As filed with the Securities and Exchange Commission on March 29, 2000
Registration No. 333-33831
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
Pre-Effective Amendment No. [ ]
Post-Effective Amendment No. 3 [X]
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. 4 [X]
BACK BAY FUNDS, INC.
(Exact Name of Registrant as Specified in Charter)
c/o Reich & Tang Asset Management L.P.
600 Fifth Avenue
New York, New York 10020
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code: (212) 830-5220
BERNADETTE N. FINN
Reich & Tang Asset Management L.P.
600 Fifth Avenue
New York, New York 10020
(Name and Address of Agent for Service)
Copy to: MICHAEL R. ROSELLA, Esq.
Battle Fowler LLP
75 East 55th Street
New York, New York 10022
Approximate Date of Proposed Public Offering:
It is proposed that this filing will become effective: (check appropriate box)
[ ] immediately upon filing pursuant to paragraph (b)
[X] on March 29, 2000 pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)
[ ] on (date) pursuant to paragraph (a) of Rule 485
[ ] 75 days after filing pursuant to paragraph (a)(2)
[ ] on (date) pursuant to paragraph (a)(2) of Rule 485
If appropriate, check the following box:
[ ] this post-effective amendment designates a new effective date for a
previously filed post-effective amendment
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BACK BAY FUNDS, INC. 600 FIFTH AVENUE
NEW YORK, N.Y. 10020
(212) 830-5220
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PROSPECTUS
March 29, 2000
The Fund is comprised of one portfolio referred to as the Total Return Bond
Fund. The investment objective of the Total Return Bond Fund is to seek 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.
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C> <C> <C>
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
</TABLE>
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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 portfolio.
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 objectives.
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. Investment grade is defined as debt
instruments which have a rating within one of the four highest rating categories
by a nationally recognized statistical rating organization ("NRSRO"). For
example, debt securities rated BBB or higher by Standard and Poor's, a division
of The McGraw-Hill Companies ("S&P") or debt securities rated Baa or higher by
Moody's Investor Services, Inc. ("Moody's") are considered investment grade
quality.
No more than 20% of the Portfolio's total assets may be invested in
instruments which are below investment grade quality. The Portfolio may only
invest in below investment grade instruments which are rated B or higher by at
least two NRSROs. However, under normal market conditions, Back Bay Advisors,
Inc., the Fund's Manager, anticipates purchasing instruments that are rated at
least "BB" or "Ba". The Manager will select securities for inclusion in the
Portfolio based on the higher of the two ratings. With respect to the investment
allocation of the below investment grade securities of the Portfolio, no more
than 5% of the total assets may have a split rating of "B/BB" or "Ba/B".
No more than 10% of the Portfolio's total assets may be invested in
non-dollar denominated obligations issued by corporations and/or governments and
agencies thereof.
Further, no more than 5% of the total net assets may be invested in
emerging market debt. For purposes of the foregoing restriction, emerging market
debt is deemed to be below investment grade foreign sovereign debt or below
investment grade debt issued by a corporation domiciled in a foreign country
that has a below investment grade long term foreign currency debt rating from
Moody's and S&P.
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.
Also, the Manager expects to maintain an effective duration to within one
and one half years of the effective duration of the Lehman Aggregate Index.
PRINCIPAL RISKS
o The primary risk associated with an investment in fixed and floating-rate
debt instruments is that 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. Thus, 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 A risk associated with an interest in fixed and floating rate debt
instruments is also that issuer of the instrument will default on principal
and/or interest payments when due on the
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instrument. Such a default would have the effect of lessening the return of
the Portfolio and/or the value of the Portfolio's shares.
o Fixed-income securities rated BB or lower by S&P or Ba or lower by Moody's
(and in the case of split securities, BB or lower or Ba or lower) as well
as emerging market debt and comparable unrated securities, are 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 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 you in deciding whether to
invest in the Portfolio. The bar chart shows the annual total returns of the
Portfolio's Class A shares for the life of the Portfolio. The table shows how
the Portfolio's average annual total 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 OMMITTED]
<TABLE>
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BACK BAY FUNDS INC. - TOTAL RETURN BOND FUND - CLASS A SHARES (1), ( 2)
CALENDAR YEAR END % TOTAL RETURN
<S> <C>
1998 9.73%
1999 -0.73%
</TABLE>
(1) The Fund's Portfolio's highest quarterly return was 2.85% for the quarter
ended June 30, 1998; the lowest quarterly return was -1.68% for the quarter
ended June 30, 1999.
(2) Participating Organizations may be charged a fee to investors for
purchasing and redeeming shares. Therefore, the net return to such
investors may be less than the net return by investing in the Fund
directly.
<TABLE>
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AVERAGE ANNUAL TOTAL RETURNS - FOR THE PERIOD ENDED DECEMBER 31, 1999
Class A Class B Class C
<S> <C> <C> <C>
Total Return Bond Fund
One Year -0.73% -1.03% -1.03%
Lehman Aggregate Index
One Year -0.83% -0.83% -0.83%
</TABLE>
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FEE TABLE
This table describes the fees and expenses that you may pay if you buy and hold
shares in the Fund's Portfolio.
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ANNUAL FUND OPERATING EXPENSES
(EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)
TOTAL RETURN BOND FUND
CLASS A CLASS B CLASS C
<S> <C> <C> <C>
Management Fees 0.35% 0.35% 0.35%
Distribution and Service (12b-1) Fees None 0.25% 0.25%
Other Expenses 0.57% 0.57% 0.72%
Administration Fees 0.15% 0.15% 0.15%
----- ----- -----
Total Return Fund Operating Expenses 0.92% 1.17% 1.32%
</TABLE>
The Manager voluntarily waived all of the Management Fees and reimbursed
expenses equal to 0.17% with respect to Class A, B and C shares. After such
waivers and reimbursement the actual Total Annual Fund Operating Expenses for
Class A were 0.40%, for Class B were 0.65% and for Class C were 0.80%. The
Manager can terminate these voluntary waivers and reimbursements at any time.
<TABLE>
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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:
1 Year 3 Years 5 years 10 years
<S> <C> <C> <C> <C>
Class A: $ 94 $293 $509 $1,131
Total Return Bond Fund Class B: $119 $372 $644 $1,420
Class C: $134 $418 $723 $1,590
</TABLE>
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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 Portfolio will achieve its investment objectives.
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 described below 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. Investment grade is defined as debt
instruments which have a rating within one of the four highest rating categories
by a NRSRO. For example, debt securities rated BBB or higher by S&P or rated Baa
or higher by Moody's are considered investment grade quality.
No more than 20% of the Portfolio's total assets may be invested in
instruments which are below investment grade quality. The Portfolio may only
invest in below investment grade instruments which are rated B or higher by at
least two NRSROs. However, under normal market conditions the Manager
anticipates purchasing instruments that are rated at least "BB" or "Ba". The
Manager will select split rated securities for inclusion in the Portfolio based
on the higher of the two ratings. With respect to the investment allocation of
the below investment grade securities of the Portfolio, no more than 5% of the
total assets may have a split rating of "B/BB" or "Ba/B".
No more than 10% of the Portfolio's total assets may be invested in
non-dollar denominated obligations issued by corporations and/or governments and
agencies thereof.
Further, no more than 5% of the total net assets may be invested in
emerging market debt. For purposes of the foregoing restriction, emerging market
debt is deemed to be below investment grade foreign sovereign debt or below
investment grade debt issued by a corporation domiciled in a foreign country
that has a below investment grade long term foreign currency debt rating from
Moody's and S&P.
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.
Also, the Manager expects to maintain an effective duration to within one
and one half years of the effective duration of the Lehman Aggregate Index.
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The following chart highlights the Portfolio's principle investments and
strategies:
<TABLE>
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TOTAL RETURN BOND FUND
CREDIT QUALITY LIMITATIONS
- ----------------------------- --------- ----------- --------------------------------------------------------------------
<S> <C> <C> <C>
Investment Grade AAA >80% At time of purchase, a minimum of 80% of the Portfolio's total
AA assets will be invested in investment-grade debt instruments.
A
BBB
- ----------------------------- --------- ----------- --------------------------------------------------------------------
Below-Investment Grade BB <20% At time of purchase, no more than 20% of the Portfolio's total
("Junk Bonds") assets may be invested in instruments which are rated BB.
- ------------------------------------------------------------------------------------------------------------------------
Below Investment Grade - At time of purchase, no more than 5% of the Portfolio's
Emerging Market Debt total assets may be invested in emerging market debt.
Emerging market debt is deemed to be below investment grade
foreign sovereign debt or below investment grade debt issued
by a corporation domiciled in a foreign country that has a
below investment grade long term foreign currency rating
from Moody's and S&P.
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Where securities are split-rated, that is, where different rating agencies have assigned different ratings to the same
security, the higher rating will determine the security's position in the above table.
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CURRENCY LIMITATIONS
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U.S. Dollar-Denominated >90% At time of purchase, a minimum of 90% of the Portfolio's total
assets will be invested in U.S. dollar denominated debt instruments.
- --------------------------------------- ----------- ---------------------------------------------------------------------
Non-U.S. Dollar Denominated <10% At time of purchase, no more than 10% of the Portfolio's total
assets may be invested in non-dollar denominated obligations.
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DURATION LIMITATIONS
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The Manager expects to maintain an effective duration to within one and one half years of the effective duration of the
Lehman Aggregate index.
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
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The Portfolio may also invest in the following securities and transactions.
(i) FIXED INCOME SECURITIES: The Portfolio invests principally in fixed-income
securities, which include principally corporate bonds. 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 various corporate issuers, as well as the U.S.
or foreign governments or international agencies and instrumentalities. 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 the issuer to make payments of principal and interest.
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.
U.S. Government Securities do not involve the credit risks associated with
other types of fixed-income securities. Yields available from U.S. Government
Securities are generally lower than the yields available from corporate
fixed-income securities. 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.
(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 depreciation of the underlying stock into which they are
convertible.
(iii) 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 many 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 may be affected favorably or
unfavorably by changes in currency exchange rates or exchange control
regulations. Because the Portfolio may purchase securities denominated in
foreign currencies, a change in the value of any such currency relative to the
U.S. dollar will result in a change in the U.S. dollar value of the Fund's
assets and the Fund's income available for distribution.
In addition, although the Portfolio's income may be received or realized in
foreign currencies, the Portfolio will be required to compute and
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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.
(iv) LOWER RATED FIXED-INCOME SECURITIES: Fixed-income securities rated BB or
lower by S&P or Ba or lower by Moody's (and in the case of split rated
securities, BB or lower and Ba or lower), as well as emerging market debt and
comparable unrated securities, are below investment grade quality. These
securities are commonly known as "junk bonds". Achievement of the investment
objective of a mutual fund investing in lower quality fixed-income securities
may be more dependent on the fund's adviser's or subadviser's own credit
analysis than for a fund investing in higher quality bonds. The market for lower
quality fixed-income securities may be also more severely affected than some
other financial markets by economic recession or substantial
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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. 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 -- "Description of Bond Ratings."
(v) 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 mortgage related securities will
fluctuate in value as a result of fluctuations in interest rates, they are
likely to fluctuate more 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.
(vi) UNITED STATES GOVERNMENT SECURITIES: The United States securities in which
the Portfolio may invest include 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.
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, 1999 was 165.41%. Portfolio
turnover may involve the payment by the Portfolio of dealer spreads or
underwriting commissions and other transaction 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.
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BUY/SELL DECISIONS
The Manager considers the following factors when buying and selling
securities for the Portfolio: (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 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 in the case of split rated securities, BB or lower and Ba or lower), as
well as emerging market debt and comparable unrated securities, are 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.
III. MANAGEMENT, ORGANIZATION AND CAPITAL STRUCTURE
The Fund's investment adviser is Back Bay Advisors, L.P. (the "Manager").
The principal
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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 13 mutual fund portfolios. As of February 29,
2000, the Manager was investment manager, adviser or supervisor with respect to
assets aggregating in excess of $5 billion, primarily mutual fund and
institutional fixed income portfolios. Mr. Peter W. Palfrey and Mr. Richard
Raczkowski are primarily responsible for the day to day investment management of
the Portfolio. Mr. Palfrey has been employed at the Manager since 1993 and has
served as Senior Vice President since 1997. Mr. Raczkowski has served as
assistant portfolio manager since 1999 and Vice President and credit analyst
since 1998. Prior to 1998 Mr. Raczkowski was a management consultant with Hagler
Bailly, Inc.
Pursuant to the Investment Management Contract, 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. Under the Investment Management Contract, the Fund 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) as of 4:00 p.m., New York City
time, by dividing the value of the Portfolio'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 Fund
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 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.
12
<PAGE>
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 (as defined on page 19) 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 and are referred to as Participant Investors. 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
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.
13
<PAGE>
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. 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
14
<PAGE>
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:
State Street Kansas City
ABA #101003621
Reich & Tang Funds
DDA #890752-9570
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.
15
<PAGE>
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 paid out
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.
16
<PAGE>
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, 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
17
<PAGE>
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 and Class C 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 and Class C shares will be lower than the net income of and
dividends payable to the Class A 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 Portfolio has elected, and intends to continue to qualify for and elect
to be treated as a "regulated investment company" under the Internal Revenue
Code of 1986. 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 by the Portfolio,
including any market discount income, generally will be taxable to shareholders
as ordinary income. Because the Portfolio intends to invest in bonds rather than
equity securities, the distribution will not be eligible for the
dividends-received deduction available to corporations. 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.
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.
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 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
18
<PAGE>
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).
The Portfolio is generally required to report to the Internal Revenue
Service ("IRS") all distributions to shareholders. Distributions by the Fund
generally are 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 B and C 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.
Class C shares of the Fund are available to defined contribution and other
retirement plan providers. 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 their qualified retirement plan clients. 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. Defined contribution and other retirement
plan providers who may purchase Class C shares of the Portfolio will be
reimbursed for expenses incurred in providing recordkeeping, marketing, client
service and participant educational services. As a result of the payment of
these fees to insurance companies and the reimbursement of expenses to defined
contribution and other retirement plan providers, Class C shares will have
higher fees and expenses than the other classes of the Portfolio.
20
<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
PricewaterhouseCoopers LLP, for the fiscal year ended November 30, 1999, and by
other auditors for periods prior to November 30, 1999.
<TABLE>
<CAPTION>
CLASS A
-----------------------------------------------
Year December 22, 1997
Ended (Commencement of Sales) to
November 30, 1999 November 30, 1998
----------------- -----------------
Per Share Operating Performance:
(for a share outstanding throughout the period)
<S> <C> <C>
Net asset value, beginning of period............... $ 10.32 $ 10.00
-------- --------
Income from investment operations:
Net investment income............................ 0.64 0.59
Net realized and unrealized
gains (losses) on investments.................. ( 0.69 ) 0.32
------- --------
Total from investment operations................... ( 0.05 ) 0.91
------- --------
Less distributions:
Dividends from net investment income............. ( 0.64 ) ( 0.59 )
Distributions from net realized gains............ ( 0.16 ) --
------- -------
Total distributions................................ ( 0.80 ) ( 0.59 )
------- -------
Net asset value, end of period..................... $ 9.47 $ 10.32
======== ========
Total Return (not annualized)...................... ( 0.45%) 9.42%
Ratios/Supplemental Data
Net assets, end of period (000).................... $ 33,771 $ 41,101
Ratios to average net assets:
Expenses (net of fees waived and reimbursed)+.... 0.40% 0.41%*
Net investment income............................ 6.52% 6.22%*
Management fees waived........................... 0.35% 0.35%*
Expenses reimbursed.............................. 0.17% 0.58%*
Expense offsets.................................. 0.00% 0.01%*
Portfolio turnover rate.......................... 165.41% 220.55%
* Annualized
+ Includes expense offsets.
</TABLE>
21
<PAGE>
VI. FINANCIAL HIGHLIGHTS (Continued)
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
PricewaterhouseCoopers LLP, for the fiscal year ended November 30, 1999, and by
other auditors for periods prior to November 30, 1999.
<TABLE>
<CAPTION>
CLASS B CLASS C
------------------------------------------ ------------------------------------------
Year December 22, 1997 Year December 22, 1997
Ended (Commencement of Sales) to Ended (Commencement of Sales) to
November 30, 1999 November 30, 1998 November 30, 1999 November 30, 1998
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Per Share Operating Performance:
(for a share outstanding throughout the period)
Net asset value, beginning of period........... $ 10.32 $ 10.00 $ 10.32 $ 10.00
-------- -------- -------- --------
Income from investment operations:
Net investment income........................ 0.61 0.56 0.61 0.56
Net realized and unrealized
gains (losses) on investments.............. ( 0.69 ) 0.32 ( 0.69 ) 0.32
------- -------- ------- --------
Total from investment operations............... ( 0.08 ) 0.88 ( 0.08 ) 0.88
------- -------- ------- --------
Less distributions:
Dividends from net investment income......... ( 0.61 ) ( 0.56 ) ( 0.61 ) ( 0.56 )
Distributions from net realized gains........ ( 0.16 ) -- ( 0.16 ) --
------- -------- ------- --------
Total distributions............................ ( 0.77 ) ( 0.56 ) ( 0.77 ) ( 0.56 )
------- ------- ------- -------
Net asset value, end of period................. $ 9.47 $ 10.32 $ 9.47 $ 10.32
======== ======== ======== ========
Total Return (not annualized).................. ( 0.76%) 9.09% ( 0.76%) 9.09%
Ratios/Supplemental Data
Net assets, end of period (000)................ $ 1 $ 1 $ 1 $ 1
Ratios to average net assets:
Expenses (net of fees waived and reimbursed)+ 0.65% 0.66%* 0.80% 0.81%*
Net investment income........................ 6.20% 5.91%* 6.20% 5.91%*
Management and shareholder
servicing fees waived..................... 0.35% 0.60%* 0.35% 0.60%*
Expenses reimbursed.......................... 0.17% 0.58%* 0.17% 0.58%*
Expense offsets.............................. 0.00% 0.01%* 0.00% 0.01%*
Portfolio turnover rate...................... 165.41% 220.55% 165.41% 220.55%
* Annualized
+ Includes expense offsets.
</TABLE>
22
<PAGE>
A Statement of Additional Information (SAI) dated March 29, 2000, 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.
In the Fund's Annual Report, you will find a discussion of the market conditions
and investment strategies that significantly affected the Fund's performance
during it's last fiscal year. 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. Copies of the information may be obtained after paying a
duplicating fee, by sending an electronic request to [email protected]. 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 29, 2000
[OBJECT OMITTED]
811-08339
<PAGE>
- --------------------------------------------------------------------------------
BACK BAY 600 Fifth Avenue, New York, NY 10020
FUNDS, INC. (212) 830-5220
================================================================================
STATEMENT OF ADDITIONAL INFORMATION
March 29, 2000
RELATING TO THE BACK BAY FUNDS, INC.
Class A Shares, Class B Shares, Class C Shares
PROSPECTUS DATED MARCH 29, 2000
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 29, 2000 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 audited 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. The material relating to the purchase, redemption
and pricing of shares has been incorporated by reference into the Prospectus.
This Statement of Additional Information is incorporated by reference into the
Fund's Prospectus in its entirety.
<TABLE>
<CAPTION>
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Fund History.........................................2 Capital Stock and Other Securities......................14
Description of the Fund and its Investments and Purchase, Redemption and Pricing Shares.................14
Risks............................................. 2 Taxation of the Fund....................................19
Management of the Fund...............................7 Underwriters............................................19
Control Persons and Principal Holders of Calculation of Performance Data.........................19
Securities........................................ 9 Financial Statements....................................20
Investment Advisory and Other Services...............9 Description of Ratings..................................21
Brokerage Allocation and Other Practices............13
</TABLE>
- --------------------------------------------------------------------------------
<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, Back Bay Advisors, L.P.
(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) 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.
(ii) 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.
(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 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) Foreign Currency Exchange Transactions: Since the Portfolio may invest in
securities that are denominated in foreign
2
<PAGE>
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.
(v) 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).
(vi) Options, Futures, Swap Contracts and Currency Transactions: The Portfolio
may engage in a variety of transactions involving the use of exchange traded
options and futures with respect to U.S. or Foreign Government Securities,
corporate fixed-income securities or municipal bonds or indices thereof for
purposes of hedging against changes in interest rates.
The Portfolio may buy, sell or write options on securities, securities indexes,
currencies or futures contracts. The Portfolio may buy and sell futures
contracts on securities, securities indexes or currencies. The Portfolio may
also enter into swap contracts. The Portfolio may engage in these transactions
either for the purpose of enhancing investment return only against a "covered"
position of the Portfolio or to hedge against changes in the value of other
assets that the Portfolio owns or intends to acquire. The Portfolio may also
conduct foreign currency exchange transactions on a spot (i.e., cash) basis at
the spot rate prevailing in the foreign currency exchange market. Options,
futures and swap contracts fall into the broad category of financial instruments
known as "derivatives" and involve special risks. Use of options, futures or
swaps for other than hedging purposes may be considered a speculative activity,
involving greater risks than are involved in hedging.
Options can generally be classified as either "call" or "put" options. There are
two parties to a typical options transaction: the "writer" and the "buyer." A
call option gives the buyer the right to buy a security or other 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.
3
<PAGE>
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.
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.
(vii) 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
4
<PAGE>
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.
(viii) Rule 144A Securities: The Portfolio may invest in securities issued as
part of privately negotiated transactions between an issuer and one or more
purchasers. Except with respect to certain commercial paper issued in reliance
on the exemption from regulations set forth in Section 4(2) of the Securities
Act of 1933 (the "Securities Act") and securities subject to Rule 144A of the
Securities Act which are discussed below, these securities are typically not
readily marketable and are therefore considered illiquid securities, unless the
Manager, in accordance with the guidelines adopted by the Board of Directors of
the Fund, has determined that a particular issue of Rule 144A securities is
liquid. On a quarterly basis, the Manager will provide to the Directors for
ratification a list of 144A securities held in the Portfolio. 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 have adopted guidelines
and delegate to the Manager the daily function of determining and monitoring
liquidity of restricted securities and 4(2) Paper. The Directors, however,
retain sufficient oversight and are ultimately responsible for these
determinations.
(ix) "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
5
<PAGE>
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.
(x) 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.
(xi) 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.
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 at the time of purchase, provided that there shall be no
limitation on the purchase obligations issued or guaranteed by the United
States Government, its agencies or instrumentalities.
6
<PAGE>
(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) 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.
Issuer Limitations
With respect to 75% of the value of its total assets at time of purchase, the
Portfolio may not invest more than 5% of its total assets in the securities of
any single issuer, provided that there shall be no limitation on the purchase of
obligations issued or guaranteed by the United States Government, it's agencies
or instrumentalities. In the event of a merger, acquisition or other corporate
action, the combined positions may exceed the 5% limitation.
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. Reed 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, 52 - Director of the Fund, Chief Fixed Income Strategist.
Executive Vice President of Back Bay Advisors, L.P. since 1994 and Mr. Reed was
Chief Investment Officer from 1994 to 1999. He 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, 69 - 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, 61 - 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.
7
<PAGE>
Steven W. Duff, 46 - 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, 49 - Vice President of the Fund, has been Vice President of the
Mutual Funds Division of Reich & Tang Asset Management L.P. since September
1993. Ms. Flewharty is also Vice President of 16 other funds in the Reich & Tang
Fund Complex.
Lesley M. Jones, 51 - Vice President of the Fund, has been Senior Vice President
of the Mutual Funds Division of Reich & Tang Asset Management L.P. since
September 1993. Ms. Jones is also a Vice President of 14 other funds in the
Reich & Tang Fund Complex.
Dana E. Messina, 43 - Vice President of the Fund, has been Executive Vice
President of the Mutual Funds Division of Reich & Tang Asset Management L.P.
since January 1995 and was Vice President from September 1993 to January 1995.
Ms. Messina is also Vice President of 15 other funds in the Reich & Tang Fund
Complex.
Bernadette N. Finn, 52 - Vice President and Secretary of the Fund, has been Vice
President of the Mutual Funds Division of Reich & Tang Asset Management L.P.
since 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, 43 - Treasurer of the Fund, has been Treasurer of Reich &
Tang Asset Management L.P. since September 1993. 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, 35 - Assistant Treasurer of the Fund, has been Vice President
of the Mutual Funds division of Reich & Tang Asset Management L.P. 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, 1999, 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 $59,500 (16 Funds)
Director
$2,000 0
Robert Straniere, 0 $59,500 (16 Funds)
Director
$2,000 0
Dr. Yung Wong, 0 $59,500 (16 Funds)
Director
</TABLE>
* The total compensation paid to such persons by the Fund and Fund Complex for
the fiscal year ending November 30, 1999. 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>
CODE OF ETHICS
The Fund, the Manager and the Distributor have each adopted a Code of Ethics
(collectively, the "Code of Ethics") under Rule 17j-1 of the 1940 Act. The Code
of Ethics restricts the personal investing by certain access persons of the Fund
in securities that may be purchased or held by the Fund to ensure that such
investments do not disadvantage the Fund. The Code of Ethics for the Fund, the
Manager and the Distributor are filed as exhibits to the Fund's registration
statement and instructions concerning how these documents can be obtained may be
found on the back cover of the Fund's Prospectus.
IV. CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
On February 29, 2000 there were 3,768,553 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 29, 2000, 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 February 29, 2000:
<TABLE>
<CAPTION>
Name and Address % of Class Nature of Ownership
TOTAL RETURN BOND FUND - CLASS A
<S> <C> <C>
Back Bay Advisors, L.P. 17.43% Record
399 Boylston Street
Boston, MA 02116-3305
Kollmorgan Corp. 14.21% Record
1601 Trapelo Road
Waltham, Ma 02451-733
Enele Co. FBO Omni 12.00% Record
601 SW 2nd Avenue
Portland, OR 97204-3154
Concordia College Corporation 50.26% Record
901 South 8th Street
Moorehead, MN 56562-0002
TOTAL RETURN BOND FUND - CLASS B
Back Bay Advisors, L.P. 99.03% Record
399 Boylston Street
Boston, MA 02116-3305
TOTAL RETURN BOND FUND - CLASS C
Back Bay Advisors, L.P. 99.03% Record
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 13 mutual fund
portfolios and as of February 29, 2000, was investment manager, adviser or
supervisor with respect to assets aggregating in excess of $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.
9
<PAGE>
Back Bay Advisors, Inc. (an indirect wholly-owned subsidiary of Nvest Companies)
is the sole general partner Back Bay Advisors, L.P. Nvest Corporation, a
Massachusetts Corporation (formerly known as New England Investment Companies,
Inc.), serves as the managing general partner of Nvest Companies.
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 and is the second largest life
insurance company in the United States in terms of total assets. MetLife
provides a wide range of insurance and investment products and services to
individuals and groups and is the leader among United States life insurance
companies in terms of total life insurance in force. MetLife and its affiliates
provide insurance or other financial services to approximately 36 million people
worldwide.
Nvest Companies is a holding company offering a broad array of investment styles
across a wide range of asset categories through more then seventeen
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., Back Bay Advisors, L.P.,
Capital Growth Management, L.P., Harris Associates, L.P., Jurika & Voyles, L.P.,
Kobrick Funds, LLC, Loomis, Sayles & Company, L.P., New England Funds, L.P.,
Nvest Advisor Services, L.P., Nvest Associates, Inc., Nvest Retirement Services,
Nvest Services Company, 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 of more than 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, 2000. 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 its investment
management fees totaling $94,245. For the Fund's fiscal year ended November 30,
1999 the Manager voluntarily waived all of its investment management fees
totaling $150,595.
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.
10
<PAGE>
EXPENSE LIMITATION
The Manager has agreed, pursuant to the Investment Management Contract, to
reimburse the Fund for its expenses (exclusive of interest, taxes, brokerage and
extraordinary expenses) which in any year exceed the limits on investment
company expenses prescribed by any state in which the Fund's shares are
qualified for sale. For the purpose of this obligation to reimburse expenses,
the Fund's annual expenses are estimated and accrued daily, and any appropriate
estimated payments are made to it on a monthly basis. Subject to the obligations
of the Manager to reimburse the Fund for its excess expenses as described above,
the Fund has, under the Investment Management Contract, confirmed its obligation
for payment of all its other expenses. 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. For the
fiscal year ended November 30,1999, the Portfolio paid a Service Fee for
expenditures pursuant to the Plan in amounts aggregating $3 with respect to the
Class B Shares and $3 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, $2,125 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.
11
<PAGE>
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 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, 2000.
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
State Street Kansas City, 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 INDEPENDENT ACCOUNTANTS
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.
PricewaterhouseCoopers LLP, 1177 Avenue of the Americas, New York, New York
10036, independent accountants, have been selected as auditors for the Fund.
12
<PAGE>
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 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 years ended November 30, 1998 and November 30, 1999, 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
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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 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
The material relating to the purchase, redemption and pricing of shares is
located in the Shareholder Information section of the Prospectus and is hereby
incorporated by reference.
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 Portfolio has elected, and intends to continue to qualify and elect to be
treated as a regulated investment company under Subchapter M of the Internal
Revenue Code of 1986 (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
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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
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.
The Portfolio intends to invest primarily in fixed and floating rate debt
instruments and accordingly anticipates that a substantial portion of its
distributions to shareholders will constitute ordinary income rather than
capital gains.
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
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
15
<PAGE>
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 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 Service
("IRS") all distributions to shareholders. Distributions by the Fund generally
are 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).
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
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<PAGE>
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, 1999 and the report therein of PricewaterhouseCoopers LLP are herein
incorporated by reference to the Fund's Annual Report. The Annual Report is
available upon request and without charge.
17
<PAGE>
DESCRIPTION OF RATINGS*
MOODY'S INVESTORS SERVICE, INC. ("MOODY'S")
Aaa: Bonds which are rated Aaa are judged to be the best quality. They carry the
smallest degree of investment risk and are generally referred to as "gilt edge."
Interest payments are protected by a large or by an exceptionally stable margin
and principal is secure. While the various protective elements are likely to
change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuations of protective elements
may be of greater amplitude or there may be other elements present which make
the long-term risks appear somewhat larger than in Aaa securities.
A: Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future.
Baa: Bonds which are rated Baa are considered as medium grade obligations, i.e.,
they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba: Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of a desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca: Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
UNRATED: Where no rating has been assigned or where a rating has been suspended
or withdrawn, it may be for reasons unrelated to the quality of the issue.
Should no rating be assigned, the reason may be one of the following:
An application for rating was not received or accepted.
1. The issue or issuer belongs to a group of securities that are not rated as a
matter of policy.
2. There is a lack of essential data pertaining to the issue or issuer.
3. The issue was privately placed, in which case the rating is not published in
Moody's publications.
Suspension or withdrawal may occur if new and material circumstances arise, the
effects of which preclude satisfactory analysis; if there is no longer available
reasonable up-to-date data to permit a judgment to be formed; if a bond is
called for redemption; or for other reasons.
NOTE: Those bonds in the Aa, A, Baa, Ba and B groups which Moody's believes
possess the strongest investment attributes are designated by the symbols Aa-1,
A-1, Baa-1 and B-1.
* As described by the rating agencies.
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STANDARD & POOR'S RATING SERVICES, A DIVISION OF THE MCGRAW-HILL COMPANIES
("S&P")
AAA: Bonds rated AAA have the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.
AA: Bonds rated AA have a very strong capacity to pay interest and repay
principal and differ from the higher rated issues only in small degree.
A: Bonds rated A have a strong capacity to pay interest and repay principal
although they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than bonds in the highest rated
categories.
BBB: Bonds rated BBB are regarded as having an adequate capacity to pay interest
and repay principal. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
bonds in this category than in higher rated categories.
BB, B, CCC, CC, C: Bonds rated BB, B, CCC, CC and C are regarded, on balance, as
predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of this obligation. BB indicates the
lowest degree of speculation and C the highest degree of speculation. While such
bonds will likely have some quality and protective characteristics, they are
outweighed by large uncertainties of major risk exposures to adverse conditions.
C1: The rating C1 is reserved for income bonds on which no interest is being
paid.
D: Bonds rated D are in default, and payment of interest and/or repayment of
principal is in arrears.
PLUS (+) OR MINUS (-): The ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
NR: Indicates that no rating has been requested, that there is insufficient
information on which to base a rating, or that S&P does not rate a particular
type of obligation as a matter of policy.
FITCH INVESTORS SERVICE, INC.
AAA: Securities in this category are considered to be investment grade and of
the highest credit quality. The obligor has an exceptionally strong ability to
pay interest and repay principal, which is unlikely to be affected by reasonably
foreseeable events.
AA: Securities in this category are considered to be investment grade and of
very high credit quality. The obligor's ability to pay interest and repay
principal is very strong, although not quite as strong as securities rated
"AAA." As securities rated in the "AAA" and "AA" categories are not
significantly vulnerable to foreseeable future developments, short-term debt of
these issuers is generally rated "F-1+."
A: Securities in this category are considered to be investment grade and of high
credit quality. The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse changes in
economic conditions and circumstances than securities with higher ratings.
BBB: Securities in this category are considered to be investment grade and of
satisfactory quality. The obligor's ability to pay interest and repay principal
is considered to be adequate. Adverse changes in 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.
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C: Securities are in imminent default in payment of interest or principal.
DDD, DD, and D: Securities are in default on interest and/or principal payments.
Such securities are extremely speculative and should be valued on the basis of
their ultimate recovery value in liquidation or reorganization of the obligor.
"DDD" represents the highest potential for recovery on these securities, and "D"
represents the lowest potential for recovery.
PLUS (+) OR MINUS (-): The ratings from AA to C (i.e. five categories below BBB)
may be modified by the addition of a plus or minus sign to indicate the relative
position of a credit within the rating category.
NR: Indicates that Fitch does not rate the specific issue.
CONDITIONAL: A conditional rating is premised on the successful completion of a
project or the occurrence of a specific event.
DUFF & PHELPS CREDIT RATING CO.
AAA: Highest credit quality. The risk factors are negligible, being only
slightly more than for risk-free U.S. Treasury debt.
AA: High credit quality. Protection factors are strong. Risk is modest but may
vary slightly from time to time because of economic conditions.
A: Protection factors are average but adequate. However, risk factors are more
variable and greater in periods of economic stress.
BBB: Below-average protection factors but within the definition of investment
grade securities but still considered sufficient for prudent investment.
Considerable variability in risk during economic cycles.
BB+, BB, BB-: Below investment grade but deemed likely to meet obligations when
due. Present or prospective financial protection factors fluctuate according to
industry conditions or company fortunes. Overall quality may move up or down
frequently within this category.
B+, B, B-: Below investment grade and possessing risk that obligations will not
be met when due. Financial protection factors will fluctuate widely according to
economic cycles, industry conditions and/or company fortunes. Potential exists
for frequent changes in the rating within this category or into a higher or
lower rating grade.
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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PART C - OTHER INFORMATION
Item 23. Exhibits
(a) Articles of Incorporation of the Registrant (Filed with Registration
Statement No. 333-33831 on August 18, 1997, and incorporated by reference
herein).
(b) By-Laws of the Registrant. (Filed with Registration Statement No. 333-33831
on August 18, 1997, and incorporated by reference herein).
(c) Not applicable
(d) Form of Investment Management Contract between the Registrant and Back Bay
Advisors, L.P. (Filed as Exhibit (5) to Pre-Effective Amendment No. 1 to
the Registration Statement on December 11, 1997 and incorporated herein by
reference).
(e) Form of Distribution Agreement (Filed as Exhibit (15.2) to Pre-Effective
Amendment No. 1 to the Registration Statement on December 11, 1997 and
incorporated herein by reference).
(f) Not applicable.
(g) Form of Custody Agreement between the Registrant and Investors Fiduciary
Trust Company. (Filed as Exhibit (8) to Pre-Effective Amendment No. 1 to
the Registration Statement on December 11, 1997 and incorporated herein by
reference).
(h) Form of Administrative Services Agreement between the Registrant and Reich
& Tang Asset Management L.P. (Filed as Exhibit (9.11) to Pre-Effective
Amendment No. 1 to the Registration Statement on December 11, 1997 and
incorporated herein by reference).
(i) Opinion of Messrs. Battle Fowler LLP and Consent as to the use of their
name under the headings "Federal Income Taxes" in the Prospectus and
"Counsel and Auditors" in the Statement of Additional Information. (Filed
as Exhibit (10) to Pre-Effective Amendment No. 1 to the Registration
Statement on December 11, 1997 and incorporated herein by reference).
(j) Consent of Independent Auditors.
(k) Audited Financial Statements for the fiscal year ended November 30, 1999
(filed with the Annual Report and incorporated herein by reference).
(l) Written assurance of New England Investment Companies, L.P. that its
purchase of shares of the Registrant was for investment purposes without
any present intention of redeeming or reselling. (Filed as Exhibit (13) to
Pre-Effective Amendment No. 1 to the Registration Statement on December 11,
1997 and incorporated herein by reference).
(m) Form of Distribution and Service Plan pursuant to Rule 12b-1 under the
Investment Company Act of 1940. (Filed as Exhibit (15.1) to Pre-Effective
Amendment No. 1 to the Registration Statement on December 11, 1997 and
incorporated herein by reference).
(m.1) Form of Distribution Agreement between the Registrant and Reich & Tang
Distributors L.P. (Filed as Exhibit (15.2) to Pre-Effective Amendment No. 1
to the Registration Statement on December 11, 1997 and incorporated herein
by reference).
(m.2) Form of Shareholder Servicing Agreements (with respect to Class B and C
only) between the Registrant and Reich & Tang Distributors L.P. (Filed as
Exhibit (15.3) to Pre-Effective Amendment No. 1 to the Registration
Statement on December 11, 1997 and incorporated herein by reference).
(n) Not applicable.
(o) 18f-3 Multi-Class Plan. (Filed as Exhibit (1) to Pre-Effective Amendment
No. 18 to the Registration Statement on December 11, 1997 and incorporated
herein by reference).
(p) Code of Ethics of Registrant.
(p.1) Code of Ethics of Back Bay Advisors L.P.
(p.2) Code of Ethics of Reich & Tang Distributors, L.P.
C-1
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Item 24. Persons Controlled by or Under Common Control with Registrant.
None.
Item 25. Indemnification.
The registrant incorporates by reference the response to Item 25 of Part II
of the Registrants Registration Statement on Form N-1A filed with the Commission
on December 11, 1997.
Item 26. Business and Other Connections of Investment Adviser.
The description of the Back Bay Advisors, L.P. ("BBALLP") under the caption
"Management of the Fund" in the Statement of Additional Information constituting
part B of the Registration Statement is incorporated herein by reference.
The Manager is a Delaware limited partnership and a registered investment
adviser under the 1940 Act, with its principal office at 399 Boylston Street,
Boston, Massachusetts 02116-3310. The Manager provides discretionary investment
management services to mutual funds and other institutional investors. Formed in
1986, the Manager now manages 14 mutual fund portfolios and as of June 30, 1997,
was investment manager, adviser or supervisor with respect to assets aggregating
in excess of $7 billion, primarily mutual fund and institutional fixed-income
portfolios. Mr. Peter W. Palfrey and Mr. Richard Raczkowski are primarily
responsible for the day-to-day investment management of the Portfolio. Mr.
Conrad Chanzit has served as Head of Research for the Fund since 1998. Mr.
Palfrey has served as Vice President of the Manager since 1993. Prior to 1993,
Mr. Palfrey was employed by Mutual of New York Capital Management as a Vice
President. Prior to 1998, Mr. Raczkowski was formerly management consultant with
Hagler Bailly, Inc.
Peter S. Voss, President, Chief Executive Officer and a Director of NVEST
Corporation (formerly New England Investment Companies, Inc.) since October
1992, Chairman of the Board of NVEST Corporation since December 1992, Group
Executive Vice President, Bank of America, responsible for the global asset
management private banking businesses, from April 1992 to October 1992,
Executive Vice President of Security Pacific Bank, and Chief Executive Officer
of Security Pacific Hoare Govett Companies, a wholly owned subsidiary of
Security Pacific Corporation, from April 1988 to April 1992, Director of The New
England since March 1993, Chairman of the Board of Directors of NVEST
Corporation's subsidiaries other than Loomis, Sayles & Company, Incorporated
("Loomis") and Back Bay Advisors, Inc. ("Back Bay"), where he serves as a
Director, and Chairman of the Board of Trustees of all of the mutual funds in
the TNE Fund Group and the Zenith Funds. J. Michael Gaffney, Director, President
and Chief Executive Officer of Back Bay since 1998. G. Neal Ryland, Director of
Back Bay; Executive Vice President, Treasurer and Chief Financial Officer NVEST
Corporation since July 1993, Executive Vice President and Chief Financial
Officer of The Boston Company, a diversified financial services company, from
March 1989 until July 1993; from September 1985 to December 1988, Mr. Ryland was
employed by Kenner Parker Toys, Inc. as Senior Vice President and Chief
Financial Officer. Jeffrey Plunckett, Executive Vice President, General Counsel,
Clerk and Secretary of NVEST Corporation since March 2000, Senior Vice President
and Associate General Counsel of The New England from 1984 until December 1992,
and Secretary of Westpeak and Draycott and the Treasurer of NVEST Corporation.
During the past two fiscal years, Charles T. Wallis has served as President and
Chief Executive Officer of the Manager and a Director for NEF Corporation.
Charles G. Glueck has served as Senior Vice President of the Manager. Scott A.
Milliment has served as Executive Vice President of the Manager and also as
Senior Vice President and manager of Carroll, McEntee & McGinley which is
located at Chicago Board of Trade, 141 West Jackson Boulevard, Chicago, IL
60634. Edgar M. Reed has served as Fixed Income Strategist, Executive Vice
President and Chief Investment Officer Income Strategist of the Manager and also
as head of the Fixed Income Management Group at Aetna Capital Management, 151
Farmington Avenue, Hartford, CT 06156. J. Scott Nicholson has served as Senior
Vice President of the Manager. Nathan R. Wentworth, Peter Palfrey, Harold B.
Bjornson, Richard Raczkowski and Eric Gutterson have all served as Vice
President of the Manager. Paul Zamagni has served as Vice President and
Treasurer of the Manager. Peter Hanson has served as Secretary and Clerk of the
Manager.
C-2
<PAGE>
Item 27. Principal Underwriters.
(a) Reich & Tang Distributors, Inc., the Registrant's Distributor is also
distributor for California Daily Tax Free Income Fund, Inc., Connecticut Daily
Tax Free Income Fund, Inc., Cortland Trust, Inc., Daily Tax Free Income Fund,
Inc., Delafield Fund, Inc., Florida Daily Municipal Income Fund, Georgia Daily
Municipal Income Fund, Inc., Institutional Daily Income Fund, Michigan Daily Tax
Free Income Fund, Inc., New Jersey Daily Municipal Income Fund, Inc., New York
Daily Tax Free Income Fund, Inc., North Carolina Daily Municipal Income, Inc.,
Pax World Money Market Fund, Inc., Pennsylvania Daily Municipal Income Fund,
Reich & Tang Equity Fund, Inc., Short Term Income Fund, Inc., Tax Exempt
Proceeds Fund, Inc. and Virginia Daily Municipal Income Fund, Inc.
(b) The following are the directors and officers of Reich & Tang Asset
Distributors, Inc. The principal business address of Messrs. Voss, Ryland, and
Wadsworth is 399 Boylston Street, Boston, Massachusetts 02116. For all other
persons the principal address is 600 Fifth Avenue, New York, New York 10020.
<TABLE>
<CAPTION>
<S> <C> <C>
Positions and Offices Positions and Offices
Name of the Distributor With Registrant
Peter S. Voss ...... Director None
G. Neal Ryland ..... Director None
Richard E. Smith III President & Director None
Steven W. Duff ..... Director President and Director
Bernadette N. Finn . Vice President Secretary
Lorraine C. Hysler . Executive Vice President and Secretary None
Richard De Sanctis . Executive Vice President and Treasurer Treasurer
Richard I. Weiner .. Vice President None
</TABLE>
(c) Not applicable
Item 28. Location of Accounts and Records.
Accounts, books and other documents required to be maintained by Section
31(a) of the Investment Company Act of 1940 and the Rules promulgated thereunder
are maintained in the physical possession of Registrant at Back Bay Advisors,
L.P., 399 Boylston Street, Boston, Massachusetts 02116-3310, the Registrant's
Manager; Reich & Tang Services, Inc., 600 Fifth Avenue, New York, New York, the
Registrant's transfer agent and dividend agent; and at State Street Kansas City,
801 Pennsylvania, Kansas City, Missouri 64105, the Registrant's custodian.
Item 29. Management Services.
Not Applicable.
Item 30. Undertakings.
Not applicable.
C-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of this Post-Effective Amendment to its
Registration Statement under Rule 485(b) of the Securities Act of 1933 and has
duly caused this Post-Effective Amendment to its Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of New York, and State of New York, on the 29th day of March, 2000
BACK BAY FUNDS, INC.
By: /s/ Bernadette N. Finn
Bernadette N. Finn, Secretary
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment No. 1 to the Registration Statement has been signed
below by the following persons in the capacities and on the date indicated
below.
SIGNATURE TITLE DATE
(1) Principal Executive Officer: Chairman and President March 29, 2000
Edgar M. Reed
By: /s/ Bernadette N. Finn
Bernadette N. Finn
Attorney-in-Fact*
(2) Principal Financial and Treasurer March 29, 2000
Accounting Officer
By: /s/ Richard De Sanctis
Richard De Sanctis
(3) Majority of Directors
Edgar M. Reed Director March 29, 2000
W. Giles Mellon Director
Yung Wong Director
Robert Straniere Director
By: /s/ Bernadette N. Finn
Bernadette N. Finn
Attorney-in-Fact*
- --------
* Powers of Attorney, filed as Exhibit (16) with Pre-Effective Amendment No.
1 to the Registration Statement on December 11, 1997 and incorporated
herein by reference.
EXHIBIT J
McGLADREY & PULLEN, L.L.P.
Certified Public Accountants & Consultants
CONSENT OF INDEPENDENT AUDITORS
CONSENT OF INDEPENDENT AUDITORS
We consent to the use of our report dated December 28, 1998, on the
financial statements referred to therein, in Post-Effective Amendment No. 3 to
the Registration Statement on Form N-1A, File No. 333-33831, of Back Bay Funds,
Inc. as filed with the Securities and Exchange Commission.
McGladrey & Pullen, LLP
New York, New York
March 23. 2000
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in this Registration
Statement on Form N-1A of our report dated January 13, 2000, relating to the
financial statements and financial highlights which appear in the November 30,
1999 Annual Report to Shareholders of Back Bay Funds, Inc. Total Return Bond
Fund which is also incorporated by reference into the Registration Statement. We
also consent to the references to us under the headings "Financial Highlights",
"Financial Statements", and "Counsel and Independent Accountants" in such
Registration Statement.
PricewaterhouseCoopers LLP
New York, New York
March 23, 2000
CODE OF ETHICS FOR
BACK BAY FUNDS, INC.
Back Bay Funds, Inc. (the "Fund") has determined to adopt this Code of
Ethics (the "Code") as of December 1, 1997, to specify and prohibit certain
types of personal securities transactions deemed to create a conflict of
interest and to establish reporting requirements and preventive procedures
pursuant to the provisions of Rule 17j-1(b)(1) under the Investment Company Act
of 1940 (the "1940 Act").
I. DEFINITIONS
A. An "Access Person" means (i) any trustee, director, officer or
Advisory Person (as defined below) of the Fund or any investment
adviser thereof, or (ii) any director or officer of a principal
underwriter of the Fund who, in the ordinary course of his or her
business, makes, participates in or obtains information regarding the
purchase or sale of securities for the Fund for which the principal
underwriter so acts or whose functions or duties as part of the
ordinary course of his or her business relate to the making of any
recommendation to the Fund regarding the purchase or sale of
securities or (iii) notwithstanding the provisions of clause (i)
above, where the investment adviser is primarily engaged in a business
or businesses other than advising registered investment companies or
other advisory clients, any trustee, director, officer or Advisory
Person of the investment adviser who, with respect to the Fund, makes
any recommendation or participates in the determination of which
recommendation shall be made, or whose principal function or duties
relate to the determination of which recommendation shall be made to
the Fund or who, in connection with his or her duties, obtains any
information concerning securities recommendations being made by such
investment adviser to the Fund.
B. An "Advisory Person" means any employee of the Fund or any investment
adviser thereof (or of any company in a control relationship to the
Fund or such investment adviser), who, in connection with his or her
regular functions or duties, makes, participates in or obtains
information regarding the purchase or sale of securities by the Fund
or whose functions relate to any recommendations with respect to such
purchases or sales and any natural person in a control relationship
with the Fund or adviser who obtains information regarding the
purchase or sale of securities.
C. An "Portfolio Manager" means any person or persons with the direct
responsibility and authority to make investment decisions affecting
the Fund.
<PAGE>
D. "Access Persons," "Advisory Persons" and "Portfolio Managers" shall
not include any individual who is required to and does file reports,
at least quarterly, with any investment adviser, sub-adviser,
administrator or the principal underwriter substantially in conformity
with Rule 17j-1 of the 1940 Act or Rule 204-2 of the Investment
Advisers Act of 1940, provided however, that the compliance officer of
any investment adviser, sub-adviser, administrator, or the principal
underwriter shall (i) file an annual certification with the Fund
stating that such entity has adopted or approved the continuation of
its Code of Ethics, substantially in the form that was provided to the
Fund's Board of Directors at the time when the Fund's Code of Ethics
was adopted; and (ii) notify the Fund's compliance officer of any
violation of such entity's Code of Ethics upon actual knowledge by
such compliance officer that a violation had occurred. The Fund's
compliance officer shall report any such violations to the Fund's
Board of Directors in accordance with the provisions of the Fund's
Code of Ethics as if the report of the violation had been made under
the Fund's Code of Ethics.
E. "Beneficial Ownership" shall be interpreted subject to the provisions
of Rule 16a-l(a) (exclusive of Section (a)(1) of such Rule) of the
Securities Exchange Act of 1934.
F. "Control" shall have the same meaning as set forth in Section 2(a)9 of
the 1940 Act.
G. "Disinterested Director" means a Director who is not an "interested
person" within the meaning of Section 2(a)(19) of the 1940 Act. An
"interested person" includes any person who is a trustee, director,
officer, employee or owner of 5% or more of the outstanding stock of
the Adviser. Affiliates of brokers or dealers are also "interested
persons", except as provided in Rule 2(a)(19)(1) under the 1940 Act.
H. The "Review Officer" is an employee of the investment adviser as
designated by the Fund's Board of Directors to monitor the overall
compliance with this Code. In the absence of any such designation the
Review Officer shall be the Treasurer or any Assistant Treasurer of
the Fund, provided that such person is an employee of the investment
adviser.
<PAGE>
I. The "Preclearance Officer" is an employee of the investment adviser as
designated by the Fund's Board of Directors to provide preclearance of
any personal security transaction as required by this Code of Ethics.
In the absence of any such designation the Preclearance Officer shall
be the Treasurer or any Assistant Treasurer of the Fund, provided that
such person is an employee of the investment adviser.
J. "Purchase or sale of a security" includes, among other things, the
writing of an option to purchase or sell a security or the purchase or
sale of a future or index on a security or option thereon.
K. "Security" shall have the meaning as set forth in Section 2(a)(36) of
the 1940 Act (in effect, all securities), except that it shall not
include securities issued by the U.S. Government (or any other
"government security" as that term is defined in the 1940 Act),
bankers' acceptances, bank certificates of deposit, commercial paper
and such other money market instruments as may be designated by the
Directors of the Fund and shares of registered open-end investment
companies.
L. A security is "being considered for purchase or sale" when a
recommendation to purchase or sell the security has been made and
communicated and, with respect to the person making the
recommendation, when such person seriously considers making such a
recommendation.
II. STATEMENT OF GENERAL PRINCIPLES
The following general fiduciary principles shall govern the personal
investment activities of all Access Persons.
Each Access Person shall adhere to the highest ethical standards and shall:
A. at all times, place the interests of the Fund before his personal
interests;
<PAGE>
B. conduct all personal securities transactions in a manner consistent
with this Code so as to avoid any actual or potential conflicts of
interest or an abuse of position of trust and responsibility; and
C. not take any inappropriate advantage of his position with or on behalf
of the Fund.
III. RESTRICTIONS ON PERSONAL INVESTING ACTIVITIES.
A. Blackout Periods
1. No Access Person (other than a Disinterested Director) shall
purchase or sell, directly or indirectly, any security in which
he has, or by reason of such transaction acquires, any direct or
indirect beneficial ownership on a day during which he knows or
should have known the Fund has a pending "buy" and "sell" order
in that same security until that order is executed or withdrawn.
2. No Advisory Person or Portfolio Manager shall purchase or sell,
directly or indirectly, any security in which he has, or by
reason of such transaction acquires, any direct or indirect
beneficial ownership within at least seven calendar days before
and after the Fund trades (or has traded) in that security.
B. Initial Public Offerings
No Advisory Person shall acquire any security in an initial
public offering for his or her personal account.
C. Private Placements
1. With regard to private placements, each Advisory Person shall:
a. obtain express prior written approval from the Review
Officer (who, in making such determination, shall consider
among other factors, whether the investment opportunity
should be reserved for the Fund, and whether such
opportunity is being offered to such Advisory Person by
virtue of his position with the Fund) for any acquisition of
securities in a private placement; and
<PAGE>
b. after authorization to acquire securities in a private
placement has been obtained, disclose such personal
investment with respect to any subsequent consideration by
the Fund (or any other investment company for which he acts
in a capacity as an Advisory Person) for investment in that
issuer.
2. Any express prior written approval received from the Review
Officer shall be valid only on the day on which it was issued. If
the Fund decides to purchase securities of an issuer, the shares
of which have been previously obtained for personal investment by
an Advisory Person, that decision shall be subject to an
independent review by Advisory Persons with no personal interest
in the issuer.
D. Short-Term Trading Profits
No Advisory Person shall profit from the purchase and sale, or sale
and purchase, of the same (or equivalent) securities of which such
Advisory Person has beneficial ownership within 60 calendar days. Any
profit so realized shall, unless the Fund's Board of Directors
approves otherwise, be disgorged as directed by the Fund's Board of
Directors.
E. Gifts
No Advisory Person shall receive any gift or other things of more than
de minimis value from any person or entity that does business with or
on behalf of the Fund that poses a potential conflict of interest.
F. Service as a Director
1. No Advisory Person shall serve on a board of directors of a
publicly traded company without prior authorization from the
Board of Directors
<PAGE>
of the Fund, based upon a determination that such board service
would be consistent with the interests of the Fund and its
investors.
2. If board service of an Advisory Person is authorized by the Board
of Directors of the Fund such Advisory Person shall be isolated
from the investment making decisions of the Fund with respect to
the company of which he is a director.
G. Exempted Transactions
The prohibition of Section III shall not apply to:
1. purchases or sales effected in any account over which the Access
Person has no direct or indirect influence or control;
2. purchases or sales that are non-volitional on the part of the
Access Person or the Fund, including mergers, recapitalizations
or similar transactions;
3. purchases which are part of an automatic dividend reinvestment
plan;
4. purchases effected upon the exercise of rights issued by an
issuer pro rata to all holders of a class of its securities, to
the extent such rights were acquired from such issuer, and sales
of such rights so acquired; and
5. purchases and sales that receive prior approval in writing by the
Preclearance Officer as (a) only remotely potentially harmful to
the Fund because they would be very unlikely to affect a highly
institutional market, (b) clearly not economically related to the
securities to be purchased or sold or held by the Fund or client
or (c) not representing any danger of the abuses prescribed by
Rule 17j-l, but only if in each case the prospective purchaser
has identified to the Review Officer all factors of which he or
she is aware which are potentially relevant to a conflict of
interest analysis, including the existence of any substantial
economic relationship between his or her transaction and
securities held or to be held by the Fund.
<PAGE>
IV. COMPLIANCE PROCEDURES
A. Preclearance
1. An Access Person (other than a Disinterested Director) may not,
directly or indirectly, acquire or dispose of beneficial
ownership of a security except as provided below unless:
a. such purchase or sale has been approved by the Preclearance
Officer;
b. the approved transaction is completed on the same day
approval is received; and
c. the Preclearance Officer has not rescinded such approval
prior to execution of the transaction.
2. Each Access Person may effect total purchases and sales of up to
$25,000 of securities listed on a national securities exchange
within any six month period without preclearance from the Board
of Directors or the Preclearance Officer.
a. The six month period is a "rolling" period, i.e., the limit
is applicable between any two dates which are six months
apart.
b. Transactions in options and futures, other than options or
futures on commodities, will be included for purposes of
calculating whether the $25,000 limit has been exceeded.
Such transactions will be measured by the value of the
securities underlying the options and futures.
c. Although preclearance is not required for personal
transactions in securities which fall into this "de minimis"
exception, these trades must still be reported on a
quarterly basis pursuant to Section IV.B, if such
transactions are reportable.
<PAGE>
B. Reporting
1. Reports
a. Each Access Person (other than Disinterested Directors)
shall file with the Review Officer confidential reports, at
least quarterly, containing the information required in
Section IV.B.2 of this Code with respect to all transactions
during the preceding quarter in any securities in which such
person has, or by reason of such transaction acquires, any
direct or indirect beneficial ownership, provided that no
Access Person shall be required to report transactions
effected for any account over which such Access Person has
no direct or indirect influence or control (except that such
an Access Person must file a written certification stating
that he or she has no direct or indirect influence or
control over the account in question).
b. All such Access Persons shall file reports, even when no
transactions have been effected, representing that no
transactions subject to reporting requirements were
effected.
2. Filings: Every report shall be made no later than 10 days after
the end of the calendar quarter in which the transaction to which
the report relates was effected, and shall contain the following
information:
a. the date of the transaction, the title and the number of
shares and the principal amount of each security involved;
b. the nature of the transaction (i.e., purchase, sale or any
other type of acquisition or disposition);
c. the price at which the transaction was effected; and
d. the name of the broker, dealer or bank with or through whom
the transaction was effected.
<PAGE>
3. Admissions: Any report may contain a statement that it shall not
be construed as an admission by the person making the report that
he or she has any direct or indirect beneficial ownership in the
security to which the report relates.
4. Confirmations: All Access Persons (other than Disinterested
Directors) shall direct their brokers to supply the Fund's Review
Officer on a timely basis, duplicate copies of confirmations of
all personal securities transactions.
C. Review
In reviewing transactions, the Review Officer shall take into account
the exemptions allowed under Section III.G. Before making a
determination that a violation has been committed by an Access Person,
the Review Officer shall give such person an opportunity to supply
additional information regarding the transaction in question.
D. Disclosure of Personal Holdings
All Advisory Persons shall disclose all personal securities holdings
upon commencement of employment and thereafter on an annual basis.
E. Certification of Compliance
Each Access Person is required to certify annually that he or she has
read and understood the Fund's Code and recognizes that he or she is
subject to such Code. Further, each Access Person is required to
certify annually that he or she has complied with all the requirements
of the Code and that he or she has disclosed or reported all personal
securities transactions pursuant to the requirements of the Code.
V. REQUIREMENTS FOR DISINTERESTED DIRECTORS
A. Every Disinterested Director shall file with the Fund's Administrator
a quarterly report indicating that he or she had no reportable
transactions or a report
<PAGE>
containing the information required in Section IV.B.2 of this Code
with respect to transactions (other than exempted transactions listed
under Section III.G.) in any securities in which such person has, or
by reason of such transactions acquires, any direct or indirect
beneficial ownership, if such Director, at the time of that
transaction, knew or should have known, in the ordinary course of
pursuing his or her official duties as Director, that during the
15-day period immediately preceding or after the transaction by the
Director:
1. such security was being purchased or sold by the Fund; or
2. such security was being considered for purchase or sale by the
Fund.
B. In the event the Disinterested Directors knew or should have known, in
the ordinary course of pursuing his or here official duties as
Director, all Disinterested Directors shall file reports even when no
transactions have been effected, representing that no transactions
subject to reporting requirement were effected.
C. Notwithstanding the preceding section, any Disinterested Director may,
at his or her option, report the information described in section
IV.B.2 with respect to any one or more transactions and may include a
statement that the report shall not be construed as an admission that
the person knew or should have known of portfolio transactions by the
Fund in such securities.
VI. REVIEW BY THE BOARD OF DIRECTORS
At least annually, the Review Officer shall report to the Board of
Directors regarding:
A. All existing procedures concerning Access Persons' personal trading
activities and any procedural changes made during the past year;
B. Any recommended changes to the Funds' Code or procedures; and
C. A summary of any violations which occurred during the past year with
respect to which significant remedial action was taken.
<PAGE>
VII. SANCTIONS
A. Sanctions for Violations by Access Persons
If the Review Officer determines that a violation of this Code has
occurred, he or she shall so advise the Board of Directors and the
Board may impose such sanctions as it deems appropriate, including,
inter alia, disgorgement of profits, censure, suspension or
termination of the employment of the violator. All material violations
of the Code and any sanctions imposed as a result thereto shall be
reported periodically to the Board of Directors.
B. Sanctions for Violations by Disinterested Directors
If the Fund's Administrator determines that any Disinterested Director
has violated this Code, he or she shall so advise the President of the
Fund and also the Directors (other than the person whose transaction
is at issue) and shall provide such persons with a report, including
the record of pertinent actual or contemplated portfolio transactions
of the Fund and any additional information supplied by the person
whose transaction is at issue. The Board of Directors, at its option,
shall impose such sanctions as it deems appropriate.
VIII. MISCELLANEOUS
A. Access Persons
The Review Officer of the Fund will identify all Access Persons who
are under a duty to make reports to the Fund and will inform such
persons of such duty. Any failure by the Review Officer to notify any
person of his or her duties under this Code shall not relieve such
person of his or her obligations hereunder.
B. Records
The Fund's Administrator shall maintain records in the manner and to
the extent set forth below, which records may be maintained on
microfilm under the conditions described in Rule 31a-2(f) under the
1940 Act, and shall be available
<PAGE>
for examination by representatives of the Securities and Exchange
Commission ("SEC"):
1. a copy of this Code and any other code which is, or at any time
within the past five years has been, in effect shall be preserved
in an easily accessible place;
2. a record of any violation of this Code and of any action taken as
a result of such violation shall be preserved in an easily
accessible place for a period of not less than five years
following the end of the fiscal year in which the violation
occurs;
3. a copy of each report made pursuant to this Code shall be
preserved for a period of not less than five years from the end
of the fiscal year in which it is made, the first two years in an
easily accessible place; and
4. a list of all persons who are required, or within the past five
years have been required, to make reports pursuant to this Code
shall be maintained in an easily accessible place.
C. Confidentiality
All reports of securities transactions and any other information filed
pursuant to this Code shall be treated as confidential, except to the
extent required by law.
D. Interpretation of Provisions
The Board of Directors of the Fund may from time to time adopt such
interpretations of this Code as it deems appropriate.
<PAGE>
BACK BAY FUNDS, INC.
TRANSACTIONS REPORT
To: _________________________, Review Officer
From: _______________________________________________
(Your Name)
This Transaction Report (the "Report") is submitted pursuant to Section
IV of the Code of Ethics of Back Bay Funds, Inc. (the "Fund") and supplies
(below) information with respect to transactions in any security in which I may
be deemed to have, or by reason of such transaction acquire, any direct or
indirect beneficial ownership interest (whether or not such security is a
security held or to be acquired by a Fund) for the calendar quarter ended
____________________________.
Unless the context otherwise requires, all terms used in the Report
shall have the same meaning as set forth in the Code of Ethics.
For purposes of the Report, beneficial ownership shall be interpreted
subject to the provisions of the Code of Ethics and Rule 16a-l(a) (exclusive of
Section (a)(1) of such Rule) of the Securities Exchange Act of 1934.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Nature of
Transaction
Name of the
(Whether Principal Broker, Dealer
Purchase, Sale Amount of Price At Which Or Bank With
or Other Type Securities the Whom The Nature Of
Title of Date of of Disposition Acquired or Transaction Transaction Ownership of
Securities Transaction Or Acquisition) Disposed Of Was Effected Was Effected Securities*
---------- ----------- -------------- ----------- ------------ ------------ -----------
</TABLE>
* If appropriate, you may disclaim beneficial ownership of any security
listed in this report.
<PAGE>
Transaction Report - Page 2
I HEREBY CERTIFY THAT I (1) HAVE READ AND UNDERSTAND THE CODE OF ETHICS
OF THE FUND, DATED _________________, (2) RECOGNIZE THAT I AM SUBJECT TO THE
CODE OF ETHICS, (3) HAVE COMPLIED WITH THE REQUIREMENTS OF THE CODE OF ETHICS
OVER THE PAST YEAR, (4) HAVE DISCLOSED ALL PERSONAL SECURITIES TRANSACTIONS,
OVER THE PAST YEAR, REQUIRED TO BE DISCLOSED BY THE CODE OF ETHICS, (5) HAVE
SOUGHT AND OBTAINED PRECLEARANCE WHENEVER REQUIRED BY THE CODE OF ETHICS AND (6)
CERTIFY THAT TO THE BEST OF MY KNOWLEDGE THE INFORMATION FURNISHED IN THIS
REPORT IS TRUE AND CORRECT.
Name (Print) _____________________________________________
Signature _____________________________________________
Date _____________________________________________
<PAGE>
BACK BAY FUNDS, INC.
PERSONAL TRADING REQUEST AND AUTHORIZATION
Personal Trading Request (to be completed by access person prior to any personal
trade):
Name:
Date For Which You Seek Approval:
Name of the issuer and dollar amount or number of securities of the issuer to be
purchased or sold:
Nature of the transaction (i.e., purchase, sale): (1)
Are you or is a member of your immediate family an officer or director of the
issuer of the securities or any affiliate (2) of the issuer? Yes __ No __
If yes, please describe:
Describe the nature of any direct or indirect professional or business
relationship that you may have with the issuer of the securities. (3)
- ------------------------
(1) If other than market order, please describe any proposed limits.
(2) For purposes of this question, "affiliate" includes (i) any entity that
directly or indirectly owns, controls or holds with power to vote 5% or
more of the outstanding voting securities of the issuer and (ii) any entity
under common control with the issuer.
(3) A "professional relationship" includes, for example, the provision of legal
counsel or accounting services. A, "business relationship" includes, for
example, the provision of consulting services or insurance coverage.
<PAGE>
Do you have any material nonpublic information concerning the issuer?
Yes ___ No___
Do you beneficially own more than 1/2 of 1% of the outstanding equity securities
of the issuer?
Yes___ No___
If yes, please report the name of the issuer and the total number of shares
"beneficially owned"
Are you aware of any facts regarding the proposed transaction, including the
existence of any substantial economic relationship, between the proposed
transaction and any securities held or to be acquired by a Fund that may be
relevant to a determination as to the existence of a potential conflict of
interest? (4)
Yes___ No___
If yes, please describe:
To the best of your knowledge and belief, the answers that you have
provided above are true and correct.
----------------------
Signature
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(4) Facts that would be responsive to this question include, for example, the
receipt of "special favors" from a stock promoter, such as participation in
a private placement or initial public offering, as an inducement to
purchase other securities of the Fund. Another example would be investment
in securities of a limited partnership that in turn owned warrants of a
company formed for the purpose of effecting a leveraged buy-out in
circumstances where the Fund might invest in securities related to the
leveraged buy-out. The foregoing are only examples of pertinent facts and
in no way limit the types of facts that may be responsive to this question.
<PAGE>
Approval or Disapproval of Personal Trading Request (to be completed by
Preclearance Officer):
[ ] I confirm that the above-described proposed transaction appears to be
consistent with the policies described in the Code and that the
conditions necessary (5) for approval of the proposed transaction have
been satisfied.
[ ] I do not believe the above-described proposed transaction is
consistent with the policies described in the Code or that the
conditions necessary for approval of the proposed transaction have
been satisfied.
Dated: Signed:
Title:
- --------------
(5) In the case of a personal securities transaction by an Access Person of a
Portfolio (other than Disinterested Directors of the Fund), the Code of
Ethics of the Portfolio requires that the Portfolio's Preclearance Officer
determine that the proposed personal securities transaction (i) is not
potentially harmful to the Portfolio, (ii) would be unlikely to affect the
market in which the Portfolio's portfolio securities are traded, or (iii)
is not related economically to securities to be purchased, sold, or held by
the Portfolio. In addition, the Code requires that the Portfolio's
Preclearance Officer determine that the decision to purchase or sell the
security at issue is not the result of information obtained in the course
of the access person's relationship with the Portfolio.
BACK BAY ADVISORS, INC.
Code of Business Policies and Ethics
February 1999
A. Client Relationships and Records
The relationships with all clients for which Back Bay Advisors, Inc.
("BBA") acts as investment adviser, regardless of how or through whom the client
relationship originated or developed, are the property of BBA and not of any
officer or employee of BBA.
All records, data and other information in BBA's files pertaining to
clients or prospective clients, publications, forms, and procedures, is
confidential property of BBA.
You agree that, both before and for three years after the termination
of your employment, you, will not attempt in any way, directly or indirectly,
to solicit any BBA client or otherwise disturb BBA's client relationships.
You. agree that, upon termination of your employment, you will not
remove or copy any of BBA's records, correspondence, files, forms, documents,
publications, or procedures, and that you will not, before or after termination
of employment, make any of such records or other information or data available
to any other person or firm.
B. Confidentiality of Client Information
BBA's relationship with its clients is confidential. You may not
disclose the name or any detail of the circumstances of a client to anyone not
a director, officer or employee of BBA without the specific permission of the
client.
C. Proprietary Information
You acknowledge that all inventions, discoveries, methods, processes,
works and concepts, including but not limited to computer programs or systems
relating to investmenT management analyses or strategies, created or developed
by you during your employment that relate to any present or proposed activity
of BBA, shall be the sole property of BBA, and you assign to BBA all right,
title and interest you may have to such property. You agree that you will not,
during your employment or thereafter, disclose to any other person or firm any
confidential information of BBA or any of its customers, including without
limitation customer lists, strategic plans, or discoveries, inventions,
improvements, methods or other trade secrets, whether developed by you or
others.
<PAGE>
D. Allocating Investment Opportunities among Clients
Investment opportunities must be allocated fairly among BBA clients.
While BBA members may give advice and take action with respect to any clients
that may differ from advice given or the timing or nature of action taken with
respect to other clients, it is BBA's policy to allocate, to the extent
practicable, investment opportunities to each client over a period of time on
a fair and equitable basis relative to other clients.
BBA's policy on this matter, as represented to clients, is as
follows:
Where BBA determines that an investment purchase or sale
opportunity is appropriate and desirable for more than one
advisory account, purchase and sale orders may be executed
separately or may be combined and, to the extent practicable,
allocated by BBA to the participating account. Where advisory
accounts have competing interests in a limited investment
opportunity, BBA generally allocates purchase and sale
opportunities on a pro rata basis in proportion to the amounts
desired to be purchased or sold at the same time for each account
However, in those isolated instances where such pro rata
allocation is not practicable, BBA may allocate an investment
purchase opportunity based on the relative length of time the
competing accounts have had funds available for investment, and
the relative amounts of available funds, and may allocate an
investment sale opportunity based on relative cash requirements
and length of time the competing accounts have had investments
available for sale. It is BBA's policy to allocate, to the extent
practicable, investment opportunities to each client over a
period of time on a fair and equitable basis relative to its
other clients.
E. Allocation of Trades among Brokers
It is BBA's policy to seek the best price and execution on all trades
effected for clients. Factors to be considered in selecting brokers include
commission cost or spread, trading experience and demonstrated ability in
filling orders, creditworthiness and financial strength, and integrity. Where
there is no impact on obtaining the best price and execution, trades may be
directed to brokers who have provided BBA with valuable research services or
trading opportunities.
F. Gifts from Brokers or Clients
Neither you nor a member of your family may accept any gift or other
accommodation from a broker, securities salesperson or client that might
create or appear to create a conflict of interest that could interfere with
the impartial discharge of your responsibilities.
<PAGE>
G. Legal Compliance and Employee Supervision
You may not knowingly participate in, or assist, any acts in violation
of any applicable law, rule, or regulation of any government agency,
regulatory organization governing BBA's business activities.
If you have supervisory responsibility you are required to exercise
reasonable supervision over those subordinate employees subject to your
control to prevent any violation by such persons of applicable statutes,
regulations, or provisions of this Code.
H. Inside Information Procedures
If you possess "inside information", or material nonpublic
information about the issuer of Securities ("MNI") you may neither buy nor
sell securities or related options (whether for an account in which you have a
personal interest or for the account of an investment advisory client) nor
communicate the MNI to others, except as authorized under the following
procedures.
1. General Procedures Regarding the Identification and Use of MNI
Whenever you receive information that you know or suspect to be
MNI, you may not:
a) Purchase or sell, of direct or recommend a purchase or sale
of, any security that could be affected by the information
(unless the purchase or sale is from or to the person who has
provided you with the information); or
b) Relate the information to anybody other than BBA's legal
counsel.
You must immediately report the information to BBA's legal
counsel, who will determine what actions, if any should be
taKen with respect to the information. In addition, you must be
sure the information is kept confidential until instructed
otherwise by legal counsel. In the absence of BBA's legal
counsel, information may be reported to, and determinations made
by, the Compliance Officer.
2. Documents
Whenever you receive a document that you suspect may contain MNI
(such as a private placement memorandum marked "Confidential"),
you must, prior to reviewing such document, file it with the
Compliance Officer, who will make a record of the filing and
retain the document in a secure place.
<PAGE>
If you or another member of the staff wish to review the
document, the Compliance Officer will release the document,
making a record of the time and the person to whom the document
was released, but only if the following conditions are satisfied.
The Compliance Officer will only release documents (1) to persons
who need to review the document to perform their duties on
behalf of their clients, and (2) in circumstances where the MNI
does not relate to the issuer of a security held by, or under
consideration for purchase by, any client (other than clients
whose purchases are selected by an unaffiliated computer
service).
No exceptions will be made to this rule unless previously
approved by BBA's legal counsel.
All documents released by the Compliance Officer will be held in
a secure place by the person to whom released, and may not be
given to, shared with, or discussed with any other member of the
staff unless that staff member has the same need to know as the
person lo whom the document was released, the staff member is
identified to the Compliance Officer, and the staff members name
is noted on the record of the document release.
If, in reviewing the document, you learn information that is or
may be MNI, you shall follow the procedures described in Section
H.1 above.
BBA's legal counsel may impose additional restraints on the
release of documents known to contain MNI.
3. Guidelines for Dissemination and Protection of Sensitive
Information
Every effort shall be made to avoid compromising the ability
of BBA and its affiliates to perform investment advisory duties
owed to any client not affiliated with BBA. You shall not
communicate or permit the communication of information that is or
is suspected to be MNI to any other person unless the
communication is approved by BBA's legal counsel- BBA's legal
counsel shall approve a communication of MNI to another person
only if that person needs to know the MNI to perform his or her
dunes To BBA or its affiliates. Written documents and letters and
other materials containing MNI shall be maintained only in a
manner reasonably designed to prevent the future dissemination
of the MNI, by discovery, burglary, or otherwise. Files and
programmed data must be secured.
4. Identification and Reporting of MNI
A record of the names of all persons in possession of MNI shall be
maintained by the Compliance Officer. This record shall also include
the names of all persons to whom the MNI is further disseminated.
<PAGE>
I. Conflicts of Interest
BBA puts the client first. If you learn of an investment opportunity of
limited availability that would be suitable for a client, you must make the
opportunity available to the client first, and may not invest in that
opportunity for your own account without the client's consent.
You may not implement an investment transaction for an account in which
you have a beneficial interest at the expense of BBA or its clients, take
advantage of knowledge you may have of the market impact of transactions
effected by BBA for any of its clients, or make investment decisions for a
client (that are not in the best interest of the client) for the purpose of
influencing the value of investments in an account in which you have a personal
interest or for the purpose of obtaining benefits for any person other than the
clients of BBA.
J. Personal Securities Transactions
The principles of the foregoing section apply in all situations. In
addition, in furtherance of these principles, all personnel must adhere to the
following restrictions on their personal investing activity. These restrictions
apply to all accounts in which an employee has a personal interest.
1. Initial Public Offerings
No one may acquire securities in an initial public offering.
2. Private Placements
No one may acquire securities in a private placement without the
express prior approval of the Compliance Officer.
Any one who now or hereafter owns a privately-placed security and
who becomes involved in an investment decision involving the
issuer of the security shall disclose his or her ownership of the
private placement to the Compliance Officer as soon as
practicable after becoming involved in the decision-making
process.
Any one who owns a private placement of an issuer must refrain
from deliberations regarding client purchases or sales of
securities issued by the same issuer.
<PAGE>
3. Blackout Periods
Except as set forth below, no one may purchase or sell securities on
any day during which a buy or sell order in the same security is
pending for a client.
Except as set forth below, no Portfolio Manager may purchase or sell
securities purchased or sold by an investment company managed, by
the Portfolio Manager within seven calendar days before and after
the investment company buys or sells the security.
Except as set forth below, no one may buy or sell and buy, the
same securities (including options on securities) at a profit
within 60 calendar days. Trades made in violation of this
provision shall, if practicable, be unwound. The Compliance
Officer may allow exceptions to this provision only in cases
where the security must be sold involuntarily (such as in the
case of a merger involving the issuer).
The prohibitions of this section do not apply to transactions in the
following securities:
o Securities that are not eligible for purchase by any of BBA'S
clients.
o Securities issued or guaranteed by any by any government that is a
member of the Organization for Economic Cooperation and Development,
or any agency or authority thereof.
o Common or preferred stocks or debt securities of a class that is
publicly-traded, and issued by companies with a market capitalization
in excess of one billion U.S. dollars (or the equivalent in foreign
currency) and, in the case of debt securities, rated in one of the
top four rating categories, (i.e. rated investment grade) by
Standard & Poor's Corporation and Moody's Investor Services, Inc.
o Futures and options contracts on indices.
o Commodity futures contracts, including futures contracts on interest
rate instruments or indices, and options on such contracts.
o Open end investment management companies (mutual funds).
The provisions of this section do not apply to the following
transactions:
o Transactions that occur by operation of law or under any other
circumstance in which, the investor does not exercise any discretion
to buy or sell.
<PAGE>
o Purchases of securities pursuant to an automatic dividend
reinvestment plan.
o Purchases pursuant to the exercise of rights issued pro rata to all
holders of the class of securities held by the investor and received
by the investor from the issuer.
An employee is deemed to have a personal interest in an account
whenever the employee directly or indirectly derives any personal benefit from
the income or from value of the assets in that account or whenever the employee
can directly or indirectly exercise a controlled influence over the purchase,
sale or voting of the assets in that account. Accordingly, the employee is
normally considered to have a personal interest in any account held:
a. for the employee's benefit by others (e.g., brokers, custodians
and pledges, but not trustees unless the employee has direct or
indirect influence or control over the trust See (e) below);
b. for the benefit of the employee's spouse or minor children (or
any other relative or other person who shares the employee's home)
unless the employee does not exercise any direct Or
indirect influence or control over transactions of the
relative or other person and does not otherwise advise him
or her as to his or her transactions;
c. by a partnership of which the employee is a partner,
d. by a corporation of which the employee is a controlling person
and that is used by the employee alone or with a small group as a
medium for investing Or trading in securities; and
e. by a trust over which the employee has any direct or indirect
influence or control.
K. Disclosure and Certification
You must direct your broker to supply the Compliance Officer with
duplicate confirmation statements and periodic account statements upon request
of the Compliance Officer. If the Compliance Officer so directs, you will
direct your brokers to send duplicate confirmation and account statements to
the Compliance Officer routinely.
<PAGE>
Within ten days following the end of each month, each employee must file a
signed securities transaction form with the Compliance Officer. On that form
each employee must report the security transactions carried out during the
quarter for all accounts in which he or she has a personal interest, except
accounts where the employee has no direct or indirect influence or control over
investments. All transactions in securities must be included in the quarterly
reports other than transactions in shares of registered open-end investment
companies, in securities purchased as part of an automatic dividend reinvestment
plan, in securities that arc direct obligations of the United States, and in
money market instruments.
Every report shall contain the following information for each
transaction:
a. a description of the security or other interest acquired;
b. the date of the transaction, number of shares, and the
principal amount of each security involved;
c. the nature of the transaction (i.e., purchase, sale or any
other type of acquisition or disposition);
d. the price at which the transaction wag effected; and
e. the name of the broker, dealer or bank with or through which
the transaction was effected.
If the reporting person is a client of BBA or has a beneficial interest
in. an account managed by BBA, the reporting person should arrange the
reporting details with the Compliance Officer.
This form must be filed whether or not any security transactions have
been carried out. In instances where there have been no transactions, that fact
should be stated.
Any such report may contain a statement that the report shall not be
construed as an admission that the reporting person has any direct or indirect
beneficial ownership in a security to which the report relates and no report
shall be considered as an admission that any transaction reported constitutes a
violation of the Code.
L. Review and Enforcement
The Compliance Officer shall review the transactions reported by all
staff members and shall review transactions directed by members of BBA on
behalf of TNE and its affiliates and on behalf of advisory clients, with the
objective of catching at an early date any violations of this Code. The
Compliance Officer shall identity any apparent violations to BBA's legal
counsel, who shall be responsible for investigating
<PAGE>
apparent violations, for counseling and educating staff members, and for
recommending sanctions or other action where appropriate.
BBA's legal counsel Or the Compliance Officer shall report at least
annually the Board of Directors on the reviews and resulting action, if any,
taken pursuant to these procedures.
Except as otherwise may be necessary in connection with the
recommendation of sanction or other action, the information submitted by
staff members in monthly reports will be held confidential.
M. Service as a Director
BBA prohibits investment professionals from serving on the boards of
directors of publicly traded companies absent prior authorization based upon a
determination that the board service would be consistent with the interest of
the investment company and its shareholders.
N. Maintenance of Separate Investment Decision-Making
The following internal procedures, which are adopted by Nvest Companies,
L.P. ("Nvest"), by each investment advisory subsidiary of Nvest and by each
General Partner of Nvest (collectively, the "Nvest Firms"), formalize the
operational separation of each firm's investment process and treatment of
portfolio investment information and thereby confirm the basis upon which each
firm qualifies as a separate entity, for sporting and other purposes as
relevant, under applicable schemes of financial ownership regulation.
1. Each Nvest Firm exercises independent investment decision-making,
which includes purchase and sale decisions and proxy voting.
2. The officers, directors and employees making investment decisions
for a particular Nvest Firm act only for that firm (and its
controlled affiliates, if applicable). There is no overlap of
investment decision-making personnel among the Nvest Firms.
3. Each Nvest Firm maintains separate records relating to its
investment decisions. No other firm is generally given access to
these records.
4. Each Nvest Firm maintains separate premises, and the officers of
other firms may be granted access only as visitors under procedures
reasonably designed to maintain confidentiality as to the investment
decision-making process.
<PAGE>
5. The Nvest Firms generally do not share information as to their
investment decisions and generally do not otherwise take concerted
actions with regard to the investments that they manage. Where
officials of two or more Nvest Firms desire to collaborate with
respect to purchase or sale decisions, proxy voting or some other
aspect of the investment process (for instance, where one firm
proposes to act as a subadvisor with shared investment
decision-making with another Nvest firm or where two films propose
to service a single client account that has multiple investment
strategies), or where collaboration is required by law or otherwise,
specific prior review must first be undertaken with the compliance
officer of each firm. Also, before any such collaboration is
effected the compliance officers must further review the matter
with the General Counsel of Nvest, who will consider, among other
matters, whether the proposed joint actions would require any
change in the regulatory filings of either firm. In addition to the
foregoing, the compliance officer of any Nvest Firm must review in
advance with the General Counsel of Nvest any instance where such
collaboration is proposed by a Nvest Firm with Metropolitan Life
Insurance Company ("MetLife") or with any non-Nvest Firm that is
directly or indirectly controlled by MetLife. The provisions of
this paragraph 5 do not apply to the purchase of pure investment
research or data from an affiliated firm on terms substantially
similar to the purchase of such research or data. from an
unaffiliated firm.
6. Each Nvest Firm maintains in confidence form the other firms
all nonpublic information that it may have obtained relating to
securities and their issuers, In this regard, each Nvest Firm has
and enforces its own policy regarding the confidential handling
of material nonpublic information.
No less often than annually, there will be an independent assessment
carried out, upon the initiative and at the expense of Nvest, of the
effectiveness of the operation of the procedures set out above.
The foregoing procedures, among other things, are intended to constitute an
information-blocking device for purposes of federal securities regulation and
are administered as an integral part of each Nvest Firm's compliance program
and the Nvest Enterprise Compliance Program. Any failure to adhere these
policies should be reported immediately to the General Counsel of Nvest.
<PAGE>
0. Annual Certification
All employees shall certify annually that they have read and understood
this Code and complied with its provisions including the reporting requirements
of section K.
REICH & TANG ASSET MANAGEMENT L.P.
REICH & TANG DISTRIBUTORS, INC.
CODE OF ETHICS AND CONDUCT ("Code")
Effective March 1, 2000
I. Definitions
A. "Partnership" shall mean Reich & Tang Asset Management L.P.
B. "Security" shall have the meaning set forth in Section 2(a) (36) of the
Investment Company Act of 1940, as amended ("the Act"), but shall not include
securities issued or guaranteed by the United States Government or its agencies
or instrumentalities, bankers' acceptances, bank certificates of deposit,
commercial paper, shares of registered open-end investment companies or other
money market instruments designated by the Partnership.
C. A security is "being considered for purchase or sale" when a
recommendation to purchase or sell such security has been made and communicated
and, with respect to the person making the recommendation, when such person
seriously considers making such a recommendation.
D. "Control" shall have the meaning set forth in Section 2(a) (9) of the
Act.
E. "Access Person" shall mean any partner, officer, or Advisory Person of
the Partnership or any director or officer of Reich & Tang Asset Management,
Inc. who, in the ordinary course of his or her business, makes, participates in,
or obtains information regarding, the purchase or sale of Securities by the
Partnership, or whose functions or duties as part of the ordinary course of his
or her business relate to the making of any recommendation by the Partnership
regarding the purchase or sale of Securities.
F. "Advisory Person" shall mean:
1. any Employee, as defined herein, of the Partnership (or Reich &
Tang Asset Management, Inc.) who, in connection with his or her
regular functions or duties, makes, participates in, or obtains
information regarding, the purchase or sale of a Security by the
Partnership, or whose functions relate to the making of any
recommendation with respect to such purchases or sales; or
2. any natural person in a control relationship to the Partnership
who obtains information concerning recommendations made with
regard to the purchase or sale of a Security by the Partnership.
G. "Director" means a director of Reich & Tang Asset Management, Inc.
within the meaning of Section 202(a) (8) of the Investment Advisors Act of 1940
("Advisors Act").
H. "Employee" includes all "Access Persons" and "Advisory Persons" and
"Portfolio Managers" as defined herein as well as all other employees of the
Partnership.
<PAGE>
I. "Beneficial Ownership" shall be interpreted in the same manner as it
would be under Rule 16a-1(a)(2) under the Securities Exchange Act of 1934, as
amended. Generally, a person is considered the beneficial owner of securities if
the person has a pecuniary interest in the securities and includes securities
held by members of the person's immediate family sharing the same household, or
other persons if, by reason of any contract, understanding, relationship,
agreement or other arrangement, the person obtains from such securities benefits
substantially equivalent to those of ownership.
J. "Portfolio Manager" shall mean those Employees of the Partnership
entrusted with the direct responsibility and authority to make investment
decisions affecting clients and who, therefore, are the persons best informed
about clients' investment plans and interests.
K. "Fund" shall mean an investment company registered under the Act.
L. "Distributor" shall mean Reich & Tang Distributors, Inc.
II. Conflicts of Interest-Personal Investments
A. General. All Employees are obliged to put the interests of the
Partnership's clients before their own personal interests and to act honestly
and fairly in all respects in their dealings with clients. This is an obligation
imposed on all Employees of any investment advisory firm.
It is the fundamental policy of the Partnership and the Distributor to
avoid conflicts of interest, potential conflicts of interest or even the
appearance of such conflicts whenever possible. Moreover, it is a basic policy
of the Partnership and the Distributor that no Employee should take advantage of
their position with the Partnership and the Distributor for personal gain.
However, if a conflict were to unavoidably occur, it is also the policy of the
Partnership to resolve such conflict in favor of the client. Even in instances
in which there is an identity of interest between a client and an Employee, the
Employee must recognize that the Partnership's clients have priority in any
right to benefit from our investment advice over any rights of the Employee, or
any non-client members of the Employee's family whom he or she may advise. This
condition inevitably places some restrictions on the freedom of investment of
our Employees and their families.
This Code does not attempt to describe all possible conflicts of interests,
but rather, attempts to establish general principles and to highlight possible
problem areas. Employees should be conscious that areas other than personal
securities transactions may involve conflicts of interest. For example, one such
area would be accepting gifts or favors from persons such as brokers, dealers,
securities salespersons or other persons with whom the Partnership has a
business relationship since such gifts or favors (such as the ability to
participate in initial public offerings or private placements) could impair the
Employee's objectivity. Thus, the requirements set forth below are not intended
to cover all situations that may involve a possible conflict of interest. Rather
they are intended to provide (i) a framework for understanding such conflicts
and (ii) a mechanism for monitoring and reporting personal securities
transactions. If there is any doubt about such matters, the compliance officers
listed in Appendix A or such other persons designated by them to perform such
functions ("Compliance Officers") should be consulted before any action
regarding such matters are taken.
B. Prohibited Personal Trading
1. Improper Use of Information. No Employee may use their
knowledge concerning any client's securities transactions for trading
in their personal account, any account in which he or she has a
"beneficial ownership" interest, or in any account controlled by or
under the influence of such Employee.
2. Purchases and Sales. Unless the transaction is exempt under
II.B.3. below, no Employee may purchase or sell, directly or
indirectly, any Security in which he or she has, or by reason of the
transaction will acquire, any direct or indirect beneficial ownership
interest and to their actual
<PAGE>
knowledge at the time of such Security's purchase or sale (a) is
currently being purchased or sold on behalf of a client (i.e., an
order has been entered but not executed for a client), or (b) is
currently being considered for purchase or sale on any client's
behalf, even though no order has been placed, unless either (i) the
order for the client is executed or withdrawn or (ii) the Employee's
order is executed at the same time and at the same price as the
client's order and the Employee's order does not otherwise receive any
unfair advantage. In addition, unless the transaction is exempt under
II.B.3. below, no Portfolio Manager may purchase or sell, directly or
indirectly, any Security in which he or she has, or by reason of the
transaction will acquire, any direct or indirect beneficial ownership
interest and to their actual knowledge at the time of such purchase or
sale (a) is currently being considered for purchase or sale on any
clients' behalf or (b) has been purchased or sold for a client's
account within the prior seven business days, unless the Portfolio
Manager obtains the prior written approval of one of the Compliance
Officers. In the event client orders cannot be fully satisfied,
Employee orders for the same security that were entered at the same
time as client orders will only be satisfied after client orders are
filled unless otherwise approved by a Compliance Officer. For these
purposes, registered investment companies and unregistered investment
funds are treated as client accounts even if Employees or their
affiliates own all or substantially all of such entities. Any profits
on transactions prohibited by this paragraph will be required to be
disgorged.
Unless the transaction is exempt under II.B.3. below or the
transaction does not involve a Security, every Employee intending to
make a personal securities transaction that will result in the
Employee acquiring or disposing of any direct or indirect beneficial
ownership interest in Securities whose value exceeds $10,000 must
either (i) obtain prior written approval for such personal securities
transaction from one of the Compliance Officers or (ii) refrain from
effecting such transaction.
Requests by Employees for prior clearance of personal securities
transactions must be made in writing on the standard Personal Trading
Request and Authorization Form attached as Appendix B ("Authorization
Form") and submitted to one of the Compliance Officers, who will be
responsible for reviewing and processing such requests. Written
responses to such requests will also be provided on the Authorization
Form. The requesting Employee should retain a copy of the
Authorization Form for his or her records.
A Compliance Officer may grant such approval if the transaction
(i) is considered not to be potentially harmful to any client, or (ii)
would be very unlikely to affect the market in which such Securities
are traded, or (iii) clearly is not related economically to the
Securities to be purchased, sold, or held by any client and the
Employee is not in possession of material non-public information
obtained in the course of the Employee's duties for the Partnership.
Prior clearance of any personal securities transaction is
effective for five (5) business days from and including the date
clearance is granted. If the personal securities transaction is not
completed within that period, reapproval of the transaction for each
additional period of five (5) business days must be obtained.
3. Exempt Transactions. The prohibitions of II.B.2. above do not
apply to the following transactions:
a. purchases or sales effected in any account over which an
Employee has no direct or indirect influence or control; or
in any account of the Employee which is managed on a
discretionary basis by a person other than the Employee and
which the Employee does not in fact influence or control the
purchase or sale transactions;
b. purchases or sales which are non-volitional on the part of
the Employee;
c. purchases which are part of an automatic dividend
reinvestment plan;
<PAGE>
d. purchases effected upon the exercise of rights issued pro
rata to all holders of a class of Securities to the extent
such rights were acquired from such issuer, and sales of
such rights so acquired;
e. purchases or sales of Securities which are not eligible for
purchase or sale by any client;
f. purchases and sales of shares of open-end investment
companies and other instruments not considered to be
"Securities" for purposes of this Code.
C. Specific Rules. The following rules govern Employee investment
activities for the Employee's personal account and for accounts in which the
Employee has any direct or indirect beneficial ownership interest. These rules
are in addition to those described in II.B. above.
1. New Issues. No Employee may purchase any Securities available in an
initial public offering ("IPO") of common stock or convertible securities
directly from the issuer or an underwriter at the initial offering price,
but must purchase such securities in secondary trading after obtaining the
prior written approval of one of the Compliance Officers.
2. Private Placements. No Employee may purchase a Security that is the
subject of a private offering unless the prior written approval of one of
the Compliance Officers has been obtained. The rationale of the Compliance
Officer supporting the approval will be retained in the Partnership's files
with the approval.
3. Short Sales. No Employee may sell a Security short that is owned by
any client.
4. Short-Term Trading. No Employee shall profit in the purchase and
sale, or sale and purchase, of the same (or equivalent) Securities within
15 calendar days without the prior written approval of one of the
Compliance Officers. Any profit realized by an Employee on such short-term
trading will be disgorged, unless such prior written approval has been
obtained.
5. Commissions. Commissions on personal securities transactions may be
negotiated by the Employee, but payment of a commission rate that is better
than the rate available to the Partnership's clients through similar
negotiations is prohibited.
6. Options and Futures. The purchase, sale, and utilization of options
and futures contracts on specific Securities by the Employee are subject to
the same restrictions as those set forth in this Code with respect to
Securities, i.e., the option or futures contract should be treated as if it
were the Security for these purposes.
III. General Standards
A. Written Record of Securities Recommendations. Every order for the
purchase or sale of Securities for clients, excluding recommendations to
increase or decrease existing positions, must be memorialized in writing either
prior to or immediately after the purchase or sale order is provided to the
trading desk. A standard Security Trading Advice Form (buy/sell ticket) for
purchase or sale orders must be used for this purpose and should be provided to
or otherwise made available to the trading desk.
B. Use of Securities Recommendations. Any investment ideas developed by any
Employee in the course of working for the Partnership must be made available for
use by clients prior to any personal trading or investment by any Employee based
on such investment ideas, provided, however, that this shall not prohibit any
Employee from purchasing such Securities where such purchase by clients would be
inappropriate at such time in the opinion of the applicable Portfolio Manager.
See also the prohibitions against self-dealing and front-running described in
III.E. and III.F. below.
<PAGE>
C. Gifts, Favors and Gratuities. No Employee should seek from a
broker-dealer, securities salesperson, approved company (i.e., a company the
Securities of which are held by a client), supplier, client or other person or
organization with whom the Employee has a business relationship any gift, favor,
gratuity or preferential treatment that is or may appear to be connected with
any present or future business dealings between the Partnership and that person
or organization and which may create or appear to create a conflict of interest.
As one consequence, no Employee may purchase IPOs or private placements, except
as described in II.C.1. and 2. above. No gifts or other items of more than de
minimis value may be accepted from any person or entity that does business with
or on behalf of the Partnership. All gifts, favors or gratuities having a fair
market value in excess of $100 should be reported immediately to one of the
Compliance Officers and described on the Monthly Securities Transaction report
("Monthly Report'). Gifts, favors or gratuities with an aggregate value of less
than $100 need only be reported on the Monthly Report. A determination will be
made whether any such gifts, favors or gratuities should be returned. In
addition, discretion should be used in accepting invitations for dinners,
evening entertainment, sporting events or theater. While in certain
circumstances it may be appropriate to accept such invitations, all invitations
whose value exceeds $100 should also be immediately reported to one of the
Compliance Officers and described on the Monthly Report. Any invitations from
any person or organization involving free travel for more than one day must
receive prior approval from one of the Compliance Officers. No Employee should
offer any gifts, favors or gratuities that could be viewed as influencing
decision-making or otherwise could be considered as creating a conflict of
interest on the part of their recipient.
D. Inside Information. No Employee may seek any benefit for himself or
herself, a client or anyone else from the use of material, non-public
information about issuers, whether or not held in the portfolios of our clients
or suitable for inclusion in their portfolios. Any Employee who believes he or
she is in possession of such information must contact one of the Compliance
Officers immediately. This prohibition should not preclude an Employee from
contacting officers and employees of issuers or other investment professionals
in seeking information about issuers that is publicly available. Please
remember, in this regard, to review the Statement of Policy Regarding Insider
Trading attached as Appendix C ("Policy Statement").
E. Fair Dealing vs. Self-Dealing. Every Employee shall act in a manner
consistent with the obligation to deal fairly with all clients when taking
investment action. Self-dealing for personal benefit or for the benefit of the
Partnership, at the expense of clients, will not be tolerated. The receipt of
"special favors" from a stock promoter, such as participation in a private
placement or IPO, as an inducement to purchase other Securities for clients is
not permitted. The existence of any substantial economic relationship between a
proposed personal securities transaction and any Securities held or to be
acquired by the Partnership or clients must be disclosed on the Authorization
Form.
F. Front-Running. No Employee shall engage in "front-running" an order or
recommendation, even if the Employee is not handling either the order or the
recommendation and even if the order or recommendation is for someone other than
a client of the Partnership. Front-running consists of executing a transaction
in the same or underlying Securities, options, rights, warrants, convertible
Securities or other related Securities, in advance of block or large
transactions of a similar nature likely to affect the value of the Securities,
based on the knowledge of the forthcoming transaction or recommendation. See
II.B.2. above in this regard.
G. Confidentiality. Information relating to any client's portfolio or
activities is strictly confidential and should not be discussed with anyone
outside of the Partnership. In addition, from the time that an Employee
anticipates making a recommendation to purchase or sell a Security, through the
time that all transactions for clients based on that recommendation have been
consummated, the "subject and content" of the recommendation may be considered
to constitute "inside information". Accordingly, Employees must maintain the
utmost confidentiality with respect to their recommendations during this period
and may not discuss a contemplated recommendation with anyone outside of the
Partnership. In this regard, please also see the Policy Statement.
<PAGE>
Any written or oral disclosure of information concerning clients or
particular purchase or sale transactions for client accounts should be made only
by persons who are specifically authorized to release that information, after
consultation with one of the Compliance Officers. Please note that this
prohibition is not intended to inhibit exchanges of information among Employees.
H. Service as a Director. No Portfolio Manager shall serve on the board of
directors of a publicly traded company, absent prior written authorization from
a Compliance Officer based upon a determination that the board service would be
consistent with the interests of the Partnership and its clients.
IV. Reports of Personal Investments by Employees
A. Account Reporting. Every Employee must immediately notify one of the
Compliance Officers in writing of any account in which they have or will have a
beneficial interest or for which they exercise influence or control over
investment decisions. Such notification must identify the brokerage firm at
which the account is maintained, the date the account was established, the
account executive, the title of the account, the account number and the names
and addresses of all individuals with a beneficial interest in the account. This
requirement also includes all such accounts of the Partnership's clients in
which the Employee has or will have a beneficial interest. Each Employee is
responsible for arranging to have records for securities transactions in such
accounts, other than those at the Partnership, sent to a Compliance Officer in
accordance with IV.B. below.
B. Monthly Reporting. Rule 204-2 under the Advisers Act requires that, with
certain minor exceptions, the Partnership must maintain a record of every
transaction in a Security in which the firm or any Employee has, or by reason of
such transaction acquires, direct or indirect beneficial interest in the
Security; provided, however, that no Employee shall be required to make a report
with respect to an exempt transaction specified in II.B.3. above. This
recordkeeping requirement is met through Monthly Reports sent to the
Partnership.
All Employees of the Partnership must file with the Partnership, by the
tenth calendar day of each month, a confidential Monthly Report for the
immediately preceding month whether or not there has been a personal securities
transaction for the month. (A copy of this Monthly Report is attached as
Appendix D). Each Monthly Report must set forth every transaction in a Security:
1. for the Employee's own account;
2. for any account in which the Employee has any "direct or
indirect beneficial ownership interest" (as defined herein),
unless the Employee has no direct or indirect "influence or
control" over investment decisions for the account; and
3. for any accounts of non-clients that the Employee manages
(for example, as trustee) or to whom the Employee gives
investment or voting advice.
In filing Monthly Reports for such accounts, please note:
a. Employees must file a report every month whether or not
there were any reportable transactions for such
accounts. If an Employee did not have any reportable
transactions, the Monthly Report should state "None."
All reportable transactions should be listed, if
possible, on a single form. If necessary, because of
the number of transactions, please attach a second form
and mark it "continuation." For every Security listed
on the Monthly Report, the information called for must
be completed by all Employees. Copies of duplicate
confirmation statements and account statements
(including those with the Partnership) may be attached
to a
<PAGE>
signed and dated Monthly Report in lieu of setting
forth the information otherwise required, or may be
mailed directly to a Compliance Officer.
b. Monthly Reports must show: (i) the date of the
transaction, the name of the issuer, the interest rate
and maturity date (if applicable), and the number of
shares and the principal amount of the Security
involved; (ii) the nature of the transaction, i.e.,
purchase, sale or other acquisition or disposition,
including gifts, the rounding out of fractional shares,
exercises of conversion rights and exercises or sales
of subscription rights; (iii) the price at which the
transaction was effected; (iv) the name of the broker,
dealer or bank with or through whom the transaction was
effected; and (v) the date that the report is submitted
by the Employee.
c. If duplicate confirmation statements and copies of
account statements are not attached to the Employee's
Monthly Report they should be mailed to a Compliance
Officer.
d. Monthly Reports on family and other accounts in which
an Employee has any direct or indirect beneficial
interest, and which are fee paying clients of the
Partnership or traded through the Partnership's Access
System, need merely list the Partnership account
number. Securities transactions for such accounts need
not be separately itemized.
4. Disclaimer of Beneficial Ownership. The broad definition of
"beneficial ownership" is for purposes of this Code only. It
does not necessarily cover other securities or tax laws. In
reporting securities transactions to the Partnership, an
Employee can include in their Monthly Report "a statement
declaring that the reporting or recording of any securities
transaction shall not be construed as an admission that the
reporting person has any direct or indirect beneficial
ownership in the security." For example, if an Employee who
is a parent or custodian sold securities owned by a minor
child under a Uniform Gifts to Minor Act, the Employee would
report such transaction on the Monthly Report, but such
Employee could disclaim beneficial ownership.
Whether an Employee's Monthly Report should include such a
disclaimer is a personal matter on which the Partnership
will make no recommendation. A disclaimer may be important
not only for securities law purposes, but also because it
might be some evidence of ownership for other purposes, such
as estate taxes. Accordingly, an Employee may wish to
consult his/her own attorney on this issue.
V. Securities Holdings Report
Upon entering employment with the Partnership (but in no event later
than 10 days thereafter), each new employee must complete an Existing Brokerage
Accounts memorandum, which is attached as Appendix E.2. Thereafter during
January in each year, all Employees must disclose on the Annual Personal
Securities Holdings Form, which is attached as Appendix F.2, all Securities
which they own or in which they have a beneficial interest and all securities in
any non-client account for which they participate in making decisions as of a
date no more than 30 days before the report is submitted. The Annual Personal
Securities Holdings Form must show: (i) the title of the Security, name of the
issuer, the number of shares and principal amount of the Security involved; (ii)
the name of the broker, dealer or bank with whom such accounts are maintained;
and (iii) the date that the report is submitted by the Employee.
<PAGE>
VI. Advising Non-Partnership Clients
Employees may not render investment advice to persons other than
clients of the Partnership or members of the Employee's immediate family, unless
the advisory relationship, including the identity of those involved and any fee
arrangements, has been disclosed to and cleared with a Compliance Officer. Such
advisory relationships are subject to the reporting provisions of IV. above.
VII. Violations of this Code
Violations of this Code may result in the imposition of sanctions by
regulatory authorities and/or the Partnership, including forfeiture of any
profit from a transaction, reduction in salary, fine, letter of censure,
suspension or termination of employment or such other remedial action as deemed
appropriate by the Partnership.
VIII. Acknowledgment of Receipt
Shortly following the commencement of employment, new Employees must
meet with the Compliance Officer to review the obligations imposed by this Code.
New Employees shall then sign a Compliance Certificate, which is attached to the
Code as Appendix E.1, to affirm that they have received the Code and will be
given a copy of the Code for their files. All Employees shall be required on an
annual basis to review the Code and sign another Compliance Certificate, which
is attached as Appendix F.1.
IX. Report to Boards of Fund Clients
At least annually, the Partnership and the Distributor must furnish to
the Board of each Fund client that it advises or underwrites, respectively, a
written report that (i) describes any issues arising under the Code, including,
but not limited to, information about material violations of the Code or
procedures and sanctions imposed in response to the material violations; and
(ii) certifies that the Partnership has adopted procedures reasonably necessary
to prevent Employees from violating the Code.
<PAGE>
APPENDIX A
Compliance Officers
Richard E. Smith III
Lorraine C. Hysler
<PAGE>
Appendix B
PERSONAL TRADING REQUEST AND AUTHORIZATION FORM
This Form must be completed by all Employees and Portfolio Managers of Reich &
Tang Asset Management, L.P. ("Partnership") prior to certain personal securities
transactions specified in the Partnership's Code of Ethics, unless the
transaction concerns an "exempt transaction" or does not involve "Securities" as
defined in the Code of Ethics for the Partnership.
Section I. (to be completed by the Employee)
1. Name: (Phone: )
2. Date or dates of proposed transaction:
3. Name of the issuer and dollar amount and/or number of securities of the
issuer proposed to be Purchased or sold:
4. Nature of transaction (i.e., purchase, sale, or other type of acquisition):
(1)
5. Are you or is a member of your immediate family an officer or director of
the issuer of the securities or any affiliate2 of the issuer? Yes[] No[]
If yes, please describe:
6. Do you have any direct or indirect professional or business relationship
with the issuer of the securities: (3)
If so, please describe:
7. Do you currently beneficially own more than 1/2 of 1% of the outstanding
equity securities of the issuer? Yes [] No[]
If yes, please report the total number of shares "beneficially owned":
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(1) If other than a market order, please describe any proposed limits.
(2) For purposes of this question, "affiliate" would include (i) any
entity that directly or indirectly owns, controls, or holds with power
to vote 5% or more of the outstanding voting securities of the issuers
and (ii) any entity under common control with the issuer.
(3) A "professional relationship" includes, for example, the provision of
legal counsel or accounting services. A "business relationship"
includes, for example, the provision of consulting services and
insurance coverage.
<PAGE>
Section II. (to be completed by the Employee)
1. Are you aware of any facts regarding the proposed personal securities
transaction, including the existence of any substantial economic
relationship between the proposed personal securities transaction and any
securities held or to be acquired by the Partnership, or clients of the
Partnership, that may be relevant to a determination as to the existence of
a potential conflict of interest? (4)
Yes[] No[]
If yes, please describe:
2. Is the Security in question being considered for recommendation to any
client account or is there an order for a client account pending?
Yes[] No[]
If YES, do you intend to trade at a different time or price?
Yes[] No[]
If YES, all Employee orders must wait until the client order is executed or
withdrawn. All Portfolio Manager orders concerning such Securities must
receive prior written approval. See criteria listed in Section III below.
3. Has the Security in question been purchased or sold within the past seven
days? Yes[] No[]
If YES, all Portfolio Manager orders concerning such Securities must
receive prior written approval. See criteria list in Section III below.
4. Does the personal securities transaction involve Securities to be acquired
or sold having a value exceeding $10,000? Yes [] No []
If YES, the transaction must receive prior written approval. See criteria
listed in Section III below.
To the best of your knowledge and belief, the answers that you have
provided above in this Form are true and correct.
Date Signature
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(4) Facts that would be responsive to this question would include, for
example, the receipt of "special favors" from a stock promotor, such
as participation in a private placement or initial public offering, as
an inducement to purchase other securities for clients. Another
example would be investment in securities of a limited partnership
that in turn owned warrants of a company formed for the purpose of
effecting a leveraged buy-out in circumstances where clients might
invest in securities related to the leveraged buy-out. The foregoing
are by no means the only examples of pertinent facts and in no way
limits the types of facts that may be responsive to this question.
<PAGE>
Section III. (to be completed by the Compliance Officer)
In determining whether to grant approval, the Compliance Officer will consider
the following factors:
1. Will the Employee or Portfolio Manager forseeably obtain a better price
with respect to the same Securities than any pending or recommended
transactions for clients? Yes [] No []
2. Does the Employee or Portfolio Manager propose to purchase a Security in a
rising market ahead of any client accounts? Yes [] No []
3. Does the Employee or Portfolio Manager propose to sell a Security in a
falling market ahead of any client accounts? Yes [] No []
4. Is the broker selection unusual in any respect? Yes [] No []
5. Is the size of the personal securities transaction large in comparison to
the average trading volume for the Security? Yes [] No []
6. Is the size of the personal securities transaction large in comparison to
the size of other transactions effected for the Employee or Portfolio
Manger? Yes [] No []
7. Does the Employee or Portfolio Manager have a pattern of short-term
transactions? Yes [] No []
8. Does the Employee or Portfolio Manager have a pattern of trading before
client transactions? Yes [] No[]
Section IV.
Approval or Disapproval of Personal Trading Request (to be completed by
Compliance Officer):
[] I confirm that the above-described proposed transaction is consistent with
the policies described in the Code of Ethics of the Partnership and that
the conditions necessary (5) for approval of the proposed transaction have
been satisfied.
[] I do not believe the above-described proposed transaction is consistent
with the policies described in the Code of Ethics of the Partnership or
that the conditions necessary for approval of the proposed transaction have
been satisfied.
Dated: Signed:
Title:
- ------------------------
(5) In the case of a personal securities transaction that involves a
"security" and is not an "exempt transaction" under the Code of
Ethics, please note that one of the Compliance Officers is required to
determine that the proposed personal securities transaction (i) is not
potentially harmful to any client, or (ii) would be very unlikely to
affect the market in which the portfolio securities are traded, or
(iii) clearly is not related economically to securities to be
purchased, sold, or held by any client. In addition, the Code of
Ethics require that the decision to purchase or sell the security at
issue does not involve the use of material non-public information
obtained in the course of the Employee's relationship with the
Partnership.
<PAGE>
Appendix C
STATEMENT OF POLICY REGARDING INSIDER TRADING
("POLICY STATEMENT")
Every Employee (1) of Reich & Tang Asset Management L.P. ("RTAM"), a
registered investment adviser, must read and retain a copy of this Policy
Statement. Any questions regarding this Policy Statement should be referred to
RTAM's compliance officers (the "Compliance Officers") who are primarily
responsible for the enforcement of the policies and procedures described herein.
SECTION I. STATEMENT OF POLICY
This Policy Statement applies to every Employee and extends to activities
both within and outside the scope of their duties at RTAM. RTAM forbids any
Employee from engaging in any activities that would be considered to be "insider
trading."
The term "insider trading" is not defined in the federal securities laws,
but generally is understood to prohibit the following activities:
1. trading by an insider, while in possession of material non-public
information;
2. trading by a non-insider while in the possession of material
non-public information, where the information either was disclosed to
the non-insider in violation of an insider's duty to keep it
confidential or was misappropriated;
3. recommending the purchase or sale of securities while in possession of
material non-public information; or
4. communicating material non-public information to others (i.e.,
"tipping").
The elements of insider trading and the penalties for such unlawful conduct
are discussed below. If after reviewing this Policy Statement, you have any
questions, you should consult one of the Compliance Officers.
A. Who is an Insider? The concept of "insider" is broad and it includes
officers, partners, and employees of a company. In addition, a person can be a
"temporary insider" if he or she enters into a special confidential relationship
in the conduct of a company's affairs and, as a result, is given access to
information solely for the company's purposes. A temporary insider can include,
among others, a company's attorneys, accountants, consultants, bank lending
officers, and the employees of these organizations. In addition, RTAM and its
Employees may become temporary insiders of a company that RTAM advises or for
which RTAM performs other services. According to the U.S. Supreme Court, before
an outsider will be considered a temporary insider for these purposes, the
company must expect the outsider to keep the disclosed non-public information
confidential and the relationship must, at least, imply such a duty.
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(1) The term "Employee" as used herein includes "access persons" and
"advisory representatives," as those terms are defined in Rule 17j-1
under the Investment Company Act of 1940 and Rule 204-2 under the
Investment Advisers Act of 1940, respectively, as well as all other
employees of RTAM. Your receipt of this Policy Statement for your
review and signature means you are a person to whom all of the
provisions of this Policy Statement apply.
<PAGE>
B. What is Material Information? Trading, tipping, or recommending
securities transactions based on inside information is not an actionable
activity unless the information is "material." Generally, information is
considered material if: (i) there is a substantial likelihood that a reasonable
investor would consider it important in making his or her investment decisions;
or (ii) it is reasonably certain to have a substantial effect on the price of a
company's securities. Information that should be considered material includes,
but is not limited to, the following: dividend changes, earnings estimates,
changes in previously released earning estimates, a joint venture, the borrowing
of significant funds, a major labor dispute, merger or acquisition proposals or
agreements, major litigation, liquidation problems, and extraordinary management
developments. For information to be considered material, it need not be so
important that it would have changed an investor's decision to purchase or sell
a particular security; rather it is enough that is the type of information on
which reasonable investors rely in making purchase or sale decisions. The
materiality of information relating to the possible occurrence of any future
event would depend on the likelihood that the event will occur and its
significance if it did occur.
C. What is Non-Public Information? All information is considered non-public
until it has been effectively communicated to the marketplace. One must be able
to point to some fact to show that the information is generally public. For
example, information found in a report filed with the Securities and Exchange
Commission ("SEC"), or appearing in Dow Jones, Reuters Economic Services, The
Wall Street Journal, or other publications of general circulation would be
considered public. Information in bulletins and research reports disseminated by
brokerage firms are also generally considered to be public information.
D. Bases for Liability. In order to be found liable for insider trading,
one must either: (i) have a fiduciary relationship with the other party to the
transaction and have breached the fiduciary duty owed to that other party; or
(ii) have misappropriated material non-public information from another person.
1. Fiduciary Duty Theory
Insider trading liability may be imposed on the theory that the insider
breached a fiduciary duty to a company. In 1990, the U.S. Supreme Court held
that there is no general duty to disclose before trading on material non-public
information, and that such a duty arises only where there is a fiduciary
relationship. That is, there must be an existing relationship between the
parties to the transaction such that one party has a right to expect that the
other party would either: (a) disclose any material non-public information, if
appropriate or permitted to do so; or (b) refrain from trading on such material
non-public information.
In 1983, the U.S. Supreme Court stated alternative theories under which
non-insiders can acquire the fiduciary duties of insiders: (a) they can enter
into a confidential relationship with the company through which they gain the
information (e.g., attorneys and accountants); or (b) they can acquire a
fiduciary duty to the company's shareholders as "tippees" if they were aware, or
should have been aware, that they had been given confidential information by an
insider that violated his or her fiduciary duty to the company's shareholders by
providing such information to an outsider.
However, in the "tippee" situation, a breach of duty occurs only where the
insider personally benefits, directly or indirectly, from the disclosure. Such
benefit does not have to be pecuniary, and can be a gift, a reputational benefit
that will translate into future earnings, or even evidence of a relationship
that suggests a quid pro quo.
2. Misappropriation Theory
Another basis for insider trading liability is the "misappropriation"
theory. Under the misappropriation theory, liability is established when trading
occurs as a result of, or based upon, material non-public information that was
stolen or misappropriated from any other person. The U.S. Supreme Court held
that a columnist for The Wall Street Journal had defrauded the Journal when he
obtained information
<PAGE>
that was to appear in the Journal and used such information for trading in the
securities markets. The U.S. Supreme Court held that the columnist's
misappropriation of information from his employer was sufficient to give rise to
a duty to disclose such information or abstain from trading thereon, even though
the columnist owed no direct fiduciary duty to the issuers of the securities
described in the column or to the purchasers or sellers of such securities in
the marketplace. Similarly, if information is given to an analyst on a
confidential basis and the analyst uses that information for trading purposes,
liability could arise under the misappropriation theory.
E. Penalties for Insider Trading. Penalties for trading on or communicating
material non-public information are severe, both for individuals involved in
such unlawful conduct and their employers. A person can be subject to some or
all of the penalties below even if he or she did not personally benefit from the
violation. Penalties include:
1. civil injunctions;
2. criminal penalties of up to $1 million and a maximum jail term of
from five to ten years for individuals and, for "non-natural
persons", penalties of up to $2.5 million;
3. private rights of actions for disgorgement of profits;
4. civil penalties for the person who committed the violation of up
to three times the profit gained or loss avoided, whether or not
the person actually benefitted;
5. civil penalties for the employer or other controlling person of
up to the greater of $1 million per violation or three times the
amount of profit gained or loss avoided as a result of each
violation; and
6. a permanent bar, pursuant to the SEC's administrative
jurisdiction, from association with any broker, dealer,
investment company, investment adviser, or municipal securities
dealer.
In addition, any violation of this Policy Statement can be expected to
result in serious sanctions by RTAM, including dismissal of the person(s)
involved.
SECTION II. PROCEDURES TO IMPLEMENT
THIS POLICY STATEMENT
The following procedures have been established to aid Employees in avoiding
insider trading, and to aid in preventing, detecting, and imposing sanctions
against insider trading. Every Employee of RTAM must follow these procedures or
risk serious sanctions, as described above. If you have any questions about
these procedures, please contact one of the Compliance Officers.
A. Identifying Insider Information. Before trading for yourself or others,
including for any client accounts managed by RTAM, in the securities of a
company about which you may have potential insider information, or before
revealing such information to others or making a recommendation based on such
information, you should ask yourself the following questions:
1. Is the information material? Is this information that an investor
would consider important in making an investment decision? Is
this information that would substantially affect the market price
of the securities if generally disclosed?
2. Is the information non-public? To whom has this information been
provided? Has the information been effectively communicated to
the marketplace by being
<PAGE>
published in The Wall Street Journal or other publications of
general circulation, or has it otherwise been made available to
the public?
If, after consideration of the above, you believe that the information is
material and non-public, or if you have any questions as to whether the
information is material and non-public, you should take the following steps:
1. Report the matter immediately to one of the Compliance Officers.
In consulting with the Compliance Officers, you should disclose
all information that you believe may bear on the issue of whether
the information you have is material and non-public.
2. Refrain from purchasing or selling securities with respect to
such information on behalf of yourself or others, including for
client accounts managed by RTAM, and from recommending a purchase
or sale of such securities.
3. Refrain from communicating the information inside or outside
RTAM, other than to the Compliance Officers.
After the Compliance Officers have reviewed the issue, you will be
instructed to continue the prohibitions against trading, recommending, or
tipping, or you will be allowed to trade, recommend, or communicate the
information. In appropriate circumstances, the Compliance Officers will consult
with legal counsel as to the appropriate course to follow.
B. Personal Securities Trading. All Employees of RTAM must adhere to the
Code of Ethics and Conduct ("Code") with respect to securities transactions
effected for their own account, accounts over which they have a direct or
indirect beneficial interest, and accounts over which they exercise any direct
or indirect influence. Please refer to the Code as necessary. In accordance with
the Code, Employees are required to obtain prior written approval from the
Compliance Officers on all personal securities transactions (unless otherwise
exempted) and to submit to the Compliance Officers Monthly Securities
Transaction Reports ("Monthly Reports") concerning their securities transactions
as required by the Code.
C. Restricting Access to Material Non-Public Information. Information in
your possession that you identify, or which has been identified to you, as
material and non-public must not be communicated to anyone, except as provided
in paragraph II.A., above. In addition, you should make certain that such
information is secure.
D. Resolving Issues Concerning Insider Trading. If, after consideration of
the items set forth in paragraph II.A., above, doubt remains as to whether
information is material or non-public, or if there is any unresolved question as
to the applicability or interpretation of the foregoing procedures, or as to the
propriety of any action, please discuss such matters with one of the Compliance
Officers before trading or recommending a purchase or sale based on such
information or communicating the information in question to anyone.
E. Supervisory Procedures. The Compliance Officers are critical to the
implementation and maintenance of these Policy and Procedures against insider
trading. The supervisory procedures set forth below are designed: (i) to prevent
insider trading; and (ii) to detect insider trading.
1. Prevention of Insider Trading.
In addition to the prior approval and the reporting and
monitoring procedures specified in the Code concerning personal
securities transactions, the following measures have been implemented
to prevent insider trading by Employees.
<PAGE>
a. Each Employee will be provided with a copy of this Policy
Statement regarding insider trading;
b. The Compliance Officers will, on a regular basis, conduct
educational seminars to familiarize Employees with this
Policy Statement. Such educational seminars will target, in
particular, persons in sensitive areas of RTAM who may more
often receive inside information;
c. The Compliance Officers will answer questions regarding this
Policy Statement;
d. The Compliance Officers will resolve issues of whether
information received by an Employee is material or
non-public;
e. The Compliance Officers will review on a regular basis, and
update as necessary, this Policy Statement;
f. Whenever it has been determined that an Employee has
material non-public information, the Compliance Officers
will: (i) implement measures to prevent dissemination of
such information, and (ii) restrict Employees from trading
in the securities by placing such securities on RTAM's
Restricted List; and
g. Upon the request of any Employee, one of the Compliance
Officers will promptly review and either approve or
disapprove a request for clearance to trade in specified
securities.
2. Detection of Insider Trading. To detect insider trading, the
Compliance Officers will:
a. review the personal securities transaction reports filed by
each Employee, including subsequent monthly review of all
personal securities transactions;
b. review the trading activity of client accounts managed by
RTAM;
c. review the trading activity of RTAM's own accounts, if any;
and
d. coordinate this review with other appropriate Employees of
RTAM, when the Compliance Officers have reason to believe
that insider information has been provided to certain
Employees.
3. Special Reports to Management. Promptly upon learning of a
potential violation of this Policy Statement, the Compliance Officers will
investigate the situation and prepare a confidential written report to
management providing full details and recommendations for further action.
4. Annual Reports to Management. On an annual basis, the Compliance
Officers will prepare a written report to RTAM's management summarizing
this Policy Statement particularly indicating any changes hereto since last
year's report, describing the steps taken to communicate this Policy
Statement to Employees, and detailing any investigation, either internal or
by any regulatory agency, into possible insider trading by any Employee and
describing the outcome and any resulting disciplinary action. In response
to the findings detailed in the report, RTAM's management may determine
that changes to this Policy Statement may be appropriate.
<PAGE>
Appendix D
REICH & TANG ASSET MANAGEMENT L.P.
MONTHLY REPORT OF SECURITIES TRANSACTIONS
FOR THE MONTH ENDED _________________
[] I have no securities transactions to report for this month.
[] I have securities transactions to report for this month and they are
listed as follows (to report additional transactions, please attach
additional pages, as needed).
[] As an analyst/manager, to the best of my knowledge, all of the trades
that I have given to the Capital Management Equity Trading Desk for
clients have been executed in accordance with my instructions.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
================ ============== ================ =================== ================ ============== ============== ===============
INTEREST RATE AND NAME OF
SHARES/ MATURITY DATE (IF BROKER OR
DATE AMOUNT SECURITY* APPLICABLE) PRICE BUY SELL BANK USED
- ---------------- -------------- ---------------- ------------------- ---------------- -------------- -------------- ---------------
- ---------------- -------------- ---------------- ------------------- ---------------- -------------- -------------- ---------------
- ---------------- -------------- ---------------- ------------------- ---------------- -------------- -------------- ---------------
- ---------------- -------------- ---------------- ------------------- ---------------- -------------- -------------- ---------------
- ---------------- -------------- ---------------- ------------------- ---------------- -------------- -------------- ---------------
================ ============== ================ =================== ================ ============== ============== ===============
*Please do not abbreviate or use ticker symbol.
</TABLE>
I (received __________ did not receive __________) favors, gifts or gratuities
from brokers, dealers, investment bankers or other business-related persons or
organizations during the above month. If such items were received, please
describe such favors, gifts or gratuities with a fair market value in excess of
$100 and the circumstances under which such items were received under "NOTES"
below.
Does any transaction for the month involve:
(a) Sales of securities purchased within 15 days of the sales? Yes [] No []
(b) Purchases or sales of private placement securities? Yes [] No []
(c) Purchases of an IPO within 5 days of its issuance? Yes [] No []
<PAGE>
NOTES
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Directions:
1. Include all securities transactions other than transactions in shares of
open-end investment companies (mutual funds), direct obligations of the
United States or any other OECD country or purchases which are part of an
automatic dividend reinvestment plan.
2. Report all transactions for all accounts (including client accounts) in
which you have any direct or indirect beneficial interest, except any such
account where you have no influence or control over investments. This
includes accounts of other members of your household for whose welfare you
are responsible or with whom you share expenses, such as a spouse, child,
or elderly relation. It would also include securities owned by an entity if
you are in a position to influence investment decisions of that entity.
3. A report on this form is required every month. It is to be filed within 10
days after the end of each month even if no securities transactions have
been carried out during the month.
- ----------------------------- ---------------------------------
Name (Please Print) Signature
- -----------------------------
Date Submitted:
<PAGE>
Appendix E.1
MEMORANDUM
TO: Reich & Tang Asset Management L.P. Employees
FROM: Lorraine C. Hysler
RE: Code of Ethics and Conduct Statement of Policy Regarding Insider Trading
DATE:
- --------------------------------------------------------------------------------
Attached to this memorandum are the Code of Ethics and Conduct (the "Code") and
Statement of Policy Regarding Insider Trading (the "Policy Statement") for Reich
& Tang Asset Management L.P. Both of these documents are essential in helping us
to protect the interests of all of our clients by maintaining the high standards
and reputation of the firm and guarding against inadvertent violations of
federal and/or state securities laws by the Partnership, its partners, officers
and employees.
For these reasons, we will from time to time distribute copies of the Code and
Policy Statement to our partners, officers and employees to be sure that
everyone is familiar with their provisions and continues to agree to comply with
the Code and Policy Statement as a condition of employment.
After you have had an opportunity to read and understand the Code and Policy
Statement, please return a signed copy of this memorandum to Lorraine C. Hysler
acknowledging (i) your receipt of such documents, (ii) your compliance with
their terms, including reporting or disclosing all personal securities
transactions or instances of insider trading required to be reported or
disclosed pursuant to the requirements of the Code and Policy Statement, (iii)
your agreement to comply with the provisions of those documents in the future
and (iv) your understanding that violations of the Code or Policy Statement may
lead to sanctions, including disciplinary action or dismissal and may also be a
violation of federal and/or state securities laws. Retain the Code and Policy
Statement for your files.
- -------------------- -----------------------------------------
Date Signature
------------------------------------------
(Print Name)
<PAGE>
Appendix E.2
MEMORANDUM
TO: Lorraine C. Hysler
FROM:
DATE:
SUBJECT: Existing Brokerage Accounts
This memo is to acknowledge that I understand that as part of my compliance with
Reich & Tang's Code of Ethics, I may only maintain a brokerage relationship with
Schroder Wertheim.
I understand that I am not to open any new brokerage accounts other than an
account at Schroder with trades executed by the Equity Trading Desk.
I have listed any existing brokerage relationships below and will contact each
to close my account within the next 30 days.
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
- ------------------------------- -----------------------------------------
Date Signature of Employee
<PAGE>
Appendix F.1
TO: Reich & Tang Asset Management L.P. Employees
FROM: Richard E. Smith, III
RE: Annual Distribution of Code of Ethics and Conduct
Statement of Policy Regarding Insider Trading
Attached to this memorandum are the Code of Ethics and Conduct (the
"Code") and Statement of Policy Regarding Insider Trading (the "Policy
Statement") for Reich & Tang Asset Management L.P. Both of these documents are
being distributed to all employees to be sure that everyone is familiar with
their provisions and continues to agree to comply with the Code and Policy
Statement as a condition of employment. We have made the following changes to
the Code:
- - Clarified the Definition of "Beneficial Ownership";
- - Added that a Compliance Officer must provide his or her rationale for
permitting an employee to invest in a private placement;
- - Specified in greater detail the information and timing requirement of the
various monthly and annual reports required of employees under the Code;
- - Added the requirement of providing a written report and certification to
the Board of Directors of the equity funds concerning the Code and any
violations of it by RTAM employees;
- - Provided that, absent approval of a Compliance Officer, client orders would
be fully satisfied before RTAM employee orders for the same security placed
at the same time and at the same price, if the aggregated order could not
be completely filled;
- - Restricted RTAM employees from purchasing securities in an initial public
offering directly from the issuer or an underwriter of such offering,
relegating such employees to purchasing such issues in secondary trading;
- - Clarified that no gifts of more than a de minimis value may be accepted
from any person or entity that does business with RTAM;
- - Expanded the scope of remedial action that RTAM could take in response to
Code violations.
After you have had an opportunity to read and understand the Code and
Policy Statement, please return a signed copy of this memorandum to Lorraine
Hysler acknowledging (i) your receipt of such documents, (ii) your compliance
with the terms, including reporting or disclosing personal securities
transaction or instances of insider
<PAGE>
trading required to be reported or disclosed pursuant to the requirements of the
Code and Policy Statement, (iii) your agreement to comply with the provisions of
those documents in the future and (iv) your understanding that violations of the
Code or Policy Statement may lead to sanctions, including disciplinary action or
dismissal and may also be a violation of federal and/or state securities laws.
Retain the Code and Policy Statement for your files.
This form and the attached Annual Personal Securities Holdings form must be
completed and returned to Lorraine Hysler as soon as possible.
- ----------------- ---------------------------
Date Signature
<PAGE>
Appendix F.2
REICH & TANG ASSET MANAGEMENT L.P.
ANNUAL PERSONAL SECURITIES HOLDINGS
In accordance with Section V of the Code of Ethics, please provide a
list of all Securities which you own or in which you have a Beneficial Interest,
including those in accounts of your immediate family members and all Securities
in non-client accounts for which you make investment decisions.
(1) Your name:
(2) If different than (1), name of the
person in whose name the account
is held:
(3) Relationship of (2) to (1):
(4) Broker at which account is maintained:
(5) Account Number:
(6) Contact person at Broker and phone number:
(7) For each account, attach the most recent account statement listing
Securities in that account. If you own or have a Beneficial Interest in
Securities that are not listed in an attached account statement(s),
list each such Security below:
Name of Security Quantity Value
Custodian
1.______________________________________________________________________________
2.______________________________________________________________________________
3.______________________________________________________________________________
4.______________________________________________________________________________
5.______________________________________________________________________________
6.______________________________________________________________________________
(Attach separate sheet if necessary)
I certify that this form and the attached statement(s) (if any)
constitute all of the Securities that I own or in which I have a Beneficial
Interest, including those held in accounts of my Immediate Family.
Date: Your Signature
Print Name
This form should be returned to Lorraine Hysler - 10th Floor
by February 15th of each year
<PAGE>
APPENDIX G
Effective January 1, 1998, all existing brokerage relationships were
"grandfathered"; all new accounts must be opened at Schroder and trades must be
executed by the Equity Trading Desk located on the 8th Floor.
