[State Street Research Logo]
Supplement
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to Prospectus*
for State Street Research International Equity Fund
a series of State Street Research Portfolios, Inc.
Investment Policy and Other Changes
-----------------------------------
Subject to shareholder approval as described below, the following changes are
expected to be made:
1. State Street Research International Equity Fund (the "Fund") will be
reorganized from its present form as the sole portfolio series of a Maryland
corporation to that of a newly-organized portfolio series of a Massachusetts
business trust. This change will result in greater administrative efficiency.
2. The fundamental policy on options will be amended to change the
classification of the policy from fundamental to nonfundamental to provide
greater investment flexibility to invest in options.
3. The fundamental policy on commodities will be amended to provide that the
Fund may invest up to 10% of its net assets in physical commodities and that
investments in financial instruments such as futures contracts would not be
deemed to be investments in commodities or commodities contracts.
4. The fundamental policy regarding securities lending will be amended to permit
lending of portfolio securities up to a maximum value of 33 1/3% of the Fund's
total assets.
<PAGE>
5. The fundamental policy regarding concentration of investments in any one
industry will be amended to allow for changes in the definition of an industry,
as set forth in the Fund's Prospectus and Statement of Additional Information as
amended from time to time.
6. Class S shares will be included under the Fund's Plan of Distribution
Pursuant to Rule 12b-1. Class S shareholders will not incur any new service or
distribution fees, but the plan will provide that the Fund's distributor may
expend its own resources in the distribution of Class S and other shares.
The above changes will be effective upon, and subject to, shareholder approval
at a meeting scheduled for May 1999, or any continued session thereof. For more
detailed information about the changes, obtain a copy of the related Proxy
Statement by calling the Service Center at 1-800-562-0032 after February 28,
1999.
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*This is Supplement No. 3 to the Prospectus dated March 1, 1998.
This is Supplement No. 1 to the Prospectus dated March 1, 1999 which will be
available after March 1, 1999.
Control Number: (exp0999) IE-534F-0299
<PAGE>
[PHOTO OF BUILDING]
[STATE STREET RESEARCH LOGO]
International Equity Fund
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An aggressive growth
fund investing in stocks
of foreign companies
Prospectus
March 1, 1999
[SIDEBAR TEXT]
This prospectus has information you should know before you invest. Please read
it carefully and keep it with your investment records.
Although these securities have been registered with the Securities and Exchange
Commission, the SEC has not approved or disapproved them and does not guarantee
the accuracy or adequacy of the information in this prospectus. Anyone who
informs you otherwise is committing a federal crime.
[END OF SIDEBAR TEXT]
<PAGE>
CONTENTS
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1 THE FUND
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1 Goal and Strategies
3 Principal Risks
4 Volatility and Performance
6 Investor Expenses
8 Investment Management
9 YOUR INVESTMENT
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9 Opening an Account
9 Choosing a Share Class
10 Sales Charges
13 Dealer Compensation
14 Buying and Selling Shares
18 Account Policies
20 Distributions and Taxes
21 Investor Services
22 OTHER INFORMATION
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22 Other Securities and Risks
24 Financial Highlights
26 Board of Directors
Back Cover FOR ADDITIONAL INFORMATION
<PAGE>
THE FUND 1
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[CHESSPIECE GRAPHIC] GOAL AND STRATEGIES
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.
PRINCIPAL STRATEGIES 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. These investments may include companies established anywhere in the
world and the fund 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
[SIDEBAR TEXT]
[MAGNIFYING GLASS GRAPHIC] WHO MAY WANT TO INVEST
State Street Research International Equity Fund is designed for investors who
seek one or more of the following:
[bullet] an aggressive stock fund for a long-term goal
[bullet] a fund to complement a portfolio of more conservative investments
[bullet] a fund to complement a portfolio of U.S. investments
[bullet] an investment that offers exposure to a variety of foreign markets
The fund is NOT appropriate for investors who:
[bullet] want to avoid high volatility or possible losses
[bullet] are making short-term investments
[bullet] are investing emergency reserve money
[bullet] are seeking regular income
[END OF SIDEBAR TEXT]
<PAGE>
2 THE FUND CONTINUED
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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.
The fund may adjust the composition of its portfolio as market conditions and
economic outlooks change. For more information about the fund's investments and
practices, see page 22.
[SIDEBAR TEXT]
[MAGNIFYING GLASS GRAPHIC] CURRENCY FLUCTUATIONS AND PERFORMANCE
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 lets 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.
[END OF SIDEBAR TEXT]
<PAGE>
3
[TRAFFIC SIGN GRAPHIC] PRINCIPAL RISKS
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 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.
The fund's management approach, which may include short-term trading, could
cause the fund's portfolio turnover rate to be above-average for a stock fund.
High turnover will 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.
The fund's shares will rise and fall in value and there is a risk that you could
lose money by investing in the fund. Also, the fund cannot be certain that it
will achieve its goal. Finally, fund shares are not bank deposits and are not
guaranteed, endorsed or insured by any financial institution, government entity
or the FDIC.
Information on other securities and risks appears on page 22.
A "snapshot" of the fund's investments may be found in the current annual or
semiannual report (see back cover).
<PAGE>
4 VOLATILITY AND PERFORMANCE
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[BAR CHART]
<TABLE>
<CAPTION>
Years ended December 31
Year-by-Year Total Return (Class A) 1992* 1993 1994 1995 1996 1997 1998
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
(9.73) 52.36 8.03 (0.31) (1.86) (4.84) 23.20
</TABLE>
[END BAR CHART]
(TRIANGLE POINTING UP) Best Quarter: First Quarter 1993 up 18.48%
(TRIANGLE POINTING DOWN) Worst Quarter: Third Quarter 1998 down 13.27%
<TABLE>
<CAPTION>
As of December 31, 1998
Average Annual Total Return 1 Year 5 Years Since Inception*
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Class A (%) 17.65 3.43 7.26
Class B(1) (introduced January 1, 1999) (%) -- -- --
Class B (%) 17.36 3.29 7.42
Class C (%) 21.27 3.63 7.41
Class S (%) 23.57 4.67 8.19
Morgan Stanley EAFE Index (%) 20.00 9.19 9.27
Lipper International Funds Index (%) 12.66 8.59 10.46
</TABLE>
*Since inception (1/22/92)
<PAGE>
5
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[SIDEBAR TEXT]
[MAGNIFYING GLASS GRAPHIC] UNDERSTANDING
VOLATILITY AND
PERFORMANCE
The chart and table on the opposite page are designed to show two aspects of the
fund's track record:
[bullet] YEAR-BY-YEAR TOTAL RETURN shows how volatile the fund has been: how
much the difference has been, historically, between its best years and
worst years. In general, funds with higher average annual total returns
will also have higher volatility. The graph includes the effects of
fund expenses, but not sales charges. If sales charges had been
included, returns would have been less than shown.
[bullet] AVERAGE ANNUAL TOTAL RETURN is a measure of the fund's performance over
time. It is determined by taking the fund's performance over a given
period and expressing it as an average annual rate. Average annual
total return includes the effects of fund expenses and maximum sales
charges for each class, and assumes that you sold your shares at the
end of the period.
Also included are two independent measures of performance. The 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 EAFE Index, your returns would
always be lower, because that index does not include brokerage or administrative
expenses.
The returns in both the chart and the table would have been lower if the
distributor had not voluntarily reduced the fund's expenses.
In both the chart and the table, the returns shown for the fund include
performance from before the creation of share classes in 1994. If the returns
for Class B and Class C from before 1994 had reflected their current
distribution/service (12b-1) fees (as described on page 12, these returns would
have been lower.
Keep in mind that past performance is no guarantee of future results.
[END OF SIDEBAR TEXT]
<PAGE>
6 INVESTOR EXPENSES
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Class descriptions begin on page __
<TABLE>
<CAPTION>
Shareholder Fees (% of offering price) Class A Class B(1) Class B Class C Class S
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Maximum front-end sales charge (load) 5.75 0.00 0.00 0.00 0.00
Maximum deferred sales charge (load) 0.00(a) 5.00 5.00 1.00 0.00
<CAPTION>
Annual Fund Operating Expenses (% of average net assets) Class A Class B(1) Class B Class C Class S
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Management fee 0.95 0.95 0.95 0.95 0.95
Distribution/service (12b-1) fees 0.25 1.00 1.00 1.00 0.00
Other expenses 1.45 1.45 1.45 1.45 1.45
---- ---- ---- ---- ----
Total annual fund operating expenses* 2.65 3.40 3.40 3.40 2.40
==== ==== ==== ==== ====
*Because some of the fund's expenses have
been subsidized, actual total operating
expenses for the prior year were: 1.90 2.65 2.65 2.65 1.65
The fund expects the expense subsidy to
continue through the current fiscal year,
although there is no guarantee that it
will.
</TABLE>
<TABLE>
<CAPTION>
Example Year Class A Class B(1) Class B Class C Class S
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1 $828 $843/$343 $843/$343 $443/343 $243
3 $1,351 $1,345/$1,045 $1,345/$1,045 $1,045 $748
5 $1,899 $1,969/$1,769 $1,969/$1,769 $1,769 $1,280
10 $3,387 $3,516 $3,516 $3,685 $2,736
</TABLE>
[FOOTNOTE TEXT]
(a) Except for investments of $1 million or more; see page 10.
[END OF FOOTNOTE TEXT]
<PAGE>
7
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[SIDEBAR TEXT]
[MAGNIFYING GLASS GRAPHIC] UNDERSTANDING
INVESTOR EXPENSES
The information on the opposite page is designed to give you an idea of what you
should expect to pay in expenses as an investor in the fund:
[bullet] SHAREHOLDER FEES are costs that are charged to you directly. These fees
are not charged on reinvestments or exchanges.
[bullet] ANNUAL FUND OPERATING EXPENSES are deducted from the fund's assets
every year, and are thus paid indirectly by all fund investors.
[bullet] The EXAMPLE is designed to allow you to compare the costs of this fund
with those of other funds. It assumes that you invested $10,000 over
the years indicated, reinvested all distributions, earned a
hypothetical 5% annual return and paid the maximum applicable sales
charges. For ClassB(1) and Class B shares, it also assumes the
automatic conversion to Class A after eight years.
When two numbers are shown separated by a slash, the first one assumes you sold
all your shares at the end of the period, while the second assumes you stayed in
the fund. Where there is only one number, the costs would be the same either
way.
Investors should keep in mind that the example is for comparison purposes only.
The fund's actual performance and expenses may be higher or lower.
[END OF SIDEBAR TEXT]
<PAGE>
8 THE FUND CONTINUED
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[THINKER GRAPHIC] INVESTMENT
MANAGEMENT
The fund's investment manager is State Street Research & Management Company.
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 $54 billion in
assets under management (as of December 31, 1998), including more than $17
billion in mutual funds.
The investment manager is responsible for the fund's investment and business
activities, and receives the management fee (0.95%) of fund assets, annually) as
compensation. The investment manager is a subsidiary of Metropolitan Life
Insurance Company.
Thomas P. Moore, Jr. and Peter C. Bennett have been responsible for the fund's
day-to-day portfolio management since October 1998. Mr. Moore is a senior vice
president and has worked as an investment professional for 20 years. Mr. Bennett
is an executive vice president and director and chief investment officer for
equities. He joined the firm in 1968 and has worked as an investment
professional since 1963.
<PAGE>
YOUR INVESTMENT 9
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[KEY GRAPHIC] OPENING AN ACCOUNT
If you are opening an account through a financial professional, he or she can
assist you with all phases of your investment.
If you are investing through a 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.
[CHECKLIST GRAPHIC] CHOOSING A SHARE CLASS
The fund generally offers four share classes, each with its own sales charge and
expense structure: Class A, Class B(1), Class C and Class S. The fund also
offers Class B shares, but only to current Class B shareholders through
reinvestment of dividends and through exchanges from existing Class B accounts
of State Street Research funds.
If you are investing a substantial amount and plan to hold your shares for a
long period, Class A shares may make the most sense for you. If you are
investing a lesser amount, you may want to consider Class B(1) shares (if
investing for at least six years) or Class C shares (if investing for less than
six years). If you are investing through a special program, such as a large
employer-sponsored retirement plan or certain programs available through
financial professionals, you may be eligible to purchase Class S shares.
Because all future investments in your account will be made in the share class
you designate when opening the account, you should make your decision carefully.
Your financial professional can help you choose the share class that makes the
most sense for you.
<PAGE>
10 YOUR INVESTMENT CONTINUED
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CLASS A -- FRONT LOAD
[bullet] Initial sales charge of 5.75% or less
[bullet] Lower sales charges for larger investments; see sales charge schedule
at right
[bullet] Lower annual expenses than Class B(1) or C shares due to lower
distribution/service (12b-1) fee of 0.25%
CLASS B(1) -- BACK LOAD
[bullet] No initial sales charge
[bullet] Deferred sales charge of 5% or less on shares you sell within six
years
[bullet] Annual distribution/service (12b-1) fee of 1.00%
[bullet] Automatic conversion to Class A shares after eight years, reducing
future annual expenses
CLASS B--BACK LOAD
[bullet] Available only to current Class B shareholders, see page 11
CLASS C -- LEVEL LOAD
[bullet] No initial sales charge
[bullet] Deferred sales charge of 1.00%, paid if you sell shares within one year
of purchase
[bullet] Lower deferred sales charge than Class B(1) shares
[bullet] Annual distribution/service (12b-1) fee of 1.00%
[bullet] No conversion to Class A shares after eight years, so annual expenses
do not decrease
CLASS S -- SPECIAL PROGRAMS
[bullet] Available only through certain retirement accounts, advisory accounts
of the investment manager and other special programs, including
programs through financial professionals with record-keeping and other
services; these programs usually involve special conditions and
separate fees (consult your financial professional or your program
materials)
[bullet] No sales charges of any kind
[bullet] No marketing/service (12b-1) fees; annual expenses are lower than other
share classes
SALES CHARGES
CLASS A -- FRONT LOAD
<TABLE>
<CAPTION>
when you invest this % is which equals
this amount deducted this % of
for sales your net
charges investment
- -------------------------------------------------------
<S> <C> <C>
Up to $50,000 5.75 6.10
$50,000 to $100,000 4.50 4.71
$100,000 to $250,000 3.50 3.63
$250,000 to $500,000 2.50 2.56
$500,000 to $1 million 2.00 2.04
$1 million or more see below
</TABLE>
With Class A shares, you pay a sales charge only when you buy shares.
If you are investing $1 million or more (either as a lump sum or through any of
the methods described on the application), you can purchase Class A shares
without any sales charge. However, you may be charged a "contingent deferred
sales charge" (CDSC) of 1.00% if you sell any shares within
<PAGE>
11
---------
one year of purchasing them. See "Other CDSC Policies," on page 12.
Class A shares are also offered with low or no sales charges through various
wrap-fee programs and other sponsored arrangements (consult your financial
professional or your program materials).
CLASS B(1) -- BACK LOAD
<TABLE>
<CAPTION>
this % of net asset value
when you sell shares at the time of purchase (or
in this year after you of sale, if lower) is deduct-
bought them ed from your proceeds
- -------------------------------------------------------
<S> <C>
First year 5.00
Second year 4.00
Third year 3.00
Fourth year 3.00
Fifth year 2.00
Sixth year 1.00
Seventh or eighth year None
</TABLE>
With Class B(1) shares, you pay no sales charge when you invest, but you are
charged a "contingent deferred sales charge" (CDSC) when you sell shares you
have held for six years or less, as described in the table above. See "Other
CDSC Policies" on page 12.
Class B(1) shares automatically convert to Class A shares after eight years;
Class A shares have lower annual expenses.
CLASS B -- BACK LOAD
Class B shares are available only to current shareholders through reinvestment
of dividends and distributions or through exchanges from existing Class B
accounts of the State Street Research funds. Other investments made by current
Class B shareholders will be in Class B(1) shares.
With Class B shares, you are charged a "contingent deferred sales charge"
(CDSC) when you sell shares you have held for five years or less. The CDSC is a
percentage of net asset value at the time of purchase (or of sale, if lower) and
is deducted from your proceeds. When you sell shares in the first year after you
bought them, the CDSC is 5.00%; second year, 4.00%; third year, 3.00%; fourth
year, 3.00%; fifth year, 2.00%; sixth year or later, none. See "Other CDSC
Policies" on page 12.
Class B shares automatically convert to Class A shares after eight years.
CLASS C -- LEVEL LOAD
<TABLE>
<CAPTION>
this % of net asset value
when you sell shares at the time of purchase (or
in this year after you of sale, if lower) is deduct-
bought them ed from your proceeds
- ----------------------------------------------------------
<S> <C>
First year 1.00
Second year or later None
</TABLE>
With Class C shares, you pay no sales charge when you invest, but you are
charged a "contingent deferred sales charge" (CDSC) when you sell shares you
<PAGE>
12 YOUR INVESTMENT CONTINUED
- -------------------------------------------------------------------------------
have held for one year or less, as described in the table above. See "Other CDSC
Policies" on this page.
Class C shares currently have the same annual expenses as Class B(1) shares, but
never convert to Class A shares.
CLASS S -- SPECIAL PROGRAMS
Class S shares have no sales charges.
OTHER CDSC POLICIES
The CDSC will be based on the net asset value of the shares at the time of
purchase (or sale, if lower). Any shares acquired through reinvestment are not
subject to the CDSC. There is no CDSC on exchanges into other State Street
Research funds, and the date of your initial investment will continue to be used
as the basis for CDSC calculations when you exchange. To ensure that you pay the
lowest CDSC possible, the fund will always use the shares with the lowest CDSC
to fill your sell requests.
The CDSC is waived on shares sold for participant initiated distributions from
State Street Research prototype retirement plans. In other cases, the CDSC is
waived on shares sold for mandatory retirement distributions or because of
disability or death. Consult your financial professional or the State Street
Research Service Center for more information.
[SIDEBAR TEXT]
[MAGNIFYING GLASS GRAPHIC] UNDERSTANDING
DISTIRBUTION/SERVICE FEES
As noted in the descriptions on pages 10 to 12, all share classes except Class S
have an annual distribution/service fee, also called a 12b-1 fee.
Under its current 12b-1 plans, the fund may pay certain distribution and service
fees for these classes out of fund assets. Because 12b-1 fees are an ongoing
expense, they will increase the cost of your investment and, over time, could
potentially cost you more than if you had paid other types of sales charges. For
that reason, you should consider the effects of 12b-1 fees as well as sales
loads when choosing a share class.
Some of the 12b-1 fee is used to compensate those financial professionals who
sell fund shares and provide ongoing service to shareholders. The table on the
next page shows how these professionals' compensation is calculated.
The fund may continue to pay 12b-1 fees even if the fund is subsequently closed
to new investors.
[END OF SIDEBAR TEXT]
<PAGE>
13
------------
[GRAPHIC OF A CHECK] DEALER COMPENSATION
Financial professionals who sell shares of State Street Research funds and
perform services for fund investors may receive sales commissions and annual
fees. These are paid by the fund's distributor, using money from sales charges,
distribution/service (12b-1) fees and its other resources.
Brokers and agents may charge a transaction fee on orders of fund shares placed
directly through them. The distributor may pay its affiliate MetLife Securities,
Inc. additional compensation of up to 0.25% of certain sales or assets.
<TABLE>
<CAPTION>
Maximum Dealer Compensation (%) Class A Class B(1) Class B Class C Class S
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Commission See below 4.00 4.00 1.00 0.00
Investments up to $50,000 5.00 -- -- -- --
$50,000 to $100,000 4.00 -- -- -- --
$100,000 to $250,000 3.00 -- -- -- --
$250,000 to $500,000 2.00 -- -- -- --
$500,000 to $1 million 1.75 -- -- -- --
First $1 to $3 million 1.00(a) -- -- -- --
Next $2 million 0.75(a) -- -- -- --
Next $2 million 0.50(a) -- -- -- --
Next $1 and above 0.25(a) -- -- -- --
Annual fee 0.25 0.25 0.25 1.00 0.00
</TABLE>
Brokers for Portfolio Trades
When placing trades for the fund's portfolio, State Street Research chooses
brokers that provide the best execution (a term defined by service as well as
price), but may also consider a broker's sales of fund shares.
[FOOTNOTE TEXT]
(a) If your financial professional declines this commission, the one-year CDSC
on your investment is waived.
[END OF FOOTNOTE TEXT]
<PAGE>
14 BUYING AND SELLING SHARES
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[CASH REGISTER GRAPHIC] POLICIES FOR
BUYING SHARES
Once you have chosen a share class, the next step is to determine the amount you
want to invest.
MINIMUM INITIAL INVESTMENTS:
[bullet] $1,000 for accounts that use the Investamatic program(a)
[bullet] $2,000 for Individual Retirement Accounts(a)
[bullet] $2,500 for all other accounts
Minimum Additional Investments:
[bullet] $50 for any account
Complete the enclosed application. You can avoid future inconvenience by signing
up now for any services you might later use.
TIMING OF REQUESTS All requests received in good order by State Street Research
before the close of regular trading on the New York Stock Exchange (usually 4:00
p.m. eastern time) will be executed the same day, at that day's closing share
price. Orders received thereafter will be executed the following day, at that
day's closing share price.
WIRE TRANSACTIONS Funds may be wired between 8:00 a.m. and 4:00 p.m. eastern
time. To make a same-day wire investment, please notify State Street Research by
12:00 noon of your intention to wire funds, and make sure your wire arrives by
4:00 p.m. If the New York Stock Exchange closes before 4:00 p.m. eastern time,
you may be unable to make a same-day wire investment. Your bank may charge a fee
for wiring money.
[FOOTNOTE TEXT]
(a) Through April 15, 1999, the minimum is $500 for Individual Retirement
Accounts. Also, the $10 annual administrative fee will be waived for new
IRAs with $5,000 invested by then.
[END OF FOOTNOTE TEXT]
<PAGE>
INSTRUCTIONS FOR BUYING SHARES 15
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
To Open an Account To Add to an Account
<S> <C> <C>
[GRAPHIC Through a Consult your financial Consult your financial professional or your program materials.
OF Professional professional or your program
BRIEFCASE] or Program materials.
By Mail [GRAPHIC OF MAILBOX] Make your check payable to Fill out an investment slip from an account statement, or indicate
"State Street Research Funds." the fund name and account number on your check. Make your check
Forward the check and your payable to "State Street Research Funds." Forward the check and
application to State Street slip to State Street Research.
Research.
[GRAPHIC By Federal Call to obtain an account Call State Street Research to obtain a control number. Instruct
OF Funds Wire number and forward your your bank to wire funds to:
FEDERAL application to State Street [bullet] State Street Bank and Trust Company, Boston, MA
BUILDING] Research. Wire funds using the [bullet] ABA: 011000028
instructions at right. [bullet] BNF: fund name and share class you want to buy
[bullet] AC: 99029761
[bullet] OBI: your name and your account number
[bullet] Control: the number given to you by State Street Research
By Electronic [GRAPHIC Verify that your bank is a Call State Street Research to verify that the necessary bank
Funds Transfer OF member of the ACH (Automated information is on file for your account. If it is, you may request
(ACH) ELECTRIC Clearing House) system. a transfer with the same phone call. If not, please ask State
PLUG] Forward your application to Street Research to provide you with an EZ Trader application.
State Street Research. Please
be sure to include the
appropriate bank information.
Call State Street Research to
request a purchase.
[GRAPHIC By Investamatic Forward your application, with Call State Street Research to verify that Investamatic is in place
OF all appropriate sections on your account, or to request a form to add it. Investments are
CALENDAR] completed, to State Street automatic once Investamatic is in place.
Research, along with a check
for your initial investment
payable to "State Street
Research Funds."
By Exchange [GRAPHIC OF Call State Street Research or Call State Street Research or visit our Web site.
ARROWS visit our Web site.
POINTING IN
OPPOSITE
DIRECTIONS]
State Street Research Service Center PO Box 8408, Boston, MA 02266-8408 Internet www.ssrfunds.com
Call toll-free: 1-800-562-0032 (business days 8:00 a.m. - 6:00 p.m., eastern time)
</TABLE>
<PAGE>
16 YOUR INVESTMENT CONTINUED
- --------------------------------------------------------------------------------
[GRAPHIC OF CASH REGISTER AND RECEIPT] POLICIES FOR
SELLING SHARES
CIRCUMSTANCES THAT REQUIRE WRITTEN REQUESTS Please submit instructions in
writing when any of the following apply:
[bullet] you are selling more than $100,000 worth of shares
[bullet] the name or address on the account has changed within the last 30 days
[bullet] you want the proceeds to go to a name or address not on the account
registration
[bullet] you are transferring shares to an account with a different registration
or share class
[bullet] you are selling shares held in a corporate or fiduciary account; for
these accounts, additional documents are required:
corporate accounts: certified copy of a corporate resolution
fiduciary accounts: copy of power of attorney or other governing
document
To protect your account against fraud, all signatures on these documents must be
guaranteed. You may obtain a signature guarantee at most banks and securities
dealers. A notary public cannot provide a signature guarantee.
INCOMPLETE SELL REQUESTS State Street Research will attempt to notify you
promptly if any information necessary to process your request is missing.
TIMING OF REQUESTS All requests received in good order by State Street Research
before the close of regular trading on the New York Stock Exchange (usually 4:00
p.m. eastern time) will be executed the same day, at that day's closing share
price. Requests received 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>
INSTRUCTIONS FOR SELLING SHARES 17
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
[GRAPHIC Through a Consult your financial professional or your program materials.
OF Professional
BRIEFCASE] or Program
By Mail [GRAPHIC OF Send a letter of instruction, an endorsed stock power or share certificates (if you hold certificate
MAILBOX] 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 a wire redemption privilege, including a bank
OF Funds Wire designation, is in place on your account. Once this is established, you may place your request to sell
FEDERAL shares with State Street Research. Proceeds will be wired to your pre-designated bank account. (See
BUILDING] "Wire Transactions" on facing page.)
By Electronic [GRAPHIC OF Check with State Street Research to make sure that the EZ Trader feature, including a bank
Funds Transfer ELECTRIC designation, is in place on your account. Once this is established, you may place your request to sell
(ACH) PLUG] shares with State Street Research. Proceeds will sent to your pre-designated bank account.
[GRAPHIC By Telephone As long as the transaction does not require a written request (see facing page), you or your financial
OF TELEPHONE] professional can sell shares by calling State Street Research. A check will be mailed to your address
of record on the following business day.
By Exchange [GRAPHIC OF Read the prospectus for the fund into which you are exchanging. Call State Street Research or visit
ARROWS our Web site.
POINTING IN
OPPOSITE
DIRECTIONS]
[GRAPHIC By Systematic See plan information on page 21.
OF Withdrawal Plan
CALENDAR]
State Street Research Service Center PO Box 8408, Boston, MA 02266-8408 Internet www.ssrfunds.com
Call toll-free: 1-800-562-0032 (business days 8:00 a.m. - 6:00 p.m., eastern time)
</TABLE>
<PAGE>
18 YOUR INVESTMENT CONTINUED
- --------------------------------------------------------------------------------
[GRAPHIC OF POLICIES] ACCOUNT POLICIES
TELEPHONE REQUESTS When you open an account you automatically receive telephone
privileges, allowing you to place requests for your account by telephone. Your
financial professional can also use these privileges to request exchanges on
your account, and with your written permission, redemptions. For your
protection, all telephone calls are recorded.
As long as State Street Research takes certain measures to authenticate
telephone requests on your account, you may be held responsible for unauthorized
requests. Unauthorized telephone requests are rare, but if you want to protect
yourself completely, you can decline the telephone privilege on your
application. The fund may suspend or eliminate the telephone privilege at any
time.
EXCHANGE PRIVILEGES There is no fee to exchange shares among State Street
Research funds. Your new fund shares will be the equivalent class of your
current shares. Any contingent deferred sales charges will continue to be
calculated from the date of your initial investment.
You must hold Class A shares of any fund for at least 30 days before you may
exchange them at net asset value for Class A shares of a different fund with a
higher applicable sales charge.
Frequent exchanges can interfere with fund management and drive up costs for all
shareholders. Because of this, the fund currently limits each account, or group
of accounts under common ownership or control, to six exchanges per calendar
year. The fund may change or eliminate the exchange privilege at any time, may
limit or cancel any shareholder's exchange privilege and may refuse to accept
any exchange request, particularly those associated with "market timing"
strategies.
For Merrill Lynch customers, exchange privileges extend to Summit Cash Reserves
Fund, which is related to the fund for purposes of investment and investor
services.
ACCOUNTS WITH LOW BALANCES If the value of your account falls below $1,500,
State Street Research may mail you a notice asking you to bring the account back
up to $1,500 or close it out. If you do not take action within 60 days, State
Street Research may either sell your shares and mail the proceeds to you at the
address of record or, depending on the circumstances, may deduct an annual
maintenance fee (currently $18).
<PAGE>
19
-----
THE FUND'S BUSINESS HOURS The fund is open the same days as the New York Stock
Exchange (generally Monday through Friday). Fund representatives are available
from 8:00 a.m. to 6:00 p.m. eastern time on these days.
CALCULATING SHARE PRICE The fund calculates its share price every business day
at the close of regular trading on the New York Stock Exchange (usually at 4:00
p.m. eastern time). The share price is the fund's total assets minus its
liabilities (net asset value, or NAV) divided by the number of existing shares.
In calculating its NAV, the fund uses the last reported sale price or quotation
for portfolio securities. However, in cases where these are unavailable, or when
the investment manager believes that subsequent events have rendered them
unreliable, the fund may use fair-value estimates instead.
Because foreign securities markets are sometimes open on different days from
U.S. markets, there may be instances when the value of the fund's portfolio
changes on days when you cannot buy or sell fund shares.
REINSTATING RECENTLY SOLD SHARES For 120 days after you sell shares, you have
the right to "reinstate" yourinvestment by putting some or all of the proceeds
into any currently available State Street Research fund at net asset value. Any
CDSC you paid on the amount you are reinstating will be credited to your
account. You may only use this privilege once in any twelve-month period with
respect to your shares of a given fund.
ADDITIONAL POLICIES Please note that the fund maintains additional policies and
reserves certain rights, including:
[bullet] The fund may vary its requirements for initial or additional
investments, exchanges, reinvestments, periodic investment plans,
retirement and employee benefit plans, sponsored arrangements and other
similar programs
[bullet] All orders to purchase shares are subject to acceptance by the fund
[bullet] 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
[bullet] The fund may delay sending you redemptions proceeds for up to seven
days, or longer if permitted by the SEC
[bullet] To permit investors to obtain the current price, dealers are
responsible for transmitting all orders to the State Street Research
Service Center promptly
<PAGE>
20 YOUR INVESTMENT CONTINUED
- --------------------------------------------------------------------------------
[SIDEBAR TEXT]
[MAGNIFYING GLASS GRAPHIC] TAX CONSIDERATIONS
Unless your investment is in a tax-deferred account, you may want to avoid:
[bullet] investing a large amount in the fund close to the end of its fiscal
year or calendar year (if the fund makes a distribution, you will
receive some of your investment back as a taxable distribution)
[bullet] 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) in the current year
[END OF SIDEBAR TEXT]
[UNCLE SAM GRAPHIC] DISTRIBUTIONS AND TAXES
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.
TAX EFFECTS OF DISTRIBUTIONS AND TRANSACTIONS In general, any dividends and
short-term capital gains distributions you receive from the fund are taxable as
ordinary income. Distributions of other capital gains are generally taxable as
capital gains -- in most cases, at different rates from those that apply to
ordinary income.
The tax you pay on a given capital gains distribution generally depends on how
long the fund has held the portfolio securities it sold. It does not depend on
how long you have owned your fund shares or whether you reinvest your
distributions.
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
<PAGE>
21
-----
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.
[INTERLOCKED HANDS GRAPHIC] INVESTOR SERVICES
INVESTAMATIC PROGRAM Use Investamatic to set up regular automatic investments in
the fund from your bank account. You determine the frequency and amount of your
investments.
SYSTEMATIC WITHDRAWAL PLAN This plan is designed for retirees and other
investors who want regular withdrawals from a fund account. The plan is free and
allows you to withdraw up to 8% of your fund assets a year without incurring any
contingent deferred sales charges. Certain terms and minimums apply.
EZ TRADER This service allows you to purchase or sell fund shares over the
telephone through the ACH (Automated Clearing House) system.
DIVIDEND ALLOCATION PLAN This plan automatically invests your distributions from
the fund into another fund of your choice, without any fees or sales charges.
AUTOMATIC BANK CONNECTION This plan lets you route any distributions or
Systematic Withdrawal Plan payments directly to your bank account.
RETIREMENT PLANS State Street Research also offers a full range of prototype
retirement plans for individuals, sole proprietors, partnerships, corporations
and employees.
Call 1-800-562-0032 for information on any of the services described above.
<PAGE>
22 OTHER INFORMATION
- -------------------------------------------------------------------------------
[GRAPHIC OF SECURITIES CERTIFICATES] OTHER SECURITIES
AND RISKS
Each of the fund's portfolio securities and investment practices offers certain
opportunities and carries various risks. Major investments and risk factors are
outlined in the fund description starting on page 1. Below are brief
descriptions of other securities and practices, along with their associated
risks.
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 certain derivatives for hedging (attempting to
offset a potential loss in one position by establishing an interest in an
opposite position). This includes the use of currency-based derivatives for
hedging its positions in foreign securities. The fund may also use certain
derivatives for speculation (investing for potential income or capital gain).
While hedging can guard against potential risks, it adds to the fund's expenses
and can eliminate some opportunities for gains. There is also a risk that a
derivative intended as a hedge may not perform as expected.
The main risk with derivatives is that some types can amplify a gain or loss,
potentially earning or losing substantially more money than the actual cost of
the derivative.
With some derivatives, whether used for hedging or speculation, there is also
the risk that the counterparty may fail to honor its contract terms, causing a
loss for the fund.
<PAGE>
YOUR INVESTMENT CONTINUED 23
- -------------------------------------------------------------------------------
SECURITIES LENDING The fund may seek additional income or fees by lending
portfolio securities to qualified institutions. By reinvesting any cash
collateral it receives in these transactions, the fund could realize additional
gains or losses. If the borrower fails to return the securities and the invested
collateral has declined in value, the fund could lose money.
WHEN-ISSUED SECURITIES The fund may invest in securities prior to their date of
issue. These securities could fall in value by the time they are actually
issued, which may be any time from a few days to over a year.
COUNTRY DIVERSIFICATION The fund generally includes stocks from at least three
different countries, other than the U.S., at any given time.
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, high-quality, short-term U.S. debt securities or U.S.
stocks. To the extent that the Fund does this, it is not pursuing its goal.
YEAR 2000 The investment manager does not currently anticipate that computer
problems related to the year 2000 will have a material effect on the fund.
However, there can be no assurances in this area, including the possibility that
year 2000 computer problems could negatively affect communication systems,
investment markets or the economy in general.
<PAGE>
24 FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
These highlights are intended to help you understand the fund's performance over
the past five years. The information in these tables has been audited by
Deloitte & Touche LLP, the fund's independent accountants. Their report and the
fund's financial statements are included in the fund's annual report, which is
available upon request. Total return figures assume reinvestment of all
distributions.
<TABLE>
<CAPTION>
CLASS A CLASS B
- -------------------------------------------------------------------------------------------------------------------------------
Years ended October 31 Years ended October 31
------------------------------------------ -----------------------------------------
Per Share Data 1994(a) 1995(b) 1996(b) 1997(b) 1998(b) 1994(a) 1995(b) 1996(b) 1997(b) 1998(b)
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of year ($) 10.54 10.98 9.34 9.22 9.42 10.54 10.93 9.22 9.04 9.16
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Net investment loss ($)* (0.04) (0.08) (0.04) (0.02) (0.01) (0.06) (0.15) (0.11) (0.09) (0.05)
Net realized and unrealized gain (loss) on
investments and foreign currency ($) 0.48 (1.04) (0.08) 0.22 0.90 0.45 (1.04) (0.07) 0.21 0.84
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total from investment operations ($) 0.44 (1.12) (0.12) 0.20 0.89 0.39 (1.19) (0.18) 0.12 0.79
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Distribution from capital gains ($) -- (0.52) -- -- -- -- (0.52) -- -- --
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total distributions ($) -- (0.52) -- -- -- -- (0.52) -- -- --
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Net asset value, end of year ($) 10.98 9.34 9.22 9.42 10.31 10.93 9.22 9.04 9.16 9.95
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
Total return (%)(c) 4.17(d)(10.38) (1.28) 2.17 9.45 3.70(d)(11.09) (1.95) 1.33 8.62
Ratios/Supplemental Data
- --------------------------------------------------------------------------------------------------------------------------------
Net assets at end of year ($ thousands) 22,579 22,497 21,116 16,346 15,104 18,904 27,614 28,971 21,914 21,117
Expense ratio (%)* 1.90(e) 1.90 1.90 1.90 1.90 2.65(e) 2.65 2.65 2.65 2.65
Ratio of net investment loss to
average net assets (%)* (0.87)(e)(0.82) (0.37) (0.18) (0.20) (1.61)(e)(1.54) (1.13) (0.94) (0.88)
Portfolio turnover rate (%) 80.60 100.68 132.36 174.69 116.28 80.60 100.68 132.36 174.69 116.28
*Reflects voluntary reduction of
expenses per share of these ($)
amounts 0.03 0.06 0.05 0.04 0.04 0.03 0.06 0.05 0.04 0.04
</TABLE>
<PAGE>
25
-----
<TABLE>
<CAPTION>
Class C Class S
- ---------------------------------------------------------------------------------------------------------------------------------
Years ended October 31 Years ended October 31
------------------------------------------ -------------------------------------------
Per Share Data 1994(a) 1995(b) 1996(b) 1997(b) 1998(b) 1994 1995(b) 1996(b) 1997(b) 1998(b)
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of year ($) 10.54 10.93 9.22 9.03 9.16 9.56 11.01 9.39 9.29 9.51
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Net investment income (loss) ($)* (0.07) (0.15) (0.11) (0.09) (0.05) (0.07) (0.05) (0.02) 0.01 0.00
Net realized and unrealized gain
(loss) on investments and foreign
currency ($) 0.46 (1.04) (0.08) 0.22 0.84 2.09 (1.05) (0.08) 0.21 0.93
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Total from investment operations ($) 0.39 (1.19) (0.19) 0.13 0.79 2.02 (1.10) (0.10) 0.22 0.93
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Dividend from net investment
income ($) -- -- -- -- -- (0.05) -- -- -- --
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Distribution from capital gains ($) -- (0.52) -- -- -- (0.52) (0.52) -- -- --
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Total distributions ($) -- (0.52) -- -- -- (0.57) (0.52) -- -- --
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Net asset value, end of year ($) 10.93 9.22 9.03 9.16 9.95 11.01 9.39 9.29 9.51 10.44
===== ===== ===== ===== ===== ===== ===== ===== ===== =====
Total return (%)(c) 3.70(d)(11.09) (2.06) 1.44 8.62 22.73 (10.16) (1.06) 2.37 9.78
Ratios/Supplemental Data
- ---------------------------------------------------------------------------------------------------------------------------------
Net assets at end of year ($ thousands)2,134 5,674 5,324 2,469 1,706 54,631 33,883 26,649 21,230 13,615
Expense ratio (%)* 2.65(e) 2.65 2.65 2.65 2.65 1.65 1.65 1.65 1.65 1.65
Ratio of net investment loss to
average net assets (%)* (1.62)(e)(1.55) (1.10) (0.97) (0.90) (0.75) (0.51) (0.16) 0.06 0.06
Portfolio turnover rate (%) 80.60 100.68 132.36 174.69 116.28 80.60 100.68 132.36 174.69 116.28
*Reflects voluntary reduction of
expenses per share of these
amounts ($) 0.03 0.06 0.05 0.04 0.04 0.05 0.06 0.05 0.04 0.04
</TABLE>
[FOOTNOTE TEXT]
(a) March 1, 1994 (commencement of share class designations)
to October 31, 1994.
(b) Per-share figures have been calculated using the average shares method.
(c) Does not reflect any front-end or contingent deferred sales charges. Total
return would be lower if the distributor and its affiliates had not
voluntarily reduced a portion of the fund's expenses.
(d) Not annualized.
(e) Annualized.
[END OF FOOTNOTE TEXT]
<PAGE>
26 Board of Directors
- --------------------------------------------------------------------------------
[top of Greek column graphic]
The Board of Directors is responsible for the operation of the fund. They
establish the fund's major policies, review investments, and provide guidance to
the investment manager and others who provide services to the fund. The
Directors have diverse backgrounds and substantial experience in business and
other areas.
Ralph F. Verni
Chairman of the Board, President,
Chief Executive Officer and Director,
State Street Research & Management
Company
Steve A. Garban
Former Senior Vice President for Finance
and Operations and Treasurer,
The Pennsylvania State University
Malcolm T. Hopkins
Former Vice Chairman of the Board
and Chief Financial Officer,
St. Regis Corp.
Edward M. Lamont
Formerly in banking, with an affiliate of
J.P. Morgan & Co. in New York); presently
engaged in private investments and civic
affairs
Robert A. Lawrence
Former Partner, Saltonstall & Co.
Dean O. Morton
Former Executive Vice President
Chief Operating Officer and Director,
Hewlett-Packard Company
Toby Rosenblatt
President, the Glen Ellen Company
Vice President, Founders Investments Ltd.
Michael S. Scott Morton
Jay W. Forrester Professor of
Management, Sloan School of
Management, Massachusetts
Institute of Technology
<PAGE>
NOTES 27
- --------------------------------------------------------------------------------
<PAGE>
FOR ADDITIONAL INFORMATION
- -------------------------------------------------------------------------------
If you have questions about the fund or would like to request a free copy of the
current annual/semiannual report or SAI, contact State Street Research or your
financial professional.
[STATE STREET RESEARCH LOGO]
Service Center
P.O. Box 8408, Boston, MA 02266
Telephone: 1-800-562-0032
Internet: www.ssrfunds.com
You can also obtain information about the fund, including the SAI and certain
other fund documents, on the Internet at www.sec.gov, in person at the SEC's
Public Reference Room in Washington, DC (telephone 1-800-SEC-0330) or by mail by
sending your request, along with a duplicating fee, to the SEC's Public
Reference Section, Washington, DC 20549-6009.
prospectus
SEC File Number: 811-6375
Control Number: (exp0300)SSR-LD
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.
<TABLE>
<S> <C>
Ticker Symbols
Class A SSIEX
Class B(1) (proposed) SSNPX
Class C SSNDX
Class S SSNCX
</TABLE>
STATEMENT OF ADDITIONAL INFORMATION (SAI) A supplement to the prospectus,
the SAI contains further information about the fund and its investment
limitations and policies. A current SAI for this fund is on file with the
Securities and Exchange Commission and is incorporated by reference (is legally
part of this prospectus).
IE-916E-399
Control Number: (expo300)SSR-LD
<PAGE>
STATE STREET RESEARCH INTERNATIONAL EQUITY FUND
a Series of
STATE STREET RESEARCH PORTFOLIOS, INC.
STATEMENT OF ADDITIONAL INFORMATION
March 1, 1999
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
INVESTMENT OBJECTIVE......................................................2
ADDITIONAL INVESTMENT POLICIES AND RESTRICTIONS...........................2
ADDITIONAL INFORMATION CONCERNING
CERTAIN RISKS AND INVESTMENT TECHNIQUES..........................4
DEBT INSTRUMENTS AND
PERMITTED CASH INVESTMENTS......................................16
THE COMPANY, THE FUND AND ITS SHARES.....................................21
DIRECTORS AND OFFICERS...................................................22
MANAGEMENT OF THE FUND
AND INVESTMENT ADVISORY SERVICES................................25
PURCHASE AND REDEMPTION OF SHARES........................................27
SHAREHOLDER ACCOUNTS.....................................................34
NET ASSET VALUE..........................................................38
PORTFOLIO TRANSACTIONS...................................................40
CERTAIN TAX MATTERS......................................................43
DISTRIBUTION OF SHARES OF THE FUND.......................................47
CALCULATION OF PERFORMANCE DATA..........................................51
CUSTODIAN................................................................54
INDEPENDENT ACCOUNTANTS..................................................54
FINANCIAL STATEMENTS.....................................................54
</TABLE>
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, 1999, 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.
The Fund's financial statements as of and for the fiscal year ended
October 31, 1998, which are included in the Fund's Annual Report for that year,
are incorporated by reference. The Annual Report is available, without charge,
upon request by calling 1-800-562-0032.
CONTROL NUMBER:
<PAGE>
INVESTMENT OBJECTIVE
As set forth under The "Fund--Goal and Strategies--Fundamental Goal" in
the Prospectus of State Street Research 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 "The Fund--Principal Risks" and "Other
Information--Other Securities and Risks" in the Fund's Prospectus, the Fund has
adopted certain investment restrictions, and those restrictions are either
fundamental or not fundamental. Fundamental restrictions may not be changed by
the Fund except by the affirmative vote of a majority of the outstanding voting
securities of the Fund, 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
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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 may be changed without
shareholder approval. Under these restrictions, it is the Fund's policy:
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(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 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 RISKS AND INVESTMENT TECHNIQUES
Derivatives
The Fund may buy and sell certain types of derivatives, such as
options, futures contracts, options on futures contracts, and swaps under
circumstances in which such instruments are expected by State Street Research &
Management Company, the 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
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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 (i) an expected decline in the market value of an asset or group of
assets which the Fund does not own or (ii) expected increases in the market
value of an asset which it does not plan to acquire. Information about specific
types of instruments is provided below.
Futures Contracts
Futures contracts are publicly traded contracts to buy or sell an
underlying asset or group of assets, such as a currency, or an index of
securities, at a future time at a specified price. A contract to buy establishes
a long position while a contract to sell establishes a short position.
The purchase of a futures contract on an equity security or an index of
equity securities normally enables a buyer to participate in the market movement
of the underlying asset or index after paying a transaction charge and posting
margin in an amount equal to a small percentage of the value of the underlying
asset or index. The Fund will initially be required to deposit with the Fund's
custodian or the futures commission merchant effecting the futures transaction
an amount of "initial margin" in cash or securities, as permitted under
applicable regulatory policies.
Initial margin in futures transactions is different from margin in
securities transactions in that the former does not involve the borrowing of
funds by the customer to finance the transaction. Rather, the initial margin is
like a performance bond or good faith deposit on the contract. Subsequent
payments (called "maintenance margin") to and from the broker will be made on a
daily basis as the price of the underlying asset fluctuates. This process is
known as "marking to market." For example, when the Fund has taken a long
position in a futures contract and the value of the underlying asset has risen,
that position will have increased in
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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 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
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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.
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 non-hedging
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
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futures and options depends on the degree to which price movements in its
holdings correlate with price movements of the futures and options.
Non-hedging strategies typically involve special risks. The
profitability of the Fund's non-hedging strategies will depend on the ability of
the Investment Manager to analyze both the applicable derivatives market and the
market for the underlying asset or group of assets. Derivatives markets are
often more volatile than corresponding securities markets and a relatively small
change in the price of the underlying asset or group of assets can have a
magnified effect upon the price of a related derivative instrument.
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.
Short Sales Against the Box
The Fund may effect short sales, but only if such transactions are
short sale transactions known as short sales "against the box." A short sale is
a transaction in which the Fund sells a security it does not own by borrowing it
from a broker, and consequently becomes obligated to replace that security. A
short sale against the box is a short sale where the Fund owns the security sold
short or has an immediate and unconditional right to acquire that security
without additional cash consideration upon conversion, exercise or exchange of
options with respect to securities held in its portfolio. The effect of selling
a security short against the box is to insulate that security against any future
gain or loss.
Swap Arrangements
The Fund may enter into various forms of swap arrangements with
counterparties with respect to interest rates, currency rates or indices,
including purchase of caps, floors and collars as described below. In an
interest rate swap the Fund could agree for a specified period to pay a bank or
investment banker the floating rate of interest on a so-called notional
principal amount (i.e., an assumed figure selected by the parties for this
purpose) in exchange for agreement by the bank or investment banker to pay the
Fund a fixed rate of interest on the notional principal amount. In a currency
swap the Fund would agree with the other party to exchange cash flows based on
the relative differences in values of a notional amount of two (or more)
currencies; in an index swap, the Fund would agree to exchange cash flows on a
notional amount based on changes in the values of the selected indices. Purchase
of a cap entitles the purchaser to receive payments from the seller on a
notional amount to the extent
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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 default by the referenced creditor on the
underlying debt or a bankruptcy event of the creditor.
Most swaps entered into by the Fund will be on a net basis; for
example, in an interest rate swap, amounts generated by application of the fixed
rate and the floating rate to the notional principal amount would first offset
one another, with the Fund either receiving or paying the difference between
such amounts. In order to be in a position to meet any obligations resulting
from swaps, the Fund will set up a segregated custodial account to hold
appropriate liquid assets, including cash; for swaps entered into on a net
basis, assets will be segregated having a daily net asset value equal to any
excess of the Fund's accrued obligations over the accrued obligations of the
other party, while for swaps on other than a net basis assets will be segregated
having a value equal to the total amount of the Fund's obligations.
These arrangements will be made primarily for hedging purposes, to
preserve the return on an investment or on a portion of the Fund's portfolio.
However, the Fund may, as noted above, enter into such arrangements for income
purposes to the extent permitted by the Commodities Futures Trading Commission
for entities which are not commodity pool operators, such as the Fund. In
entering a swap arrangement, the Fund is dependent upon the creditworthiness and
good faith of the counterparty. The Fund attempts to reduce the risks of
nonperformance by the counterparty by dealing only with established, reputable
institutions. The swap market is still relatively new and emerging; positions in
swap arrangements may become illiquid to the extent that nonstandard
arrangements with one counterparty are not readily transferable to another
counterparty or if a market for the transfer of swap positions does not develop.
The use of interest rate swaps is a highly specialized activity which involves
investment techniques and risks different from those associated with ordinary
portfolio securities transactions. If the Investment Manager is incorrect in its
forecasts of market values, interest rates and other applicable factors, the
investment performance of the Fund would diminish compared with what it would
have been if these investment techniques were not used. Moreover, even if the
Investment Manager is correct in its forecasts, there is a risk that the swap
position may correlate imperfectly with the price of the asset or liability
being hedged.
Repurchase Agreements
The Fund may enter into repurchase agreements. Repurchase agreements
occur when the Fund acquires a security and the seller, which may be either (i)
a primary dealer in U.S. Government securities or (ii) an FDIC-insured bank
having gross assets in excess of $500 million, simultaneously commits to
repurchase it at an agreed-upon price on an agreed-upon
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date within a specified number of days (usually not more than seven) from the
date of purchase. The repurchase price reflects the purchase price plus an
agreed-upon market rate of interest which is unrelated to the coupon rate or
maturity of the acquired security. The Fund will only enter into repurchase
agreements involving U.S. Government securities. Repurchase agreements could
involve certain risks in the event of default or insolvency of the other party,
including possible delays or restrictions upon the Fund's ability to dispose of
the underlying securities. Repurchase agreements will be limited to 30% of the
Fund's net assets, except that repurchase agreements extending for more than
seven days when combined with any other illiquid securities held by the Fund
will be limited to 15% of the Fund's net assets. To the extent excludable under
relevant regulatory interpretations, repurchase agreements involving U.S.
Government securities are not subject to the Fund's investment restrictions
which otherwise limit the amount of the Fund's total assets which may be
invested in one issuer or industry.
Reverse Repurchase Agreements
The Fund may enter into reverse repurchase agreements. However, the
Fund has no present intention of engaging in reverse repurchase agreements in
excess of 5% of the Fund's total assets. In a reverse repurchase agreement the
Fund transfers possession of a portfolio instrument to another person, such as a
financial institution, broker or dealer, in return for a percentage of the
instrument's market value in cash, and agrees that on a stipulated date in the
future the Fund will repurchase the portfolio instrument by remitting the
original consideration plus interest at an agreed upon rate. The ability to use
reverse repurchase agreements may enable, but does not ensure the ability of,
the Fund to avoid selling portfolio instruments at a time when a sale may be
deemed to be disadvantageous.
When effecting reverse repurchase agreements, assets of the Fund in a
dollar amount sufficient to make payment of the obligations to be purchased are
segregated on the Fund's records at the trade date and maintained until the
transaction is settled.
When-Issued Securities
The Fund may purchase "when-issued" securities, which are traded on a
price or yield basis prior to actual issuance. Such purchases will be made only
to achieve the Fund's investment objective and not for leverage. The when-issued
trading period generally lasts from a few days to months, or over a year or
more; during this period dividends or interest on the securities are not
payable. A frequent form of when-issued trading occurs 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.
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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.
Foreign Investments
The Fund may invest in securities of non-U.S. issuers directly, or
indirectly in the form of American Depositary Receipts ("ADRs"), European
Depositary Receipts ("EDRs") and Global Depositary Receipts ("GDRs").
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. GDSs are receipts issued to one country which
also 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. GDRs are designed for use when the issuer is
raising capital in more than one market simultaneously, such as the issuer's
local market and the U.S.,
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and have been used to overcome local selling restrictions to foreign investors.
In addition, many GDRs are eligible for book-entry settlement through Cedel,
Euroclear and DTC. The underlying securities are not always denominated in the
same currency as the ADRs, EDRs or GDRs. Although investment in the form of
ADRs, EDRs or GDRs 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 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.
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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 purchase or
sell currencies. Under current policy, 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.
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 repurchase agreements, or other similar investments. The
investing of cash collateral received from loaning portfolio securities involves
leverage which magnifies the potential for gain or loss on monies invested and,
therefore, results in an increase in the volatility of the Fund's outstanding
securities. Such loans may be terminated at any time.
The Fund may receive a lending fee and will retain rights to dividends,
interest or other distributions, on the loaned securities. Voting rights pass
with the lending, although the Fund may call loans to vote proxies if desired.
Should the borrower of the securities fail financially, there is a risk of delay
in recovery of the securities or loss of rights in the collateral. Loans are
made only to borrowers which are deemed by the Investment Manager or its agents
to be of good financial standing.
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Short-Term Trading
The Fund may engage in short-term trading of securities and reserves
full freedom with respect to portfolio turnover. In periods where there are
rapid changes in economic conditions and security price levels or when
reinvestment strategy changes significantly, portfolio turnover may be higher
than during times of economic and market price stability or when investment
strategy remains relatively constant. The Fund's portfolio turnover rate
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 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.
14
<PAGE>
<TABLE>
<S> <C> <C>
Energy Materials Capital Equipment
- ------ --------- -----------------
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 (shipping) Multi-industry
Wholesale/Trade Gold Mining
</TABLE>
Computer-Related Risks
Many mutual funds and other companies that issue securities, as well as
government entities upon whom those mutual funds and companies depend, may be
adversely affected by computer systems (whether their own systems or systems of
their service providers) that do not properly process dates beginning with
January 1, 2000 and information related to those dates.
The Investment Manager currently is in the process of reviewing its
internal computer systems as they relate to the Fund, as well as the computer
systems of those service providers
15
<PAGE>
upon which the Fund relies, in order to obtain reasonable assurances that the
Fund will not experience a material adverse impact related to the problem. The
Fund does not currently anticipate that the problem will have a material adverse
impact on its portfolio investments, taken as a whole. There can be no
assurances in the area, however, including the possibility that the problem
could negatively affect the investment markets or the economy generally.
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.
U.S. Government and Related Securities
U.S. Government securities are securities which are issued or
guaranteed as to principal or interest by the U.S. Government, a U.S. Government
agency or instrumentality, or certain mixed-ownership Government corporations as
described herein. The U.S. Government securities in which the Fund invests
include, among others:
[bullet] direct obligations of the U.S. Treasury, i.e., U.S. Treasury bills,
notes, certificates and bonds;
[bullet] obligations of U.S. Government agencies or instrumentalities, such as
the Federal Home Loan Banks, the Federal Farm Credit Banks, the Federal
National Mortgage Association, the Government National Mortgage
Association and the Federal Home Loan Mortgage Corporation; and
[bullet] obligations of mixed-ownership Government corporations such as
Resolution Funding Corporation.
U.S. Government securities which the Fund may buy are backed in a
variety of ways by the U.S. Government, its agencies or instrumentalities. Some
of these obligations, such as Government National Mortgage Association
mortgage-backed securities, are backed by the full faith and credit of the U.S.
Treasury. Other obligations, such as those of the Federal National Mortgage
Association, are backed by the discretionary authority of the U.S. Government to
purchase certain obligations of agencies or instrumentalities, although the U.S.
Government has no legal obligation to do so. Obligations such as those of the
Federal Home Loan Bank, the Federal Farm Credit Bank, the Federal National
Mortgage Association and the Federal Home Loan Mortgage Corporation are backed
by the credit of the agency or instrumentality issuing the obligations. Certain
obligations of Resolution Funding Corporation, a mixed-ownership Government
corporation, are backed with respect to interest payments by the U.S. Treasury,
and with respect to principal payments by U.S. Treasury obligations held in a
segregated account with a Federal Reserve Bank. Except for certain
mortgage-related
16
<PAGE>
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.
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 the
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
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
17
<PAGE>
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.
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
18
<PAGE>
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.
Zero and Step Coupon Securities
Zero and step coupon securities are debt securities that may pay no
interest for all or a portion of their life but are purchased at a discount to
face value at maturity. Their return consists of the amortization of the
discount between their purchase price and their maturity value, plus in the case
of a step coupon, any fixed rate interest income. Zero coupon securities pay no
interest to holders prior to maturity even though interest on these securities
is reported
19
<PAGE>
as income to the Fund. The Fund will be required to distribute all or
substantially all of such amounts annually to its shareholders. These
distributions may cause the Fund to liquidate portfolio assets in order to make
such distributions at a time when the Fund may have otherwise chosen not to sell
such securities. The market value of such securities may be more volatile than
that of securities which pay interest at regular intervals.
Commercial Paper Ratings
Commercial paper investments at the time of purchase will be rated
within the "A" major rating category by S&P or within the "Prime" major rating
category by Moody's, or, if not rated, issued by companies having an outstanding
long-term unsecured debt issue rated at least within the "A" category by S&P or
by Moody's. The money market investments in corporate bonds and debentures
(which must have maturities at the date of settlement of one year or less) must
be rated at the time of purchase at least within the "A" category by S&P or
within the "Prime" category by Moody's.
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.
20
<PAGE>
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 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
five classes: Class A, Class B (1), Class B, Class C and Class S shares.
Each share of each class of shares represents an identical legal
interest in the same portfolio of investments of the Fund, has the same rights
and is identical in all respects, except that Class A, Class B (1), Class B and
Class C shares bear the expenses of the deferred sales arrangement and any
expenses (including the higher service and distribution fees) resulting from
such sales arrangement, and certain other incremental expenses related to a
class. Each class will have exclusive voting rights with respect to provisions
of the Rule 12b-1 distribution plan pursuant to which the service and
distribution fees, if any, are paid. Although the legal rights of holders of
each class of shares are identical, it is likely that the different expenses
borne by each class will result in different net asset values and dividends. The
different classes of shares of the Fund also have different exchange privileges.
Except for those differences between classes of shares described above, in the
Fund's Prospectus and otherwise this Statement of Additional Information, each
share of the Fund has equal dividend, redemption and liquidation rights with
other shares of the Fund, and when issued, is fully paid and nonassessable by
the Fund.
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.
21
<PAGE>
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 60. His principal occupation is currently,
and during the past five years has been, Executive Vice President and Director
of State Street Research & Management Company. Mr. Bennett's other principal
business affiliations include Director, State Street Research Investment
Services, Inc.
+Steve A. Garban, The Pennsylvania State University, 210 Old Main,
University Park, PA 16802, serves as Director of Portfolios. He is 61. He is
retired and was formerly Senior Vice President for Finance and Operations and
Treasurer of The Pennsylvania State University.
+Malcolm T. Hopkins, 14 Brookside Road, Biltmore Forest, Asheville, NC
28803, serves as Director of Portfolios. He is 70. He is engaged principally in
private investments. Previously, he was Vice Chairman of the Board and Chief
Financial Officer of St. Regis Corp.
+Edward M. Lamont, Box 1234, Moores Hill Road, Syosset, NY 11791,
serves as Director of Portfolios. He is 72. 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 72. He is retired and was formerly a Partner at
Saltonstall & Co., a private investment firm.
*+Gerard P. Maus, One Financial Center, Boston, MA 02111, serves as
Treasurer of Portfolios. He is 47. His principal occupation is currently, and
during the past five years has been, Executive Vice President, Treasurer, Chief
Financial Officer, Chief Administrative Officer and Director of State Street
Research & Management Company. Mr. Maus's other principal business affiliations
include Executive Vice President, Treasurer, Chief Financial Officer, Chief
Administrative Officer and Director of State Street Research Investment
Services, Inc.
*+Francis J. McNamara, III, One Financial Center, Boston, MA 02111
serves as Secretary and General Counsel of Portfolios. He is 43. His principal
occupation is Executive Vice President, General Counsel and Secretary of State
Street Research & Management Company. During the past five years he has also
served as Senior Vice President of State
- ------------------------
* or +, see footnotes on page 23.
22
<PAGE>
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.
*Thomas P. Moore, Jr., One Financial Center, Boston, MA 02111, serves
as Vice President of Portfolios. He is 60. His principal occupation is
currently, and during the past five years has been, Senior Vice President of
State Street Research & Management Company.
+Dean O. Morton, 3200 Hillview Avenue, Palo Alto, CA 94304, serves as
Director of Portfolios. He is 66. 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 60. His principal occupations during the past
five years have been President of The Glen Ellen Company, a private investment
company, and Vice President of Founders Investments Ltd.
+Michael S. Scott Morton, Massachusetts Institute of Technology, 77
Massachusetts Avenue, Cambridge, MA 02139, serves as Director of Portfolios. He
is 61. His principal occupation during the past five years has been Jay W.
Forrester Professor of Management at Sloan School of Management, Massachusetts
Institute of Technology.
*+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 56. His principal occupation is currently, and during the past
five years has been, Chairman of the Board, President, Chief Executive Officer
and Director of State Street Research & Management Company. Mr. Verni's other
principal business affiliations include Chairman of the Board and Director of
State Street Research Investment Services, Inc., (and until February 1996, prior
positions as President and Chief Executive Officer of that company).
*+James M. Weiss, One Financial Center, Boston, MA 02111, serves as
Vice President of Portfolios. He is 52. His principal occupation is Executive
Vice President 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 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: 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>
As of November 30, 1998, the Directors and principal officers of
Portfolios as a group owned approximately 1.4% of the outstanding Class A shares
of the Fund, and none of the outstanding Class B, Class C or Class S shares.
Record ownership of shares of the Fund as of November 30, 1998 was as
follows:
<TABLE>
<CAPTION>
% of
Class Holder Class
----- ------ -----
<S> <C> <C>
B Merrill Lynch 10.67
C Merrill Lynch 34.68
State Street Bank 7.08
S Chase Manhattan 42.72
Bank, N.A.
</TABLE>
The full name and address of the above institutions are:
Chase Manhattan Bank, N.A.(a)(b)
770 Broadway
New York, New York 10003
Merrill Lynch, Pierce, Fenner & Smith, Inc. (b)
4800 Deerlake Drive East
Jacksonville, FL 32246
State Street Bank and Trust Company (c)
225 Franklin Street
Boston, MA 02110
- ---------------------------------
(a) Chase Manhattan Bank, N.A. holds such shares as trustee under certain
employee benefit plans serviced by Metropolitan Life Insurance Company.
(b) The Fund believes that each named recordholder does not have beneficial
ownership of such shares.
(c) Includes shares owned by the indicated holder of record for the benefit of
named owners who may separately own less than 5% of the share class S.
24
<PAGE>
Ownership of 25% or more of a voting security is deemed "control," as
defined in the 1940 Act. So long as 25% of a class of shares is so owned, such
owners will be presumed to be in control of such class of shares for purposes of
voting on certain matters submitted to a vote of shareholders, such as any
Distribution Plan for a given class.
The Directors were compensated as follows:
<TABLE>
<CAPTION>
Total
Compensation
Aggregate From Fund and
Compensation Fund Complex Paid
Name of Director From Fund(a) to Directors(b)
- --------------------------------------------------------------------------------
<S> <C> <C>
Steve A. Garban $2,200 $110,300
Malcolm T. Hopkins $1,900 $ 97,200
Edward M. Lamont $1,800 $ 66,000
Robert A. Lawrence $1,900 $ 96,700
Dean O. Morton $2,200 $110,700
Toby Rosenblatt $2,000 $ 72,600
Michael S. Scott Morton $2,400 $115,500
Ralph F. Verni $ 0 $ 0
</TABLE>
(a) For the Fund's fiscal year ended October 31, 1998.
(b) Includes compensation on behalf of all series of 12 investment companies
for which the Investment Manager or its parent, Metropolitan Life Insurance
Company, served as investment adviser. "Total Compensation from Fund and
Fund Complex Paid to Directors" for the 12 months ended December 31, 1998.
Portfolios does not provide any pension or retirement benefits for the
Directors.
MANAGEMENT OF THE FUND
AND INVESTMENT ADVISORY SERVICES
State Street Research & Management Company, the Investment Manager, a
Delaware corporation, with offices at One Financial Center, Boston,
Massachusetts 02111-2690, acts as investment adviser to the Fund. The Investment
Manager was founded by Paul Cabot, Richard Saltonstall and Richard Paine to
serve as investment adviser to one of the nation's first mutual funds, presently
known as State Street Research Investment Trust, which they had formed in 1924.
Their investment management philosophy emphasized comprehensive fundamental
research and analysis, including meetings with the management of companies under
consideration for investment. The Investment Manager's portfolio management
group has extensive investment industry experience managing equity and debt
securities. In managing debt securities, if any, for a portfolio, the Investment
Manager may consider yield curve positioning, sector rotation and duration,
among other factors.
25
<PAGE>
The Investment Manager is charged with the overall responsibility for
managing the investments and business affairs of the Fund, subject to the
authority of the Board of Directors. 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 is an indirect
wholly-owned subsidiary of Metropolitan Life Insurance Company ("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.
The advisory fees paid by the Fund to the Investment Manager for the
last three fiscal years, prior to the assumption of fees or expenses, were as
follows: 1998, $549,360; 1997, $701,440; and 1996, $921,649.
The Distributor and its affiliates have from time to time and in
varying amounts voluntarily reduced the Fund's expenses. The voluntary reduction
of expenses for the same periods were as follows: 1998, $433,268; 1997,
$335,089; and 1996, $452,847.
The Investment Management Agreement provides that it shall continue in
effect from year to year with respect to the Fund as long as it is approved at
least annually both (i) by a vote of a majority of the outstanding voting
securities of the Fund (as defined in the 1940 Act) or by the 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 Investment Management Agreement may be terminated on 60 days'
written notice by either party and will terminate automatically in the event of
its assignment, as defined under the 1940 Act and regulations thereunder. Such
regulations provide that a transaction which does not result in a change of
actual control or management of an adviser is not deemed an assignment.
Under 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.
26
<PAGE>
PURCHASE AND REDEMPTION OF SHARES
Shares of the Fund are distributed by State Street Research Investment
Services, Inc., the Distributor. The Fund generally offers four classes of
shares. Class A, Class B(1), Class C and Class S shares are available to all
eligible investors. The Fund also offers Class B shares, which are available
only to current Class B shareholders through reinvestment of dividends and
capital gains distributions or through exchanges from existing Class B accounts
of the State Street Research Funds. Class A, Class B(1), Class B, Class C and
Class S shares of the Fund may be purchased at the next determined net asset
value per share plus, in the case of all classes except Class S shares, a sales
charge which, at the election of the investor, may be imposed (i) at the time of
purchase (the Class A shares) or (ii) on a deferred basis (the Class B(1) and
Class C shares). General information on how to buy shares of the Fund, as well
as sales charges involved, are set forth under "Your Investment" in the
Prospectus. The following supplements that information.
Public Offering Price. The public offering price for each class of
shares is based on their net asset value determined as of 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.
Alternative Purchase Program. Alternative classes of shares permit
investors to select a purchase program which they believe will be the most
advantageous for them, given the amount of their purchase, the length of time
they anticipate holding Fund shares, or the flexibility they desire in this
regard, and other relevant circumstances. Investors will be able to determine
whether in their particular circumstances it is more advantageous to incur an
initial sales charge and not be subject to certain ongoing charges or to have
their entire initial purchase price invested in the Fund with the investment
being subject thereafter to ongoing service fees and distribution fees.
As described in greater detail below, financial professionals are paid
differing amounts of compensation depending on which class of shares they sell.
The major differences among the various classes of shares are as
follows:
27
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
Class A Class B(1) Class B Class C Class S
------- ---------- ------- ------- -------
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Sales Charges Paid Initial sales Contingent Contingent Contingent None
by Investor to charge at time deferred sales deferred sales deferred sales
Distributor of investment of charge of 5% to charge of 5% to charge of 1%
up to 5.75% 1% applies to 2% applies to applies to any
depending on any shares any shares shares redeemed
amount of redeemed within redeemed within within one year
investment first six years first five years following their
following their following their purchase
purchase; no purchase; no
contingent contingent
deferred sales deferred sales
charge after six charge after
years five years
- ----------------------------------------------------------------------------------------------------------
On investments
of $1 million or
more, no initial
sales charge;
but contingent
deferred sales
charge of 1%
applies to any
shares redeemed
within one year
following their
purchase
- ----------------------------------------------------------------------------------------------------------
Initial Commission Above described 4% 4% 1% None
Paid by Distributor initial sales
to Financial charge less
Professional 0.25% to 0.75%
retained by
distributor
On investments
of $1 million or
more, 0.25% to
1% paid to
dealer by
Distributor
- ----------------------------------------------------------------------------------------------------------
Rule 12b-1 Service
Fee
- ---------------------------------------------------------------------------------------------------------
Paid by Fund to 0.25% each year 0.25% each year 0.25% each year 0.25% each year None
Distributor
- ----------------------------------------------------------------------------------------------------------
Paid by Distributor 0.25% each year 0.25% each year 0.25% each year 0.25% each year None
to Financial commencing after commencing after commencing after
Professional one year one year one year
following following following
purchase purchase purchase
- ----------------------------------------------------------------------------------------------------------
Rule 12b-1
Distribution Fee
- ----------------------------------------------------------------------------------------------------------
Paid by Fund to None 0.75% for first 0.75% for first 0.75% each year None
Distributor eight years; eight years;
Class B(1) Class B shares
shares convert convert
automatically to automatically to
Class A shares Class A shares
after eight years after eight years
- ----------------------------------------------------------------------------------------------------------
Paid by Distributor None None None 0.75% each year None
to Financial commencing after
Professional one year
following
purchase
- ----------------------------------------------------------------------------------------------------------
</TABLE>
28
<PAGE>
Class A Shares--Reduced Sales Charges. The reduced sales charges set
forth under "Your Investment--Choosing a Share Class" in the Prospectus apply to
purchases made at any one time by any "person," which includes: (i) an
individual, or an individual combining with his or her spouse and their children
and purchasing for his, her or their own account; (ii) a "company" as defined in
Section 2(a)(8) of the 1940 Act; (iii) a trustee or other fiduciary purchasing
for a single trust estate or single fiduciary account (including a pension,
profit sharing or other employee benefit trust created pursuant to a plan
qualified under Section 401 of the Internal Revenue Code); (iv) a tax-exempt
organization under Section 501(c)(3) or (13) of the Internal Revenue Code; and
(v) an employee benefit plan of a single employer or of affiliated employers.
Investors may purchase Class A shares of the Fund at reduced sales
charges by executing a Letter of Intent to purchase no less than an aggregate of
$100,000 of the Fund or any combination of Class A shares of "Eligible Funds"
(which include the Fund and other funds as designated by the Distributor from
time to time) within a 13-month period. The sales charge applicable to each
purchase made pursuant to a Letter of Intent will be that which would apply if
the total dollar amount set forth in the Letter of Intent were being bought in a
single transaction. Purchases made within a 90-day period prior to the execution
of a Letter of Intent may be included therein; in such case the date of the
earliest of such purchases marks the commencement of the 13-month period.
An investor may include toward completion of a Letter of Intent the
value (at the current public offering price) of all of his or her Class A shares
of the Fund and of any of the other Class A shares of Eligible Funds held of
record as of the date of his or her Letter of Intent, plus the value (at the
current offering price) as of such date of all of such shares held by any
"person" described herein as eligible to join with the investor in a single
purchase. Class B(1), Class B, Class C and Class S shares may also be included
in the combination under certain circumstances.
A Letter of Intent does not bind the investor to purchase the specified
amount. Shares equivalent to 5% of the specified amount will, however, be taken
from the initial purchase (or, if necessary, subsequent purchases) and held in
escrow in the investor's account as collateral against the higher sales charge
which would apply if the total purchase is not completed within the allotted
time. The escrowed shares will be released when the Letter of Intent is
completed or, if it is not completed, when the balance of the higher sales
charge is, upon notice, remitted by the investor. All dividends and capital
gains distributions with respect to the escrowed shares will be credited to the
investor's account.
Investors may purchase Class A shares of the Fund or a combination of
Eligible Funds at reduced sales charges pursuant to a Right of Accumulation. The
applicable sales charge under the right is determined on the amount arrived at
by combining the dollar amount of the purchase with the value (at the current
public offering price) of all Class A shares of the other Eligible Funds owned
as of the purchase date by the investor plus the value (at the current public
offering price) of all such shares owned as of such date by any "person"
described
29
<PAGE>
herein as eligible to join with the investor in a single purchase. Class B(1),
Class B, Class C and Class S shares may also be included in the combination
under certain circumstances. Investors must submit to the Distributor sufficient
information to show that they qualify for this Right of Accumulation.
Other Programs Related to Class A Shares. Class A shares of the Fund
may be sold or issued in an exchange at a reduced sales charge or without sales
charge pursuant to certain sponsored arrangements, which include programs under
which a company, employee benefit plan or other organization makes
recommendations to, or permits group solicitation of, its employees, members or
participants, except any organization created primarily for the purpose of
obtaining shares of the Fund at a reduced sales charge or without a sales
charge. Sales without a sales charge, or with a reduced sales charge, may also
be made through brokers, registered investment advisers, financial planners,
institutions, and others, under managed fee-based programs (e.g., "wrap fee" or
similar programs) which meet certain requirements established from time to time
by the Distributor. Information on such arrangements and further conditions and
limitations is available from the Distributor.
In addition, no sales charge is imposed in connection with the sale of
Class A shares of the Fund to the following entities and person: (A) the
Investment Manager, Distributor or any affiliated entities, including any direct
or indirect parent companies and other subsidiaries of such parents
(collectively "Affiliated Companies"); (B) employees, officers, sales
representatives or current or retired directors or trustees of the Affiliated
Companies or any investment company managed by any of the Affiliated Companies,
any relatives of any such individuals whose relationship is directly verified by
such individuals to the Distributor, or any beneficial account for such
relatives or individuals; and (C) employees, officers, sales representatives or
directors of dealers and other entities with a selling agreement with the
Distributor to sell shares of any aforementioned investment company, any spouse
or child of such person, or any beneficial account for any of them. The purchase
must be made for investment and the shares purchased may not be resold except
through redemption. This purchase program is subject to such administrative
policies, regarding the qualification of purchasers and any other matters, as
may be adopted by the Distributor from time to time.
Conversion of Class B(1) and Class B Shares to Class A Shares. A
shareholder's Class B(1) and Class B shares of the Fund, including all shares
received as dividends or distributions with respect to such shares, will
automatically convert to Class A shares of the Fund at the end of eight years
following the issuance of such shares; consequently, they will no longer be
subject to the higher expenses borne by Class B(1) and Class B shares. The
conversion rate will be determined on the basis of the relative per share net
asset values of the two classes and may result in a shareholder receiving either
a greater or fewer number of Class A shares than the Class B shares so
converted. As noted above, holding periods for Class B(1) shares received in
exchange for Class B(1) shares of other Eligible Funds and for Class B shares
received in exchange for Class B shares of other Eligible Funds, will be counted
toward the eight-year period.
30
<PAGE>
Contingent Deferred Sales Charges. The amount of any contingent
deferred sales charge paid on Class A shares (on sales of $1 million or more and
which do not involve an initial sales charge) or on Class B(1), Class B or Class
C shares of the Fund will be paid to the Distributor. The Distributor will pay
dealers at the time of sale a 4% commission for selling Class B(1) and Class B
shares and a 1% commission for selling Class C shares. In certain cases, a
dealer may elect to waive the 4% commission on Class B(1) and Class B shares and
receive in lieu thereof an annual fee, usually 1%, with respect to such
outstanding shares. The proceeds of the contingent deferred sales charges and
the distribution fees are used to offset distribution expenses and thereby
permit the sale of Class B(1), Class B and Class C shares without an initial
sales charge.
In determining the applicability and rate of any contingent deferred
sales charge on Class B(1), Class B or Class C shares, it will be assumed that a
redemption of the shares is made first of those shares having the greatest
capital appreciation, next of shares representing reinvestment of dividends and
capital gains distributions and finally of remaining shares held by shareholder
for the longest period of time. Class B(1) shares that are redeemed within a
six-year period after purchase, Class B shares that are redeemed within a
five-year period after their purchase, and Class C shares that are redeemed
within a one-year period after their purchase, will not be subject to a
contingent deferred sales charge to the extent that the value of such shares
represents (1) capital appreciation of Fund assets or (2) reinvestment of
dividends or capital gains distributions. The holding period for purposes of
applying a contingent deferred sales charge for a particular class of shares of
the Fund acquired through an exchange from another Eligible Fund will be
measured from the date that such shares were initially acquired in the other
Eligible Fund, and shares of the same class being redeemed will be considered to
represent, as applicable, capital appreciation or dividend and capital gains
distribution reinvestments in such other Eligible Fund. These determinations
will result in any contingent deferred sales charge being imposed at the lowest
possible rate. For federal income tax purposes, the amount of the contingent
deferred sales charge will reduce the gain or increase the loss, as the case may
be, on the amount realized on redemption.
Contingent Deferred Sales Charge Waivers. With respect to Class A
shares (on sales of $1 million or more and which do not involve an initial sales
charge), and Class B(1), Class B and Class C shares of the Fund, the contingent
deferred sales charge does not apply to exchanges or to redemptions under a
systematic withdrawal plan which meets certain conditions. The contingent
deferred sales charge will be waived for participant initiated distributions
from State Street Research prototype employee retirement plans. In addition, the
contingent deferred sales charge will be waived for: (i) redemptions made within
one year of the death or total disability, as defined by the Social Security
Administration, of all shareholders of an account; (ii) redemptions made after
attainment of a specific age in an amount which represents the minimum
distribution required at such age under Section 401(a)(9) of the Internal
Revenue Code of 1986, as amended, for retirement accounts or plans (e.g., age 70
1/2 for Individual Retirement Accounts and Section 403(b) plans), calculated
solely on the basis of assets invested in the Fund or other Eligible Funds; and
(iii) a redemption resulting from a tax-free return of an excess contribution to
an Individual
31
<PAGE>
Retirement Account. (The foregoing waivers do not apply to a tax-free rollover
or transfer of assets out of the Fund). The Fund may modify or terminate the
waivers at any time; for example, the Fund may limit the application of multiple
waivers and establish other conditions for employee benefit plans. Certain
employee benefit plans sponsored by a financial professional may be subject to
other conditions for waivers under which the plans may initially invest in Class
B(1) or Class B shares and then invest in Class A shares of certain funds upon
meeting specific criteria.
Class S Shares. Class S shares are currently available to certain
employee benefit plans such as qualified retirement plans which meet criteria
relating to number of participants, service arrangements, or similar factors;
insurance companies; investment companies; advisory accounts of the Investment
Manager; endowment funds of nonprofit organizations with substantial minimum
assets (currently a minimum of $10 million); and other similar institutional
investors. Class S shares may be acquired through programs or products sponsored
by Metropolitan, its affiliates, or both for which Class S shares have been
designated. In addition, Class S shares are available through programs under
which, for example, investors pay an asset-based fee and/or a transaction fee to
intermediaries. Class S share availability is determined by the Distributor and
intermediaries based on the overall direct and indirect costs of a particular
program, expected assets, account sizes and similar considerations.
Reorganizations. In the event of mergers or reorganizations with other
public or private collective investment entities, including investment companies
as defined in the 1940 Act, the Fund may issue its shares at net asset value (or
more) to such entities or to their security holders.
Redemptions. The Fund reserves the right to pay redemptions in kind
with portfolio securities in lieu of cash. In accordance with its election
pursuant to Rule 18f-1 under the 1940 Act, the Fund may limit the amount of
redemption proceeds paid in cash. Although it has no present intention to do so,
the Fund may, under unusual circumstances, limit redemptions in cash with
respect to each shareholder during any ninety-day period to the lesser of (i)
$250,000 or (ii) 1% of the net asset value of the Fund at the beginning of such
period. In connection with any redemptions paid in kind with portfolio
securities, brokerage and other costs may be incurred by the redeeming
shareholder in the sale of the securities received.
Systematic Withdrawal Plan. A shareholder who owns noncertificated
Class A or Class S shares with a value of $5,000 or more, or Class B(1), Class B
or Class C shares with a value of $10,000 or more, may elect, by participating
in the Fund's Systematic Withdrawal Plan, to have periodic checks issued for
specified amounts. These amounts may not be less than certain minimums,
depending on the class of shares held. The Plan provides that all income
dividends and capital gains distributions of the Fund shall be credited to
participating shareholders in additional shares of the Fund. Thus, the
withdrawal amounts paid can only be realized by redeeming shares of the Fund
under the Plan. To the extent such amounts paid exceed dividends and
distributions from the Fund, a shareholder's investment will decrease and may
eventually be exhausted.
32
<PAGE>
In the case of shares otherwise subject to contingent deferred sales
charges, no such charges will be imposed on withdrawals of up to 8% annually of
either (a) the value, at the time the Systematic Withdrawal Plan is initiated,
of the shares then in the account or (b) the value, at the time of a withdrawal,
of the same number of shares as in the account when the Systematic Withdrawal
Plan was initiated, whichever is higher.
Expenses of the Systematic Withdrawal Plan are borne by the Fund. A
participating shareholder may withdraw from the Systematic Withdrawal Plan, and
the Fund may terminate the Systematic Withdrawal Plan at any time on written
notice. Purchase of additional shares while a shareholder is receiving payments
under a Systematic Withdrawal Plan is ordinarily disadvantageous because of
duplicative sales charges. For this reason, a shareholder may not participate in
the Investamatic Program (see "Your Investment--Investor Services--Investamatic
Program" in the Fund's Prospectus) and the Systematic Withdrawal Plan at the
same time.
Request to Dealer to Repurchase. For the convenience of shareholders,
the Fund has authorized the Distributor as its agent to accept orders from
dealers by wire or telephone for the repurchase of shares by the Distributor
from the dealer. The Fund may revoke or suspend this authorization at any time.
The repurchase price is the net asset value for the applicable shares next
determined following the time at which the shares are offered for repurchase by
the dealer to the Distributor. The dealer is responsible for promptly
transmitting a shareholder's order to the Distributor.
Signature Guarantees. Signature guarantees are required for, among
other things: (1) written requests for redemptions for more than $100,000; (2)
written requests for redemptions for any amount if the proceeds are transmitted
to other than the current address of record (unchanged in the past 30 days); (3)
written requests for redemptions for any amount submitted by corporations and
certain fiduciaries and other intermediaries; and (4) requests to transfer the
registration of shares to another owner. Signatures must be guaranteed by a
bank, a member firm of a national stock exchange, or other eligible guarantor
institution. The Transfer Agent will not accept guarantees (or notarizations)
from notaries public. The above requirements may be waived in certain instances.
Dishonored Checks. If a purchaser's check is not honored for its full
amount, the purchaser could be subject to additional charges to cover collection
costs and any investment loss, and the purchase may be canceled.
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.
33
<PAGE>
SHAREHOLDER ACCOUNTS
General information on shareholder accounts is included in the Fund's
Prospectus under "Your Investment." The following supplements that information.
Maintenance Fees and Involuntary Redemption. Because of the relatively
high cost of maintaining small shareholder accounts, the Fund reserves the right
to redeem at its option any shareholder account which remains below $1,500 for a
period of 60 days after notice is mailed to the applicable shareholder, or to
impose a maintenance fee on such account after 60 days' notice. Such
involuntarily redemptions will be subject to applicable sales charges, if any.
The Fund may increase such minimum account value above such amount in the future
after notice to affected shareholders. Involuntarily redeemed shares will be
priced at the net asset value on the date fixed for redemption by the Fund, and
the proceeds of the redemption will be mailed to the affected shareholder at the
address of record. Currently, the maintenance fee is $18 annually, which is paid
to the Transfer Agent. The fee does not apply to certain retirement accounts or
if the shareholder has more than an aggregate $50,000 invested in the Fund and
other Eligible Funds combined. Imposition of a maintenance fee on a small
account could, over time, exhaust the assets of such account.
To cover the cost of additional compliance administration, a $20 fee
will be charged against any shareholder account that has been determined to be
subject to escheat under applicable state laws.
The Fund may not suspend the right of redemption or postpone the date
of payment of redemption proceeds for more than seven days, except that (a) it
may elect to suspend the redemption of shares or postpone the date of payment of
redemption proceeds: (1) during any period that the NYSE is closed (other than
customary weekend and holiday closings) or trading on the NYSE is restricted;
(2) during any period in which an emergency exists as a result of which disposal
of portfolio securities is not reasonably practicable or it is not reasonably
practicable to fairly determine the Fund's net asset values; or (3) during such
other periods as the Securities and Exchange Commission (the "SEC") may by order
permit for the protection of investors; and (b) the payment of redemption
proceeds may be postponed as otherwise provided under "Purchase and Redemption
of Shares" in this Statement of Additional Information.
The Open Account System. Under the Open Account System full and
fractional shares of the Fund owned by shareholders are credited to their
accounts by the Transfer Agent, State Street Bank and Trust Company, 225
Franklin Street, Boston, Massachusetts 02110. Certificates representing Class
B(1), Class B or Class C shares will not be issued, while certificates
representing Class A or Class S shares will only be issued if specifically
requested in writing and, in any case, will only be issued for full shares, with
any fractional shares to be carried on the shareholder's account. Shareholders
will receive periodic statements of transactions in their accounts.
34
<PAGE>
The Fund's Open Account System provides the following options:
1. Additional purchases of shares of the Fund may be made through
dealers, by wire or by mailing a check payable to "State
Street Research Funds" under the terms set forth above under
"Purchase and Redemption of Shares" in this Statement of
Additional Information.
2. The following methods of receiving dividends from investment
income and distributions from capital gains generally are
available:
(a) All income dividends and capital gains distributions
reinvested in additional shares of the Fund.
(b) All income dividends and capital gains distributions
in cash.
(c) All income dividends and capital gains distributions
invested in any one available Eligible Fund
designated by the shareholder as described below. See
"Dividend Allocation Plan" herein.
Dividend and distribution selections should be made on the Application
accompanying the initial investment. If no selection is indicated on the
Application, that account will be automatically coded for reinvestment of all
dividends and distributions in additional shares of the same class of the Fund.
Selections may be changed at any time by telephone or written notice to the
Service Center. Dividends and distributions are reinvested at net asset value
without a sales charge.
Exchange Privileges. Shareholders of the Fund may exchange their shares
for available shares with corresponding characteristics of any of the other
Eligible Funds, subject to any applicable initial holding period, on the basis
of the relative net asset values of the respective shares to be exchanged,
subject to compliance with applicable securities laws. Shareholders of any other
Eligible Fund may similarly exchange their shares for Fund shares with
corresponding characteristics. Prior to making an exchange, shareholders should
obtain the Prospectus of the Eligible Fund into which they are exchanging. Under
the Direct Program, subject to certain conditions, shareholders may make
arrangements for regular exchanges from the Fund into other Eligible Funds. To
effect an exchange, Class A, Class B(1), Class B and Class C shares may be
redeemed without the payment of any contingent deferred sales charge that might
otherwise be due upon an ordinary redemption of such shares. The State Street
Research Money Market Fund issues Class E shares which are sold without any
sales charge. Exchanges of State Street Research Money Market Fund Class E
shares into Class A shares of the Fund or any other Eligible Fund are subject to
the initial sales charge or contingent deferred sales charge applicable to an
initial investment in such Class A shares, unless a prior Class A sales charge
has been paid directly or indirectly with respect to the shares redeemed. Class
A shares acquired through a new investment after January 1, 1999 are subject to
an incremental sales charge if exchanged within 30 days of acquisition for Class
A shares of a Fund with a higher applicable sales charge. For purposes of
computing the contingent deferred sales charge that may be payable upon
disposition of any acquired Class A, Class B(1), Class B and Class C shares, the
holding period of the redeemed
35
<PAGE>
shares is "tacked" to the holding period of any acquired shares. No exchange
transaction fee is currently imposed on any exchange.
Shares of the Fund may also be acquired or redeemed in exchange for
shares of the Summit Cash Reserves Fund ("Summit Cash Reserves") by customers of
Merrill Lynch, Pierce, Fenner & Smith Incorporated (subject to completion of
steps necessary to implement the program). The Fund and Summit Cash Reserves are
related mutual funds for purposes of investment and investor services. Upon the
acquisition of shares of Summit Cash Reserves by exchange for redeemed shares of
the Fund, (a) no sales charge is imposed by Summit Cash Reserves, (b) no
contingent deferred sales charge is imposed by the Fund on the Fund shares
redeemed, and (c) any applicable holding period of the Fund shares redeemed is
"tolled," that is, the holding period clock stops running pending further
transactions. Upon the acquisition of shares of the Fund by exchange for
redeemed shares of Summit Cash Reserves, (a) the acquisition of Class A shares
shall be subject to the initial sales charges or contingent deferred sales
charges applicable to an initial investment in such Class A shares, unless a
prior Class A sales charge has been paid indirectly, and (b) the acquisition of
Class B(1), Class B or Class C shares of the Fund shall restart any holding
period previously tolled, or shall be subject to the contingent deferred sales
charge applicable to an initial investment in such shares.
The exchange privilege may be terminated or suspended or its terms
changed at any time, subject, if required under applicable regulations, to 60
days' prior notice. New accounts established for investments upon exchange from
an existing account in another fund will have the same telephone privileges with
respect to the Fund (see "Your Investment--Account Policies--Telephone Requests"
in the Fund's Prospectus and "--Telephone Privileges," below) as the existing
account unless the Service Center is instructed otherwise. Related
administrative policies and procedures may also be adopted with regard to a
series of exchanges, street name accounts, sponsored arrangements and other
matters.
The exchange privilege is not designed for use in connection with
short-term trading or market timing strategies. To protect the interests of
shareholders, the Fund reserves the right to temporarily or permanently
terminate the exchange privilege for any person who makes more than six
exchanges out of or into the Fund per calendar year. Accounts under common
ownership or control, including accounts with the same taxpayer identification
number, may be aggregated for purposes of the six exchange limit.
Notwithstanding the six exchange limit, the Fund reserves the right to refuse
exchanges by any person or group if, in the Investment Manager's judgment, the
Fund would be unable to invest 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
36
<PAGE>
Center and delivered by the Service Center to the Transfer Agent by 12 noon
Boston time on any business day with normal trading conditions, the exchange
usually will occur that day. For further information regarding the exchange
privilege, shareholders should contact the Service Center.
Reinvestment Privilege. A shareholder of the Fund who has redeemed
shares or had shares repurchased at his or her request may reinvest all or any
portion of the proceeds (plus that amount necessary to acquire a fractional
share to round off his or her reinvestment to full shares) in shares, of the
same class as the shares redeemed, of the Fund or any other Eligible Fund at net
asset value and without subjecting the reinvestment to an initial sales charge,
provided such reinvestment is made within 120 calendar days after a redemption
or repurchase. Upon such reinvestment, the shareholder will be credited with any
contingent deferred sales charge previously charged with respect to the amount
reinvested. The redemption of shares is, for federal income tax purposes, a sale
on which the shareholder may realize a gain or loss. If a redemption at a loss
is followed by a reinvestment within 30 days, the transaction may be a "wash
sale" resulting in a denial of the loss for federal income tax purposes.
Any reinvestment pursuant to the reinvestment privilege will be subject
to any applicable minimum account standards imposed by the fund into which the
reinvestment is made. Shares are sold to a reinvesting shareholder at the net
asset value thereof next determined following timely receipt by the Service
Center of such shareholder's written purchase request and delivery of the
request by the Service Center to the Transfer Agent. A shareholder may exercise
this reinvestment privilege only once per 12-month period with respect to his or
her shares of the Fund.
Dividend Allocation Plan. The Dividend Allocation Plan allows
shareholders to elect to have all their dividends and any other distributions
from the Fund or any Eligible Fund automatically invested at net asset value in
one other such Eligible Fund designated by the shareholder, provided the account
into which the dividends and distributions are directed is initially funded with
the requisite minimum amount.
Telephone Privileges. The following telephone privileges are
available:
[bullet] Telephone Exchange Privilege for Shareholder and Shareholder's
Financial Professional
[bullet] Shareholders automatically receive this privilege
unless declined.
[bullet] This privilege allows a shareholder or a
shareholder's financial professional to request
exchanges into other State Street Research funds.
[bullet] Telephone Redemption Privilege for Shareholder
[bullet] Shareholders automatically receive this privilege
unless declined.
[bullet] This privilege allows a shareholder to phone requests
to sell shares, with the proceeds sent to the address
of record.
37
<PAGE>
[bullet] Telephone Redemption Privilege for Shareholder's Financial
Professional (This privilege is not automatic; a shareholder
must specifically elect it)
[bullet] This privilege allows a shareholder's financial
professional to phone requests to sell shares, with
the proceeds sent to the address of record on the
account.
A shareholder with the above telephone privileges is deemed to
authorize the Service Center and the Transfer Agent to: (1) act upon the
telephone instructions of any person purporting to be any of the shareholders of
an account or a shareholder's financial professional; and (2) honor any written
instructions for a change of address regardless of whether such request is
accompanied by a signature guarantee. All telephone calls will be recorded.
Neither the Fund, the other Eligible Funds, the Transfer Agent, the Investment
Manager nor the Distributor will be liable for any loss, expense or cost arising
out of any request, including any fraudulent or unauthorized requests.
Shareholders assume the risk to the full extent of their accounts that telephone
requests may be unauthorized. Reasonable procedures will be followed to confirm
that instructions communicated by telephone are genuine. The shareholder will
not be liable for any losses arising from unauthorized or fraudulent
instructions if such procedures are not followed.
Alternative Means of Contacting the Fund. It is unlikely, 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.
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
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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 Trustees also
reserve the right to adopt other valuations based on fair value pricing in
unusual circumstances where use of other methods as discussed in part above,
could otherwise have a material adverse effect on the Fund as a whole.
The 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 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.
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<PAGE>
PORTFOLIO TRANSACTIONS
Portfolio Turnover
The Fund's portfolio turnover rate is determined by dividing the lesser
of securities purchases or sales for a year by the monthly average value of
securities held by the Fund (excluding, for purposes of this determination,
securities the maturities of which as of the time of their acquisition were one
year or less). The Fund's portfolio turnover rates for the fiscal years ended
October 31, 1997 and 1998, respectively, were as follows: 174.69% and 116.289%.
The Fund experienced a lower portfolio turnover rate in 1998 than in 1997
because there was less shifting of portfolio weightings among countries and
areas, that is Asia versus Europe, during fiscal year 1998 as compared to fiscal
year 1997.
Brokerage Allocation
The Investment Manager's policy is to seek for its clients, including
the Fund, what in the Investment Manager's judgment will be the best overall
execution of purchase or sale orders and the most favorable net prices in
securities transactions consistent with its judgment as to the business
qualifications of the various broker or dealer firms with whom the Investment
Manager may do business, and the Investment Manager may not necessarily choose
the broker offering the lowest available commission rate. Decisions with respect
to the market where the transaction is to be completed, to the form of
transaction (whether principal or agency), and to the allocation of orders among
brokers or dealers are made in accordance with this policy. In selecting brokers
or dealers to effect portfolio transactions, consideration is given to their
proven integrity and financial responsibility, their demonstrated execution
experience and capabilities both generally and with respect to particular
markets or securities, the competitiveness of their commission rates in agency
transactions (and their net prices in principal transactions), their willingness
to commit capital, and their clearance and settlement capability. The Investment
Manager makes every effort to keep informed of commission rate structures and
prevalent bid/ask spread characteristics of the markets and securities in which
transactions for the Fund occur. Against this background, the Investment Manager
evaluates the reasonableness of a commission or a net price with respect to a
particular transaction by considering such factors as difficulty of execution or
security positioning by the executing firm. The Investment Manager may or may
not solicit competitive bids based on its judgment of the expected benefit or
harm to the execution process for that transaction.
When it appears that a number of firms could satisfy the required
standards in respect of a particular transaction, consideration may also be
given to services other than execution services which certain of such firms have
provided in the past or may provide in the future. Negotiated commission rates
and prices, however, are based upon the Investment Manager's judgment of the
rate which reflects the execution requirements of the transaction without regard
to whether the broker provides services in addition to execution. Among such
other services are the supplying of supplemental investment research; general
economic, political and
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<PAGE>
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 or its affiliates, the above services may
include data relating to performance, expenses and fees of those investment
companies and other investment companies; this information is used by the
Trustees or Directors of the investment companies to fulfill their
responsibility to oversee the quality of the Investment Manager's advisory
contracts between the investment companies and the Investment Manager. The
Investment Manager considers these investment company services only in
connection with the execution of transactions on behalf of its investment
company clients and not its other clients. Certain of the nonexecution services
provided by broker-dealers may in turn be obtained by the broker-dealers from
third parties who are paid for such services by the broker-dealers.
The Investment Manager regularly reviews and evaluates the services
furnished by broker-dealers. The Investment Manager's investment management
personnel seek to evaluate the quality of the research and other services
provided by various broker-dealer firms, and the results of these efforts are
made available to the equity trading department, which uses this information as
consideration to the extent described above in the selection of brokers to
execute portfolio transactions.
Some services furnished by broker-dealers may be used for research and
investment decision-making purposes, and also for marketing or administrative
purposes. Under these circumstances, the Investment Manager allocates the cost
of the services to determine the proportion which is allocable to research or
investment decision-making and the proportion allocable to other purposes. The
Investment Manager pays directly from its own funds for that portion that is
allocable to uses other than research or investment decision-making. Some
research and execution services may benefit the Investment Manager's clients as
a whole, while others may benefit a specific segment of clients. Not all such
services will necessarily be used exclusively in connection with the accounts
which pay the commissions to the broker-dealer providing the services.
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<PAGE>
The Investment Manager has 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 otherwise.
There may be, however, understandings with certain firms that in order for such
firms to be able to continuously supply certain services, they need to receive
allocation of a specified amount of brokerage business. These understandings are
honored to the extent possible in accordance with the policies set forth above.
It is not the Investment Manager's policy to intentionally pay a firm a
brokerage commission higher than that which another firm would charge for
handling the same transaction in recognition of services (other than execution
services) provided. However, the Investment Manager is aware that this is an
area where differences of opinion as to fact and circumstances may exist, and in
such circumstances, if any, the Investment Manager relies on the provisions of
Section 28(e) of the Securities Exchange Act of 1934. Brokerage commissions paid
by the Fund in secondary trading during the last three fiscal years ended
October 31 were as follows: 1996, $569,761; 1997, $791,999; and 1998, $409,066.
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 Investment Manager follows any instructions received from its
clients as to the allocation of new issue discounts, selling commissions and
designations to brokers or dealers which provide the client with research,
performance evaluation, master trustee and other services. In the absence of
instructions from the client, the Investment Manager may make such allocations
to broker-dealers which have provided the Investment Manager with research
and brokerage services.
In some instances, certain clients of the Investment Manager request it
to place all or part of the orders for their account with certain brokers or
dealers, which in some cases provide services to those clients. The Investment
Manager generally agrees to honor these requests to the extent practicable.
Clients may condition their requests by requiring the Investment Manager only
effect transactions with the specified broker-dealers if the broker-dealers are
competitive as to price and execution. In other cases, the Investment Manager
may be unable to negotiate commissions or obtain volume discounts or best
execution. In addition, a disparity may exist among the commissions charged to
clients who request the Investment Manager to use particular brokers or dealers,
and also between those clients and those who do not make such requests. A client
who requests the use of a particular broker-dealer should understand that it may
lose the possible advantage which non-requesting clients derive from aggregation
of orders for several clients as a single transaction for the purchase or sale
of a particular security. Among other reasons why best execution may not be
achieved with directed brokerage is that, in an effort to achieve orderly
execution of transactions, execution of orders that have designated particular
brokers may, at the discretion
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<PAGE>
of the trading desk, be delayed until execution of other non-designated orders
have been completed.
When more than one client of the Investment Manager is seeking to buy
or sell the same security, the sale or purchase is carried out in a manner which
is considered fair and equitable to all accounts. In allocating investments
among various clients (including in what sequence orders for trades are placed),
the Investment Manager will use its best business judgment and will take into
account such factors as the investment objectives of the clients, the amount of
investment funds available to each, the amount already committed for each client
to a specific investment and the relative risks of the investments, all in order
to provide on balance a fair and equitable result to each client over time.
Although sharing in large transactions may sometimes affect price or volume of
shares acquired or sold, overall it is believed there may be an advantage in
execution. The Investment Manager may follow the practice of grouping orders of
various clients for execution to get the benefit of lower prices or commission
rates. In certain cases where the aggregate order may be executed in a series of
transactions at various prices, the transactions are allocated as to amount and
price in a manner considered equitable to each so that each receives, to the
extent practicable, the average price of such transactions. Exceptions may be
made based on such factors as the size of the account and the size of the trade.
For example, the Investment Manager may not aggregate trades where it believes
that it is in the best interests of clients not to do so, including situations
where aggregation might result in a large number of small transactions with
consequent increased custodial and other transactional costs which may
disproportionately impact smaller accounts. Such disaggregation, depending on
the circumstances, may or may not result in such accounts receiving more or less
favorable execution relative to other clients.
CERTAIN TAX MATTERS
Federal Income Taxation of the Fund-- in General
The Fund intends to qualify and elects to be treated each taxable year
as a "regulated investment company" under Subchapter M of the Internal Revenue
Code of 1986, as amended (the "Code"), although it cannot give complete
assurance that it will qualify to do so. Accordingly, the Fund must, among other
things, (a) derive at least 90% of its gross income in each taxable year from
dividends, interest, payments with respect to securities loans, gains from the
sale or other disposition of stock, securities or foreign currencies, or other
income (including, but not limited to, gains from options, futures or forward
contracts) derived with respect to its business of investing in such stock,
securities or currencies (the "90% test"); and (b) satisfy certain
diversification requirements on a quarterly basis.
If the Fund should fail to qualify as a regulated investment company in
any year, it would lose the beneficial tax treatment accorded regulated
investment companies under Subchapter M of the Code and all of its taxable
income would be subject to tax at regular
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<PAGE>
corporate rates without any deduction for distributions to shareholders, and
such distributions will be taxable to shareholders as ordinary income to the
extent of the Fund's current or accumulated earnings and profits. Also, the
shareholders, if they received a distribution in excess of current or
accumulated earnings and profits, would receive a return of capital that would
reduce the basis of their shares of the Fund to the extent thereof. Any
distribution in excess of a shareholder's basis in the shareholder's shares
would be taxable as gain realized from the sale of such shares.
The Fund will be liable for a nondeductible 4% excise tax on amounts
not distributed on a timely basis in accordance with a calendar year
distribution requirement. To avoid the tax, during each calendar year the Fund
must distribute an amount equal to at least 98% of the sum of its ordinary
income (not taking into account any capital gains or losses 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. The Fund intends to make sufficient distributions
to avoid this 4% excise tax.
Taxation of the Fund's Investments
Original Issue Discount; Market Discount. For federal income tax
purposes, debt securities purchased by the Fund may be treated as having
original issue discount. Original issue discount represents interest for federal
income tax purposes and can generally be defined as the excess of the stated
redemption price at maturity of a debt obligation over the issue price. Original
issue discount is treated for federal income tax purposes as income earned by
the Fund, whether or not any income is actually received, and therefore is
subject to the distribution requirements of the Code. Generally, the amount of
original issue discount is determined on the basis of a constant yield to
maturity which takes into account the compounding of accrued interest. Under
section 1286 of the Code, an investment in a stripped bond or stripped coupon
may result in original issue discount.
Debt securities may be purchased by the Fund at a discount that exceeds
the original issue discount plus previously accrued original issue discount
remaining on the securities, if any, at the time the Fund purchases the
securities. This additional discount represents market discount for federal
income tax purposes. In the case of any debt security 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
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<PAGE>
maintain its status as a regulated investment company under Subchapter M of the
Code or to avoid the 4% excise tax described above.
Options and Futures Transactions. Certain of the Fund's investments may
be subject to provisions of the Code that (i) require inclusion of unrealized
gains or losses in the Fund's income for purposes of the 90% test, and require
inclusion of unrealized gains in the Fund's income for purposes of the excise
tax and the distribution requirements applicable to regulated investment
companies; (ii) defer recognition of realized losses; and (iii) characterize
both realized and unrealized gain or loss as short-term and long-term gain or
loss irrespective of the holding period of the investment. Such provisions
generally apply to, among other investments, options on debt securities, indices
on securities and futures contracts. The Fund will monitor its transactions and
may make certain tax elections available to it in order to mitigate the impact
of these rules and prevent disqualification of the Fund as a regulated
investment company.
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 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.
Taxation of the Fund's 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
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<PAGE>
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 from domestic corporations are not expected to comprise a
substantial part of the income of the Fund. If such dividends are earned by the
Fund, then a portion of the dividends paid by the Fund may qualify for the 70%
deduction for dividends received which is available to corporate shareholders of
the Fund. Shareholders will be informed of any portion of the dividends paid by
the Fund which qualifies for this deduction. The dividends-received deduction is
reduced to the extent the dividends received are treated as debt-financed, under
the Code, and is eliminated if the stock is held for less than 46 days.
Any dividend declared in October, November or December and made payable
to shareholders of record in any such month is treated as received by such
shareholder on December 31, provided that the Fund pays the dividend during
January of the following calendar year.
Distributions by the Fund 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
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<PAGE>
long-term capital gain, even though, from an investment standpoint, it may
constitute a partial return of capital. In particular, investors should be
careful to consider the tax implications of buying shares just prior to a
taxable distribution. The price of shares purchased at that time includes the
amount of any forthcoming distribution. Those investors purchasing shares just
prior to a taxable distribution will then receive a return of investment upon
distribution which will nevertheless be taxable to them.
The foregoing discussion of United States federal income tax law
relates solely to the application of that law to United States persons, that is,
United States citizens and residents and United States corporations,
partnerships, trusts and estates. Each shareholder who is not a United States
person should consider the United States and foreign tax consequences of
ownership of shares of the Fund, including the possibility that such a
shareholder may be subject to United States withholding tax at a rate of up to
30% (or at a lower rate under applicable treaty) on distributions from the Fund.
Shareholders should consult their tax advisers about the application of
the provisions of tax law described in this Statement of Additional Information
in light of their particular tax situations.
DISTRIBUTION OF SHARES OF THE 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(1), 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: 1998, $38,180; 1997, $42,760; and 1996,
$157,855. For the same periods, the Distributor retained the following amounts
after reallowance of concessions to dealers: 1998, $4,692; 1997, $6,794; and
1996, $19,830. The Distributor may also pay its affiliate MetLife Securities,
Inc. additional sales compensation of up to 0.25% of certain sales or assets.
The differences in the price at which the Fund's Class A shares are
offered due to scheduled variations in sales charges, or Class S shares are
offered, as described in the Fund's Prospectus, result from cost savings
inherent in economies of scale among other factors. Management believes that the
cost of sales efforts of the Distributor and broker-dealers tends to decrease as
the size of purchases increases, or does not involve any incremental sales
expenses as in the case of, for example, exchanges, reinvestments or dividend
investments at net asset value. Similarly, no significant sales effort
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<PAGE>
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 special programs, the amount of the sales charge
reduction will similarly reflect the anticipated reduction in sales expenses
associated with such arrangements. The reductions in sales expenses, and
therefore the reduction in sales charges, will vary depending on factors such as
the size and other characteristics of the organization or program, and the
nature of its membership or the participants. The Fund reserves the right to
make variations in, or eliminate, sales charges at any time or to revise the
terms of or to suspend or discontinue sales pursuant to sponsored arrangements
or similar programs at any time.
On any sale of Class A shares to a single investor in the amount of
$1,000,000 or more, the Distributor will pay the authorized securities dealer
making such sale a commission based on the aggregate of such sales. Such
commission also is payable to authorized securities dealers upon sales of Class
A shares made pursuant to a Letter of Intent to purchase shares having a net
asset value of $1,000,000 or more. Shares sold with such commissions payable are
subject to a one-year contingent deferred sales charge of 1.00% on any portion
of such shares redeemed within one year following their sale. After a particular
purchase of Class A shares is made under the Letter of Intent, the commission
will be paid only in respect of that particular purchase of shares. If the
Letter of Intent is not completed, the commission paid will be deducted from any
discounts or commissions otherwise payable to such dealer in respect of shares
actually sold. If an investor is eligible to purchase shares at net asset value
on account of the Right of Accumulation, the commission will be paid only in
respect of the incremental purchase at net asset value.
For the periods shown below, the Distributor received contingent
deferred sales charges upon redemption of Class A, Class B and Class C shares of
the Fund and paid initial commissions to securities dealers for sales of such
Class A, Class B and Class C shares as follows:
<TABLE>
<CAPTION>
Fiscal Year Ended Fiscal Year Ended Fiscal Year Ended
October 31, 1998 October 31, 1997 October 31, 1996
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 $ 33,488 $ 0 $ 35,966 $ 0 $ 138,025
Class B $ 63,293 $ 85,890 $ 117,824 $ 111,491 $ 139,376 $ 413,917
Class C $ 206 $ 2,746 $ 619 $ 4,843 $ 4,578 $ 32,126
</TABLE>
The Fund has adopted a "Plan of Distribution Pursuant to Rule 12b-1"
(the "General Distribution Plan") under which the Fund may engage, directly or
indirectly, in financing any activities primarily intended to result in the sale
of Class A, Class B and Class C shares, including, but not limited to, (1) the
payment of commissions and/or reimbursement to underwriters, securities dealers
and others engaged in the sale of shares, including payments to the Distributor
to be used to pay commissions and/or reimbursement to securities dealers (which
securities dealers may be affiliates of the Distributor) engaged in the
distribution and
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<PAGE>
marketing of shares and furnishing ongoing assistance to investors, (2)
reimbursement of direct out-of-pocket expenditures incurred by the Distributor
in connection with the distribution and marketing of shares and the servicing of
investor accounts and (3) reimbursement of expenses incurred by the Distributor
in connection with the servicing of shareholder accounts including payments to
securities dealers and others in consideration of the provision of personal
service to investors and/or the maintenance or servicing of shareholder
accounts. In addition, the General Distribution Plan is deemed to authorize the
Distributor and the Investment Manager to make payments out of general profits,
revenues or other sources to underwriters, securities dealers and others in
connection with sales of shares, to the extent, if any, that such payments may
be deemed to be within the scope of Rule 12b-1 under the 1940 Act.
The expenditures to be made pursuant to the General Distribution Plan
may not exceed (i) with respect to Class A shares, an annual rate of 0.25% of
the average daily value of net assets represented by such Class A shares, and
(ii) with respect to Class B and Class C shares, an annual rate of 0.75% of the
average daily value of the net assets represented by such Class B or Class C
shares ( as the case may be) to finance sales or promotion expenses and an
annual rate of 0.25% of the average daily value of the net assets represented by
such Class B or Class C shares (as the case may be) to make payments for
personal services and/or the maintenance or servicing of shareholder accounts.
The Fund also has adopted a Rule 12b-1 Plan for Distribution of Shares
(the Share Distribution Plan") under which the Fund shall pay the Distributor
(a) a service fee at the end of each month at the annual rate of 0.25% of
average daily net assets attributable to the Class (B)1 shares to compensate the
Distributor and any securities firms or other third parties who render personal
services to and/or maintain shareholder accounts for the shareholders of the
respective class and (b) a distribution fee at the end of each month at the
annual rate of 0.75% of average daily net assets attributable to the Class B(1)
shares to compensate the Distributor for services provided and expenses incurred
by it in connection with sales, promotional and marketing activities relating to
the respective class. To the extent that any payments made by Fund to the
Distributor or the Investment Manager, including payment of investment
management fees, should be deemed to be an indirect financing of any activity
primarily resulting in the sale of shares of the Fund within the scope of Rule
12b-1 under the 1940 Act, then such payments shall be deemed to be authorized by
the Share Distribution Plan.
A rule of the National Association of Securities Dealers, Inc. ("NASD")
limits annual expenditures that the Fund may incur to 0.75% for distribution
expenses and 0.25% for service fees. The NASD Rule also limits the aggregate
amount that the Fund may pay for such distribution costs to 6.25% of gross share
sales of a class since the inception of any asset-based sales charge plus
interest at the prime rate plus 1% on unpaid amounts thereof (less any
contingent deferred sales charges). Such limitation does not apply to the
service fees. Payments to the Distributor or to dealers funded under either the
General Distribution Plan or the Share Distribution Plan may be discontinued at
any time.
49
<PAGE>
Some or all of the service fees are used to pay or reimburse dealers
(including dealers that are affiliates of the Distributor) or others for
personal services and/or the maintenance of shareholder accounts. A portion of
any initial commission paid to dealers for the sale of shares of the Fund
represents payment for personal services and/or the maintenance or servicing of
shareholder accounts by such dealers. Dealers who have sold Class A shares are
eligible for further reimbursement commencing as of the time of such sale.
Dealers who have sold Class B(1), Class B and Class C shares are eligible for
further reimbursement after the first year during which such shares have been
held of record by such dealer as nominee for its clients (or by such clients
directly). 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 and for other sales and
marketing expenditures.
The Distributor provides distribution services on behalf of other funds
having distribution plans and receives similar payments from, and incurs similar
expenses on behalf of, such other funds. When expenses of the Distributor cannot
be identified as relating to a specific fund, the Distributor allocates expenses
among the funds in a manner deemed fair and equitable to each fund.
The payment of service and distribution fees may continue even if the
Fund ceases, temporarily or permanently, to sell one or more classes of shares
to new accounts. During the period the Fund is closed to new accounts, the
distribution fee will not be used for promotion expenses. The service and
distribution fees are used during a closed period to cover services provided to
current shareholders and to cover the compensation of financial professionals in
connection with the prior sale of Fund shares, among other non-promotional
distribution expenditures.
The Distributor may pay certain dealers and other intermediaries
additional compensation for sales and administrative services. The Distributor
may provide cash and noncash incentives to intermediaries who, for example, sell
significant amounts of shares or develop particular distribution channels. The
Distributor may compensate dealers with clients who maintain their investments
in the Fund over a period of years. The incentives can include merchandise and
trips to, and attendance at, sales seminars at resorts. The Distributor may pay
for administrative services, such as technological and computer systems support
for the maintenance of pension plan participant records, for subaccounting, and
for distribution through mutual fund supermarkets or similar arrangements.
During the fiscal year ended October 31, 1998, the Fund paid the
Distributor fees under the General Distribution Plan and the Distributor used
all of such payments for expenses incurred on behalf of the Fund as follows:
50
<PAGE>
<TABLE>
<CAPTION>
Class A Class B Class C
------- ------- -------
<S> <C> <C> <C>
Advertising $ 0 $ 0 $ 1,148
Printing and mailing of prospectuses to
other than current shareholders 0 0 158
Compensation to dealers 39,090 217,098 16,318
Compensation to sales personnel 0 0 2,533
Carrying or other financing charges 0 0 0
Interest 0 0 0
Other expenses: marketing; general 0 0 1,883
------- -------- -------
Total fees $39,090 $217,098 $22,040
======= ======== =======
</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.
To the extent that the Glass-Steagall Act may be interpreted as
prohibiting banks and other depository institutions from being paid for
performing services under the Distribution Plan, the Fund will make alternative
arrangements for such services for shareholders who acquired shares through such
institutions.
CALCULATION OF PERFORMANCE DATA
From time to time, in advertisements or in communications to
shareholders or prospective investors, the Fund may compare the performance of
its Class A, Class B(1), Class B, Class C or Class S shares to the performance
of other mutual funds with similar investment objectives, to certificates of
deposit 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.
51
<PAGE>
The average annual total return ("standard total return") of the Class
A, Class B(1), Class B, Class C and Class S shares of the Fund will be
calculated as set forth below. Total return 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.
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 standard average annual total return ("standard total return") of
each class of the Fund's shares was as follows:
<TABLE>
<CAPTION>
Commencement
of Operations Five Years One Year
(January 22, 1992) to Ended Ended
October 31, 1998 October 31, 1998 October 31, 1998
---------------- ---------------- ----------------
<S> <C> <C> <C>
Class A 6.22% 2.95% 4.52%
Class B 6.38% 2.82% 3.62%
Class C 6.38% 3.17% 7.62%
Class S 7.13% 4.16% 9.78%
</TABLE>
Standard total return is computed separately for each class of shares
by determining the average annual compounded rates of return over the designated
periods that, if applied to the initial amount invested, would produce the
ending redeemable value in accordance with the following formula:
52
<PAGE>
P(1+T)(n) = ERV
<TABLE>
<S> <C> <C>
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value at the end of the designated period
assuming a hypothetical $1,000 payment made at the beginning of
the designated period
</TABLE>
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(1), Class B, Class C and Class S shares for periods which
end no earlier than the most recent calendar quarter end and which begin twelve
months before, five years before and 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, 1998, without taking sales charges into account, were as
follows:
53
<PAGE>
<TABLE>
<S> <C>
Class A -4.54%
Class B -4.97%
Class C -4.97%
Class S -4.48%
</TABLE>
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
Each of the Investment Portfolio, Statement of Assets and
Liabilities, Statement of Operations and Statement of Changes in Net Assets
included in the Fund's Annual Report to Shareholders as of and for the fiscal
year ended October 31, 1998, including any notes thereto or Report of
Independent Accountants is hereby incorporated by reference from the Fund's
Annual Report, filed with the Securities and Exchange Commission (EDGAR
accession number 0000950146-99-000002.) Shareholder reports are available
without charge upon request. For more information, call the State Street
Research Service Center.
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.
54
