can obtain a free copy of the current annual/semiannual report or SAI by
contacting:
[GRAPHIC: STATE STREET RESEARCH LOGO]
STATE STREET RESEARCH
Service Center
P.O. Box 8408, Boston, MA 02266
Telephone: 1-800-562-0032
Internet: www.ssrfunds.com
Or you can visit the SEC Web site at:
www.sec.gov
You can find additional information on the fund's structure and its performance
in the following documents:
Annual/Semiannual Reports While the prospectus describes the fund's potential
investments, these reports detail the fund's actual investments as of the report
date. Reports include a discussion by fund management of recent economic and
market trends and fund performance. The annual report also includes the report
of the fund's independent accountants.
Statement of Additional Information (SAI) A supplement to the prospectus,
the SAI contains further information about the fund and its investment
limitations and policies. It also includes the most recent annual report and the
independent accountants' report. A current SAI for this fund is on file with the
Securities and Exchange Commission and is incorporated by reference (is legally
part of this prospectus).
prospectus
Control Number: xxxx-xxxxxx(xxxx)SSR-LD EIN-xxxx-xxxxx
<PAGE>
STATE STREET RESEARCH INTERNATIONAL EQUITY FUND
a Series of
STATE STREET RESEARCH PORTFOLIOS, INC.
STATEMENT OF ADDITIONAL INFORMATION
March 1, 1998
TABLE OF CONTENTS
Page
----
INVESTMENT OBJECTIVE..................................................... 2
ADDITIONAL INVESTMENT POLICIES AND RESTRICTIONS.......................... 2
ADDITIONAL INFORMATION CONCERNING
CERTAIN INVESTMENT TECHNIQUES........................................ 5
DEBT INSTRUMENTS AND
PERMITTED CASH INVESTMENTS...........................................15
THE COMPANY, THE FUND AND ITS SHARES.....................................19
DIRECTORS AND OFFICERS...................................................20
INVESTMENT ADVISORY SERVICES.............................................25
PURCHASE AND REDEMPTION OF SHARES........................................27
SHAREHOLDER ACCOUNTS.....................................................32
NET ASSET VALUE..........................................................37
PORTFOLIO TRANSACTIONS...................................................38
CERTAIN TAX MATTERS......................................................42
DISTRIBUTION OF SHARES OF THE FUND.......................................45
CALCULATION OF PERFORMANCE DATA..........................................49
CUSTODIAN................................................................52
INDEPENDENT ACCOUNTANTS..................................................52
FINANCIAL STATEMENTS.....................................................52
The following Statement of Additional Information is not a Prospectus. It
should be read in conjunction with the Prospectus of State Street Research
International Equity Fund (the "Fund") dated March 1, 1998, which may be
obtained without charge from the offices of State Street Research Portfolios,
Inc. ("Portfolios") or State Street Research Investment Services, Inc. (the
"Distributor"), One Financial Center, Boston, Massachusetts 02111-2690.
CONTROL NUMBER: 1285J-970827(0998)SSR-LD IE-879D-897
<PAGE>
INVESTMENT OBJECTIVE
As set forth under "International Equity Fund--Goal and Strategy--
Fundamental Goal" in the Prospectus of State Street Research International
Equity Fund (the "Fund"), the Fund's investment goal is to provide long-term
growth of capital, by investing primarily in common stocks and equity-related
securities of non-U.S. companies. This goal is not fundamental and may be
changed by the Board of Directors without approval of shareholders.
ADDITIONAL INVESTMENT POLICIES AND RESTRICTIONS
As set forth under "International Equity Fund--Portfolio Risks" and "Other
Securities and Risks" in the Fund's Prospectus, the Fund has adopted certain
investment restrictions, and those restrictions are either fundamental or not
fundamental. Fundamental restrictions may not be changed by the Fund except by
the affirmative vote of a majority of the outstanding voting securities of the
Fund, as defined in the Investment Company Act of 1940, as amended (the "1940
Act"). (Under the 1940 Act, a "vote of the majority of the outstanding voting
securities" means the vote, at the annual or a special meeting of security
holders duly called, (i) of 67% or more of the voting securities present at the
meeting if the holders of more than 50% of the outstanding voting securities are
present or represented by proxy or (ii) of more than 50% of the outstanding
voting securities, whichever is less.) Restrictions that are not fundamental may
be changed by the Board of Directors without approval of shareholders.
The Fund's fundamental investment restrictions are set forth below. Under
these restrictions, it is the Fund's policy that it may not:
(1) borrow money or purchase securities on margin, provided, however, that
this restriction shall not prohibit the 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 the
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 securities at a time when it is not in the Fund's
best interests or (c) 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 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 liabilities
represented by such obligations). If at any time the 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 Fund will not issue senior securities, other
than those which represent obligations under (a), (b) and (c). For
purposes hereof, writing covered call and put options and entering
into
2
<PAGE>
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;
(3) purchase or sell real estate or real estate interests (except that the
Fund may invest up to 10% of its total assets in: (i) readily
marketable securities of issuers which deal in real estate or
mortgages; 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 real estate acquired as a result of the
Fund's ownership of such securities;
(4) acquire securities for the purpose of exercising control over the
management 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 government, its agencies and instrumentalities) which,
together with other securities 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 the Fund; and
(5) 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 are not fundamental. Under these
restrictions, it is the Fund's policy:
3
<PAGE>
(1) not to purchase a security issued by another investment company,
except to the extent permitted under the 1940 Act or except by
purchases in the open market involving only customary brokers'
commissions, or securities acquired as dividends or distributions or
in connection with a merger, consolidation or similar transaction or
other exchange;
(2) not to purchase any security or enter into a repurchase agreement if
as a result more than 15% of its net assets would be invested in
securities that are illiquid (including repurchase agreements not
entitling the holder to payment of principal and interest within seven
days; and
(3) not to 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.
The investment restrictions set forth in the Prospectus contain an
exception that permits the Fund to purchase securities pursuant to the exercise
of subscription rights, subject to the condition that such purchase will not
result in the 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 the Fund's interest in
the issuing company being diluted. The market for such rights is not well
developed and, accordingly, the 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 the Fund's portfolio securities with the
result that the Fund
4
<PAGE>
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.
ADDITIONAL INFORMATION CONCERNING
CERTAIN INVESTMENT TECHNIQUES
The Fund may buy and sell certain types of derivatives, such as options,
futures contracts, options on futures contracts, and swaps under circumstances
in which such instruments are expected by State Street Research & Management
Company, the Fund's investment manager (the "Investment Manager") to aid in
achieving the Fund's investment objective. The Fund may also purchase
instruments with characteristics of both futures and securities (e.g., debt
instruments with interest and principal payments determined by reference to the
value of a commodity or a currency at a future time) and which, therefore,
possess the risks of both futures and securities investments.
Derivatives, such as options, futures contracts, options on futures
contracts, and swaps enable the Fund to take both "short" positions (positions
which anticipate a decline in the market value of a particular asset or index)
and "long" positions (positions which anticipate an increase in the market value
of a particular asset or index). The Fund may also use strategies which involve
simultaneous short and long positions in response to specific market conditions,
such as where the Investment Manager anticipates unusually high or low market
volatility.
The Investment Manager may enter into derivative positions for the Fund for
either hedging or non-hedging purposes. The term hedging is applied to defensive
strategies designed to protect the Fund from an expected decline in the market
value of an asset or group of assets that the Fund owns (in the case of a short
hedge) or to protect the Fund from an expected rise in the market value of an
asset or group of assets which it intends to acquire in the future (in the case
of a long or "anticipatory" hedge). Non-hedging strategies include strategies
designed to produce incremental income (such as the option writing strategy
described below) or "speculative" strategies which are undertaken to profit from
an expected decline in the market value of an asset or group of assets asset
which the Fund does not own or expected increases in the market value of an
asset which it does not plan to acquire. Information about specific types of
instruments is provided below.
Futures Contracts
- -----------------
Futures contracts are publicly traded contracts to buy or sell an
underlying asset or group of assets, such as a currency, or an index of
securities, at a future time at a specified price. A contract to buy establishes
a long position while a contract to sell establishes a short position.
The purchase of a futures contract on an equity security or an index of
equity securities normally enables a buyer to participate in the market movement
of the underlying asset or
5
<PAGE>
index after paying a transaction charge and posting margin in an amount equal to
a small percentage of the value of the underlying asset or index. The Fund will
initially be required to deposit with the Fund's custodian or the broker
effecting the futures transaction an amount of "initial margin" in cash or
securities, as permitted under applicable regulatory policies.
Initial margin in futures transactions is different from margin in
securities transactions in that the former does not involve the borrowing of
funds by the customer to finance the transaction. Rather, the initial margin is
like a performance bond or good faith deposit on the contract. Subsequent
payments (called "maintenance margin") to and from the broker will be made on a
daily basis as the price of the underlying asset fluctuates. This process is
known as "marking to market." For example, when the Fund has taken a long
position in a futures contract and the value of the underlying asset has risen,
that position will have increased in value and the Fund will receive from the
broker a maintenance margin payment equal to the increase in value of the
underlying asset. Conversely, when the Fund has taken a long position in a
futures contract and the value of the underlying instrument has declined, the
position would be less valuable, and the Fund would be required to make a
maintenance margin payment to the broker.
At any time prior to expiration of the futures contract, the Fund may elect
to close the position by taking an opposite position which will terminate the
Fund's position in the futures contract. A final determination of maintenance
margin is then made, additional cash is required to be paid by or released to
the Fund, and the Fund realizes a loss or a gain. While futures contracts with
respect to securities do provide for the delivery and acceptance of such
securities, such delivery and acceptance are seldom made.
In transactions establishing a long position in a futures contract, assets
equal to the face value of the futures contract will be identified by the Fund
to the Fund's custodian for maintenance in a separate account to insure that the
use of such futures contracts is unleveraged. Similarly, assets having a value
equal to the aggregate face value of the futures contract will be identified
with respect to each short position. The Fund will utilize such assets and
methods of cover as appropriate under applicable exchange and regulatory
policies.
Options
- -------
The Fund may use options to implement its investment strategy. There are
two basic types of options: "puts" and "calls." Each type of option can
establish either a long or a short position, depending upon whether the Fund is
the purchaser or the writer of the option. A call option on a security, for
example, gives the purchaser of the option the right to buy, and the writer the
obligation to sell, the underlying asset at the exercise price during the option
period. Conversely, a put option on a security gives the purchaser the right to
sell, and the writer the obligation to buy, the underlying asset at the exercise
price during the option period.
Purchased options have defined risk, that is, the premium paid for the
option, no matter how adversely the price of the underlying asset moves, while
affording an opportunity for gain
6
<PAGE>
corresponding to the increase or decrease in the value of the optioned asset. In
general, a purchased put increases in value as the value of the underlying
security falls and a purchased call increases in value as the value of the
underlying security rises
The principal reason to write options is to generate extra income (the
premium paid by the buyer). Written options have varying degrees of risk. An
uncovered written call option theoretically carries unlimited risk, as the
market price of the underlying asset could rise far above the exercise price
before its expiration. This risk is tempered when the call option is covered,
that is, when the option writer owns the underlying asset. In this case, the
writer runs the risk of the lost opportunity to participate in the appreciation
in value of the asset rather than the risk of an out-of-pocket loss. A written
put option has defined risk, that is, the difference between the agreed-upon
price that the Fund must pay to the buyer upon exercise of the put and the
value, which could be zero, of the asset at the time of exercise.
The obligation of the writer of an option continues until the writer
effects a closing purchase transaction or until the option expires. To secure
its obligation to deliver the underlying asset in the case of a call option, or
to pay for the underlying asset in the case of a put option, a covered writer is
required to deposit in escrow the underlying security or other assets in
accordance with the rules of the applicable clearing corporation and exchanges.
Among the options which the Fund may enter are options on securities
indices. In general, options on indices of securities are similar to options on
the securities themselves except that delivery requirements are different. For
example, a put option on an index of securities does not give the holder the
right to make actual delivery of a basket of securities but instead gives the
holder the right to receive an amount of cash upon exercise of the option if the
value of the underlying index has fallen below the exercise price. The amount of
cash received will be equal to the difference between the closing price of the
index and the exercise price of the option expressed in dollars times a
specified multiple. As with options on equity securities or futures contracts, a
Fund may offset its position in index options prior to expiration by entering
into a closing transaction on an exchange or it may let the option expire
unexercised.
A securities index assigns relative values to the securities included in
the index and the index options are based on a broad market index. In connection
with the use of such options, the Fund may cover its position by identifying
assets having a value equal to the aggregate face value of the option position
taken.
Options on Futures Contracts
- ----------------------------
An option on a futures contract gives the purchaser the right, in return
for the premium paid, to assume a position in a futures contract (a long
position if the option is a call and a short position if the option is a put) at
a specified exercise price at any time during the period of the option.
7
<PAGE>
Limitations and Risks of Options and Futures Activity
- -----------------------------------------------------
The Fund may not establish a position in a commodity futures contract or
purchase or sell a commodity option contract for other than bona fide hedging
purposes if immediately thereafter the sum of the amount of initial margin
deposits and premiums required to establish such positions for such nonhedging
purposes would exceed 5% of the market value of the Fund's net assets. The Fund
applies a similar policy to options that are not commodities.
As noted above, the Fund may engage in both hedging and nonhedging
strategies. Although effective hedging can generally capture the bulk of a
desired risk adjustment, no hedge is completely effective. The Fund's ability to
hedge effectively through transactions in futures and options depends on the
degree to which price movements in its holdings correlate with price movements
of the futures and options.
Nonhedging strategies typically involve special risks. The profitability of
the Fund's nonhedging strategies will depend on the ability of the Investment
Manger to analyze both the applicable derivatives market and the market for the
underlying asset or group of assets. Derivatives markets are often more volatile
than corresponding securities markets and a relatively small change in the price
of the underlying asset or group of assets can have a magnified effect upon the
price of a related derivative instrument.
Derivatives markets also are often less liquid than the market for the
underlying asset or group of assets. Some positions in futures and options may
be closed out only on an exchange which provides a secondary market therefor.
There can be no assurance that a liquid secondary market will exist for any
particular futures contract or option at any specific time. Thus, it may not be
possible to close such an option or futures position prior to maturity. The
inability to close options and futures positions also could have an adverse
impact on the Fund's ability to effectively carry out their derivative
strategies and might, in some cases, require a Fund to deposit cash to meet
applicable margin requirements. The Fund will enter into an option or futures
position only if it appears to be a liquid investment.
Swaps
- -----
The Fund may enter into various forms of swap arrangements with
counterparties with respect to interest rates, currency rates or indices,
including purchase of caps, floors and collars as described below. In an
interest rate swap the Fund could agree for a specified period to pay a bank or
investment banker the floating rate of interest on a so-called notional
principal amount (i.e., an assumed figure selected by the parties for this
purpose) in exchange for agreement by the bank or investment banker to pay the
Fund a fixed rate of interest on the notional principal amount. In a currency
swap the Fund would agree with the other party to exchange cash flows based on
the relative differences in values of a notional amount of two (or more)
currencies; in an index swap, the Fund would agree to exchange cash flows on a
notional amount based on changes in the values of the selected indices. Purchase
of a cap entitles the purchaser to receive payments from the seller on a
notional amount to the extent
8
<PAGE>
that the selected index exceeds an agreed upon interest rate or amount whereas
purchase of a floor entitles the purchaser to receive such payments to the
extent the selected index falls below an agreed upon interest rate or amount. A
collar combines a cap and a floor.
The Fund may enter credit protection swap arrangements involving the sale
by the Fund of a put option on a debt security which is exercisable by the buyer
upon certain events, such as a default by the referenced creditor on the
underlying debt or a bankruptcy event of the creditor.
Most swaps entered into by the Fund will be on a net basis; for example, in
an interest rate swap, amounts generated by application of the fixed rate and
the floating rate to the notional principal amount would first offset one
another, with the Fund either receiving or paying the difference between such
amounts. In order to be in a position to meet any obligations resulting from
swaps, the Fund will set up a segregated custodial account to hold appropriate
liquid assets, including cash; for swaps entered into on a net basis, assets
will be segregated having a daily net asset value equal to any excess of the
Fund's accrued obligations over the accrued obligations of the other party,
while for swaps on other than a net basis assets will be segregated having a
value equal to the total amount of the Fund's obligations.
These arrangements will be made primarily for hedging purposes, to preserve
the return on an investment or on a portion of the Fund's portfolio. However,
the Fund may, as noted above, enter into such arrangements for income purposes
to the extent permitted by the Commodities Futures Trading Commission for
entities which are not commodity pool operators, such as the Fund. In entering a
swap arrangement, the Fund is dependent upon the creditworthiness and good faith
of the counterparty. The Fund attempts to reduce the risks of nonperformance by
the counterparty by dealing only with established, reputable institutions. The
swap market is still relatively new and emerging; positions in swap arrangements
may become illiquid to the extent that nonstandard arrangements with one
counterparty are not readily transferable to another counterparty or if a market
for the transfer of swap positions does not develop. The use of interest rate
swaps is a highly specialized activity which involves investment techniques and
risks different from those associated with ordinary portfolio securities
transactions. If the Investment Manager is incorrect in its forecasts of market
values, interest rates and other applicable factors, the investment performance
of the Fund would diminish compared with what it would have been if these
investment techniques were not used. Moreover, even if the Investment Manager is
correct in its forecasts, there is a risk that the swap position may correlate
imperfectly with the price of the asset or liability being hedged.
Currency Transactions
- ---------------------
The Fund may engage in currency exchange transactions in order to protect
against the effect of uncertain future exchange rates on securities denominated
in foreign currencies. The Fund will conduct its currency exchange transactions
either on a spot (i.e., cash) basis at the rate prevailing in the currency
exchange market, or by entering into forward contracts to
9
<PAGE>
purchase or sell currencies. The Fund's dealings in forward currency exchange
contracts will be limited to hedging involving either specific transactions or
aggregate portfolio positions. 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 contract agreed upon by the
parties, at a price set at the time of the contract. These contracts are not
commodities and are entered into in the interbank market conducted directly
between currency traders (usually large commercial banks) and their customers.
In entering a forward currency contract, the Fund is dependent upon the
creditworthiness and good faith of the counterparty. The Fund attempts to reduce
the risks of nonperformance by the counterparty by dealing only with
established, reputable institutions. Although spot and forward contracts will be
used primarily to protect the Fund from adverse currency movements, they also
involve the risk that anticipated currency movements will not be accurately
predicted, which may result in losses to the Fund. This method of protecting the
value of the Fund's portfolio securities against a decline in the value of a
currency does not eliminate fluctuations in the underlying prices of the
securities. It simply establishes a rate of exchange that can be achieved at
some future point in time. Although such contracts tend to minimize the risk of
loss due to a decline in the value of hedged currency, they tend to limit any
potential gain that might result should the value of such currency increase.
Repurchase Agreements
- ---------------------
The Fund may enter into repurchase agreements. Repurchase agreements occur
when the Fund acquires a security and the seller, which may be either (i) a
primary dealer in U.S. Government securities or (ii) an FDIC-insured bank having
gross assets in excess of $500 million, simultaneously commits to repurchase it
at an agreed-upon price on an agreed-upon date within a specified number of days
(usually not more than seven) from the date of purchase. The repurchase price
reflects the purchase price plus an agreed-upon market rate of interest which is
unrelated to the coupon rate or maturity of the acquired security. The Fund will
only enter into repurchase agreements involving U.S. Government securities.
Repurchase agreements could involve certain risks in the event of default or
insolvency of the other party, including possible delays or restrictions upon
the Fund's ability to dispose of the underlying securities. Repurchase
agreements will be limited to 30% of the Fund's net assets, except that
repurchase agreements extending for more than seven days when combined with any
net illiquid securities held by the Fund will be limited to 15% of the Fund's
net assets.
Reverse Repurchase Agreements
- -----------------------------
The Fund may enter into reverse repurchase agreements. However, the Fund
has no present intention of engaging in reverse repurchase agreements in excess
of 5% of the Fund's total assets. In a reverse repurchase agreement the Fund
transfers a portfolio instrument to another person, such as a financial
institution, broker or dealer, in return for a percentage of the instrument's
market value in cash, and agrees that on a stipulated date in the future the
Fund will repurchase the portfolio instrument by remitting the original
consideration plus interest at an agreed-upon rate. The ability to use reverse
repurchase agreements may enable,
10
<PAGE>
but does not ensure the ability of, the Fund to avoid selling portfolio
instruments at a time when a sale may be deemed to be disadvantageous.
When effecting reverse repurchase agreements, assets of the Fund in a
dollar amount sufficient to make payment of the obligations to be purchased are
segregated on the Fund's records at the trade date and maintained until the
transaction is settled.
When-Issued Securities
- ----------------------
The Fund may purchase "when-issued" securities, which are traded on a price
or yield basis prior to actual issuance. Such purchases will be made only to
achieve the Fund's investment objective and not for leverage. The when-issued
trading period generally lasts from a few days to months, or over a year or
more; during this period dividends or interest on the securities are not
payable. A frequent form of when-issued trading occurs when corporate securities
to be created by a merger of companies are traded prior to the actual
consummation of the merger. Such transactions may involve a risk of loss if the
value of the securities falls below the price committed to prior to actual
issuance. The Fund's custodian will establish a segregated account when the Fund
purchases securities on a when-issued basis consisting of cash or liquid
securities equal to the amount of the when-issued commitments. Securities
transactions involving delayed deliveries or forward commitments are frequently
characterized as when-issued transactions and are similarly treated by the Fund.
Restricted Securities
- ---------------------
It is the Fund's policy not to make an investment in restricted securities,
including restricted securities sold in accordance with Rule 144A under the
Securities Act of 1933 ("Rule 144A Securities") if, as a result, more than 35%
of the Fund's total assets are invested in restricted securities, provided not
more than 10% of the Fund's total assets are invested in restricted securities
other than Rule 144A Securities.
Securities may be resold pursuant to Rule 144A under certain circumstances
only to qualified institutional buyers as defined in the rule, and the markets
and trading practices for such securities are relatively new and still
developing; depending on the development of such markets, Rule 144A Securities
may be deemed to be liquid as determined by or in accordance with methods
adopted by the Board of Directors. Under such methods the following factors are
considered, among others: the frequency of trades and quotes for the security,
the number of dealers and potential purchasers in the market, market making
activity, and the nature of the security and marketplace trades. Investments in
Rule 144A Securities could have the effect of increasing the level of the Fund's
illiquidity to the extent that qualified institutional buyers become, for a
time, uninterested in purchasing such securities. Also, the Fund may be
adversely impacted by the subjective valuation of such securities in the absence
of a market for them. Restricted securities that are not resalable under Rule
144A may be subject to risks of illiquidity and subjective valuations to a
greater degree than Rule 144A Securities.
11
<PAGE>
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
erratic market movements than more established companies or the market
generally. Also, these companies may have limited product lines, markets or
financial resources, or they may be dependent on a limited management group.
Foreign Investments
- -------------------
The Fund may invest in securities of non-U.S. issuers directly, or
indirectly in the form of American Depositary Receipts ("ADRs") and European
Depositary Receipts ("EDRs").
ADRs are receipts, typically issued by a U.S. bank or trust company, which
evidence ownership of underlying securities issued by a foreign corporation or
other entity. EDRs are receipts issued in Europe which evidence a similar
ownership arrangement. Generally, ADRs in registered form are designed for use
in U.S. securities markets and EDRs are designed for use in European securities
markets. The underlying securities are not always denominated in the same
currency as the ADRs or EDRs. Although investment in the form of ADRs or EDRs
facilitates trading in foreign securities, it does not mitigate all the risks
associated with investing in foreign securities.
ADRs are available through facilities which may be either "sponsored" or
"unsponsored." In a sponsored arrangement, the foreign issuer establishes the
facility, pays some or all of the depository's fees, and usually agrees to
provide shareholder communications. In an unsponsored arrangement, the foreign
issuer is not involved, and the ADR holders pay the fees of the depository.
Sponsored ADRs are generally more advantageous to the ADR holders and the issuer
than are unsponsored ADRs. More and higher fees are generally charged in an
unsponsored program compared to a sponsored facility. Only sponsored ADRs may be
listed on the New York or American Stock Exchanges. Unsponsored ADRs may prove
to be more risky due to (a) the additional costs involved to the Fund; (b) the
relative illiquidity of the issue in U.S. markets; and (c) the possibility of
higher trading costs in the over-the-counter market as opposed to exchange based
tradings. The Fund will take these and other risk considerations into account
before making an investment in an unsponsored ADR.
The risks associated with investments in foreign securities include those
resulting from fluctuations in currency exchange rates, revaluation of
currencies, future political and economic developments, including the risks of
nationalization or expropriation, the possible imposition of currency exchange
blockages, higher operating expenses, foreign withholding and other taxes which
may reduce investment return, reduced availability of public information
concerning issuers, the difficulties in obtaining and enforcing a judgment
against a foreign issuer and the fact that foreign issuers are not generally
subject to uniform accounting, auditing
12
<PAGE>
and financial reporting standards or to other regulatory practices and
requirements comparable to those applicable to domestic issuers. Moreover,
securities of many foreign issuers may be less liquid and their prices more
volatile than those of securities of comparable domestic issuers.
It is anticipated that many of the foreign investments by the Fund will
consist of securities of issuers in countries with developed economies. However,
the Fund may also invest in the securities of issuers in countries with less
developed economies as deemed appropriate by the Investment Manager. Such
countries include countries that have an emerging stock market that trades a
small number of securities; countries with low- to middle-income economies;
and/or countries with economies that are based on only a few industries. Eastern
European countries are considered to have less developed capital markets.
Zero Coupon Bonds
- -----------------
Zero coupon bonds do not require the periodic payment of interest and are
issued at a significant discount from face value. The discount approximates the
total amount of interest the bonds will accrue and compound over the period
until 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
investments may experience greater volatility in market value than debt
obligations which make regular payments of interest. The Fund will accrue income
on such investments for tax and accounting purposes, which is distributable to
shareholders. When distributed to shareholders, any such income resulting from
zero coupon bonds will be paid from the Fund's cash assets, or, if necessary to
pay the distribution, from the proceeds of sales of portfolio securities held by
the Fund. Furthermore, the Fund will be unable to purchase additional portfolio
securities with any cash used to make such distributions and its current income
may be reduced.
Securities Lending
- ------------------
The Fund may lend portfolio securities with a value of up to 33 1/3% of its
total assets. The Fund will receive cash or cash equivalents (e.g., U.S.
Government obligations) as collateral in an amount equal to at least 100% of the
current market value of any loaned securities plus accrued interest. Collateral
received by the Fund will generally be held in the form tendered, although cash
may be invested in unaffiliated mutual funds with quality short-term portfolios,
securities issued or guaranteed by the U.S. Government or its agencies or
instrumentalities or certain unaffiliated mutual funds, irrevocable stand-by
letters of credit issued by a bank, or repurchase agreements, or other similar
investments. The investing of cash collateral received from loaning portfolio
securities involves leverage which magnifies the potential for gain or loss on
monies invested and, therefore, results in an increase in the volatility of the
Fund's outstanding securities. Such loans may be terminated at any time.
13
<PAGE>
The Fund will retain rights to dividends, interest or other distributions,
on the loaned securities. Voting rights pass with the lending, although the Fund
may call loans to vote proxies if desired. Should the borrower of the securities
fail financially, there is a risk of delay in recovery of the securities or loss
of rights in the collateral. Loans are made only to borrowers which are deemed
by the Investment Manager or its agents to be of good financial standing.
Short-Term Trading
- ------------------
The Fund may engage in short-term trading of securities and reserves full
freedom with respect to portfolio turnover. In periods where there are rapid
changes in economic conditions and security price levels or when reinvestment
strategy changes significantly, portfolio turnover may be higher than during
times of economic and market price stability or when investment strategy remains
relatively constant. The Fund's portfolio turnover rate involves greater
transaction costs, relative to other funds in general, and may have tax and
other consequences.
Temporary and Defensive Investments
- -----------------------------------
The Fund may hold up to 100% of its assets in cash or short-term debt
securities for temporary defensive purposes. The Fund will adopt a temporary
defensive position when, in the opinion of the Investment Manager, such a
position is more likely to provide protection against adverse market conditions
than adherence to the Fund's other investment policies. The types of short-term
instruments in which the Fund may invest for such purposes include short-term
money market securities, such as repurchase agreements, and securities issued or
guaranteed by the U.S. Government or its agencies or instrumentalities,
certificates of deposit, time deposits and bankers' acceptances of certain
qualified financial institutions and corporate commercial paper, which at the
time of purchase are rated at least within the "A" major rating category by
Standard & Poor's Corporation ("S&P") or the "Prime" major rating category by
Moody's Investor's Service, Inc. ("Moody's"), or, if not rated, issued by
companies having an outstanding long-term unsecured debt issued rated at least
within the "A" category by S&P or Moody's.
Industry Classifications
- ------------------------
In determining how much of the Fund's portfolio is invested in a given
industry, the following industry classifications are currently used. Securities
issued or guaranteed as to principal or interest by the U.S. Government or its
agencies or instrumentalities or mixed- ownership Government corporations or
sponsored enterprises (including repurchase agreements involving U.S. Government
securities to the extent excludable under relevant regulatory interpretations)
are excluded. Securities issued by foreign governments are also excluded.
Companies engaged in the business of financing may be classified according to
the industries of their parent or sponsor companies or industries that otherwise
most affect such financing companies. Issuers of asset-backed pools will be
classified as separate industries
14
<PAGE>
based on the nature of the underlying assets, such as mortgages and credit card
receivables. "Asset-backed-Mortgages" includes private pools of nongovernment
backed mortgages.
<TABLE>
<CAPTION>
Energy Materials Capital Equipment
- ----- --------- -----------------
<S> <C> <C>
Energy Resources Building Materials Aerospace
Utilities Chemicals Construction & Housing
Forest Products & Paper Data Processing
Metals (non-ferrous) Electronics
Metals (steel) Electronic Components
Misc. Materials Industrial Components
Machinery/Engineering
Consumer Goods Services Financial
- -------------- -------- ---------
Appliances Broadcasting/Publishing Banking
Automobiles Business/Public Services Financial Services
Beverages/Tobacco Leisure/Tourism Insurance
Food/Household Merchandising
Health/Personal Care Telecommunications Miscellaneous
Recreation Transportation (airlines) -------------
Textiles/Apparel Transportation (road/rail) Real Estate
Transportation (road/rail) Multi-industry
Wholesale/Trade Gold Mining
</TABLE>
DEBT INSTRUMENTS AND
PERMITTED CASH INVESTMENTS
The Fund may invest in long-term and short-term debt securities. Certain
debt securities and money market instruments in which the Fund may invest are
described below.
Managing Volatility. In administering the Fund's portfolio, the Investment
Manager attempts to manage volatility in part by managing the duration and
weighted average maturity of the Fund's bond position.
Duration is an indicator of the expected volatility of a bond position in
response to changes in interest rates. In calculating duration, the Fund
measures the average time required to receive all cash flows associated with
those debt securities held in the Fund's portfolio -- representing payments of
principal and interest -- by considering the timing, frequency and amount of
payment expected from each portfolio security. The higher the duration, the
greater the gains and losses when interest rates change. Duration generally is a
more accurate measure of potential volatility with a portfolio composed of
high-quality debt securities, such as U.S. government securities, municipal
securities and high-grade U.S. corporate bonds, than with lower-grade
securities.
The Investment Manager may use several methods to manage the duration of
the Fund's bond position in order to increase or decrease its exposure to
changes in interest rates. First, the Investment Manager may adjust portfolio
duration by adjusting the mix of debt securities held by the Fund. For example,
if the Investment Manager intends to shorten duration, it may sell debt
instruments that individually have a long duration and purchase other debt
instruments that individually have a shorter duration. Among the factors that
will affect a debt security's duration are the length of time to maturity, the
timing of interest and principal payments, and whether the terms of the security
give the issuer of the security the right to call the security prior to
maturity. Second, the Investment Manager may adjust bond portfolio duration
using derivative transactions, especially with interest rate futures and options
contracts. For example, if the Investment Manager wants to lengthen the duration
of the Fund's bond position, it could purchase interest rate futures contracts
instead of buying longer-term bonds or selling shorter-term bonds. Similarly,
during periods of lower interest rate volatility, the Investment Manager may use
a technique to extend duration in the event rates rise by writing an
out-of-the-money put option and receiving premium income with the expectation
that the option could be exercised. In managing duration, the use of such
derivatives may be faster and more efficient than trading specific portfolio
securities.
Weighted average maturity is another indicator of potential volatility used
by the Investment Manager with respect to the Fund's bond portfolio, although
for certain types of debt securities, such as high quality debt securities, it
is not as accurate as duration in quantifying potential volatility. Weighted
average maturity is the average of all maturities of the individual debt
securities held by the Fund, weighted by the market value of each security.
Generally, the longer the weighted maturity, the more bond prices will vary in
response to changes in interest rates.
U.S. Government and Related Securities. U.S. Government securities are
securities which are issued or guaranteed as to principal or interest by the
U.S. Government, a U.S. Government agency or instrumentality, or certain
mixed-ownership Government corporations as described herein. The U.S. Government
securities in which the Fund invests include, among others:
o direct obligations of the U.S. Treasury, i.e., U.S. Treasury bills, notes,
certificates and bonds;
o obligations of U.S. Government agencies or instrumentalities, such as the
Federal Home Loan Banks, the Federal Farm Credit Banks, the Federal
National Mortgage Association, the Government National Mortgage Association
and the Federal Home Loan Mortgage Corporation; and
15
<PAGE>
o obligations of mixed-ownership Government corporations such as Resolution
Funding Corporation.
U.S. Government securities which the Fund may buy are backed in a variety
of ways by the U.S. Government, its agencies or instrumentalities. Some of these
obligations, such as Government National Mortgage Association mortgage-backed
securities, are backed by the full faith and credit of the U.S. Treasury. Other
obligations, such as those of the Federal National Mortgage Association, are
backed by the discretionary authority of the U.S. Government to purchase certain
obligations of agencies or instrumentalities, although the U.S. Government has
no legal obligation to do so. Obligations such as those of the Federal Home Loan
Banks, the Federal Farm Credit Banks, the Federal National Mortgage Association
and the Federal Home Loan Mortgage Corporation are backed by the credit of the
agency or instrumentality issuing the obligations. Certain obligations of
Resolution Funding Corporation, a mixed-ownership Government corporation, are
backed with respect to interest payments by the U.S. Treasury, and with respect
to principal payments by U.S. Treasury obligations held in a segregated account
with a Federal Reserve Bank. Except for certain mortgage-related securities, the
Fund will only invest in obligations issued by mixed-ownership Government
corporations where such securities are guaranteed as to payment of principal or
interest by the U.S. Government or a U.S. Government agency or instrumentality,
and any unguaranteed principal or interest is otherwise supported by U.S.
Government obligations held in a segregated account.
U.S. Government securities may be acquired by the Fund in the form of
separately traded principal and interest components of securities issued or
guaranteed by the U.S. Treasury. The principal and interest components of
selected securities are traded independently under the Separate Trading of
Registered Interest and Principal of Securities ("STRIPS") program. Under the
STRIPS program, the principal and interest components are individually numbered
and separately issued by the U.S. Treasury at the request of depository
financial institutions, which then trade the component parts independently.
Obligations of Resolution Funding Corporation are similarly divided into
principal and interest components and maintained as such on the book entry
records of the Federal Reserve Banks.
In addition, the Fund may invest in custodial receipts that evidence
ownership of future interest payments, principal payments or both on certain
U.S. Treasury notes or bonds in connection with programs sponsored by banks and
brokerage firms. Such notes and bonds are held in custody by a bank on behalf of
the owners of the receipts. These custodial receipts are known by various names,
including "Treasury Receipts" ("TRs"), "Treasury Investment Growth Receipts"
("TIGRs") and "Certificates of Accrual on Treasury Securities" ("CATS"), and may
not be deemed U.S. Government securities.
The Fund may also invest from time to time in collective investment
vehicles, the assets of which consist principally of U.S. Government securities
or other assets substantially collateralized or supported by such securities,
such as Government trust certificates.
16
<PAGE>
Foreign Government Debt. The obligations of foreign governmental entities
have various kinds of government support and include obligations issued or
guaranteed by foreign governmental entities with taxing powers. These
obligations may or may not be supported by the full faith and credit of a
foreign government. The Fund will invest in foreign government securities of
issuers considered stable by GFM International Investors Limited, the sub-
investment manager (the "Sub-Investment Manager"), 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. The Sub-Investment Manager 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 the 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 supranational entity is unable to repay its borrowings.
Foreign Currency Units. The Fund may invest in securities denominated in a
multi-national currency unit. An illustration of a multi-national currency unit
is the European Currency Unit (the "ECU"), which is a "basket" consisting of
specified amounts of the currencies of the member states of the European
Community, a Western European economic cooperative organization that includes
France, Germany, The Netherlands 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. The Sub-Investment Manager does not believe that such adjustments
will adversely affect holders of ECU-denominated obligations or the
marketability of such securities. European supranational entities, in
particular, issue ECU-denominated obligations. The Fund may invest in securities
denominated in the currency of one nation although issued by a governmental
entity, corporation or financial institution of another nation. For example, the
Fund may invest in a British pound sterling-denominated obligation issued by a
United States corporation. Such investments involve credit risks associated with
the issuer and currency risks associated with the currency in which the
obligation is denominated.
Synthetic Non-U.S. Money Market Positions. Money market securities
denominated in foreign currencies are permissible investments of the Fund. In
addition to, or in lieu of direct investment in such securities, the Fund 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.
17
<PAGE>
dollar-denominated instruments may offer greater liquidity than direct
investment in a money market instrument denominated in a foreign currency.
Bank Money Investments. Bank money investments include, but are not limited
to, certificates of deposit, bankers' acceptances and time deposits.
Certificates of deposit are generally short-term (i.e., less than one year),
interest-bearing negotiable certificates issued by commercial banks or savings
and loan associations against funds deposited in the issuing institution. A
banker's acceptance is a time draft drawn on a commercial bank by a borrower,
usually in connection with an international commercial transaction (to finance
the import, export, transfer or storage of goods). A banker's acceptance may be
obtained from a domestic or foreign bank, including a U.S. branch or agency of a
foreign bank. The borrower is liable for payment as well as the bank, which
unconditionally guarantees to pay the draft at its face amount on the maturity
date. Most acceptances have maturities of six months or less and are traded in
secondary markets prior to maturity. Time deposits are nonnegotiable deposits
for a fixed period of time at a stated interest rate. The Fund will not invest
in any such bank money investment unless the investment is issued by a U.S. bank
that is a member of the Federal Deposit Insurance Corporation ("FDIC"),
including any foreign branch thereof, a U.S. branch or agency of a foreign bank,
a foreign branch of a foreign bank, or a savings bank or savings and loan
association that is a member of the FDIC and which at the date of investment has
capital, surplus and undivided profits (as of the date of its most recently
published financial statements) in excess of $50 million. The Fund will not
invest in time deposits maturing in more than seven days and will not invest
more than 10% of its total assets in time deposits maturing in two to seven
days.
U.S. branches and agencies of foreign banks are offices of foreign banks
and are not separately incorporated entities. They are chartered and regulated
either federally or under state law. U.S. federal branches or agencies of
foreign banks are chartered and regulated by the Comptroller of the Currency,
while state branches and agencies are chartered and regulated by authorities of
the respective states or the District of Columbia. U.S. branches of foreign
banks may accept deposits and thus are eligible for FDIC insurance; however, not
all such branches elect FDIC insurance. Unlike U.S. branches of foreign banks,
U.S. agencies of foreign banks may not accept deposits and thus are not eligible
for FDIC insurance. Both branches and agencies can maintain credit balances,
which are funds received by the office incidental to or arising out of the
exercise of their banking powers and can exercise other commercial functions,
such as lending activities.
Short-Term Corporate Debt Instruments. Short-term corporate debt
instruments include commercial paper to finance short-term credit needs (i.e.,
short-term, unsecured promissory notes) issued by corporations including but not
limited to (a) domestic or foreign bank holding companies or (b) their
subsidiaries or affiliates where the debt instrument is guaranteed by the bank
holding company or an affiliated bank or where the bank holding company or the
affiliated bank is unconditionally liable for the debt instrument. Commercial
paper is usually sold on a discounted basis and has a maturity at the time of
issuance not exceeding nine months.
18
<PAGE>
Commercial Paper Ratings. Commercial paper investments at the time of
purchase will be rated within the "A" major rating category by S&P or within the
"Prime" major rating category by Moody's, or, if not rated, issued by companies
having an outstanding long-term unsecured debt issue rated at least within the
"A" category by S&P or by Moody's. The money market investments in corporate
bonds and debentures (which must have maturities at the date of settlement of
one year or less) must be rated at the time of purchase at least within the "A"
category by S&P or within the "Prime" category by Moody's.
Commercial paper rated within the "A" category (highest quality) by S&P is
issued by entities which have liquidity ratios which are adequate to meet cash
requirements. Long-term senior debt is rated within the "A" category or better,
although in some cases credits within the "BBB" category may be allowed. The
issuer has access to at least two additional channels of borrowing. Basic
earnings and cash flow have an upward trend with allowance made for unusual
circumstances. Typically, the issuer's industry is well established and the
issuer has a strong position within the industry. The reliability and quality of
management are unquestioned. The relative strength or weakness of the above
factors determines whether the issuer's commercial paper is rated A-1, A-2 or
A-3. (Those A-1 issues determined to possess overwhelming safety characteristics
are denoted with a plus (+) sign: A-1+.)
The rating Prime is the highest commercial paper rating category assigned
by Moody's. Among the factors considered by Moody's in assigning ratings are the
following: evaluation of the management of the issuer; economic evaluation of
the issuer's industry or industries and an appraisal of speculative-type risks
which may be inherent in certain areas; evaluation of the issuer's products in
relation to competition and customer acceptance; liquidity; amount and quality
of long-term debt; trend of earnings over a period of 10 years; financial
management of obligations which may be present or may arise as a result of
public interest questions and preparations to meet such obligations. These
factors are all considered in determining whether the commercial paper is rated
Prime-1, Prime-2 or Prime-3.
In the event the lowering of ratings of debt instruments held by the Fund
by applicable rating agencies results in a material decline in the overall
quality of the Fund's portfolio, the Board of Directors of Portfolios will
review the situation and take such action as they deem in the best interests of
the Fund's shareholders, including, if necessary, changing the composition of
the portfolio.
THE COMPANY, THE FUND AND ITS SHARES
State Street Research Portfolios, Inc. is currently comprised of only one
series, State Street Research International Equity Fund. The Board of Directors
of Portfolios has the authority to issue an unlimited number of shares of
beneficial interest of separate series, $.01 par value per share. The Board of
Directors also has the authority, without the necessity of a shareholder vote,
to create any number of new series or classes or to commence the public offering
of shares of any previously established series or class. A "series" is a
separate pool of assets of Portfolios which is
19
<PAGE>
separately managed and has a different investment objective and different
investment policies from those of another series.
The Directors have authorized shares of the Fund to be issued in four
classes: Class A, Class B, Class C and Class S shares. Prior to November 1,
1997, the Fund's current Class C shares were designated as Class D shares and
the Fund's current Class S shares were designated as Class C shares.
Each share of each class of shares represents an identical legal interest
in the same portfolio of investments of the Fund, has the same rights and is
identical in all respects, except that Class A, Class B and Class C shares bear
the expenses of the deferred sales arrangement and any expenses (including the
higher service and distribution fees) resulting from such sales arrangement, and
certain other incremental expenses related to a class. Each class will have
exclusive voting rights with respect to provisions of the Rule 12b-1
distribution plan pursuant to which the service and distribution fees, if any,
are paid. Although the legal rights of holders of each class of shares are
identical, it is likely that the different expenses borne by each class will
result in different net asset values and dividends. The different classes of
shares of the Fund also have different exchange privileges. Except for those
differences between classes of shares described above, in the Fund's Prospectus
and otherwise this Statement of Additional Information, each share of the Fund
has equal dividend, redemption and liquidation rights with other shares of the
Fund, and when issued, is fully paid and nonassessable by the Fund.
The rights of holders of shares may be modified by the Board of Directors
at any time, so long as such modifications do not have a material, adverse
effect on the rights of any shareholder. On any matter submitted to the
shareholders, the holder of a Fund share is entitled to one vote per share (with
proportionate voting for fractional shares) regardless of the relative net asset
value thereof.
Except as otherwise provided under the 1940 Act, the Board of Directors
will be a self-perpetuating body until fewer than two-thirds of the Directors
serving as such are Directors who were elected by shareholders of Portfolios. In
the event less than a majority of the Directors serving as such were elected by
shareholders of the Portfolio, a meeting of shareholders will be called to elect
Directors.
DIRECTORS AND OFFICERS
The Directors and principal officers of Portfolios, their addresses, and
their principal occupations and positions with certain affiliates of the
Investment Manager are set forth below.
*+Peter C. Bennett, One Financial Center, Boston, MA 02111, serves as Vice
President of Portfolios. He is 59. His principal occupation is Executive Vice
President and Director of State Street Research & Management Company. During the
past five years he has also served
20
<PAGE>
as Senior Vice President of State Street Research & Management Company. Mr.
Bennett's other principal business affiliation is Director, State Street
Research Investment Services, Inc. and Executive Vice President, GFM
International Investors, Inc.
*Justin T. Donegan, Five Upper St. Martins Lane, London, WC2H 9EA England,
serves as Vice President of Portfolios. He is 38. His principal occupation is
portfolios manager for GFM International Investors, Inc. During the past five
years he has also served as a self-employed financial consultant, as the
Japanese Portfolio Manager of Pictet Asset Management, and as the Far Eastern
Portfolio Manager for Johnson Capital Management.
+Steve A. Garban, The Pennsylvania State University, 210 Old Main,
University Park, PA 16802, serves as Director of Portfolios. He is 60. He is
retired and was formerly Senior Vice President for Finance and Operations and
Treasurer of The Pennsylvania State University.
+Malcolm T. Hopkins, 14 Brookside Road, Biltmore Forest, Asheville, NC
28803, serves as Director of Portfolios. He is 69. He is engaged principally in
private investments. Previously, he was Vice Chairman of the Board and Chief
Financial Officer of St. Regis Corp.
*+John H. Kallis, One Financial Center, Boston, MA 02111, serves as Vice
President of Portfolios. He is 57. Mr. Kallis' principal occupation is Senior
Vice President of State Street Research & Management Company. During the past
five years he has also served as portfolio manager for State Street Research &
Management Company.
+Edward M. Lamont, Box 1234, Moores Hill Road, Syosset, NY 11791, serves as
Director of Portfolios. He is 71. He is engaged principally in private
investments and civic affairs and is an author of business history. Previously,
he was with an affiliate of J.P. Morgan Co. in New York.
+Robert A. Lawrence, 175 Federal Street, Boston, MA 02110, serves as
Director of Portfolios. He is 71. He is retired and was formerly a Partner in
Saltonstall & Co., a private investment firm.
*+Gerard P. Maus, One Financial Center, Boston, MA 02111, serves as
Treasurer of Portfolios. He is 46. His principal occupation is currently, and
during the past five years has been, Executive Vice President, Treasurer, Chief
Financial Officer and Director of State Street Research & Management Company.
- -------------------------
* or +, see footnotes on page 23.
21
<PAGE>
Mr. Maus's other principal business affiliations include Executive Vice
President, Treasurer, Chief Financial Officer and Director of State Street
Research Investment Services, Inc. and Executive Vice President, Chief Financial
Officer, Administrative Officer and Director, GFM International Investors, Inc.
*+Francis J. McNamara, III, One Financial Center, Boston, MA 02111 serves
as Secretary and General Counsel of Portfolios. He is 42. His principal
occupation is Executive Vice President, General Counsel and Secretary of State
Street Research & Management Company. During the past five years he has also
served as Senior Vice President of State Street Research & Management Company
and as Senior Vice President, General Counsel and Assistant Secretary of The
Boston Company, Inc., Boston Safe Deposit and Trust Company and The Boston
Company Advisors, Inc. Mr. McNamara's other principal business affiliations
include Executive Vice President, Clerk and General Counsel of State Street
Research Investment Services, Inc. and Executive Vice President and General
Counsel, GFM International Investors, Inc.
+Dean O. Morton, 3200 Hillview Avenue, Palo Alto, CA 94304, serves as
Director of Portfolios. He is 65. He is retired and was formerly Executive Vice
President, Chief Operating Officer and Director of Hewlett-Packard Company.
+Toby Rosenblatt, 3409 Pacific Avenue, San Francisco, CA 94118, serves as
Director of Portfolios. He is 59. His principal occupations during the past five
years have been President of The Glen Ellen Company, a private investment
company, and Vice President of Founders Investments Ltd.
*Nicholas Sanjana, Five Upper St. Martins Lane, London, WC2H 9EA England,
serves as Vice President of Portfolios. He is 34. His principal occupation
during the past five years has been portfolios manager for GFM International
Investors, Inc.
+Michael S. Scott Morton, Massachusetts Institute of Technology, 77
Massachusetts Avenue, Cambridge, MA 02139, serves as Director of Portfolios. He
is 60. His principal occupation during the past five years has been Jay W.
Forrester Professor of Management at Sloan School of Management, Massachusetts
Institute of Technology.
**Thomas A. Shively, One Financial Center, Boston, MA 02111, serves as Vice
President of the Trust. He is 43. His principal occupation is Executive Vice
President and Director of State Street Research & Management Company. During the
past five years he has also served as Senior Vice President of State Street
Research & Management Company. Mr. Shively's other business affiliations include
Director of State Street Research Investment Services, Inc.
*+Ralph F. Verni, One Financial Center, Boston, MA 02111, serves as
Chairman of the Board, President, Chief Executive Officer and Director of
Portfolios. He is 55. His principal occupation currently, and during the past
five years, has been Chairman of the Board, President, Chief Executive Officer
and Director of State Street Research & Management Company.
- -------------------------
* or +, see footnotes on page 23.
22
<PAGE>
Mr. Verni's other principal business affiliations include Chairman of the Board
and Director of State Street Research Investment Services, Inc., (and until
February 1996, prior positions as President and Chief Executive Officer of that
company) and Chairman of the Board, President, Chief Executive Officer and
Director of GFM International Investors, Inc.
*Ian R. Vose, Five Upper St. Martins Lane, London, WC2H 9EA England, serves
as Vice President of Portfolios. He is 41. His principal occupation is Senior
Vice President and Chief Investment Officer of GFM International Investors
Limited. During the past five years he has also served as Chief Executive
Officer of GFM International Investors, Inc.
*+James M. Weiss, One Financial Center, Boston, MA 02111, serves as Vice
President of Portfolios. He is 51. His principal occupation is Senior Vice
President of State Street Research & Management Company. During the past five
years he has also served as President and Chief Investment Officer of IDS
Advisory Group, Inc.
- -------------------------
* These Directors and/or officers are or may be deemed to be "interested
persons" of Portfolios under the 1940 Act because of their affiliations
with the Fund's investment adviser.
+ Serves as a Trustee/Director and/or officer of one or more of the following
investment companies, each of which has an advisory relationship with the
Investment Manager or its parent, Metropolitan Life Insurance Company
("Metropolitan"): State Street Research Equity Trust, State Street Research
Financial Trust, State Street Research Income Trust, State Street Research
Money Market Trust, State Street Research Tax-Exempt Trust, State Street
Research Capital Trust, State Street Research Exchange Trust, State Street
Research Growth Trust, State Street Research Master Investment Trust, State
Street Research Securities Trust, State Street Research Portfolios, Inc.
and Metropolitan Series Fund, Inc.
23
<PAGE>
Record ownership of shares of the Fund as of November 30, 1997 was as
follows:
% of
Class Holder Class
A Merrill Lynch 14.83
B Merrill Lynch 12.55
C(a) Merrill Lynch 42.60
S(a) Chase Manhattan 59.23
Bank, N.A.
The full name and address of the above institutions are:
Chase Manhattan Bank, N.A.(b)(c)
770 Broadway
New York, New York 10003
Merrill Lynch, Pierce, Fenner & Smith, Inc. (c)
4800 Deerlake Drive East
Jacksonville, FL 32246
- ---------------------------------
(a) Prior to November 1, 1997, the Fund's current Class C shares were
designated as Class D shares and the Fund's current Class S shares were
designated as Class C shares.
(b) Chase Manhattan Bank, N.A. holds such shares as trustee under certain
employee benefit plans serviced by Metropolitan Life Insurance Company
("Metropolitan").
(c) The Fund believes that each named recordholder does not have beneficial
ownership of such shares.
Ownership of 25% or more of a voting security is deemed "control," as
defined in the 1940 Act. So long as 25% of a class of shares is so owned, such
owners will be presumed to be in control of such class of shares for purposes of
voting on certain matters submitted to a vote of shareholders, such as any
Distribution Plan for a given class.
24
<PAGE>
As of November 30, 1997, the Directors and principal officers of
Portfolios as a group owned approximately 1.2% of the outstanding Class A shares
of the Fund, and none of the outstanding Class B, Class C or Class S shares.*
- ------------------------
* Prior to November 1, 1997, the Fund's current Class C shares were
designated as Class D shares and the Fund's current Class S shares were
designated as Class C shares.
The Directors were compensated as follows:
<TABLE>
<CAPTION>
Total
Compensation
Aggregate From Portfolios and
Compensation Complex Paid
Name of Director From Portfolios(a) to Directors(b)
<S> <C> <C>
Steve A. Garban $7,225 $ 75,899
Malcolm T. Hopkins $5,425 $ 78,499
Edward M. Lamont $2,091 $ 68,741
Robert A. Lawrence $4,925 $ 93,125
Dean O. Morton $4,925 $ 97,125
Toby Rosenblatt $2,091 $ 68,741
Michael S. Scott Morton $4,925 $103,625
Ralph F. Verni $ 0 $ 0
</TABLE>
(a) For the Fund's fiscal year ended October 31, 1997.
(b) Includes compensation on behalf of all series of 12 investment companies
for which the Investment Manager or its parent, Metropolitan, served as
investment adviser. "Total Compensation from Portfolios and Complex Paid to
Directors" for the 12 months ended December 31, 1997. Portfolios does not
provide any pension or retirement benefits for the Directors.
INVESTMENT ADVISORY SERVICES
State Street Research & Management Company, the Investment Manager, a
Delaware corporation, with offices at One Financial Center, Boston,
Massachusetts 02111-2690, acts as investment adviser to the Fund. GFM
International Investors Limited, the Sub-Investment Manager, an English
corporation, with offices at 5 Upper St. Martins Lane, London, WC2H 9EA,
England, acts as sub-investment adviser to the Fund.
The Investment Manager was founded by Paul Cabot, Richard Saltonstall and
Richard Paine to serve as investment adviser to one of the nation's first mutual
funds, presently known
25
<PAGE>
as State Street Research Investment Trust, which they had formed in 1924. Their
investment management philosophy emphasized comprehensive fundamental research
and analysis, including meetings with the management of companies under
consideration for investment. The Investment Manager's portfolio management
group has extensive investment industry experience managing equity and debt
securities. In managing debt securities, if any, for a portfolio, the Investment
Manager may consider yield curve positioning, sector rotation and duration,
among other factors.
The Sub-Investment Management Agreement provides that the Sub-Investment
Manager has overall responsibility for the investment management, and supplies
the portfolio managers for the Fund. The Investment Management Agreement
provides that the Investment Manager compensates all executive and clerical
personnel and Directors of Portfolios if such persons are employees of the
Investment Manager or its affiliates. The Investment Manager and the Sub-
Investment Manager are indirect wholly-owned subsidiaries of Metropolitan.
The advisory fees payable monthly by the Fund to the Investment Manager are
computed as percentages of the average of the value of the net assets of the
Fund as determined at the close of regular trading on of the New York Stock
Exchange (the "NYSE") on each day the NYSE is open for trading, at the annual
rate of 0.95% of the net assets of the Fund. The subadvisory fee payable monthly
by the Investment Manager to the Sub-Investment Manager is at the annual rate of
0.75% of the average daily value of the Fund's net assets. The Fund has no
responsibility for the payment of fees to the Sub-Investment Manager.
The advisory fees paid by the Fund to the Investment Manager for the last
three fiscal years, prior to the assumption of fees or expenses, were as
follows: 1997, $701,440; 1996, $921,649; and 1995, $830,476. The sub-investment
management fees for the Fund for the same periods were as follows: 1997,
$553,768; 1996, $727,618; and 1995, $655,639.
The Distributor and its affiliates have from time to time and in varying
amounts voluntarily assumed some portion of fees or expenses relating to the
Fund. The voluntary reduction of fees or assumption of expenses for the same
periods were as follows: 1997, $335,089; 1996, $452,847; and 1995, $529,341.
The Investment Management Agreement and the Sub-Investment Management
Agreement provide that they shall continue in effect from year to year with
respect to the Fund as long as each Agreement is approved at least annually both
(i) by a vote of a majority of the outstanding voting securities of the Fund (as
defined in the 1940 Act) or by the Board of Directors of Portfolios, and (ii) in
either event by a vote of a majority of the Board of Directors who are not
parties to the Agreements or "interested persons" of any party thereto, cast in
person at a meeting called for the purpose of voting on such approval. The
Agreements may be terminated on 60 days' written notice by either party and will
terminate automatically in the event of its assignment, as defined under the
1940 Act and regulations thereunder. Such regulations provide that a transaction
which does not result in a change of actual control or management of an adviser
is not deemed an assignment.
26
<PAGE>
Under the Fund's Administration Agreement between the Investment Manager
and the Distributor, the Distributor provides assistance to the Investment
Manager in performing certain fund administration services for Portfolios, such
as assistance in determining the daily net asset value of shares of each series
of Portfolios and in preparing various reports required by regulations.
Under a Shareholders' Administrative Services Agreement between Portfolios
and the Distributor, the Distributor provides shareholders' administrative
services, such as responding to inquiries and instructions from investors
respecting the purchase and redemption of shares of the Fund, and is entitled to
reimbursements of its costs for providing such services. Under certain
arrangements for Metropolitan to provide subadministration services,
Metropolitan may receive a fee for the maintenance of certain share ownership
records for participants in sponsored arrangements, such as employee benefit
plans, through or under which the Fund's shares may be purchased.
Under the Code of Ethics of the Investment Manager, investment management
personnel are only permitted to engage in personal securities transactions in
accordance with certain conditions relating to such person's position, the
identity of the security, the timing of the transaction, and similar factors.
Such personnel must report their personal securities transactions quarterly and
supply broker confirmations of such transactions to the Investment Manager.
PURCHASE AND REDEMPTION OF SHARES
Shares of the Fund are distributed by State Street Research Investment
Services, Inc., the Distributor. The Fund offers 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 S shares, a sales charge which, at the election
of the investor, may be imposed (i) at the time of purchase (the Class A shares)
or (ii) on a deferred basis (the Class B and Class C shares). General
information on how to buy shares of the Fund, as well as sales charges involved,
are set forth under "Your Account" in the Prospectus. The following supplements
that information.
Public Offering Price. The public offering price for each class of shares
is based on their net asset value determined as of regular trading on the close
of the NYSE on the day the purchase order is received by State Street Research
Service Center (the "Service Center"), provided that the order is received prior
to the close of regular trading on the NYSE on that day; otherwise the net asset
value used is that determined as of the close of the NYSE on the next day it is
open for unrestricted trading. When a purchase order is placed through a dealer,
that dealer is responsible for transmitting the order promptly to the Service
Center in order to permit the investor to obtain the current price. Any loss
suffered by an investor which results from a dealer's failure to transmit an
order promptly is a matter for settlement between the investor and the dealer.
27
<PAGE>
Class A Shares--Reduced Sales Charges. The reduced sales charges set forth
under "Your Account--Class A Sales Charge Reductions and Waivers" in the Fund's
Prospectus apply to purchases made at any one time by any "person," which
includes: (i) an individual, or an individual combining with his or her spouse
and their children and purchasing for his, her or their own account; (ii) a
"company" as defined in Section 2(a)(8) of the 1940 Act; (iii) a trustee or
other fiduciary purchasing for a single trust estate or single fiduciary account
(including a pension, profit sharing or other employee benefit trust created
pursuant to a plan qualified under Section 401 of the Internal Revenue Code);
(iv) a tax-exempt organization under Section 501(c)(3) or (13) of the Internal
Revenue Code; and (v) an employee benefit plan of a single employer or of
affiliated employers.
Investors may purchase Class A shares of the Fund at reduced sales charges
by executing a Letter of Intent to purchase no less than an aggregate of
$100,000 of the Fund or any combination of Class A shares of "Eligible Funds"
(which include the Fund and other funds as designated by the Distributor from
time to time) within a 13-month period. The sales charge applicable to each
purchase made pursuant to a Letter of Intent will be that which would apply if
the total dollar amount set forth in the Letter of Intent were being bought in a
single transaction. Purchases made within a 90-day period prior to the execution
of a Letter of Intent may be included therein; in such case the date of the
earliest of such purchases marks the commencement of the 13-month period.
An investor may include toward completion of a Letter of Intent the value
(at the current public offering price) of all of his or her Class A shares of
the Fund and of any of the other Class A shares of Eligible Funds held of record
as of the date of his or her Letter of Intent, plus the value (at the current
offering price) as of such date of all of such shares held by any "person"
described herein as eligible to join with the investor in a single purchase.
Class B, Class C and Class S shares may also be included in the combination
under certain circumstances.
A Letter of Intent does not bind the investor to purchase the specified
amount. Shares equivalent to 5% of the specified amount will, however, be taken
from the initial purchase (or, if necessary, subsequent purchases) and held in
escrow in the investor's account as collateral against the higher sales charge
which would apply if the total purchase is not completed within the allotted
time. The escrowed shares will be released when the Letter of Intent is
completed or, if it is not completed, when the balance of the higher sales
charge is, upon notice, remitted by the investor. All dividends and capital
gains distributions with respect to the escrowed shares will be credited to the
investor's account.
Investors may purchase Class A shares of the Fund or a combination of
Eligible Funds at reduced sales charges pursuant to a Right of Accumulation. The
applicable sales charge under the right is determined on the amount arrived at
by combining the dollar amount of the purchase with the value (at the current
public offering price) of all Class A shares of the other Eligible Funds owned
as of the purchase date by the investor plus the value (at the current public
offering price) of all such shares owned as of such date by any "person"
described
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herein as eligible to join with the investor in a single purchase. Class B,
Class C and Class S shares may also be included in the combination under certain
circumstances. Investors must submit to the Distributor sufficient information
to show that they qualify for this Right of Accumulation.
Other Programs Related to Class A Shares. Class A shares of the Fund may be
sold or issued in an exchange at a reduced sales charge or without sales charge
pursuant to certain sponsored arrangements, which include programs under which a
company, employee benefit plan or other organization makes recommendations to,
or permits group solicitation of, its employees, members or participants, except
any organization created primarily for the purpose of obtaining shares of the
Fund at a reduced sales charge or without a sales charge. Sales without a sales
charge, or with a reduced sales charge, may also be made through brokers,
registered investment advisers, financial planners, institutions, and others,
under managed fee-based programs (e.g., "wrap fee" or similar programs) which
meet certain requirements established from time to time by the Distributor.
Information on such arrangements and further conditions and limitations is
available from the Distributor.
In addition, no sales charge is imposed in connection with the sale of
Class A shares of the Fund to the following entities and person: (A) the
Investment Manager, Distributor or any affiliated entities, including any direct
or indirect parent companies and other subsidiaries of such parents
(collectively "Affiliated Companies"); (B) employees, officers, sales
representatives or current or retired directors or trustees of the Affiliated
Companies or any investment company managed by any of the Affiliated Companies,
any relatives of any such individuals whose relationship is directly verified by
such individuals to the Distributor, or any beneficial account for such
relatives or individuals; and (C) employees, officers, sales representatives or
directors of dealers and other entities with a selling agreement with the
Distributor to sell shares of any aforementioned investment company, any spouse
or child of such person, or any beneficial account for any of them. The purchase
must be made for investment and the shares purchased may not be resold except
through redemption. This purchase program is subject to such administrative
policies, regarding the qualification of purchasers and any other matters, as
may be adopted by the Distributor from time to time.
Conversion of Class B Shares to Class A Shares. A shareholder's Class B
shares of the Fund, including all shares received as dividends or distributions
with respect to such shares, will automatically convert to Class A shares of the
Fund at the end of eight years following the issuance of such Class B shares;
consequently, they will no longer be subject to the higher expenses borne by
Class B shares. The conversion rate will be determined on the basis of the
relative per share net asset values of the two classes and may result in a
shareholder receiving either a greater or fewer number of Class A shares than
the Class B shares so converted. As noted above, holding periods for Class B
shares received in exchange for Class B shares of other Eligible Funds will be
counted toward the eight-year period.
Contingent Deferred Sales Charges. The amount of any contingent deferred
sales charge paid on Class A shares (on sales of $1 million or more and which do
not involve an
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initial sales charge) or on Class B or Class C shares of the Fund will be paid
to the Distributor. The Distributor will pay dealers at the time of sale a 4%
commission for selling Class B shares and a 1% commission for selling Class C
shares. In certain cases, a dealer may elect to waive the 4% commission on Class
B shares and receive in lieu thereof a 1% annual fee with respect to such
outstanding shares until the shares convert to Class A shares. The proceeds of
the contingent deferred sales charges and the distribution fees are used to
offset distribution expenses and thereby permit the sale of Class B and Class C
shares without an initial sales charge.
In determining the applicability and rate of any contingent deferred sales
charge of Class B or Class C shares, it will be assumed that a redemption of the
shares is made first of those shares having the greatest capital appreciation,
next of shares representing reinvestment of dividends and capital gains
distributions and finally of remaining shares held by shareholder for the
longest period of time. Class B shares that are redeemed within a five-year
period after their purchase, and Class C shares that are redeemed within a
one-year period after their purchase, will not be subject to a contingent
deferred sales charge to the extent that the value of such shares represents (1)
capital appreciation of Fund assets or (2) reinvestment of dividends or capital
gains distributions. The holding period for purposes of applying a contingent
deferred sales charge for a particular class of shares of the Fund acquired
through an exchange from another Eligible Fund will be measured from the date
that such shares were initially acquired in the other Eligible Fund, and shares
of the same class being redeemed will be considered to represent, as applicable,
capital appreciation or dividend and capital gains distribution reinvestments in
such other Eligible Fund. These determinations will result in any contingent
deferred sales charge being imposed at the lowest possible rate. For federal
income tax purposes, the amount of the contingent deferred sales charge will
reduce the gain or increase the loss, as the case may be, on the amount realized
on redemption.
Contingent Deferred Sales Charge Waivers. With respect to Class A shares
(on sales of $1 million or more and which do not involve an initial sales
charge), and Class B and Class C shares of the Fund, the contingent deferred
sales charge does not apply to exchanges or to redemptions under a systematic
withdrawal plan which meets certain conditions. In addition, the contingent
deferred sales charge will be waived for: (i) redemptions made within one year
of the death or total disability, as defined by the Social Security
Administration, of all shareholders of an account; (ii) redemptions made after
attainment of a specific age in an amount which represents the minimum
distribution required at such age under Section 401(a)(9) of the Internal
Revenue Code of 1986, as amended, for retirement accounts or plans (e.g., age 70
1/2 for Individual Retirement Accounts and Section 403(b) plans), calculated
solely on the basis of assets invested in the Fund or other Eligible Funds; and
(iii) a redemption resulting from a tax-free return of an excess contribution to
an Individual Retirement Account. (The foregoing waivers do not apply to a
tax-free rollover or transfer of assets out of the Fund). The Fund may modify or
terminate the waivers at any time; for example, the Fund may limit the
application of multiple waivers and establish other conditions for employee
benefit plans.
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Class S Shares. Class S shares are currently available to certain employee
benefit plans such as qualified retirement plans which meet criteria relating to
number of participants, service arrangements, or similar factors; insurance
companies; investment companies; advisory accounts of the Investment Manager;
endowment funds of nonprofit organizations with substantial minimum assets
(currently a minimum of $10 million); and other similar institutional investors.
Class S shares may be acquired through programs or products sponsored by
Metropolitan, its affiliates, or both for which Class S shares have been
designated. In addition, Class S shares are available through programs under
which, for example, investors pay an asset-based fee and/or a transaction fee to
intermediaries. Class S share availability is determined by the Distributor and
intermediaries based on the overall direct and indirect costs of a particular
program, expected assets, account sizes and similar considerations.
Reorganizations. In the event of mergers or reorganizations with other
public or private collective investment entities, including investment companies
as defined in the 1940 Act, the Fund may issue its shares at net asset value (or
more) to such entities or to their security holders.
Redemptions. The Fund reserves the right to pay redemptions in kind with
portfolio securities in lieu of cash. In accordance with its election pursuant
to Rule 18f-1 under the 1940 Act, the Fund may limit the amount of redemption
proceeds paid in cash. Although it has no present intention to do so, the Fund
may, under unusual circumstances, limit redemptions in cash with respect to each
shareholder during any ninety-day period to the lesser of (i) $250,000 or (ii)
1% of the net asset value of the Fund at the beginning of such period. In
connection with any redemptions paid in kind with portfolio securities,
brokerage and other costs may be incurred by the redeeming shareholder in the
sale of the securities received.
Systematic Withdrawal Plan. A shareholder who owns noncertificated Class A
or Class S shares with a value of $5,000 or more, or Class B or Class C shares
with a value of $10,000 or more, may elect, by participating in the Fund's
Systematic Withdrawal Plan, to have periodic checks issued for specified
amounts. These amounts may not be less than certain minimums, depending on the
class of shares held. The Plan provides that all income dividends and capital
gains distributions of the Fund shall be credited to participating shareholders
in additional shares of the Fund. Thus, the withdrawal amounts paid can only be
realized by redeeming shares of the Fund under the Plan. To the extent such
amounts paid exceed dividends and distributions from the Fund, a shareholder's
investment will decrease and may eventually be exhausted.
In the case of shares otherwise subject to contingent deferred sales
charges, no such charges will be imposed on withdrawals of up to 8% annually of
either (a) the value, at the time the Systematic Withdrawal Plan is initiated,
of the shares then in the account or (b) the value, at the time of a withdrawal,
of the same number of shares as in the account when the Systematic Withdrawal
Plan was initiated, whichever is higher.
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Expenses of the Systematic Withdrawal Plan are borne by the Fund. A
participating shareholder may withdraw from the Systematic Withdrawal Plan, and
the Fund may terminate the Systematic Withdrawal Plan at any time on written
notice. Purchase of additional shares while a shareholder is receiving payments
under a Systematic Withdrawal Plan is ordinarily disadvantageous because of
duplicative sales charges. For this reason, a shareholder may not participate in
the Investamatic Program (see "Your Account--Investor Services--Investamatic
Program" in the Fund's Prospectus) and the Systematic Withdrawal Plan at the
same time.
Request to Dealer to Repurchase. For the convenience of shareholders, the
Fund has authorized the Distributor as its agent to accept orders from dealers
by wire or telephone for the repurchase of shares by the Distributor from the
dealer. The Fund may revoke or suspend this authorization at any time. The
repurchase price is the net asset value for the applicable shares next
determined following the time at which the shares are offered for repurchase by
the dealer to the Distributor. The dealer is responsible for promptly
transmitting a shareholder's order to the Distributor.
Signature Guarantees. Signature guarantees are required for, among other
things: (1) written requests for redemptions for more than $50,000; (2) written
requests for redemptions for any amount if the proceeds are transmitted to other
than the current address of record (unchanged in the past 30 days); (3) written
requests for redemptions for any amount submitted by corporations and certain
fiduciaries and other intermediaries; and (4) requests to transfer the
registration of shares to another owner. Signatures must be guaranteed by a
bank, a member firm of a national stock exchange, or other eligible guarantor
institution. The Transfer Agent will not accept guarantees (or notarizations)
from notaries public. The above requirements may be waived in certain instances.
Dishonored Checks. If a purchaser's check is not honored for its full
amount, the purchaser could be subject to additional charges to cover collection
costs and any investment loss, and the purchase may be canceled.
Processing Charges. Purchases and redemptions processed through securities
dealers may be subject to processing charges imposed by the securities dealer in
addition to sales charges that may be imposed by the Fund or the Distributor.
SHAREHOLDER ACCOUNTS
General information on shareholder accounts is included in the Fund's
Prospectus under "Your Account." The following supplements that information.
Maintenance Fees and Involuntary Redemption. Because of the relatively high
cost of maintaining small shareholder accounts, the Fund reserves the right to
redeem at its option any shareholder account which remains below $1,500 for a
period of 60 days after notice is mailed to the applicable shareholder, or to
impose a maintenance fee on such
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account after 60 days' notice. Such involuntarily redemptions will be subject to
applicable sales charges, if any. The Fund may increase such minimum account
value above such amount in the future after notice to affected shareholders.
Involuntarily redeemed shares will be priced at the net asset value on the date
fixed for redemption by the Fund, and the proceeds of the redemption will be
mailed to the affected shareholder at the address of record. Currently, the
maintenance fee is $18 annually, which is paid to the Transfer Agent. The fee
does not apply to certain retirement accounts or if the shareholder has more
than an aggregate $50,000 invested in the Fund and other Eligible Funds
combined. Imposition of a maintenance fee on a small account could, over time,
exhaust the assets of such account.
To cover the cost of additional compliance administration, a $20 fee will
be charged against any shareholder account that has been determined to be
subject to escheat under applicable state laws.
The Fund may not suspend the right of redemption or postpone the date of
payment of redemption proceeds for more than seven days, except that (a) it may
elect to suspend the redemption of shares or postpone the date of payment of
redemption proceeds: (1) during any period that the NYSE is closed (other than
customary weekend and holiday closings) or trading on the NYSE is restricted;
(2) during any period in which an emergency exists as a result of which disposal
of portfolio securities is not reasonably practicable or it is not reasonably
practicable to fairly determine the Fund's net asset values; or (3) during such
other periods as the Securities and Exchange Commission (the "SEC") may by order
permit for the protection of investors; and (b) the payment of redemption
proceeds may be postponed as otherwise provided under "Purchase and Redemption
of Shares" in this Statement of Additional Information.
The Open Account System. Under the Open Account System full and fractional
shares of the Fund owned by shareholders are credited to their accounts by the
Transfer Agent, State Street Bank and Trust Company, 225 Franklin Street,
Boston, Massachusetts 02110. Certificates representing Class B or Class C shares
will not be issued, while certificates representing Class A or Class S shares
will only be issued if specifically requested in writing and, in any case, will
only be issued for full shares, with any fractional shares to be carried on the
shareholder's account. Shareholders will receive periodic statements of
transactions in their accounts.
The Fund's Open Account System provides the following options:
1. Additional purchases of shares of the Fund may be made through
dealers, by wire or by mailing a check payable to "State Street
Research Funds" under the terms set forth above under "Purchase and
Redemption of Shares" in this Statement of Additional Information.
2. The following methods of receiving dividends from investment income
and distributions from capital gains generally are available:
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(a) All income dividends and capital gains distributions reinvested
in additional shares of the Fund.
(b) All income dividends and capital gains distributions in cash.
(c) All income dividends and capital gains distributions invested in
any one available Eligible Fund designated by the shareholder as
described below. See "Dividend Allocation Plan" herein.
Dividend and distribution selections should be made on the Application
accompanying the initial investment. If no selection is indicated on the
Application, that account will be automatically coded for reinvestment of all
dividends and distributions in additional shares of the same class of the Fund.
Selections may be changed at any time by telephone or written notice to the
Service Center. Dividends and distributions are reinvested at net asset value
without a sales charge.
Exchange Privileges. Shareholders of the Fund may exchange their shares for
available shares with corresponding characteristics of any of the other Eligible
Funds at any time on the basis of the relative net asset values of the
respective shares to be exchanged, subject to compliance with applicable
securities laws. Shareholders of any other Eligible Fund may similarly exchange
their shares for Fund shares with corresponding characteristics. Prior to making
an exchange, shareholders should obtain the Prospectus of the Eligible Fund into
which they are exchanging. Under the Direct Program, subject to certain
conditions, shareholders may make arrangements for regular exchanges from the
Fund into other Eligible Funds. To effect an exchange, Class A, Class B and
Class C shares may be redeemed without the payment of any contingent deferred
sales charge that might otherwise be due upon an ordinary redemption of such
shares. The State Street Research Money Market Fund issues Class E shares which
are sold without any sales charge. Exchanges of State Street Research Money
Market Fund Class E shares into Class A shares of the Fund or any other Eligible
Fund are subject to the initial sales charge or contingent deferred sales charge
applicable to an initial investment in such Class A shares, unless a prior Class
A sales charge has been paid directly or indirectly with respect to the shares
redeemed. For purposes of computing the contingent deferred sales charge that
may be payable upon disposition of any acquired Class A, Class B and Class C
shares, the holding period of the redeemed shares is "tacked" to the holding
period of any acquired shares. No exchange transaction fee is currently imposed
on any exchange.
Shares of the Fund may also be acquired or redeemed in exchange for shares
of the Summit Cash Reserves Fund ("Summit Cash Reserves") by customers of
Merrill Lynch, Pierce, Fenner & Smith Incorporated (subject to completion of
steps necessary to implement the program). The Fund and Summit Cash Reserves are
related mutual funds for purposes of investment and investor services. Upon the
acquisition of shares of Summit Cash Reserves by exchange for redeemed shares of
the Fund, (a) no sales charge is imposed by Summit Cash Reserves, (b) no
contingent deferred sales charge is imposed by the Fund on the Fund shares
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redeemed, and (c) any applicable holding period of the Fund shares redeemed is
"tolled," that is, the holding period clock stops running pending further
transactions. Upon the acquisition of shares of the Fund by exchange for
redeemed shares of Summit Cash Reserves, (a) the acquisition of Class A shares
shall be subject to the initial sales charges or contingent deferred sales
charges applicable to an initial investment in such Class A shares, unless a
prior Class A sales charge has been paid indirectly, and (b) the acquisition of
Class B or Class C shares of the Fund shall restart any holding period
previously tolled, or shall be subject to the contingent deferred sales charge
applicable to an initial investment in such shares.
The exchange privilege may be terminated or suspended or its terms changed
at any time, subject, if required under applicable regulations, to 60 days'
prior notice. New accounts established for investments upon exchange from an
existing account in another fund will have the same telephone privileges with
respect to the Fund (see "Your Account--Account Policies--Telephone Requests" in
the Fund's Prospectus and "--Telephone Privileges," below) as the existing
account unless the Service Center is instructed otherwise. Related
administrative policies and procedures may also be adopted with regard to a
series of exchanges, street name accounts, sponsored arrangements and other
matters.
The exchange privilege is not designed for use in connection with
short-term trading or market timing strategies. To protect the interests of
shareholders, the Fund reserves the right to temporarily or permanently
terminate the exchange privilege for any person who makes more than six
exchanges out of or into the Fund per calendar year. Accounts under common
ownership or control, including accounts with the same taxpayer identification
number, may be aggregated for purposes of the six exchange limit.
Notwithstanding the six exchange limit, the Fund reserves the right to refuse
exchanges by any person or group if, in the Investment Manager's judgment, the
Fund would be unable to invest effectively in accordance with its investment
objective and policies, or would otherwise potentially be adversely affected.
Exchanges may be restricted or refused if the Fund receives or anticipates
simultaneous orders affecting significant portions of the Fund's assets. In
particular, a pattern of exchanges that coincides with a "market timing"
strategy may be disruptive to the Fund. The Fund may impose these restrictions
at any time. The exchange limit may be modified for accounts in certain
institutional retirement plans because of plan exchange limits, Department of
Labor regulations or administrative and other considerations. Subject to the
foregoing, if an exchange request in good order is received by the Service
Center and delivered by the Service Center to the Transfer Agent by 12 noon
Boston time on any business day, the exchange usually will occur that day. For
further information regarding the exchange privilege, shareholders should
contact the Service Center.
Reinvestment Privilege. A shareholder of the Fund who has redeemed shares
or had shares repurchased at his or her request may reinvest all or any portion
of the proceeds (plus that amount necessary to acquire a fractional share to
round off his or her reinvestment to full shares) in shares, of the same class
as the shares redeemed, of the Fund or any other Eligible Fund at net asset
value and without subjecting the reinvestment to an initial sales charge,
provided such reinvestment is made within 120 calendar days after a redemption
or repurchase.
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Upon such reinvestment, the shareholder will be credited with any contingent
deferred sales charge previously charged with respect to the amount reinvested.
The redemption of shares is, for federal income tax purposes, a sale on which
the shareholder may realize a gain or loss. If a redemption at a loss is
followed by a reinvestment within 30 days, the transaction may be a "wash sale"
resulting in a denial of the loss for federal income tax purposes.
Any reinvestment pursuant to the reinvestment privilege will be subject to
any applicable minimum account standards imposed by the fund into which the
reinvestment is made. Shares are sold to a reinvesting shareholder at the net
asset value thereof next determined following timely receipt by the Service
Center of such shareholder's written purchase request and delivery of the
request by the Service Center to the Transfer Agent. A shareholder may exercise
this reinvestment privilege only once per 12-month period with respect to his or
her shares of the Fund.
Dividend Allocation Plan. The Dividend Allocation Plan allows shareholders
to elect to have all their dividends and any other distributions from the Fund
or any Eligible Fund automatically invested at net asset value in one other such
Eligible Fund designated by the shareholder, provided the account into which the
dividends and distributions are directed is initially funded with the requisite
minimum amount.
Telephone Privileges. A shareholder with telephone privileges that are
offered with his or her Account, (see "Your Account--Account Policies--Telephone
Requests"), is deemed to authorize the Service Center and the Transfer Agent to:
(1) act upon the telephone instructions of any person purporting to be the
shareholder to redeem, or purporting to be the shareholder or the shareholder's
dealer to exchange, shares from any account; and (2) honor any written
instructions for a change of address regardless of whether such request is
accompanied by a signature guarantee. All telephone calls will be recorded.
Neither the Fund, the other Eligible Funds, the Transfer Agent, the Investment
Manager nor the Distributor will be liable for any loss, expense or cost arising
out of any request, including any fraudulent or unauthorized requests.
Shareholders assume the risk to the full extent of their accounts that telephone
requests may be unauthorized. Reasonable procedures will be followed to confirm
that instructions communicated by telephone are genuine. The shareholder will
not be liable for any losses arising from unauthorized or fraudulent
instructions if such procedures are not followed.
Alternative Means of Contacting the Fund. It is unlikely, during periods of
extraordinary market conditions, that a shareholder may have difficulty in
reaching the Service Center. In that event, however, the shareholder should
contact the Service Center at 1-800-562-0032, 1-617-357-7800 or otherwise at
its main office at One Financial Center, Boston, Massachusetts 02111-2690.
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NET ASSET VALUE
The net asset value of the shares of the Fund is determined once daily as
of the close of regular trading on the NYSE, ordinarily 4 P.M. New York City
time, Monday through Friday, on each day during which the NYSE is open for
unrestricted trading. The NYSE is currently closed on New Year's Day, Martin
Luther King, Jr. Day, Presidents Day, Good Friday, Memorial Day, Independence
Day, Labor Day, Thanksgiving Day and Christmas Day.
The net asset value per share of the Fund is computed by dividing the sum
of the value of the securities held by the Fund plus any cash or other assets
minus all liabilities by the total number of outstanding shares of the Fund at
such time. Any expenses, except for extraordinary or nonrecurring expenses,
borne by the Fund, including the investment management fee payable to the
Investment Manager, are accrued daily.
In determining the values of portfolio assets as provided below, the
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 utilize information with respect to market transactions, quotations
from dealers and various relationships among securities in determining value and
may provide prices determined as of times prior to the close of the NYSE.
In general, securities are valued as follows. Securities which are listed
or traded on the New York or American Stock Exchange are valued at the price of
the last quoted sale on the respective exchange for that day. Securities which
are listed or traded on a national securities exchange or exchanges, but not on
the New York or American Stock Exchange, are valued at the price of the last
quoted sale on the exchange for that day prior to the close of the NYSE.
Securities not listed on any national securities exchange which are traded "over
the counter" and for which quotations are available on the National Association
of Securities Dealers, Inc.'s (the "NASD") NASDAQ System are valued at the
closing price supplied through such system for that day at the close of the
NYSE. Other securities are, in general, valued at the mean of the bid and asked
quotations last quoted prior to the close of the NYSE if there are market
quotations readily available, or in the absence of such market quotations, then
at the fair value thereof as determined by or under authority of the Board of
Directors of Portfolios with the use of such pricing services as may be deemed
appropriate or methodologies approved by the Directors.
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 obtained is fair
value, provided that during any period in which more than 25% of the Fund's
total assets is invested in short-term debt securities the current market value
of such securities will be used in calculating net asset value per share in lieu
of the amortized cost method. Under the amortized cost method of valuation, the
security is initially valued at cost on the date of purchase (or in the case of
short-term debt instruments purchased with more than 60 days remaining to
maturity, the market value on the 61st day prior to maturity), and thereafter a
constant amortization to maturity of any discount or
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premium is assumed regardless of the impact of fluctuating interest rates on the
market value of the security.
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 Fund's 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 computation of the Fund's net asset value. If events materially
affecting the value of such securities occur during such period, then these
securities will be valued at their fair value as determined in good faith by the
Directors.
PORTFOLIO TRANSACTIONS
Portfolio Turnover
The Fund's portfolio turnover rate is determined by dividing the lesser of
securities purchases or sales for a year by the monthly average value of
securities held by the Fund (excluding, for purposes of this determination,
securities the maturities of which as of the time of their acquisition were one
year or less). The Fund's portfolio turnover rates for the fiscal years ended
October 31, 1996 and 1997, respectively, were as follows: 132.36% and 174.69%.
The Fund experienced a higher portfolio turnover rate in 1997 than in 1996
because portfolio modifications made in a rapidly changing market for
international securities. The Fund sold off poor performing materials stocks in
Continental Europe and reduced its exposure to Japan during the year. In
addition, assets in Malaysia were liquidated and redeployed in the region. Also,
the Fund continued its current program of generally moving the portfolio to
larger size companies.
Brokerage Allocation
Under the Investment Management Agreement, the Investment Manager has
ultimate responsibility for selecting broker-dealers through which investments
are to be purchased and sold for the Fund. Under the Sub-Investment Management
Agreement, the Sub-Investment Manager has day-to-day responsibility for
selecting broker-dealers through which securities or other investments are to be
purchased and sold for the Fund.
The Investment Manager and the Sub-Investment Manager's policy is to seek
for their clients, including the Fund, what in the Investment Manager or
Sub-Investment Manager's judgment will be the best overall execution of purchase
or sale orders and the most favorable net prices in securities transactions
consistent with their judgment as to the business qualifications of the various
broker or dealer firms with whom the Investment Manager or Sub-Investment
Manager may do business, and the Investment Manager or Sub-Investment Manager
may not necessarily choose the broker offering the lowest available commission
rate. Decisions with respect to the market where the transaction is to be
completed, to the form of
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transaction (whether principal or agency), and to the allocation of orders among
brokers or dealers are made in accordance with this policy. In selecting brokers
or dealers to effect portfolio transactions, consideration is given to their
proven integrity and financial responsibility, their demonstrated execution
experience and capabilities both generally and with respect to particular
markets or securities, the competitiveness of their commission rates in agency
transactions (and their net prices in principal transactions), their willingness
to commit capital, and their clearance and settlement capability. The
Sub-Investment Manager makes every effort to keep informed of commission rate
structures and prevalent bid/ask spread characteristics of the markets and
securities in which transactions for the Fund occur. Against this background,
the Sub-Investment Manager evaluates the reasonableness of a commission or a net
price with respect to a particular transaction by considering such factors as
difficulty of execution or security positioning by the executing firm. The
Sub-Investment Manager may or may not solicit competitive bids based on its
judgment of the expected benefit or harm to the execution process for that
transaction.
When it appears that a number of firms could satisfy the required standards
in respect of a particular transaction, consideration may also be given to
services other than execution services which certain of such firms have provided
in the past or may provide in the future. Negotiated commission rates and
prices, however, are based upon the Sub-Investment Manager's judgment of the
rate which reflects the execution requirements of the transaction without regard
to whether the broker provides services in addition to execution. Among such
other services are the supplying of supplemental investment research; general
economic, political and business information; analytical and statistical data;
relevant market information, quotation equipment and services; reports and
information about specific companies, industries and securities; purchase and
sale recommendations for stocks and bonds; portfolio strategy services;
historical statistical information; market data services providing information
on specific issues and prices; financial publications; proxy voting data and
analysis services; technical analysis of various aspects of the securities
markets, including technical charts; computer hardware used for brokerage and
research purposes; computer software and databases (including those used for
portfolio analysis and modeling in conjunction with certain trading systems and
including software providing investment personnel with efficient access to
current and historical data from a variety of internal and external sources) and
portfolio evaluation services and relative performance of accounts. Certain of
the nonexecution services provided by broker-dealers may in turn be obtained by
the broker-dealers from third parties who are paid for such services by the
broker-dealers.
In the case of the Fund and other registered investment companies advised
by the Investment Manager, the Sub-Investment Manager or their affiliates, the
above services may include data relating to performance, expenses and fees of
those investment companies and other investment companies; this information is
used by the Trustees or Directors of the investment companies to fulfill their
responsibility to oversee the quality of the Investment Manager and
Sub-Investment Manager's advisory contracts between the investment companies and
the Investment Manager or Sub-Investment Manager. The Investment Manager and
Sub-Investment Manager consider these investment company services only in
connection with the execution of transactions on behalf of their investment
company clients and not their other clients.
39
<PAGE>
The Sub-Investment Manager regularly reviews and evaluates the services
furnished by broker-dealers. Among other measures, the Sub-Investment Manager's
investment management personnel seek to evaluate the quality of research and
other services received, and the results of this effort are made available to
the equity trading department, which sometimes uses this information as
consideration in the selection of brokers to execute portfolio transactions.
Some services furnished by broker-dealers may be used for research and
investment decision-making purposes, and also for marketing or administrative
purposes. Under these circumstances, the Sub-Investment Manager allocates the
cost of such services to determine the appropriate proportion of the cost which
is allocable to purposes other than research or investment decision-making and
the Sub-Investment Manager pays for that portion directly from its own funds.
Some research and execution services may benefit the Investment Manager or
Sub-Investment Manager's clients as a whole, while others may benefit a specific
segment of clients. Not all such services will necessarily be used exclusively
in connection with the accounts which pay the commissions to the broker-dealer
producing the services.
The Investment Manager and Sub-Investment Manager have no fixed agreements
or understandings with any broker-dealer as to the amount of brokerage business
which the firm may expect to receive for services supplied to the Investment
Manager, or Sub-Investment Manager or otherwise. There may be, however,
understandings with certain firms that in order for such firms to be able to
continuously supply certain services, they need to receive allocation of a
specified amount of brokerage business. These understandings are honored to the
extent possible in accordance with the policies set forth above.
It is not the Investment Manager and Sub-Investment Manager's policy to
intentionally pay a firm a brokerage commission higher than that which another
firm would charge for handling the same transaction in recognition of services
(other than execution services) provided. However, the Investment Manager and
Sub-Investment Manager are aware that this is an area where differences of
opinion as to fact and circumstances may exist, and in such circumstances, if
any, the Investment Manager and Sub-Investment Manager rely on the provisions of
Section 28(e) of the Securities Exchange Act of 1934, to the extent applicable.
40
<PAGE>
Brokerage commissions paid by the Fund in secondary trading during the last
three fiscal years ended October 31 were as follows: 1995, $400,465; 1996,
$569,761; and 1997, $791,999.
During and at the end of its most recent fiscal year, the Fund did not hold
in its portfolio securities of any entity that might be deemed to be a regular
broker-dealer of the Fund as defined under the 1940 Act.
In the case of the purchase of fixed income securities in underwriting
transactions, the Sub-Investment Manager follows any instructions received from
its clients as to the allocation of new issue discounts, selling commissions and
designations to brokers or dealers which provide the client with research,
performance evaluation, master trustee and other services. In the absence of
instructions from the client, the Sub-Investment Manager may make such
allocations to broker-dealers which have provided the Sub-Investment Manager
with research and brokerage services.
When more than one client of the Investment Manager or Sub-Investment
Manager is seeking to buy or sell the same security, the sale or purchase is
carried out in a manner which is considered fair and equitable to all accounts.
In allocating investments among various clients (including in what sequence
orders for trades are placed), the Investment Manager and Sub-Investment Manager
will use their best business judgment and will take into account such factors as
the investment objectives of the clients, the amount of investment funds
available to each, the amount already committed for each client to a specific
investment and the relative risks of the investments, all in order to provide on
balance a fair and equitable result to each client over time. Although sharing
in large transactions may sometimes affect price or volume of shares acquired or
sold, overall it is believed there may be an advantage in execution. The
Investment Manager or Sub-Investment Manager may follow the practice of grouping
orders of various clients for execution to get the benefit of lower prices or
commission rates. In certain cases where the aggregate order may be executed in
a series of transactions at various prices, the transactions are allocated as to
amount and price in a manner considered equitable to each so that each receives,
to the extent practicable, the average price of such transactions. Exceptions
may be made based on such factors as the size of the account and the size of the
trade. For example, the Investment Manager or Sub-Investment Manager may not
aggregate trades where they believe that it is in the best interests of clients
not to do so, including situations where aggregation might result in a large
number of small transactions with consequent increased custodial and other
transactional costs which may disproportionately impact smaller accounts. Such
disaggregation, depending on the circumstances, may or may not result in such
accounts receiving more or less favorable execution relative to other clients.
41
<PAGE>
CERTAIN TAX MATTERS
Federal Income Taxation of the Fund--in General
The Fund intends to qualify and elect to be treated each taxable year as a
"regulated investment company" under Subchapter M of the Internal Revenue Code
of 1986, as amended (the "Code"), although it cannot give complete assurance
that it will do so. Accordingly, for each of the Fund's tax years that has begun
after August 5, 1997, the Fund must, among other things, (a) derive at least 90%
of its gross income in each taxable year from dividends, interest, payments with
respect to securities loans, gains from the sale or other disposition of stock,
securities or foreign currencies, or other income (including, but not limited
to, gains from options, futures or forward contracts) derived with respect to
its business of investing in such stock, securities or currencies (the "90%
test"); (b) satisfy certain diversification requirements; and (c) in order to be
entitled to utilize the dividends paid deduction, distribute annually at least
90% of its investment company taxable income (determined without regard to the
deduction for dividends paid).
If the Fund should fail to qualify as a regulated investment company in any
year, it would lose the beneficial tax treatment accorded regulated investment
companies under Subchapter M of the Code and all of its taxable income would be
subject to tax at regular corporate rates without any deduction for
distributions to shareholders, and such distributions will be taxable to
shareholders as ordinary income to the extent of the Fund's current or
accumulated earnings and profits. Also, the shareholders, if they received a
distribution in excess of current or accumulated earnings and profits, would
receive a return of capital that would reduce the basis of their shares of the
Fund to the extent thereof. Any distribution in excess of a shareholder's basis
in the shareholder's shares would be taxable as gain realized from the sale of
such shares.
The Fund will be liable for a nondeductible 4% excise tax on amounts not
distributed (or deemed distributed) on a timely basis in accordance with a
calendar year distribution requirement. To avoid the tax, during each calendar
year the Fund must distribute (or be deemed to have distributed) an amount equal
to at least 98% of the sum of its ordinary income (not taking into account any
capital gains or losses or certain foreign currency gains and losses) for the
calendar year, plus its capital gain net income and certain foreign currency
gains and losses for the 12-month period ending on October 31, in addition to
any undistributed portion of the respective balances from the prior year. For
that purpose, any income or gain retained by the Fund that is subject to
corporate tax will be considered to have been distributed by year-end. The Fund
intends to make sufficient distributions to avoid this 4% excise tax.
Federal Income Taxation of the Fund's Investments
Original Issue Discount. For federal income tax purposes, debt securities
purchased by the Fund may be treated as having original issue discount. Original
issue discount represents interest for federal income tax purposes and can
generally be defined as the excess of the stated redemption price at maturity of
a debt obligation over the issue price. Original issue discount
42
<PAGE>
is treated for federal income tax purposes as income earned by the Fund, whether
or not any income is actually received, and therefore is subject to the
distribution requirements of the Code. Generally, the amount of original issue
discount is determined on the basis of a constant yield to maturity which takes
into account the compounding of accrued interest. Under section 1286 of the
Code, an investment in a stripped bond or stripped coupon may result in original
issue discount.
Debt securities may be purchased by the Fund at a discount that exceeds the
original issue discount plus previously accrued original issue discount
remaining on the securities, if any, at the time the Fund purchases the
securities. This additional discount represents market discount for federal
income tax purposes. In the case of any debt security issued after July 18,
1984, having a fixed maturity date of more than one year from the date of issue
and having market discount, the gain realized on disposition will be treated as
interest to the extent it does not exceed the accrued market discount on the
security (unless the Fund elects to include such accrued market discount in
income in the tax year to which it is attributable). Generally, market discount
is accrued on a daily basis. The Fund may be required to capitalize, rather than
deduct currently, part or all of any direct interest expense incurred or
continued to purchase or carry any debt security having market discount, unless
the Fund makes the election to include market discount currently. Because the
Fund must include original issue discount in income, it will be more difficult
for the Fund to make the distributions required for the Fund to maintain its
status as a regulated investment company under Subchapter M of the Code or to
avoid the 4% excise tax described above.
Options and Futures Transactions. Certain of the Fund's investments may be
subject to provisions of the Code that (i) require inclusion of unrealized gains
or losses in the Fund's income for purposes of the 90% test, the excise tax and
the distribution requirements applicable to regulated investment companies; (ii)
defer recognition of realized losses; and (iii) characterize both realized and
unrealized gain or loss as short-term or long-term gain or loss. Such provisions
generally apply to, among other investments, options on debt securities, indices
on securities and futures contracts.
Gains or losses attributable to foreign currency contracts or fluctuations
in exchange rates that occur between the time the 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 portion 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 foreign 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 the Fund invests in the stock of certain "passive foreign investment
companies" ("PFICs"), the income of such companies may become taxable to the
Fund prior to its distribution to the Fund or, alternatively, ordinary income
taxes and interest charges may be imposed on the Fund on "excess distributions"
received by the Fund or on gain from the
43
<PAGE>
disposition of such investments by the Fund. Alternatively, if the stock of a
PFIC is marketable, the Fund may elect to mark the stock of the PFIC to market
annually, and to recognize gain or loss of the appreciation or depreciation in
the stock. Any gain so recognized would be treated as ordinary income, and a
loss would be recognized and treated as an ordinary deduction to the extent of
any prior, unreversed amounts of gain recognized with respect to that stock. The
Fund does not intend to invest in PFICs. Because of the broad scope of the PFIC
rules, however, there can be no assurance that the Fund can avoid doing so.
Federal Income Taxation of Shareholders
The Fund may be subject to foreign taxes, including foreign income taxes.
If so, the 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 the Fund at the close of its
taxable 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)
include 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) either
deduct such share of taxes or treat such share of taxes as a credit against
United State income tax liability. A tax-exempt shareholder will ordinarily not
benefit from this election.
Generally, a credit for foreign taxes paid by the Fund may not exceed a
shareholder's United States income tax attributable to the shareholder's foreign
source income. This limitation applies separately to different categories of
income, one of which is a foreign-source passive income, which is likely to
include all of the foreign-source income of the Fund. As a result of these
limitations, some shareholders may not be able to utilize fully any foreign tax
credits generated by an investment in the Fund. In addition, holding period
requirements apply so that, generally, the shareholder will be unable to take a
tax credit for any foreign withholding tax on a dividend payment unless (a) the
Fund held the stock in the foreign corporation for more than 15 days during the
30-day period beginning on the date that the stock becomes ex-dividend with
respect to the dividend on which the withholding tax is paid and (b) the
shareholder held his or her shares in the Fund during the same period. In the
case of certain preference dividends on foreign stock, the 15-day and 30-day
periods are extended to 45 days and 90 days, respectively. Shareholders also
will be unable to claim a credit for foreign withholding taxes on dividends if
the Fund has entered into certain hedging transactions with respect to the stock
of the foreign corporation. Shareholders may take a deduction to the extent of
any tax credits disallowed under the holding period and hedging rules. The Fund
will provide its shareholders with information about the source of its income
and the foreign taxes it has paid for use in preparing the shareholder's United
States income tax returns, including information about withholding taxes for
which a tax credit could be denied to the Fund under the holding period and
hedging rules described above.
Dividends paid by the Fund may be eligible for the 70% dividends-received
deduction for corporations. The percentage of the Fund's dividends eligible for
such tax treatment may be less than 100% to the extent that less than 100% of
the Fund's gross income may be from qualifying dividends of domestic
corporations. Any dividend declared in October, November or December and made
payable to shareholders of record in any such month is treated as received by
such shareholder on December 31, provided that the Fund pays the dividend during
January of the following calendar year.
Distributions by the Fund can result in a reduction in the fair market
value of the Fund's shares. Should a distribution reduce the fair market value
below a shareholder's cost basis, such distribution nevertheless may be taxable
to the shareholder as ordinary income or long-term capital gain, even though,
from an investment standpoint, it may constitute a partial return of capital. In
particular, investors should be careful to consider the tax implications of
buying shares just prior to a taxable distribution. The price of shares
purchased at that time includes the amount of any forthcoming distribution.
Those investors purchasing shares just
44
<PAGE>
prior to a taxable distribution will then receive a return of investment upon
distribution which will nevertheless be taxable to them.
DISTRIBUTION OF SHARES OF THE FUND
Portfolios has entered into a Distribution Agreement with State Street
Research Investment Services, Inc., as Distributor, whereby the Distributor acts
as agent to sell and distribute shares of the Fund. Shares of the Fund are sold
through dealers who have entered into sales agreements with the Distributor. The
Distributor distributes shares of the Fund on a continuous basis at an offering
price which is based on the net asset value per share of the Fund plus (subject
to certain exceptions) a sales charge which, at the election of the investor,
may be imposed (i) at the time of purchase (the Class A shares) or (ii) on a
deferred basis (Class B and Class C shares). The Distributor may reallow all or
portions of such sales charges as concessions to dealers.
Total sales charges on Class A shares paid to the Distributor for the last
three fiscal years were as follows: 1997, $42,760; 1996, $157,855; and 1995,
$255,655.
For the same periods, the Distributor retained the following amounts after
reallowance of concessions to dealers: 1997, $6,794; 1996, $19,830; and 1995,
$29,729.
The differences in the price at which the Fund's Class A shares are offered
due to scheduled variations in sales charges, as described in the Fund's
Prospectus, result from cost savings inherent in economies of scale. Management
believes that the cost of sales efforts of the Distributor and broker-dealers
tends to decrease as the size of purchases increases, or does not involve any
incremental sales expenses as in the case of, for example, exchanges,
reinvestments or dividend investments at net asset value. Similarly, no
significant sales effort is necessary for sales of shares at net asset value to
certain Directors, officers, employees, their relatives and other persons
directly or indirectly related to the Fund or associated entities. Where shares
of the Fund are offered at a reduced sales charge or without a sales charge
pursuant to sponsored arrangements, managed fee-based programs and so-called
"mutual fund supermarkets," among other programs, the amount of the sales charge
reduction will similarly reflect the anticipated reduction in sales expenses
associated with such arrangements. The reductions in sales expenses, and
therefore the reduction in sales charges, will vary depending on factors such as
the size and other characteristics of the organization or program, and the
nature of its membership or the participants. The Fund reserves the right to
make variations in, or eliminate, sales charges at any time or to revise the
terms of or to suspend or discontinue sales pursuant to sponsored arrangements
or similar programs at any time.
On any sale of Class A shares to a single investor in the amount of
$1,000,000 or more, the Distributor will pay the authorized securities dealer
making such sale a commission based on the aggregate of such sales. Such
commission also is payable to authorized securities dealers upon sales of Class
A shares made pursuant to a Letter of Intent to purchase shares
45
<PAGE>
having a net asset value of $1,000,000 or more. Shares sold with such
commissions payable are subject to a one-year contingent deferred sales charge
of 1.00% on any portion of such shares redeemed within one year following their
sale. After a particular purchase of Class A shares is made under the Letter of
Intent, the commission will be paid only in respect of that particular purchase
of shares. If the Letter of Intent is not completed, the commission paid will be
deducted from any discounts or commissions otherwise payable to such dealer in
respect of shares actually sold. If an investor is eligible to purchase shares
at net asset value on account of the Right of Accumulation, the commission will
be paid only in respect of the incremental purchase at net asset value.
For the periods shown below, the Distributor received contingent deferred
sales charges upon redemption of Class A, Class B and Class C shares of the Fund
and paid initial commissions to securities dealers for sales of such Class A,
Class B and Class C shares as follows:
<TABLE>
<CAPTION>
Fiscal Year Ended Fiscal Year Ended Fiscal Year Ended
October 31, 1997 October 31, 1996 October 31, 1995
----------------------------- ------------------------------- ------------------------------
Contingent Contingent Contingent
Deferred Commissions Deferred Commissions Deferred Commissions
Sales Charges Paid to Dealers Sales Charges Paid to Dealers Sales Charges Paid to Dealers
------------- --------------- ------------- --------------- ------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Class A $ 0 $ 35,966 $ 0 $138,025 $ 0 $222,926
Class B $117,824 $111,491 $139,376 $413,917 $81,190 $558,930
Class C $ 619 $ 4,843 $ 4,578 $ 32,126 $ 2,446 $ 45,585
</TABLE>
The Fund has adopted a "Plan of Distribution Pursuant to Rule 12b-1" (the
"Distribution Plan") under which the Fund may engage, directly or indirectly, in
financing any activities primarily intended to result in the sale of Class A,
Class B and Class C shares, including, but not limited to, (1) the payment of
commissions and/or reimbursement to underwriters, securities dealers and others
engaged in the sale of shares, including payments to the Distributor to be used
to pay commissions and/or reimbursement to securities dealers (which securities
dealers may be affiliates of the Distributor) engaged in the distribution and
marketing of shares and furnishing ongoing assistance to investors, (2)
reimbursement of direct out-of-pocket expenditures incurred by the Distributor
in connection with the distribution and marketing of shares and the servicing of
investor accounts including expenses relating to the formulation and
implementation of marketing strategies and promotional activities such as direct
mail promotions and television, radio, newspaper, magazine and other mass media
advertising, the preparation, printing and distribution of Prospectuses of the
Fund and reports for recipients other than existing shareholders of the Fund,
and obtaining such information, analyses and reports with respect to marketing
and promotional activities and investor accounts as the Fund may, from time to
time, deem advisable, and (3) reimbursement of expenses incurred by the
Distributor in connection with the servicing of shareholder accounts including
payments to securities dealers and others in consideration of the provision of
personal service to investors and/or the maintenance or servicing of shareholder
accounts and expenses associated with the provision of personal service by the
Distributor directly to investors. In addition, the Distribution Plan is deemed
to authorize the Distributor and the Investment Manager to make payments out of
general profits, revenues or other sources to underwriters,
46
<PAGE>
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.
Some or all of the service fees are used to pay or reimburse dealers
(including dealers that are affiliates of the Distributor) or others for
personal services and/or the maintenance of shareholder accounts. A portion of
any initial commission paid to dealers for the sale of shares of the Fund
represents payment for personal services and/or the maintenance or servicing of
shareholder accounts by such dealers. Dealers who have sold Class A shares are
eligible for further reimbursement commencing as of the time of such sale.
Dealers who have sold Class B and Class C shares are eligible for further
reimbursement after the first year during which such shares have been held of
record by such dealer as nominee for its clients (or by such clients directly).
Any service fees received by the Distributor and not allocated to dealers may be
applied by the Distributor in reduction of expenses incurred by it directly for
personal services and the maintenance or servicing of shareholder accounts.
The distribution fees are used primarily to offset initial and ongoing
commissions paid to dealers for selling such shares. Any distribution fees
received by the Distributor and not allocated to dealers may be applied by the
Distributor in connection with sales or marketing efforts, including special
promotional fees and cash and noncash incentives based upon sales by dealers.
The Distributor provides distribution services on behalf of other funds
having distribution plans and receives similar payments from, and incurs similar
expenses on behalf of, such other funds. When expenses of the Distributor cannot
be identified as relating to a specific fund, the Distributor allocates expenses
among the funds in a manner deemed fair and equitable to each fund.
Commissions and other cash and noncash incentives and payments to dealers,
to the extent payable out of the general profits, revenues or other sources of
the Distributor (including the advisory fees paid by the Fund), have also been
authorized pursuant to the Distribution Plan.
The expenditures to be made pursuant to the Distribution Plan may not
exceed (i) with respect to Class A shares, an annual rate of 0.25% of the
average daily value of net assets represented by such Class A shares, and (ii)
with respect to Class B and Class C shares, an annual rate of 0.75% of the
average daily value of the net assets represented by such Class B or Class C
shares (as the case may be) to finance sales or promotion expenses and an annual
rate of 0.25% of the average daily value of the net assets represented by such
Class B or Class C shares (as the case may be) to make payments for personal
services and/or the maintenance or servicing of shareholder accounts. The
distribution and servicing expenses of a particular class will be borne solely
by that class. In addition, a rule of the NASD limits annual expenditures that
the Fund may incur under the Distribution Plan to 1%, of which 0.75% may be used
to pay distribution expenses and 0.25% may be used to pay shareholder service
fees. The NASD rule also limits the aggregate amount that the Fund may pay for
such
47
<PAGE>
distribution costs to 6.25% of gross share sales of a class since the inception
of any asset-based sales charge plus interest at the prime rate plus 1% on
unpaid amounts thereof (less any contingent deferred sales charges). Such
limitation does not apply to shareholder service fees. Payments to the
Distributor or to dealers funded under the Distribution Plan may be discontinued
at any time.
The Distributor may pay certain dealers and other intermediaries additional
compensation for sales and administrative services. The Distributor may provide
cash and noncash incentives to intermediaries who, for example, sell significant
amounts of shares or develop particular distribution channels. The Distributor
may compensate dealers with clients who maintain their investments in the Fund
over a period of years. The incentives can include merchandise and trips to, and
attendance at, sales seminars at resorts. The Distributor may pay for
administrative services, such as technological and computer systems support for
the maintenance of pension plan participant records, for subaccounting, and for
distribution through mutual fund supermarkets or similar arrangements.
During the fiscal year ended October 31, 1997, the Fund paid the
Distributor fees under the Distribution Plan and the Distributor used all of
such payments for expenses incurred on behalf of the Fund as follows:
<TABLE>
<CAPTION>
Class A Class B Class C
------- --------- -------
<S> <C> <C> <C>
Advertising $ 0 $ 0 $ 1,748
Printing and mailing of prospectuses to
other than current shareholders 0 0 642
Compensation to dealers 48,442 263,930 27,737
Compensation to sales personnel 0 0 5,394
Carrying or other financing charges 0 0 0
Interest 0 0 0
Other expenses: marketing; general 0 0 2,542
------- -------- -------
Total fees $48,442 $263,930 $38,073
====== ======== =======
</TABLE>
The Distributor may have also used additional resources of its own for
further expenses on behalf of the Fund.
No interested Director of Portfolios has any direct or indirect financial
interest in the operation of the Distribution Plan or any related agreements
thereunder. The Distributor's interest in the Distribution Plan is described
above.
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<PAGE>
To the extent that the Glass-Steagall Act may be interpreted as prohibiting
banks and other depository institutions from being paid for performing services
under the Distribution Plan, the Fund will make alternative arrangements for
such services for shareholders who acquired shares through such institutions.
CALCULATION OF PERFORMANCE DATA
From time to time, in advertisements or in communications to shareholders
or prospective investors, the Fund may compare the performance of its Class A,
Class B, Class C or Class S shares to the performance of other mutual funds with
similar investment objectives, to certificates of deposit and/or to other
financial alternatives. The Fund may also compare its performance to appropriate
indices, such as Standard & Poor's 500 Index, Consumer Price Index and Dow Jones
Industrial Average, and The Morgan Stanley Capital International, Europe,
Australia, Far East (EAFE) Index and/or to appropriate rankings and averages
such as those compiled by Lipper Analytical Services, Inc., Morningstar, Inc.,
Money Magazine, Business Week, Forbes Magazine, The Wall Street Journal and
Investor's Daily. For example, the performance of the Fund might be compared to
the Lipper International Funds Group.
The average annual total return ("standard total return") of the Class A,
Class B, Class C and Class S shares of the Fund will be calculated as set forth
below. Total return is computed separately for each class of shares of the Fund.
Performance data for a specified class includes periods prior to the adoption of
class designations on March 1, 1994, when designations were assigned based on
the pricing and Rule 12b-1 fees applicable to shares sold thereafter. The
application of the additional Rule 12b-1 fees, if any, of up to 1% will, for
periods after to March 1, 1994 adversely affect Fund performance results. Thus,
performance data or rankings for a given class of shares should be interpreted
carefully by investors who hold or may invest in a different class of shares.
The performance data below reflect Rule 12b-1 fees and, where applicable,
sales charges as follows:
<TABLE>
<CAPTION>
Rule 12b-1 Fees Sales Charges
--------------- -------------
Class Amount Period
----- ------ ------
<S> <C> <C> <C>
A 0.25% March 1, 1994 to present; fee will Maximum 4.5% sales charge reflected
reduce performance for periods after
March 1, 1994
B 1.00% March 1, 1994 to present; fee will 1- and 5-year periods reflect a 5% and
reduce performance for periods after a 2% contingent deferred sales charge,
March 1, 1994 respectively
C* 1.00% March 1, 1994 to present; fee will 1-year period reflects a 1% contingent
reduce performance for periods after deferred sales charge
49
<PAGE>
March 1, 1994
S* None Since commencement None
of operations to present
</TABLE>
- ------------------------
* Prior to November 1, 1997, the Fund's current Class C shares were
designated as Class D shares and the Fund's current Class S shares were
designated as Class C shares.
All calculations of performance data in this section reflect the voluntary
measures, if any, by the Fund's affiliates to reduce fees or expenses relating
to the Fund; see "--Accrued Expenses and Recurring Charges" later in this
section.
Total Return
The Fund's standard average annual total returns ("standard total return")
of each class of shares were as follows:
<TABLE>
<CAPTION>
Commencement
of Operations Five Years One Year
(January 22, 1992) to Ended Ended
October 31, 1997 October 31, 1997 October 31, 1997
---------------- ---------------- ----------------
<S> <C> <C> <C>
Class A 5.67% 9.38% -2.43%
Class B 6.00% 9.50% -3.67%
Class C* 6.00% 9.78% 0.44%
Class S* 6.68% 10.60% 2.37%
- ------------------
</TABLE>
* Prior to November 1, 1997, the Fund's current Class C shares were
designated as Class D shares and the Fund's current Class S shares were
designated as Class C shares.
Standard total return is computed separately for each class of shares by
determining the average annual compounded rates of return over the designated
periods that, if applied to the initial amount invested, would produce the
ending redeemable value in accordance with the following formula:
P(1+T)n = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
50
<PAGE>
n = number of years
ERV = ending redeemable value at the end of the
designated period assuming a hypothetical
$1,000 payment made at the beginning of
the designated period
The calculation is based on the further assumptions that the highest
applicable initial or contingent deferred sales charge is deducted, and that all
dividends and distributions by the Fund are reinvested at net asset value on the
reinvestment dates during the periods. All accrued expenses and recurring
charges are also taken into account as described later herein.
Accrued Expenses and Recurring Charges
Accrued expenses include all recurring charges that are charged to all
shareholder accounts in proportion to the length of the base period. The
standard total return results take sales charges, if applicable, into account,
although the results do not take into account recurring and nonrecurring charges
for optional services which only certain shareholders elect and which involve
nominal fees, such as the $7.50 fee for wire orders.
Accrued expenses do not include the subsidization, if any, by affiliates of
fees or expenses during the subject period. In the absence of such
subsidization, the performance of the Fund would have been lower.
Nonstandardized Total Return
The Fund may provide the above described standard total return results for
Class A, Class B, Class C and Class S shares for periods which end no earlier
than the most recent calendar quarter end and which begin twelve months before,
five years before and at the time of commencement of the Fund's operations. In
addition, the Fund may provide nonstandardized total return results for
differing periods, such as for the most recent six months, and/or without taking
sales charges into account. Such nonstandardized total return is computed as
otherwise described under "--Total Return" except the result may or may not be
annualized, and as noted any applicable sales charge may not be taken into
account and therefore not deducted from the hypothetical initial payment of
$1,000. For example, the Fund's nonstandardized total returns for the six months
ended October 31, 1997, without taking sales charges into account, were as
follows:
51
<PAGE>
Without
Subsidy
-------
Class A -0.32%
Class B -0.76%
Class C* -0.31%
Class S* -0.65%
- ------------------------
* Prior to November 1, 1997, the Fund's current Class C shares were
designated as Class D shares and the Fund's current Class S shares were
designated as Class C shares.
CUSTODIAN
State Street Bank and Trust Company, 225 Franklin Street, Boston,
Massachusetts 02110, is the Fund's custodian. As custodian, State Street Bank
and Trust Company is responsible for, among other things, safeguarding and
controlling the Fund's cash and securities, handling the receipt and delivery of
securities and collecting interest and dividends on the Fund's investments.
State Street Bank and Trust Company is not an affiliate of the Investment
Manager or its affiliates.
INDEPENDENT ACCOUNTANTS
Deloitte & Touche LLP, 125 Summer Street, Boston, Massachusetts 02110,
serves as the Fund's independent accountants, providing professional services
including (1) audits of the Fund's annual financial statements, (2) assistance
and consultation in connection with SEC filings and (3) review of the annual
income tax returns filed on behalf of the Fund.
FINANCIAL STATEMENTS
In addition to the reports provided to holders of record on a semiannual
basis, other supplementary financial reports may be made available from time to
time through electronic or other media. Shareholders with substantial holdings
in one or more State Street Research Funds may also receive reports and other
information which reflect or analyze their positions in a consolidated manner.
For more information, call State Street Research Service Center.
The following financial statements are for the Fund's fiscal year ended
October 31, 1997.
52
<PAGE>
STATE STREET RESEARCH INTERNATIONAL EQUITY FUND
- --------------------------------------------------------------------------------
INVESTMENT PORTFOLIO
- --------------------------------------------------------------------------------
October 31, 1997
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Value
Shares (Note 1)
- --------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS 93.4%
Australia 4.5%
Australia & New Zealand Banking Group Ltd. ....... 70,000 $ 488,337
Australia National Industries .................... 236,000 237,333
Comalco Ltd. ..................................... 77,000 315,154
GIO Australia Holdings Ltd. ...................... 100,000 255,983
National Australia Bank .......................... 13,000 177,817
News Corp. Ltd. ADR .............................. 75,000 359,185
North Ltd. ....................................... 47,150 123,614
Savage Resources ................................. 313,500 180,784
Westpac Banking Ltd. ............................. 79,300 461,757
WMC Ltd. ......................................... 57,700 204,917
----------
2,804,881
----------
Austria 1.6%
Bohler Uddeholm AG ............................... 2,494 178,826
EVN Energie-Versorgung AG ........................ 1,642 190,542
VA Stahl AG ...................................... 6,062 262,294
Z Laenderbank Bank Austria AG .................... 7,764 364,732
----------
996,394
----------
Belgium 1.6%
GPE Bruxelles .................................... 1,771 274,303
Petrofina SA ..................................... 1,375 506,284
Union Miniere SA ................................. 2,990 218,924
----------
999,511
----------
Bermuda 0.1%
Isleinvest Ltd.*+ ................................ 95,821 67,990
----------
Canada 0.7%
Advanced Material Resources Ltd.* ................ 133,000 212,332
Kemgas Ltd.* ..................................... 200,000 234,150
----------
446,482
----------
Denmark 0.3%
Unidanmark SA Cl. A .............................. 2,800 189,259
----------
France 8.6%
Alcatel Alsthom .................................. 4,339 523,546
Cap Gemini ....................................... 4,624 367,146
Cie de Michelin Cl. B ............................ 5,335 273,675
Cie de St. Gobain ................................ 2,367 339,770
Credit Commerce France ........................... 5,917 335,227
Eaux Cie Generale ................................ 3,141 366,470
Elf Aquitaine SA ................................. 4,438 549,340
L'Air Liquide .................................... 1,040 161,366
Lafarge .......................................... 5,917 369,694
Pechiney International NV ........................ 7,340 301,833
Rhone-Poulenc SA ................................. 5,440 237,188
Sanofi SA ........................................ 3,800 361,011
- --------------------------------------------------------------------------------
Value
Shares (Note 1)
- --------------------------------------------------------------------------------
<S> <C> <C>
France (cont'd)
Schneider SA ..................................... 5,750 $ 307,026
Total SA Cl. B ................................... 4,298 476,873
Valeo SA ......................................... 5,083 338,999
----------
5,309,164
----------
Germany 9.2%
Allianz AG Holding ............................... 3,982 887,045
Bankgesellschaft Berlin AG ....................... 14,394 354,882
BASF AG .......................................... 12,601 427,636
Commerzbank AG ................................... 10,966 372,149
Daimler-Benz AG .................................. 3,758 251,798
Deutsche Bank AG ................................. 3,674 240,415
Deutsche Pfandbrief .............................. 5,116 288,773
Deutsche Telekom AG .............................. 11,585 217,076
Dresdner Bank AG ................................. 3,976 162,610
Lufthansa AG ..................................... 12,881 224,920
MAN AG ........................................... 688 207,142
Metallgesellschaft AG ............................ 10,746 213,823
RWE AG ........................................... 7,174 311,298
SGL Carbon AG .................................... 1,426 200,193
Siemens AG ....................................... 11,220 690,592
Thyssen AG ....................................... 1,572 346,993
Viag AG .......................................... 599 278,164
----------
5,675,509
----------
Hong Kong 3.5%
Beijing Enterprises Holdings Ltd. ................ 70,200 234,711
Cheung Kong Infrastructure Holdings Ltd. ......... 75,400 195,046
China Resources Enterprise Ltd. .................. 97,000 265,977
Citic Pacific Ltd. ............................... 54,000 258,423
First Tractor Co. Cl. H* ......................... 332,000 257,647
Hutchison Whampoa ................................ 47,000 325,228
Johnson Electric Holdings Ltd. ................... 26,000 70,957
New World Development Co. Ltd. ................... 40,000 140,723
Shanghai Industrial Holdings Ltd. ................ 60,000 266,960
Television Broadcasts Ltd. ....................... 60,000 166,850
----------
2,182,522
----------
Indonesia 0.2%
PT Indah Kiat Pulp & Paper Corp. ................. 357,000 136,165
----------
Italy 4.4%
Assic Generali ................................... 14,716 329,002
Credito Italiano ................................. 200,904 535,783
ENI SPA .......................................... 82,869 465,985
La Rinascente SPA ................................ 40,842 302,757
Mediaset SPA ..................................... 66,470 301,530
Montedison SPA ................................... 374,167 303,665
Telecom Italia SPA ............................... 75,499 473,151
----------
2,711,873
----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
3
<PAGE>
STATE STREET RESEARCH INTERNATIONAL EQUITY FUND
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Value
Shares (Note 1)
- --------------------------------------------------------------------------------
<S> <C> <C>
Japan 16.5%
Alps Electric Co. ................................ 42,000 $ 471,126
Amada Co. ........................................ 49,000 260,573
Gunze Ltd. ....................................... 105,000 309,722
Hitachi Ltd. ..................................... 76,000 584,130
Hitachi Zosen Corp. .............................. 94,000 206,980
Ines Corp. ....................................... 18,000 255,754
Intec Inc. ....................................... 29,000 274,699
Izumiya Co. Ltd. ................................. 35,000 287,910
Matsushita Electric Industrial Co. Ltd. .......... 28,000 469,962
Mitsubishi Estate Co. Ltd. ....................... 57,000 719,900
Mitsubishi Oil Co. Ltd. .......................... 105,000 307,977
Mitsubishi Paper Mills ........................... 140,000 371,084
Nintendo Co. Ltd. ................................ 11,100 959,202
Nippon Light Metal Co. Ltd. ...................... 192,000 445,102
Nippon Sheet Glass Co. Ltd. ...................... 149,000 351,608
Nippon Steel Corp. ............................... 140,000 288,492
Nissan Fire & Marine Insurance ................... 97,250 399,990
Nomura Securities ................................ 46,000 535,106
Sankyo Seiki Manufacturing Co. Ltd. .............. 36,000 272,206
Seino Transportation ............................. 21,000 181,471
Shima Seiki Manufacturing Co. .................... 5,200 211,716
Shimano Inc. ..................................... 15,000 305,359
Sumitomo Special Metals .......................... 20,000 382,218
Tokyo Nissan Auto Sales Co. Ltd. ................. 19,000 53,677
Tokyo Steel Manufacturing ........................ 73,000 515,579
Tomy Co. Ltd. .................................... 16,000 210,054
Toyo Ink Manufacturing Co. ....................... 84,000 249,871
Yamanouchi Pharmaceutical Co. .................... 15,000 368,924
----------
10,250,392
----------
Korea 1.5%
Housing & Commercial Bank GDR[dbldag] ............ 14,400 124,200
LG Electronics Inc. GDR[dbldag] .................. 109,000 283,400
SK Telecom Co. Ltd. ADR .......................... 47,000 246,750
Samsung Electronics Ltd. GDR[dbldag] ............. 27,200 275,400
----------
929,750
----------
Luxembourg 0.3%
Arbed SA ......................................... 1,356 171,453
----------
Mexico 0.7%
Cemex SA ADR ..................................... 14,900 129,533
Grupo Television SA de CV GDR .................... 4,700 145,700
Grupo Carso SA de CV ............................. 24,400 154,519
----------
429,752
----------
- --------------------------------------------------------------------------------
Value
Shares (Note 1)
- --------------------------------------------------------------------------------
<S> <C> <C>
Netherlands 3.8%
Akzo Nobel NV .................................... 1,648 $ 290,384
ING Groep NV ..................................... 9,758 409,620
Kon Ptt .......................................... 7,664 292,901
Koninklijke KNP BT NV ............................ 10,300 234,489
Philips Electronics NV ........................... 3,514 275,111
Royal Dutch Petroleum Co. ........................ 16,653 880,898
----------
2,383,403
----------
Norway 0.8%
Fred Olsen Energy ASA ............................ 5,200 131,166
Schibsted ASA .................................... 10,650 199,953
Smedvig ASA ...................................... 6,400 193,539
----------
524,658
----------
Portugal 1.5%
Banco Commercial Portugues ....................... 8,100 164,902
Cimpor-Cimentos de Portugal SA ................... 6,920 175,115
Elecricidade de Portugal SA ...................... 11,400 200,318
Portugal Telecom SA .............................. 9,000 369,264
----------
909,599
----------
Singapore 1.3%
City Development Ltd. ............................ 37,000 155,048
Development Bank of Singapore Ltd. ............... 25,000 233,333
Sing Technologies Automotive Ltd. ................ 72,000 211,200
Singapore Airlines Ltd. .......................... 29,100 218,019
----------
817,600
----------
Spain 3.5%
Acerinox SA ...................................... 1,490 222,573
Banco Bilbao Vizcaya ............................. 13,286 355,280
Banco Popular Espagnol SA ........................ 3,768 222,500
Endesa SA ........................................ 12,135 228,569
Fomento de Construcciones y Contratas SA ......... 5,580 203,300
Repsol SA ........................................ 6,369 267,071
Tabacalera SA CI. A .............................. 4,430 319,148
Telefonica de Espagna ............................ 11,860 323,669
----------
2,142,110
----------
Sweden 3.3%
Autoliv AB ADR ................................... 8,680 348,248
Electrolux AB CI. B .............................. 4,720 390,713
L.M. Ericsson Telephone Co. Cl. B ................ 3,540 155,970
Mo Och Domsjo AB CI. B ........................... 9,140 247,723
Pricer AB CI. B .................................. 5,800 134,741
Skandia Foersaekrings AB ......................... 6,224 290,845
Svenska Handelsbank AB ........................... 7,831 247,793
Volvo AB CI. B ................................... 8,300 217,199
----------
2,033,232
----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
4
<PAGE>
STATE STREET RESEARCH INTERNATIONAL EQUITY FUND
- --------------------------------------------------------------------------------
INVESTMENT PORTFOLIO (cont'd)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Value
Shares (Note 1)
- --------------------------------------------------------------------------------
<S> <C> <C>
Switzerland 5.7%
CS Holding AG .................................... 2,030 $ 285,962
Holderbank Financiere Glarus AG .................. 207 166,605
Nestle SA ........................................ 465 655,201
Novartis AG ...................................... 642 1,005,467
Roche Holding AG ................................. 93 817,258
Schweiz Bankverein AG ............................ 1,111 298,726
Zurich Versicherun AG ............................ 723 298,443
----------
3,527,662
----------
United Kingdom 19.8%
Ashurst Technology Ltd.+ ......................... 250,000 133,040
Bass PLC ......................................... 16,300 226,436
BAT Industries PLC ............................... 115,400 1,009,689
BG PLC ........................................... 61,000 268,138
Billiton PLC ..................................... 61,792 179,093
British Biotech PLC .............................. 70,000 122,140
British Petroleum Co. PLC ........................ 90,000 1,322,739
British Telecom PLC .............................. 39,000 296,408
Burmah Castrol PLC ............................... 11,500 197,765
Commercial Union PLC ............................. 27,500 387,560
Enterprise Oil PLC ............................... 20,200 225,711
Glaxo Wellcome PLC ............................... 51,000 1,093,524
Granada Group PLC ................................ 17,500 241,344
Great University Stores PLC ...................... 34,000 403,013
Guinness PLC ..................................... 60,000 536,545
Halifax PLC ...................................... 44,000 498,292
J. Sainsbury PLC ................................. 50,000 417,341
Land Securities PLC .............................. 17,000 285,218
Lloyds TSB Group PLC ............................. 65,000 812,451
Marks & Spencer PLC .............................. 45,000 456,768
Morgan Crucible Co. .............................. 31,000 252,250
Northern Foods PLC ............................... 62,000 239,247
P & O PLC ........................................ 34,000 393,600
Rolls Royce PLC .................................. 61,000 219,014
Royal Bank Scotland Group PLC .................... 48,100 510,023
Smiths Industries PLC ............................ 11,100 161,089
Unilever PLC ..................................... 131,000 975,847
United Utilities PLC ............................. 16,500 201,670
Wolseley PLC ..................................... 21,000 175,019
----------
12,240,974
----------
Total Common Stocks (Cost $56,013,112) .......................... 57,880,335
----------
- --------------------------------------------------------------------------------
Value
Shares (Note 1)
- --------------------------------------------------------------------------------
<S> <C> <C>
EQUITY-RELATED SECURITIES 0.3%
Upton & Southern Holdings PLC Cv. Pfd. ........... 115,207 $ 180,725
-----------
Total Equity-Related Securities (Cost $178,174) ................. 180,725
-----------
Total Investments (Cost $56,191,286)--93.7% ..................... 58,061,060
Cash and Other Assets, Less Liabilities--6.3% ................... 3,897,407
-----------
Net Assets--100.0% .............................................. $61,958,467
===========
Federal Income Tax Information:
At October 31, 1997, the net unrealized appreciation of
investments based on cost for Federal income tax
purposes of $56,848,513 was as follows:
Aggregate gross unrealized appreciation for all investments
in which there is an excess of value over tax cost .... $ 6,143,305
Aggregate gross unrealized depreciation for all investments
in which there is an excess of tax cost over value ............ (4,930,758)
------------
$ 1,212,547
============
</TABLE>
- -------------------------------------
* Nonincome-producing securities.
ADR and GDR stand for American Depositary Receipt and Global Depositary
Receipt, respectively, representing ownership of foreign securities.
+ Security determined to be illiquid by the Directors.
[dbldag] Security restricted as to public resale. At October 31, 1997, there
were no outstanding unrestricted securities of the same class as those
held. The total cost and market value of restricted securities at
October 31, 1997 were $1,360,583 and $683,000 (1.10% of net assets),
respectively.
The accompanying notes are an integral part of the financial statements.
5
<PAGE>
STATE STREET RESEARCH INTERNATIONAL EQUITY FUND
- ---------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
- ---------------------------------------------------------------------------
October 31, 1997 For the year ended October 31, 1997
<TABLE>
<S> <C>
Assets
Investments, at value (Cost $56,191,286) (Note 1) ............ $58,061,060
Foreign currency, at value (Cost $366,124) ................... 380,095
Cash ......................................................... 1,818,347
Receivable for securities sold ............................... 4,442,975
Receivable for fund shares sold .............................. 61,756
Dividends and interest receivable ............................ 122,129
Foreign tax receivable ....................................... 86,041
Receivable from Distributor (Note 3) ......................... 18,818
-----------
64,991,221
Liabilities
Payable for securities purchased ............................. 2,184,822
Payable for fund shares redeemed ............................. 306,448
Accrued transfer agent and shareholder services
(Note 2) ................................................... 122,933
Accrued management fee (Note 2) .............................. 58,431
Accrued distribution and service fees (Note 5) ............... 28,500
Accrued directors' fees (Note 2) ............................. 50,982
Other accrued expenses ....................................... 280,638
-----------
3,032,754
-----------
Net Assets ................................................... $61,958,467
===========
Net Assets consist of:
Unrealized appreciation of investments and foreign
currency .................................................. $ 1,889,375
Accumulated net realized loss on investments and
foreign currency .......................................... (1,634,055)
Shares of beneficial interest ............................... 61,703,147
-----------
$61,958,467
===========
Net Asset Value and redemption price per share of
Class A shares ($16,346,321 [divided by] 1,735,776 shares of
beneficial interest) ....................................... $9.42
=====
Maximum Offering Price per share of Class A shares
($9.42 [divided by] .955) .................................. $9.86
=====
Net Asset Value and offering price per share of Class
B shares ($21,913,638 [divided by] 2,392,283 shares of
beneficial interest)* ...................................... $9.16
=====
Net Asset Value and offering price per share of Class
C shares ($2,468,566 [divided by] 269,592 shares of
beneficial interest)* ...................................... $9.16
=====
Net Asset Value, offering price and redemption price
per share of Class S shares ($21,229,942 [divided by]
2,231,528 shares of beneficial interest) ................... $9.51
=====
</TABLE>
- -------------------------------------
* Redemption price per share for Class B and Class C is equal to net asset
value less any applicable contingent deferred sales charge.
- ---------------------------------------------------------------------------
STATEMENT OF OPERATIONS
- ---------------------------------------------------------------------------
For the year ended October 31, 1997
<TABLE>
<S> <C>
Investment Income
Dividends, net of foreign taxes of $181,669 .................. $1,241,357
Interest, net of foreign taxes of $48 ........................ 19,467
----------
1,260,824
Expenses
Management fee (Note 2) ...................................... 701,440
Transfer agent and shareholder services (Note 2) ............. 319,083
Custodian fee ................................................ 311,928
Reports to shareholders ...................................... 133,841
Audit fee .................................................... 47,110
Registration fees ............................................ 2,679
Service fee-Class A (Note 5) ................................. 48,442
Distribution and service fees-Class B (Note 5) ............... 263,930
Distribution and service fees-Class C (Note 5) ............... 38,073
Amortization of organization costs (Note 1) .................. 2,697
Legal fees ................................................... 3,816
Directors' fees (Note 2) ..................................... 15,483
Miscellaneous ................................................ 14,500
----------
1,903,022
Expenses borne by the Distributor (Note 3) ................... (335,089)
----------
1,567,933
----------
Net investment loss .......................................... (307,109)
----------
Realized and Unrealized Gain (Loss) on
Investments and Foreign Currency
Net realized gain on investments (Notes 1 and 4) ............. 305,259
Net realized loss on foreign currency (Note 1) ............... (59,507)
----------
Total net realized gain .................................... 245,752
----------
Net unrealized appreciation of investments ................... 2,101,520
Net unrealized appreciation of foreign currency .............. 4,759
----------
Total net unrealized appreciation .......................... 2,106,279
----------
Net gain on investments and foreign currency ................. 2,352,031
----------
Net increase in net assets resulting from operations ......... $2,044,922
==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
6
<PAGE>
STATE STREET RESEARCH INTERNATIONAL EQUITY FUND
- ------------------------------------- -------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
- ------------------------------------- -------------------------------------
October 31, 1997
<TABLE>
<CAPTION>
Years ended October 31
-------------------------
Value
Shares (Note 1)
- --------------------------------------------------------------------------------
<S> <C> <C>
Increase (Decrease) in Net Assets
Operations:
Net investment loss .............................. $ (592,238) $ (307,109)
Net realized gain (loss) on
investments and foreign
currency ....................................... (2,377,922) 245,752
Net unrealized appreciation of
investments and foreign
currency ....................................... 1,601,264 2,106,279
---------- ----------
Net increase (decrease)
resulting from operations ...................... (1,368,896) 2,044,922
---------- ----------
Net decrease from fund share
transactions (Note 6) .......................... (6,239,509) (22,146,754)
---------- ----------
Total decrease in net assets ..................... (7,608,405) (20,101,832)
Net Assets
Beginning of year ................................ 89,668,704 82,060,299
---------- ----------
End of year ...................................... $82,060,299 $61,958,467
========== ==========
</TABLE>
- ------------------------------------- -------------------------------------
NOTES TO FINANCIAL STATEMENTS
- ------------------------------------- -------------------------------------
October 31, 1997
Note 1
State Street Research International Equity Fund (the "Fund"), is a diversified
series of State Street Research Portfolios, Inc. ("Portfolios"), which was
organized as a Maryland corporation in April, 1991 and is registered under the
Investment Company Act of 1940, as amended, as an open-end management
investment company. The Fund commenced operations in January, 1992. The Fund is
presently the only active series of Portfolios, although the Directors have the
authority to create an unlimited number of series.
The investment objective of the Fund is to achieve long-term growth of capital
by investing primarily in common stocks and equity-related securities of
non-U.S. companies. Non-U.S. companies for these purposes are companies
domiciled outside the United States.
The Fund offers four classes of shares. Before November 1, 1997, Class C shares
were designated Class D and Class S shares were designated Class C. Class A
shares are subject to an initial sales charge of up to 4.50% and an annual
service fee of 0.25% of average daily net assets. Class B shares are subject to
a contingent deferred sales charge on certain redemptions made within five
years of purchase and pay annual distribution and service fees of 1.00%. Class
B shares automatically convert into Class A shares (which pay lower ongoing
expenses) at the end of eight years after the issuance of the Class B shares.
Class C shares are subject to a contingent deferred sales charge of 1.00% on
any shares redeemed within one year of their purchase. Class C shares also pay
annual distribution and service fees of 1.00%. Class S shares are only offered
through certain retirement accounts, advisory accounts of State Street Research
& Management Company (the "Investment Manager") and special programs. No sales
charge is imposed at the time of purchase or redemption of Class S shares.
Class S shares do not pay any distribution or service fees. The Fund's expenses
are borne pro-rata by each class, except that each class bears expenses, and
has exclusive voting rights with respect to provisions of the Plan of
Distribution, related specifically to that class. The Directors declare
separate dividends on each class of shares.
The following significant accounting policies are consistently followed by the
Fund in preparing its financial statements, and such policies are in conformity
with generally accepted accounting principles for investment companies.
A. Investment Valuation
Securities 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. Securities
traded on the National Association of Securities Dealers Automated Quotation
("NASDAQ") system are valued at the last reported sales price. Each security
traded primarily 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
The accompanying notes are an integral part of the financial statements.
7
<PAGE>
STATE STREET RESEARCH INTERNATIONAL EQUITY FUND
- ---------------------------------------------------------------------------
- ---------------------------------------------------------------------------
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 at the mean between the
last current bid and asked prices or by using the last available closing price.
Domestic securities traded in the over-the-counter market are valued at the mean
between the bid and asked prices or yield equivalent as obtained from two or
more dealers that make markets in the securities. All non-U.S. securities traded
in the over-the-counter market are valued at the last sale quote or the last
closing bid price, if there is no active trading in a particular security for a
given day. Portfolio securities traded both in the over-the-counter market and
on a securities exchange are valued according to the broadest and most
representative market. Securities for which market quotations are not readily
available are valued as determined in good faith by or under the authority of
the Directors. Short-term securities maturing within sixty days are valued at
amortized cost. Securities quoted in foreign currencies are translated into U.S.
dollars at the current exchange rate.
B. Security Transactions
Security transactions are accounted for on the trade date (date the order to
buy or sell is executed). Realized gains or losses are reported on the basis of
identified cost of securities delivered. Gains and losses that arise from
changes in exchange rates are not segregated from gains and losses that arise
from changes in market prices of investments.
C. Net Investment Income
Interest income is accrued daily as earned. Dividend income is accrued on the
ex-dividend date.
D. Dividends
Dividends from net investment income, if any, are declared and paid or
reinvested annually. Net realized capital gains, if any, are distributed
annually, unless additional distributions are required for compliance with
applicable tax regulations.
Income dividends and capital gain distributions are determined in accordance
with Federal income tax regulations which may differ from generally accepted
accounting principles. The difference is primarily due to differing treatments
for foreign currency transactions.
E. Federal Income Taxes
No provision for Federal income taxes is necessary because the Fund has elected
to qualify under Subchapter M of the Internal Revenue Code and its policy is to
distribute all of its taxable income, including net realized capital gains,
within the prescribed time periods. At October 31, 1997, the Fund had a capital
loss carryforward of $1,280,650 available, to the extent provided in
regulations, to offset future capital gains, if any, which expires on October
31, 2004.
F. Deferred Organization Costs
Certain costs incurred in the organization and registration of the Fund were
capitalized and amortized under the straight-line method over a period of five
years.
G. Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of income and expenses during the reporting period. Actual
results could differ from those estimates.
Note 2
The Fund and the Investment Manager, a wholly owned, indirect subsidiary of
Metropolitan Life Insurance Company ("Metropolitan"), have entered into an
agreement under which the Investment Manager receives monthly fees at an annual
rate of 0.95% of the Fund's average daily net assets. The Investment Manager
has entered into a Sub-Investment Management Agreement with GFM International
Investors Limited (the "Sub-Investment Manager"), an affiliate of the
Investment Manager and a substantially wholly owned, indirect subsidiary of
Metropolitan, pursuant to which the Sub-Investment Manager has assumed the
overall responsibility for managing the investments of the Fund. During the
year ended October 31, 1997, the Fund paid the Investment Manager $701,440 in
management fees. The Fund has no responsibility for the payment of fees to the
Sub-Investment Manager.
State Street Research Service Center, a division of State Street Research
Investment Services, Inc., the Fund's principal underwriter (the
"Distributor"), an indirect wholly owned subsidiary of Metropolitan, provides
certain shareholder services to the Fund such as responding to inquiries and
instructions from investors with respect to the purchase and redemption of
shares of the Fund. In addition, Metropolitan receives a fee for maintenance of
the accounts of certain shareholders who are participants in sponsored
arrangements, employee benefit plans and similar programs or plans, through or
under which shares of the Fund may be purchased. During the year ended October
31, 1997, the amount of such expenses was $134,963.
The fees of the Directors not currently affiliated with the Investment Manager
amounted to $15,483 during the year ended October 31, 1997.
Note 3
The Distributor and its affiliates may from time to time and in varying amounts
voluntarily assume some portion of fees or expenses relating to the Fund.
During the year ended October 31, 1997, the amount of such expenses assumed by
the Distributor and its affiliates was $335,089.
Note 4
For the year ended October 31, 1997, purchases and sales of securities,
exclusive of short-term obligations, aggregated $125,535,559 and $149,423,412,
respectively.
8
<PAGE>
STATE STREET RESEARCH INTERNATIONAL EQUITY FUND
- --------------------------------------------------------------------------------
NOTES (cont'd)
- --------------------------------------------------------------------------------
Note 5
Portfolios has adopted a Plan of Distribution Pursuant to Rule 12b-1 (the
"Plan") under the Investment Company Act of 1940, as amended. Under the Plan,
the Fund pays annual service fees to the Distributor at a rate of 0.25% of
average daily net assets for Class A, Class B and Class C shares. In addition,
the Fund pays annual distribution fees of 0.75% of average daily net assets for
Class B and Class C shares. The Distributor uses such payments for personal
services and/or the maintenance or servicing of shareholder accounts, to
reimburse securities dealers for distribution and marketing services, to
furnish ongoing assistance to investors and to defray a portion of its
distribution and marketing expenses. For the year ended October 31, 1997, fees
pursuant to such plan amounted to $48,442, $263,930 and $38,073 for Class A,
Class B and Class C shares, respectively.
The Fund has been informed that the Distributor and MetLife Securities, Inc., a
wholly owned subsidiary of Metropolitan, earned initial sales charges
aggregating $6,794 and $28,707, respectively, on sales of Class A shares of the
Fund during the year ended October 31, 1997, and that MetLife Securities, Inc.
earned commissions aggregating $76,885 on sales of Class B shares, and that the
Distributor collected contingent deferred sales charges of $117,824 and $619 on
redemptions of Class B and Class C shares, respectively, during the same
period.
Note 6
The authorized capital stock of the Fund currently consists of 100,000,000
shares, $.01 par value per share. The Fund reserves the right to issue
additional classes of shares.
Share transactions were as follows:
<TABLE>
<CAPTION>
Years ended October 31
-----------------------------------------------------------------
1996 1997
----------------------------- -----------------------------
Class A Shares Amount Shares Amount
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold .............. 1,219,188 $ 11,886,027 394,891 $ 3,901,312
Shares repurchased ....... (1,339,064) (12,879,562) (948,477) (9,228,795)
---------- ------------ ---------- ------------
Net decrease ............. (119,876) $ (993,535) (553,586) $ (5,327,483)
========== ============ ========== ============
Class B Shares Amount Shares Amount
- -------------------------------------------------------------------------------------------------
Shares sold .............. 1,649,800 $ 15,674,421 618,239 $ 5,987,370
Shares repurchased ....... (1,439,371) (13,641,573) (1,431,021) (13,575,005)
---------- ------------ ---------- ------------
Net increase (decrease) .. 210,429 $ 2,032,848 (812,782) $ (7,587,635)
========== ============ ========== ============
Class C (Formerly Class D) Shares Amount Shares Amount
- -------------------------------------------------------------------------------------------------
Shares sold .............. 377,202 $ 3,629,056 105,782 $ 1,002,139
Shares repurchased ....... (403,584) (3,757,456) (425,536) (4,046,600)
---------- ------------ ---------- ------------
Net decrease ............. (26,382) $ (128,400) (319,754) $ (3,044,461)
========== ============ ========== ============
Class S (Formerly Class C) Shares Amount Shares Amount
- -------------------------------------------------------------------------------------------------
Shares sold .............. 945,704 $ 9,234,435 858,029 $ 8,508,109
Shares repurchased ....... (1,687,889) (16,384,857) (1,493,530) (14,695,284)
---------- ------------ ---------- ------------
Net decrease ............. (742,185) $ (7,150,422) (635,501) $ (6,187,175)
========== ============ ========== ============
</TABLE>
9
<PAGE>
STATE STREET RESEARCH INTERNATIONAL EQUITY FUND
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
For a share outstanding throughout each year:
<TABLE>
<CAPTION>
Class A
---------------------------------------------
Years ended October 31
---------------------------------------------
1994(2) 1995(1) 1996(1) 1997(1)
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value, beginning of year ($) 10.54 10.98 9.34 9.22
----- ----- ----- ----
Net investment loss ($)* (0.04) (0.08) (0.04) (0.02)
Net realized and unrealized gain (loss) on investments and
foreign currency ($) 0.48 (1.04) (0.08) 0.22
----- ----- ----- ----
Total from investment operations ($) 0.44 (1.12) (0.12) 0.20
----- ----- ----- ----
Distribution from net realized gains ($) -- (0.52) -- --
----- ----- ----- ----
Total distributions ($) -- (0.52) -- --
----- ----- ----- ----
Net asset value, end of year ($) 10.98 9.34 9.22 9.42
===== ===== ===== ====
Total return(3) (%) 4.17(4) (10.38) (1.28) 2.17
Ratios/supplemental data:
Net assets at end of year ($ thousands) 22,579 22,497 21,116 16,346
Ratio of operating expenses to average net assets (%)* 1.90(5) 1.90 1.90 1.90
Ratio of net investment loss to average net assets (%)* (0.87)(5) (0.82) (0.37) (0.18)
Portfolio turnover rate (%) 80.60 100.68 132.36 174.69
Average commission rate ($)(6) -- -- 0.0069 0.0140
*Reflects voluntary assumption of fees or expenses per
share in each year ($)
(Note 3) 0.03 0.06 0.05 0.04
</TABLE>
<TABLE>
<CAPTION>
Class
---------------------------------------------
Years ended October 31
---------------------------------------------
1994(2) 1995(1) 1996(1) 1997(1)
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value, beginning of year ($) 10.54 10.93 9.22 9.04
----- ----- ----- ----
Net investment loss ($)* (0.06) (0.15) (0.11) (0.09)
Net realized and unrealized gain (loss) on investments and
foreign currency ($) 0.45 (1.04) (0.07) 0.21
----- ----- ----- ----
Total from investment operations ($) 0.39 (1.19) (0.18) 0.12
----- ----- ----- ----
Distribution from net realized gains ($) -- (0.52) -- --
----- ----- ----- ----
Total distributions ($) -- (0.52) -- --
----- ----- ----- ----
Net asset value, end of year ($) 10.93 9.22 9.04 9.16
===== ===== ==== ====
Total return(3) (%) 3.70(4) (11.09) (1.95) 1.33
Ratios/supplemental data:
Net assets at end of year ($ thousands) 18,904 27,614 28,971 21,914
Ratio of operating expenses to average net assets (%)* 2.65(5) 2.65 2.65 2.65
Ratio of net investment loss to average net assets (%)* (1.61)(5) (1.54) (1.13) (0.94)
Portfolio turnover rate (%) 80.60 100.68 132.36 174.69
Average commission rate ($)(6) -- -- 0.0069 0.0140
*Reflects voluntary assumption of fees or expenses per
share in each year ($)
(Note 3) 0.03 0.06 0.05 0.04
</TABLE>
- --------------------------------------------------------------------------------
(1) Per share figures have been calculated using the average shares method.
(2) March 1, 1994 (commencement of share class designations) to October 31,
1994.
(3) Does not reflect any front-end or contingent deferred sales charges. Total
return would be lower if the Distributor and its affiliates had not
voluntarily assumed a portion of the Fund's expenses.
(4) Not annualized.
(5) Annualized.
(6) Average commission rate per share paid for security trades beginning with
the fiscal year ended October 31, 1996.
10
<PAGE>
STATE STREET RESEARCH INTERNATIONAL EQUITY FUND
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (cont'd)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class C (Formerly Class D)
----------------------------------------------------
Years ended October 31
- ---------------------------------------------------------------------------------------------------------------------------------
1994(2) 1995(1) 1996(1) 1997(1)
------ ------ ------- -------
<S> <C> <C> <C> <C>
Net asset value, beginning of year ($) 10.54 10.93 9.22 9.03
----- ----- ----- ----
Net investment loss ($)* (0.07) (0.15) (0.11) (0.09)
Net realized and unrealized gain (loss) on investments
and foreign currency ($) 0.46 (1.04) (0.08) 0.22
----- ----- ----- ----
Total from investment operations ($) 0.39 (1.19) (0.19) 0.13
----- ----- ----- ----
Distribution from net realized gains ($) -- (0.52) -- --
----- ----- ----- ----
Total distributions ($) -- (0.52) -- --
----- ----- ----- ----
Net asset value, end of year ($) 10.93 9.22 9.03 9.16
===== ====== ===== ====
Total return(3) (%) 3.70(4) (11.09) (2.06) 1.44
Ratios/supplemental data:
Net assets at end of year ($ thousands) 2,134 5,674 5,324 2,469
Ratio of operating expenses to average net assets (%)* 2.65(5) 2.65 2.65 2.65
Ratio of net investment loss to average net assets (%)* (1.62)(5) (1.55) (1.10) (0.97)
Portfolio turnover rate (%) 80.60 100.68 132.36 174.69
Average commission rate ($)(6) -- -- 0.0069 0.0140
*Reflects voluntary assumption of fees or expenses per
share in each year ($) (Note 3) 0.03 0.06 0.05 0.04
</TABLE>
<TABLE>
<CAPTION>
Class S (Formerly Class C)
-------------------------------------------------------------
Years ended October 31
- ------------------------------------------------------------------------------------------------------------------------
1993 1994(2) 1995(1) 1996(1) 1997(1)
------ ------ ------ ------- -------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year ($) 6.50 9.56 11.01 9.39 9.29
------ ----- ------ ------ -------
Net investment income (loss) ($)* (0.02) (0.07) (0.05) (0.02) 0.01
Net realized and unrealized gain (loss) on investments
and foreign currency ($) 3.17 2.09 (1.05) (0.08) 0.21
------ ----- ------ ------ -----
Total from investment operations ($) 3.15 2.02 (1.10) (0.10) 0.22
------ ----- ------ ------ -----
Dividends from net investment income ($) (0.04) (0.05) -- -- --
Distributions from net realized gains ($) (0.05) (0.52) (0.52) -- --
------ ----- ------ ------ -----
Total distributions ($) (0.09) (0.57) (0.52) -- --
------ ----- ------ ------ -----
Net asset value, end of year ($) 9.56 11.01 9.39 9.29 9.51
====== ===== ====== ====== =====
Total return(3) (%) 48.95 22.73 (10.16) (1.06) 2.37
Ratios/supplemental data:
Net assets at end of year ($ thousands) 27,767 54,631 33,883 26,649 21,230
Ratio of operating expenses to average net assets (%)* 1.65 1.65 1.65 1.65 1.65
Ratio of net investment income (loss) to average net
assets (%)* (0.37) (0.75) (0.51) (0.16) 0.06
Portfolio turnover rate (%) 116.12 80.60 100.68 132.36 174.69
Average commission rate ($)(6) -- -- -- 0.0069 0.0140
*Reflects voluntary assumption of fees or expenses per
share in each year ($) (Note 3) 0.08 0.05 0.06 0.05 0.04
</TABLE>
- --------------------------------------------------------------------------------
(1) Per share figures have been calculated using the average shares method.
(2) March 1, 1994 (commencement of share class designations) to October 31,
1994.
(3) Does not reflect any front-end or contingent deferred sales charges. Total
return would be lower if the Distributor and its affiliates had not
voluntarily assumed a portion of the Fund's expenses.
(4) Not annualized.
(5) Annualized.
(6) Average commission rate per share paid for security trades beginning with
the fiscal year ended October 31, 1996.
11
<PAGE>
- --------------------------------------------------------------------------------
INDEPENDENT AUDITORS' REPORT
- --------------------------------------------------------------------------------
To the Board of Directors of State Street
Research Portfolios, Inc. and the Shareholders of
State Street Research International Equity Fund
We have audited the accompanying statement of assets and liabilities, including
the investment portfolio, of State Street Research International Equity Fund (a
series of State Street Research Portfolios, Inc.) as of October 31, 1997, and
the related statement of operations for the year then ended, the statement of
changes in net assets for the two years then ended and the financial highlights
for each of the years in the five year period ended October 31, 1997. These
financial statements and financial highlights are the responsibility of the
Fund's management. Our responsibility is to express an opinion on the financial
statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned at October
31, 1997, by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of State Street
Research International Equity Fund (a series of State Street Research
Portfolios, Inc.) at October 31, 1997, the results of its operations, the
changes in its net assets, and its financial highlights for the respective
stated periods, in conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Boston, Massachusetts
December 15, 1997
12
<PAGE>
STATE STREET RESEARCH INTERNATIONAL EQUITY FUND
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE
- --------------------------------------------------------------------------------
Foreign stocks trailed U.S. stocks for the third consecutive year. Continental
Europe had several strong performing markets; Japan has been weak; and
Southeast Asia fell sharply near the end of the period.
International Equity Class A shares returned 2.17% for the 12 months ended
October 31, 1997 [without sales charge]. The Fund underperformed the average
international fund, which was up 10.39%, according to Lipper Analytical
Services. It also lagged the Morgan Stanley Capital International EAFE Index,
which gained 4.63% for the year.
The Fund's performance was hurt by underexposure to consumer stocks and
overexposure to materials stocks in Continental Europe. In general, a
significant underweighting in Japan helped the Fund, although large, blue chip
Japanese exporters did well as American investors began to seek opportunities
outside its borders. Finally, the Fund's investments in emerging markets
brought the Fund down relative to its peers and its benchmark as Southeast
Asian markets fell sharply near the end of the period.
The managers sold off poor-performing materials stocks in Continental Europe
and further reduced the Fund's exposure to Japan during the year. In Europe,
investments are concentrated in the peripheral markets of Austria, Italy,
Spain, Sweden and Portugal, which stand to benefit from declining interest
rates spurred by convergence toward a common currency. In Asia, assets in
Malaysia were liquidated and remaining investments are concentrated in
Singapore and Hong Kong.
October 31, 1997
The Morgan Stanley EAFE (Europe, Australia, Far East) Index is a commonly-used
measure of international stock market performance. The index is unmanaged and
does not take sales charges into account. Direct investment in the index is not
possible; results are for illustrative purposes only. All returns represent
past perform-ance, which is no guarantee of future results. The investment
return and principal value of an investment made in the Fund will fluctuate and
shares, when redeemed, may be worth more or less than their original cost. All
returns assume reinvestment of capital gain distributions and income dividends.
Shares of the Fund had no class designations until March 1, 1994, when
designations were assigned based on the pricing and 12b-1 fees applicable to
shares sold thereafter. Perform-ance for a class includes periods prior to the
adoption of class designations. Perform-ance prior to March 1, 1994, does not
reflect annual 12b-1 fees of .25% for "A" shares and 1% for "B" and "C" shares,
which will reduce subsequent performance. "S" shares, offered without a sales
charge, are available through certain employee benefit plans and special
programs. Before November 1, 1997, Class C shares were designated Class D, and
Class S shares were designated Class C. Performance results for the Fund are
increased by the investment manager's voluntary reduction of fees and expenses;
without subsidization, performance would have been lower.
Change In Value Of $10,000
Based On The Morgan Stanley EAFE Index Compared
To Change In Value of $10,000 Invested In
International Equity Fund
[GRAPHIC: CLASS A SHARES LINE CHART]
- -------------------------------------
Average Annual Total Return
- -------------------------------------
1 Year 5 Years Life of Fund
- -------------------------------------
-2.43% +9.38% +5.67%
- -------------------------------------
International Equity Fund Morgan Stanley EAFE Index
9550 10000
8389 8845
12430 12158
15213 13385
13635 13335
13460 14732
13752 15414
[GRAPHIC: CLASS B SHARES LINE CHART]
- -------------------------------------
Average Annual Total Return
- -------------------------------------
1 Year 5 Years Life of Fund
- -------------------------------------
-3.67% +9.50% +6.00%
- -------------------------------------
International Equity Fund Morgan Stanley EAFE Index
10000 10000
8784 8845
13015 12158
15858 13385
14098 13335
13623 14732
14007 15414
[GRAPHIC: CLASS C SHARES LINE CHART]
- -------------------------------------
Average Annual Total Return
- -------------------------------------
1 Year 5 Years Life of Fund
- -------------------------------------
+0.44% +9.78% +6.00%
- -------------------------------------
International Equity Fund Morgan Stanley EAFE Index
10000 10000
8784 8845
13015 12158
15858 13385
14098 13335
13808 14732
14007 15414
[GRAPHIC: CLASS D SHARES LINE CHART]
- -------------------------------------
Average Annual Total Return
- -------------------------------------
1 Year 5 Years Life of Fund
- -------------------------------------
+2.37% +10.60% +6.68%
- -------------------------------------
International Equity Fund Morgan Stanley EAFE Index
10000 10000
8784 8845
13015 12158
15974 13385
14351 13335
14198 14732
14534 15414
13
