Registration No. 333-33831
Rule 497(c)
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BACK BAY FUNDS, INC. 600 FIFTH AVENUE
(THE "FUND") NEW YORK, NEW YORK 10020
(212) 830-5220
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SUPPLEMENT TO PROSPECTUS
Effective January 1, 1998, Reich & Tang Distributors L.P., the distributor
of the Fund, became Reich & Tang Distributors, Inc. (the "Distributor"), due to
a restructuring of New England Investment Companies, L.P. ("NEIC"), the former
parent company of Reich & Tang Asset Management, Inc. the sole shareholder of
the Distributor. The Distributor has indicated that such restructuring did not
result in any change in its management and will have no impact upon the
Distributor's performance of its responsibilities and obligations.
In addition, the restructuring resulted in the change of name of Reich &
Tang Services, L.P., the fund's transfer agent, to Reich & Tang Services, Inc.
Effective January 1, 1998, NEIC Operating Partnership, L.P. ("NEICOP") was
the limited partner and owner of a 99.5% interest in the Manager replacing New
England Investment Companies, L.P. ("NEICLP") as the limited partner and owner
of such interest in the Manager, due to a restructuring by New England
Investment Companies, Inc. ("NEIC"). Subsequently, effective March 31, 1998,
Nvest Companies, L.P. ("Nvest Companies") due to a change in name of NEICOP,
replaces NEICOP as the limited partner and owner of a 99.5% interest in the
Manager.
Reich & Tang Asset Management, Inc. (an indirect wholly-owned subsidiary of
Nvest Companies) is the sole general partner and owner of the remaining 0.5%
interest of the Manager. Nvest Corporation, a Massachusetts Corporation
(formerly known as New England Investment Companies, Inc.), serves as the
managing general partner of Nvest Companies.
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BACK BAY ADVISORS
Back Bay Funds, Inc.
Total Return Portfolio
BBA Past Performance Information
The graph below is based on performance data relating to Back Bay Advisors Bond
Account (BBA). This account is a commingled vehicle exclusively for qualified
pension and profit sharing plans with substantially similar investment
objectives to the Portfolio and has been managed by Back Bay Advisors, L.P.
since April 1, 1986. Back Bay Advisors, L.P. has applied the same investment
styles and techniques that it is applying to the Portfolio. The following
information does not represent the Portfolio's performance. The Portfolio is
newly organized and has no performance record of its own. The information should
not be considered a prediction of the future performance record of its own. The
Portfolio's performance may be higher or lower than that shown below.
Data identified as BBA Bond Account (Net) reflects the gross performance
adjusted to give effect to the higher of the level of actual expenses of the
Account during the periods shown, or the annualized expenses projected for the
Portfolio's Class A shares during it's first full fiscal year. Annual expenses
reflected in the Net performance equal to .40% through December 31, 1995 and
.50% thereafter. Performance is net of expenses incurred in investment
transactions, taxes, and any commissions. No adjustments were made to give
effect to the higher expense levels of the Portfolio's Class B and Class C
shares. Performance would be lower if it were adjusted for these expenses.
The following graph shows the annualized returns for the one, two, three, five,
seven, and ten year periods ending December 31, 1997 of Back Bay Advisors Bond
Account. The graph also shows the comparable returns for Lehman Aggregate Index.
<TABLE>
<CAPTION>
Annualized Rates of Total Return for Period Ending December 31, 1997
[GRAPHIC OMMITTED]
<S> <C> <C> <C> <C> <C> <C>
1 Year 2 Years 3 Years 5 Years 7 Years 10 Years
Lehman Aggregate Index 9.65% 6.60% 10.42% 7.48% 8.65% 9.18%
BBA Bond Account (Gross) 11.72% 8.32% 12.78% 9.50% 10.62% 10.64%
BBA Bond Account (Net) 11.17% 7.78% 12.26% 9.03% 10.16% 10.18%
</TABLE>
<PAGE>
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BACK BAY FUNDS, INC. 600 FIFTH AVENUE
NEW YORK, N.Y. 10020
(212) 830-5220
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PROSPECTUS
DECEMBER 17, 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. 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.
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TABLE OF FEES AND EXPENSES
ESTIMATED ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
TOTAL RETURN
PORTFOLIO
<TABLE>
<CAPTION>
<S> <C> <C> <C>
CLASS A CLASS B CLASS C
Management Fees - After Fee waiver .085% .085% .085%
12b-1 Fees None .25% .025%
Other Expenses .315% .325% .465%
Administration Fees .15% .15% .15%
----- ----- ------
Total Portfolio Operating
Expenses - After Fee Waiver .40% .65% .80%
</TABLE>
TOTAL RETURN
PORTFOLIO
<TABLE>
<CAPTION>
<S> <C> <C> <C>
EXAMPLE CLASS A CLASS B CLASS C
You would pay the following on a $1,000 1 year $4 $7 $8
investment, assuming 5% annual return and
redemption at the end of each time period: 3 years $13 $21 $26
</TABLE>
The purpose of the above fee table is to assist an investor in understanding the
various costs and expenses an investor in the Fund will bear 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.
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
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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.
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
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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.
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-
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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.
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
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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 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
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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."
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
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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
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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
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 extemely 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
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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 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
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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.
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
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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 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
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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 33 % 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.
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;
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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 33 % 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 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").
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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 17, 1997, which has a term which extends to November 30, 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
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approved by the sole shareholder of the Portfolio on November 26, 1997.
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
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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.
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
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"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.
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
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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 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.
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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.#
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.
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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.
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
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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 1, 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).
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
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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 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 17, 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
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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 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
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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.
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.
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
26
<PAGE>
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.
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.
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<PAGE>
TABLE OF CONTENTS
Table of Fees And Expenses......................... 2
Prospectus Summary................................. 3
Investment Objectives, Policies
And Risks..................................... 4 Back Bay
Portfolio Turnover.................................14 Funds, Inc.
Investment Restrictions............................14
Management of the Fund.............................15 Total Return Bond Fund
Management and Investment Management
Contract....................................15
Administrator and Administrative
Services Contract...........................17 Prospectus
Fees...........................................17 December 17, 1998
Description of Shares..............................17
How to Purchase and Redeem Shares..................18
Investments Through Participating
Organizations.............................19
Direct Purchase and Redemption Procedures..........20
Initial Purchase of Shares.....................20 [GRAPHIC OMMITED]
Subsequent Purchases of Shares.................21 Back Bay Advisors, L.P.
Redemption of Shares...........................21
Retirement Plans...................................22
Distribution and Service Plan......................23
Dividends, Distributions and Taxes.................24
Performance Information............................25
Net Asset Value....................................26
General Information................................27
Custodian And Transfer Agent.......................27
<PAGE>
Registration No. 333-33831
Rule 497(c)
- --------------------------------------------------------------------------------
BACK BAY
FUNDS, INC. 600 Fifth Avenue, New York, NY 10020
(212) 830-5200
================================================================================
STATEMENT OF ADDITIONAL INFORMATION
DECEMBER 17, 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 17, 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>
<CAPTION>
<S> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------
Investment Objectives, Policies and Risks..............2 Management of the Fund.................8
Foreign and Emerging Market Securities............2 Compensation Table...................9
Lower-Rated Securities............................3 Counsel and Auditors.................9
Mortgage-Related Securities.......................3 Distribution and Service Plan..........9
Collateralized Mortgage Obligations...............4 Dividends, Distributions and Taxes.....9
Stripped Securities...............................4 The Glass-Steagall Act................10
Options, Futures, Swap Contracts and Description of Shares.................10
Currency Transactions.........................4 Custodian and Transfer Agent..........10
Investment Restrictions................................6 Performance Information...............10
Portfolio Transactions.................................6 Net Asset Value.......................10
How to Purchase and Redeem Shares......................7 Description of Ratings................11
Manager................................................7 Independent Auditor's Report..........14
Expense Limitation................................7 Financial Statements..................15
- -----------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
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.
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.
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<PAGE>
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 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.
3
<PAGE>
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.
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.
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
4
<PAGE>
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 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.
5
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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.
(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
6
<PAGE>
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, 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,
telecommunications 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.
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.
7
<PAGE>
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 399 Boylston Street, Boston MA, 02216. 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 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
8
<PAGE>
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.
<TABLE>
<CAPTION>
COMPENSATION TABLE
(Estimated for the year ended November 30, 1998)
<S> <C> <C> <C> <C>
(1) (2) (3) (4) (5)
Name of Person, Position Aggregate Compensation Pension or Retirement Estimated Annual Total Compensation
from Registrant for Benefits Accrued as Benefits upon from Fund and Fund
Fiscal Year Part of Fund Expenses Retirement Complex Paid to
Directors*
W. Giles Mellon, $5,200 0 0 $5,200 ( 1 Fund)
Director
Robert Straniere, $5,200 0 0 $5,200 ( 1 Fund)
Director
Yung Wong, $5,200 0 0 $5,200 ( 1 Fund)
Director
- ----------------------- ------------------------- ------------------------ --------------------- ------------------------
</TABLE>
* The total compensation paid to such persons by the Fund and Fund Complex for
the fiscal year ending November 30, 1998 (and, with respect to certain of the
funds in the Fund Complex, estimated to be paid during the fiscal year ending
November 30, 1998). The parenthetical number represents the number of investment
companies (including the Fund) from which such person receives compensation that
are considered part of the same Fund complex as the Fund, because, among other
things, they have a common investment advisor. COUNSEL AND AUDITORS
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.
9
<PAGE>
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.
10
<PAGE>
DESCRIPTION OF RATINGS*
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.
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.
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.
11
<PAGE>
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 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.
12
<PAGE>
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.
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.
- --------------------------------------------------------------------------------
* * As described by the rating agencies.
13
<PAGE>
BACK BAY FUNDS, INC.
INDEPENDENT AUDITOR'S REPORT
TO THE DIRECTORS AND SHAREHOLDERS
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.
/S/ McGladrey & Pullen
New York, New York
December 4, 1997
BACK BAY FUNDS, INC. -- TOTAL RETURN BOND FUND
NOTES TO FINANCIAL STATEMENT
14
<PAGE>
================================================================================
BACK BAY FUNDS, INC. -- TOTAL RETURN BOND FUND
STATEMENT OF ASSETS AND LIABILITIES
NOVEMBER 26, 1997
================================================================================
<TABLE>
<CAPTION>
<S> <C>
ASSETS
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.
15
<PAGE>
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BACK BAY FUNDS, INC. -- TOTAL RETURN BOND FUND
NOTES TO FINANCIAL STATEMENT
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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.
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