RULE 497(C)
Registration No. 333-33831
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BACK BAY FUNDS, INC. 600 Fifth Avenue
Class A Shares; Class B Shares; Class C Shares New York, NY 10020
(212) 830-5220
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PROSPECTUS
March 31, 1999
The investment objective of the Total Return Bond Fund is to maximize total
return. The generation of income is a secondary objective. The minimum initial
purchase is $1,000,000.
The Securities and Exchange Commission has not approved or disapproved these
securities or passed upon the adequacy of this prospectus. Any representation to
the contrary is a criminal offense.
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CONTENTS
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2 Risk/Return Summary: Investments, Risks, 11 Management, Organization and Capital Structure
and Performance 11 Shareholder Information
5 Fee Table 17 Tax Consequences
6 Investment Objectives, Principal Investment 19 Distribution Arrangements
Strategies and Related Risks. 21 Financial Highlights
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I. RISK/RETURN SUMMARY: INVESTMENTS, RISKS, AND PERFORMANCE
INVESTMENT OBJECTIVES
The Fund is currently comprised of the Total Return Bond Fund. The objective of
the Portfolio is to seek to maximize total return. The generation of income is a
secondary objective. There is no assurance that the Portfolio will achieve its
investment objective.
PRINCIPAL INVESTMENT STRATEGIES
The Portfolio will seek to achieve its objectives by investing primarily in
higher quality, fixed and floating-rate debt instruments. Since the Fund was
created for tax-exempt retirement plans, the tax consequences of portfolio
activity are not an investment consideration.
A minimum of 80% of the Portfolio's total assets will be invested in investment
grade debt instruments. 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 Portfolio must be invested in instruments which are rated by a
nationally recognized statistical rating organization 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" and no
instrument may be rated below "B" at the time of investment. However, under
normal market conditions the Manager anticipates purchasing instruments that are
rated at least "BB" or "Ba".
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. Additionally, no more than 5% of the total net assets may be
invested in dollar denominated emerging market debt. Also, the Manager expects
to maintain a duration to within one and one half years of the duration of the
Lehman Aggregate Index.
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.
PRINCIPAL RISKS
o The primary risk associated with an investment in fixed and floating-rate
debt instruments is that the issuer of the instrument will default on
principal and/or interest payments when due on the instrument. Such a
default would have the effect of lessening the return of the Portfolio
and/or the value of the Portfolio's shares. Also, rising interest rates
will generally have the effect of decreasing the value of fixed-income debt
instruments and falling interest rates will decrease the amount of income
generated by floating-rate debt instruments. The value of the Portfolio's
shares and the securities held by the Portfolio can each decline in value
and the loss of money is a risk of investing in the Portfolio.
o 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
and are considered high yield, high risk securities. They are commonly
known as "junk bonds." Lower quality fixed-income securities are considered
predominantly speculative with respect to the ability of the issuer to meet
principal and interest payments. They generally provide higher yields, but
are subject to greater credit and market risk than higher quality
fixed-income securities.
o Securities issued by foreign issuers may be subject to additional
investment risks compared to an investment in securities of United States
domestic issuers. Such
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additional risks include future adverse political or economic developments
in a foreign jurisdiction, sudden changes in foreign laws regarding the
regulation of and rights attached with such investments and unfavorable
changes in currency exchange rates or exchange control regulations.
o 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. An investment in the securities of
emerging market issuers is considered predominantly speculative with
respect to the ability of the issuer to meet principal and interest
payments.
RISK/RETURN BAR CHART AND TABLE
The following bar chart and table may assist in your decision to invest in the
Portfolio. The bar chart shows the average annual returns of the Portfolio for
the life of the Portfolio. The table shows how the Portfolio's average annual
returns for a one year period compare with that of the Lehman Aggregate Index.
While analyzing this information, please note that the Portfolio's past
performance is not an indication of how the Portfolio will perform in the
future.
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[GRAPHIC OMITTED]
BACK BAY FUNDS, INC. - TOTAL RETURN BOND FUND - CLASS A SHARES (1), (2), (3)
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CALENDAR YEAR END % TOTAL RETURN
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1998 9.73%
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(1) As of December 31, 1998, the Fund's Portfolio had a year-to-date return of
9.73%.
(2) The Fund's Portfolio's highest quarterly return was 2.85% for the quarter
ended June 30, 1998; the lowest quarterly return was 2.09% for the quarter
ended September 30 1998.
(3) Investors purchasing or redeeming shares through a Participating
Organization may be charged a fee in connection with such service and,
therefore, the net return to such investors may be less than the net return
by investing in the Fund directly.
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AVERAGE ANNUAL TOTAL RETURNS FOR THE PERIOD ENDED DECEMBER 31, 1998
TOTAL RETURN BOND FUND
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CLASS A CLASS B CLASS C
One Year 9.73% 9.38% 9.38%
LEHMAN AGGREGATE INDEX
One Year 8.69%
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FEE TABLE
This table describes the fees and expenses that you may pay if you buy and hold
shares in any of the Fund's portfolios.
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ANNUAL FUND OPERATING EXPENSES
(EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)
Total Return Bond Fund
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Class A Class B Class C
Management Fees .35% .35% .35%
Distribution and Service (12b-1) Fees None .25% .25%
Other Expenses .99% .99% 1.14%
Administration Fees .15% _____ .15% _____ .15% _____
Total Annual Fund Operating Expenses 1.34% 1.59% 1.74%
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The Manager voluntarily waived all of the Management Fees with respect to
Class A, B and C shares. The Manager reimbursed expenses equal to .58%.
After such waivers and reimbursement the actual Total Annual Fund Operating
Expenses for Class A were .41%, for Class B were .66% and for Class C were
.81%. The Manager can terminate these voluntary waivers and reimbursements
at any time.
EXAMPLE
This Example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds.
The Example assumes that you invest $10,000 in the Portfolio for the time
periods indicated and then redeem all of your shares at the end of those
periods. The Example also assumes that your investment has a 5% return each year
and that the Fund's operating expenses remain the same. Although your actual
costs may be higher or lower, based on these assumptions your costs would be:
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1 YEAR 3 YEARS 5 YEARS 10 YEARS
CLASS A: $136 $425 $734 $1,613
TOTAL RETURN BOND FUND CLASS B: $162 $502 $866 $1,889
CLASS C: $177 $548 $944 $2,052
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II. INVESTMENT OBJECTIVES, PRINCIPAL INVESTMENT STRATEGIES AND RELATED RISKS
INVESTMENT OBJECTIVES
The objective of the Portfolio is to seek to maximize total return. The
generation of income is a secondary objective. There can be no assurance that
the Fund will achieve its investment objective.
The investment objectives of the Portfolio described in this section may only be
changed upon the approval of the holders of a majority of the outstanding shares
of the portfolio that would be affected by such a change. The investment
strategies of a portfolio are not fundamental and may be changed without
shareholder approval.
PRINCIPAL INVESTMENT STRATEGIES AND RELATED RISKS
The Portfolio will seek to achieve its objectives by investing primarily in
higher quality, fixed and floating-rate debt instruments. Since the Fund was
created for tax-exempt retirement plans, the tax consequences of portfolio
activity are not an investment consideration. A minimum of 80% of the
Portfolio's total assets will be invested in investment grade debt instruments
issued by corporations based in the United States and abroad. 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 Portfolio must be invested in
instruments which are rated by a nationally recognized statistical rating
organization 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" and no instrument may be rated below "B" at the time
of investment. However, under normal market conditions the Manager anticipates
purchasing instruments that are rated at least "BB" or "Ba".
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. Additionally, no more than 5% of the total net assets may be
invested in dollar denominated emerging market debt. Also, the Manager expects
to maintain a duration to within one and one half years of the duration of the
Lehman Aggregate Index.
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 Total Return Bond Fund is to attain its investment objectives through
investments in the following securities and transactions.
(i) 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. Fixed-income securities may also 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
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the issuer to make payments of principal and interest. In the case of municipal
bonds, the issuer may make these payments from money raised through a variety of
sources, including (1) the issuer's general taxing power, (2) a specific type of
tax such as a property tax, or (3) a particular facility or project such as a
highway. The ability of an issuer of municipal bonds to make these payments
could be affected by litigation, legislation or other political events, or the
bankruptcy of the issuer. U.S. Government Securities do not involve the credit
risks associated with other types of fixed-income securities; as a result, the
yields available from U.S. Government Securities are generally lower than the
yields available from corporate fixed-income securities. Market risk is the risk
that the value of the security will fall because of changes in market rates of
interest. (Generally, the value of fixed-income securities falls when market
rates of interest are rising.) Some fixed-income securities also involve
prepayment or call risk. Prepayment or call risk both involve the risk that the
issuer will repay the Portfolio the principal on the security before it is due,
thus depriving the Portfolio of a favorable stream of future interest payments.
Because interest rates vary, it is impossible to predict the income of a fund
that invests in fixed-income securities for any particular period. Fluctuations
in the value of the Portfolio's investments in fixed-income securities will also
cause the Portfolio's net asset value to increase or decrease.
(ii) 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.
(iii) UNITED STATES GOVERNMENT SECURITIES: The United States securities in which
the Portfolio may invest include 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.
(iv) 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
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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 also increase.
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.
(v) 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
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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 also 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 also 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."
(vi) 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 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, they are likely to appreciate
less than other fixed-income securities 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.
PORTFOLIO TURNOVER
Purchases and sales are made for the Portfolio whenever necessary, in the
Manager's opinion, to meet the Portfolio's objective. The turnover rate of the
Portfolio for the fiscal year ended November 30, 1998 was 220.55%. 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 adverse effect on the Portfolio's total rate of
return. Since the Fund was created for tax-exempt retirement plans, the tax
consequences of Portfolio activity are not an investment consideration.
BUY/SELL DECISIONS
The Fund's investment manager considers the following factors when buying and
selling securities for each of the Portfolios: (i) availability of cash, (ii)
redemption requests, (iii) total return management, (iv) credit management, and
(v) securities' duration.
RISKS
The primary risk associated with an investment in fixed and floating-rate debt
instruments is that the issuer of the instrument will default on principal
and/or interest payments when due on the instrument. Such a default would have
the effect of lessening the income generated by the Portfolio and/or the value
of the Portfolio's shares. Also, rising interest rates will
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generally have the effect of decreasing the value of fixed-income debt
instruments and falling interest rates will decrease the amount of income
generated by floating-rate debt instruments. The value of the Portfolio's shares
and the securities held by the Portfolio can each decline in value and the loss
of money is a risk of investing in the Portfolio.
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.
Securities of below investment grade quality are considered high yield, high
risk securities and are commonly known as "junk bonds." Lower quality
fixed-income securities generally provide higher yields, but are subject to
greater credit and market risk than higher quality fixed-income securities.
Lower quality fixed-income securities are considered predominantly speculative
with respect to the ability of the issuer to meet principal and interest
payments.
The Portfolio may lend its portfolio securities to qualified institutions as
determined by the Manager. By lending its portfolio securities, the Portfolio
attempts to increase its income through the receipt of interest on the loan. Any
gain or loss in the market price of the securities loaned that may occur during
the term of the loan will be for the account of the Portfolio. Although 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, the party borrowing from the
Portfolio may default on payment of interest due on the loan and it is possible
that the loan will not be repaid. The Manager is unable to predict whether a
borrower from the Portfolio will default on its loan obligations. 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).
Securities issued by foreign issuers may be subject to additional investment
risks compared to an investment in securities of United States domestic issuers.
Such additional risks include future adverse political or economic developments
in a foreign jurisdiction, sudden changes in foreign laws regarding the
regulation of and rights attached with such investments and unfavorable changes
in currency exchange rates or exchange control regulations.
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. An investment in the
securities of emerging market issuers is considered predominantly speculative
with respect to the ability of the issuer to meet principal and interest
payments.
As the year 2000 approaches, an issue has emerged regarding how existing
application software programs and operating systems can accommodate this date
value. Failure to adequately address this issue could have potentially serious
repercussions. The Manager is in the process of working with the Fund's service
providers to prepare for the year 2000. Based on information currently
available, the Manager does not expect that the Fund will incur material costs
to be year 2000 compliant. Although the Manager does not anticipate that the
year 2000 issue will have a material impact on the Fund's ability to provide
service at current levels, there can be no assurance that steps taken in
preparation for the year 2000 will be sufficient to avoid an adverse impact on
the Fund. The Year 2000 Problem may also adversely affect issuers of the
Securities contained in the Portfolio to varying degrees based upon various
factors, and thus may have a corresponding adverse effect on the Portfolio's
performance. The Manager is unable to predict what effect, if any, the Year 2000
Problem will
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have on such issuers. At this time, it is generally believed that municipal
issuers may be more vulnerable to Year 2000 issues or problems than other
issuers.
III. MANAGEMENT, ORGANIZATION AND CAPITAL STRUCTURE
The Fund's investment adviser is Back Bay Advisors, L.P. (the "Manager"). The
principal business office of the manager is located 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. As of February 28,
1999, the Manager was investment manager, adviser or supervisor with respect to
assets aggregating in excess of $9.5 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.
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.
IV. SHAREHOLDER INFORMATION
The Fund sells and redeems its shares on a continuing basis at their net asset
value and does not impose a charge for either sales or redemptions. All
transactions in Fund shares are effected through the Fund's transfer agent, who
accepts orders for purchases and redemptions from Participating Organizations
and from investors directly.
PRICING OF FUND SHARES
The Fund determines the net asset value of the shares of the Portfolio (computed
separately for each Class of shares) of the Portfolio 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 Portfolio at the time the determination is made. The
Portfolio determines its net asset value on each Fund Business Day. Fund
Business Day for this purpose means any day on which the New York Stock Exchange
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. The Portfolio may have portfolio securities that are primarily
listed on foreign exchanges that trade on weekdays or other days when the Fund
does not price its shares, thus the Portfolio's shares may change on days when
Shareholders will not be able to purchase or redeem the Portfolio's Shares.
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 on the basis of the factors
listed above. If a pricing service is not used, municipal obligations will be
valued at quotated prices provided by municipal bond dealers. Non-tax-exempt
securities for which transaction prices are readily available are stated at
market value (determined on the basis of the last reported sales
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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.
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. 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. 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.
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. However, the amount of minimum
initial purchase or subsequent investment may be waived by the Manager at its
sole discretion.
The Fund sells and redeems its shares on a continuing basis at their net asset
value and does not impose a sales charge for either sales or redemptions. All
transactions in Fund shares are effected through the Fund's transfer agent which
accepts orders for purchases and redemptions from the Distributor and from
shareholders directly.
In order to maximize earnings on the Portfolio, the Fund normally has its assets
as fully invested as is practicable. Many securities in which the Fund invests
require immediate settlement in Funds of Federal Reserve member banks on deposit
at a Federal Reserve bank (commonly known as "Federal Funds"). Accordingly, the
Fund does not accept a subscription or invest an investor's payment in portfolio
securities until the payment has been converted into Federal Funds.
Shares will be issued as of the first determination of the Fund's net asset
value per share for each Class made after acceptance of the investor's purchase
order. An investor's funds will not be invested by the Fund during the period
before the Fund's receipt of Federal Funds and its issuance of Fund shares. The
Fund reserves the right to reject any purchase order.
Shares are issued as of 4:00 p.m., New York City time, on any Fund Business Day
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. The Fund may make any redemption in
kind. In all other cases, 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
12
<PAGE>
shareholder elects to redeem all the shares of the portfolio he/she owns, all
dividends credited to the shareholder through the date of redemption are paid to
the shareholder in addition to the proceeds of the redemption.
The date of payment upon redemption may not be postponed for more than seven
days after shares are tendered for redemption, and the right of redemption may
not be suspended, except for any period during which the NYSE is closed (other
than customary weekend and holiday closings) or during which the SEC determines
that trading thereon is restricted, or for any period during which an emergency
(as determined by the SEC) exists as a result of which disposal by the Fund of
its securities is not reasonably practicable or as a result of which it is not
reasonably practicable for the Fund fairly to determine the value of its net
assets, or for such other period as the SEC may by order permit for the
protection of the shareholders of the Fund.
Redemption requests received by the Fund's transfer agent before 4:00 p.m., New
York City time, on any Fund Business Day become effective at 4:00 p.m. that day.
Shares redeemed are not entitled to participate in dividends declared on the day
or after the day a redemption becomes effective.
The Fund has reserved the right to redeem the shares of any shareholder if the
net asset value of all the remaining shares in his account after a withdrawal is
less than $250,000. Written notice of any such mandatory redemption will be
given at least 30 days in advance to any shareholder whose account is to be
redeemed or the Fund may impose a monthly service charge of $10 on such
accounts. During the notice period any shareholder who receives such a notice
may (without regard to the normal $10,000 requirement for an additional
investment) make a purchase of additional shares to increase his total net asset
value at least to the minimum amount and thereby avoid such mandatory
redemption.
The Fund has reserved the right to charge individual shareholder accounts for
expenses actually incurred by such account for wire transfers and certain other
shareholder expenses, as well as to impose a monthly service charge for accounts
whose net asset value falls below the minimum amount.
INVESTMENTS THROUGH PARTICIPATING ORGANIZATIONS
Participant Investors may, if they wish, invest in the Fund through the
Participating Organizations with which they have accounts. "Participating
Organizations" are securities brokers, banks, financial institutions or other
industry professionals or organizations which have entered into shareholder
servicing agreements with the Distributor with respect to investment of their
customer accounts in the Fund. When instructed by its customer to purchase or
redeem Fund shares, the Participating Organization, on behalf of the customer,
transmits to the Fund's transfer agent a purchase or redemption order, and in
the case of a purchase order, payment for the shares being purchased.
Participating Organizations may confirm to their customers who are shareholders
in the Fund each purchase and redemption of Fund shares for the customers'
accounts. Also, Participating Organizations may send their customers periodic
account statements showing the total number of Fund shares owned by each
customer as of the statement closing date, purchases and redemptions of Fund
shares by each customer during the period covered by the statement and the
income earned by Fund shares of each customer during the statement period
(including dividends paid in cash or reinvested in additional Fund shares).
Participant Investors whose Participating Organizations have not undertaken to
provide such statements will receive them from the Portfolio directly.
Participating Organizations may charge Participant Investors a fee in connection
with their use of specialized purchase and redemption procedures offered to
Participant Investors by the Participating Organizations. In addition,
Participating Organizations offering purchase and redemption procedures similar
to those offered to
13
<PAGE>
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.
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
14
<PAGE>
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 4:00 p.m., New York City time. However, redemption requests
will not be effected unless the check (including a certified or cashier's check)
used for investment has been cleared for payment by the investor's bank,
currently considered by the Fund to occur within 15 days after investment.
A shareholder's original subscription order form permits the shareholder to
redeem by written request and to elect one or more of the additional redemption
procedures described below. A shareholder may only change the instructions
indicated on his original subscription order form by transmitting a written
direction to the Fund's transfer agent. Requests to institute or change any of
the additional redemption procedures will require a signature guarantee. When a
signature guarantee is called for, the shareholder should have "Signature
Guaranteed" stamped under his signature and guaranteed by an eligible guarantor
institution which includes a domestic bank, a domestic savings and loan
institution, a domestic credit union, a member bank of the Federal Reserve
System or a member firm of a national securities exchange, pursuant to the
Fund's transfer agent's standards and procedures.
WRITTEN REQUESTS
Shareholders may make a redemption in any amount by sending a written request
to:
Back Bay Funds, Inc.
c/o Reich & Tang Funds
600 Fifth Avenue-8th Floor
New York, New York 10020
All written requests for redemption must be signed by the shareholder with
signature guaranteed. Unless the redemption is made in kind, the redemption
proceeds are normally 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
15
<PAGE>
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 (married individuals filing joint returns may each contribute up to
$2000 ($4000 in the aggregate) even where one spouse is not working if certain
conditions are met), depending on whether they are active participants in an
employer sponsored retirement plan and on their income level. Dividends and
distributions held in an IRA account are not taxed until withdrawn in accordance
with the provisions of the Code. Beginning January 1, 1998, investors satisfying
statutory income level requirements may make non-deductible contributions of up
to $2,000 annually to a Roth IRA. Distributions from a Roth IRA are not subject
to tax if a statutory five year holding period requirement is satisfied. Under
certain circumstances, individuals may establish education IRAs which permit
eligible individuals to contribute up to $500 per year per beneficiary under 18
years old. Distributions from an education IRA are generally excluded from
income when used for qualified higher education expenses.
Investors should be aware that they may be subject to penalties or additional
tax on contributions or withdrawals from IRAs or other retirement plans which
are not permitted by the applicable provisions of the Code, and, prior to a
withdrawal, shareholders may be required to certify their age and awareness of
such restrictions in writing. Persons desiring information concerning
investments through IRAs or other retirement plans should write or telephone the
Distributor at 600 Fifth Avenue, New York, New York 10020, (212) 830-5200.
DIVIDENDS AND DISTRIBUTIONS
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, although
the amount and timing of any such dividend or distribution depends 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 each 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,
16
<PAGE>
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.
Each dividend and capital gain distribution declared by the Fund will, at the
election of each shareholder, be paid either in cash or in additional shares of
the same Class shares of the Portfolio having an aggregate net asset value,
determined as of the payment date of such dividend or distribution, equal to the
cash amount of such dividend or distribution. The election to receive dividends
and distributions in cash or shares is made at the time shares are subscribed
for and may be changed by notifying the Fund in writing at any time prior to the
record date for a particular dividend or distribution. If the shareholder makes
no election, the Fund will make the distribution in shares. There is no sales or
other charge in connection with the reinvestment of dividends and capital gains
distributions.
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.
TAX CONSEQUENCES
The acquisition of shares in the Fund will generally be treated as a capital
investment. 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, income and distributions. For each year in which the Portfolio
qualifies as a regulated investment company, the Portfolio will not be subject
to federal income tax on income or capital gains distributed to its
shareholders.
Distributions of investment company taxable income generally are taxable to
shareholders as ordinary income and will not be eligible for the
dividends-received deduction available to corporations. Distributions designated
by the Portfolio as capital gain dividends are taxable to shareholders as long
term capital gains regardless of the length of time the shareholders have held
their shares. Distributions are taxable to shareholders whether reinvested in
additional shares or received in cash. Shareholders receiving distributions in
the form of additional shares will have a cost basis for Federal income tax
purposes in each share received equal to the net asset value of a share of the
Portfolio on the reinvestment date. Shareholders will be notified annually as to
the federal tax status of distributions. The Portfolio intends to invest
primarily in fixed and floating rate debt instrument and accordingly anticipates
that a substantial portion of its distributions to shareholders will constitute
ordinary income rather than capital gains.
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 be careful to consider the tax
implications of buying shares just prior to a distribution by the Portfolio. The
price of shares purchased at such a time includes the amount of the forthcoming
distribution. Distributions by the Portfolio will reduce the net asset value of
the Fund's shares, and even a distribution that reduces net asset value below a
stockholder's cost basis will nevertheless, be taxable to the shareholder as
ordinary income or capital gain as described above, even though, from an
investment standpoint, it may constitute a partial return of capital.
Upon the taxable disposition (including a sale or redemption) of shares of the
Fund, a shareholder may realize a gain or loss depending upon its basis in the
shares. Such gain or loss will be treated as capital gain or loss if the shares
17
<PAGE>
are capital assets in the shareholder's hands. Such gain or loss will be
long-term, or short-term, generally depending upon the shareholder's holding
period for the shares. However, a loss realized by a shareholder on the
disposition of shares with respect to which capital gain dividends have been
paid will be treated as long-term capital gain loss, to the extent of such
capital gain dividends, if such shares have been held by the shareholder for six
months or less. Further, a loss realized on a disposition will be disallowed to
the extent the shares disposed of are replaced (whether by reinvestment of
distributions or otherwise) within a period of 61 days beginning 30 days before
and ending 30 days after the shares are disposed of. In such a case, the basis
of the shares acquired will be adjusted to reflect the disallowed loss.
Non-corporate shareholders are subject to tax at a maximum rate of 20% on
capital gains resulting from the disposition of shares held for more than 12
months (10% if the taxpayer is, and would be after accounting for such gains,
subject to the 15% tax bracket for ordinary income).
Certain of the options, future contracts, and forward foreign currency exchange
contracts in which the Portfolio may invest are so-called "section 1256
contracts". With certain exceptions, realized gains or losses on section 1256
contracts generally are considered 60% long-term and 40% short-term capital
gains or losses ("60/40"). Also, section 1256 contracts held by the Portfolio at
the end of each taxable year (and, generally, for purposes of the 4% excise tax,
on October 31 of each year) are "marked-to-market" with the result that
unrealized gains or losses are treated as though they were realized and the
resulting gain or loss is treated as 60/40 gain or loss. Investors should
consult their own tax advisers in this regard.
Generally, the hedging transactions undertaken by the Portfolio may result in
"straddles" for Federal income tax purposes. The straddle rules may affect the
character of gains (or losses) realized by the Portfolio. In addition, losses
realized by the Portfolio on a position that is part of a straddle may be
deferred under the straddle rules, rather than being taken into account in
calculating the taxable income for the taxable year in which such losses are
realized. Because only a few regulations implementing the straddle rules have
been promulgated, the tax consequences to the Portfolio of hedging transactions
are not entirely clear. The hedging transactions may increase the amount of
short-term capital gain realized by the Portfolio that is taxed as ordinary
income when distributed to stockholders.
The Portfolio may make one or more of the elections applicable to straddles
available under the Code. In that event, the amount, character and timing of the
recognition of gains or losses from the affected straddle positions will be
determined pursuant to the rules applicable to the election(s) made, which may
accelerate the recognition of gains or losses from the affected straddle
positions. Because application of the straddle rules may affect the character of
gains or losses, defer losses and/or accelerate the recognition of gains or
losses from the affected straddle positions, the amount which must be
distributed to shareholders, and will be taxed to shareholders as ordinary
income or long-term capital gain, may be increased or decreased substantially as
compared to a Portfolio that did not engage in such hedging transactions.
Under the Code, gains or losses attributable to fluctuations in exchange rates
that occur between the time the Portfolio accrues interest or other receivables
or accrues expenses or other liabilities denominated in a foreign currency and
the time the Portfolio actually collects such receivables or pays such
liabilities generally are treated as ordinary income or ordinary loss.
Similarly, on disposition of debt securities denominated in a foreign currency
and on disposition of certain forward contracts, gains or losses attributable to
fluctuations in the value of foreign currency between the date of acquisition of
the security or contract and the date of disposition also are treated as
ordinary gain or loss. These gains or losses, referred to under the Code as
"section 988" gains or losses, may increase, decrease, or eliminate the amount
of
18
<PAGE>
the Portfolio's investment company taxable income to be distributed to its
shareholders as ordinary income.
Income received by the Portfolio from sources within foreign countries may be
subject to withholding and other similar income taxes imposed by the foreign
country. The Portfolio does not expect to be eligible to elect to allow
shareholders to claim such foreign taxes as a credit against their U.S. tax
liability.
The Portfolio is generally required to report to the Internal Revenue Services
("IRS") all distributions to shareholders. Distributions by the Fund generally
subject to withholding of Federal income tax at a rate of 31% ("backup
withholding") if (1) the shareholder fails to certify to the Fund the
shareholder's correct taxpayer identification number or social security number,
(2) the IRS notifies the Fund or a shareholder that the shareholder has failed
to report properly certain interest and dividend income to the IRS and to
respond to notices to that effect, or (3) when required to do so, the
shareholder fails to certify that he or she is not subject to backup
withholding. If the withholding provisions are applicable, any distributions
(whether reinvested in additional shares or taken in cash) will be reduced by
the amounts required to be withheld. The reporting and backup withholding
requirements do not apply to certain exempt shareholders.
The foregoing discussion relates only to Federal income tax law as applicable to
U.S. persons (i.e., U.S. citizens and residents and U.S. domestic corporations,
partnerships, trusts and estates). Distributions by the Portfolio also may be
subject to state and local taxes, and the treatment of distributions under state
and local income tax laws may differ from the Federal income tax treatment.
Shareholders should consult their tax advisors with respect to particular
questions of Federal, state and local taxation. Shareholders who are not U.S.
persons should consult their tax advisors regarding U.S. and foreign tax
consequences of ownership of shares of the Funds, including the likelihood that
distributions to them would be subject to withholding of U.S. tax at a rate of
30% (or at a lower rate under a tax treaty).
V. DISTRIBUTION ARRANGEMENTS
RULE 12B-1 FEES
Investors do not pay a sales charge to purchase shares of the Fund. However, the
Fund pays fees in connection with the distribution of shares and for services
provided to the Class A shareholders. The Fund pays these fees from its assets
on an ongoing basis and therefore, over time, the payment of these fees will
increase the cost of your investment and may cost you more than paying other
types of sales charges.
The Fund's Board of Directors has adopted a Rule 12b-1 distribution and service
plan (the "Plan") and, pursuant to the Plan, the Fund and Reich & Tang
Distributors, Inc. (the "Distributor") have entered into a Distribution
Agreement and a Shareholder Servicing Agreement (with respect to the Class B and
C shares of the Fund only).
Under the Distribution Agreement, the Distributor serves as distributor of the
Fund's shares and, for nominal consideration (i.e., $1.00) 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 only to the Class B and C shares, a service fee equal to .25% per annum
of the Portfolio's Class B and C shares' average daily net assets (the
"Shareholder Servicing Fee") for providing personal shareholder services and for
the maintenance of shareholder accounts. This 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 each Portfolio. The Class A shareholders will not receive the
benefit of such services from Participating Organizations and, therefore, will
not be assessed a Shareholder Servicing Fee.
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<PAGE>
The Plan provides that, in addition to the Shareholder Servicing Fee, the Fund
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 Fund and
preparing and printing subscription application forms for shareholder accounts.
These payments are limited to a maximum of 0.05% per annum of the Portfolio's
Class B and C Shares' average daily net assets.
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.
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<PAGE>
VI. FINANCIAL HIGHLIGHTS
This financial highlights table is intended to help you understand the financial
performance of all classes of the Total Return Bond Fund for the life of the
Fund. Certain information reflects financial results for a single Portfolio
share. The total returns in the table represent the rate that an investor would
have earned (or lost) on an investment in the Fund (assuming reinvestment of all
dividends and distributions). This information has been audited by McGladrey and
Pullen, LLP, whose report, along with the Fund's financial statements, is
included in the annual report, which is available upon request.
<TABLE>
<CAPTION>
DECEMBER 22, 1997
(COMMENCEMENT OF SALES) TO
NOVEMBER 30, 1998
<S> <C> <C> <C>
CLASS A CLASS B CLASS C
PER SHARE OPERATING PERFORMANCE
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
Net asset value, beginning of period........... $ 10.00 $ 10.00 $ 10.00
Income from investment operations:
Net investment income....................... 0.59 0.56 0.56
Net realized and unrealized
gains (losses) on investments.............. 0.32 0.32 0.32
Total from investment operations............... 0.91 0.88 0.88
Less distributions:
Dividends from net investment income........ ( 0.59) ( 0.56 ) ( 0.56 )
Distributions from net realized gains....... -- -- --
Total distributions............................ ( 0.59) ( 0.56 ) ( 0.56 )
Net asset value, end of period................. $ 10.32 $ 10.32 $ 10.32
TOTAL RETURN (NOT ANNUALIZED) 9.42% 9.09% 9.09%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000)................ $ 41,101 $ 1 $ 1
Ratios to average net assets:
Expenses (net of fees waived and reimbursed)+ 0.41%* 0.66%* 0.81%*
Net investment income....................... 6.22%* 5.91%* 5.91%*
Management and shareholder servicing fees waived 0.35%* 0.60%* 0.60%*
Expenses reimbursed......................... 0.58%* 0.58%* 0.58%*
Expense offsets............................. 0.01%* 0.01%* 0.01%*
Portfolio turnover rate........................ 220.55% 220.55% 220.55%
* Annualized
+ Includes expense offsets.
</TABLE>
21
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A Statement of Additional Information (SAI) dated March 31, 1999, and the Fund's
Annual and Semi-Annual Reports include additional information about the Fund and
its investments and are incorporated by reference into this prospectus. You may
obtain the SAI, the Annual and Semi-Annual Reports and material incorporated by
reference without charge by calling the Fund at 1-800-221-3079. To request other
information, please call your financial intermediary or the Fund.
- -------------------------------------
- -------------------------------------
A current SAI has been filed with the Securities and Exchange Commission. You
may visit the Securities and Exchange Commission's Internet website
(www.sec.gov) to view the SAI, material incorporated by reference and other
information. These materials can also be reviewed and copied at the Commission's
Public Reference Room in Washington D.C. Information on the operation of the
Public Reference Room may be obtained by calling the Commission at
1-800-SEC-0330. In addition, copies of these materials may be obtained, upon
payment of a duplicating fee, by writing the Public Reference Section of the
Commission, Washington, D.C. 20549-6009.
BACK BAY
FUNDS, INC.
TOTAL RETURN BOND FUND
PROSPECTUS
March 31, 1999
[OBJECT OMITTED]
811-08339
<PAGE>
RULE 497(C)
Registration No. 333-33831
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BACK BAY 600 Fifth Avenue, New York, NY 10020
FUNDS, INC. (212) 830-5220
================================================================================
STATEMENT OF ADDITIONAL INFORMATION
March 31, 1999
RELATING TO THE BACK BAY FUNDS, INC.
CLASS A SHARES, CLASS B SHARES, CLASS C SHARES
PROSPECTUS DATED March 31, 1999
This Statement of Additional Information (SAI) is not a Prospectus. The SAI
expands upon and supplements the information contained in the current Prospectus
of the Fund, dated March 31, 1999 and should be read in conjunction with the
Fund's Prospectus.
A Prospectus may be obtained from any Participating Organization or by writing
or calling the Fund toll-free at 1-(800) 221-3079. The Financial Statements of
the Fund have been incorporated by reference to the Fund's Annual Report. The
Annual Report is available, without charge, upon request by calling the
toll-free number provided.
This Statement of Additional Information is incorporated by reference into the
Fund's Prospectus in its entirety.
<TABLE>
<CAPTION>
TABLE OF CONTENTS
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<S> <C> <C> <C>
Fund History.........................................2 Capital Stock and Other Securities......................13
Description of the Fund and its Investments and Purchase, Redemption and Pricing Shares.................14
Risks............................................. 2 Taxation of the Fund....................................18
Management of the Fund...............................7 Underwriters............................................19
Control Persons and Principal Holders of Calculation of Performance Data.........................19
Securities........................................ 9 Financial Statements....................................19
Investment Advisory and Other Services...............9 Description of Ratings..................................20
Brokerage Allocation and Other Practices............12
</TABLE>
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<PAGE>
I. FUND HISTORY
The Fund was incorporated on August 15, 1997 in the state of Maryland.
II. DESCRIPTION OF THE FUND AND ITS INVESTMENTS AND RISKS
The Fund is an open-end, diversified management investment company. The Fund's
investment objective is to seek to maximize total return. The generation of
income is a secondary objective. No assurance can be given that these objectives
will be achieved. Although not principal strategies, the Manager may enter into
the following types of transactions or invest in the following types of
instruments as part of its investment strategies.
(i) Foreign Currency Exchange Transactions: Since the Portfolio may invest in
securities that are denominated in foreign currencies or traded in foreign
markets, the Portfolio may engage in related foreign currency exchange
transactions to protect the value of specific portfolio positions or in
anticipation of changes in relative values of currencies in which current or
future portfolio holdings are denominated or quoted.
The Portfolio may also engage in transactions in currency forward contracts. A
currency forward contract is a contract that obligates parties to the contract
to exchange specified amounts of different currencies at a specified future
date. For example, a party may agree to deliver a specified number of French
francs, in exchange for a specified number of U.S. dollars on a certain date.
From time to time, a portion of the Portfolio's assets may be 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 to (1) facilitate settlement of the
Portfolio's transactions in these securities and (2) 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.
(ii) Adjustable Rate Mortgage--Related 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.
(iii) 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
2
<PAGE>
with direct ownership of real estate. This may be especially (true in the case
of Commercial Mortgage Backed Securities secured by, or evidencing an interest
in, a relatively small or less diverse pool of commercial mortgage loans. The
factors contributing to these risks include the effects of general and local
economic conditions on real estate values, the conditions of specific industry
segments, the ability of tenants to make lease payments and the ability of a
property to attract and retain tenants, which in turn may be affected by local
conditions such as oversupply of space or a reduction of available space, the
ability of the owner to provide adequate maintenance and insurance, changes in
management of the underlying commercial property, energy costs, government
regulations with respect to environmental, zoning, rent control, bankruptcy and
other matters, real estate and other taxes, and prepayments of the underlying
commercial mortgage loans (although such prepayments generally occur less
frequently than prepayments on residential mortgage loans).
(iv) 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 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 derivatives securities.
(v) "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 and large
increases in interest rates may cause a substantial loss in the value of these
instruments. In the case of stripped mortgage securities, if the underlying
mortgage assets experience greater than anticipated payments of principal, the
Portfolio may fail to recoup fully its investments in IOs. The cash flows and
yields on IO and PO Classes are extremely sensitive to the rate of principal
payments (including prepayments) on the related underlying mortgage assets. For
example, a rapid or slow rate of principal payments may have a material adverse
effect on the yield to maturity of IOs and POs, respectively. If the underlying
mortgage assets experience greater than anticipated prepayments of principal, an
investor may fail to recoup fully its initial investment in an IO class even if
the IO class is rated AAA or Aaa. Conversely, if the underlying mortgage assets
experience slower than anticipated prepayments of principal, the yield on a PO
class will be affected more severely than would be the case with a traditional
mortgage-backed security. The staff of the SEC has indicated that it views
stripped mortgage securities as illiquid unless the securities are issued by the
U.S. Government or its agencies and are backed by fixed-rate mortgages. The
Portfolio intends to abide by the staff's position. As a result of illiquidity,
the Portfolio may not be able to sell these instruments when the Manager
considers it desirable to do so or may have to sell them at a price lower than
could be obtained if they were more liquid. These factors may have an adverse
impact on net asset value. Also, the sale of illiquid securities may require
more time and result in higher brokerage charges or dealer discounts and other
selling expenses than does the sale of securities eligible for trading on
national securities exchanges or in over-the-counter markets. Stripped
securities may be considered derivative securities.
(vi) 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 and large increases in interest rates may cause a substantial
loss in the value of these instruments. 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.
(vii) Options, Futures, Swap Contracts and Currency Transactions: The Portfolio
may engage in a variety of transactions involving the use of exchange traded
options and futures with respect to U.S. or Foreign Government Securities,
corporate fixed-income securities or municipal bonds or indices thereof for
purposes of hedging against changes in interest rates.
The Portfolio may buy, sell or write options on securities, securities indexes,
currencies or futures contracts. The Portfolio may buy and sell futures
contracts on securities, securities indexes or currencies. The Portfolio may
also enter into swap contracts. The Portfolio may engage in these transactions
either for the purpose of enhancing investment return only against a "covered"
position of the Portfolio or to hedge against changes in the value of other
assets that the Portfolio
3
<PAGE>
owns or intends to acquire. The Portfolio may also conduct foreign currency
exchange transactions on a spot (i.e., cash) basis at the spot rate prevailing
in the foreign currency exchange market. Options, futures and swap contracts
fall into the broad category of financial instruments known as "derivatives" and
involve special risks. Use of options, futures or swaps for other than hedging
purposes may be considered a speculative activity, involving greater risks than
are involved in hedging.
Options can generally be classified as either "call" or "put" options. There are
two parties to a typical options transaction: the "writer" and the "buyer." A
call option gives the buyer the right to buy a security or other asset (such as
an amount of currency or a futures contract) from, and a put option the right to
sell a security or other asset to, the option writer at a specified price, on or
before a specified date. The buyer of an option pays a premium when purchasing
the option, which reduces the return on the underlying security or other asset
if the option is exercised, and results in a loss if the option expires
unexercised. The writer of an option receives a premium from writing an option,
which may increase its return if the option expires or is closed out at a
profit. If the Portfolio, as the writer of an option, is unable to close out an
unexpired option, it must continue to hold the underlying security or other
asset until the option expires, to "cover" its obligations under the option.
A futures contract creates an obligation by the seller to deliver and the buyer
to take delivery of the type of instrument or cash at the time and in the amount
specified in the contract. Although many futures contracts call for the delivery
(or acceptance) of the specified instrument, futures are usually closed out
before the settlement date through the purchase (or sale) of a comparable
contract. If the price of the sale of the futures contract by the Fund exceeds
(or is less than) the price of the offsetting purchase, the Portfolio will
realize a gain (or loss). The Portfolio may not purchase or sell futures
contracts or purchase related options if immediately thereafter the sum of the
amount of deposits for initial margin or premiums on the existing futures and
related options positions would exceed 5% of the market value of the Portfolio's
net assets. Transactions in futures and related options involve the risks of (1)
imperfect correlation between the price movement of the contracts and the
underlying securities, (2) significant price movement in one but not the other
market because of different hours, (3) the possible absence of a liquid
secondary market at any point in time. If the subadviser's prediction on
interest rates or other economic factors is inaccurate, the Fund may be worse
off than if it had not hedged. Futures transactions involve potentially
unlimited risk of loss.
The Portfolio may enter into interest rate, currency and securities index swaps.
The Portfolio will enter into these transactions primarily to seek to preserve a
return or spread on a particular investment or portion of its portfolio, to
protect against currency fluctuations, as a duration management technique, or to
protect against an increase in the price of securities the Portfolio anticipates
purchasing at a later date. Interest rate swaps involve the exchange by the Fund
with another party of their respective commitments to pay or receive interest
(for example, an exchange of floating rate payments for fixed rate payments with
respect to a notional amount of principal). A currency swap is an agreement to
exchange cash flows on a notional amount based on changes in the relative values
of the specified currencies. An index swap is an agreement to make or receive
payments based on the different returns that would be achieved if a notional
amount were invested in a specified basket of securities such as 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.
4
<PAGE>
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.
(viii) When-Issued Securities: The Portfolio may purchase securities on a
when-issued basis. Certain municipal securities are sometimes offered on a
"when-issued" basis, that is, the date for delivery of and payment for the
securities is not fixed at the date of purchase, but is set after the securities
are issued (normally within forty-five days after the date of the transaction).
The payment obligation and the interest rate that will be received on the
securities are fixed at the time the buyer enters into the commitment. The
Portfolio will only make commitments to purchase such municipal securities with
the intention of actually acquiring such securities, but the Portfolio may sell
these securities before the settlement date if it is deemed advisable.
If the Portfolio purchases a when-issued security, the Portfolio will direct the
custodian to place cash or other high grade securities (including municipal
securities) in a separate account of the Portfolio in an amount equal to its
when-issued commitments. If the market value of such securities declines,
additional cash or securities will be placed in the account on a daily basis so
that the market value of the account will equal the amount of the Portfolio's
when-issued commitments. To the extent that funds are in a separate account,
they will not be available for new investment or to meet redemptions. Investment
in securities on a when-issued basis may increase the Portfolio's exposure to
market fluctuation; may increase the possibility that the Portfolio will incur a
short-term gain subject to federal taxation; or may increase the possibility
that the Portfolio will incur a short-term loss, if the Portfolio must engage in
portfolio transactions in order to honor a when-issued commitment. The Portfolio
will employ techniques designed to minimize these risks. No additional
when-issued commitments will be made if more than 10% of the Portfolio's net
assets become so committed.
(ix) 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. 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 (1) are recorded in the name of the Portfolio with the Federal
Reserve Book Entry System or (2) 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.
(x) 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
5
<PAGE>
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.
(xi) Lending of Portfolio 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. The Portfolio will not lend its portfolio
securities without deposit by the borrower with the Fund's custodian of
collateral equal to at least the market value of the securities loaned plus any
accrued interest on such securities. Any gain or loss in the market price of the
securities loaned that may occur during the term of the loan will be for the
account of the Portfolio. Although 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, the party borrowing from the Portfolio may default on payment of
interest due on the loan and it is possible that the loan will not be repaid.
The Manager is unable to predict whether a borrower from the Portfolio will
default on its loan obligations. 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).
INVESTMENT RESTRICTIONS
The Fund has adopted the following fundamental investment restrictions which
apply to the Portfolio. These restrictions may not be changed unless approved by
a majority of the outstanding shares "of each series of the Portfolio's shares
that would be affected by such a change." The term "majority of the outstanding
shares" of the Portfolio means the vote of the lesser of (i) 67% or more of the
shares of the Portfolio present at a meeting, if the holders of more than 50% of
the outstanding shares of the Portfolio are present or represented by proxy, or
(ii) more than 50% of the outstanding shares of the Portfolio. The Portfolio may
not:
(1) Issue senior securities, except insofar as the Portfolio may be deemed to
have issued a senior security in connection with any permitted borrowing.
(2) 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.
(3) 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.
(4) Invest more than 25% of its 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.
(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 obligations secured by real
estate or interests in real estate.
6
<PAGE>
(6) Make loans, except through loans of portfolio securities to qualified
investors, and by entry into repurchase agreements. 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).
(7) 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.
(8) 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.
(9) Pledge, mortgage, assign or encumber any of the Portfolio's assets except
to the extent necessary to secure a borrowing permitted by clause (2) made
with respect to the Portfolio.
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 a Fund's portfolio's assets will not
constitute a violation of such restriction.
III. MANAGEMENT OF THE FUND
The Fund's Board of Directors, which is responsible for the overall management
and supervision of the Fund, has employed the Manager to serve as investment
manager 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 their
full-time to the affairs of the Fund.
The Directors and Officers of the Fund and their principal occupations during
the past five years are set forth below. Unless otherwise specified, the address
of each of the following persons is 600 Fifth Avenue, New York, New York 10020.
Mr. Reid may be deemed an "interested person" of the Fund, as defined in the
1940 Act on the basis of his affiliation with Back Bay Advisors, L.P.
EDGAR M. REED, 51 - 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, 68 - Director of the Fund, has been Professor of Business
Administration and Area Chairman of Economics in the Graduate School of
Management, Rutgers University which he has been associated with since 1966. His
address is Rutgers University Graduate School of Management, 92 New Street,
Newark, New Jersey 07102. Dr. Mellon is a Director/Trustee of 15 other funds in
the Reich & Tang Fund Complex.
ROBERT STRANIERE, 58 - Director of the Fund, has been a member of the New York
State Assembly and a partner with The Straniere Law Firm since 1981. His address
is 182 Rose Avenue, Staten Island, New York 10306. Mr. Straniere is a
Director/Trustee of 15 other funds in the Reich & Tang Fund Complex and Director
of Life Cycle Mutual Funds, Inc.
DR. YUNG WONG, 60 - Director of the Fund, was Director of Shaw Investment
Management (UK) Limited from 1994 to October 1995 and formerly General Partner
of Abacus Partners 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 (a provider of telecommunications equipment) since January 1989 and
of TelWatch, Inc. (a provider of network management software) since August 1989.
Dr. Wong is also a Director/Trustee of 14 other funds in the Reich & Tang Fund
Complex and a Trustee of Eclipse Financial Asset Trust.
STEVEN W. DUFF, 45 - President of the Fund, has been President of the Mutual
Funds Division of Reich & Tang Asset Management L.P. since September 1994. Mr.
Duff was formerly Director of Mutual Fund Administration at NationsBank which he
was associated with from June 1981 to August 1994. Mr. Duff is also President
and a Director/Trustee of 14 other funds in the Reich & Tang Fund Complex
Executive Vice President of Reich & Tang Equity Fund, Inc., and President and
Chief Executive Officer of Tax Exempt Proceeds Fund, Inc.
MOLLY FLEWHARTY, 48 - 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 16
other funds in the Reich & Tang Fund Complex.
7
<PAGE>
LESLEY M. JONES, 50 - Vice President of the Fund, has been Senior Vice President
of the 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 14
other funds in the Reich & Tang Fund Complex.
DANA E. MESSINA, 42 - 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. with which she was associated with from
December 1980 to September 1993. Ms. Messina is also Vice President of 15 other
funds in the Reich & Tang Fund Complex.
BERNADETTE N. FINN, 51 - Vice President and 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 14 other funds in the Reich & Tang Fund Complex, and a Vice
President and Secretary of 4 funds in the Reich & Tang Fund Complex.
RICHARD DE SANCTIS, 42 - Treasurer of the Fund, has been Assistant Treasurer of
NEIC 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. Mr. De Sanctis is also Treasurer of 17 other
funds in the Reich & Tang Fund Complex and is Vice President and Treasurer of
Cortland Trust, Inc.
ROSANNE HOLTZER, 34 - Assistant Treasurer of the Fund, has been Vice President
of the Mutual Funds division of the Manager since December 1997. Ms. Holtzer was
formerly Manager of Fund Accounting for the Manager with which she has been
associated with from June 1986. Ms. Holtzer is also Assistant Treasurer of 18
other funds in the Reich & Tang Fund Complex.
The Fund paid an aggregate remuneration of $6,000 to its directors with respect
to the period ended November 30, 1998, all of which consisted of directors' fees
paid to the three disinterested directors, pursuant to the terms of the
Investment Management Contract (see "Investment Advisory and Other Services"
herein.)
<TABLE>
<CAPTION>
COMPENSATION TABLE
<S> <C> <C> <C> <C>
AGGREGATE COMPENSATION PENSION OR RETIREMENT ESTIMATED ANNUAL TOTAL COMPENSATION FROM
NAME OF PERSON, FROM THE FUND BENEFITS ACCRUED AS PART BENEFITS UPON RETIREMENT FUND AND FUND COMPLEX PAID
POSITION OF FUND EXPENSES TO DIRECTORS*
$2,000 0
Dr. W. Giles Mellon, 0 $58,000 (16 Funds)
Director
$2,000 0
Robert Straniere, 0 $58,000 (16 Funds)
Director
$2,000 0
Dr. Yung Wong, 0 $58,000 (16 Funds)
Director
</TABLE>
* The total compensation paid to such persons by the Fund and Fund Complex for
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.
8
<PAGE>
IV. CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
On February 28, 1999 there were 4,794,822 Class A shares of the Fund
outstanding, 104 Class B shares of the Fund outstanding, and 104 Class C shares
of the Fund outstanding. As of February 28, 1999, the amount of shares owned by
all officers and directors of the Fund, as a group, was less than 1% of the
outstanding shares. Set forth below is certain information as to persons who
owned 5% or more of the Fund's outstanding shares as of December 31, 1998:
<TABLE>
<CAPTION>
<S> <C> <C>
NAME AND ADDRESS % OF CLASS NATURE OF OWNERSHIP
TOTAL RETURN BOND FUND - CLASS A
Back Bay Advisors, L.P. 13.70% Record
attn: Ted Reid
399 Boylston Street
Boston, MA 02116-3305
Northern Trust TTEE FBO 33.36% Record
Baker Hughs Inc.
PO Box 92956
Chicago, IL 50675-2956
Concordia College Corporation 45.17% Record
Concordia College Endowment Fund
901 South 8th Street
Moorehead, MN 56562-0002
TOTAL RETURN BOND FUND - CLASS B
Back Bay Advisors, L.P. 99.70% Record
attn: Ted Reid
399 Boylston Street
Boston, MA 02116-3305
TOTAL RETURN BOND FUND - CLASS C
Back Bay Advisors, L.P. 99.70% Record
attn: Ted Reid
399 Boylston Street
Boston, MA 02116-3305
</TABLE>
V. INVESTMENT ADVISORY AND OTHER SERVICES
The Manager is a Delaware limited partnership 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 February 28, 1999, was investment manager, adviser or
supervisor with respect to assets aggregating in excess of $9.5 billion,
primarily mutual fund and institutional fixed-income portfolios.
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.
9
<PAGE>
Reich & Tang Asset Management, Inc. is an indirect subsidiary of Metropolitan
Life Insurance Company ("MetLife"). Also, MetLife directly and indirectly owns
approximately 47% of the outstanding partnership interests of Nvest Companies
and may be deemed a "controlling person" of the Manager. Reich & Tang, Inc.
owns, directly and indirectly, approximately 13% of the outstanding partnership
interests of Nvest Companies.
MetLife is a mutual life insurance company with assets of $330.6 billion at
December 31, 1997. MetLife provides a wide range of insurance and investment
products and services to individuals and groups and is the leader among United
States life insurance companies in terms of total life insurance in force, which
totaled $1.7 trillion at December 31, 1997 for MetLife and its insurance
affiliates.
Nvest Companies 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 Limited Partnerships;
Greystone Partners, L.P.; Harris Associates, L.P.; Jurika Voyles, L.P.; Loomis,
Sayles & Company, L.P.; New England Funds, L.P.; Nvest Associates, Inc.; Reich &
Tang Asset Management, L.P.; Snyder Capital Management, L.P.; Vaughan, Nelson,
Scarborough & McCullough, L.P.; and Westpeak Investment Advisors, L.P. These
affiliates in the aggregate are investment advisors or managers to 80 other
registered investment companies.
The recent name change did not result in a change of control of the Manager and
has no impact upon the Manager's performance of its responsibilities and
obligations.
On November 28, 1997, the Board of Directors, including a majority of the
directors who are not interested persons (as defined in the 1940 Act) of the
Fund or the Manager, approved an Investment Management Contract effective May 1,
1998, which has been which extended to April 30, 1999. The contract is continued
in force thereafter for successive twelve-month periods beginning each May 1,
provided that such majority vote of the Fund'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, by votes cast in person at a
meeting called for the purpose of voting on such matter.
Pursuant to the Investment Management Contract, the Manager manages the Fund's
portfolio of securities and makes decisions with respect to the purchase and
sale of investments, subject to the general control of the Board of Directors of
the Fund.
The Manager provides persons satisfactory to the Board of Directors of the Fund
to serve as officers of the Fund. Such officers, as well as certain other
employees and directors of the Fund, may be directors or officers of NEIC, the
sole general partner of the Manager, or employees of the Manager or its
affiliates.
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.
Under the Investment Management Contract, (i) the Portfolio will pay an annual
management fee of .35% of the Portfolio's average daily net assets. The Manager,
at its discretion, may voluntarily waive all or a portion of the management fee.
The fees are accrued daily and paid monthly. Any portion of the total fees
received by the Manager may be used by the Manager to provide shareholder
services and for distribution of Fund shares. For the Fund's fiscal year ended
November 30, 1998 the Manager voluntarily waived all of it's investment
management fees totaling $94,245.
The Manager at its discretion may waive its rights to any portion of the
management fee and may use any portion of the management fee for purposes of
shareholder and administrative services and distribution of the Fund's shares.
Investment management fees and operating expenses which are attributable to all
Classes of the Portfolio will be allocated daily to each Class based on the
percentage of outstanding shares at the end of the day. Additional shareholder
services provided by Participating Organizations to Class B and C shareholders
pursuant to the Plan shall be compensated by the Distributor from its
shareholder servicing fee, the Manager from its management fee. Expenses
incurred in the distribution of Class A shares and the servicing of Class A
shares shall be paid by the Manager.
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
10
<PAGE>
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. This includes all operating expenses, 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 Manager
or its affiliates, costs of investor services, shareholders' reports and
corporate meetings, SEC 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 and reimbursements payable to the
Manager under the Investment Management 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 discussed herein. 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 passage of the National Securities
Improvement Act of 1996, all state expense limitations have been eliminated.
DISTRIBUTION AND SERVICE PLAN
The Fund's distributor is Reich & Tang Distributors, Inc., a Delaware
corporation with principal officers at 600 Fifth Avenue, New York, New York
10020. 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 the Rule. The
Fund's Board of Directors has adopted a distribution and service plan (the
"Plan") and, pursuant to the Plan, the Fund has entered into a Distribution
Agreement and a Shareholder Servicing Agreement (with respect to Class B and C
shares only) with Reich & Tang Distributors, Inc., (the "Distributor"), as
distributor of the Fund's shares.
Under the Plan, the Portfolios and the Distributor will enter into a Shareholder
Servicing Agreement with respect to the Class B and C shares. Under the
Shareholder Servicing Agreement, the Distributor receives from the Portfolio a
service fee equal to .25% per annum of the Portfolio's Class B and C shares
average daily net assets (the "Service Fee"). The service fee is in exchange for
providing personal shareholder services and for the maintenance of shareholder
accounts. The Service Fee is accrued daily and paid monthly and any portion of
the Service Fee may be deemed to be used by the Distributor for payments to
Participating Organizations with respect to servicing their clients or customers
who are shareholders of the Fund. The Class A shareholders will not receive the
benefit of such services from Participating Organizations and, therefore, will
not be assessed a Shareholder Servicing Fee.
The following information applies to the Class B and C shares of the Portfolio.
For the fiscal year ended November 30,1998, the Portfolio paid a Service Fee for
expenditures pursuant to the Plan in amounts aggregating $2 with respect to the
Class B Shares and $2 with respect to the Class C Shares. During such period,
the Manager and Distributor made payments pursuant to the Plan to or on behalf
of Participating Organizations of $0 with respect to the Class B Shares and $0
with respect to the Class C Shares. Of the payments made pursuant to the Plan by
the Portfolio, $0 was spent on advertising, $426 on printing and mailing of
prospectuses to other than current shareholders, $0 on compensation to
underwriters, $0 on compensation to broker-dealers, 0 on compensation to sales
personnel, and $0 on interest, carrying or other financial charges. The excess
of such payments over the total payments the Distributor received from the
Portfolio represents distribution and servicing expenses funded by the
Distributor from its own resources.
Under the Distribution Agreement, the Distributor, for nominal consideration
(i.e., $1.00) and as agent for the Fund, will solicit orders for the purchase of
the Fund's shares, provided that any subscriptions and orders will not be
binding on the Fund until accepted by the Portfolio as principal.
The Plan and the Shareholder Servicing Agreement provide that, in addition to
the Shareholder Servicing Fee, the Fund will pay for (i) telecommunications
expenses, including the cost of dedicated lines and CRT terminals, incurred by
the Participating Organizations and Distributor in carrying out their
obligations under the Shareholder Servicing Agreement with respect to the Class
B and C shares and (ii) preparing, printing and delivering the Fund's prospectus
to existing shareholders of the Fund and preparing and printing subscription
application forms for shareholder accounts.
The Plan provides that the Manager may make payments from time to time from
their own resources, which may include the management 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 and related
administrative functions on behalf of the Class B and C shares of the Fund; (ii)
to
11
<PAGE>
compensate certain Participating Organizations for providing assistance in
distributing the Fund's shares; and (iii) to pay the costs of printing and
distributing the Fund'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 shares. The
Distributor may also make payments from time to time from its own resources,
which may include the Shareholder Servicing Fee with respect to Class B and C
shares and past profits for the purpose 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 Fund is required to
pay to the Manager or the Distributor for any fiscal year under the Investment
Management Contract or the Shareholder Servicing Agreement in effect for that
year.
In accordance with the Rule, 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 will remain in effect until November 30, 1999.
Thereafter it may continue in effect for successive annual periods commencing
December 1, provided it is approved by the Class B and C shareholders or by the
Board of Directors. This includes 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 in the agreements related to the Plan. 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 Class B and C
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 Class B and C shareholders.
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. The fees are accrued daily and paid
monthly.
CUSTODIAN AND TRANSFER AGENT
Investors Fiduciary Trust Company, 801 Pennsylvania, Kansas City, Missouri
64105, is custodian for the Fund's cash and securities. Reich & Tang Services,
Inc., an affiliate of the Fund's Manager, located at 600 Fifth Avenue, New York,
NY 10020, is transfer agent and dividend agent for the shares of the Fund. The
custodian and transfer agent do not assist in, and are not responsible for,
investment decisions involving assets of the Fund.
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.
VI. BROKERAGE ALLOCATION AND OTHER PRACTICES
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
12
<PAGE>
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 advice
to the Fund. While it is impossible to place an actual dollar value on such
investment information, its receipt by the Manager probably does not reduce the
overall expenses of the Manager to any material extent. Consistent with the
Rules of Fair Practice of the National Association of Securities Dealers, Inc.,
and subject to seeking best execution, the Manager may consider sales of shares
of the Fund as a factor in the selection of brokers to execute portfolio
transactions for the Fund.
The investment information provided to the Manager is of the type described in
Section 28(e) of the Securities Exchange Act of 1934 and is designed to augment
the Manager's own internal research and investment strategy capabilities.
Research services furnished by brokers through which the Fund effects securities
transactions are used by the Manager in carrying out its investment management
responsibilities with respect to all its clients' accounts. There may be
occasions where the transaction cost charged by a broker may be greater than
that which another broker may charge if the Manager determines in good faith
that the amount of such transaction cost is reasonable in relation to the value
of brokerage and research services provided by the executing broker.
The Fund may deal in some instances in securities which are not listed on a
national securities exchange but are traded in the over-the-counter market. It
may also purchase listed securities through the third market. Where transactions
are executed in the over-the counter market or the third market, the Fund will
seek to deal with the primary market makers; but when necessary in order to
obtain best execution, it will utilize the services of others. In all cases the
Fund will attempt to negotiate best execution.
The Distributor may from time to time effect transactions in the Fund's
portfolio securities. In such instances, the placement of orders with the
Distributor would be consistent with the Fund's objective of obtaining best
execution. With respect to orders placed with the Distributor for execution on a
national securities exchange, 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.
For the fiscal year ended November 30, 1998, the Fund did not pay any brokerage
commissions.
VII. CAPITAL STOCK AND OTHER SECURITIES
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's
Board of Directors is authorized to divide the shares into separate series of
stock, one for each of the portfolios that may be created. 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.
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
13
<PAGE>
will be assessed a service fee of .25% of the average daily net assets of the
Class B and C shares of the Portfolio pursuant to the Rule 12b-1 Distribution
and Service Plan of the Portfolio; and (iii) only the holders of the Class B and
C shares would be entitled to vote on matters pertaining to the Plan and any
related agreements in accordance with provisions of Rule 12b-1. Payments that
are made under the Plan will be calculated and charged daily to the appropriate
class prior to determining daily net asset value per share and
dividend/distributions.
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.
VIII. PURCHASE, REDEMPTION AND PRICING 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. 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. 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. 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. However, the amount of minimum initial purchase or subsequent
investment may be waived by the Manager at its sole discretion.
The Fund sells and redeems its shares on a continuing basis at their net asset
value and does not impose a sales charge for either sales or redemptions. All
transactions in Fund shares are effected through the Fund's transfer agent which
accepts orders for purchases and redemptions from the Distributor and from
shareholders directly.
In order to maximize earnings on the Portfolio, the Fund normally has its assets
as fully invested as is practicable. Many securities in which the Fund invests
require immediate settlement in Funds of Federal Reserve member banks on deposit
at a Federal Reserve bank (commonly known as "Federal Funds"). Accordingly, the
Fund does not accept a subscription or invest an investor's payment in portfolio
securities until the payment has been converted into Federal Funds.
Shares will be issued as of the first determination of the Fund's net asset
value per share for each Class made after acceptance of the investor's purchase
order. An investor's funds will not be invested by the Fund during the period
before the Fund's receipt of Federal Funds and its issuance of Fund shares. The
Fund reserves the right to reject any purchase order.
Shares are issued as of 4:00 p.m., New York City time, on any Fund Business Day,
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. The Fund may make any redemption in
kind. In all other cases, 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 Portfolio he/she 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.
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The date of payment upon redemption may not be postponed for more than seven
days after shares are tendered for redemption, and the right of redemption may
not be suspended, except for any period during which the NYSE is closed (other
than customary weekend and holiday closings) or during which the SEC determines
that trading thereon is restricted, or for any period during which an emergency
(as determined by the SEC) exists as a result of which disposal by the Fund of
its securities is not reasonably practicable or as a result of which it is not
reasonably practicable for the Fund fairly to determine the value of its net
assets, or for such other period as the SEC may by order permit for the
protection of the shareholders of the Fund.
Redemption requests received by the Fund's transfer agent before 4:00 p.m., New
York City time, on any Fund Business Day become effective at 4:00 p.m. that day.
Shares redeemed are not entitled to participate in dividends declared on the day
or after the day a redemption becomes effective.
The Fund has reserved the right to redeem the shares of any shareholder if the
net asset value of all the remaining shares in his account after a withdrawal is
less than $250,000. Written notice of any such mandatory redemption will be
given at least 30 days in advance to any shareholder whose account is to be
redeemed or the Fund may impose a monthly service charge of $10 on such
accounts. During the notice period any shareholder who receives such a notice
may (without regard to the normal $10,000 requirement for an additional
investment) make a purchase of additional shares to increase his total net asset
value at least to the minimum amount and thereby avoid such mandatory
redemption.
The Fund has reserved the right to charge individual shareholder accounts for
expenses actually incurred by such account for wire transfers and certain other
shareholder expenses, as well as to impose a monthly service charge for accounts
whose net asset value falls below the minimum amount.
INVESTMENTS THROUGH PARTICIPATING ORGANIZATIONS
Participant Investors may, if they wish, invest in the Fund through the
Participating Organizations with which they have accounts. "Participating
Organizations" are securities brokers, banks, financial institutions or other
industry professionals or organizations which have entered into shareholder
servicing agreements with the Distributor with respect to investment of their
customer accounts in the Fund. When instructed by its customer to purchase or
redeem Fund shares, the Participating Organization, on behalf of the customer,
transmits to the Fund's transfer agent a purchase or redemption order, and in
the case of a purchase order, payment for the shares being purchased.
Participating Organizations may confirm to their customers who are shareholders
in the Fund each purchase and redemption of Fund shares for the customers'
accounts. Also, Participating Organizations may send their customers periodic
account statements showing the total number of Fund shares owned by each
customer as of the statement closing date, purchases and redemptions of Fund
shares by each customer during the period covered by the statement and the
income earned by Fund shares of each customer during the statement period
(including dividends paid in cash or reinvested in additional Fund shares).
Participant Investors whose Participating Organizations have not undertaken to
provide such statements will receive them from the Portfolio directly.
Participating Organizations may charge Participant Investors a fee in connection
with their use of specialized purchase and redemption procedures offered to
Participant Investors by the Participating Organizations. In addition,
Participating Organizations offering purchase and redemption procedures similar
to those offered to shareholders who invest in the Fund directly may impose
charges, limitations, minimums and restrictions in addition to or different from
those applicable to shareholders who invest in the Fund directly. Accordingly,
the net yield to investors who invest through Participating Organizations may be
less than by investing in 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).
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All shareholders will receive from the Fund a monthly statement listing the
total number of shares of the Portfolio owned as of the statement closing date,
purchases and redemptions of shares of the Portfolio during the month covered by
the statement and the dividends paid on shares of the Portfolio of each
shareholder during the statement period (including dividends paid in cash or
reinvested in additional shares of the Portfolio). Certificates for Fund shares
will not be issued to an investor.
INITIAL PURCHASE OF SHARES
MAIL
Class B share investors may send a check made payable to the Fund along with a
completed subscription order form to:
Back Bay Funds, Inc.
c/o Reich & Tang Funds
600 Fifth Avenue-8th Floor
New York, New York 10020
Checks are accepted subject to collection at full value in United States
currency.
BANK WIRE
To purchase shares of the Fund using the wire system for transmittal of money
among banks, an investor should first obtain a new account number by telephoning
the Fund at either [212-830-5220] (within New York State) or at 800-241-3263
(outside New York State) and then instruct a member commercial bank to wire
money immediately to:
Investors Fiduciary Trust Company
ABA #101003621
Reich & Tang Funds
DDA #890752-955-4
For Back Bay Funds, Inc.
Total Return Portfolio
Account of (Investor's Name)
Portfolio Account #
SS #/Tax I.D.#
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
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redemption request is received prior to 4:00 p.m., New York City time. However,
redemption requests will not be effected unless the check (including a certified
or cashier's check) used for investment has been cleared for payment by the
investor's bank, currently considered by the Fund to occur within 15 days after
investment.
A shareholder's original subscription order form permits the shareholder to
redeem by written request and to elect one or more of the additional redemption
procedures described below. A shareholder may only change the instructions
indicated on his original subscription order form by transmitting a written
direction to the Fund's transfer agent. Requests to institute or change any of
the additional redemption procedures will require a signature guarantee. When a
signature guarantee is called for, the shareholder should have "Signature
Guaranteed" stamped under his signature and guaranteed by an eligible guarantor
institution which includes a domestic bank, a domestic savings and loan
institution, a domestic credit union, a member bank of the Federal Reserve
System or a member firm of a national securities exchange, pursuant to the
Fund's transfer agent's standards and procedures.
WRITTEN REQUESTS
Shareholders may make a redemption in any amount by sending a written request
to:
Back Bay Funds, Inc.
c/o Reich & Tang Funds
600 Fifth Avenue-8th Floor
New York, New York 10020
All written requests for redemption must be signed by the shareholder with
signature guaranteed. Unless the redemption is made in kind, the redemption
proceeds are normally 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 (married individuals filing joint returns may each contribute up to
$2,000 ($4,000 in the aggregate) even where one spouse is not working if certain
conditions are met), depending on whether they are active participants in an
employer sponsored retirement plan and on their income level. Dividends and
distributions held in an IRA account are not taxed until withdrawn in accordance
with the provisions of the Code. Beginning January 1, 1998, investors satisfying
statutory income level requirements may make non-deductible contributions of up
to $2,000 annually to Roth IRA, distributions from a Roth IRA are not subject to
tax if a statutory five year holding period requirement is satisfied.
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<PAGE>
Under certain circumstances, individuals may establish education IRAs. Education
IRAs permit eligible individuals to contribute up to $500 per year per
beneficiary under 18 years old. Distributions from an education IRA are
generally excluded from income when used for qualified higher education
expenses.
Investors should be aware that they may be subject to penalties or additional
tax on contributions or withdrawals from IRAs or other retirement plans which
are not permitted by the applicable provisions of the Code, and, prior to a
withdrawal, shareholders may be required to certify their age and awareness of
such restrictions in writing. Persons desiring information concerning
investments through IRAs or other retirement plans should write or telephone the
Distributor at 600 Fifth Avenue, New York, New York 10020, (212) 830-5200.
NET ASSET VALUE
The Fund determines the net asset value of the shares of the Portfolio (computed
separately for each Class of shares) of the Portfolio 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 Portfolio at the time the determination is made. The
Portfolio determines its net asset value on each Fund Business Day. Fund
Business Day for this purpose means any day on which the New York Stock Exchange
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. The Portfolio may have portfolio securities that are primarily
listed on foreign exchanges that trade on weekdays or other days when the Fund
does not price its shares, and thus the Portfolio's shares may change on days
when Shareholders will not be able to purchase or redeem the Portfolio's Shares.
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 on the basis of the factors
listed above. If a pricing service is not used, municipal obligations will be
valued at quoted prices provided by municipal bond dealers. Non-tax-exempt
securities for which transaction prices are readily available are stated at
market value (determined on the basis of the last reported sales price, or a
similar means). Short-term investments that will mature in 60 days or less are
stated at amortized cost, which approximates market value. All other securities
and assets are valued at their fair market value as determined in good faith by
the Board of Directors.
IX. TAXATION OF THE FUND
FEDERAL INCOME TAXES
The Fund intends to cause the Portfolio to qualify and elect to be treated as a
regulated investment company under Subchapter M of the Internal Revenue Code of
1986, as amended (the "Code"). To qualify as a regulated investment company, the
Portfolio must distribute to shareholders at least 90% of its investment company
taxable income (which includes, among other items, taxable interest, dividends
and the excess of net short-term capital gains over net long-term capital
losses), and meet certain sources of income, diversification of assets and other
requirements of the Code. If the Portfolio meets these requirements and elects
to be treated as a regulated investment company, the Portfolio generally will
not be subject to Federal income tax on its investment company taxable income or
on its net capital gains (the excess of net long-term capital gains over net
short-term capital losses) designated by the Portfolio as capital gain dividends
and distributed to shareholders. If the Portfolio does not meet all of these
Code requirements, it will be taxed as an ordinary corporation and its
distributions will generally be taxed to shareholders as ordinary income. In
determining the amount of net capital gains to be distributed, any capital loss
carryover from prior years will be applied against capital gains to reduce the
amount to be distributed. In addition, any losses incurred in the taxable year
subsequent to October 31 will be deferred to the next taxable year and used to
reduce distributions in the subsequent year.
Amounts not distributed on a timely basis in accordance with a calendar year
distribution requirement may be subject to a nondeductible 4% excise tax. To
avoid the imposition of the excise tax, for each calendar year the Portfolio
must distribute for the calendar year an amount equal to the sum of (1) at least
98% of its ordinary income (excluding any capital gains or losses) for the
calendar year, (2) at least 98% of its capital gain net income (the excess of
its capital gains over capital losses, reduced by certain ordinary losses) for
the one-year period ending October 31 of such year, and (3) all ordinary income
and capital gain net income for previous years that were not distributed during
such years. A distribution will be treated as paid on December 31 of a calendar
year if it is declared by the Portfolio during October, November or December of
that year to shareholders of record on a date in such a month and paid during
January of the following year. Such distributions will be taxable to
shareholders in the calendar year in which the distributions are declared,
rather than the calendar year in which the distributions are received.
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X. UNDERWRITERS
The Fund sells and redeems its shares on a continuing basis at their net asset
value and does not impose a sales charge. The Distributor does not receive an
underwriting commission. In effecting sales of Fund shares under the
Distribution Agreement, the Distributor, for nominal consideration (i.e., $1.00)
and as agent for the Fund, will solicit orders for the purchase of the Fund's
shares, provided that any subscriptions and orders will not be binding on the
Fund until accepted by the Fund as principal.
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. In the opinion of the Manager,
however, 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 ad dealers pursuant to
state law.
XI. CALCULATION OF PERFORMANCE DATA
Average annual total return is a measure of the average annual compounded rate
of return of $1,000,000 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
investments 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.
XII. FINANCIAL STATEMENTS
The audited financial statements for the Fund for the fiscal year ended November
30, 1998 and the report therein of McGladrey & Pullen, LLP are herein
incorporated by reference to the Fund's Annual Report. The Annual Report is
available upon request and without charge.
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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.
* As described by the rating agencies.
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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.
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CONDITIONAL: A conditional rating is premised on the successful completion of a
project or the occurrence of a specific event.
DUFF & PHELPS CREDIT RATING CO.
AAA: Highest credit quality. The risk factors are negligible, being only
slightly more than for risk-free U.S. Treasury debt.
AA: High credit quality. Protection factors are strong. Risk is modest but may
vary slightly from time to time because of economic conditions.
A: Protection factors are average but adequate. However, risk factors are more
variable and greater in periods of economic stress.
BBB: Below-average protection factors but within the definition of investment
grade securities but still considered sufficient for prudent investment.
Considerable variability in risk during economic cycles.
BB+, BB, BB-: Below investment grade but deemed likely to meet obligations when
due. Present or prospective financial protection factors fluctuate according to
industry conditions or company fortunes. Overall quality may move up or down
frequently within this category.
B+, B, B-: Below investment grade and possessing risk that obligations will not
be met when due. Financial protection factors will fluctuate widely according to
economic cycles, industry conditions and/or company fortunes. Potential exists
for frequent changes in the rating within this category or into a higher or
lower rating grade.
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.
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