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As filed with the Securities and Exchange Commission on December 11, 1997
Registration No. 333-33831
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [ X]
Pre-Effective Amendment No. 1 [X]
Post-Effective Amendment No. [ ]
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. 1 [X]
BACK BAY FUNDS, INC.
(Exact Name of Registrant as Specified in Charter)
c/o Reich & Tang Asset Management L.P.
600 Fifth Avenue
New York, New York 10020
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code: (212) 830-5220
BERNADETTE N. FINN
Reich & Tang Asset Management L.P.
600 Fifth Avenue
New York, New York 10020
(Name and Address of Agent for Service)
Copy to: MICHAEL R. ROSELLA, Esq.
Battle Fowler LLP
75 East 55th Street
New York, New York 10022
Approximate Date of Proposed Public Offering: As soon as practicable after this
Registration Statement becomes effective.
It is proposed that this filing will become effective: (check appropriate box)
[ ] immediately upon filing pursuant to paragraph (b)
[ ] on (Date) pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)
[ ] on (date) pursuant to paragraph (a) of Rule 485
[ ] 75 days after filing pursuant to paragraph (a)(2)
[ ] on (date) pursuant to paragraph (a)(2) of Rule 485
-1-
619920.3
<PAGE>
BACK BAY FUNDS, INC.
Registration Statement on Form N-1A
-----------------------
CROSS REFERENCE SHEET -
Pursuant to Rule 404(c)
-----------------------
<TABLE>
<CAPTION>
Part A
Item No. Prospectus Heading
<S> <C>
1. Cover Page........................ Cover Page
2. Synopsis.......................... Prospectus Summary; Table of Fees and Expenses
3. Condensed Financial
Information....................... Financial Highlights
4. General Description of
Registrant........................ General Information; Investment Objectives, Policies and
Risks
5. Management of the Fund............ Distribution and Service Plan; Management of the Fund;
Custodian and Transfer Agent
5a. Management's Discussion of
Fund Performance.................. Not Applicable
6. Capital Stock and Other
Securities........................ Description of Shares; How to Purchase and Redeem
Shares; General Information; Dividends, Distributions and
Taxes
7. Purchase of Securities Being
Offered........................... How to Purchase and Redeem Shares; Distribution and
Service Plan; Net Asset Value
8. Redemption or Repurchase.......... How to Purchase and Redeem Shares
9. Legal Proceedings................. Not Applicable
</TABLE>
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619920.3
<PAGE>
<TABLE>
<CAPTION>
Part B
Item No. Caption in Statement of Additional Information
<S> <C>
10. Cover Page........................ Cover Page
11. Table of Contents................. Table of Contents
12. General Information and
History........................... Manager; Management of the Fund
13. Investment Objectives and
Policies.......................... Investment Objectives, Policies and Risks
14. Management of the Registrant...... Manager; Management of the Fund
15. Control Persons and
Principal Holders of
Securities........................ Management of the Fund; Description of Shares
16. Investment Advisory and
Other Services.................... Manager; Expense Limitation, Management of the Fund;
Distribution and Service Plan; Custodian and Transfer
Agent
17. Brokerage Allocation.............. Portfolio Transactions
18. Capital Stock and Other
Securities........................ Description of Shares
19. Purchase, Redemption and
Pricing of Securities
Being Offered..................... How to Purchase and Redeem Shares; Net Asset Value
20. Tax Status........................ Dividends, Distributions and Taxes
21. Underwriters...................... Distribution and Service Plan
22. Calculations of Yield............. Performance Information
23. Financial Statements.............. Independent Auditor's Report; Statement of Net Assets and
Liabilities; Notes to Financial Statements
</TABLE>
-3-
619920.3
<PAGE>
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BACK BAY FUNDS, INC. 600 FIFTH AVENUE
NEW YORK, N.Y. 10020
212-830-5200
PROSPECTUS
December __, 1997
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Back Bay Funds Inc. (the "Fund") is an open-end, diversified management
investment company currently comprised of the Total Return Bond Fund (the
"Portfolio"). The Portfolio's investment objective is to seek to maximize total
return. The generation of income is a secondary objective. There is no assurance
that these objectives will be achieved. The Portfolio will seek to achieve its
objectives by investing primarily in higher quality, fixed and floating-rate
debt instruments. There are no sales loads or redemption fees associated with
the Portfolio.
The Portfolio offers three classes of shares to retirement plan investors. The
Class A shares of the Portfolio are available to corporate, institutional and
individual investors ("Institutional Investors") and either are sold directly to
Institutional Investors or are sold through financial intermediaries that do not
receive compensation from the Manager or Distributor. The Class B shares of the
Portfolio are subject to a service fee pursuant to the Portfolio's Rule 12b-1
Distribution and Service Plan (the "12b-1 Plan") and are sold through financial
intermediaries who provide servicing to Class B shareholders for which they
receive compensation from the Manager or the Distributor. The Class C shares of
the Portfolio are available to qualified retirement plan clients of life
insurance companies ("Insurance Company Investors") and, as are the Class B
shares, the Class C shares are subject to a service fee pursuant to the
Portfolio's 12b-1 Plan and [either are sold directly to Insurance Company
Investors or] are sold through financial intermediaries who provide servicing to
Class C shareholders for which they receive compensation from the Manager or
Distributor. Unlike the Class B and Class C shares, the Class A shares are not
subject to a service fee. In all other respects, the Class A, Class B and Class
C shares represent the same interest in the income and assets of the Portfolio.
See "Description of Shares."
This Prospectus sets forth concisely the information about the Portfolio that
prospective investors will find helpful in making their investment decisions.
Additional information about the Portfolio, including additional information
concerning risk factors relating to an investment in the Portfolio, has been
filed with the Securities and Exchange Commission ("SEC") and is available upon
request and without charge by calling or writing the Portfolio at the above
address. The "Statement of Additional Information" bears the same date as this
Prospectus and is incorporated by reference into this Prospectus in its
entirety. The SEC maintains a web site (http://www.sec.gov) that contains the
Statement of Additional Information and other reports and information regarding
the Portfolio which have been filed electronically with the SEC. This Prospectus
should be read and retained by investors for future reference.
Back Bay Advisors, L.P. acts as Manager of the Portfolio and Reich & Tang
Distributors L.P. acts as Distributor of the Fund's shares. Back Bay Advisors,
L.P. is a registered investment adviser. Reich & Tang Distributors L.P. is a
registered broker-dealer and member of the National Association of Securities
Dealers, Inc.
MINIMUM INITIAL PURCHASE $1,000,000
Shares in the Portfolio are not deposits or obligations of, or guaranteed or
endorsed by, any bank, and the shares are not federally insured by the Federal
Deposit Insurance Corporation, the Federal Reserve Board, or any other agency.
---------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE. SHARES OF THE FUND ARE NOT BEING OFFERED VIA THE INTERNET TO
RESIDENTS OF PARTICULAR STATES.
613115.9
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<PAGE>
<TABLE>
<CAPTION>
TABLE OF FEES AND EXPENSES
Estimated Annual Portfolio Operating Expenses
(as a percentage of average net assets)
Total Return
Portfolio
--------------------------------------------------------------
<S> <C> <C> <C>
Class A Class B Class C
Management Fees - After fee waiver .085% .085% .085%
12b-1 Fees None .25% .25%
Other Expenses .315% .315% .465%
Administration Fees .15% .15% .15%
Total Portfolio Operating Expenses - After fee waivers .40% .65% .80%
Total Return Portfolio
---------------------------------------
Class A Class B Class C
EXAMPLE
You would pay the following expenses on a $1,000 investment, 1 year $4 $7 $8
assuming 5% annual return and redemption at the end of each time 3 years $13 $21 $26
period:
</TABLE>
________________________________________________________________________________
The purpose of the above fee table is to assist an investor in understanding the
various costs and expenses that an investor in the Portfolio will bear both
directly or indirectly. Also, financial intermediaries may impose fees in
connection with the purchase and redemption procedures offered to investors by
such organizations. (See "Investments through Participating Organizations"
herein). The Manager and the Administrator at their discretion may voluntarily
waive all or a portion of the Management Fees and Administration Fees and to
voluntarily reimburse the Portfolio's other operating expenses to the extent
necessary to maintain the Total Portfolio Operating Expenses at not more than
.40%, .65% and .80% of the Portfolio's average net assets with respect to the
Class A, B and C shares, respectively. However, waivers of management and other
non-class expenses, if any, will be made in the same proportion for all classes
of the Portfolio. The Distributor at its discretion may voluntarily waive all or
a portion of the 12b-1 Fee. Absent such waivers, the Management Fee will be .35%
of average daily net assets and the Total Portfolio Operating Expenses are
anticipated to be .665%, .915% and 1.065% for Classes A, B and C, respectively .
The expenses shown are at the levels anticipated for the current year. For a
further discussion of these fees see "Management of the Portfolio" and
"Distribution and Service Plan" herein.
The figures reflected in this example should not be considered to be a
representation of past or future expenses. Actual expenses may be greater or
less than those shown above.
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PROSPECTUS SUMMARY
The Back Bay Funds Inc. (the "Fund") is an open-end, diversified management
investment company currently comprised of the Total Return Bond Fund (the
"Portfolio"). The Portfolio's investment objective is to seek to maximize total
return. The generation of income is a secondary objective. There is no assurance
that these objectives will be achieved. Since the Fund is created for tax-exempt
retirement plans, the tax consequences of portfolio activity are not an
investment consideration. The Portfolio will seek to achieve its objectives by
investing primarily in higher quality, fixed and floating-rate debt instruments.
613115.9
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<PAGE>
Since the Portfolio attempts to achieve its objectives by investing primarily in
higher quality, fixed and floating-rate debt instruments, at least 80% of its
total assets will be invested in investment grade debt instruments issued by
corporations based in the United States and abroad, (i.e., rated within one of
the four highest ratings categories by a nationally recognized statistical
rating organization ("NRSRO"), e.g., BBB or higher by Standard & Poor's Rating
Services, a division of The McGraw-Hill Companies, Inc. ("S&P") or Baa or higher
by Moody's Investor Services, Inc. ("Moody's") or BBB or higher by Fitch
Investors Services, Inc. ("Fitch") or Duff & Phelps Credit Rating Co. ("Duff &
Phelps"). The lowest grade of the investment grade securities may have
speculative characteristics. With respect to the 80% of the Portfolio's total
assets which will be invested in investment grade debt instruments issued by
corporations based in the United States and abroad, no more than 10% of the
Portfolio's total assets may be invested in non-dollar denominated foreign
obligations issued by corporations and/or governments and agencies thereof. In
addition, the Manager expects to maintain a duration to within one and one half
years of the duration of the Lehman Aggregate Index.
No more than 20% of the total assets of the Portfolio may be invested in
instruments which are below investment grade quality. With respect to the
investment allocation to below investment grade quality securities of the
Portfolio, the Portfolio must be invested in instruments which are rated B or
higher by at least two NRSROs. However, under normal market conditions, the
Manager anticipates purchasing instruments that are rated at least BB or BA by a
NSRSO.
The percentage limitations referred to above apply at the time an investment is
made by the Portfolio. If a security is downgraded subsequent to its purchase by
the Portfolio, the Manager will consider whether the investment remains
appropriate for the Portfolio, even if retention would cause the Portfolio to
exceed these percentage limitations.
The Portfolio may invest in preferred stock, convertible securities, Rule 144A
debt, U.S. Government Securities and securities issued or guaranteed by foreign
governments (including their political subdivisions, agencies, authorities
and/or instrumentalities) ("Foreign Government Securities") and securities
issued by supranational agencies. The Portfolio may also invest in mortgage pass
through securities including, collateralized mortgage obligations, adjustable
rate mortgages, commercial mortgage backed securities, and "stripped" securities
evidencing individual ownership interests in interest payments or principal
payments, or both. If an investment rated BBB or Baa is downgraded by a
nationally recognized statistical rating organization, the Portfolio's Manager
will consider whether the investment remains appropriate for the Portfolio. The
Portfolio may invest in securities of any maturity and the Portfolio may invest
in zero coupon securities.
The Fund's investment manager is Back Bay Advisors, L.P. (the "Manager"), a
registered investment adviser. (See "Management of the Fund" herein.) The
Portfolio's shares are distributed through Reich & Tang Distributors L.P. (the
"Distributor"), with whom the Portfolio has entered into a Distribution
Agreement and Shareholder Servicing Agreement (with respect to Class B and C
shares of the Portfolio only) pursuant to the Portfolio's distribution and
service plan adopted under Rule 12b-1 under the Investment Company Act of 1940,
as amended (the "1940 Act"). (See "Distribution and Service Plan" herein.)
On any day on which the New York Stock Exchange, Inc. and Investors Fiduciary
Trust Company, the Fund's custodian, are open for trading ("Fund Business Day"),
investors may initiate purchases and redemptions of shares of the Portfolio's
common stock at their net asset value, which will be determined daily. (See "How
to Purchase and Redeem Shares" and "Net Asset Value" herein.) Shares of the
Portfolio may be purchased only in those states where they may lawfully be sold.
The Portfolio currently intends to pay dividends, if any, monthly. Net capital
gains, if any, will be distributed annually, and in no event later than within
60 days after the end of the Fund's fiscal year. All dividends and distributions
of capital gains are automatically invested in additional shares of the same
class of the Portfolio unless a shareholder has elected by written notice to the
Fund to receive either of such distributions in cash. (See "Dividends,
Distributions and Taxes" herein.)
The Fund currently has one Portfolio. The Board of Directors of the Portfolio
may in the future determine to establish additional portfolios. Set forth below
are the Portfolio's investment objectives and policies. The investment policies
for the Portfolio, as well as for any portfolios which the Board of Directors
may determine to establish in the future, may be changed by the Board of
Directors of the Portfolio without shareholder approval. The investment
objectives for the Portfolio may not be changed without shareholder approval.
613115.9
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<PAGE>
An investment in the Portfolio of the Fund entails certain risks, including
risks associated with the purchase of restricted securities, non-rated and
lower-rated bonds, when-issued securities, foreign securities, mortgage-related
securities and "stripped securities." The Portfolio may invest in securities
with a below investment grade rating which are considered to be speculative
investments. In addition, the Portfolio may use various investment management
techniques that also involve special consideration, including options, futures,
swap contracts and currency transactions. Risk factors for the Portfolio are
further described under "Risk Factors and Additional Investment Information"
herein.
INVESTMENT OBJECTIVES, POLICIES AND RISKS
Total Return Bond Fund
The Fund is an open-end, diversified management investment company currently
comprised of the Total Return Bond Fund (the "Portfolio"). The Portfolio's
investment objective is to seek to maximize total return. The generation of
income is a secondary objective. There is no assurance that these objectives
will be achieved. The investment objective of the Portfolio, which is described
herein, is fundamental and may not be changed without shareholder approval.
Since the Fund is created for tax-exempt retirement plans, the tax consequences
of portfolio activity are not an investment consideration. The Portfolio will
seek to achieve its objectives by investing primarily in higher quality, fixed
and floating-rate debt instruments.
Since the Portfolio attempts to achieve its objectives by investing primarily in
higher quality, fixed and floating-rate debt instruments, at least 80% of its
total assets will be invested in investment grade debt instruments issued by
corporations based in the United States and abroad, (i.e., rated within one of
the four highest ratings categories by a nationally recognized statistical
rating organization, e.g., BBB or higher by Standard & Poor's Rating Services, a
division of The McGraw-Hill Companies, Inc. ("S&P") or Baa or higher by Moody's
Investor Services, Inc. ("Moody's") or BBB or higher by Fitch Investors
Services, Inc. ("Fitch") or Duff & Phelps Credit Rating Co. ("Duff & Phelps").
The lowest grade of the investment grade securities may have speculative
characteristics. With respect to the 80% of the Portfolio's total assets which
will be invested in investment grade debt instruments issued by corporations
based in the United States and abroad, no more than 10% of the Portfolio's total
assets may be invested in non-dollar denominated foreign obligations issued by
corporations and/or governments and agencies thereof.
No more than 20% of the total assets of the Portfolio may be invested in
instruments which are below investment grade quality. With respect to the
investment allocation of the below investment grade quality securities of the
Portfolio, as a percentage of the total net assets, at least 15% of the total
assets of the Portfolio must be invested in instruments which are rated with the
highest below investment grade rating ("BB" or "Ba", respectively). Further, no
more than 5% of the total assets may have a split rating of "B/BB" or Ba/B."
Additionally, no more than 5% of the total net assets may be invested in dollar
denominated emerging market debt.
The Portfolio may invest in preferred stock, convertible securities, Rule 144A
debt, U.S. Government Securities and securities issued or guaranteed by foreign
governments (including their political subdivisions, agencies, authorities
and/or instrumentalities) ("Foreign Government Securities") and securities
issued by supranational agencies. The Portfolio may also invest in mortgage pass
through securities including, collateralized mortgage obligations, adjustable
rate mortgages, commercial mortgage backed securities, and "stripped" securities
evidencing individual ownership interests in interest payments or principal
payments, or both. If an investment rated BBB or Baa is downgraded by a major
rating agency, the Portfolio's Manager will consider whether the investment
remains appropriate for the Portfolio. The Portfolio may invest in securities of
any maturity and the Portfolio may invest in zero coupon securities.
The Portfolio may engage in a variety of options and futures transactions with
respect to U.S. or Foreign Government Securities and corporate fixed-income
securities. See "Risk Factors and Additional Investment Information - Options,
Futures, Swap Contracts and Currency Transactions" for information about these
kinds of transactions.
613115.9
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<PAGE>
Risk Factors and Additional Investment Information
Fixed Income Securities: The Portfolio invests principally in fixed-income
securities. Because interest rates vary, it is impossible to predict the income
of the Portfolio for any particular period. The net asset value of the Portfolio
shares will vary as a result of changes in the value of the bonds and other
securities in the Portfolio.
Fixed-income securities include a broad array of short, medium and long term
obligations issued by the U.S. or foreign governments, government or
international agencies and instrumentalities, and corporate issuers of various
types. Some fixed-income securities represent uncollateralized obligations of
their issuers; in other cases, the securities may be backed by specific assets
(such as mortgages or other receivables) that have been set aside as collateral
for the issuer's obligation. Fixed-income securities generally involve an
obligation of the issuer to pay interest or dividends on either a current basis
or at the maturity of the securities, as well as the obligation to repay the
principal amount of the security at maturity.
Fixed-income securities are subject to market and credit risk. Credit risk
relates to the ability of the issuer to make payments of principal and interest.
In the case of municipal bonds, the issuer may make these payments from money
raised through a variety of sources, including (1) the issuer's general taxing
power, (2) a specific type of tax such as a property tax, or (3) a particular
facility or project such as a highway. The ability of an issuer of municipal
bonds to make these payments could be affected by litigation, legislation or
other political events, or the bankruptcy of the issuer. U.S. Government
Securities do not involve the credit risks associated with other types of
fixed-income securities; as a result, the yields available from U.S. Government
Securities are generally lower than the yields available from corporate
fixed-income securities. Market risk is the risk that the value of the security
will fall because of changes in market rates of interest. (Generally, the value
of fixed-income securities falls when market rates of interest are rising.) Some
fixed-income securities also involve prepayment or call risk. Prepayment or call
risk both involve the risk that the issuer will repay the Portfolio the
principal on the security before it is due, thus depriving the Portfolio of a
favorable stream of future interest payments.
Because interest rates vary, it is impossible to predict the income of a fund
that invests in fixed-income securities for any particular period. Fluctuations
in the value of the Portfolio's investments in fixed-income securities will also
cause the Portfolio's net asset value to increase or decrease.
Convertible Securities: The convertible securities in which the Portfolio may
invest include any debt securities or preferred stock which may be converted
into common stock or which carry the right to purchase common stock. Convertible
securities entitle the holder to exchange the securities for a specified number
of shares of common stock, usually of the same company, at specified prices
within a certain period of time. Convertible securities generally have paid
dividends or interest at rates higher than common stocks but lower than
non-convertible securities. They usually participate to a lesser degree in the
appreciation or other depreciation of the underlying stock into which they are
convertible. Changes in economic conditions or other circumstances are more
likely to lead to weakened capacity to make principal and interest payments than
higher rated bonds.
United States and Foreign Government Securities: Short-term obligations issued
or guaranteed by the United States Government, its agencies or
instrumentalities. These include issues of the United States Treasury, such as
bills, certificates of indebtedness, notes and bonds, and issues of agencies and
instrumentalities established under the authority of an act of Congress. Some of
these securities are supported by the full faith and credit of the United States
Treasury, others are supported by the right of the issuer to borrow from the
Treasury, and still others are supported only by the credit of the agency or
instrumentality. Although obligations of federal agencies and instrumentalities
are not debts of the United States Treasury, in some cases payment of interest
and principal on such obligations is guaranteed by the United States Government,
e.g., obligations of the Federal Housing Administration, the Export-Import Bank
of the United States, the Small Business Administration, the Government National
Mortgage Association, the General Services Administration and the Maritime
Administration; in other cases payment of interest and principal is not
guaranteed, e.g., obligations of the Federal Home Loan Bank System and the
Federal Farm Credit Bank.
613115.9
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<PAGE>
Obligations of foreign governmental entities include obligations issued or
guaranteed by governments with taxing power or by their agencies. Some Foreign
Government Securities are supported by the full faith and credit of a foreign
national government or political subdivision (such as a province of Canada) and
some are not. For example, Foreign Government Securities include securities
issued by corporations which have been charged with a public purpose and a
majority of whose outstanding equity securities are owned by a foreign
government or government agency. Such Securities may be supported only by the
credit of the issuing corporation and not by that of the government or agency.
Foreign and Emerging Market Securities: Foreign Government Securities and
foreign corporate securities present risks not associated with investments in
U.S. Government or corporate securities.
Since most foreign securities are denominated in foreign currencies or traded
primarily in securities markets in which settlements are made in foreign
currencies, the value of these investments and the net investment income
available for distribution to shareholders of a Fund may be affected favorably
or unfavorably by changes in currency exchange rates or exchange control
regulations. Because the Portfolio may purchase securities denominated in
foreign currencies, a change in the value of any such currency relative to the
U.S. dollar will result in a change in the U.S. dollar value of the Fund's
assets and the Fund's income available for distribution.
In addition, although the Portfolio's income may be received or realized in
foreign currencies, the Portfolio will be required to compute and distribute its
income in U.S. dollars. Therefore, if the value of a currency relative to the
U.S. dollar declines after the Portfolio's income has been earned in that
currency, translated into U.S. dollars and declared as a dividend, but before
payment of such dividend, the Portfolio could be required to liquidate portfolio
securities to pay such dividend. Similarly, if the value of a currency relative
to the U.S. dollar declines between the time the Portfolio incurs expenses in
U.S. dollars and the time such expenses are paid, the amount of such currency
required to be converted into U.S. dollars in order to pay such expenses in U.S.
dollars will be greater than the equivalent amount in such currency of such
expenses at the time they were incurred.
There may be less information publicly available about a foreign corporate or
government issuer than about an U.S. issuer, and foreign corporate issuers are
not generally subject to accounting, auditing and financial reporting standards
and practices comparable to those in the United States. The securities of some
foreign issuers are less liquid and at times more volatile than securities of
comparable U.S. issuers. Foreign brokerage commission and other fees in some
circumstances may be higher than in the United States. With respect to certain
foreign countries, there is a possibility of expropriation of assets,
confiscatory taxation, political or financial instability and diplomatic
developments that could affect the value of investments in those countries. The
receipt of interest on foreign government securities may depend on the
availability of tax or other revenues to satisfy the issuer's obligations. The
Portfolio may have limited legal recourse should a foreign government be
unwilling or unable to repay the principal or interest owed.
The Portfolio may also invest in the securities of emerging markets. Investments
in emerging markets include investments in countries whose economies and /or
securities markets are not yet highly developed. Special considerations
associated with these investments (in addition to the considerations regarding
foreign investments as discussed above) may include, among others, greater
political uncertainties, an economy's dependence on revenues from particular
commodities or on international aid or development assistance, currency transfer
restrictions, highly limited numbers of potential buyers for such securities and
delays and disruptions in security settlement procedures.
In addition, the Portfolio may invest in securities issued by supranational
agencies. Supranational agencies are those agencies whose member nations
determine to make capital contributions to support the agencies' activities, and
include such entities as the International Bank of Reconstruction and
Development (the World Bank), the Asian Development Bank, the European Coal and
Steel Community and the Inter-American Development Bank.
Portfolio securities which are listed on foreign exchanges may be traded on days
that the Portfolio does not value its securities, such as Saturdays and the
customary United States business holidays on which the New
613115.9
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<PAGE>
York Stock Exchange ("NYSE") is closed. As a result, the net asset value of the
shares of the Portfolio may be significantly affected on days when shareholders
do not have access to the Fund.
In determining whether to invest in securities of foreign issuers, the Manager
will consider the likely effects of foreign taxes on the net yield available to
the Portfolio and its shareholders. Compliance with foreign tax law may reduce
the Portfolio's net income available for distribution to shareholders.
Foreign Currency Exchange Transactions: Since the Portfolio may invest in
securities that are denominated in foreign currencies or traded in foreign
markets, the Portfolio may engage in related foreign currency exchange
transactions to protect the value of specific portfolio positions or in
anticipation of changes in relative values of currencies in which current or
future portfolio holdings are denominated or quoted.
The Portfolio may also engage in transactions in currency forward contracts. A
currency forward contract is a contract that obligates parties to the contract
to exchange specified amounts of different currencies at a specified future
date. For example, a party may agree to deliver a specified number of French
francs, in exchange for a specified number of U.S. dollars on a certain date.
From time to time, a portion of the Portfolio's assets may invested in
securities that are denominated in foreign currencies or that are traded in
markets where purchase or sale transactions settle in a foreign currency.
Currency forward contracts may be used both (1) to facilitate settlement of the
Portfolio's transactions in these securities and (2) to hedge against possible
adverse changes in the relative values of the currencies in which the
Portfolio's holdings (or intended future holdings) are denominated.
Currency forward contracts involve transaction costs and the risk that the banks
with which a fund enters into such contracts will fail financially. The Manager
will, however, monitor the creditworthiness of these banks on an ongoing basis.
Successful use of currency forward contracts for hedging purposes also depends
on the accuracy of the Manager's forecasts as to future changes in the relative
values of currencies. The accuracy of such forecasts cannot be assured. The Fund
will set aside with its custodian certain assets to provide for satisfaction of
its obligations under currency forward contracts.
Although the Portfolio is permitted to use currency forward contracts, it is not
obligated to do so. Thus, the Portfolio will not necessarily be fully (or even
partially) hedged against the risk of adverse currency price movements at any
given time.
Foreign currency transaction involve costs and may result in losses. See the
Statement of Additional Information for more information.
Lower Rated Fixed-Income Securities: Fixed-income securities rated BB or lower
by S&P or Ba or lower by Moody's (and comparable unrated securities) are of
below "investment grade" quality. Lower quality fixed-income securities
generally provide higher yields, but are subject to greater credit and market
risk, than higher quality fixed-income securities, including U.S. Government and
many Foreign Government Securities. Lower quality fixed-income securities are
considered predominantly speculative with respect to the ability of the issuer
to meet principal and interest payments. Achievement of the investment objective
of a mutual fund investing in lower quality fixed-income securities may be more
dependent on the fund's adviser's or subadviser's own credit analysis than for a
fund investing in higher quality bonds. The market for lower quality
fixed-income securities may be more severely affected than some other financial
markets by economic recession or substantial interest rate increases, by
changing public perceptions of this market or by legislation that limits the
ability of certain categories of financial institutions to invest in these
securities. In addition, the secondary market may be less liquid for lower rated
fixed income securities. The lack of liquidity at certain times may affect the
valuation of these securities and may make the valuation and sale of these
securities more difficult. Securities of below investment grade quality are
considered high yield, high risk securities and are commonly known as "junk
bonds." For more information, including a detailed description of the ratings
assigned by S&P, Moody's, Fitch and Duff & Phelps, please refer to the Statement
of Additional Information's Appendix A - Description of Bond Ratings."
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Mortgage-Related Securities: Mortgage-related securities, such as GNMA or FNMA
certificates, differ from traditional debt securities. Among the major
differences are that interest and principal payments are made more frequently,
usually monthly, and that principal may be prepaid at any time because the
underlying mortgage loans generally may be prepaid at any time. As a result, if
the Portfolio purchases these assets at a premium, a faster-than-expected
prepayment rate will reduce yield to maturity, and a slower-than- expected
prepayment rate will have the opposite effect of increasing yield to maturity.
If the Portfolio purchases mortgage-related securities at a discount,
faster-than-expected prepayments will increase, and slower-than-expected
prepayments will reduce, yield to maturity. Prepayments, and resulting amounts
available for reinvestment by the Portfolio, are likely to be greater during a
period of declining interest rates and, as a result, are likely to be reinvested
at lower interest rates. Accelerated prepayments on securities purchased at a
premium may result in a loss of principal if the premium has not been fully
amortized at the time of prepayment. Although these securities will decrease in
value as a result of increases in interest rates generally, they are likely to
appreciate less than other fixed-income securities when interest rates decline
because of the risk of prepayments. In addition, an increase in interest rates
would also increase the inherent volatility of the Portfolio by increasing the
average life of the portfolio securities.
An ARM, like a traditional mortgage security, is an interest in a pool of
mortgage loans that provides investors with payments consisting of both
principal and interest as mortgage loans in the underlying mortgage pool are
paid off by the borrowers. ARMs have interest rates that are reset at periodic
intervals, usually by reference to some interest rate index or market interest
rate. Although the rate adjustment feature may act as a buffer to reduce sharp
changes in the value of adjustable rate securities, these securities are still
subject to changes in value based on changes in market interest rates or changes
in the issuer's creditworthiness. Because the interest rates are reset only
periodically, changes in the interest rate on ARMs may lag behind changes in
prevailing market interest rates. Also, some ARMs (or the underlying mortgages)
are subject to caps or floors that limit the maximum change in interest rate
during a specified period or over the life of the security. As a result, changes
in the interest rate on an ARM may not fully reflect changes in prevailing
market interest rates during certain periods. Because of the resetting of
interest rates, ARMs are less likely than non-adjustable rate securities of
comparable quality and maturity to increase significantly in value when market
interest rates fall.
Commercial Mortgage Backed Securities: Commercial Mortgage Backed Securities are
generally multi- class debt or pass-through securities backed by a mortgage loan
or pool of mortgage loans secured by commercial property, such as industrial and
warehouse properties, office buildings, retail centers and shopping malls,
multi-family properties and cooperative apartments, hotels and motels, nursing
homes, hospitals, senior living centers, manufactured living communities and
mobile home parks. Assets underlying Commercial Mortgage Backed Securities may
relate to many properties, only a few properties, or to a single property.
Investments in Commercial Mortgage Backed Securities involve the credit risk of
delinquency and default. Delinquency refers to interruptions in the payment of
interest and principal. Default refers to the potential for unrecoverable
principal loss from the sale of foreclosed property. These risks include the
risks inherent in the commercial mortgage loans which support such Commercial
Mortgage Backed Securities and the risks associated with direct ownership of
real estate. This may be especially true in the case of Commercial Mortgage
Backed Securities secured by, or evidencing an interest in, a relatively small
or less diverse pool of commercial mortgage loans. The factors contributing to
these risks include the effects of general and local economic conditions on real
estate values, the conditions of specific industry segments, the ability of
tenants to make lease payments and the ability of a property to attract and
retain tenants, which in turn may be affected by local conditions such as
oversupply of space or a reduction of available space, the ability of the owner
to provide adequate maintenance and insurance, changes in management of the
underlying commercial property, energy costs, government regulations with
respect to environmental, zoning, rent control, bankruptcy and other matters,
real estate and other taxes, and prepayments of the underlying commercial
mortgage loans (although such prepayments generally occur less frequently than
prepayments on residential mortgage loans).
Collateralized Mortgage Obligations: A CMO is a security backed by a portfolio
of mortgages or mortgage securities held under an indenture. The underlying
mortgages or mortgage securities are issued or guaranteed by the U.S. Government
or an agency or instrumentality thereof. The issuer's obligation to make
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interest and principal payments is secured by the underlying portfolio of
mortgages or mortgage securities. CMOs are issued with a number of classes or
series which have different maturities and which may represent interests in some
or all of the interest or principal on the underlying collateral or a
combination thereof. CMOs of different classes are generally retired in sequence
as the underlying mortgage loans in the mortgage pool are repaid. In the event
of sufficient early prepayments on such mortgages, the class or series of CMO
first to mature generally will be retired prior to its maturity. Thus, the early
retirement of a particular class or series of CMO held by the Portfolio would
have the same effect as the prepayment of mortgages underlying a mortgage
pass-through security. CMOs may be considered derivative securities.
"Stripped" Securities: Stripped securities are usually structured with two or
more classes that receive different proportions of the interest and principal
distribution from a pool of U.S. or Foreign Government Securities or mortgage
assets. In some cases, one class will receive all of the interest (the
interest-only or "IO" class), while the other class will receive all of the
principal (the principal-only or "PO" class). Stripped securities commonly have
greater market volatility than other types of fixed-income securities. In the
case of stripped mortgage securities, if the underlying mortgage assets
experience greater than anticipated payments of principal, the Portfolio may
fail to recoup fully its investments in IOs. The cash flows and yields on IO and
PO Classes are extremely sensitive to the rate of principal payments (including
prepayments) on the related underlying mortgage assets. For example, a rapid or
slow rate of principal payments may have a material adverse effect on the yield
to maturity of IOs and POs, respectively. If the underlying mortgage assets
experience greater than anticipated prepayments of principal, an investor may
fail to recoup fully its initial investment in an IO class even if the IO class
is rated AAA or Aaa. Conversely, if the underlying mortgage assets experience
slower than anticipated prepayments of principal, the yield on a PO class will
be affected more severely than would be the case with a traditional
mortgage-backed security. The staff of the SEC has indicated that it views
stripped mortgage securities as illiquid unless the securities are issued by the
U.S. Government or its agencies and are backed by fixed-rate mortgages. The
Portfolio intends to abide by the staff's position. As a result of illiquidity,
the Portfolio may not be able to sell these instruments when the Manager
considers it desirable to do so or may have to sell them at a price lower than
could be obtained if they were more liquid. These factors may have an adverse
impact on net asset value. Also, the sale of illiquid securities may require
more time and result in higher brokerage charges or dealer discounts and other
selling expenses than does the sale of securities eligible for trading on
national securities exchanges or in over-the-counter markets. Stripped
securities may be considered derivative securities.
Zero Coupon Securities: Zero coupon securities are issued at a significant
discount from face value and pay interest only at maturity, rather than at
intervals during the life of the security. The prices of zero coupon securities
may react more strongly to changes in interest rates than the prices of many
other securities. The Portfolio is required to accrue and distribute income from
zero coupon securities on a current basis, even though the Portfolio will not
receive the income currently in cash. Thus, the Portfolio may have to sell other
investments to obtain cash needed to make income distributions.
Options, Futures, Swap Contracts and Currency Transactions: The Portfolio may
engage in a variety of transactions involving the use of exchange traded options
and futures with respect to U.S. or Foreign Government Securities, corporate
fixed-income securities or municipal bonds or indices thereof for purposes of
hedging against changes in interest rates.
The Portfolio may buy, sell or write options on securities, securities indexes,
currencies or futures contracts. The Portfolio may buy and sell futures
contracts on securities, securities indexes or currencies. The Portfolio may
also enter into swap contracts. The Portfolio may engage in these transactions
either for the purpose of enhancing investment return only against a "covered"
position of the Portfolio or to hedge against changes in the value of other
assets that the Portfolio owns or intends to acquire. The Portfolio may also
conduct foreign currency exchange transactions on a spot (i.e., cash) basis at
the spot rate prevailing in the foreign currency exchange market. Options,
futures and swap contracts fall into the broad category of financial instruments
known as "derivatives" and involve special risks. Use of options, futures or
swaps for other than hedging purposes may be considered a speculative activity,
involving greater risks than are involved in hedging.
Options can generally be classified as either "call" or "put" options. There are
two parties to a typical options transaction: the "writer" and the "buyer." A
call option gives the buyer the right to buy a security or other
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asset (such as an amount of currency or a futures contract) from, and a put
option the right to sell a security or other asset to, the option writer at a
specified price, on or before a specified date. The buyer of an option pays a
premium when purchasing the option, which reduces the return on the underlying
security or other asset if the option is exercised, and results in a loss if the
option expires unexercised. The writer of an option receives a premium from
writing an option, which may increase its return if the option expires or is
closed out at a profit. If the Portfolio as the writer of an option is unable to
close out an unexpired option, it must continue to hold the underlying security
or other asset until the option expires, to "cover" its obligations under the
option.
A futures contract creates an obligation by the seller to deliver and the buyer
to take delivery of the type of instrument or cash at the time and in the amount
specified in the contract. Although many futures contracts call for the delivery
(or acceptance) of the specified instrument, futures are usually closed out
before the settlement date through the purchase (or sale) of a comparable
contract. If the price of the sale of the futures contract by the Fund exceeds
(or is less than) the price of the offsetting purchase, the Portfolio will
realize a gain (or loss). The Portfolio may not purchase or sell futures
contracts or purchase related options if immediately thereafter the sum of the
amount of deposits for initial margin or premiums on the existing futures and
related options positions would exceed 5% of the market value of the Portfolio's
net assets. Transactions in futures and related options involve the risks of (1)
imperfect correlation between the price movement of the contracts and the
underlying securities, (2) significant price movement in one but not the other
market because of different hours, (3) the possible absence of a liquid
secondary market at any point in time. If the subadviser's prediction on
interest rates or other economic factors is inaccurate, the Fund may be worse
off than if it had not hedged. Futures transactions involve potentially
unlimited risk of loss.
The Portfolio may enter into interest rate, currency and securities index swaps.
The Portfolio will enter into these transactions primarily to seek to preserve a
return or spread on a particular investment or portion of its portfolio, to
protect against currency fluctuations, as a duration management technique, or to
protect against an increase in the price of securities the Portfolio anticipates
purchasing at a later date. Interest rate swaps involve the exchange by the Fund
with another party of their respective commitments to pay or receive interest
(for example, an exchange of floating rate payments for fixed rate payments with
respect to a notional amount of principal). A currency swap is an agreement to
exchange cash flows on a notional amount based on changes in the relative values
of the specified currencies. An index swap is an agreement to make or receive
payments based on the different returns that would be achieved if a notional
amount were invested in a specified basket of securities such as U.S. Treasury
securities or the Standard & Poor's Composite Index of 500 Stocks (the "S&P
500").
The value of options purchased by the Portfolio, futures contracts held by the
Portfolio and the Portfolio's positions in swap contracts may fluctuate up or
down based on a variety of market and economic factors. In some cases, the
fluctuations may offset (or be offset by) changes in the value of securities
held in the Portfolio. All transactions in options, futures or swaps involve
costs and the possible risk of loss to the Portfolio of all or a significant
part of the value of its investment. In some cases, the risk of loss may exceed
the amount of the Portfolio's investment. The Portfolio will be required,
however, to set aside with its custodian bank certain assets in amounts
sufficient at all times to satisfy its obligations under options, futures and
swap contracts.
The successful use of options, futures and swaps will usually depend on the
Manager's ability to forecast bond market, currency or other financial market
movements correctly. The Portfolio's ability to hedge against adverse changes in
the value of securities held in its portfolio through options, futures and swap
transactions also depends on the degree of correlation between the changes in
the value of futures, options or swap positions and changes in the values of the
portfolio securities. The successful use of futures and exchange traded options
also depends on the availability of a liquid secondary market to enable the
Portfolio to close its positions on a timely basis. There can be no assurance
that such a market will exist at any particular time. Trading hours for options
may differ from the trading hours for the underlying securities. Thus,
significant price movements may occur in the securities markets that are not
reflected in the options market. The foregoing may limit the effectiveness of
options as hedging devices. Certain provisions of the Code and certain
regulatory requirements may limit the Portfolio's ability to engage in futures,
options and swap transactions.
613115.9
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The options and futures markets of foreign countries are small compared to those
of the United States and consequently are characterized in most cases by less
liquidity than are the U.S. markets. In addition, foreign markets may be subject
to less detailed reporting requirements and regulatory controls than U.S.
markets. Furthermore, investments by the Portfolio in options and futures in
foreign markets are subject to many of the same risks as are the Fund's other
foreign investments. See "Foreign and Emerging Market Securities." For further
information, see "Futures, Options and Swap Contracts" in the Statement of
Additional Information.
When-Issued Securities: The Portfolio may purchase securities on a when-issued
basis. Certain municipal securities are sometimes offered on a "when-issued"
basis, that is, the date for delivery of and payment for the securities is not
fixed at the date of purchase, but is set after the securities are issued
(normally within forty-five days after the date of the transaction). The payment
obligation and the interest rate that will be received on the securities are
fixed at the time the buyer enters into the commitment. The Portfolio will only
make commitments to purchase such municipal securities with the intention of
actually acquiring such securities, but the Portfolio may sell these securities
before the settlement date if it is deemed advisable.
If the Portfolio purchases a when-issued security, the Portfolio will direct the
custodian to place cash or other high grade securities (including municipal
securities) in a separate account of the Portfolio in an amount equal to its
when-issued commitments. If the market value of such securities declines,
additional cash or securities will be placed in the account on a daily basis so
that the market value of the account will equal the amount of the Portfolio's
when-issued commitments. To the extent that funds are in a separate account,
they will not be available for new investment or to meet redemptions. Investment
in securities on a when-issued basis may increase the Portfolio's exposure to
market fluctuation; may increase the possibility that the Portfolio will incur a
short-term gain subject to federal taxation; or may increase the possibility
that the Portfolio will incur a short-term loss, if the Portfolio must engage in
portfolio transactions in order to honor a when-issued commitment. The Portfolio
will employ techniques designed to minimize these risks. No additional
when-issued commitments will be made if more than 10% of the Portfolio's net
assets become so committed.
Repurchase Agreements: When the Portfolio purchases securities, it may enter
into a repurchase agreement with the seller wherein the seller agrees, at the
time of sale, to repurchase the security at a mutually agreed upon time and
price, thereby determining the yield during the purchaser's holding period. This
arrangement results in a fixed rate of return insulated from market fluctuations
during such period. The Portfolio may enter into repurchase agreements which are
collateralized by obligations issued or guaranteed by the U.S. Government and
the Portfolio may enter into repurchase agreements with member banks of the
Federal Reserve System and with broker-dealers who are recognized as primary
dealers in United States government securities by the Federal Reserve Bank of
New York whose creditworthiness has been reviewed and found to meet the
investment criteria of the Portfolio. The resale price will be in excess of the
purchase price, reflecting an agreed upon market rate effective for the period
of time the Fund's money will be invested in the security, and will not be
related to the coupon rate of the purchased security. At the time a Portfolio
enters into a repurchase agreement the value of the underlying security,
including accrued interest, will be equal to or exceed the value of the
repurchase agreement and, in the case of a repurchase agreement exceeding one
day, the seller will agree that the value of the underlying security, including
accrued interest, will at all times be equal to or exceed the value of the
repurchase agreement. The Portfolio may engage in a repurchase agreement with
respect to any security in which the Portfolio is authorized to invest, even
though the underlying security may mature in more than one year. The collateral
securing the seller's obligation must be of a credit quality at least equal to
the Fund's investment criteria for Portfolio securities and will be held by the
Fund's custodian or in the Federal Reserve Book Entry System. Nevertheless, if
the seller of a repurchase agreement fails to repurchase the obligation in
accordance with the terms of the agreement, the Portfolio may incur a loss to
the extent that the proceeds it realized on the sale of the underlying
obligation are less than the repurchase price. Repurchase agreements may be
considered loans to the seller of the underlying security. Income with respect
to repurchase agreements is not tax-exempt. If bankruptcy proceedings are
commenced with respect to the seller, the Fund's realization upon the collateral
may be delayed or limited. The Portfolio may invest no more than 15% of its net
assets in illiquid securities including repurchase agreements maturing in more
than seven days. See "Investment Restrictions" herein. A Portfolio may, however,
enter into "continuing contract" or "open" repurchase
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agreements under which the seller is under a continuing obligation to repurchase
the underlying obligation from the Portfolio on demand and the effective
interest rate is negotiated on a daily basis.
Securities purchased pursuant to a repurchase agreement are held by the Fund's
custodian and (I) are recorded in the name of the Portfolio with the Federal
Reserve Book Entry System or (ii) the Portfolio receives daily written
confirmation of each purchase of a security and a receipt from the custodian.
The Portfolio purchases securities subject to a repurchase agreement only when
the purchase price of the security acquired is equal to or less than its market
price at the time of purchase.
Lending of Securities: The Portfolio may lend its portfolio securities to
qualified institutions as determined by the Manager. By lending its portfolio
securities, the Portfolio attempts to increase its income through the receipt of
interest on the loan. Any gain or loss in the market price of the securities
loaned that may occur during the term of the loan will be for the account of the
Portfolio.
The Portfolio will not lend portfolio securities if, as a result, the aggregate
of such loan exceeds 331/3% of the value of the Portfolio's total assets
(including such loans). All relevant facts and circumstances, including the
creditworthiness of the qualified institution, will be monitored by the Manager,
and will be considered in making decisions with respect to lending of
securities, subject to review by the Fund's Board of Directors. The Portfolio
may pay reasonable negotiated fees in connection with loaned securities, so long
as such fees are set forth in a written contract and their reasonableness is
determined by the Fund's Board of Directors.
Rule 144A Securities: The Portfolio may invest in securities issued as part of
privately negotiated transactions between an issuer and one or more purchasers.
Except with respect to certain commercial paper issued in reliance on the
exemption from regulations set forth in Section 4(2) of the Securities Act of
1933 (the "Securities Act") and securities subject to Rule 144A of the
Securities Act which are discussed below, these securities are typically not
readily marketable and are therefore considered illiquid securities. The price
the Portfolio paid for illiquid securities, and any price received upon resale,
may be lower than the price paid or received for similar securities with a more
liquid market. Accordingly, the valuation of privately placed securities
purchased by the Portfolio will reflect any limitations on their liquidity. As a
matter of policy, the Portfolio will not invest more than 15% of the market
value of the net assets of the Portfolio in repurchase agreements maturing in
over seven days and other illiquid investments.
The Portfolio may purchase securities that are not registered ("restricted
securities") under the Securities Act, but can be offered and sold to "qualified
institutional buyers" under Rule 144A of the Securities Act. The Portfolio may
also purchase certain commercial paper issued in reliance on the exemption from
regulations in Section 4(2) of the Securities Act ("4(2) Paper"). However, the
Portfolio will not invest more than 15% of its net assets in illiquid
investments, which include securities for which there is no readily available
market, securities subject to contractual restriction on resale, certain
investments in asset-backed and receivable- backed securities and restricted
securities (unless, with respect to these securities and 4(2) Paper, the Fund's
Directors continuously determine, based on the trading markets for the specific
restricted security, that it is liquid). The Directors may adopt guidelines and
delegate to the Manager the daily function of determining and monitoring
liquidity of restricted securities and 4(2) Paper. The Directors, however, will
retain sufficient oversight and be ultimately responsible for these
determinations.
PORTFOLIO TURNOVER
Purchases and sales are made for the Portfolio whenever necessary, in the
Manager's opinion, to meet the Portfolio's objective. The Manager expects that
the turnover of the Portfolio should not exceed 200%. Portfolio turnover may
involve the payment by the Portfolio of dealer spreads or underwriting
commissions, and other transactions costs, on the sale of securities, as well as
on the investment of the proceeds in other securities. The greater the portfolio
turnover the greater the transaction costs to the Portfolio which could have an
effect on the Portfolio which could have an effect on the Portfolio's total rate
of return.
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INVESTMENT RESTRICTIONS
The Portfolio operates under the following investment restrictions which,
together with the investment objective of the Portfolio, may not be changed
without shareholder approval and which apply to the Portfolio.
The Portfolio may not:
(1) invest more than 5% of the total market value of the Portfolio's assets
(determined at the time of the proposed investment and giving effect
thereto) in the securities of any one issuer other than the United States
Government, its agencies or instrumentalities;
(2) invest more than 25% of the value of the Portfolio's total assets in
securities of companies in the same industry (excluding United States
government securities if the purchase would cause more than 25% of the value
of the Portfolio's total assets to be invested in companies in the same
industry (for the purpose of this restriction wholly-owned finance companies
are considered to be in the industry of their parents if their activities
are similarly related to financing the activities of their parents);
(3) acquire securities that are not readily marketable or repurchase agreements
calling for resale within more than seven days if, as a result thereof, more
than 15% of the value of its net assets would be invested in such illiquid
securities;
(4) make loans, except through loans of portfolio securities to qualified
investors, and that the Portfolio may purchase the debt securities described
above under "Investment Objectives, Policies and Risks" and may enter into
repurchase agreements as therein described. The Portfolio will not lend
portfolio securities if, as a result, the aggregate of such loans exceeds
331/3% of the value of the portfolio's total assets (including such loans);
(5) borrow money, unless (I) the borrowing does not exceed 15% of the total
market value of the assets of the Portfolio with respect to which the
borrowing is made (determined at the time of borrowing but without giving
effect thereto) and the money is borrowed from one or more banks as a
temporary measure for extraordinary or emergency purposes or to meet
unexpected redemption requests and furthermore the Portfolio will not make
additional investments when borrowings exceed 5% of the Portfolio's net
assets or (ii) as otherwise provided herein and permissible under the 1940
Act; and
(6) pledge, mortgage, assign or encumber any of the Portfolio's assets except to
the extent necessary to secure a borrowing permitted by clause (4) made with
respect to the Portfolio.
MANAGEMENT OF THE FUND
Management and Investment Management Contract
The Fund's Board of Directors, which is responsible for the overall management
and supervision of the Fund, has employed Back Bay Advisors, L.P. to serve as
the investment manager of the Fund under an Investment Management Contract. The
Manager provides persons satisfactory to the Fund's Board of Directors to serve
as officers of the Fund. Due to the services performed by the Manager, the Fund
currently has no employees and its officers are not required to devote full-time
to the affairs of the Fund. The Statement of Additional Information contains
general background information regarding each Director and principal officer of
the Fund.
The Manager is a Delaware limited partnership and a registered investment
adviser under the 1940 Act, with its principal office at 399 Boylston Street,
Boston Massachusetts 02116-3310. The Manager provides discretionary investment
management services to mutual funds and other institutional investors. Formed in
1986, the Manager now manages 14 mutual fund portfolios and as of June 30, 1997,
was investment manager, adviser or supervisor with respect to assets aggregating
in excess of $7 billion, primarily mutual fund and institutional fixed-income
portfolios. Ms. Catherine L. Bunting and Mr. Peter W. Palfrey are primarily
responsible for the day-to-day investment management of the Portfolio. Ms.
Bunting has served as Senior Vice President of the Manager since 1988. Mr.
Palfrey has served as Senior Vice President of
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the Manager since 1993. Prior to 1993, Mr. Palfrey was employed by Mutual of New
York Capital Management as a Vice President.
The general partner of the Manager is a special purpose corporation that is an
indirect, wholly-owned subsidiary of New England Investment Companies ("NEIC").
NEIC's sole general partner, New England Investment Companies, Inc., is an
indirect, wholly-owned subsidiary of Metropolitan Life Insurance Company
("MetLife"). MetLife is a mutual life insurance company with $298 billion of
assets under management at December 31, 1996. It is the second largest life
insurance company in the United States in terms of total assets. MetLife
provides a wide range of insurance and investment products and service to
individuals and groups and is the leader among United States life insurance
companies in terms of total life insurance in force, which totaled $1.6 trillion
at December 31, 1996 for MetLife and its insurance affiliates. MetLife and its
affiliates provide insurance or other financial services to approximately 36
million people worldwide.
NEIC, a limited partnership with approximately $108 billion assets under
management, is a holding company offering a broad array of investment styles
across a wide range of asset categories through thirteen subsidiaries, divisions
and affiliates offering a wide array of investment styles and products to
institutional clients. Its business units, in addition to the Manager, include
AEW Capital Management, L.P., Capital Growth Management, L.P., Graystone
Partners, L.P., Harris Associates, L.P., Jurika & Voyles, L.P., Loomis, Sayles &
Company, L.P., New England Funds, L.P., New England Investment Associates, Inc.,
Reich & Tang Asset Management, L.P., Snyder Capital Management, Inc., Vaughan,
Nelson, Scarborough & McConnell, L.P. and Westpeak Investment Advisors, L.P.
These affiliates in the aggregate are investment advisers or managers to more
than 80 other registered investment companies.
Pursuant to the Investment Management Contract for the Portfolio, the Manager
manages the Portfolio's portfolio of securities and makes the decisions with
respect to the purchase and sale of investments, subject to the general control
of the Board of Directors of the Portfolio. Under the Investment Management
Contract, the Portfolio will pay an annual management fee of .35% of the
Portfolio's average daily net assets. The management fees are accrued daily and
paid monthly. The Manager, at its discretion, may voluntarily waive all or a
portion of the Management Fee. Any portion of the total fees received by the
Manager and its past profits may be used to provide shareholder services and for
distribution of Portfolio Shares. (See "Distribution and Service Plan" herein.)
The Investment Management Contract is terminable without penalty by the Fund on
sixty days written notice when authorized either by majority vote of its
outstanding voting shares or by a vote of a majority of its Board of Directors,
or by the Manager on sixty days written notice, and will automatically terminate
in the event of its assignment. The Investment Management Contract provides that
in the absence of willful misfeasance, bad faith or gross negligence on the part
of the Manager, or of reckless disregard of its obligations thereunder, the
Manager shall not be liable for any action or failure to act in accordance with
its duties thereunder.
The Manager or Administrator, at its discretion, may waive its rights to any
portion of the management fee or the administrative services fee, respectively,
and may use any portion of the management fee and the administrative services
fee for purposes of shareholder and administrative services and distribution of
the Fund's shares. There can be no assurance that such fees will be waived in
the future (see "Distribution and Service Plan" herein).
On December 1, 1997, the Board of Directors, including a majority of the
Directors who are not interested persons (as defined in the 1940 Act) of the
Portfolio or the Manager, approved the Investment Management Contract effective
December ___, 1997, which has a term which extends to November __, 1999 and may
be continued in force thereafter for successive twelve-month periods beginning
each December 1, provided that a majority vote of the Portfolio's outstanding
voting securities or by a majority of the directors who are not parties to the
Investment Management Contract or interested persons of any such party, approve
the continuation of the Investment Management Contract by votes cast in person
at a meeting called for the purpose of voting on such matter. The Investment
Management Contract was approved by the sole shareholder of the Portfolio on
November 26, 1997.
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Administrator and Administrative Services Contract
Reich & Tang Asset Management L.P. with its principal office at 600 Fifth
Avenue, New York, NY 10020 is the administrator of the Fund (the
"Administrator"). Pursuant to an Administrative Services Agreement for the
Portfolio, the Administrator performs clerical, accounting supervision and
office service functions for the Portfolio and provides the Portfolio with
personnel to (i) supervise the performance of bookkeeping and related services
by Investors Fiduciary Trust Company, the Fund's bookkeeping agent; (ii) prepare
reports to and filings with regulatory authorities; and (iii) perform such other
administrative services as the Portfolio may from time to time request of the
Administrator. The personnel rendering such services may be employees of the
Administrator or its affiliates. The Administrator, at its discretion, may
voluntarily waive all or a portion of the administrative services fee. For its
services under the Administrative Services Agreement, the Administrator receives
an annual fee equal to .15% of the Portfolio's average daily net assets up to
$100 million, .125% of the next $150 million of such assets,.10% of the next
$250 million of such assets and .075% of such assets over $500 million, with a
minimum monthly fee of $8,000. Any portion of the total fees received by the
Administrator and its past profits may be used to provide shareholder services
and for distribution of Portfolio shares. (See "Distribution and Service Plan "
herein.) The fees are accrued daily and paid monthly.
In addition, Reich & Tang Distributors L.P., the Distributor, receives a
servicing fee equal to .25% per annum of the average daily net assets of the
Class B and Class C shares (the "Shareholder Servicing Fee") of the Portfolio
under the Shareholder Servicing Agreements (with respect to the Class B and C
shares). The fees are accrued daily and paid monthly. Investment management fees
and operating expenses, which are attributable to all Classes of shares of the
Portfolio, will be allocated daily to each Class of shares based on the
percentage of shares outstanding for each Class at the end of the day.
Fees
See "Expense Limitation" in the Statement of Additional Information.
DESCRIPTION OF SHARES
The Fund was incorporated in the State of Maryland on August 15, 1997. The
authorized capital stock of the Fund consists of twenty billion shares of stock
having a par value of one tenth of one cent ($.001) per share. The Fund
currently has only one portfolio. Except as noted below, each share when issued
will have equal dividend, distribution and liquidation rights within the series
for which it was issued, and each fractional share has rights in proportion to
the percentage it represents of a whole share. Generally, all shares will be
voted in the aggregate, except if voting by Class is required by law or the
matter involved affects only one Class, in which case shares will be voted
separately by class. Shares of all series have identical voting rights, except
where, by law, certain matters must be approved by a majority of the shares of
the affected series. There are no conversion or preemptive rights in connection
with any shares of the Portfolio. All shares when issued in accordance with the
terms of the offering will be fully paid and non-assessable. Shares of the Fund
are redeemable at net asset value, at the option of the shareholders. On
November 26, 1997, the Manager purchased $100,000 of the Fund's shares at an
initial subscription price of $10.00 per share.
The Portfolio is subdivided into three classes of common stock, Class A, Class B
and Class C. Each share, regardless of class, will represent an interest in the
same portfolio of investments and will have identical voting, dividend,
liquidation and other rights, preferences, powers, restrictions, limitations,
qualifications, designations and terms and conditions, except that: (i) the
Class A, Class B and Class C shares will have different class designations; (ii)
only the Class B and C shares will be assessed a service fee of .25% of the
average daily net assets of the Class B and C shares of the Portfolio pursuant
to the Rule 12b-1 Distribution and Service Plan of the Portfolio; and (iii) only
the holders of the Class B and C shares would be entitled to vote on matters
pertaining to the Plan and any related agreements in accordance with provisions
of Rule 12b-1. Payments that are made under the Plan will be calculated and
charged daily to the appropriate class prior to determining daily net asset
value per share and dividend/distributions.
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Under its Articles of Incorporation the Fund has the right to redeem, for cash,
shares of the Fund owned by any shareholder to the extent and at such times as
the Fund's Board of Directors determines to be necessary or appropriate to
prevent any concentration of share ownership which would cause the Fund to
become a "personal holding company" for Federal income tax purposes. In this
regard, the Fund may also exercise its right to reject purchase orders.
The shares of the Fund have non-cumulative voting rights, which means that the
holders of more than 50% of the shares outstanding voting for the election of
directors can elect 100% of the directors if the holders choose to do so, and,
in that event, the holders of the remaining shares will not be able to elect any
person or persons to the Board of Directors. The Fund's By-laws provide the
holders of one-third of the outstanding shares of the Fund present at a meeting
in person or by proxy will constitute a quorum for the transaction of business
at all meetings.
HOW TO PURCHASE AND REDEEM SHARES
Investors who have accounts with Participating Organizations may invest in the
Fund through their Participating Organizations in accordance with the procedures
established by the Participating Organizations. "Participating Organizations"
are securities brokers, banks and financial institutions or other industry
professionals or organizations which have entered into shareholder servicing
agreements with the Distributor with respect to investment of their customer
accounts in the Fund. Certain Participating Organizations are compensated by the
Distributor from its Shareholder Servicing Fee and by the Manager from its
management fee for the performance of these services. An investor who purchases
shares through a Participating Organization that receives payment from the
Manager or the Distributor will become a Class B or Class C shareholder. (See
"Investments Through Participating Organizations" herein.) All other investors,
and investors who have accounts with Participating Organizations but who do not
wish to invest in the Portfolio through their Participating Organizations, may
invest in the Portfolio directly as Class A shareholders of the Portfolio and
not receive the benefit of the servicing functions performed by a Participating
Organization. Class A shares may also be offered to investors who purchase their
shares through Participating Organizations who do not receive compensation from
the Distributor or the Manager because they may not be legally permitted to
receive such as fiduciaries. The Manager pays the expenses incurred in the
distribution of Class A shares. Participating Organizations whose clients become
Class A shareholders will not receive compensation from the Manager or
Distributor for the servicing they may provide to their clients. (See "Direct
Purchase and Redemption Procedures" herein.) With respect to each Class of
shares, the minimum initial investment in the Fund with respect to the Portfolio
is $1,000,000. The minimum amount for subsequent investments is $10,000 for all
shareholders.
The Fund sells and redeems its shares on a continuing basis at their net asset
value and does not impose a sales charge for either sales or redemptions. All
transactions in Fund shares are effected through the Fund's transfer agent which
accepts orders for purchases and redemptions from the Distributor and from
shareholders directly.
In order to maximize earnings on the Portfolio, the Fund normally has its assets
as fully invested as is practicable. Many securities in which the Fund invests
require immediate settlement in Funds of Federal Reserve member banks on deposit
at a Federal Reserve bank (commonly known as "Federal Funds"). Accordingly, the
Fund does not accept a subscription or invest an investor's payment in portfolio
securities until the payment has been converted into Federal Funds.
Shares will be issued as of the first determination of the Fund's net asset
value per share for each Class made after acceptance of the investor's purchase
order. An investor's funds will not be invested by the Fund during the period
before the Fund's receipt of Federal Funds and its issuance of Fund shares. The
Fund reserves the right to reject any purchase order to its shares.
Shares are issued as of 4:00 p.m., New York City time, on any Fund Business Day,
as defined herein, on which an order for the shares and accompanying Federal
Funds are received by the Fund's transfer agent before 4:00 p.m., New York City
time. Fund shares begin accruing income on the day after the shares are issued
to an investor.
613115.9
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There is no redemption charge, no minimum period of investment and no
restriction on frequency of withdrawals. Proceeds of redemptions are paid by
check or bank wire. Unless other instructions are given in proper form to the
Fund's transfer agent, a check for the proceeds of a redemption will be sent to
the shareholder's address of record. If a shareholder elects to redeem all the
shares of the Fund he owns, all dividends credited to the shareholder through
the date of redemption are paid to the shareholder in addition to the proceeds
of the redemption.
The date of payment upon redemption may not be postponed for more than seven
days after shares are tendered for redemption, and the right of redemption may
not be suspended, except for any period during which the NYSE is closed (other
than customary weekend and holiday closings) or during which the SEC determines
that trading thereon is restricted, or for any period during which an emergency
(as determined by the SEC) exists as a result of which disposal by the Fund of
its securities is not reasonably practicable or as a result of which it is not
reasonably practicable for the Fund fairly to determine the value of its net
assets, or for such other period as the SEC may by order permit for the
protection of the shareholders of the Fund.
Redemption requests received by the Fund's transfer agent before 4:00 p.m., New
York City time, on any Fund Business Day become effective at 4:00 p.m. that day.
Shares redeemed are not entitled to participate in dividends declared on the day
or after the day a redemption becomes effective.
The Fund has reserved the right to redeem the shares of any shareholder if the
net asset value of all the remaining shares in his account after a withdrawal is
less than $250,000. Written notice of any such mandatory redemption will be
given at least 30 days in advance to any shareholder whose account is to be
redeemed or the Fund may impose a monthly service charge of $10 on such
accounts. During the notice period any shareholder who receives such a notice
may (without regard to the normal $10,000 requirement for an additional
investment) make a purchase of additional shares to increase his total net asset
value at least to the minimum amount and thereby avoid such mandatory
redemption.
The Fund has reserved the right to charge individual shareholder accounts for
expenses actually incurred by such account for wire transfers and certain other
shareholder expenses, as well as to impose a monthly service charge for accounts
whose net asset value falls below the minimum amount.
Investments Through Participating Organizations
Participant Investors may, if they wish, invest in the Fund through the
Participating Organizations with which they have accounts. "Participating
Organizations" are securities brokers, banks, financial institutions or other
industry professionals or organizations which have entered into shareholder
servicing agreements with the Distributor with respect to investment of their
customer accounts in the Fund. When instructed by its customer to purchase or
redeem Fund shares, the Participating Organization, on behalf of the customer,
transmits to the Fund's transfer agent a purchase or redemption order, and in
the case of a purchase order, payment for the shares being purchased.
Participating Organizations may confirm to their customers who are shareholders
in the Fund each purchase and redemption of Fund shares for the customers'
accounts. Also, Participating Organizations may send their customers periodic
account statements showing the total number of Fund shares owned by each
customer as of the statement closing date, purchases and redemptions of Fund
shares by each customer during the period covered by the statement and the
income earned by Fund shares of each customer during the statement period
(including dividends paid in cash or reinvested in additional Fund shares).
Participant Investors whose Participating Organizations have not undertaken to
provide such statements will receive them from the Portfolio directly.
Participating Organizations may charge Participant Investors a fee in connection
with their use of specialized purchase and redemption procedures offered to
Participant Investors by the Participating Organizations. In addition,
Participating Organizations offering purchase and redemption procedures similar
to those offered to shareholders who invest in the Fund directly may impose
charges, limitations, minimums and restrictions in addition to or different from
those applicable to shareholders who invest in the Fund directly. Accordingly,
the net yield to investors who invest through Participating Organizations may be
less than by investing in
613115.9
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the Portfolio directly. A Participant Investor should read this Prospectus in
conjunction with the materials provided by the Participating Organization
describing the procedures under which Fund shares may be purchased and redeemed
through the Participating Organization.
In the case of qualified Participating Organizations, orders received by the
Fund's transfer agent before 4:00 p.m., New York City time, on a Fund Business
Day, without accompanying Federal Funds will result in the issuance of shares on
that day provided that the Federal Funds required in connection with the orders
are received by the Fund's transfer agent before 4:00 p.m., New York City time,
on that day. Participating Organizations are responsible for instituting
procedures to insure that purchase orders by their respective clients are
processed expeditiously.
DIRECT PURCHASE AND
REDEMPTION PROCEDURES
The following purchase and redemption procedures apply to investors who wish to
invest in the Fund directly. Class B shares purchased by retirement plan
investors may be purchased by check or bank wire. Class A and Class C shares may
be purchased by bank wire only. These investors may obtain the subscription
order form necessary to open an account by telephoning the Fund at either
212-830-5220 (within New York State) or at 800-241-3263 (toll free outside New
York State).
All shareholders will receive from the Fund a monthly statement listing the
total number of shares of the Portfolio owned as of the statement closing date,
purchases and redemptions of shares of the Portfolio during the month covered by
the statement and the dividends paid on shares of the Portfolio of each
shareholder during the statement period (including dividends paid in cash or
reinvested in additional shares of the Portfolio). Certificates for Fund shares
will not be issued to an investor.
Initial Purchase of Shares
Mail
Class B share investors may send a check made payable to the Fund along with a
completed subscription order form to:
Back Bay Funds, Inc.
c/o Reich & Tang Funds
600 Fifth Avenue-8th Floor
New York, New York 10020
Checks are accepted subject to collection at full value in United States
currency.
Bank Wire
To purchase shares of the Fund using the wire system for transmittal of money
among banks, an investor should first obtain a new account number by telephoning
the Fund at either [212-830-5220] (within New York State) or at 800-241-3263
(outside New York State) and then instruct a member commercial bank to wire
money immediately to:
Investors Fiduciary Trust Company
ABA #101003621
Reich & Tang Funds
DDA #890752-955-4
For Back Bay Funds, Inc.
Total Return Portfolio
Account of (Investor's Name)
Portfolio Account # ____________________
SS #/Tax I.D.# ____________________
613115.9
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The investor should then promptly complete and mail the subscription order form.
An investor planning to wire the Fund should instruct his bank early in the day
so the wire transfer can be accomplished the same day. There may be a charge by
the investor's bank for transmitting the money by bank wire, and there also may
be a charge for use of Federal Funds. The Fund does not charge investors in the
Fund for its receipt of wire transfers. Payment in the form of a "bank wire"
received prior to 4:00 p.m., New York City time, on a Fund Business Day will be
treated as a Federal Funds payment received on that day.
Subsequent Purchases of Shares
Subsequent purchases can be made by personal delivery or by bank wire, as
indicated above, or by mailing a check to:
Back Bay Funds, Inc.
Mutual Funds Group
P.O. Box 13232
Newark, New Jersey 07101-3232
There is a $10,000 minimum for subsequent purchases of shares. All payments
should clearly indicate the shareholder's account number.
Provided that the information on the subscription order form on file with the
Fund is still applicable, a shareholder may reopen an account without filing a
new subscription order form at any time during the year the shareholder's
account is closed or during the following calendar year.
Redemption of Shares
A redemption is effected immediately following, and at a price determined in
accordance with, the next determination of net asset value per share of each
Class of the Portfolio following receipt by the Fund's transfer agent of the
redemption order. Normally payment for redeemed shares is made on the Fund
Business Day the redemption is effected, provided the redemption request is
received prior to 5:00 p.m., New York City time. However, redemption requests
will not be effected unless the check (including a certified or cashier's check)
used for investment has been cleared for payment by the investor's bank,
currently considered by the Fund to occur within 15 days after investment.
A shareholder's original subscription order form permits the shareholder to
redeem by written request and to elect one or more of the additional redemption
procedures described below. A shareholder may only change the instructions
indicated on his original subscription order form by transmitting a written
direction to the Fund's transfer agent. Requests to institute or change any of
the additional redemption procedures will require a signature guarantee. When a
signature guarantee is called for, the shareholder should have "Signature
Guaranteed" stamped under his signature and guaranteed by an eligible guarantor
institution which includes a domestic bank, a domestic savings and loan
institution, a domestic credit union, a member bank of the Federal Reserve
System or a member firm of a national securities exchange, pursuant to the
Fund's transfer agent's standards and procedures.
Written Requests
Shareholders may make a redemption in any amount by sending a written request
to:
Back Bay Funds, Inc.
c/o Reich & Tang Funds
600 Fifth Avenue-8th Floor
New York, New York 10020
All written requests for redemption must be signed by the shareholder with
signature guaranteed. Normally the redemption proceeds are paid by check mailed
to the shareholder of record.
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Telephone
The Fund accepts telephone requests for redemption from shareholders who elect
this option. The proceeds of a telephone redemption will be sent to the
shareholder at his address or to his bank account as set forth in the
subscription order form or in a subsequent signature guaranteed written
authorization. Redemptions following an investment by check will not be effected
until the check has cleared, which could take up to 15 days after investment.
The Fund may accept telephone redemption instructions from any person with
respect to accounts of shareholders who elect this service, and thus
shareholders risk possible loss of dividends in the event of a telephone
redemption which was not authorized by them. Telephone requests to wire
redemption proceeds must be for amounts in excess of $10,000. The Fund will
employ reasonable procedures to confirm that telephone redemption instructions
are genuine, and will require that shareholders electing such option provide a
form of personal identification. The failure by the Fund to employ such
reasonable procedures may cause the Fund to be liable for any losses incurred by
investors due to telephone redemptions based upon unauthorized or fraudulent
instructions. The telephone redemption option may be modified or discontinued at
any time upon 60 days written notice to shareholders.
A shareholder making a telephone withdrawal should call the Fund at
212-830-5220; outside New York State at 800-241-3263 and state (i) the name of
the shareholder appearing on the Fund's records, (ii) his account number with
the Fund, (iii) the amount to be withdrawn and (iv) the name of the person
requesting the redemption. Usually, the proceeds are sent to the investor on the
same Fund Business Day the redemption is effected, provided the redemption
request is received prior to 4:00 p.m., New York City time.
RETIREMENT PLANS
The Fund has available a form of Individual Retirement Account ("IRA") for
investment in Fund shares. Fund shares may also be a suitable investment for
other types of qualified pension or profit-sharing plans which are
employer-sponsored, including deferred compensation or salary reduction plans
known as "401(k) Plans" which give participants the right to defer portions of
their compensation for investment on a tax-deferred basis until distributions
are made from the plans.
The minimum initial investment for all such retirement plans is $1,000. The
minimum for all subsequent investments is $100.
Under the Internal Revenue Code of 1986, as amended (the "Code"), individuals
may make wholly or partly tax deductible IRA contributions of up to $2,000
annually, depending on whether they are active participants in an employer
sponsored retirement plan and on their income level. However, dividends and
distributions held in the account are not taxed until withdrawn in accordance
with the provisions of the Code. An individual with a non-working spouse may
establish a separate IRA for the spouse under the same conditions and contribute
a combined maximum of $4,000 annually to either or both IRAs provided that no
more than $2,000 may be contributed to the IRA of either spouse.
Investors should be aware that they may be subject to penalties or additional
tax on contributions or withdrawals from IRAs or other retirement plans which
are not permitted by the applicable provisions of the Code, and, prior to a
withdrawal, shareholders may be required to certify their age and awareness of
such restrictions in writing. Persons desiring information concerning
investments through IRAs or other retirement plans should write or telephone the
Distributor at 600 Fifth Avenue, New York, New York 10020, (212) 830- 5200.
DISTRIBUTION AND SERVICE PLAN
Pursuant to Rule 12b-1 under the 1940 Act, the SEC has required that an
investment company which bears any direct or indirect expense of distributing
its shares must do so only in accordance with a plan permitted by Rule 12b-1.
Effective December ___, 1997, the Fund's Board of Directors and Class B
shareholders adopted a distribution and service plan (the "Plan") and, pursuant
to the Plan, the Portfolio and Reich & Tang Distributors L.P. (the
"Distributor") entered into a Distribution Agreement and a Shareholder Servicing
Agreement (with respect to the Class B and Class C shares of the Portfolio
only).
613115.9
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Reich & Tang Asset Management, Inc. serves as the sole general partner for both
Reich & Tang Asset Management L.P. and Reich & Tang Distributors L.P., and Reich
& Tang Asset Management L.P. serves as the sole limited partner of the
Distributor.
Under the Distribution Agreement, the Distributor serves as distributor of the
Fund's shares and, for nominal consideration and as agent for the Fund, will
solicit orders for the purchase of the Fund's shares, provided that any orders
will not be binding on the Fund until accepted by the Fund as principal.
Under the Shareholder Servicing Agreement, the Distributor receives, with
respect to the Class B and C shares, a service fee equal to .25% per annum of
the Class B and C shares' average daily net assets, respectively, (the
"Shareholder Servicing Fee"), for providing personal shareholder services and
for the maintenance of shareholder accounts. The fee is accrued daily and paid
monthly and any portion of the fee may be deemed to be used by the Distributor
for payments to Participating Organizations with respect to their provision of
such services to their clients or customers who are shareholders of the Class B
and C shares of the Portfolio. The Class A shareholders do not receive the
benefit of such services from Participating Organizations or receive the benefit
of such services from other financial intermediaries who receive compensation
from the Manager or Distributor and, therefore, will not be assessed a
Shareholder Servicing Fee.
The Plan and the Shareholder Servicing Agreement (with respect to the Class B
and C shares) provide that, in addition to the Shareholder Servicing Fee, the
Portfolio will pay for (i) telecommunications expenses including the cost of
dedicated lines and CRT terminals, incurred by the Distributor and Participating
Organizations in carrying out their obligations under the Shareholder Servicing
Agreement with respect to Class B and C shares and (ii) preparing, printing and
delivering the Fund's prospectus to existing shareholders of the Portfolio and
preparing and printing subscription application forms for shareholder accounts.
The Plan provides that, with respect to Class B and C shares, the Manager and
Administrator may make payments from time to time from their own resources,
which may include the management fee, the administration fee and past profits
for the following purposes: (i) to defray the costs of, and to compensate
others, including Participating Organizations with whom the Distributor has
entered into written agreements, for performing shareholder servicing on behalf
of the Class B and C shares of the Portfolio; (ii) to compensate certain
Participating Organizations for providing assistance in distributing the Class B
and C shares; and (iii) to pay the costs of printing and distributing the
Portfolio's prospectus to prospective investors, and to defray the cost of the
preparation and printing of brochures and other promotional materials, mailings
to prospective shareholders, advertising, and other promotional activities,
including the salaries and/or commissions of sales personnel in connection with
the distribution of the Fund's Class B and C shares. The Distributor may also
make payments from time to time from its own resources, which may include the
Shareholder Servicing Fee (with respect to Class B and C shares) and past
profits, for the purposes enumerated in (i) above. The Distributor will
determine the amount of such payments made pursuant to the Plan, provided that
such payments will not increase the amount which the Portfolio is required to
pay to the Manager and Distributor for any fiscal year under either the
Investment Management Contract or the Shareholder Servicing Agreement in effect
for that year.
The life insurance companies whose qualified retirement plan clients may
purchase Class C shares of the Portfolio have contracted with the Distributor to
perform certain sub-transfer agent accounting services for the Insurance Company
Investors. In consideration of the provisions of these sub-transfer agency
accounting services, the life insurance companies will receive sub-transfer
agency fees from the Distributor or its affiliate, the Fund's transfer agent. As
a result of the payment of the sub-transfer agency accounting fees to these
insurance companies relating to qualified retirement plan services, Class C
shares will have higher transfer agency charges than the other classes of the
Portfolio.
The Glass-Steagall Act and other applicable laws and regulations prohibit banks
and other depository institutions from engaging in the business of underwriting,
selling or distributing most types of securities. However, in the opinion of the
Manager based on the advice of counsel, these laws and regulations do not
prohibit such depository institutions from providing other services for
investment companies such as the shareholder servicing and related
administrative functions referred to above. The Fund's Board of Directors
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will consider appropriate modifications to the Fund's operations, including
discontinuance of any payments then being made under the Plan to banks and other
depository institutions, in the event of any future change in such laws or
regulations which may affect the ability of such institutions to provide the
above-mentioned services. It is not anticipated that the discontinuance of
payments to such an institution would result in loss to shareholders or change
in the Fund's net asset value. In addition, state securities laws on this issue
may differ from the interpretations of Federal law expressed herein and banks
and financial institutions may be required to register as dealers pursuant to
state law.
In accordance with Rule 12b-1, the Plan provides that all written agreements
relating to the Plan entered into between either the Fund or the Distributor and
Participating Organizations or other organizations must be in a form
satisfactory to the Fund's Board of Directors. In addition, the Plan requires
the Fund and the Distributor to prepare, at least quarterly, written reports
setting forth all amounts expended for distribution purposes by the Fund and the
Distributor pursuant to the Plan and identifying the distribution activities for
which those expenditures were made.
The Plan provides that it may continue in effect for successive annual periods
provided it is approved by the Fund's shareholders or by the Board of Directors,
including a majority of directors who are not interested persons of the Fund and
who have no direct or indirect interest in the operation of the Plan, or
agreements related to the Plan. The Plan was approved by a majority of its
shareholders on December __, 1997. The Plan further provides that it may not be
amended to increase materially the costs which may be spent by the Fund for
distribution pursuant to the Plan without shareholder approval, and the other
material amendments must be approved by the directors in the manner described in
the preceding sentence. The Plan may be terminated at any time by a vote of a
majority of the disinterested directors of the Fund or the Fund's shareholders.
DIVIDENDS, DISTRIBUTIONS AND TAXES
Each dividend and capital gains distribution, if any, declared by the Fund on
its outstanding shares will, at the election of each shareholder, be paid in
cash or in additional shares of the same Class shares of the Portfolio having an
aggregate net asset value as of the payment date of such dividend or
distribution equal to the cash amount of such dividend or distribution. Election
to receive dividends and distributions in cash or shares is made at the time
shares are subscribed for and may be changed by notifying the Fund in writing at
any time prior to the record date for a particular dividend or distribution. If
the shareholder makes no election, the Fund will make the distribution in
shares. There is no sales or other charge in connection with the reinvestment of
dividends and capital gains distributions.
While it is the intention of the Fund to distribute to its shareholders
substantially all of each fiscal year's net income and net realized capital
gains, if any, the amount and time of any such dividend or distribution must
necessarily depend upon the realization by the Fund of income and capital gains
from investments. Except as described herein, the Portfolio's net investment
income (including net realized short-term capital gains, if any) will be
declared as a dividend on the Fund Business Day. The Fund declares dividends for
Saturdays, Sundays and holidays on the previous Fund Business Day. The Fund
generally pays dividends monthly after the close of business on the last
calendar day of each month or after the close of business on the previous Fund
Business Day if the last calendar day of each month is not a Fund Business Day.
Capital gains distributions, if any, will be made at least annually, and in no
event later than 60 days after the end of the Fund's fiscal year. There is no
fixed dividend rate, and there can be no assurance that the Fund will pay any
dividends or realize any capital gains.
The Class B shares will bear the Shareholder Servicing Fee under the Plan. As a
result, the net income of and the dividends payable to the Class B shares will
be lower than the net income of and dividends payable to the Class A or Class C
shares of the Portfolio. Dividends paid to each Class of shares of the Fund
will, however, be declared and paid on the same days at the same times and,
except as noted with respect to the Shareholder Servicing Fee payable under the
Plan, will be determined in the same manner and paid in the same amounts.
The Fund intends to qualify for and elect special treatment applicable to a
"regulated investment company" under the Internal Revenue Code of 1986, as
amended, for the Portfolio. To qualify as a regulated
613115.9
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investment company, the Portfolio must meet certain complex tests concerning its
investments and distributions. For each year the Portfolio qualifies as a
regulated investment company, the Portfolio will not be subject to federal
income tax on income distributed to its shareholders in the form of dividends or
capital gains distributions. Additionally, the Portfolio will not be subject to
a federal excise tax if the Portfolio distributes at least 98% of its ordinary
income and 98% of its capital gain income to its shareholders. Dividends of net
ordinary income and distributions of net short-term capital gains are taxable to
the recipient shareholders as ordinary income but will not be eligible, in the
case of corporate shareholders, for the dividend-received deduction.
The Fund is required by Federal law to withhold 31% of reportable payments
(which may include dividends, capital gains distributions and redemptions) paid
to shareholder who have not complied with IRS regulations. In connection with
this withholding requirement, a shareholder will be asked to certify on his
application that the social security or tax identification number provided is
correct and that the shareholder is not subject to 31% backup withholding for
previous underreporting to the IRS.
Distributions that are derived from interest on certain obligations of the
United States Government and agencies thereof may be exempt from state and local
taxes in certain states. Investors should consult their own tax advisers
regarding specific questions as to Federal, state or local taxes.
PERFORMANCE INFORMATION
The Portfolio, on behalf of each Class and computed separately for each Class of
shares, may from time to time include its yield, total return, and average
annual total return in advertisements or information furnished to present or
prospective shareholders. The performance for each Class of shares may vary due
to variations in expenses of each Class of shares. The Portfolio may also from
time to time include in advertisements the ranking of those performance figures
relative to such figures for groups of mutual funds categorized by the Lipper
Analytical Services, Inc., CDA Investment Technologies, Inc., Morningstar Inc.,
Wiesenberger Investment Company Service, Barron's, Business Week, Changing
Times, Financial World, Forbes, Fortune, Money, Personal Investor, Bank Rate
Monitor, and The Wall Street Journal as having the same investment objectives.
The Manager may also include the performance of its Separate Bond Accounts
("SBA"), retirement plan client accounts managed by the Manager since 1986 to
which the Manager has applied the same investment styles and techniques that the
Manager intends to apply to the management of the Portfolio and for which the
Manager has full discretionary authority to manage. This performance information
relates to the Manager's management of retirement plan accounts and should not
be interpreted as indicative of the future performance of the Portfolio.
Average annual total return is a measure of the average annual compounded rate
of return of [$1,000] invested at the maximum public offering price over a
specified period, which assumes that any dividends or capital gains
distributions are automatically reinvested in the Portfolio rather than paid to
the investor in cash. Total return is calculated with the same assumptions and
shows the aggregate return on an investment over a specified period.
The formula for total return used by the Portfolio includes three steps: (1)
adding to the total number of shares purchased by the hypothetical investment in
the portfolio all additional shares that would have been purchased if all
dividends and distributions paid or distributed during the period had been
automatically reinvested; (2) calculating the value of the hypothetical initial
investment as of the end of the period by multiplying the total number of shares
owned at the end of the period by the net asset value per share on the last
trading day of the period; and (3) dividing this account value for the
hypothetical investor by the amount of the initial investment and annualizing
the result for periods of less than one year.
The Portfolio computes yield by annualizing net investment income in a
particular class per share for a recent 30-day period and dividing that amount
by a Portfolio's share's maximum public offering price (reduced by any
undeclared earned income expected to be paid shortly as a dividend) on the last
trading day of that period. The Portfolio's yield will vary from time to time
depending upon market conditions, the composition of the Portfolio and operating
expenses of the Portfolio.
613115.9
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Total return and yield may be stated with or without giving effect to any
expense limitations in effect for the Portfolio.
The Fund's Annual Report to shareholders will contain information regarding the
Fund's Performance and, when available, will be provided without charge, upon
request.
NET ASSET VALUE
The Fund determines the net asset value of the shares of the Fund (computed
separately for each Class of shares) of the Fund as of 4:00 p.m., New York City
time, by dividing the value of each Fund's net assets (i.e., the value of its
securities and other assets less its liabilities, including expenses payable or
accrued but excluding capital stock and surplus) by the number of shares
outstanding of the Fund at the time the determination is made. The Fund
determines its net asset value on each Fund Business Day. Fund Business Day for
this purpose means any day on which the Fund's custodian is open for trading.
Purchases and redemptions will be effected at the time of determination of net
asset value next following the receipt of any purchase or redemption order. (See
"Purchase and Redemption of Shares" and "Other Purchase and Redemption
Procedures" herein.)
Municipal obligations are priced on the basis of valuations provided by a
pricing service approved by the Board of Directors, which uses information with
respect to transactions in bonds, quotations from bond dealers, market
transactions in comparable securities and various relationships between
securities in determining value. The valuations provided by such pricing service
will be based upon fair market value determined most likely on the basis of the
factors listed above. If a pricing service is not used, municipal obligations
will be valued at quoted prices provided by municipal bond dealers.
Non-tax-exempt securities for which transaction prices are readily available are
stated at market value (determined on the basis of the last reported sales
price, or a similar means). Short-term investments that will mature in 60 days
or less are stated at amortized cost, which approximates market value. All other
securities and assets are valued at their fair market value as determined in
good faith by the Board of Directors.
GENERAL INFORMATION
The Fund was incorporated under the laws of the State of Maryland on August 15,
1997 and it is registered with the SEC as a non-diversified, open-end,
management investment company.
The Fund prepares semi-annual unaudited and annual audited reports which include
a list of investment securities held by the Fund and which are sent to
shareholders.
As a general matter, the Fund will not hold annual or other meetings of the
Fund's shareholders. This is because the By-laws of the Fund provide for annual
meetings only (a) for the election of directors, (b) for approval of revised
investment advisory contracts with respect to a particular class or series of
stock, (c) for approval of revisions to the Fund's distribution agreement with
respect to a particular class or series of stock, and (d) upon the written
request of holders of shares entitled to cast not less than 25% of all the votes
entitled to be cast at such meeting. Annual and other meetings may be required
with respect to such additional matters relating to the Fund as may be required
by the Act including the removal of Fund director(s) and communication among
shareholders, any registration of the Fund with the SEC or any state, or as the
Directors may consider necessary or desirable. Each Director serves until the
next meeting of the shareholders called for the purpose of considering the
election or reelection of such Director or of a successor to such Director, and
until the election and qualification of his or her successor, elected at such a
meeting, or until such Director sooner dies, resigns, retires or is removed by
the vote of the shareholders.
For further information with respect to the Fund and the shares offered hereby,
reference is made to the Fund's Registration Statement filed with the SEC and
copies thereof may be obtained upon payment of certain duplicating fees.
613115.9
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CUSTODIAN AND TRANSFER AGENT
Investors Fiduciary Trust Company, 801 Pennsylvania, Kansas City, Missouri
64105, is the custodian for the Fund's cash and securities. Reich & Tang
Services L.P., 600 Fifth Avenue, New York, New York 10020 is the transfer agent
and dividend agent for the shares of the Fund. The Fund's custodian and transfer
agent do not assist in, and are not responsible for, investment decisions
involving assets of the Fund.
613115.9
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<PAGE>
TABLE OF CONTENTS
BACK BAY FUNDS,
INC.
PROSPECTUS
December __, 1997
TABLE OF FEES AND EXPENSES.....................................................2
PROSPECTUS SUMMARY.............................................................2
INVESTMENT OBJECTIVES, POLICIES
AND RISKS......................................................................4
PORTFOLIO TURNOVER............................................................12
INVESTMENT RESTRICTIONS.......................................................12
MANAGEMENT OF THE FUND........................................................13
Management and Investment
Management Contract.........................................13
Administrator and Administrative
Services Contract...........................................14
Fees ............................................................14
DESCRIPTION OF SHARES.........................................................15
HOW TO PURCHASE AND REDEEM
SHARES........................................................................15
Investments Through Participating
Organizations...............................................17
DIRECT PURCHASE AND
REDEMPTION PROCEDURES.........................................................17
Initial Purchase of Shares...........................................18
Subsequent Purchases of Shares.......................................18
Redemption of Shares.................................................19
RETIREMENT PLANS..............................................................20
DISTRIBUTION AND SERVICE PLAN.................................................20
DIVIDENDS, DISTRIBUTIONS AND TAXES
..............................................................................22
PERFORMANCE INFORMATION.......................................................23
NET ASSET VALUE...............................................................23
GENERAL INFORMATION...........................................................24
CUSTODIAN AND TRANSFER AGENT..................................................24
613115.9
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BACK BAY 600 Fifth Avenue, New York, NY 10020
FUNDS, INC. (212) 830-5200
- --------------------------------------------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION
December __, 1997
Back Bay Funds, Inc. (the "Fund") is an open-end, diversified management
investment company currently comprised of the Total Return Bond Fund (the
"Portfolio"). The Portfolio's investment objective is to seek to maximize total
return.
This Statement of Additional Information is not a prospectus and is only
authorized for distribution when preceded or accompanied by the Fund's
prospectus dated December __, 1997 (the "Prospectus"). This Statement of
Additional Information contains additional and expands upon information set
forth in the Prospectus and should be read in conjunction with the Prospectus.
Additional copies of the Prospectus may be obtained without charge by either
writing or telephoning the Fund at the address or telephone number set forth
above. Table of Contents
<TABLE>
<S> <C>
Investment Objectives, Policies and Risks............. Management of the Fund................................
Foreign and Emerging Market Securities............. Compensation Table.................................
Lower-Rated Securities............................. Counsel and Auditors...............................
Mortgage-Related Securities........................ Distribution and Service Plan.........................
Collateralized Mortgage Obligations................ The Glass-Steagall Act ...............................
Stripped Securities................................ Description of Shares.................................
Options, Futures, Swap Contracts and Dividends, Distributions and Taxes....................
Currency Transactions..............................
Investment Restrictions............................... Custodian and Transfer Agent..........................
Portfolio Transactions................................ Performance Information...............................
How to Purchase and Redeem Shares..................... Net Asset Value.......................................
Manager............................................... Description of Ratings................................
Expense Limitation................................. Independent Auditor's Report..........................
Financial Statements..................................
</TABLE>
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INVESTMENT OBJECTIVES, POLICIES AND RISKS
As stated in the Prospectus, the Fund is an open-end, diversified management
investment company currently comprised of the Total Return Bond Fund (the
"Portfolio"). The Portfolio's investment objective is to seek to maximize total
return. The generation of income is a secondary objective. There is no assurance
that these objectives will be achieved. The investment objective of the
Portfolio, which is described herein, is fundamental and may not be changed
without shareholder approval. Since the Fund is created for tax-exempt
retirement plans, the tax consequences of portfolio activity are not an
investment consideration. The Portfolio will seek to achieve its objectives by
investing primarily in higher quality, fixed and floating-rate debt instruments.
Since the Portfolio attempts to achieve its objectives by investing primarily in
higher quality, fixed and floating-rate debt instruments, at least 80% of its
total assets will be invested in investment grade debt instruments issued by
corporations based in the United States and abroad, (i.e., rated within the four
highest ratings categories by a nationally recognized statistical rating
organization, e.g., BBB or higher by Standard & Poor's Rating Services, a
division of The McGraw-Hill Companies, Inc. ("S&P") or Baa or higher by Moody's
Investor Services, Inc. ("Moody's") or BBB or higher by Fitch Investors
Services, Inc. ("Fitch") or Duff & Phelps Credit Rating Co. ("Duff & Phelps").
The lowest grade of the investment grade securities may have speculative
characteristics. With respect to the 80% of the Portfolio's total assets which
will be invested in investment grade debt instruments issued by corporations
based in the United States and abroad, no more than 10% of the Portfolio's total
assets may be invested in non-dollar denominated foreign obligations issued by
corporations and/or governments and agencies thereof.
No more than 20% of the total assets of the Portfolio may be invested in
instruments which are below investment grade quality. With respect to the
investment allocation of the below investment grade quality securities of the
Portfolio, as a percentage of the total net assets, at least 15% of the total
assets of the Portfolio must be invested in instruments which are rated with the
highest below investment grade rating "("BB" or "Ba", respectively). Further, no
more than 5% of the total assets may have a split rating of "B/BB" or Ba/B".
Additionally, no more than 5% of the total assets may be invested in dollar
denominated emerging market debt. The Portfolio may invest in preferred stock,
convertible securities, Rule 144A debt, U.S. Government Securities and
securities issued or guaranteed by foreign governments (including their
political subdivisions, agencies, authorities and/or instrumentalities)
("Foreign Government Securities") and securities issued by supranational
agencies.
The Portfolio may also invest in mortgage pass through securities including,
collateralized mortgage obligations, adjustable rate mortgages, commercial
mortgage backed securities, and "stripped" securities evidencing individual
ownership interests in interest payments or principal payments, or both. If an
investment rated BBB or Baa is downgraded by a major rating agency, the
Portfolio's Manager will consider whether the investment remains appropriate for
the Portfolio. The Portfolio may invest in securities of any maturity and the
Portfolio may invest in zero coupon securities.
The Portfolio may engage in a variety of options and futures transactions with
respect to U.S. or Foreign Government Securities and corporate fixed-income
securities. See "Risk Factors and Additional Investment Information - Options,
Futures, Swap Contracts and Currency Transactions" for information about these
kinds of transactions.
621733.6
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Risk Factors and Additional Investment Information
Foreign and Emerging Market Securities: Foreign Government Securities and
foreign corporate securities present risks not associated with investments in
U.S. Government or corporate securities.
Since most foreign securities are denominated in foreign currencies or traded
primarily in securities markets in which settlements are made in foreign
currencies, the value of these investments and the net investment income
available for distribution to shareholders of a Fund may be affected favorably
or unfavorably by changes in currency exchange rates or exchange control
regulations. Because the Portfolio may purchase securities denominated in
foreign currencies, a change in the value of any such currency relative to the
U.S. dollar will result in a change in the U.S. dollar value of the Fund's
assets and the Fund's income available for distribution.
In addition, although the Portfolio's income may be received or realized in
foreign currencies, the Portfolio will be required to compute and distribute its
income in U.S. dollars. Therefore, if the value of a currency relative to the
U.S. dollar declines after the Portfolio's income has been earned in that
currency, translated into U.S. dollars and declared as a dividend, but before
payment of such dividend, the Portfolio could be required to liquidate portfolio
securities to pay such dividend. Similarly, if the value of a currency relative
to the U.S. dollar declines between the time the Portfolio incurs expenses in
U.S. dollars and the time such expenses are paid, the amount of such currency
required to be converted into U.S. dollars in order to pay such expenses in U.S.
dollars will be greater than the equivalent amount in such currency of such
expenses at the time they were incurred.
There may be less information publicly available about a foreign corporate or
government issuer than about an U.S. issuer, and foreign corporate issuers are
not generally subject to accounting, auditing and financial reporting standards
and practices comparable to those in the United States. The securities of some
foreign issuers are less liquid and at times more volatile than securities of
comparable U.S. issuers. Foreign brokerage commission and other fees in some
circumstances may be higher than in the United States. With respect to certain
foreign countries, there is a possibility of expropriation of assets,
confiscatory taxation, political or financial instability and diplomatic
developments that could affect the value of investments in those countries. The
receipt of interest on foreign government securities may depend on the
availability of tax or other revenues to satisfy the issuer's obligations. The
Portfolio may have limited legal recourse should a foreign government be
unwilling or unable to repay the principal or interest owed.
The Portfolio may also invest in the securities of emerging markets. Investments
in emerging markets include investments in countries whose economies and /or
securities markets are not yet highly developed. Special considerations
associated with these investments (in addition to the considerations regarding
foreign investments as discussed above) may include, among others, greater
political uncertainties, an economy's dependence on revenues from particular
commodities or on international aid or development assistance, currency transfer
restrictions, highly limited numbers of potential buyers for such securities and
delays and disruptions in security settlement procedures.
In addition, the Portfolio may invest in securities issued by supranational
agencies. Supranational agencies are those agencies whose member nations
determine to make capital contributions to support the agencies' activities, and
include such entities as the International Bank of Reconstruction and
Development (the World Bank), the Asian Development Bank, the European Coal and
Steel Community and the Inter-American Development Bank.
Portfolio securities which are listed on foreign exchanges may be traded on days
that the Portfolio does not value its securities, such as Saturdays and the
customary United States business holidays on which the New
621733.6
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York Stock Exchange ("NYSE") is closed. As a result, the net asset value of the
shares of the Portfolio may be significantly affected on days when shareholders
do not have access to the Fund.
In determining whether to invest in securities of foreign issuers, the Manager
will consider the likely effects of foreign taxes on the net yield available to
the Portfolio and its shareholders. Compliance with foreign tax law may reduce
the Portfolio's net income available for distribution to shareholders.
Lower Rated Securities: Fixed-income securities rated BB or lower by S&P or Ba
or lower by Moody's (and comparable unrated securities) are of below "investment
grade" quality. Lower quality fixed-income securities generally provide higher
yields, but are subject to greater credit and market risk, than higher quality
fixed-income securities, including U.S. Government and many Foreign Government
Securities. Lower quality fixed-income securities are considered predominantly
speculative with respect to the ability of the issuer to meet principal and
interest payments. Achievement of the investment objective of a mutual fund
investing in lower quality fixed-income securities may be more dependent on the
fund's adviser's or subadviser's own credit analysis than for a fund investing
in higher quality bonds. The market for lower quality fixed-income securities
may be more severely affected than some other financial markets by economic
recession or substantial interest rate increases, by changing public perceptions
of this market or by legislation that limits the ability of certain categories
of financial institutions to invest in these securities. In addition, the
secondary market may be less liquid for lower rated fixed income securities. The
lack of liquidity at certain times may affect the valuation of these securities
and may make the valuation and sale of these securities more difficult.
Securities of below investment grade quality are considered high yield, high
risk securities and are commonly known as "junk bonds." For more information,
including a detailed description of the ratings assigned by S&P, Moody's, Fitch
and Duff & Phelps, please refer to the Statement of Additional Information's
Appendix A - Description of Bond Ratings."
Mortgage-Related Securities: Mortgage-related securities, such as GNMA or FNMA
certificates, differ from traditional debt securities. Among the major
differences are that interest and principal payments are made more frequently,
usually monthly, and that principal may be prepaid at any time because the
underlying mortgage loans generally may be prepaid at any time. As a result, if
the Portfolio purchases these assets at a premium, a faster-than-expected
prepayment rate will reduce yield to maturity, and a slower-than-expected
prepayment rate will have the opposite effect of increasing yield to maturity.
If the Portfolio purchases mortgage-related securities at a discount,
faster-than-expected prepayments will increase, and slower-than- expected
prepayments will reduce, yield to maturity. Prepayments, and resulting amounts
available for reinvestment by the Portfolio, are likely to be greater during a
period of declining interest rates and, as a result, are likely to be reinvested
at lower interest rates. Accelerated prepayments on securities purchased at a
premium may result in a loss of principal if the premium has not been fully
amortized at the time of prepayment. Although these securities will decrease in
value as a result of increases in interest rates generally, they are likely to
appreciate less than other fixed-income securities when interest rates decline
because of the risk of prepayments. In addition, an increase in interest rates
would also increase the inherent volatility of the Portfolio by increasing the
average life of the portfolio securities.
An ARM, like a traditional mortgage security, is an interest in a pool of
mortgage loans that provides investors with payments consisting of both
principal and interest as mortgage loans in the underlying mortgage pool are
paid off by the borrowers. ARMs have interest rates that are reset at periodic
intervals, usually by reference to some interest rate index or market interest
rate. Although the rate adjustment feature may act as a buffer to reduce sharp
changes in the value of adjustable rate securities, these securities are still
subject to changes in value based on changes in market interest rates or changes
in the issuer's creditworthiness. Because the interest rates are reset only
periodically, changes in the interest rate on ARMs may lag behind changes in
prevailing market interest rates. Also, some ARMs (or the underlying mortgages)
are subject to caps or floors that limit the maximum change in interest rate
during a specified period or over the life of the security. As a result, changes
in the interest rate on an ARM may not fully reflect changes in prevailing
market interest rates during certain periods. Because of the resetting of
interest rates, ARMs are less likely than non-adjustable
621733.6
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rate securities of comparable quality and maturity to increase significantly in
value when market interest rates fall.
Collateralized Mortgage Obligations: A CMO is a security backed by a portfolio
of mortgages or mortgage securities held under an indenture. The underlying
mortgages or mortgage securities are issued or guaranteed by the U.S. Government
or an agency or instrumentality thereof. The issuer's obligation to make
interest and principal payments is secured by the underlying portfolio of
mortgages or mortgage securities. CMOs are issued with a number of classes or
series which have different maturities and which may represent interests in some
or all of the interest or principal on the underlying collateral or a
combination thereof. CMOs of different classes are generally retired in sequence
as the underlying mortgage loans in the mortgage pool are repaid. In the event
of sufficient early prepayments on such mortgages, the class or series of CMO
first to mature generally will be retired prior to its maturity. Thus, the early
retirement of a particular class or series of CMO held by the Portfolio would
have the same effect as the prepayment of mortgages underlying a mortgage
pass-through security. CMOs may be considered derivative securities.
In a CMO, a series of bonds or certificates are issued in multiple classes. Each
class of CMOs, often referred to as a "tranche," may be issued with a specific
fixed or floating coupon rate and has a stated maturity or final scheduled
distribution date. Principal prepayments on the underlying Mortgage Assets may
cause the CMOs to be retired substantially earlier than their stated maturities
or final scheduled distribution dates. Interest is paid or accrues on CMOs on a
monthly, quarterly or semi-annual basis. The principal of, and interest on, the
Mortgage Assets may be allocated among the several classes of a CMO in many
ways. The general goal in allocating cash flows on Mortgage Assets to the
various classes of a CMO is to create certain tranches on which the expected
cash flows have a higher degree of predictability than the underlying Mortgage
Assets. As a general matter, the more predictable the cash flow is on a
particular CMO tranche, the lower the anticipated yield will be on that tranche
at the time of issuance relative to prevailing market yields on certain other
Mortgage-Backed Securities. As part of the process of creating more predictable
cash flows on certain tranches of a CMO, one or more tranches generally must be
created that absorb most of the changes in the cash flows on the underlying
Mortgage Assets. The yields on these tranches are generally higher than
prevailing market yields on Mortgage-Backed Securities with similar average
lives. Because of the uncertainty of the cash flows on these tranches, the
market prices of and yields on these tranches are more volatile. The Fund may
purchase CMOs that have been sold in public offerings registered under the
Securities Act of 1933 or in private placements. CMOs acquired in private
placements will be subject to certain restrictions on resale and accordingly
will have limited marketability.
"Stripped" Securities: Stripped securities are usually structured with two or
more classes that receive different proportions of the interest and principal
distribution from a pool of U.S. or Foreign Government Securities or mortgage
assets. In some cases, one class will receive all of the interest (the
interest-only or "IO" class), while the other class will receive all of the
principal (the principal-only or "PO" class). Stripped securities commonly have
greater market volatility than other types of fixed-income securities. In the
case of stripped mortgage securities, if the underlying mortgage assets
experience greater than anticipated payments of principal, the Portfolio may
fail to recoup fully its investments in IOs. The staff of the SEC has indicated
that it views stripped mortgage securities as illiquid unless the securities are
issued by the U.S. Government or its agencies and are backed by fixed-rate
mortgages. The Portfolio intends to abide by the staff's position. Stripped
securities may be considered derivative securities.
Options, Futures, Swap Contracts and Currency Transactions: The Portfolio may
engage in a variety of transactions involving the use of exchange traded options
and futures with respect to U.S. or Foreign Government Securities, corporate
fixed-income securities or municipal bonds or indices thereof for purposes of
hedging against changes in interest rates.
621733.6
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The Portfolio may buy, sell or write options on securities, securities indexes,
currencies or futures contracts. The Portfolio may buy and sell futures
contracts on securities, securities indexes or currencies. The Portfolio may
also enter into swap contracts. The Portfolio may engage in these transactions
either for the purpose of enhancing investment return, or to hedge against
changes in the value of other assets that the Portfolio owns or intends to
acquire. The Portfolio may also conduct foreign currency exchange transactions
on a spot (i.e., cash) basis at the spot rate prevailing in the foreign currency
exchange market. Options, futures and swap contracts fall into the broad
category of financial instruments known as "derivatives" and involve special
risks. Use of options, futures or swaps for other than hedging purposes may be
considered a speculative activity, involving greater risks than are involved in
hedging.
Options can generally be classified as either "call" or "put" options. There are
two parties to a typical options transaction: the "writer" and the "buyer." A
call option gives the buyer the right to buy a security or other asset (such as
an amount of currency or a futures contract) from, and a put option the right to
sell a security or other asset to, the option writer at a specified price, on or
before a specified date. The buyer of an option pays a premium when purchasing
the option, which reduces the return on the underlying security or other asset
if the option is exercised, and results in a loss if the option expires
unexercised. The writer of an option receives a premium from writing an option,
which may increase its return if the option expires or is closed out at a
profit. If the Portfolio as the writer of an option is unable to close out an
unexpired option, it must continue to hold the underlying security or other
asset until the option expires, to "cover" its obligations under the option.
A futures contract creates an obligation by the seller to deliver and the buyer
to take delivery of the type of instrument or cash at the time and in the amount
specified in the contract. Although many futures contracts call for the delivery
(or acceptance) of the specified instrument, futures are usually closed out
before the settlement date through the purchase (or sale) of a comparable
contract. If the price of the sale of the futures contract by the Fund exceeds
(or is less than) the price of the offsetting purchase, the Portfolio will
realize a gain (or loss). The Portfolio may not purchase or sell futures
contracts or purchase related options if immediately thereafter the sum of the
amount of deposits for initial margin or premiums on the existing futures and
related options positions would exceed 5% of the market value of the Portfolio's
net assets. Transactions in futures and related options involve the risks of (1)
imperfect correlation between the price movement of the contracts and the
underlying securities, (2) significant price movement in one but not the other
market because of different hours, (3) the possible absence of a liquid
secondary market at any point in time. If the subadviser's prediction on
interest rates or other economic factors is inaccurate, the Fund may be worse
off than if it had not hedged. Futures transactions involve potentially
unlimited risk of loss.
The Portfolio may enter into interest rate, currency and securities index swaps.
The Portfolio will enter into these transactions primarily to seek to preserve a
return or spread on a particular investment or portion of its portfolio, to
protect against currency fluctuations, as a duration management technique, or to
protect against an increase in the price of securities the Portfolio anticipates
purchasing at a later date. Interest rate swaps involve the exchange by the Fund
with another party of their respective commitments to pay or receive interest
(for example, an exchange of floating rate payments for fixed rate payments with
respect to a notional amount of principal). A currency swap is an agreement to
exchange cash flows on a notional amount based on changes in the relative values
of the specified currencies. An index swap is an agreement to make or receive
payments based on the different returns that would be achieved if a notional
amount were invested in a specified basket of securities (such as the Standard &
Poor's Composite Index of 500 Stocks (the "S&P 500") or in some other investment
(such as U.S. Treasury securities).
The value of options purchased by the Portfolio, futures contracts held by the
Portfolio and the Portfolio's positions in swap contracts may fluctuate up or
down based on a variety of market and economic factors. In some cases, the
fluctuations may offset (or be offset by) changes in the value of securities
held in the Portfolio. All transactions in options, futures or swaps involve
costs and the possible risk of loss to the Portfolio of all or a significant
part of the value of its investment. In some cases, the risk of loss may exceed
the amount of the Portfolio's investment. The Portfolio will be required,
however, to set aside with its
621733.6
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custodian bank certain assets in amounts sufficient at all times to satisfy its
obligations under options, futures and swap contracts.
The successful use of options, futures and swaps will usually depend on the
Manager's ability to forecast bond market, currency or other financial market
movements correctly. The Portfolio's ability to hedge against adverse changes in
the value of securities held in its portfolio through options, futures and swap
transactions also depends on the degree of correlation between the changes in
the value of futures, options or swap positions and changes in the values of the
portfolio securities. The successful use of futures and exchange traded options
also depends on the availability of a liquid secondary market to enable the
Portfolio to close its positions on a timely basis. There can be no assurance
that such a market will exist at any particular time. Trading hours for options
may differ from the trading hours for the underlying securities. Thus,
significant price movements may occur in the securities markets that are not
reflected in the options market. The foregoing may limit the effectiveness of
options as hedging devices. Certain provisions of the Code and certain
regulatory requirements may limit the Portfolio's ability to engage in futures,
options and swap transactions.
The options and futures markets of foreign countries are small compared to those
of the United States and consequently are characterized in most cases by less
liquidity than are the U.S. markets. In addition, foreign markets may be subject
to less detailed reporting requirements and regulatory controls than U.S.
markets. Furthermore, investments by the Portfolio in options and futures in
foreign markets are subject to many of the same risks as are the Fund's other
foreign investments. See "Foreign Securities." For further information, see
"Futures, Options and Swap Contracts" in the Statement of Additional
Information.
INVESTMENT RESTRICTIONS
The Portfolio has adopted the following investment restrictions which are in
addition to those described in the Prospectus. Under the following restrictions,
which may not be changed without the approval of a majority of the Portfolio's
shareholders, the Portfolio may not:
(1) Borrow Money. This restriction shall not apply to borrowings from banks
for temporary or emergency (not leveraging) purposes, including the
meeting of redemption requests that might otherwise require the untimely
disposition of securities, in an amount up to 15% of the value of the
Portfolio's total assets (including the amount borrowed) valued at market
less liabilities (not including the amount borrowed) at the time the
borrowing was made. While borrowings exceed 5% of the value of the
Portfolio's total assets, the Portfolio will not make any investments.
Interest paid on borrowings will reduce net income.
(2) Pledge, hypothecate, mortgage or otherwise encumber its assets, except in
an amount up to 15% of the value of its total assets and only to secure
borrowings for temporary or emergency purposes.
(3) Sell securities short or purchase securities on margin, or engage in the
purchase and sale of put, call, straddle or spread options or in writing
such options.
(4) Underwrite the securities of other issuers, except insofar as the
Portfolio may be deemed an underwriter under the Securities Act of 1933
in disposing of a portfolio security.
(5) Purchase or sell real estate, real estate investment trust securities,
commodities or commodity contracts, or oil and gas interests, but this
shall not prevent the Portfolio from investing in obligations secured by
real estate or interests in real estate.
(6) Make loans to others.
(7) Invest in companies for the purpose of exercising control.
621733.6
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(8) Invest more than 25% of it assets in the securities of "issuers" in any
single industry, provided that there shall be no limitation on the
purchase obligations issued or guaranteed by the United States
Government, its agencies or instrumentalities.
(9) Invest in securities of other investment companies, except the Portfolio
may purchase unit investment trust securities where such unit trusts meet
the investment objectives of the Portfolio and then only up to 5% of the
Portfolio's net assets, except as they may be acquired as part of a
merger, consolidation or acquisition of assets.
(10) Issue senior securities, except insofar as the Portfolio may be deemed to
have issued a senior security in connection with any permitted borrowing.
If a percentage restriction is adhered to at the time of an investment, a later
increase or decrease in percentage resulting from a change in values of
portfolio securities or in the amount of the Fund's assets will not constitute a
violation of such restrictions.
PORTFOLIO TRANSACTIONS
The Manager makes the Fund's portfolio decisions and determines the broker to be
used in each specific transaction with the objective of negotiating a
combination of the most favorable commission and the best price obtainable on
each transaction (generally defined as best execution). When consistent with the
objective of obtaining best execution, brokerage may be directed to persons or
firms supplying investment information to the Manager or portfolio transactions
may be effected by the Manager. Neither the Fund nor the Manager has entered
into agreements or understandings with any brokers regarding the placement of
securities transactions because of research services they provide. To the extent
that such persons or firms supply investment information to the Manager for use
in rendering investment advice to the Fund, such information may be supplied at
no cost to the Manager and, therefore, may have the effect of reducing the
expenses of the Manager in rendering advise to the Fund. While it is impossible
to place an actual dollar value on such investment information, its receipt by
the Manager probably does not reduce the overall expenses of the Manager to any
material extent. Consistent with the Rules of Fair Practice of the National
Association of Securities Dealers, Inc., and subject to seeking best execution,
the Manager may consider sales of shares of the Fund as a factor in the
selection of brokers to execute portfolio transactions for the Fund.
The investment information provided to the Manager is of the type described in
Section 28(e) of the Securities Exchange Act of 1934 and is designed to augment
the Manager's own internal research and investment strategy capabilities.
Research services furnished by brokers through which the Fund effects securities
transactions are used by the Manager in carrying out its investment management
responsibilities with respect to all its clients' accounts. There may be
occasions where the transaction cost charged by a broker may be greater than
that which another broker may charge if the Manager determines in good faith
that the amount of such transaction cost is reasonable in relation to the value
of brokerage and research services provided by the executing broker.
The Fund may deal in some instances in securities which are not listed on a
national securities exchange but are traded in the over-the-counter market. It
may also purchase listed securities through the third market. Where transactions
are executed in the over-the-counter market or the third market, the Fund will
seek to deal with the primary market makers; but when necessary in order to
obtain best execution, it will utilize the services of others. In all cases the
Fund will attempt to negotiate best execution.
The Distributor may from time to time effect transactions in the Fund's
portfolio securities. In such instances, the placement of orders with the
Distributor would be consistent with the Fund's objective of obtaining best
execution. With respect to orders placed with the Distributor for execution on a
national securities exchange,
621733.6
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commissions received must conform to Section 17(e)(2)(A) of the Investment
Company Act of 1940 (the "1940 Act"), as amended, and Rule 17e-1 thereunder,
which permit an affiliated person of a registered investment company (such as
the Fund) to receive brokerage commissions from such registered investment
company provided that such commissions are reasonable and fair compared to
commissions received by other brokers in connection with comparable transactions
involving similar securities during a comparable period of time. In addition,
pursuant to Section 11(a) of the Securities Exchange Act of 1934, the
Distributor is restricted as to the nature and extent of the brokerage services
it may perform for the Fund. The Securities and Exchange Commission has adopted
rules under Section 11(a) which permit a distributor to a registered investment
company to receive compensation for effecting, on a national securities
exchange, transactions in portfolio securities of such investment company,
including causing such transactions to be transmitted, executed, cleared and
settled and arranging for unaffiliated brokers to execute such transactions. To
the extent permitted by such rules, the Distributor may receive compensation
relating to transactions in portfolio securities of the Fund provided that the
Fund enters into a written agreement, as required by such rules, with the
Distributor authorizing it to retain compensation for such services.
Transactions in portfolio securities placed with the Distributor which are
executed on a national securities exchange must be effected in accordance with
procedures adopted by the Board of Directors of the Fund pursuant to Rule 17e-1.
No portfolio transactions are executed with the Manager or its affiliates acting
as principal. In addition, the Fund will not buy bankers' acceptances,
certificates of deposit or commercial paper from the Manager or its affiliates.
HOW TO PURCHASE AND REDEEM SHARES
The material relating to the purchase and redemption of shares in the Prospectus
is herein incorporated by reference.
MANAGER
The material relating to the Manager in the Prospectus is herein incorporated by
reference.
Expense Limitation
The Manager has agreed, pursuant to the Investment Management Contract, to
reimburse the Fund for its expenses (exclusive of interest, taxes, brokerage,
and extraordinary expenses) which, in any year, exceed the limits on investment
company expenses prescribed by any state in which the Fund's shares are
qualified for sale. For the purpose of this obligation to reimburse expenses,
the Fund's annual expenses are estimated and accrued daily, and any appropriate
estimated payments are made to it on a monthly basis. Subject to the obligations
of the Manager to reimburse the Fund for its excess expenses as described above,
the Fund has, under the Investment Management Contract, confirmed its obligation
for payment of all its other expenses, including taxes, brokerage fees and
commissions, commitment fees, certain insurance premiums, interest charges and
expenses of the custodian, transfer agent and dividend disbursing agent's fees,
tele communications expenses, auditing and legal expenses, bookkeeping agent
fees, costs of forming the corporation and maintaining corporate existence,
compensation of directors, officers and employees of the Fund and costs of other
personnel performing services for the Fund who are not officers of the general
partner of the Manager or its affiliates, costs of investor services,
shareholder reports and corporate meetings, Securities and Exchange Commission
registration fees and expenses, state securities laws registration fees and
expenses, expenses of preparing and printing the Fund's prospectus for delivery
to existing shareholders and of printing application forms for shareholder
accounts and the fees payable to the Manager under the Investment Management
Contract and the Administrative Services Contract and the Distributor under the
Shareholder Servicing Agreement.
621733.6
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The Fund may from time to time hire its own employees or contract to have
management services performed by third parties (including Participating
Organizations, as defined under "Distribution and Service Plan") as discussed
herein, and the management of the Fund intends to do so whenever it appears
advantageous to the Fund. The Fund's expenses for employees and for such
services are among the expenses subject to the expense limitation described
above. As a result of the recent passage of the National Securities Markets
Improvement Act of 1996, all state expense limitations have been eliminated at
this time.
MANAGEMENT OF THE FUND
The directors and officers of the Fund, and their principal occupations for the
past five years, are listed below. The address of each such person, unless
otherwise indicated, is 600 Fifth Avenue, New York, New York 10020. Directors
deemed to be "interested persons" of the Fund for the purposes of the 1940 Act
are indicated by an asterisk.
Edgar M. Reed, 50 -- Director of the Fund, has been Chief Investment Officer and
Executive Vice President of Back Bay Advisors, L.P. since 1994 and was formerly
Managing Director of Aetna Capital Management's Fixed Income Group from 1972 to
1994. His address is __________________. Mr. Reed is also a Director of Back Bay
Advisors, L.P. and a Trustee of Bowdoin College.
Dr. W. Giles Mellon, 66 -- Director of the Fund, is Professor of Business
Administration in the Graduate School of Management, Rutgers University with
which he has been associated since 1966. His address is Rutgers University
Graduate School of Management, 92 New Street, Newark, New Jersey 07102. Dr.
Mellon is also a Director of AEW Commercial Mortgage Securities Fund, Inc.,
California Daily Tax Free Income Fund, Inc., Connecticut Daily Tax Free Income
Fund, Inc., Daily Tax Free Income Fund, Inc., Delafield Fund, Inc., New Jersey
Daily Municipal Income Fund, Inc., North Carolina Daily Municipal Income Fund,
Inc., Reich & Tang Equity Fund, Inc., Short Term Income Fund, Inc. and Virginia
Daily Tax Free Income Fund, Inc. and a Trustee of Florida Daily Municipal Income
Fund, Institutional Daily Income Fund, and Pennsylvania Daily Municipal Income
Fund.
Robert Straniere, 55 -- Director of the Fund, has been a member of the New York
State Assembly and a partner with the Straniere & Straniere Law Firm since 1981.
His address is 182 Rose Avenue, Staten Island, New York 10306. Mr. Straniere is
also a Director of AEW Commercial Mortgage Securities Fund, Inc., California
Daily Tax Free Income Fund, Inc., Connecticut Daily Tax Free Income Fund, Inc.,
Daily Tax Free Income Fund, Inc., Delafield Fund, Inc., LifeCycle Mutual Funds,
Inc., New Jersey Daily Municipal Income Fund Inc., North Carolina Daily
Municipal Income Fund, Inc., Reich & Tang Equity Fund, Inc., Short Term Income
Fund, Inc. and Virginia Daily Tax Free Income Fund, Inc. and a Trustee of
Florida Daily Municipal Income Fund, Institutional Daily Income Fund, and
Pennsylvania Daily Municipal Income Fund.
Dr. Yung Wong, 58 -- Director of the Fund, was director of Shaw Investment
Management (UK) Limited from October 1994 to October 1995, and formerly General
Partner of Abacus Limited Partnership (a general partner of a venture capital
investment firm) from 1984 to 1994. His address is 29 Alden Road, Greenwich,
Connecticut 06831. Dr. Wong has been a Director of Republic Telecom Systems
Corporation (provider of telecommunications equipment) since January 1989 and of
TelWatch, Inc. (provider of network management software) since August 1989. Dr.
Wong is a Director of AEW Commercial Mortgage Securities Fund, Inc., California
Daily Tax Free Income Fund, Inc., Connecticut Daily Tax Free Income Fund, Inc.,
Daily Tax Free Income Fund, Inc., Delafield Fund, Inc., New Jersey Daily
Municipal Income Fund Inc., North Carolina Daily Municipal Income Fund, Inc.,
Reich & Tang Equity Fund, Inc., Short Term Income Fund, Inc. and Virginia Daily
Tax Free Income Fund, Inc. and a Trustee of Florida Daily Municipal Income Fund,
Institutional Daily Income Fund, and Pennsylvania Daily Municipal Income Fund.
Molly Flewharty, 46 -- Vice President of the Fund, has been Vice President of
the Mutual Funds Division of the Manager since September 1993. Ms. Flewharty was
formerly Vice President of Reich & Tang, Inc. which
621733.6
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she was associated with from December 1977 to September 1993. Ms. Flewharty is
also Vice President of California Daily Tax Free Income Fund, Inc., Connecticut
Daily Tax Free Income Fund, Inc., Cortland Trust, Inc., Daily Tax Free Income
Fund, Inc., Delafield Fund, Inc., Florida Daily Municipal Income Fund,
Institutional Daily Income Fund, New Jersey Daily Municipal Income Fund Inc.,
New York Daily Tax Free Income Fund, Inc., North Carolina Daily Municipal Income
Fund, Inc., Pennsylvania Daily Municipal Income Fund, Reich & Tang Equity Fund,
Inc., Short Term Income Fund, Inc. and Tax Exempt Proceeds Fund, Inc.
Lesley M. Jones, 48 -- Vice President of the Fund, has been Senior Vice
President of the Reich & Tang Mutual Funds Division of the Manager since
September 1993. Ms. Jones was formerly Senior Vice President of Reich & Tang,
Inc. which she was associated with from April 1973 to September 1993. Ms. Jones
is also a Vice President of California Daily Tax Free Income Fund, Inc.,
Connecticut Daily Tax Free Income Fund, Inc., Daily Tax Free Income Fund, Inc.,
Delafield Fund, Inc., Florida Daily Municipal Income Fund, Institutional Daily
Income Fund, New Jersey Daily Municipal Income Fund, Inc., New York Daily Tax
Free Income Fund, Inc., North Carolina Daily Municipal Income Fund, Inc.,
Pennsylvania Daily Municipal Income Fund, Reich & Tang Equity Fund, Inc., Short
Term Income Fund and Virginia Daily Tax Free Income Fund, Inc.
Dana E. Messina, 40 -- Vice President of the Fund, has been Executive Vice
President of the Mutual Funds Division of the Manager since January 1995, and
was Vice President from September 1993 to January 1995. Ms. Messina was formerly
Vice President of Reich & Tang, Inc. which she was associated with from December
1980 to September 1993. Ms. Messina is also Vice President of California Daily
Tax Free Income Fund, Inc., Connecticut Daily Tax Free Income Fund, Inc.,
Cortland Trust, Inc., Daily Tax Free Income Fund, Inc., Delafield Fund, Inc.,
Florida Daily Municipal Income Fund, Institutional Daily Income Fund, New Jersey
Daily Municipal Income Fund, Inc., New York Daily Tax Free Income Fund, Inc.,
North Carolina Daily Municipal Income Fund, Inc., Pennsylvania Daily Municipal
Income Fund, Reich & Tang Equity Fund, Inc., Short Term Income Fund, Inc., Tax
Exempt Proceeds Fund, Inc. and Virginia Daily Tax Free Income Fund, Inc.
Bernadette N. Finn, 49 -- Secretary of the Fund, has been Vice President of the
Mutual Funds Division of the Manager since September 1993. Ms. Finn was formerly
Vice President and Assistant Secretary of Reich & Tang, Inc. which she was
associated with from September 1970 to September 1993. Ms. Finn is also
Secretary of AEW Commercial Mortgage Securities Fund, Inc., California Daily Tax
Free Income Fund, Inc., Connecticut Daily Tax Free Income Fund, Inc., Cortland
Trust, Inc., Daily Tax Free Income Fund, Inc., Florida Daily Municipal Income
Fund, New Jersey Daily Municipal Income Fund Inc., New York Daily Tax Free
Income Fund, Inc., North Carolina Daily Municipal Income Fund, Inc.,
Pennsylvania Daily Municipal Income Fund and Tax Exempt Proceeds Fund, Inc. and
Vice President and Secretary of Delafield Fund, Inc., Institutional Daily Income
Fund, Reich & Tang Equity Fund, Inc., Short Term Income Fund, Inc. and Virginia
Daily Tax Free Income Fund, Inc.
Richard De Sanctis, 40 -- Treasurer of the Fund, has been Vice President and
Treasurer of the Manager since September 1993. Mr. De Sanctis was formerly
Controller of Reich & Tang, Inc. from January 1991 to September 1993 and Vice
President and Treasurer of Cortland Financial Group, Inc. and Vice President of
Cortland Distributors, Inc. from 1989 to December 1990. He is also Treasurer of
AEW Commercial Mortgage Securities Fund, Inc., California Daily Tax Free Income
Fund, Inc., Connecticut Daily Tax Free Income Fund, Inc., Daily Tax Free Income
Fund, Inc., Delafield Fund, Inc., Florida Daily Municipal Income Fund,
Institutional Daily Income Fund, New Jersey Daily Municipal Income Fund, Inc.,
New York Daily Tax Free Income Fund, Inc., North Carolina Daily Municipal Income
Fund, Inc., Pennsylvania Daily Municipal Income Fund, Reich & Tang Equity Fund,
Inc., Short Term Income Fund, Inc., Tax Exempt Proceeds Fund, Inc., Virginia
Daily Tax Free Income Fund, Inc. and Vice President and Treasurer of Cortland
Trust, Inc.
Counsel and Auditors
621733.6
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Legal matters in connection with the issuance of shares of stock of the Fund are
passed upon by Battle Fowler LLP, 75 East 55th Street, New York, New York 10022.
McGladrey & Pullen, LLP, 555 Fifth Avenue, New York, New York 10017, independent
certified public accountants, have been selected as auditors for the Fund.
DISTRIBUTION AND SERVICE PLAN
The material relating to the Distributor in the Prospectus is herein
incorporated by reference.
DIVIDENDS, DISTRIBUTIONS AND TAXES
The material relating to Dividends, Distribution and Taxes in the Prospectus is
herein incorporated by reference.
THE GLASS-STEAGALL ACT
The material relating to the Glass-Steagall Act in the Prospectus is herein
incorporated by reference.
DESCRIPTION OF SHARES
The material relating to the description of shares in the Prospectus is herein
incorporated by reference.
CUSTODIAN AND TRANSFER AGENT
The material relating to the Custodian and Transfer Agent in the Prospectus is
herein incorporated by reference.
PERFORMANCE INFORMATION
The material relating to Performance Information in the Prospectus is herein
incorporated by reference.
NET ASSET VALUE
The Fund determines the net asset value of the shares of the Fund (computed
separately for each Class of shares) of the Fund as of 4:00 p.m., New York City
time, by dividing the value of each Fund's net assets (i.e., the value of its
securities and other assets less its liabilities, including expenses payable or
accrued but excluding capital stock and surplus) by the number of shares
outstanding of the Fund at the time the determination is made. The Fund
determines its net asset value on each Fund Business Day. Fund Business Day for
this purpose means any day on which the Fund's custodian is open for trading.
Purchases and redemptions will be effected at the time of determination of net
asset value next following the receipt of any purchase or redemption order.
DESCRIPTION OF RATINGS*
621733.6
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Moody's Investors Service, Inc. ("Moody's")
Aaa: Bonds which are rated Aaa are judged to be the best quality. They carry the
smallest degree of investment risk and are generally referred to as "gilt edge."
Interest payments are protected by a large or by an exceptionally stable margin
and principal is secure. While the various protective elements are likely to
change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuations of protective elements
may be of greater amplitude or there may be other elements present which make
the long-term risks appear somewhat larger than in Aaa securities.
A: Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future.
-----------------------------
* As described by the rating agencies.
Baa: Bonds which are rated Baa are considered as medium grade obligations, i.e.,
they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba: Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of a desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca: Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
Unrated: Where no rating has been assigned or where a rating has been
suspended or withdrawn, it may be for reasons unrelated to the quality of the
issue.
Should no rating be assigned, the reason may be one of the following:
An application for rating was not received or accepted.
1) The issue or issuer belongs to a group of securities that are not rated
as a matter of policy.
2) There is a lack of essential data pertaining to the issue or issuer.
3) The issue was privately placed, in which case the rating is not
published in Moody's publications.
621733.6
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Suspension or withdrawal may occur if new and material circumstances arise, the
effects of which preclude satisfactory analysis; if there is no longer available
reasonable up-to-date data to permit a judgment to be formed; if a bond is
called for redemption; or for other reasons.
Note: Those bonds in the Aa, A, Baa, Ba and B groups which Moody's believes
possess the strongest investment attributes are designated by the symbols Aa-1,
A-1, Baa-1 and B-1.
Standard & Poor's Rating Services, a division of the McGraw-Hill Companies
("S&P'")
AAA: Bonds rated AAA have the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.
AA: Bonds rated AA have a very strong capacity to pay interest and repay
principal and differ from the higher rated issues only in small degree.
A: Bonds rated A have a strong capacity to pay interest and repay principal
although they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than bonds in the highest rated
categories.
BBB: Bonds rated BBB are regarded as having an adequate capacity to pay interest
and repay principal. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
bonds in this category than in higher rated categories.
BB, B, CCC, CC, C: Bonds rated BB, B, CCC, CC and C are regarded, on balance, as
predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of this obligation. BB indicates the
lowest degree of speculation and C the highest degree of speculation. While such
bonds will likely have some quality and protective characteristics, they are
outweighed by large uncertainties of major risk exposures to adverse conditions.
C1: The rating C1 is reserved for income bonds on which no interest is being
paid.
D: Bonds rated D are in default, and payment of interest and/or repayment of
principal is in arrears.
Plus (+) or Minus (-): The ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
NR: Indicates that no rating has been requested, that there is insufficient
information on which to base a rating, or that S&P does not rate a particular
type of obligation as a matter of policy.
Fitch Investors Service, Inc.
AAA: Securities in this category are considered to be investment grade and of
the highest credit quality. The obligor has an exceptionally strong ability to
pay interest and repay principal, which is unlikely to be affected by reasonably
foreseeable events.
AA: Securities in this category are considered to be investment grade and of
very high credit quality. The obligor's ability to pay interest and repay
principal is very strong, although not quite as strong as securities rated
"AAA." As securities rated in the "AAA" and "AA" categories are not
significantly vulnerable to foreseeable future developments, short-term debt of
these issuers is generally rated "F-1+."
A: Securities in this category are considered to be investment grade and of high
credit quality. The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse changes in
economic conditions and circumstances than securities with higher ratings.
BBB: Securities in this category are considered to be investment grade and of
satisfactory quality. The obligor's ability to pay interest and repay principal
is considered to be adequate. Adverse changes in
621733.6
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economic conditions and circumstances, however, are more likely to have adverse
impact on these bonds, and therefore, impair timely payment.
BB: Securities are considered speculative. The obligor's ability to pay interest
and repay principal may be affected over time by adverse economic changes.
However, business and financial alternatives can be identified, which could
assist the obligor in satisfying its debt service requirements.
B: Securities are considered highly speculative. While securities in this class
are currently meeting debt service requirements, the probability of continued
timely payment of principal and interest reflects the obligor's limited margin
of safety and the need for reasonable business and economic activity throughout
the life of the issue.
CCC: Securities have certain identifiable characteristics that, if not remedied,
may lead to default. The ability to meet obligations requires an advantageous
business and economic environment.
CC: Securities are minimally protected. Default in payment of interest and/or
principal seems probable over time.
C: Securities are in imminent default in payment of interest or principal.
DDD, DD, and D: Securities are in default on interest and/or principal payments.
Such securities are extremely speculative and should be valued on the basis of
their ultimate recovery value in liquidation or reorganization of the obligor.
"DDD" represents the highest potential for recovery on these securities, and "D"
represents the lowest potential for recovery.
Plus (+) or Minus (-): The ratings from AA to C (i.e. five categories below BBB)
may be modified by the addition of a plus or minus sign to indicate the relative
position of a credit within the rating category.
NR: Indicates that Fitch does not rate the specific issue.
Conditional: A conditional rating is premised on the successful completion of a
project or the occurrence of a specific event.
Duff & Phelps Credit Rating Co.
AAA: Highest credit quality. The risk factors are negligible, being only
slightly more than for risk-free U.S. Treasury debt.
AA: High credit quality. Protection factors are strong. Risk is modest but may
vary slightly from time to time because of economic conditions.
A: Protection factors are average but adequate. However, risk factors are more
variable and greater in periods of economic stress.
BBB: Below-average protection factors but within the definition of investment
grade securities but still considered sufficient for prudent investment.
Considerable variability in risk during economic cycles.
BB+, BB, BB-: Below investment grade but deemed likely to meet obligations when
due. Present or prospective financial protection factors fluctuate according to
industry conditions or company fortunes. Overall quality may move up or down
frequently within this category.
B+, B, B-: Below investment grade and possessing risk that obligations will not
be met when due. Financial protection factors will fluctuate widely according to
economic cycles, industry conditions and/or company fortunes. Potential exists
for frequent changes in the rating within this category or into a higher or
lower rating grade.
621733.6
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CCC: Well below investment-grade securities. Considerable uncertainty exists as
to timely payment of principal, interest or preferred dividends. Protection
factors are narrow and risk can be substantial with unfavorable
economic/industry conditions, and/or with unfavorable company developments.
DD: Defaulted debt obligations. Issuer failed to meet scheduled principal and/or
interest payments.
DP: Preferred stock with dividend arrearages.
Plus (+) or Minus (-): The ratings from AA to C (i.e. five categories below BBB)
may be modified by the addition of a plus or minus sign to indicate the relative
position of a credit within the rating category.
621733.6
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<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Directors and Shareholder
Back Bay Funds, Inc.- Total Return Bond Fund
We have audited the accompanying statement of assets and liabilities of Back Bay
Funds, Inc.- Total Return Bond Fund as of November 26, 1997. This financial
statement is the responsibility of the Fund's management. Our responsibility is
to express an opinion on this financial statement based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statement is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statement referred to above presents fairly, in
all material respects, the financial position of Back Bay Funds, Inc.- Total
Return Bond Fund as of November 26, 1997, in conformity with generally accepted
accounting principles.
McGladrey & Pullen, LLP
New York, New York
December 4, 1997
<PAGE>
BACK BAY FUNDS, INC.- TOTAL RETURN BOND FUND
STATEMENT OF ASSETS AND LIABILITIES
November 26, 1997
<TABLE>
ASSETS
<S> <C>
Cash $ 102,000
Deferred organization expense 44,000
Total assets 146,000
LIABILITIES
Payable for deferred organization expense 44,000
NET ASSETS
Net assets $102,000
Net asset value, offering and redemption price per share:
Class A shares, 10,000 shares outstanding $ 10.00
Class B shares, 100 shares outstanding $ 10.00
Class C shares, 100 shares outstanding $ 10.00
</TABLE>
See Notes to Financial Statement.
<PAGE>
BACK BAY FUNDS, INC. - TOTAL RETURN BOND FUND
NOTES TO FINANCIAL STATEMENT
Note 1. Back Bay Funds, Inc. (the "Fund") was incorporated under the laws
of the state of Maryland on August 15, 1997 and is authorized to issue
20,000,000,000 shares of common stock, $.001 par value. The Fund
currently has only one portfolio, the Total Return Bond Fund (the
"Portfolio"). The Portfolio is subdivided into three classes of common
stock, Class A, Class B, and Class C. The shares differ by their class
designations and shareholders to whom they are distributed, and a
service fee for Class B and Class C shares of 0.25% of the average
daily net assets of each class.
The Fund is registered under the Investment Company Act of 1940 as a
diversified, open-end management investment company and has had no
operations to date other than those relating to its organization and
the sale and issuance of 10,000 Class A shares, and 100 shares each of
Class B and Class C shares of common stock to Back Bay Advisors, L.P.,
its Manager. The Investment Management Contract, the Administrative
Services Agreement and the Shareholder Servicing Agreement are
described elsewhere in the Prospectus and Statement of Additional
Information.
Note 2. Organizational expenses are being deferred and will be amortized on
a straight-line basis over a five year period. During the amortization
period the proceeds of any redemption of initial shares by any holder
thereof will be reduced by a pro rata portion of any then unamortized
organization expense, based on the ratio of the shares redeemed to the
total initial shares outstanding immediately prior to the redemption.
<PAGE>
PART C - OTHER INFORMATION
Item 24. Financial Statements and Exhibits.
(A) Financial Statements
Included in Prospectus Part A:
(1) Table of Fees and Expenses
Included in Statement of Additional Information Part B:
(1) Report of McGladrey & Pullen, LLP, independent
accountants, dated December 4, 1997; and
(2) Statement of Net Assets and Liabilities (audited).
(B) Exhibits
* (1) Articles of Incorporation of the Registrant.
* (2) By-Laws of the Registrant.
(3) Not applicable.
(4) Not applicable.
(5) Form of Investment Management Contract between the
Registrant and Back Bay Advisors, L.P.
(6) See Form of Distribution Agreement filed as Exhibit
15.2.
(7) Not applicable.
(8) Form of Custody Agreement between the Registrant and
Investors Fiduciary Trust Company.
(9) Not Applicable.
(9.1) Form of Administrative Services Agreement between
the Registrant and Reich & Tang Asset Management L.P.
(10) Consent Opinion of Messrs. Battle Fowler LLP as to
the use of their name under the headings "Federal
Income Taxes" in the Prospectus and "Counsel and
Auditors" in the Statement of Additional Information.
(11) Consent of Independent Auditors.
(12) Not Applicable.
(13) Written assurance of New England Investment
Companies, L.P. that its purchase of shares of the
Registrant was for investment purposes without any
present intention of redeeming or reselling.
- --------
* Filed with Registration Statement No. 333-33831 on August 18, 1997,
and incorporated by reference herein.
619920.3
C-1
<PAGE>
(14) Not Applicable.
(15.1) Form of Distribution and Service Plan pursuant to
Rule 12b-1 under the Investment Company Act of
1940.
(15.2) Form of Distribution Agreement between the Registrant
and Reich & Tang Distributors L.P.
(15.3) Form of Shareholder Servicing Agreements (with
respect to Class B and C only) between the Registrant
and Reich & Tang Distributors L.P.
(16) Powers of Attorney.
** (17) Financial Data Schedule (For EDGAR Filing Only)
(18) 18f-3 Multi-Class Plan.
Item 25. Persons controlled by or Under Common Control with Registrant.
None.
Item 26. Number of Holders of Securities.
Number of Record Holders
Title of Class as of December 11, 1997
--------------- -----------------------
Common Stock
(par value $.001)
Class A 1
Class B 1
Class C 1
Item 27. Indemnification.
In accordance with Section 2-418 of the General
Corporation Law of the State of Maryland, Article NINTH of the
Registrant's Articles of Incorporation provides as follows:
"NINTH: (a) The Corporation shall indemnify (i) its
currently acting and former directors and officers, whether
serving the Corporation or at its request any other entity, to
the fullest extent required or permitted by the General Laws of
the State of Maryland now or hereafter in force, including the
advance of expenses under the procedures and to the fullest
extent permitted by law, and (ii) other employees and agents to
such extent as shall be authorized by the Board of Directors or
the By-Laws and as permitted by law. Nothing contained herein
shall be construed to protect any director or officer of the
Corporation against any liability to the Corporation or its
security holders to which he would otherwise be subject by reason
of willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties involved in the conduct of his office.
The foregoing rights of indemnification shall not be exclusive of
any other rights to which those seeking indemnification may be
entitled. The Board of Directors may take such action as is
necessary to carry out these indemnification provisions and is
expressly empowered to adopt, approve and amend from time to time
such by-laws, resolutions or contracts implementing such
provisions or such
- --------
** To be filed by Amendment.
619920.3
C-2
<PAGE>
indemnification arrangements as may be permitted by law. No
amendment of the charter of the Corporation or repeal of any of
its provisions shall limit or eliminate the right of
indemnification provided hereunder with respect to acts or
omissions occurring prior to such amendment or repeal.
(b) To the fullest extent permitted by Maryland statutory or
decisional law, as amended or interpreted, and the Investment
Company Act of 1940, no director or officer of the Corporation
shall be personally liable to the Corporation or its stockholders
for money damages; provided, however, that nothing herein shall
be construed to protect any director or officer of the
Corporation against any liability to the Corporation or its
security holders to which he would otherwise be subject by reason
of willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties involved in the conduct of his office. No
amendment of the charter of the Corporation or repeal of any of
its provisions shall limit or eliminate the limitation of
liability provided to directors and officers hereunder with
respect to any act or omission occurring prior to such amendment
or repeal."
In Section 7 of the Distribution Agreement relating to the
securities being offered hereby, the Registrant agrees to
indemnify Back Bay Funds, Inc. and any person who controls Back
Bay Funds, Inc., within the meaning of the Securities Act of
1933, against certain types of civil liabilities arising in
connection with the Registration Statement or Prospectus.
Insofar as indemnification for liabilities arising under
the Securities Act of 1933 (the "Securities Act") may be
permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise,
the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is,
therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than a payment by
the Registrant of expenses incurred or paid by a director,
officer or the Registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer
or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question of
whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final
adjudication of such issue.
Insofar as the Investment Company Act of 1940 may be
concerned, in the event that a claim for indemnification is
asserted by a director, officer or controlling person of the
Registrant in connection with the securities being registered,
the Registrant will not make such indemnification unless (i) the
Registrant has submitted, before a court or other body, the
question of whether the person to be indemnified was liable by
reason of willful misfeasance, bad faith, gross negligence, or
reckless disregard of duties, and has obtained a final decision
on the merits that such person was not liable by reason of such
conduct or (ii) in the absence of such decision, the Registrant
shall have obtained a reasonable determination, based upon a
review of the facts, that such person was not liable by virtue of
such conduct, by (a) the vote of a majority of directors who are
neither interested persons as such term is defined in the
Investment Company Act of 1940, nor parties to the proceeding or
(b) an independent legal counsel in a written opinion.
The Registrant will not advance attorneys' fees or other
expenses incurred by the person to be indemnified unless the
Registrant shall have received an undertaking by or on behalf of
such person to repay the advance unless it is ultimately
determined that such person is entitled to indemnification and
one of the following conditions shall have occurred: (x) such
person shall provide security for his undertaking, (y) the
Registrant shall be insured against losses arising by reason of
any lawful advances or (z) a majority of the disinterested,
non-party directors of the Registrant, or an independent legal
counsel in a written opinion, shall have determined that based on
a review of readily available facts there is reason to believe
that such person ultimately will be found entitled to
indemnification.
619920.3
C-3
<PAGE>
Item 28. Business and Other Connections of Investment Adviser.
The description of the Back Bay Advisors, L.P. ("BBALLP") under
the caption "Management of the Fund" in the Prospectus and "Management and
Investment Management Contract" in the Statement of Additional Information
constituting parts A and B, respectively, of the Registration Statement are
incorporated herein by reference.
The Manager is a Delaware limited partnership and a registered
investment adviser under the 1940 Act, with its principal office at 399 Boylston
Street, Boston, Massachusetts 02116-3310. The Manager provides discretionary
investment management services to mutual funds and other institutional
investors. Formed in 1986, the Manager now manages 14 mutual fund portfolios and
as of June 30, 1997, was investment manager, adviser or supervisor with respect
to assets aggregating in excess of $7 billion, primarily mutual fund and
institutional fixed-income portfolios. Ms. Catherine L. Bunting and Mr. Peter W.
Palfrey are primarily responsible for the day-to-day investment management of
the Portfolio. Ms. Bunting has served as Senior Vice President of the Manager
since 1988. Mr. Palfrey has served as Vice President of the Manager since 1993.
Prior to 1993, Mr. Palfrey was employed by Mutual of New York Capital Management
as a Vice President.
The general partner of the Manager is a special purpose
corporation that is an indirect, wholly-owned subsidiary of New England
Investment Companies ("NEIC"). NEIC's sole general partner, New England
Investment Companies, Inc., is an indirect, wholly-owned subsidiary of
Metropolitan Life Insurance Company ("MetLife"). Reich & Tang Asset Management
L.P. serves as the sole general partner of Reich & Tang Distributors L.P. Reich
& Tang Asset Management, Inc. serves as the sole limited partner of Reich & Tang
Distributors L.P.
On August 30, 1996, The New England Mutual Life Insurance
Company and Metropolitan Life Insurance Company ("MetLife") merged, with MetLife
being the continuing company. The Manager remains a wholly-owned subsidiary of
NEICLP, but Reich & Tang Asset Management, Inc., its sole general partner, is
now an indirect subsidiary of MetLife. Also, MetLife New England Holding, Inc.,
a wholly-owned subsidiary of MetLife, owns approximately 48.5% of the
outstanding limited partnership interest of NEICLP and may be deemed a
"controlling person" of the Manager. Reich & Tang, Inc. owns approximately 16%
of the outstanding partnership units of NEICLP.
Peter S. Voss, President, Chief Executive Officer and a Director
of NEIC since October 1992, Chairman of the Board of NEIC since December 1992,
Group Executive Vice President, Bank of America, responsible for the global
asset management private banking businesses, from April 1992 to October 1992,
Executive Vice President of Security Pacific Bank, and Chief Executive Officer
of Security Pacific Hoare Govett Companies, a wholly owned subsidiary of
Security Pacific Corporation, from April 1988 to April 1992, Director of The New
England since March 1993, Chairman of the Board of Directors of NEIC's
subsidiaries other than Loomis, Sayles & Company, Incorporated ("Loomis") and
Back Bay Advisors, Inc. ("Back Bay"), where he serves as a Director, and
Chairman of the Board of Trustees of all of the mutual funds in the TNE Fund
Group and the Zenith Funds. G. Neal Ryland, Executive Vice President, Treasurer
and Chief Financial Officer NEIC since July 1993, Executive Vice President and
Chief Financial Officer of The Boston Company, a diversified financial services
company, from March 1989 until July 1993; from September 1985 to December 1988,
Mr. Ryland was employed by Kenner Parker Toys, Inc. as Senior Vice President and
Chief Financial Officer. Edward N. Wadsworth, Executive Vice President, General
Counsel, Clerk and Secretary of NEIC since December 1989, Senior Vice President
and Associate General Counsel of The New England from 1984 until December 1992,
and Secretary of Westpeak and Draycott and the Treasurer of NEIC. During the
past two fiscal years, Charles T. Wallis has served as President and Chief
Executive Officer of the Manager and a Director for NEF Corporation. Charles G.
Glueck has served as Senior Vice President of the Manager. Scott A. Milliment
has served as Executive Vice President of the Manager and also as Senior Vice
President and manager of Carroll, McEntee & McGinley which is located at Chicago
Board of Trade, 141 West Jackson Boulevard, Chicago, IL 60634. Edgar M. Reed has
served as Executive Vice President and Chief Investment Officer of the Manager
and also as head of the Fixed Income Management Group at Aetna Capital
Management, 151 Farmington Avenue, Hartford, CT 06156. J. Scott Nicholson has
served as Senior Vice President of the Manager. Catherine Bunting has served as
Senior Vice President of the Manager. Nathan R. Wentworth, Peter Palfrey, Harold
B. Bjornson and Eric Gutterson have all served as Vice President of the Manager.
Paul Zamagni has served as Vice President and Treasurer of the Manager. Peter
Hanson has served as Secretary and Clerk of the Manager.
619920.3
C-4
<PAGE>
Item 29. Principal Underwriters.
(a) Reich & Tang Distributors L.P., the Registrant's
Distributor is also distributor for California Daily Tax Free Income Fund, Inc.,
Connecticut Daily Tax Free Income Fund, Inc., Cortland Trust, Inc., Daily Tax
Free Income Fund, Inc., Delafield Fund, Inc., Florida Daily Municipal Income
Fund, Institutional Daily Income Fund, Michigan Daily Tax Free Income Fund,
Inc., New Jersey Daily Municipal Income Fund, Inc., North Carolina Daily
Municipal Income, Inc., Pennsylvania Daily Municipal Income Fund, Reich & Tang
Equity Fund, Inc., Short Term Income Fund, Inc. and Tax Exempt Proceeds Fund,
Inc.
(b) The following are the directors and officers of Reich & Tang
Asset Management, Inc., the general partner of Reich & Tang Distributors L.P.
Reich & Tang Distributors L.P. does not have any officers. The principal
business address of Messrs. Voss, Ryland, and Wadsworth is 399 Boylston Street,
Boston, Massachusetts 02116. For all other persons the principal address is 600
Fifth Avenue, New York, New York 10020.
<TABLE>
<CAPTION>
Positions and Offices
With the General Partner Positions and Offices
Name of the Distributor With Registrant
<S> <C> <C>
Peter S. Voss Director None
G. Neal Ryland Director None
Edward N. Wadsworth Clerk None
Richard E. Smith III Director None
Steven W. Duff Director President and Director
Bernadette N. Finn Vice President - Compliance Secretary
and Secretary
Lorraine C. Hysler Secretary None
Richard De Sanctis Vice President and Treasurer
Treasurer
Richard I. Weiner Vice President None
</TABLE>
(c) Not applicable
Item 30. Location of Accounts and Records.
Accounts, books and other documents required to be maintained by
Section 31(a) of the Investment Company Act of 1940 and the Rules promulgated
thereunder are maintained in the physical possession of Registrant at Back Bay
Advisors, L.P., 399 Boylston Street, Boston, Massachusetts 02116-3310, the
Registrant's Manager; Reich & Tang Services L.P., 600 Fifth Avenue, New York,
New York, the Registrant's transfer agent and dividend agent; and at Investors
Fiduciary Trust Company, 801 Pennsylvania, Kansas City, Missouri 64105, the
Registrant's custodian.
Item 31. Management Services.
Not Applicable.
Item 32. Undertakings.
(a) Not applicable.
(b) The Registrant undertakes to file a post-effective
amendment, using financial statements which need not be
certified, within four to six months from the effective
date of its Securities Act Registration Statement.
619920.3
C-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and
the Investment Company Act of 1940, the Registrant has duly caused this
Pre-Effective Amendment No. 1 to the Registration Statement to be signed on its
behalf by the undersigned, thereto duly authorized, in the City of New York, and
State of New York, on the 11th day of December, 1997.
BACK BAY FUNDS, INC.
By:/s/ Bernadette N. Finn
Bernadette N. Finn, Secretary
Pursuant to the requirements of the Securities Act of 1933, this
Pre-Effective Amendment No. 1 to the Registration Statement has been signed
below by the following persons in the capacities and on the date indicated
below.
Signature Title Date
(1) Principal Executive Officer: Chairman and President December 11, 1997
Edgar M. Reed
By: /s/ Bernadette N. Finn
Bernadette N. Finn
Attorney-in-Fact*
(2) Principal Financial and Treasurer December 11, 1997
Accounting Officer
By: /s/ Richard De Sanctis
Richard De Sanctis
(3) Majority of Directors
Edgar M. Reed Director December 11, 1997
W. Giles Mellon Director
Yung Wong Director
Robert Straniere Director
By: /s/ Bernadette N. Finn
Bernadette N. Finn
Attorney-in-Fact*
- --------
* Filed herewith.
619920.3
C-6
<PAGE>
Exhibit Index
* (1) Articles of Incorporation of the Registrant.
* (2) By-Laws of the Registrant.
(3) Not applicable.
(4) Not applicable.
(5) Form of Investment Management Contract between the
Registrant and Back Bay Advisors, L.P.
(6) See Form of Distribution Agreement filed as Exhibit 15.2.
(7) Not applicable.
(8) Form of Custody Agreement between the Registrant and
Investors Fiduciary Trust Company.
(9) Not Applicable.
(9.1) Form of Administrative Services Agreement between the
Registrant and Reich & Tang Asset Management L.P.
(10) Consent Opinion of Messrs. Battle Fowler LLP as to
the use of their name under the headings "Federal
Income Taxes" in the Prospectus and "Counsel and
Auditors" in the Statement of Additional Information.
(11) Consent of Independent Auditors.
(12) Not Applicable.
(13) Written assurance of New England Investment
Companies, L.P. that its purchase of shares of the
Registrant was for investment purposes without any
present intention of redeeming or reselling.
(14) Not Applicable.
(15.1) Form of Distribution and Service Plan pursuant to
Rule 12b-1 under the Investment Company Act of 1940.
(15.2) Form of Distribution Agreement between the Registrant
and Reich & Tang Distributors L.P.
(15.3) Form of Shareholder Servicing Agreements (with
respect to Class B and C only) between the Registrant
and Reich & Tang Distributors L.P.
(16) Powers of Attorney.
** (17) Financial Data Schedule (For EDGAR Filing Only)
(18) 18f-3 Multi-Class Plan.
- --------
* Filed with Registration Statement No. 333-33831 on August 18, 1997, and
incorporated by reference herein.
** To be filed by Amendment.
619920.3
C-7
<PAGE>
Form of
INVESTMENT MANAGEMENT CONTRACT
BACK BAY FUNDS, INC.
the "Fund"
Total Return Bond Fund
(the "Portfolio")
600 Fifth Avenue
New York, New York 10020
December __, 1997
Back Bay Advisors, L.P.
399 Boylston Street
Boston, Massachusetts 02116-3310
Gentlemen:
We herewith confirm our agreement with you as follows:
1. We propose to engage in the business of investing and
reinvesting our assets in securities of the type, and in accordance with the
limitations, specified in our Articles of Incorporation, By-Laws and
Registration Statement filed with the Securities and Exchange Commission under
the Investment Company Act of 1940 (the "1940 Act") and the Securities Act of
1933, including the Prospectus forming a part thereof (the "Registration
Statement"), all as from time to time in effect, and in such manner and to such
extent as may from time to time be authorized by our Board of Directors. We
enclose copies of the documents listed above and will furnish you such
amendments thereto as may be made from time to time.
2. (a) We hereby employ you to manage the investment and
reinvestment of our assets as above specified, and, without limiting the
generality of the foregoing, to provide the investment management services
specified below.
(b) Subject to the general control of our Board
of Directors, you will make decisions with respect to all purchases and sales of
the portfolio securities. To carry out such decisions, you are hereby
authorized, as our agent and attorney-in-fact for our account and at our risk
and in our name, to place orders for the investment and reinvestment of our
assets. In all purchases, sales and other transactions in our portfolio
securities you are authorized to exercise full discretion and act for us in the
same manner and with the same
-1-
619938.2
force and effect as our Fund itself might or could do with respect to such
purchases, sales or other transactions, as well as with respect to all other
things necessary or incidental to the furtherance or conduct of such purchases,
sales or other transactions.
(c) You will report to our Board of Directors at
each meeting thereof all changes in our portfolio since your prior report, and
will also keep us in touch with important developments affecting our portfolio
and, on your initiative, will furnish us from time to time with such information
as you may believe appropriate for this purpose, whether concerning the
individual entities whose securities are included in our portfolio, the
activities in which such entities engage, Federal income tax policies applicable
to our investments, or the conditions prevailing in the money market or the
economy generally. You will also furnish us with such statistical and analytical
information with respect to our portfolio securities as you may believe
appropriate or as we may reasonably request. In making such purchases and sales
of our portfolio securities, you will comply with the policies set from time to
time by our Board of Directors as well as the limitations imposed by our
Articles of Incorporation and by the provisions of the Internal Revenue Code and
the 1940 Act relating to regulated investment companies and the limitations
contained in the Registration Statement.
(d) It is understood that you will from time to
time employ, subcontract with or otherwise associate with yourself, entirely at
your expense, such persons as you believe to be particularly fitted to assist
you in the execution of your duties hereunder.
(e) You or your affiliates will also furnish us,
at your own expense, such investment advisory supervision and assistance as you
may believe appropriate or as we may reasonably request subject to the
requirements of any regulatory authority to which you may be subject. You and
your affiliates will also pay the expenses of promoting the sale of our shares
(other than the costs of preparing, printing and filing our registration
statement, printing copies of the prospectus contained therein and complying
with other applicable regulatory requirements), except to the extent that we are
permitted to bear such expenses under a plan adopted pursuant to Rule 12b-1
under the 1940 Act or a similar rule.
3. We agree, subject to the limitations described below, to be
responsible for, and hereby assume the obligation for payment of, all our
expenses, including: (a) brokerage and commission expenses, (b) Federal, state
or local taxes, including issue and transfer taxes incurred by or levied on us,
(c) commitment fees and certain insurance premiums, (d) interest
-2-
619938.2
<PAGE>
charges on borrowings, (e) charges and expenses of our custodian, (f) charges,
expenses and payments relating to the issuance, redemption, transfer and
dividend disbursing functions for us, (g) recurring and nonrecurring legal and
accounting expenses, including those of the bookkeeping agent, (h)
telecommunications expenses, (i) the costs of organizing and maintaining our
existence as a corporation, (j) compensation, including directors' fees, of any
of our directors, officers or employees who are not your officers or officers of
your affiliates, and costs of other personnel providing clerical, accounting
supervision and other office services to us as we may request, (k) costs of
shareholder's services including, charges and expenses of persons providing
confirmations of transactions in our shares, periodic statements to
shareholders, and recordkeeping and shareholders' services, (l) costs of
shareholders' reports, proxy solicitations, and Fund meetings, (m) fees and
expenses of registering our shares under the appropriate Federal securities laws
and of qualifying such shares under applicable state securities laws, including
expenses attendant upon the initial registration and qualification of such
shares and attendant upon renewals of, or amendments to, those registrations and
qualifications, (n) expenses of preparing, printing and delivering our
prospectus to existing shareholders and of printing shareholder application
forms for shareholder accounts, (o) payment of the fees and expenses provided
for herein, under the Administrative Services Agreement, and pursuant to the
Shareholder Servicing Agreement, with respect to the Class B and C shares only,
and Distribution Agreement, and (p) any other distribution or promotional
expenses contemplated by an effective plan adopted by us pursuant to Rule 12b-1
under the Act. Our obligation for the foregoing expenses is limited by your
agreement to be responsible, while this Agreement is in effect, for any amount
by which our annual operating expenses (excluding taxes, brokerage, interest and
extraordinary expenses) exceed the limits on investment company expenses
prescribed by any state in which our shares are qualified for sale.
4. We will expect of you, and you will give us the benefit of,
your best judgment and efforts in rendering these services to us, and we agree
as an inducement to your undertaking these services that you will not be liable
hereunder for any mistake of judgment or for any other cause, provided that
nothing herein shall protect you against any liability to us or to our security
holders by reason of willful misfeasance, bad faith or gross negligence in the
performance of your duties hereunder, or by reason of your reckless disregard of
your obligations and duties hereunder.
5. In consideration of the foregoing we will pay you a fee at
the annual rate of .35% of the Fund's average daily net assets. Your fee will be
accrued by us daily, and will be payable on the last day of each calendar month
for services
-3-
619938.2
<PAGE>
performed hereunder during that month or on such other schedule as you shall
request of us in writing. You may use any portion of this fee for distribution
of our shares, or for making servicing payments to organizations whose customers
or clients are our shareholders. You may waive your right to any fee to which
you are entitled hereunder, provided such waiver is delivered to us in writing.
Any reimbursement of our expenses, to which we may become entitled pursuant to
paragraph 3 hereof, will be paid to us at the same time as we pay you.
6. This Agreement will become effective on the date hereof and
shall continue in effect until ____________ __, 1999 and thereafter for
successive twelve-month periods (computed from each ), provided that such
continuation is specifically approved at least annually by our Board of
Directors or by a majority vote of the holders of our outstanding voting
securities, as defined in the 1940 Act and the rules thereunder, and, in either
case, by a majority of those of our directors who are neither party to this
Agreement nor, other than by their service as directors of the Fund, interested
persons, as defined in the 1940 Act and the rules thereunder, of any such person
who is party to this Agreement. Upon the effectiveness of this Agreement, it
shall supersede all previous Agreements between us covering the subject matter
hereof. This Agreement may be terminated at any time, without the payment of any
penalty, (i) by vote of a majority of our outstanding voting securities, as
defined in the 1940 Act and the rules thereunder, or (ii) by a vote of a
majority of our entire Board of Directors, on sixty days' written notice to you,
or (iii) by you on sixty days' written notice to us.
7. This Agreement may not be transferred, assigned, sold or in
any manner hypothecated or pledged by you and this agreement shall terminate
automatically in the event of any such transfer, assignment, sale, hypothecation
or pledge by you. The terms "transfer", "assignment" and "sale" as used in this
paragraph shall have the meanings ascribed thereto by governing law and in
applicable rules or regulations of the Securities and Exchange Commission.
8. Except to the extent necessary to perform your obligations
hereunder, nothing herein shall be deemed to limit or restrict your right, or
the right of any of your employees or the officers and directors of your general
partner, who may also be a director, officer or employee of ours, or of a person
affiliated with us, as defined in the 1940 Act, to engage in any other business
or to devote time and attention to the management or other aspects of any other
business, whether of a similar or dissimilar nature, or to render services of
any kind to any other corporation, firm, individual or association.
If the foregoing is in accordance with your
-4-
619938.2
<PAGE>
understanding, will you kindly so indicate by signing and
returning to us the enclosed copy hereof.
Very truly yours,
BACK BAY FUNDS, INC.
By:_________________________________
Name:
Title:
ACCEPTED: December __, 1997
BACK BAY ADVISORS, L.P.
By: ____________________, as General Partner
By: ___________________________________
Name:
Title:
-5-
619938.2
CUSTODY AGREEMENT
THIS AGREEMENT made the ___ day of _____________, 19__, by and between
INVESTORS FIDUCIARY TRUST COMPANY, a trust company chartered under the laws of
the state of Missouri, having its trust office located at 801 Pennsylvania,
Kansas City, Missouri 64105 ("Custodian"), and Back Bay Funds, Inc., a Maryland
corporation, having its principal office and place of business at 600 Fifth
Avenue, New York, New York 10020 ("Fund").
WITNESSETH:
WHEREAS, Fund desires to appoint Investors Fiduciary Trust Company as
custodian of the securities and monies of Fund's investment portfolio; and
WHEREAS, Investors Fiduciary Trust Company is willing to
accept such appointment;
NOW THEREFORE, for and in consideration of the mutual promises
contained herein, the parties hereto, intending to be legally bound, mutually
covenant and agree as follows:
1. APPOINTMENT OF CUSTODIAN. Fund hereby constitutes and
appoints Custodian as custodian of the securities and monies
at any time owned by the Fund.
662597.1
1
<PAGE>
2. REPRESENTATIONS AND WARRANTIES.
A. Fund hereby represents, warrants and acknowledges to
Custodian:
1. That it is a corporation or trust (as specified
above) duly organized and existing and in good
standing under the laws of its state of organization,
and that it is registered under the Investment
Company Act of 1940 (the "1940 Act"); and
2. That it has the requisite power and authority under
applicable law, its articles of incorporation and
its bylaws to enter into this Agreement; that it
has taken all requisite action necessary to appoint
Custodian as custodian for the Fund; that this
Agreement has been duly executed and delivered by
Fund; and that this Agreement constitutes a legal,
valid and binding obligation of Fund, enforceable
in accordance with its terms.
B. Custodian hereby represents, warrants and acknowledges to
Fund:
1. That it is a trust company duly organized and
existing and in good standing under the laws of the
State of Missouri; and
2. That it has the requisite power and authority under
applicable law, its charter and its bylaws to enter
into and perform this Agreement; that this
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Agreement has been duly executed and delivered by
Custodian; and that this Agreement constitutes a
legal, valid and binding obligation of Custodian,
enforceable in accordance with its terms.
3. DUTIES AND RESPONSIBILITIES OF CUSTODIAN.
A. Delivery Of Assets
Except as permitted by the 1940 Act, Fund will deliver or
cause to be delivered to Custodian on the effective date of
this Agreement, or as soon thereafter as practicable, and from
time to time thereafter, all portfolio securities acquired by
it and monies then owned by it or from time to time coming
into its possession during the time this Agreement shall
continue in effect. Custodian shall have no responsibility or
liability whatsoever for or on account of securities or monies
not so delivered.
B. Delivery of Accounts and Records
--------------------------------
Fund shall turn over or cause to be turned over to
Custodian all of the Fund's relevant accounts and
records previously maintained. Custodian shall be
entitled to rely conclusively on the completeness and
correctness of the accounts and records turned over to
it, and Fund shall indemnify and hold Custodian
harmless of and from any and all expenses, damages and
losses whatsoever arising out of or in connection with
any error, omission, inaccuracy or other deficiency of
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such accounts and records or in the failure of Fund to
provide, or to provide in a timely manner, any accounts,
records or information needed by the Custodian to perform its
functions hereunder.
C. Delivery of Assets to Third Parties
Custodian will receive delivery of and keep safely the
assets of Fund delivered to it from time to time
segregated in a separate account, and if Fund is
comprised of more than one portfolio of investment
securities (each a "Portfolio") Custodian shall keep
the assets of each Portfolio segregated in a separate
account. Custodian will not deliver, assign, pledge or
hypothecate any such assets to any person except as
permitted by the provisions of this Agreement or any
agreement executed by it according to the terms of
Section 3.S. of this Agreement. Upon delivery of any
such assets to a subcustodian pursuant to Section 3.S.
of this Agreement, Custodian will create and maintain
records identifying those assets which have been
delivered to the subcustodian as belonging to the Fund,
by Portfolio if applicable. The Custodian is
responsible for the safekeeping of the securities and
monies of Fund only until they have been transmitted to
and received by other persons as permitted under the
terms of this Agreement, except for securities and
monies transmitted to subcustodians appointed under
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Section 3.S. of this Agreement, for which Custodian remains
responsible to the extent provided in Section 3.S. hereof.
Custodian may participate directly or indirectly through a
subcustodian in the Depository Trust Company (DTC),
Treasury/Federal Reserve Book Entry System (Fed System),
Participant Trust Company (PTC) or other depository approved
by the Fund (as such entities are defined at 17 CFR Section
270.17f-4(b)) (each a "Depository" and collectively, the
"Depositories").
D. Registration of Securities
The Custodian shall at all times hold registered securities of
the Fund in the name of the Custodian, the Fund, or a nominee
of either of them, unless specifically directed by
instructions to hold such registered securities in so-called
"street name," provided that, in any event, all such
securities and other assets shall be held in an account of the
Custodian containing only assets of the Fund, or only assets
held by the Custodian as a fiduciary or custodian for
customers, and provided further, that the records of the
Custodian at all times shall indicate the Fund or other
customer for which such securities and other assets are held
in such account and the respective interests therein. If,
however, the Fund directs the Custodian to maintain securities
in "street
662597.1
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<PAGE>
name", notwithstanding anything contained herein to the
contrary, the Custodian shall be obligated only to utilize its
best efforts to timely collect income due the Fund on such
securities and to notify the Fund of relevant corporate
actions including, without limitation, pendency of calls,
maturities, tender or exchange offers. All securities, and the
ownership thereof by Fund, which are held by Custodian
hereunder, however, shall at all times be identifiable on the
records of the Custodian. The Fund agrees to hold Custodian
and its nominee harmless for any liability as a shareholder of
record of securities held in custody.
E. Exchange of Securities
Upon receipt of instructions as defined herein in Section 4.A,
Custodian will exchange, or cause to be exchanged, portfolio
securities held by it for the account of Fund for other
securities or cash issued or paid in connection with any
reorganization, recapitalization, merger, consolidation,
split-up of shares, change of par value, conversion or
otherwise, and will deposit any such securities in accordance
with the terms of any reorganization or protective plan.
Without instructions, Custodian is authorized to exchange
securities held by it in temporary form for securities in
definitive form, to effect an exchange of shares when the par
value of the stock is changed, and,
662597.1
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<PAGE>
upon receiving payment therefor, to surrender bonds or other
securities held by it at maturity or when advised of earlier
call for redemption, except that Custodian shall receive
instructions prior to surrendering any convertible security.
F. Purchases of Investments of the Fund
Fund will, on each business day on which a purchase of
securities shall be made by it, deliver to Custodian
instructions which shall specify with respect to each such
purchase:
1. If applicable, the name of the Portfolio making
such purchase;
2. The name of the issuer and description of the
security;
3. The number of shares and the principal amount
purchased, and accrued interest, if any;
4. The trade date;
5. The settlement date;
6. The purchase price per unit and the brokerage
commission, taxes and other expenses payable in
connection with the purchase;
7. The total amount payable upon such purchase; and
8. The name of the person from whom or the broker or
dealer through whom the purchase was made.
9. Whether the security is to be received in
certificated form or via a specified Depository.
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<PAGE>
In accordance with such instructions, Custodian will pay for out of monies held
for the account of Fund, but only insofar as such monies are available for such
purpose, and receive the portfolio securities so purchased by or for the account
of Fund, except that Custodian may in its sole discretion advance funds to the
Fund which may result in an overdraft because the monies held by the Custodian
on behalf of the Fund are insufficient to pay the total amount payable upon such
purchase. Except as otherwise instructed by Fund, such payment shall be made by
the Custodian only upon receipt of securities: (a) by the Custodian; (b) by a
clearing corporation of a national exchange of which the Custodian is a member;
or (c) by a Depository. Notwithstanding the foregoing, (i) in the case of a
repurchase agreement, the Custodian may release funds to a Depository prior to
the receipt of advice from the Depository that the securities underlying such
repurchase agreement have been transferred by book-entry into the account
maintained with such Depository by the Custodian, on behalf of its customers,
provided that the Custodian's instructions to the Depository require that the
Depository make payment of such funds only upon transfer by book-entry of the
securities underlying the repurchase agreement in such account; (ii) in the case
of time deposits, call account deposits, currency deposits and other deposits,
foreign exchange transactions, futures contracts or options, the Custodian may
make payment therefor before receipt of an advice or confirmation evidencing
said deposit or entry into such transaction; and (iii)
662597.1
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<PAGE>
in the case of the purchase of securities, the settlement of which occurs
outside of the United States of America, the Custodian may make, or cause a
subcustodian appointed pursuant to Section 3.S.2. of this Agreement to make,
payment therefor in accordance with generally accepted local custom and market
practice.
G. Sales and Deliveries of Investments of the Fund - Other than
Options and Futures Fund will, on each business day on which a
sale of investment securities (other than options and futures)
of Fund has been made, deliver to Custodian instructions
specifying with respect to each such sale:
1. If applicable, the name of the Portfolio making such
sale;
2. The name of the issuer and description of the
securities;
3. The number of shares and principal amount sold, and
accrued interest, if any;
4. The date on which the securities sold were purchased
or other information identifying the securities sold
and to be delivered;
5. The trade date;
6. The settlement date;
7. The sale price per unit and the brokerage
commission, taxes or other expenses payable in
connection with such sale;
662597.1
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<PAGE>
8. The total amount to be received by Fund upon such
sale; and
9. The name and address of the broker or dealer through
whom or person to whom the sale was made.
In accordance with such instructions, Custodian will deliver or cause
to be delivered the securities thus designated as sold for the account
of Fund to the broker or other person specified in the instructions
relating to such sale. Except as otherwise instructed by Fund, such
delivery shall be made upon receipt of payment therefor: (a) in such
form as is satisfactory to the Custodian; (b) credit to the account of
the Custodian with a clearing corporation of a national securities
exchange of which the Custodian is a member; or (c) credit to the
account of the Custodian, on behalf of its customers, with a
Depository. Notwithstanding the foregoing: (i) in the case of
securities held in physical form, such securities shall be delivered in
accordance with "street delivery custom" to a broker or its clearing
agent; or (ii) in the case of the sale of securities, the settlement of
which occurs outside of the United States of America, the Custodian may
make, or cause a subcustodian appointed pursuant to Section 3.S.2. of
this Agreement to make, payment therefor in accordance with generally
accepted local custom and market practice.
662597.1
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<PAGE>
H. Purchases or Sales of Options and Futures Fund will, on each
business day on which a purchase or sale of the following
options and/or futures shall be made by it, deliver to
Custodian instructions which shall specify with respect to
each such purchase or sale:
1. If applicable, the name of the Portfolio making such
purchase or sale;
2. Security Options
a. The underlying security;
b. The price at which purchased or sold;
c. The expiration date;
d. The number of contracts;
e. The exercise price;
f. Whether the transaction is an opening,
exercising, expiring or closing transaction;
g. Whether the transaction involves a put or
call;
h. Whether the option is written or purchased;
i. Market on which option traded; and
j. Name and address of the broker or dealer
through whom the sale or purchase was made.
3. Options on Indices
a. The index;
b. The price at which purchased or sold;
c. The exercise price;
662597.1
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<PAGE>
d. The premium;
e. The multiple;
f. The expiration date;
g. Whether the transaction is an opening,
exercising, expiring or closing transaction;
h. Whether the transaction involves a put or
call;
i. Whether the option is written or purchased;
and
j. The name and address of the broker or dealer
through whom the sale or purchase was made,
or other applicable settlement instructions.
4. Security Index Futures Contracts
a. The last trading date specified in the
contract and, when available, the closing
level, thereof;
b. The index level on the date the contract is
entered into;
c. The multiple;
d. Any margin requirements;
e. The need for a segregated margin account (in
addition to instructions, and if not already
in the possession of Custodian, Fund shall
deliver a substantially complete and
executed custodial safekeeping account and
procedural
662597.1
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<PAGE>
agreement which shall be incorporated by
reference into this Custody Agreement); and
f. The name and address of the futures
commission merchant through whom the sale or
purchase was made, or other applicable
settlement instructions.
5. Options on Index Future Contracts
a. The underlying index future contract;
b. The premium;
c. The expiration date;
d. The number of options;
e. The exercise price;
f. Whether the transaction involves an opening,
exercising, expiring or closing transaction;
g. Whether the transaction involves a put or call;
h. Whether the option is written or purchased; and
i. The market on which the option is traded.
I. Securities Pledged or Loaned
If specifically allowed for in the prospectus of Fund,
and subject to such additional terms and conditions as
Custodian may require:
1. Upon receipt of instructions, Custodian will
release or cause to be released securities held in
custody to the pledgee designated in such
662597.1
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<PAGE>
instructions by way of pledge or hypothecation to
secure any loan incurred by Fund; provided, however,
that the securities shall be released only upon
payment to Custodian of the monies borrowed, except
that in cases where additional collateral is required
to secure a borrowing already made, further
securities may be released or caused to be released
for that purpose upon receipt of instructions. Upon
receipt of instructions, Custodian will pay, but only
from funds available for such purpose, any such loan
upon redelivery to it of the securities pledged or
hypothecated therefor and upon surrender of the note
or notes evidencing such loan.
2. Upon receipt of instructions, Custodian will
release securities held in custody to the borrower
designated in such instructions; provided,
however, that the securities will be released only
upon deposit with Custodian of full cash
collateral as specified in such instructions, and
that Fund will retain the right to any dividends,
interest or distribution on such loaned
securities. Upon receipt of instructions and the
loaned securities, Custodian will release the cash
collateral to the borrower.
662597.1
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<PAGE>
J. Routine Matters
Custodian will, in general, attend to all routine and
mechanical matters in connection with the sale, exchange,
substitution, purchase, transfer, or other dealings with
securities or other property of Fund except as may be
otherwise provided in this Agreement or directed from time to
time by the Fund in writing.
K. Deposit Accounts
Custodian will open and maintain one or more special purpose
deposit accounts in the name of Custodian ("Accounts"),
subject only to draft or order by Custodian upon receipt of
instructions. All monies received by Custodian from or for the
account of Fund shall be deposited in said Accounts. Barring
events not in the control of the Custodian such as strikes,
lockouts or labor disputes, riots, war or equipment or
transmission failure or damage, fire, flood, earthquake or
other natural disaster, action or inaction of governmental
authority or other causes beyond its control, at 9:00 a.m.,
Kansas City time, on the second business day after deposit of
any check into an Account, Custodian agrees to make Fed Funds
available to the Fund in the amount of the check. Deposits
made by Federal Reserve wire will be available to the Fund
immediately and ACH wires will be available to the Fund on the
next business day. Income earned on the
662597.1
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<PAGE>
portfolio securities will be credited to the Fund based on the
schedule attached as Exhibit A. The Custodian will be entitled
to reverse any credited amounts where credits have been made
and monies are not finally collected. If monies are collected
after such reversal, the Custodian will credit the Fund in
that amount. Custodian may open and maintain Accounts in its
own banking department, or in such other banks or trust
companies as may be designated by it or by Fund in writing,
all such Accounts, however, to be in the name of Custodian and
subject only to its draft or order. Funds received and held
for the account of different Portfolios shall be maintained in
separate Accounts established for each Portfolio.
L. Income and other Payments to the Fund
Custodian will:
1. Collect, claim and receive and deposit for the
account of Fund all income and other payments
which become due and payable on or after the
effective date of this Agreement with respect to
the securities deposited under this Agreement and
credit the account of Fund in accordance with the
schedule attached hereto as Exhibit A. If, for
any reason, the Fund is credited with income that
is not subsequently collected, Custodian may
reverse that credited amount.
662597.1
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<PAGE>
2. Execute ownership and other certificates and
affidavits for all federal, state and local tax
purposes in connection with the collection of bond
and note coupons; and
3. Take such other action as may be necessary or proper
in connection with:
a. the collection, receipt and
deposit of such income and other payments,
including but not limited to the presentation for
payment of:
1. all coupons and other income items
requiring presentation; and
2. all other securities which may mature
or be called, redeemed, retired or
otherwise become payable and
regarding which the Custodian has
actual knowledge, or should
reasonably be expected to have
knowledge; and
b. the endorsement for collection, in the name
of Fund, of all checks, drafts or other
negotiable instruments.
Custodian, however, will not be required to institute suit or take
other extraordinary action to enforce collection except upon receipt of
instructions and upon being indemnified to its satisfaction against the
costs and expenses of such suit or other actions. Custodian will
receive, claim and collect all stock dividends, rights and
662597.1
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<PAGE>
other similar items and will deal with the same pursuant to
instructions. Unless prior instructions have been received
to the contrary, Custodian will, without further
instructions, sell any rights held for the account of Fund
on the last trade date prior to the date of expiration of
such rights.
M. Payment of Dividends and other Distributions
On the declaration of any dividend or other distribution on
the shares of capital stock of Fund ("Fund Shares") by the
Board of Directors of Fund, Fund shall deliver to Custodian
instructions with respect thereto. On the date specified in
such instructions for the payment of such dividend or other
distribution, Custodian will pay out of the monies held for
the account of Fund, insofar as the same shall be available
for such purposes, and credit to the account of the Dividend
Disbursing Agent for Fund, such amount as may be necessary to
pay the amount per share payable in cash on Fund Shares issued
and outstanding on the record date established by such
resolution.
N. Shares of Fund Purchased by Fund
Whenever any Fund Shares are repurchased or redeemed by Fund,
Fund or its agent shall advise Custodian of the aggregate
dollar amount to be paid for such shares and shall confirm
such advice in writing. Upon receipt of such advice, Custodian
shall charge such aggregate
662597.1
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<PAGE>
dollar amount to the account of Fund and either deposit the
same in the account maintained for the purpose of paying for
the repurchase or redemption of Fund Shares or deliver the
same in accordance with such advice. Custodian shall not have
any duty or responsibility to determine that Fund Shares have
been removed from the proper shareholder account or accounts
or that the proper number of Fund Shares have been cancelled
and removed from the shareholder records.
O. Shares of Fund Purchased from Fund
Whenever Fund Shares are purchased from Fund, Fund will
deposit or cause to be deposited with Custodian the amount
received for such shares. Custodian shall not have any duty or
responsibility to determine that Fund Shares purchased from
Fund have been added to the proper shareholder account or
accounts or that the proper number of such shares have been
added to the shareholder records.
P. Proxies and Notices
Custodian will promptly deliver or mail or have delivered or
mailed to Fund all proxies properly signed, all notices of
meetings, all proxy statements and other notices, requests or
announcements affecting or relating to securities held by
Custodian for Fund and will, upon receipt of instructions,
execute and deliver or cause its nominee to execute and
deliver or
662597.1
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<PAGE>
mail or have delivered or mailed such proxies or other
authorizations as may be required. Except as provided by this
Agreement or pursuant to instructions hereafter received by
Custodian, neither it nor its nominee will exercise any power
inherent in any such securities, including any power to vote
the same, or execute any proxy, power of attorney, or other
similar instrument voting any of such securities, or give any
consent, approval or waiver with respect thereto, or take any
other similar action.
Q. Disbursements
Custodian will pay or cause to be paid, insofar as funds are
available for the purpose, bills, statements and other
obligations of Fund (including but not limited to obligations
in connection with the conversion, exchange or surrender of
securities owned by Fund, interest charges, dividend
disbursements, taxes, management fees, custodian fees, legal
fees, auditors' fees, transfer agents' fees, brokerage
commissions, compensation to personnel, and other operating
expenses of Fund) pursuant to instructions of Fund setting
forth the name of the person to whom payment is to be made,
the amount of the payment, and the purpose of the payment.
662597.1
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<PAGE>
R. Daily Statement of Accounts
Custodian will, within a reasonable time, render to Fund a
detailed statement of the amounts received or paid and of
securities received or delivered for the account of Fund
during each business day. Custodian will, from time to time,
upon request by Fund, render a detailed statement of the
securities and monies held for Fund under this Agreement, and
Custodian will maintain such books and records as are
necessary to enable it to do so. Custodian will permit such
persons as are authorized by Fund, including Fund's
independent public accountants, reasonable access to such
records or will provide reasonable confirmation of the
contents of such records, and if demanded, Custodian will
permit federal and state regulatory agencies to examine the
securities, books and records. Upon the written instructions
of Fund or as demanded by federal or state regulatory
agencies, Custodian will instruct any subcustodian to permit
such persons as are authorized by Fund, including Fund's
independent public accountants, reasonable access to such
records or to provide reasonable confirmation of the contents
of such records, and to permit such agencies to examine the
books, records and securities held by such subcustodian which
relate to Fund.
662597.1
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<PAGE>
S. Appointment of Subcustodians
1. Notwithstanding any other provisions of this
Agreement, all or any of the monies or securities
of Fund may be held in Custodian's own custody or
in the custody of one or more other banks or trust
companies acting as subcustodians as may be
selected by Custodian. Any such subcustodian
selected by the Custodian must have the
qualifications required for a custodian under the
1940 Act, as amended. It is understood that
Custodian initially intends to appoint United
Missouri Bank, N.A. (UMB) and United Missouri
Trust Company of New York (UMTCNY) as
subcustodians. Custodian shall be responsible to
the Fund for any loss, damage or expense suffered
or incurred by the Fund resulting from the actions
or omissions of UMB, UMTCNY and any other
subcustodians selected and appointed by Custodian
(except subcustodians appointed at the request of
Fund and as provided in Subsection 2 below) to the
same extent Custodian would be responsible to the
Fund under Section 5. of this Agreement if it
committed the act or omission itself. Upon
request of the Fund, Custodian shall be willing to
contract with other subcustodians reasonably
acceptable to the Custodian for purposes of (i)
662597.1
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<PAGE>
effecting third-party repurchase transactions with
banks, brokers, dealers, or other entities through
the use of a common custodian or subcustodian, or
(ii) providing depository and clearing agency
services with respect to certain variable rate demand
note securities, or (iii) for other reasonable
purposes specified by Fund; provided, however, that
the Custodian shall be responsible to the Fund for
any loss, damage or expense suffered or incurred by
the Fund resulting from the actions or omissions of
any such subcustodian only to the same extent such
subcustodian is responsible to the Custodian. The
Fund shall be entitled to review the Custodian's
contracts with any such subcustodians appointed at
the request of Fund. Custodian shall be responsible
to the Fund for any loss, damage or expense suffered
or incurred by the Fund resulting from the actions or
omissions of any Depository only to the same extent
such Depository is responsible to Custodian.
2. Notwithstanding any other provisions of this
Agreement, Fund's foreign securities (as defined in
Rule 17f-5(c)(1) under the 1940 Act) and Fund's cash
or cash equivalents, in amounts deemed by the Fund to
be reasonably necessary to effect Fund's
662597.1
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<PAGE>
foreign securities transactions, may be held in the
custody of one or more banks or trust companies
acting as subcustodians, and thereafter, pursuant to
a written contract or contracts as approved by Fund's
Board of Directors, may be transferred to accounts
maintained by any such subcustodian with eligible
foreign custodians, as defined in Rule 17f-5(c)(2).
Custodian shall be responsible to the Fund for any
loss, damage or expense suffered or incurred by the
Fund resulting from the actions or omissions of any
foreign subcustodians or a domestic subcustodian
contracting with such foreign subcustodians only to
the same extent such domestic subcustodian is
responsible to the Custodian.
T. Accounts and Records Property of Fund
-------------------------------------
Custodian acknowledges that all of the accounts and
records maintained by Custodian pursuant to this
Agreement are the property of Fund, and will be made
available to Fund for inspection or reproduction within
a reasonable period of time, upon demand. Custodian
will assist Fund's independent auditors, or upon
approval of Fund, or upon demand, any regulatory body,
in any requested review of Fund's accounts and records
but shall be reimbursed by Fund for all expenses and
employee time invested in any such review outside of
662597.1
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<PAGE>
routine and normal periodic reviews. Upon receipt from Fund of
the necessary information or instructions, Custodian will
supply information from the books and records it maintains for
Fund that Fund needs for tax returns, questionnaires, periodic
reports to shareholders and such other reports and information
requests as Fund and Custodian shall agree upon from time to
time.
U. Adoption of Procedures
Custodian and Fund may from time to time adopt procedures as
they agree upon, and Custodian may conclusively assume that no
procedure approved or directed by Fund or its accountants or
other advisors conflicts with or violates any requirements of
its prospectus, articles of incorporation, bylaws, any
applicable law, rule or regulation, or any order, decree or
agreement by which Fund may be bound. Fund will be responsible
to notify Custodian of any changes in statutes, regulations,
rules, requirements or policies which might necessitate
changes in Custodian's responsibilities or procedures.
V. Overdrafts
If Custodian shall in its sole discretion advance funds to the
account of the Fund which results in an overdraft in any
Account because the monies held therein by Custodian on behalf
of the Fund are
662597.1
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<PAGE>
insufficient to pay the total amount payable upon a purchase
of securities as specified in Fund's instructions or for some
other reason, the amount of the overdraft shall be payable by
the Fund to Custodian upon demand together with the overdraft
charge set forth on the then-current Fee Schedule from the
date advanced until the date of payment. Fund hereby grants
Custodian a lien on and security interest in the assets of the
Fund to secure the full amount of any outstanding overdraft
and related overdraft charges.
W. Exercise of Rights; Tender Offers
Upon receipt of instructions, the Custodian shall: (a) deliver
warrants, puts, calls, rights or similar securities to the
issuer or trustee thereof, or to the agent of such issuer or
trustee, for the purpose of exercise or sale, provided that
the new securities, cash or other assets, if any, are to be
delivered to the Custodian; and (b) deposit securities upon
invitations for tenders thereof, provided that the
consideration for such securities is to be paid or delivered
to the Custodian or the tendered securities are to be returned
to the Custodian.
INSTRUCTIONS.
A. The term "instructions", as used herein, means written
(including telecopied or telexed) or oral instructions which
Custodian reasonably believes were given by a designated
662597.1
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<PAGE>
representative of Fund. Fund shall deliver to Custodian, prior to
delivery of any assets to Custodian and thereafter from time to time as
changes therein are necessary, written instructions naming one or more
designated representatives to give instructions in the name and on
behalf of Fund, which instructions may be received and accepted by
Custodian as conclusive evidence of the authority of any designated
representative to act for Fund and may be considered to be in full
force and effect (and Custodian will be fully protected in acting in
reliance thereon) until receipt by Custodian of notice to the contrary.
Unless such written instructions delegating authority to any person to
give instructions specifically limit such authority to specific matters
or require that the approval of anyone else will first have been
obtained, Custodian will be under no obligation to inquire into the
right of such person, acting alone, to give any instructions whatsoever
which Custodian may receive from such person. If Fund fails to provide
Custodian any such instructions naming designated representatives, any
instructions received by Custodian from a person reasonably believed to
be an appropriate representative of Fund shall constitute valid and
proper instructions hereunder.
B. No later than the next business day immediately following each oral
instruction, Fund will send Custodian written confirmation of such oral
instruction. At Custodian's sole
662597.1
27
<PAGE>
discretion, Custodian may record on tape, or otherwise, any oral
instruction whether given in person or via telephone, each such
recording identifying the parties, the date and the time of the
beginning and ending of such oral instruction.
LIMITATION OF LIABILITY OF CUSTODIAN.
A. Custodian shall at all times use reasonable care and due
diligence and act in good faith in performing its duties
under this Agreement. Custodian shall not be responsible
for, and the Fund shall indemnify and hold Custodian
harmless from and against, any and all losses, damages,
costs, charges, counsel fees, payments, expenses and
liability which may be asserted against Custodian, incurred
by Custodian or for which Custodian may be held to be
liable, arising out of or attributable to:
1. All actions taken by Custodian pursuant to this
Agreement or any instructions provided to it hereunder,
provided that Custodian has acted in good faith and with due
diligence and reasonable care; and
2. The Fund's refusal or failure to comply with the terms of this
Agreement (including without limitation the Fund's failure to
pay or reimburse Custodian under this indemnification
provision), the Fund's negligence or willful misconduct, or
the failure of any representation or warranty of the Fund
hereunder to be
662597.1
28
<PAGE>
and remain true and correct in all respects at all
times.
B. Custodian may request and obtain at the expense of Fund the
advice and opinion of counsel for Fund or of its own counsel
with respect to questions or matters of law, and it shall be
without liability to Fund for any action taken or omitted by
it in good faith, in conformity with such advice or opinion.
If Custodian reasonably believes that it could not prudently
act according to the instructions of the Fund or the Fund's
accountants or counsel, it may in its discretion, with
notice to the Fund, not act according to such instructions.
C. Custodian may rely upon the advice and statements of Fund, Fund's
accountants and officers or other authorized individuals, and other
persons believed by it in good faith to be expert in matters upon which
they are consulted, and Custodian shall not be liable for any actions
taken, in good faith, upon such advice and statements.
D. If Fund requests Custodian in any capacity to take any
action which involves the payment of money by Custodian, or
which might make it or its nominee liable for payment of
monies or in any other way, Custodian shall be indemnified
and held harmless by Fund against any liability on account
of such action; provided, however, that nothing herein shall
obligate Custodian to take any such action except in its
sole discretion.
662597.1
29
<PAGE>
E. Custodian shall be protected in acting as custodian
hereunder upon any instructions, advice, notice, request,
consent, certificate or other instrument or paper appearing
to it to be genuine and to have been properly executed and
shall be entitled to receive upon request as conclusive
proof of any fact or matter required to be ascertained from
Fund hereunder a certificate signed by an officer or
designated representative of Fund.
F. Custodian shall be under no duty or obligation to inquire into, and
shall not be liable for: 1. The validity of the issue of any securities
purchased
by or for Fund, the legality of the purchase of any securities
or foreign currency positions or evidence of ownership
required by Fund to be received by Custodian, or the propriety
of the decision to purchase or amount paid therefor;
2. The legality of the sale of any securities or foreign
currency positions by or for Fund, or the propriety of
the amount for which the same are sold;
3. The legality of the issue or sale of any Fund Shares, or the
sufficiency of the amount to be received therefor;
4. The legality of the repurchase or redemption of any Fund
Shares, or the propriety of the amount to be paid therefor; or
662597.1
30
<PAGE>
5. The legality of the declaration of any dividend by Fund, or
the legality of the issue of any Fund Shares in payment of any
stock dividend.
G. Custodian shall not be liable for, or considered to be
Custodian of, any money represented by any check, draft,
wire transfer, clearinghouse funds, uncollected funds, or
instrument for the payment of money to be received by it on
behalf of Fund until Custodian actually receives such money;
provided, however, that it shall advise Fund promptly if it
fails to receive any such money in the ordinary course of
business and shall cooperate with Fund toward the end that
such money shall be received.
H. Except as provided in Section 3.S., Custodian shall not be responsible
for loss occasioned by the acts, neglects, defaults or insolvency of
any broker, bank, trust company, or any other person with whom
Custodian may deal.
I. Custodian shall not be responsible or liable for the failure
or delay in performance of its obligations under this
Agreement, or those of any entity for which it is
responsible hereunder, arising out of or caused, directly or
indirectly, by circumstances beyond the affected entity's
reasonable control, including, without limitations: any
interruption, loss or malfunction of any utility,
transportation, computer (hardware or software) or
communication service; inability to obtain labor, material,
equipment or transportation, or a delay in mails;
662597.1
31
<PAGE>
governmental or exchange action, statute, ordinance, rulings,
regulations or direction; war, strike, riot, emergency, civil
disturbance, terrorism, vandalism, explosions, labor disputes, freezes,
floods, fires, tornados, acts of God or public enemy, revolutions, or
insurrection.
J. IN NO EVENT AND UNDER NO CIRCUMSTANCES SHALL EITHER PARTY TO THIS
AGREEMENT BE LIABLE TO ANYONE, INCLUDING, WITHOUT LIMITATION TO THE
OTHER PARTY, FOR CONSEQUENTIAL, SPECIAL OR PUNITIVE DAMAGES FOR ANY ACT
OR FAILURE TO ACT UNDER ANY PROVISION OF THIS AGREEMENT EVEN IF ADVISED
OF THIS POSSIBILITY THEREOF.
6. COMPENSATION. In consideration for its services hereunder,
------------
Fund will pay to Custodian such compensation as shall be set
forth in a separate fee schedule to be agreed to by Fund and
Custodian from time to time. A copy of the initial fee
schedule is attached hereto and incorporated herein by
reference. Custodian shall also be entitled to receive, and
Fund agrees to pay to Custodian, on demand, reimbursement
for Custodian's cash disbursements and reasonable out-of-
pocket costs and expenses, including attorney's fees,
incurred by Custodian in connection with the performance of
services hereunder. Custodian may charge such compensation
against monies held by it for the account of Fund.
Custodian will also be entitled to charge against any monies
662597.1
32
<PAGE>
held by it for the account of Fund the amount of any loss, damage,
liability, advance, overdraft or expense for which it shall be entitled
to reimbursement from Fund, including but not limited to fees and
expenses due to Custodian for other services provided to the Fund by
Custodian. Custodian will be entitled to reimbursement by the Fund for
the losses, damages, liabilities, advances, overdrafts and expenses of
subcustodians only to the extent that (i) Custodian would have been
entitled to reimbursement hereunder if it had incurred the same itself
directly, and (ii) Custodian is obligated to reimburse the subcustodian
therefor.
7. TERM AND TERMINATION. The initial term of this Agreement
--------------------
shall be for a period of __________. Thereafter, either
party to this Agreement may terminate the same by notice in
writing, delivered or mailed, postage prepaid, to the other
party hereto and received not less than ninety (90) days
prior to the date upon which such termination will take
effect. Upon termination of this Agreement, Fund will pay
Custodian its fees and compensation due hereunder and its
reimbursable disbursements, costs and expenses paid or
incurred to such date and Fund shall designate a successor
custodian by notice in writing to Custodian by the
termination date. In the event no written order designating
a successor custodian has been delivered to Custodian on or
before the date when such termination becomes effective,
662597.1
33
<PAGE>
then Custodian may, at its option, deliver the securities, funds and
properties of Fund to a bank or trust company at the selection of
Custodian, and meeting the qualifications for custodian set forth in
the 1940 Act and having not less than Two Million Dollars ($2,000,000)
aggregate capital, surplus and undivided profits, as shown by its last
published report, or apply to a court of competent jurisdiction for the
appointment of a successor custodian or other proper relief, or take
any other lawful action under the circumstances; provided, however,
that Fund shall reimburse Custodian for its costs and expenses,
including reasonable attorney's fees, incurred in connection therewith.
Custodian will, upon termination of this Agreement and payment of all
sums due to Custodian from Fund hereunder or otherwise, deliver to the
successor custodian so specified or appointed, or as specified by the
court, at Custodian's office, all securities then held by Custodian
hereunder, duly endorsed and in form for transfer, and all funds and
other properties of Fund deposited with or held by Custodian hereunder,
and Custodian will co-operate in effecting changes in book-entries at
all Depositories. Upon delivery to a successor custodian or as
specified by the court, Custodian will have no further obligations or
liabilities under this Agreement. Thereafter such successor will be the
successor custodian under this Agreement and will be entitled to
reasonable compensation for its
662597.1
34
<PAGE>
services. In the event that securities, funds and other properties
remain in the possession of the Custodian after the date of termination
hereof owing to failure of the Fund to appoint a successor custodian,
the Custodian shall be entitled to compensation as provided in the
then-current fee schedule hereunder for its services during such period
as the Custodian retains possession of such securities, funds and other
properties, and the provisions of this Agreement relating to the duties
and obligations of the Custodian shall remain in full force and effect.
8. NOTICES. Notices, requests, instructions and other writings addressed to Fund
at 600 Fifth Avenue, New York, New York 10020, or at such other address as Fund
may have designated to Custodian in writing, will be deemed to have been
properly given to Fund hereunder; and notices, requests, instructions and other
writings addressed to Custodian at its offices at 127 West 10th Street, Kansas
City, Missouri 64105, Attention: Custody Department, or to such other address as
it may have designated to Fund in writing, will be deemed to have been properly
given to Custodian hereunder. 9. MULTIPLE PORTFOLIOS. If Fund is comprised of
more than one Portfolio:
A. Each Portfolio shall be regarded for all purposes
hereunder as a separate party apart from each other
Portfolio. Unless the context otherwise requires,
with respect to every transaction
662597.1
35
<PAGE>
covered by this Agreement, every reference herein to
the Fund shall be deemed to relate solely to the
particular Portfolio to which such transaction
relates. Under no circumstances shall the rights,
obligations or remedies with respect to a particular
Portfolio constitute a right, obligation or remedy
applicable to any other Portfolio. The use of this
single document to memorialize the separate agreement
of each Portfolio is understood to be for clerical
convenience only and shall not constitute any basis
for joining the Portfolios for any reason.
B. Additional Portfolios may be added to this Agreement,
provided that Custodian consents to such addition.
Rates or charges for each additional Portfolio shall
be as agreed upon by Custodian and Fund in writing.
10. MISCELLANEOUS.
A. This Agreement shall be construed according to, and
the rights and liabilities of the parties hereto
shall be governed by, the laws of the State of
Missouri, without reference to the choice of laws
principles thereof.
B. All terms and provisions of this Agreement shall
be binding upon, inure to the benefit of and be
662597.1
36
<PAGE>
enforceable by the parties hereto and their
respective successors and permitted assigns.
C. The representations and warranties and the
indemnifications extended hereunder are intended to
and shall continue after and survive the expiration,
termination or cancellation of this Agreement.
D. No provisions of the Agreement may be amended or
modified in any manner except by a written agreement
properly authorized and executed by each party
hereto.
E. The failure of either party to insist upon the
performance of any terms or conditions of this
Agreement or to enforce any rights resulting from
any breach of any of the terms or conditions of
this Agreement, including the payment of damages,
shall not be construed as a continuing or
permanent waiver of any such terms, conditions,
rights or privileges, but the same shall continue
and remain in full force and effect as if no such
forbearance or waiver had occurred. No waiver,
release or discharge of any party's rights
hereunder shall be effective unless contained in a
written instrument signed by the party sought to
be charged.
662597.1
37
<PAGE>
F. The captions in the Agreement are included for
convenience of reference only, and in no way define
or delimit any of the provisions hereof or otherwise
affect their construction or effect.
G. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an
original but all of which together shall constitute
one and the same instrument.
H. If any part, term or provision of this Agreement
is determined by the courts or any regulatory
authority to be illegal, in conflict with any law
or otherwise invalid, the remaining portion or
portions shall be considered severable and not be
affected, and the rights and obligations of the
parties shall be construed and enforced as if the
Agreement did not contain the particular part,
term or provision held to be illegal or invalid.
I. This Agreement may not be assigned by either party
hereto without the prior written consent of the other
party.
J. Neither the execution nor performance of this
Agreement shall be deemed to create a partnership or
joint venture by and between Custodian and Fund.
K. Except as specifically provided herein, this
Agreement does not in any way affect any other
662597.1
38
<PAGE>
agreements entered into among the parties hereto and
any actions taken or omitted by either party
hereunder shall not affect any rights or obligations
of the other party hereunder.
662597.1
39
<PAGE>
IN WITNESS WHEREOF, the parties have caused this
Agreement to be executed by their respective duly authorized
officers.
INVESTORS FIDUCIARY TRUST COMPANY
By:______________________________
Title:___________________________
BACK BAY FUNDS, INC.
By:______________________________
Title:___________________________
662597.1
40
<PAGE>
EXHIBIT A
INVESTORS FIDUCIARY TRUST COMPANY
AVAILABILITY SCHEDULE BY TRANSACTION TYPE
<TABLE>
<CAPTION>
TRANSACTION DTC PHYSICAL FED
----------- --- -------- ---
TYPE CREDIT DATE FUNDS TYPE CREDIT DATE FUNDS TYPE CREDIT DATE FUNDS TYPE
- ------------------------- ------------------ ---------------- --------------------- -------------- ---------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Calls Put As Received C or F* As Received C or F*
Maturities As Received C or F* Mat. Date C or F* Mat. Date F
Tender Reorgs. As Received C As Received C N/A
Dividends Paydate C Paydate C N/A
Floating Rate Int. Paydate C Paydate C N/A
Floating Rate Int. N/A As Rate C N/A
(No Rate) Received
Mtg. Backed P&I Paydate C Paydate + 1 C Paydate F
Bus. Day
Fixed Rate Inc. Paydate C Paydate C Paydate F
Euroclear N/A Paydate C
</TABLE>
Legend
C = Clearinghouse Funds F = Fed Funds N/A = Not Applicable * Availability based
on how received.
662597.1
41
Form of
ADMINISTRATIVE SERVICES AGREEMENT
BACK BAY FUNDS, INC.
(the "Fund")
TOTAL RETURN BOND FUND
(the "Portfolio")
New York, New York
December __, 1997
Reich & Tang Asset Management L.P.
600 Fifth Avenue
New York, New York 10020
Gentlemen:
We herewith confirm our agreement with you as follows:
1. We propose to engage in the business of investing and
reinvesting our assets in securities of the type, and in accordance with the
limitations, specified in our Articles of Incorporation, By-Laws and
Registration Statement filed with the Securities and Exchange Commission under
the Investment Company Act of 1940 (the "1940 Act") and the Securities Act of
1933, including the Prospectus forming a part thereof (the "Registration
Statement"), all as from time to time in effect, and in such manner and to such
extent as may from time to time be authorized by our Board of Directors. We
enclose copies of the documents listed above and will furnish you such
amendments thereto as may be made from time to time.
2. (a) We hereby employ you as our administrator (the
"Administrator") to provide all management and administrative services
reasonably necessary for our operation. The services to be provided by you shall
include but not be limited to those enumerated on Exhibit A hereto. The
personnel providing these services may be your employees or employees of your
affiliates or of other organizations. You shall make periodic reports to the
Fund's Board of Directors in the performance of your obligations under this
Agreement and the execution of your duties hereunder is subject to the general
control of the Board of Directors.
(b) It is understood that you will from time to
time employ, subcontract with or otherwise associate with yourself, entirely at
your expense, such persons as you believe
619933.2
1
<PAGE>
to be particularly fitted to assist you in the execution of your duties
hereunder. While this agreement is in effect, you or persons affiliated with
you, other than us ("your affiliates"), will provide persons satisfactory to our
Board of Directors to be elected or appointed officers or employees of our
corporation. These shall be a president, a secretary, a treasurer, and such
additional officers and employees as may reasonably be necessary for the conduct
of our business.
(c) You or your affiliates will also provide
persons, who may be our officers, to (i) supervise the performance of
bookkeeping and related services and calculation of net asset value and yield by
our bookkeeping agent and (ii) prepare reports to and the filings with
regulatory authorities, and (iii) perform such clerical, other office and
shareholder services for us as we may from time to time request of you. Such
personnel may be your employees or employees of your affiliates or of other
organizations. Notwithstanding the preceding, you shall not be required to
perform any accounting services not expressly provided for herein.
(d) You or your affiliates will also furnish us
such administrative and management supervision and assistance and such office
facilities as you may believe appropriate or as we may reasonably request
subject to the requirements of any regulatory authority to which you may be
subject. You or your affiliates will also pay the expenses of promoting the sale
of our shares (other than the costs of preparing, printing and filing our
Registration Statement, printing copies of the prospectus contained therein and
complying with other applicable regulatory requirements), except to the extent
that we are permitted to bear such expenses under a plan adopted pursuant to
Rule 12b-1 under the 1940 Act or a similar rule.
3. We will expect of you, and you will give us the benefit of,
your best judgment and efforts in rendering these services to us, and we agree
as an inducement to your undertaking these services that you will not be liable
hereunder for any mistake of judgment or for any other cause, provided that
nothing herein shall protect you against any liability to us or to our security
holders by reason of willful misfeasance, bad faith or gross negligence in the
performance of your duties hereunder, or by reason of your reckless disregard of
your obligations and duties hereunder.
4. In consideration of the foregoing, the Fund will pay you an
annual fee equal to .15% of the Portfolio's average daily net assets up to $100
million, .125% of the next $150 million of such assets, .100% of the next $250
million of such assets and .075% of such assets over $500 million, with a
minimum monthly fee of $8,000. Your fee will be accrued by us daily, and will be
payable on the last day of each calendar month for
619933.2
2
<PAGE>
services performed hereunder during that month or on such other schedule as we
may agree in writing. You may use any portion of this fee for distribution of
our shares, or for making payments to organizations whose customers or clients
are our shareholders. You may waive your right to any fee to which you are
entitled hereunder, provided such waiver is delivered to us in writing.
5. This Agreement will become effective on the date hereof and
shall continue in effect until and thereafter for successive twelve-month
periods (computed from each ), provided that such continuation is specifically
approved at least annually by our Board of Directors and by a majority of those
of our directors who are neither party to this Agreement nor, other than by
their service as directors of the Fund, interested persons, as defined in the
1940 Act, of any such person who is party to this Agreement. This Agreement may
be terminated at any time, without the payment of any penalty, (i) by vote of a
majority of the outstanding voting securities of each respective Portfolio
voting separately, as defined in the 1940 Act, or (ii) by a vote of a majority
of our entire Board of Directors, on sixty days' written notice to you, or by
you on sixty days' written notice to us.
6. This Agreement may not be transferred, assigned, sold or in
any manner hypothecated or pledged by you and this Agreement shall terminate
automatically in the event of any such transfer, assignment, sale, hypothecation
or pledge by you. The terms "transfer", "assignment" and "sale" as used in this
paragraph shall have the meanings ascribed thereto by governing law and in
applicable rules or regulations of the Securities and Exchange Commission.
7. Except to the extent necessary to perform your obligations
hereunder, nothing herein shall be deemed to limit or restrict your right, or
the right of any of your officers, directors or employees who may also be a
director, officer or employee of ours, or of a person affiliated with us, as
defined in the Act, to engage in any other business or to devote time and
attention to the management or other aspects of any other business, whether of a
similar or dissimilar nature, or to render services of any kind to any other
corporation, firm, individual or association.
8. This Agreement shall be construed in accordance with the
laws of the State of New York and the applicable provisions of the 1940 Act.
619933.2
3
<PAGE>
If the foregoing is in accordance with your understanding,
will you kindly so indicate by signing and returning to us the enclosed copy
hereof.
Very truly yours,
BACK BAY FUNDS, INC.
By:__________________________________
Name:
Title:
ACCEPTED: December __, 1997
REICH & TANG ASSET MANAGEMENT L.P.
By: REICH & TANG ASSET MANAGEMENT, INC., as General Partner
By: ___________________________________
Name:
Title:
619933.2
4
<PAGE>
Exhibit A
Administration Services To Be Performed
By Reich & Tang Asset Management L.P.
Administration Services
1. In conjunction with Fund counsel, prepare and file all
Post-Effective Amendments to the Registration Statement, all
state and federal tax returns and all other required
regulatory filings.
2. In conjunction with Fund counsel, prepare and file all Blue
Sky filings, reports and renewals.
3. Coordinate, but not pay for, required Fidelity Bond and
Directors and Officers Insurance (if any) and monitor their
compliance with Investment Company Act.
4. Coordinate the preparation and distribution of all materials
for Directors, including the agenda for meetings and all
exhibits thereto, and actual and projected quarterly
summaries.
5. Coordinate the activities of the Fund's Manager, Custodian,
Legal Counsel and Independent Accountants.
6. Prepare and file all periodic reports to shareholders and
proxies and provide support for shareholder meetings.
7. Monitor daily and periodic compliance with respect to all
requirements and restrictions of the Investment Company Act,
the Internal Revenue Code and the
Prospectus.
8. Monitor daily the Fund's bookkeeping services agent's
calculation of all income and expense accruals, sales and
redemptions of capital shares outstanding.
9. Evaluate expenses, project future expenses, and process
payments of expenses.
10. Monitor and evaluate performance of accounting and accounting
related services by Fund's bookkeeping services agent. Nothing
herein shall be construed to require you to perform any
accounting services not expressly provided for in this
Agreement.
619933.2
BATTLE FOWLER LLP
A LIMITED LIABILITY PARTNERSHIP
75 East 55th Street
New York, New York 10022
(212) 856-7000
(212) 856-6858
(212) 856-7816
December 11, 1997
Total Return Bond Fund
A series of Back Bay Funds, Inc.
600 Fifth Avenue
New York, New York 10022
Gentlemen:
We have acted as counsel to Total Return Bond Fund, a series
of Back Bay Funds, Inc., a Maryland corporation (the "Fund"), in connection with
the preparation and filing of Registration Statement No. 333-33831 on Form N-1A
and all amendments thereto (the "Registration Statement") covering shares of
Common Stock, par value $.001 per share, of the Fund.
We have examined copies of the Articles of Incorporation and
By-Laws of the Fund, the Registration Statement, and such other corporate
records, proceedings and documents, including the consent of the Board of
Directors and the minutes of the meeting of the Board of Directors of the Fund,
as we have deemed necessary for the purpose of this opinion. In our examination
of such material, we have assumed the genuineness of all signatures and the
conformity to original documents of all copies submitted to us. As to various
questions of fact material to such opinion, we have relied upon statements and
certificates of officers and representatives of the Fund and others.
We are not admitted to the practice of law in any jurisdiction
but the State of New York and we do not express any opinion as to the laws of
other states or jurisdictions except as to matters of Federal law and, with
respect to the limited scope of this opinion, Maryland corporate law.
662631.1
<PAGE>
2
Back Bay Funds, Inc. December 11, 1997
Based upon and subject to the foregoing, we are of the opinion
that the shares of Common Stock, par value $.001 per share, of the Fund, to be
issued in accordance with the terms of the offering, as set forth in the
Prospectus and Statement of Additional Information included as part of the
Registration Statement, and when issued and paid for, will constitute validly
authorized and legally issued shares of Common Stock, fully paid and
non-assessable.
We hereby consent to the filing of this opinion as an
exhibit to the Registration Statement and to the reference to us in
the Registration Statement under the heading in the Prospectus and
in the Statement of Information: "Counsel and Independent
Auditors".
Very truly yours,
662631.1
CONSENT OF INDEPENDENT AUDITORS
We hereby consent to the use of our report dated December 4, 1997, on the
financial statement referred to therein, in this Registration Statement on Form
N-1A of Back Bay Funds, Inc.- Total Return Bond Fund, as filed with the
Securities and Exchange Commission.
We also consent to the reference to our Firm in the Statement of Additional
Information under the caption "Counsel and Auditors."
McGladrey & Pullen, LLP
New York, New York
December 5, 1997
NEW ENGLAND INVESTMENT COMPANIES, L.P.
399 Boylston Street
Boston, Massachusetts 02116-3310
November 26, 1997
Board of Directors of
Back Bay Funds, Inc.
600 Fifth Avenue
New York, New York 10020
Ladies and Gentlemen:
I hereby subscribe for (i) 100,000 shares of Class A Common Stock,
$0.001 par value per share, of Back Bay Funds, Inc., a Maryland Corporation (the
"Fund"), at $10.00 per share for a purchase price of $100,000 (ii) 100 shares of
Class B Common Stock, $0.001 par value per share of the Fund at $10.00 per share
for a purchase of $1,000 and (iii) 100 shares of Class C Common Stock, $0.001
par value per share of the Fund at $10.00 per share for a purchase of $1,000,
for an aggregate purchase of $102,000 for the Class A, B and C shares. My
payment in full is confirmed.
I hereby represent and agree that I am purchasing these shares of stock
for investment purposes, for my own account and risk and not with a view to any
sale, division or other distribution thereof within the meaning of the
Securities Act of 1933 as amended, nor with any present intention of
distributing or selling such shares. I further agree that if any of such shares
are redeemed during the period that the deferred organizational expenses of the
Fund are being amortized, I will reimburse the Fund the then unamortized
organizational expenses in the same ratio as the number of shares redeemed bears
to the number of such shares held at the time of redemption.
Very truly yours,
NEW ENGLAND INVESTMENT COMPANIES, L.P.
By: New England Investment Companies,
Inc.
By:________________________
Confirmed and Accepted:
BACK BAY FUNDS, INC.
By:___________________________
619966.2
Form of
BACK BAY FUNDS, INC.
(the "Fund")
TOTAL RETURN BOND FUND
(the "Portfolio")
Distribution and Service Plan Pursuant to Rule
12b-1 Under the Investment Company Act of 1940
The Distribution and Service Plan (the "Plan") is adopted by
Back Bay Funds, Inc. (the "Fund") on behalf of the Portfolio in accordance with
the provisions of Rule 12b-1 under the Investment Company Act of 1940 (the
"Act").
The Plan
1. The Fund, on behalf of the Portfolio and the Distributor,
has entered into a Distribution Agreement, in a form satisfactory to the Fund's
Board of Directors, under which the Distributor will act as distributor of the
Portfolio's shares. Pursuant to the Distribution Agreement, the Distributor, as
agent of the Fund, will solicit orders for the purchase of the Portfolio's
shares, provided that any subscriptions and orders for the purchase of the
Portfolio's shares will not be binding on the Portfolio until accepted by the
Fund as principal.
2. The Fund, on behalf of the Portfolio and the Distributor
have entered into a Shareholder Servicing Agreement with respect to the Class B
and C shares of the Fund, in a form satisfactory to the Fund's Board of
Directors, which provides that the Distributor will be paid a service fee for
providing or
-1-
619942.2
<PAGE>
for arranging for others to provide all personal shareholder servicing and
related maintenance of shareholder account functions not performed by us or our
transfer agent.
3. The Manager may make payments from time to time from its
own resources, which may include the management fees and administrative services
fees received by the Manager from the Fund and from other companies, and past
profits for the following purposes:
(i) to pay the costs of, and to compensate others, including
organizations whose customers or clients are Class B or C Fund
Shareholders ("Participating Organizations"), for performing personal
shareholder servicing and related maintenance of shareholder account
functions on behalf of the Portfolio;
(ii) to compensate Participating Organizations for providing
assistance in distributing the Portfolio's Class B and C Shares; and
(iii) to pay the cost of the preparation and printing of
brochures and other promotional materials, mailings to prospective
shareholders, advertising, and other promotional activities, including
salaries and/or commissions of sales personnel of the Distributor and
other persons, in connection with the distribution of the Portfolio's
Class B and C shares.
The Distributor may also make payments from time to time from its own resources,
which may include the service fee and past profits
-2-
619942.2
<PAGE>
for the purpose enumerated in (i) above. Further, the Distributor may determine
the amount of such payments made pursuant to the Plan, provided that such
payments will not increase the amount which the Portfolio is required to pay to
(1) the Manager for any fiscal year under the Investment Management Contract,
the Administrator for the Administrative Services Agreement in effect for that
year or otherwise or (3) to the Distributor under the Shareholder Servicing
Agreements (with respect to the Class B and C shares) in effect for that year or
otherwise. The Investment Management Contract will also require the Manager to
reimburse the Portfolio for any amounts by which the Fund's annual operating
expenses, including distribution expenses, exceed in the aggregate in any fiscal
year the limits prescribed by any state in which the Fund's shares are qualified
for sale.
4. The Portfolio will pay for (i) telecommunications expenses,
including the cost of dedicated lines and CRT terminals, incurred by the
Distributor and Participating Organizations in carrying out its obligations
under the Shareholder Servicing Agreement with respect to the Class B and Class
C shares of the Portfolio and (ii) preparing, printing and delivering the
Portfolio's prospectus to existing shareholders of the Portfolio and preparing
and printing subscription application forms for shareholder accounts.
5. Payments by the Distributor or Manager to Participating
Organizations as set forth herein are subject to
-3-
619942.2
<PAGE>
compliance by them with the terms of written agreements in a form satisfactory
to the Fund's Board of Directors to be entered into between the Distributor and
the Participating Organizations.
6. The Portfolio and the Distributor will prepare and furnish
to the Fund's Board of Directors, at least quarterly, written reports setting
forth all amounts expended for servicing and distribution purposes by the
Portfolio, the Distributor and the Manager, pursuant to the Plan and identifying
the servicing and distribution activities for which such expenditures were made.
7. The Plan became effective upon approval by (i) a majority
of the outstanding voting securities of the Portfolio (as defined in the Act),
and (ii) a majority of the Board of Directors of the Portfolio, including a
majority of the Directors who are not interested persons (as defined in the Act)
of the Fund and who have no direct or indirect financial interest in the
operation of the Plan or in any agreement entered into in connection with the
Plan, pursuant to a vote cast in person at a meeting called for the purpose of
voting on the approval of the Plan.
8. The Plan will remain in effect until ___________ __, 1998
unless earlier terminated in accordance with its terms, and thereafter may
continue in effect for successive annual periods if approved each year in the
manner described in clause (ii) of paragraph 7 hereof.
-4-
619942.2
<PAGE>
9. The Plan may be amended at any time with the approval of
the Board of Directors of the Fund, provided that (i) any material amendments of
the terms of the Plan will be effective only upon approval as provided in clause
(ii) of paragraph 7 hereof, and (ii) any amendment which increases materially
the amount which may be spent by the Fund pursuant to the Plan will be effective
only upon the additional approval as provided in clause (i) of paragraph 7
hereof (with each Class of the Fund voting separately).
10. The Plan may be terminated without penalty at any time (i)
by a vote of the majority of the entire Board of Directors of the Fund and by a
vote of a majority of the Directors of the Fund who are not interested persons
(as defined in the Act) of the Fund and who have no direct or indirect financial
interest in the operation of the Plan or in any agreement related to the Plan,
or (ii) by a vote of a majority of the outstanding voting securities of the
Portfolio (with each Class of the Fund voting separately) (as defined in the
Act).
-5-
619942.2
Form of
DISTRIBUTION AGREEMENT
BACK BAY FUNDS, INC.
(the "Fund")
Total Return Bond Fund
(the "Portfolio")
600 Fifth Avenue
New York, New York 10020
December __, 1997
Reich & Tang Distributors L.P.
600 Fifth Avenue
New York, New York 10020
Ladies and Gentlemen:
We hereby confirm our agreement with you as follows:
1. In consideration of the agreements on your part herein
contained and of the payment by us to you of a fee of $1 per year and on the
terms and conditions set forth herein we have agreed that you shall be, for the
period of this agreement, a distributor, as our agent, for the unsold portion of
such number of shares of common stock, $.001 par value per share, as may be
effectively registered from time to time under the Securities Act of 1933, as
amended (the "1933 Act"). This agreement is being entered into pursuant to the
Distribution and Service Plan (the "Plan") adopted by us in accordance with Rule
12b-1 under the Investment Company Act of 1940, as amended (the "1940 Act").
2. We hereby agree that you will act as our agent, and hereby
appoint you our agent, to offer, and to solicit offers to subscribe to, the
unsold balance of shares of our common stock as shall then be effectively
registered under the Act. All subscriptions for shares of our common stock
obtained by you shall be directed to us for acceptance and shall not be binding
on us until accepted by us. You shall have no authority to make binding
subscriptions on our behalf. We reserve the right to sell shares of our common
stock through other distributors or directly to investors through subscriptions
received by us at our principal office in New York, New York. The right given to
you under this agreement shall not apply to shares of our common stock issued in
connection with (a) the merger or consolidation of any other investment company
with us, (b) our acquisition by
619801.2
<PAGE>
purchase or otherwise of all or substantially all of the assets or stock of any
other investment company, or (c) the reinvestment in shares of our common stock
by our shareholders of dividends or other distributions or any other offering by
us of securities to our shareholders.
3. You will use your best efforts to obtain subscriptions to
shares of our Common Stock upon the terms and conditions contained herein and in
our Prospectus, as in effect from time to time. You will send to us promptly all
subscriptions placed with you. We shall furnish you from time to time, for use
in connection with the offering of shares of our common stock, such other
information with respect to us and shares of our common stock as you may
reasonably request. We shall supply you with such copies of our Registration
Statement and Prospectus, as in effect from time to time, as you may request.
Except as we may authorize in writing, you are not authorized to give any
information or to make any representation that is not contained in the
Registration Statement or Prospectus, as then in effect. You may use employees,
agents and other persons, at your cost and expense, to assist you in carrying
out your obligations hereunder, but no such employee, agent or other person
shall be deemed to be our agent or have any rights under this agreement. You may
sell our shares to or through qualified brokers, dealers and financial
institutions under selling and servicing agreements provided that no dealer,
financial institution or other person shall be appointed or authorized to act as
our agent without our written consent.
With respect to the Class B and C Shares of the Portfolio, you
will arrange for organizations whose customers or clients are shareholders of
our Fund ("Participating Organizations") to enter into agreements with you for
the performance of shareholder servicing and related administrative functions
not performed by you or the Transfer Agent. Pursuant to each of our Shareholder
Servicing Agreements with you with respect to the Class B and C Shares, you may
make payments to Participating Organizations for performing shareholder
servicing and related administrative functions with respect to the Class B and C
Shares, respectively. Such payments will be made only pursuant to written
agreements approved in form and substance by our Board of Directors to be
entered into by you and the Participating Organizations. It is recognized that
we shall have no obligation or liability to you or any Participating
Organization for any such payments under the agreements with Participating
Organizations. Our obligation is solely to make payments to you under each
Shareholder Servicing Agreement (with respect to the Class B and C Shares) and
to the Manager under the Investment Management Contract and the Administrative
Services Contract. All sales of our shares effected through you will be made in
compliance with all applicable federal securities laws
2
619801.2
<PAGE>
and regulations and the Constitution, rules and regulations of the National
Association of Securities Dealers, Inc. ("NASD").
4. We reserve the right to suspend the offering of shares of
our common stock at any time, in the absolute discretion of our Board of
Directors, and upon notice of such suspension you shall cease to offer shares of
our common stock hereunder.
5. Both of us will cooperate with each other in taking such
action as may be necessary to qualify shares of our common stock for sale under
the securities laws of such states as we may designate, provided, that you shall
not be required to register as a broker-dealer or file a consent to service of
process in any such state where you are not now so registered. Pursuant to the
Investment Management Contract in effect between us and the Manager, we will pay
all fees and expenses of registering shares of our common stock under the Act
and of qualification of shares of our beneficial interests, and to the extent
necessary, our qualification under applicable state securities laws. You will
pay all expenses relating to your broker-dealer qualification.
6. We represent to you that our Registration Statement and
Prospectus have been carefully prepared to date in conformity with the
requirements of the 1933 Act and the 1940 Act and the rules and regulations of
the Securities and Exchange Commission (the "SEC") thereunder. We represent and
warrant to you, as of the date hereof, that our Registration Statement and
Prospectus contain all statements required to be stated therein in accordance
with the 1933 Act and the 1940 Act and the SEC's rules and regulations
thereunder; that all statements of fact contained therein are or will be true
and correct at the time indicated or the effective date as the case may be; and
that neither our Registration Statement nor our Prospectus, when they shall
become effective or be authorized for use, will include an untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading to a purchaser of shares
of our common stock. We will from time to time file such amendment or amendments
to our Registration Statement and Prospectus as, in the light of future
development, shall, in the opinion of our counsel, be necessary in order to have
our Registration Statement and Prospectus at all times contain all material
facts required to be stated therein or necessary to make any statements therein
not misleading to a purchaser of shares of our common stock. If we shall not
file such amendment or amendments within fifteen days after our receipt of a
written request from you to do so, you may, at your option, terminate this
agreement immediately. We will not file any amendment to our Registration
Statement or Prospectus without giving you reasonable notice thereof in advance;
provided, however, that nothing in this agreement shall
3
619801.2
<PAGE>
in any way limit our right to file such amendments to our Registration Statement
or Prospectus, of whatever character, as we may deem advisable, such right being
in all respects absolute and unconditional. We represent and warrant to you that
any amendment to our Registration Statement or Prospectus hereafter filed by us
will be carefully prepared in conformity within the requirements of the 1933 Act
and the 1940 Act and the SEC's rules and regulations thereunder and will, when
it becomes effective, contain all statements required to be stated therein in
accordance with the 1933 Act and the 1940 Act and the SEC's rules and
regulations thereunder; that all statements of fact contained therein will, when
the same shall become effective, be true and correct; and that no such
amendment, when it becomes effective, will include an untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading to a purchaser of our
shares.
7. We agree to indemnify, defend and hold you, and any person
who controls you within the meaning of Section 15 of the 1933 Act, free and
harmless from and against any and all claims, liabilities and expenses
(including the cost of investigating or defending such claims, demands or
liabilities and any counsel fees incurred in connection therewith) which you or
any such controlling person may incur, under the 1933 Act or the 1940 Act, or
under common law or otherwise, arising out of or based upon any alleged untrue
statement of a material fact contained in our Registration Statement or
Prospectus in effect from time to time or arising out of or based upon any
alleged omission to state a material fact required to be stated in either of
them or necessary to make the statements in either of them not misleading;
provided, however, that in no event shall anything herein contained be so
construed as to protect you against any liability to us or our security holders
to which you would otherwise be subject by reason of willful misfeasance, bad
faith, or gross negligence in the performance of your duties, or by reason of
your reckless disregard of your obligations and duties under this agreement. Our
agreement to indemnify you and any such controlling person is expressly
conditioned upon our being notified of any action brought against you or any
such controlling person, such notification to be given by letter or by telegram
addressed to us at our principal office in New York, New York, and sent to us by
the person against whom such action is brought within ten days after the summons
or other first legal process shall have been served. The failure so to notify us
of any such action shall not relieve us from any liability which we may have to
the person against whom such action is brought other than on account of our
indemnity agreement contained in this paragraph 7. We will be entitled to assume
the defense of any suit brought to enforce any such claim, and to retain counsel
of good standing chosen by us and approved by you. In the event we do elect to
assume the defense of any such suit and retain
4
619801.2
<PAGE>
counsel of good standing approved by you, the defendant or defendants in such
suit shall bear the fees and expenses of any additional counsel retained by any
of them; but in case we do not elect to assume the defense of any such suit, or
in case you, in good faith, do not approve of counsel chosen by us, we will
reimburse you or the controlling person or persons named as defendant or
defendants in such suit, for the fees and expenses of any counsel retained by
you or them. Our indemnification agreement contained in this paragraph 7 and our
representations and warranties in this agreement shall remain in full force and
effect regardless of any investigation made by or on behalf of you or any
controlling person and shall survive the sale of any shares of our common stock
made pursuant to subscriptions obtained by you. This agreement of indemnity will
inure exclusively to your benefit, to the benefit of your successors and
assigns, and to the benefit of any of your controlling persons and their
successors and assigns. We agree promptly to notify you of the commencement of
any litigation or proceeding against us in connection with the issue and sale of
any shares of our common stock.
8. You agree to indemnify, defend and hold us, our several
officers and directors, and any person who controls us within the meaning of
Section 15 of the 1933 Act, free and harmless from and against any and all
claims, demands, liabilities, and expenses (including the cost of investigating
or defending such claims, demands or liabilities and any reasonable counsel fees
incurred in connection therewith) which we, our officers or directors, or any
such controlling person may incur under the 1933 Act or under common law or
otherwise, but only to the extent that such liability or expense incurred by us,
our officers or directors or such controlling person shall arise out of or be
based upon any alleged untrue statement of a material fact contained in
information furnished in writing by you to us for use in our Registration
Statement or Prospectus as in effect from time to time, or shall arise out of or
be based upon any alleged omission to state a material fact in connection with
such information required to be stated in the Registration Statement or
Prospectus or necessary to make such information not misleading. Your agreement
to indemnify us, our officers and directors, and any such controlling person is
expressly conditioned upon your being notified of any action brought against us,
our officers or directors or any such controlling person, such notification to
be given by letter or telegram addressed to you at your principal office in New
York, New York, and sent to you by the person against whom such action is
brought, within ten days after the summons or other first legal process shall
have been served. You shall have a right to control the defense of such action,
with counsel of your own choosing, satisfactory to us, if such action is based
solely upon such alleged misstatement or omission on your part, and in any other
event you and we, our officers or directors or such
5
619801.2
<PAGE>
controlling person shall each have the right to participate in the defense or
preparation of the defense of any such action. The failure so to notify you of
any such action shall not relieve you from any liability which you may have to
us, to our officers or directors, or to such controlling person other than on
account of your indemnity agreement contained in this paragraph 8.
9. We agree to advise you immediately:
a. of any request by the SEC for amendments to
our Registration Statement or Prospectus or for additional
information,
b. of the issuance by the SEC of any stop order
suspending the effectiveness of our Registration Statement or
Prospectus or the initiation of any proceedings for that purpose,
c. of the happening of any material event which
makes untrue any statement made in our Registration Statement or Prospectus or
which requires the making of a change in either of them in order to make the
statements therein not misleading, and
d. of all action of the SEC with respect to any
amendments to our Registration Statement or Prospectus.
10. This agreement will become effective on the date hereof
and will remain in effect thereafter for successive twelve-month periods
(computed from each ____________), provided that such continuation is
specifically approved at least annually by vote of our Board of Directors and of
a majority of those of our directors who are not interested persons (as defined
in the 1940 Act) and have no direct or indirect financial interest in the
operation of the Plan or in any agreements related to the Plan, cast in person
at a meeting called for the purpose of voting on this agreement. This agreement
may be terminated at any time, without the payment of any penalty, (i) by vote
of a majority of our entire Board of Directors, and by a vote of a majority of
our Directors who are not interested persons (as defined in the 1940 Act) and
who have no direct or indirect financial interest in the operation of the Plan
or in any agreement related to the Plan, or (ii) by vote of a majority of our
outstanding voting securities, as defined in the Act, on sixty days' written
notice to you, or (iii) by you on sixty days' written notice to us.
11. This Agreement may not be transferred, assigned, sold or
in any manner hypothecated or pledged by you and this Agreement shall terminate
automatically in the event of any such transfer, assignment, sale, hypothecation
or pledge by you. The terms "transfer", "assignment" and "sale" as used in this
paragraph shall have the meanings ascribed thereto by governing law and in
applicable rules or regulations of the SEC thereunder.
6
619801.2
<PAGE>
12. Except to the extent necessary to perform your obligations
hereunder, nothing herein shall be deemed to limit or restrict your right, the
right of any of your employees or the right of any officers or directors of
Reich & Tang Asset Management, Inc., your general partner, who may also be a
director, officer or employee of ours, or of a person affiliated with us, as
defined in the 1940 Act, to engage in any other business or to devote time and
attention to the management or other aspects of any other business, whether of a
similar or dissimilar nature, or to render services of any kind to another
corporation, firm, individual or association.
If the foregoing is in accordance with your understanding,
will you kindly so indicate by signing and returning to us the enclosed copy
hereof.
Very truly yours,
BACK BAY FUNDS, INC.
By:
----------------------------------
Accepted: December __, 1997
REICH & TANG DISTRIBUTORS L.P.
By: REICH & TANG ASSET MANAGEMENT, INC., as General Partner
By:
------------------------------------
7
619801.2
Form of
SHAREHOLDER SERVICING
AGREEMENT
BACK BAY FUNDS, INC.
(the "Fund")
TOTAL RETURN BOND FUND
(the "Portfolio")
CLASS B SHARES
600 Fifth Avenue
New York, New York 10020
December __, 1997
Reich & Tang Distributors L.P. ("Distributor")
600 Fifth Avenue
New York, New York 10020
Gentlemen:
We herewith confirm our agreement with you as follows:
1. We hereby employ you, pursuant to the Distribution and
Service Plan, as amended, adopted by us in accordance with Rule 12b-1 (the
"Plan") under the Investment Company Act of 1940, as amended (the "Act"), to
provide the services listed below on behalf of the Class B Shares. You will
perform, or arrange for others including organizations whose customers or
clients are shareholders of our corporation (the "Participating Organizations")
to perform, all personal shareholder servicing and related maintenance of
shareholder account functions ("Shareholder Services") not performed by us or
our transfer agent.
2. You will be responsible for the payment of all expenses
incurred by you in rendering the foregoing services, except that we will pay for
(i) telecommunications expenses, including the cost of dedicated lines and CRT
terminals, incurred by the Distributor and Participating Organizations in
rendering such services to the Class B Shareholders, and (ii) preparing,
printing and delivering our prospectus to existing shareholders and preparing
and printing subscription application forms for shareholder accounts.
620014.2
<PAGE>
3. You may make payments from time to time from your own
resources, including the fee payable hereunder and past profits to compensate
Participating Organizations, for providing Shareholder Services to the Class B
Shareholders of the Fund. Payments to Participating Organizations to compensate
them for providing Shareholder Services are subject to compliance by them with
the terms of written agreements satisfactory to our Board of Directors to be
entered into between the Distributor and the Participating Organizations. The
Distributor will in its sole discretion determine the amount of any payments
made by the Distributor pursuant to this Agreement, provided, however, that no
such payment will increase the amount which we are required to pay either to the
Distributor under this Agreement or to the Manager under the Investment
Management Contract, the Administrative Services Agreement, or otherwise.
4. We will expect of you, and you will give us the benefit of,
your best judgment and efforts in rendering these services to us, and we agree
as an inducement to your undertaking these services that you will not be liable
hereunder for any mistake of judgment or for any other cause, provided that
nothing herein shall protect you against any liability to us or to our
shareholders by reason of willful misfeasance, bad faith or gross negligence in
the performance of your duties hereunder, or by reason of your reckless
disregard of your obligations and duties hereunder.
5. In consideration of your performance, we will pay you a
service fee as defined by Article III, Section 26(b)(9) of the Rules of Fair
Practice, as amended, of the National Association of Securities Dealers, Inc. at
the annual rate of one quarter of one percent (0.25%) of the Fund's Class B
Share's average daily net assets. Your fee will be accrued by us daily, and will
be payable on the last day of each calendar month for services performed
hereunder during that month or on such other schedule as you shall request of us
in writing. You may waive your right to any fee to which you are entitled
hereunder, provided such waiver is delivered to us in writing.
6. This Agreement will become effective on the date hereof and
thereafter for successive twelve-month periods (computed from each ___________),
provided that such continuation is specifically approved at least annually by
vote of our Board of Directors and of a majority of those of our directors who
are not interested persons (as defined in the Act) and have no direct or
indirect financial interest in the operation of the Plan or in any agreements
related to the Plan, cast in person at a meeting called for the purpose of
voting on this Agreement. This Agreement may be terminated at any time, without
the payment of any penalty, (i) by vote of a majority of our entire Board of
Directors, and by a vote of a majority of our Directors who are not interested
persons (as defined in the Act) and who have no
620014.2
2
<PAGE>
direct or indirect financial interest in the operation of the Plan or in any
agreement related to the Plan, or (ii) by vote of a majority of the outstanding
voting securities of the Fund's Class B Shares, as defined in the Act, on sixty
days' written notice to you, or (iii) by you on sixty days' written notice to
us.
7. This Agreement may not be transferred, assigned, sold or in
any manner hypothecated or pledged by you and this Agreement shall terminate
automatically in the event of any such transfer, assignment, sale, hypothecation
or pledge by you. The terms "transfer", "assignment" and "sale" as used in this
paragraph shall have the meanings ascribed thereto by governing law and in
applicable rules or regulations of the Securities and Exchange Commission
thereunder.
8. Except to the extent necessary to perform your obligations
hereunder, nothing herein shall be deemed to limit or restrict your right, the
right of any of your employees or the right of any officers or directors of
Reich & Tang Asset Management, Inc., your general partner, who may also be a
director, officer or employee of ours, or of a person affiliated with us, as
defined in the Act, to engage in any other business or to devote time and
attention to the management or other aspects of any other business, whether of a
similar or dissimilar nature, or to render services of any kind to another
corporation, firm, individual or association.
If the foregoing is in accordance with your under standing,
will you kindly so indicate by signing and returning to us the enclosed copy
hereof.
Very truly yours,
BACK BAY FUNDS, INC.
Class B SHARES
By:
-----------------------------------
ACCEPTED: December __, 1997
REICH & TANG DISTRIBUTORS L.P.
By: REICH & TANG ASSET MANAGEMENT, INC., as General Partner
By:
-----------------------------------
620014.2
3
<PAGE>
Form of
SHAREHOLDER SERVICING
AGREEMENT
BACK BAY FUNDS, INC.
(the "Fund")
TOTAL RETURN BOND FUND
(the "Portfolio")
CLASS C SHARES
600 Fifth Avenue
New York, New York 10020
December __, 1997
Reich & Tang Distributors L.P. ("Distributor")
600 Fifth Avenue
New York, New York 10020
Gentlemen:
We herewith confirm our agreement with you as follows:
1. We hereby employ you, pursuant to the Distribution and
Service Plan, as amended, adopted by us in accordance with Rule 12b-1 (the
"Plan") under the Investment Company Act of 1940, as amended (the "Act"), to
provide the services listed below on behalf of the Class C Shares. You will
perform, or arrange for others including organizations whose customers or
clients are shareholders of our corporation (the "Participating Organizations")
to perform, all personal shareholder servicing and related maintenance of
shareholder account functions ("Shareholder Services") not performed by us or
our transfer agent.
2. You will be responsible for the payment of all expenses
incurred by you in rendering the foregoing services, except that we will pay for
(i) telecommunications expenses, including the cost of dedicated lines and CRT
terminals, incurred by the Distributor and Participating Organizations in
rendering such services to the Class C Shareholders, and (ii) preparing,
printing and delivering our prospectus to existing shareholders and preparing
and printing subscription application forms for shareholder accounts.
660130.1
<PAGE>
3. You may make payments from time to time from your own
resources, including the fee payable hereunder and past profits to compensate
Participating Organizations, for providing Shareholder Services to the Class C
Shareholders of the Fund. Payments to Participating Organizations to compensate
them for providing Shareholder Services are subject to compliance by them with
the terms of written agreements satisfactory to our Board of Directors to be
entered into between the Distributor and the Participating Organizations. The
Distributor will in its sole discretion determine the amount of any payments
made by the Distributor pursuant to this Agreement, provided, however, that no
such payment will increase the amount which we are required to pay either to the
Distributor under this Agreement or to the Manager under the Investment
Management Contract, the Administrative Services Agreement, or otherwise.
4. We will expect of you, and you will give us the benefit of,
your best judgment and efforts in rendering these services to us, and we agree
as an inducement to your undertaking these services that you will not be liable
hereunder for any mistake of judgment or for any other cause, provided that
nothing herein shall protect you against any liability to us or to our
shareholders by reason of willful misfeasance, bad faith or gross negligence in
the performance of your duties hereunder, or by reason of your reckless
disregard of your obligations and duties hereunder.
5. In consideration of your performance, we will pay you a
service fee as defined by Article III, Section 26(b)(9) of the Rules of Fair
Practice, as amended, of the National Association of Securities Dealers, Inc. at
the annual rate of one quarter of one percent (0.25%) of the Fund's Class C
Share's average daily net assets. Your fee will be accrued by us daily, and will
be payable on the last day of each calendar month for services performed
hereunder during that month or on such other schedule as you shall request of us
in writing. You may waive your right to any fee to which you are entitled
hereunder, provided such waiver is delivered to us in writing.
6. This Agreement will become effective on the date hereof and
thereafter for successive twelve-month periods (computed from each ___________),
provided that such continuation is specifically approved at least annually by
vote of our Board of Directors and of a majority of those of our directors who
are not interested persons (as defined in the Act) and have no direct or
indirect financial interest in the operation of the Plan or in any agreements
related to the Plan, cast in person at a meeting called for the purpose of
voting on this Agreement. This Agreement may be terminated at any time, without
the payment of any penalty, (i) by vote of a majority of our entire Board of
Directors, and by a vote of a majority of our Directors who are not interested
persons (as defined in the Act) and who have no
660130.1
2
<PAGE>
direct or indirect financial interest in the operation of the Plan or in any
agreement related to the Plan, or (ii) by vote of a majority of the outstanding
voting securities of the Fund's Class C Shares, as defined in the Act, on sixty
days' written notice to you, or (iii) by you on sixty days' written notice to
us.
7. This Agreement may not be transferred, assigned, sold or in
any manner hypothecated or pledged by you and this Agreement shall terminate
automatically in the event of any such transfer, assignment, sale, hypothecation
or pledge by you. The terms "transfer", "assignment" and "sale" as used in this
paragraph shall have the meanings ascribed thereto by governing law and in
applicable rules or regulations of the Securities and Exchange Commission
thereunder.
8. Except to the extent necessary to perform your obligations
hereunder, nothing herein shall be deemed to limit or restrict your right, the
right of any of your employees or the right of any officers or directors of
Reich & Tang Asset Management, Inc., your general partner, who may also be a
director, officer or employee of ours, or of a person affiliated with us, as
defined in the Act, to engage in any other business or to devote time and
attention to the management or other aspects of any other business, whether of a
similar or dissimilar nature, or to render services of any kind to another
corporation, firm, individual or association.
If the foregoing is in accordance with your under standing,
will you kindly so indicate by signing and returning to us the enclosed copy
hereof.
Very truly yours,
BACK BAY FUNDS, INC.
Class C SHARES
By:
-----------------------------------
ACCEPTED: December __, 1997
REICH & TANG DISTRIBUTORS L.P.
By: REICH & TANG ASSET MANAGEMENT, INC., as General Partner
By:
-----------------------------------
660130.1
3
<PAGE>
SIGNATURES
KNOW ALL PEOPLE BY THESE PRESENTS, that the undersigned hereby
constitutes and appoints Steven W. Duff and Bernadette N. Finn, and each of
them, with full power of substitution, as his true and lawful attorney and agent
to execute in his name and on his behalf, in any and all capacities, the
Registration Statement on Form N-1A, and any and all amendments thereto
(including pre-effective amendments) filed by Back Bay Funds, Inc. (the "Fund")
with the Securities and Exchange Commission under the Securities Act of 1933, as
amended, and under the Investment Company Act of 1940, as amended, and any and
all other instruments which such attorney and agent deems necessary or advisable
to enable the Fund to comply with the Securities Act of 1933, as amended, the
Investment Company Act of 1940, as amended, the rules, regulations and
requirements of the Securities and Exchange Commission, and the securities or
Blue Sky laws of any state or other jurisdiction; and the undersigned hereby
ratifies and confirms as his own act and deed any and all that such attorney and
agent shall do or cause to be done by virtue hereof.
/s/ Robert Straniere
----------------------------
Robert Straniere
662512.1
<PAGE>
SIGNATURES
KNOW ALL PEOPLE BY THESE PRESENTS, that the undersigned hereby
constitutes and appoints Steven W. Duff and Bernadette N. Finn, and each of
them, with full power of substitution, as his true and lawful attorney and agent
to execute in his name and on his behalf, in any and all capacities, the
Registration Statement on Form N-1A, and any and all amendments thereto
(including pre-effective amendments) filed by Back Bay Funds, Inc. (the "Fund")
with the Securities and Exchange Commission under the Securities Act of 1933, as
amended, and under the Investment Company Act of 1940, as amended, and any and
all other instruments which such attorney and agent deems necessary or advisable
to enable the Fund to comply with the Securities Act of 1933, as amended, the
Investment Company Act of 1940, as amended, the rules, regulations and
requirements of the Securities and Exchange Commission, and the securities or
Blue Sky laws of any state or other jurisdiction; and the undersigned hereby
ratifies and confirms as his own act and deed any and all that such attorney and
agent shall do or cause to be done by virtue hereof.
/s/ Edgar M. Reed
----------------------------
Edgar M. Reed
662512.1
<PAGE>
SIGNATURES
KNOW ALL PEOPLE BY THESE PRESENTS, that the undersigned hereby
constitutes and appoints Steven W. Duff and Bernadette N. Finn, and each of
them, with full power of substitution, as his true and lawful attorney and agent
to execute in his name and on his behalf, in any and all capacities, the
Registration Statement on Form N-1A, and any and all amendments thereto
(including pre-effective amendments) filed by Back Bay Funds, Inc. (the "Fund")
with the Securities and Exchange Commission under the Securities Act of 1933, as
amended, and under the Investment Company Act of 1940, as amended, and any and
all other instruments which such attorney and agent deems necessary or advisable
to enable the Fund to comply with the Securities Act of 1933, as amended, the
Investment Company Act of 1940, as amended, the rules, regulations and
requirements of the Securities and Exchange Commission, and the securities or
Blue Sky laws of any state or other jurisdiction; and the undersigned hereby
ratifies and confirms as his own act and deed any and all that such attorney and
agent shall do or cause to be done by virtue hereof.
/s/ Dr. W. Giles Mellon
----------------------------
Dr. W. Giles Mellon
662512.1
<PAGE>
SIGNATURES
KNOW ALL PEOPLE BY THESE PRESENTS, that the undersigned hereby
constitutes and appoints Steven W. Duff and Bernadette N. Finn, and each of
them, with full power of substitution, as his true and lawful attorney and agent
to execute in his name and on his behalf, in any and all capacities, the
Registration Statement on Form N-1A, and any and all amendments thereto
(including pre-effective amendments) filed by Back Bay Funds, Inc. (the "Fund")
with the Securities and Exchange Commission under the Securities Act of 1933, as
amended, and under the Investment Company Act of 1940, as amended, and any and
all other instruments which such attorney and agent deems necessary or advisable
to enable the Fund to comply with the Securities Act of 1933, as amended, the
Investment Company Act of 1940, as amended, the rules, regulations and
requirements of the Securities and Exchange Commission, and the securities or
Blue Sky laws of any state or other jurisdiction; and the undersigned hereby
ratifies and confirms as his own act and deed any and all that such attorney and
agent shall do or cause to be done by virtue hereof.
/s/ Dr. Yung Wong
----------------------------
Dr. Yung Wong
662512.1
BACK BAY FORM OF ADVISORS, L.P.
RULE 18f-3 MULTI-CLASS PLAN
December 1, 1997
I. Introduction.
Pursuant to Rule 18f-3 under the Investment Company Act of
1940, as amended (the "1940 Act"), the following sets forth the method for
allocating fees and expenses among each class of shares of the Total Return Bond
Fund, a series of the Back Bay Funds, Inc. sponsored by BACK BAY ADVISORS, L.P.
(the "Company" or "Multi-Class Fund"). In addition, this Rule 18f-3 Multi-Class
Plan (the "Plan") sets forth the shareholder servicing arrangements,
distribution arrangements, conversion features, exchange privileges and other
shareholder services of each class of shares in the Multi-Class Fund.
The Company is an open-end series investment company
registered under the 1940 Act and the shares of which are registered on Form
N-1A under the Securities Act of 1933 (Reg. No. 333-33831). Upon the effective
date of this Plan, the Company hereby elects to offer multiple classes of
pursuant to the provisions of Rule 18f-3 and this Plan.
II. Allocation of Expenses.
Pursuant to Rule 18f-3 under the 1940 Act, the Company shall
allocate to each class of shares (i) any fees and expenses incurred by the
Company in connection with the distribution of such class of shares under a
distribution and service plan adopted for such class of shares pursuant to Rule
12b-1, and (ii) any fees and expenses incurred by the Company under a
shareholder servicing plan in connection with the provision of shareholder
services to the holders of such class of shares. In addition, pursuant to Rule
18f-3, the Company may allocate the following fees and expenses to a particular
class of shares:
(i) transfer agent fees and related expenses
identified by the transfer agent as being
attributable to such class of shares;
(ii) printing and postage expenses related to
preparing and distributing materials such as
shareholder reports, prospectuses, reports,
and proxies to current shareholder of such
class of shares or to regulatory agencies
with respect to such class of shares;
<PAGE>
(iii) blue sky registration or qualification fees
incurred by such class of shares;
(iv) Securities and Exchange Commission
registration fees incurred by such class of
shares;
(v) the expense of administrative personnel and
services (including, but not limited to,
those of a fund accountant, or divided
paying agent charged with calculating net
asset values or determining or paying
dividends 1 ) as required to support the
shareholders of such class of shares;
(vi) litigation or other legal expenses relating
solely to such class of shares;
(vii) fees of the Company's Directors incurred as
a result of issues relating to such class of
shares; and
(viii) independent accountants' fees relating
solely to such class of shares.
The initial determination of the class expenses that will be
allocated by the Company to a particular class of shares and any subsequent
changes thereto will be reviewed by the Board of Directors and approved by a
vote of the Directors of the Company, including a majority of the Directors who
are not interested persons of the Company.
Income, realized and unrealized capital gains and losses, and
any expenses of the Multi-Class Fund not allocated to a particular class of the
Fund pursuant to this Plan shall be allocated to each class of the Fund on the
basis of the net asset value of that class in relation to the net asset of the
Fund.
III. Class Arrangements.
The following summarizes the Rule 12b-1 distribution fees,
shareholder servicing fees, exchange privileges and other shareholder services
applicable to each class of shares of the Multi-Class Fund. Additional details
regarding such fees and services are set forth in the Fund's current Prospectus
and Statement of Additional Information.
- --------
1. Rule 18f-3 requires that services
related to the management of the
portfolio's assets, such as
custodial fees, be borne by the fund
and not by class.
662776.1
<PAGE>
A. Class A Shares -
1. Initial Sales Load: None.
2. Contingent Deferred Sales Charge: None.
3. Redemption Fees: None.
4. Rule 12b-1 Distribution Fees: None.
5. Rule 12b-1 Shareholder Servicing Fees: None.
6. Conversion Features: None.
7. Exchange Privileges: None
8. Other Incidental Shareholder Services: As
provided in the Prospectus.
B. Class B Shares -
1. Initial Sales Load: None.
2. Contingent Deferred Sales Charge: None.
3. Redemption Fees: None.
4. Rule 12b-1 Distribution Fees: None.
5. Rule 12b-1 Shareholder Servicing Fees: Up to
.25% per annum of average daily net assets.
6. Conversion Features: None.
7. Exchange Privileges: None
8. Other Incidental Shareholder Services: As
provided in the Prospectus.
C. Class C
1. Maximum Initial Sales Load: None.
2. Contingent Deferred Sales Charge: None.
<PAGE>
3. Redemption Fees: None.
4. Rule 12b-1 Distribution Fees: None.
5. Rule 12b-1 Shareholder Servicing Fees: Up to
.25 per annum of the average daily net
assets.
6. Sub-Accounting/Transfer Agent Fee: .15% per
annum of the average daily net assets.
7. Conversion Features: None.
8. Exchange Privileges: None.
9. Other Incidental Shareholder Services: As
provided in the Prospectus.
IV. Board Review.
The Board of Directors of the Company shall review this Plan
as frequently as it deems necessary. Prior to any material amendments to this
Plan, the Company's Board of Directors, including a majority of the Directors
that are not interested persons of the Company, shall find that the Plan, as
proposed to be amended (including any proposed amendments to the method of
allocating class and/or fund expenses, is in the best interest of each class of
shares of a Multi-Class Fund individually and the Fund as a whole. In
considering whether to approve any proposed amendments(s) to the Plan, the
Directors of the Company shall request and evaluate such information as they
consider reasonably necessary to evaluate the proposed amendments(s) to the
Plan.
In making its initial determination to approve this Plan, the
Board focused on, among other things, the relationship between or among the
classes and examined potential conflicts of interest between classes regarding
the allocation of fees, services, waivers and reimbursement of expenses, and
voting rights. The Board evaluated the level of services provided to each class
and the cost of those services to ensure that the services are appropriate and
the allocation of expenses is reasonable. In approving any subsequent amendments
to this Plan, the Board shall focus on and evaluate such factors as well as any
others deemed necessary by the Board.
662776.1
<PAGE>