<PAGE>
- --------------------------------------------------------------------------------
600 FIFTH AVENUE
NEW YORK, N.Y. 10020
BACK BAY FUNDS, INC. (212) 830-5220
================================================================================
December 29, 1999
Dear Shareholder:
In spite of benign inflation data reported in the U. S. and improving labor
productivity, interest rates have risen by over 1.5% in 1999. Interest rates
have risen in response to the Federal Reserve's complete reversal of the three
interest rate easings in 1998 when the global economy was at risk of
experiencing deflation. Ten year single A rated corporate bonds now yield 7.55%
and 30 year mortgage rates are currently at 8.25%, a significant rise from 5.72%
and 6.25% respectively at the beginning of the year. With reported inflation
currently running at around 1.1% on a GDP deflator basis, real interest rates
may be reaching levels that could slow the pace of economic growth. Interest
rate hawks, however, point to potential future pressure on inflation from a
surging stock market, accelerating retail sales, tight labor markets, excessive
money growth, and record current account and trade deficit data as they lobby
for Federal Reserve tightening to stay ahead of the curve.
The U. S bond market, as represented by the Lehman Aggregate Index, has returned
- -0.04% since December 1, 1998 and remains on track to record only its second
calendar year of negative returns since its inception in 1978. The year
following 1994, the only other year of negative returns, saw bond returns
improve significantly as prudent Federal Reserve action in 1994 prevented
inflation from threatening more aggressive restraint. While we expect the
Federal Reserve to have to increase interest rates in the early part of 2000, we
expect that global growth, including U. S. economic growth, will slow in
response to lower capital and consumer spending throughout the year.
On a net of fees basis Class A shares under performed the benchmark during the
fiscal year ending November 30th due to its longer duration relative to that of
the Aggregate index. Class A shares returned -0.45% versus 0.04% for the Lehman
Aggregate benchmark. During this period corporate yield premiums, especially for
the high yield and emerging market sectors, have positively responded to the
continued improvement in economic growth by narrowing. We expressed this
expectation in our last shareholder letter in May. While the portfolio
experienced positive relative performance from spread compression, the negative
impact of rising interest rates was greater. The portfolio maturity structure
remains longer than that of the index but concentrated in the 8 to 20 year
portion of the yield curve. In addition the portfolio remains over weighted in
the corporate, Yankee, and Canadian government sectors, since corporate spreads
are still in excess of 1.5 standard deviations undervalued relative to their
average yield premium over a 28 year history. We expect the return of dealer
liquidity to the bond market combined with passage of Y2K concerns will cause
corporate yield spreads to improve considerably early in the new year.
Sincerely,
/s/Edgar M. Reed
Edgar M. Reed
Executive Vice President and Chief Investment Officer
Back Bay Advisors, L.P.
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
BACK BAY FUNDS, INC.
TOTAL RETURN BOND FUND
NOVEMBER 30, 1999
================================================================================
<TABLE>
<CAPTION>
Comparison of change in value of $10,000 investment in the
Back Bay Funds, Inc. and Lehman Aggregate Index
Back Bay Funds, Inc. - Total Return Bond Fund
Performance Comparison Chart
The chart below represents the omitted graph.
Lehman Aggregate Index Back Bay Fund - Class A Back Bay Fund - Class B & C
<S> <C> <C> <C>
12/22/97 10,000 10,000 10,000
12/31/97 10,003 10,016 10,015
01/31/98 10,131 10,179 10,175
02/28/98 10,124 10,200 10,194
03/31/98 10,159 10,244 10,236
04/30/98 10,212 10,308 10,296
05/31/98 10,308 10,422 10,407
06/30/98 10,396 10,537 10,519
07/31/98 10,418 10,514 10,493
08/31/98 10,588 10,432 10,408
09/30/98 10,835 10,757 10,730
10/31/98 10,778 10,689 10,659
11/30/98 10,839 10,942 10,909
12/31/98 10,872 10,990 10,954
01/31/99 10,950 11,109 11,070
02/28/99 10,758 10,866 10,826
03/31/99 10,730 10,991 10,946
04/30/99 10,764 11,087 11,039
05/31/99 10,669 10,846 10,797
06/30/99 10,635 10,806 10,744
07/31/99 10,590 10,725 10,671
08/31/99 10,585 10,696 10,639
09/30/99 10,708 10,858 10,798
10/31/99 10,747 10,865 10,802
11/30/99 10,746 10,893 10,827
<CAPTION>
Past performance is not predictive of future performance
----------------------------------- --------------------------------------------
Average Annual Return
----------------- --------------------------
One Year Since Inception 12/22/97
----------------------------------- ----------------- --------------------------
Lehman Aggregate Index -0.04% 3.78%
Back Bay Funds, Inc. - Class A -0.45% 4.50%
Back Bay Funds, Inc. - Class B -0.76% 4.17%
Back Bay Funds, Inc. - Class C -0.76% 4.17%
----------------------------------- ----------------- --------------------------
</TABLE>
- -------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
BACK BAY FUNDS, INC.
TOTAL RETURN BOND FUND
STATEMENT OF INVESTEMENTS
NOVEMBER 30, 1999
================================================================================
<TABLE>
<CAPTION>
Face Value
Amount* (Note 1)
------ ------
Foreign Non-Convertible Corporate Bonds (27.95%)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Dollar Denominated (21.64%)
Banking/Financial Services (3.57%)
Merita Bank, 7.500%, due 12/29/49 $ 625,000 $ 598,329
Merita Bank, 7.150%, due 12/29/49 625,000 608,594
------------
1,206,923
------------
Building Product/Cement (0.82%)
Cemex SA, 9.625%, due 10/01/09 275,000 276,375
------------
Cable/Media (1.45%)
Multicanal, SA, 13.125%, 04/15/09 500,000 491,250
------------
Forest Products (3.61%)
Abitibi Consolidated, 6.950%, due 04/01/08 750,000 692,812
Abitibi Consolidated, 7.500%, due 04/01/28 180,000 157,275
Kimberly Clark de Mexico, 8.875%, due 08/01/09 355,000 367,869
------------
1,217,956
------------
Government (6.49%)
Endesa Chile, 8.500%, due 04/01/09 655,000 644,787
Gulf Canada, 8.375%, due 11/15/05 250,000 248,125
Gulf Canada, 8.350%, due 08/01/06 110,000 107,663
Republic of Argentina - Warrants, 0.000%, due 12/03/99 500 68
Republic of Argentina - Warrants, 0.000%, due 02/25/00 355 7,499
Republic Of Columbia, 9.750%, due 04/23/09 240,000 223,200
Republic Of Korea, 8.875%, due 04/15/08 310,000 329,763
Republic of Panama, 8.875%, due 09/30/27 610,000 513,925
Republic of Panama, 9.375%, due 04/01/29 125,000 118,281
------------
2,193,311
------------
Oil & Gas Production (3.64%)
PDVSA Finance, 8.750%, due 02/15/04 480,000 468,000
PDVSA Finance, 6.650%, due 02/15/06 385,000 328,694
Petro Mexicano (Pemex), 9.150%, due 11/15/18 100,000 96,375
YPF Sociedad Anonima, 9.125%, due 02/24/09 320,000 336,400
------------
1,229,469
------------
Telecom (2.06%)
Orange PLC, 8.750%, due 06/01/06 375,000 393,750
SK Telecom, 7.750%, due 04/29/04 305,000 301,187
------------
694,937
------------
Total Dollar Denominated 7,310,221
------------
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
<PAGE>
- --------------------------------------------------------------------------------
BACK BAY FUNDS, INC.
TOTAL RETURN BOND FUND
STATEMENT OF INVESTMENTS (CONTINUED)
NOVEMBER 30, 1999
================================================================================
<TABLE>
<CAPTION>
Face Value
Amount* (Note 1)
------ ------
Foreign Non-Convertible Corporate Bonds (Continued)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Non-Dollar Denominated (6.31%)
Government of Canada, 7.500%, due 12/01/03 (C) 1,011,000 $ 717,988
International Bank of Reconciliation and Development, 5.500%, due 05/14/03 (A) 1,085,000 670,177
KPN Qwest, 7.125%, due 06/01/09 (E) 150,000 149,107
Providence of Ontario, 4.875%, due 06/02/04 (C) 927,000 592,456
------------
2,129,728
------------
Total Foreign Non-Convertible Corporate Bonds (Cost $9,675,296) 9,439,949
------------
<CAPTION>
Domestic Non-Convertible Corporate Bonds (42.45%)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Banking/Financial Services (6.07%)
Bankers Trust Preferred Capital Trust II, 7.875%, due 02/25/27 $ 825,000 $ 770,344
Conseco Inc., 9.000%, due 10/15/06 190,000 191,425
Lehman Brothers Holding, 6.125%, due 07/15/03 65,000 62,562
Mellon Capital I, 7.720%, due 12/01/26 465,000 435,937
Paine Webber Group, 6.375%, due 05/15/04 200,000 191,750
State Street Institution Trust, 7.940%, due 12/30/26 410,000 396,163
------------
2,048,181
------------
Cable/Media (4.26%)
Cablevision Systems Corporation, 7.875%, due 12/15/07 475,000 469,656
Cablevision Systems Corporation, 7.875%, due 02/15/18 215,000 203,981
Comcast Cable Communications, 9.125%, due 10/15/06 300,000 312,750
Comcast Cable Communications, 8.875%, due 05/01/17 410,000 453,563
------------
1,439,950
------------
Electric Utilities (8.65%)
Arizona Public Service (PVNGS II), 8.000%, due 12/30/15 475,000 474,406
Calenergy Co Inc., 7.230%, due 09/15/05 125,000 123,437
Calenergy Co Inc., 7.630%, due 10/15/07 285,000 284,644
Calenergy Co Inc., 7.520%, due 09/15/08 185,000 183,150
Cleveland Electric (Beaver Valley), 9.000%, due 06/01/17 625,000 642,187
CE Generating (Project Finance 144A), 7.416%, due 12/15/18 100,000 94,072
East Coast Power, 7.066%, due 03/31/12 310,000 279,388
East Coast Power, 7.536%, due 06/30/17 120,000 106,950
Texas Utility Electric Capital Trust Prefund, 8.175%, due 01/30/37 765,000 732,488
------------
2,920,722
------------
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
<PAGE>
- --------------------------------------------------------------------------------
================================================================================
<TABLE>
<CAPTION>
Face Value
Amount* (Note 1)
------ ------
Domestic Non-Convertible Corporate Bonds (Continued)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Manufacturing/Industrial (6.28%)
American Standard, 7.375%, due 04/15/05 430,000 $ 407,425
Ford Holdings, Inc., 9.300%, due 03/01/30 725,000 855,500
Lockheed Martin, 8.200%, due 12/01/09 125,000 124,687
Lockheed Martin, 8.500%, due 12/01/29 105,000 103,819
Owens Illinois, 7.800%, due 05/15/18 720,000 630,900
------------
2,122,331
------------
Media/Entertainment (2.59%)
News America, 10.125%, due 10/15/12 375,000 414,375
Time Warner, 9.125%, due 01/15/13 410,000 460,737
------------
875,112
------------
Retail (4.89%)
Aramark, 7.000%, due 07/15/06 290,000 275,138
Federated Department Stores, 6.790%, due 07/15/27 260,000 255,450
Great Atlantic & Pacific Tea Company, 7.750%, due 04/15/07 725,000 670,625
J.C. Penney Co., Inc., 9.750%, due 06/15/21 150,000 157,500
Kroger Co., 7.250%, due 06/01/09 190,000 185,013
Rite Aid Corporation, 7.125%, due 01/15/07 110,000 67,100
Rite Aid Corporation, 7.700%, due 02/15/27 70,000 39,200
------------
1,650,026
------------
Telecom (8.07%)
AT&T Corporation, 8.625%, due 12/01/31 215,000 221,450
KPN Qwest, 8.125%, due 06/01/09 590,000 570,825
MCI Communications Corporation, 7.125%, due 06/15/27 1,430,000 1,440,725
Metromedia Fiber, 10.000%, due 12/15/09 80,000 81,200
Sprint, 6.900%, due 05/01/19 445,000 412,738
------------
2,726,938
------------
Transportation (1.64%)
Norfolk Southern Corporation, 7.050%, due 05/01/37 565,000 554,406
------------
Total Domestic Non-Convertible Corporate Bonds (Cost $15,232,926) 14,337,666
------------
U.S. Government Agencies (15.83%)
Federal Home Loan Mortgage Corporation, 5.000%, 01/15/04 795,000 749,908
Federal Home Loan Mortgage Corporation, 6.500%, 07/01/29 591,617 564,622
Federal National Mortgage Association, 6.000%, 05/15/08 935,000 889,129
Federal National Mortgage Association, 7.000%, 10/01/28 505,718 494,810
Government National Mortgage Association, 8.000%, 09/15/26 387,777 394,079
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
<PAGE>
- --------------------------------------------------------------------------------
BACK BAY FUNDS, INC.
TOTAL RETURN BOND FUND
STATEMENT OF INVESTMENTS (CONTINUED)
NOVEMBER 30, 1999
================================================================================
<TABLE>
<CAPTION>
Face Value
Amount* (Note 1)
------ ------
Domestic Non-Convertible Corporate Bonds (Continued)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
U.S. Government Agencies (Continued)
Government National Mortgage Association, 7.500%, 12/15/27 415,946 $ 415,035
Government National Mortgage Association, 7.000%, 05/15/28 320,793 313,274
Government National Mortgage Association, 7.000%, 06/15/28 247,345 241,548
Government National Mortgage Association, 6.500%, 10/15/28 401,006 381,457
Government National Mortgage Association, 7.500%, 08/15/29 169,603 169,232
Government National Mortgage Association, 7.000%, 12/20/29 750,000 732,420
------------
Total U.S. Government Agencies (Cost $5,474,655) 5,345,514
------------
U.S. Government Obligation (10.01%)
U.S. Treasury Note, 5.500%, 08/31/01 700,000 694,201
U.S. Treasury Note, 5.250%, 08/15/03 865,000 840,534
U.S. Treasury Note, 6.125%, 08/15/07 120,000 118,772
U.S. Treasury Note, 6.000%, 08/15/09 1,750,000 1,727,982
------------
Total U.S. Government Obligation (Cost $3,432,594) 3,381,489
------------
<CAPTION>
Short-Term Investments (4.91%)
Commercial Paper (4.91%)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
American Express Corporation, 5.450%, due 12/01/99 100,000 100,000
Household Finance, 5.680%, due 12/01/99 1,558,000 1,558,000
------------
Total Short Term Investments (Cost $1,658,000) 1,658,000
------------
Total Investments (101.15%) (Cost $35,473,471+) 34,162,618
Liabilities in Excess of Cash and Other Assets (-1.15%) ( 389,300)
------------
Net Assets (100.00%) $ 33,773,318
============
</TABLE>
+ Aggregate cost for federal income tax purposes is $35,590,158. Aggregate
unrealized appreciation and depreciation, based on cost for federal income
tax purposes, are $69,467 and $1,497,007 respectively.
* Securities denominated in U.S. dollars unless otherwise indicated.
CURRENCY ABBREVIATIONS:
A = Australia
C = Canada
E = Euro
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
<PAGE>
- --------------------------------------------------------------------------------
BACK BAY FUNDS, INC.
TOTAL RETURN BOND FUND
STATEMENT OF ASSETS AND LIABILITIES
NOVEMBER 30, 1999
================================================================================
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Investments in securities at value (Cost $35,473,471)................................. $ 34,162,618
Receivables:
Securities sold..................................................................... 1,002,289
Interest............................................................................ 608,404
Due from Manager...................................................................... 16,155
Deferred organization expenses........................................................ 28,349
--------------
Total assets................................................................. 35,817,815
--------------
<CAPTION>
LIABILITIES
<S> <C>
Payables:
Securities purchased................................................................ 802,330
Dividends........................................................................... 45,535
Due to Custodian...................................................................... 1,155,893
Accrued expenses and other liabilities................................................ 40,739
--------------
Total liabilities............................................................. 2,044,497
--------------
Net Assets............................................................................ $ 33,773,318
==============
Net asset value, offering and redemption price per share:
Class A shares, 3,565,584 shares outstanding.......................................... $ 9.47
==============
Class B shares, 104 shares outstanding.......................................... $ 9.47
==============
Class C shares, 104 shares outstanding.......................................... $ 9.47
==============
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
<PAGE>
- --------------------------------------------------------------------------------
BACK BAY FUNDS, INC.
TOTAL RETURN BOND FUND
STATEMENT OF OPERATIONS
YEAR ENDED NOVEMBER 30, 1999
================================================================================
<TABLE>
<CAPTION>
INVESTMENT INCOME
<S> <C>
Income:
Interest.......................................................................... $ 2,976,484
----------------
Expenses: (Note 2)
Investment management fee......................................................... 150,595
Administration fee................................................................ 96,000
Shareholder servicing fee (Class B)............................................... 3
Shareholder servicing fee (Class C)............................................... 3
Custodian expenses................................................................ 14,191
Shareholder servicing and related shareholder expenses............................ 28,338
Legal, compliance and filing fees................................................. 67,378
Audit and accounting.............................................................. 21,700
Directors' fees................................................................... 6,178
Amortization of organization costs................................................ 9,264
Miscellaneous..................................................................... 2,330
---------------
Total expenses.................................................................. 395,980
Less:
Expenses paid indirectly................................................... ( 3)
Fees waived and expenses reimbursed........................................ ( 223,754)
---------------
Net expenses.................................................................... 172,223
---------------
Net investment income................................................................ 2,804,261
---------------
<CAPTION>
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
<S> <C>
Net realized gain (loss) on:
Investments....................................................................... ( 1,500,139)
Foreign currency transactions..................................................... ( 283)
---------------
( 1,500,422)
---------------
Net unrealized appreciation (depreciation) on:
Investments....................................................................... ( 1,816,016)
Translation of assets and liabilities denominated in foreign currencies........... ( 181)
---------------
Net unrealized appreciation (depreciation)........................................... ( 1,816,197)
---------------
Net realized and unrealized gain (loss)........................................... ( 3,316,619)
---------------
Net Increase (decrease) in net assets resulting from operations...................... $( 512,358)
===============
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
<PAGE>
- --------------------------------------------------------------------------------
BACK BAY FUNDS, INC.
TOTAL RETURN BOND FUND
STATEMENTS OF CHANGES IN NET ASSETS
================================================================================
<TABLE>
<CAPTION>
Year December 22, 1997
Ended (Commencement of Sales)
November 30, 1999 to November 30, 1998
----------------- --------------------
INCREASE (DECREASE) IN NET ASSETS
<S> <C> <C>
Operations:
Net investment income................................... $ 2,804,261 $ 1,674,059
Net realized gain (loss)................................ ( 1,500,422) 649,056
Net unrealized appreciation (depreciation) ............. ( 1,816,197) 504,776
-------------- --------------
Increase (decrease) in net assets from operations....... ( 512,358) 2,827,891
Dividends to shareholders from:
Net investment income:
Class A.............................................. ( 2,792,021) ( 1,673,943)
Class B.............................................. ( 63) ( 58)
Class C.............................................. ( 63) ( 58)
Dividends to shareholders from:
Net realized gain (loss) on investments:
Class A.............................................. ( 649,243) -0-
Class B.............................................. ( 17) -0-
Class C.............................................. ( 17) -0-
Return of capital, Class A................................. ( 11,993) -0-
Capital share transactions (Note 3)
Class A.............................................. ( 3,363,948) 39,847,135
Class B.............................................. -0- 37
Class C.............................................. -0- 37
-------------- --------------
Total increase (decrease)............................... ( 7,329,723) 41,001,041
Net assets:
Beginning of year....................................... 41,103,041 102,000
-------------- --------------
End of year............................................. $ 33,773,318 41,103,041
============== ==============
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
<PAGE>
- --------------------------------------------------------------------------------
BACK BAY FUNDS, INC.
TOTAL RETURN BOND FUND
NOTES TO FINANCIAL STATEMENTS
================================================================================
1. Summary of Accounting Policies.
Back Bay Funds, Inc. (the "Fund") is an open-end, diversified management
investment company currently comprised of the Total Return Bond Fund (the
"Portfolio"). The Portfolio's investment objective is to seek to maximize total
return by investing primarily in higher quality, fixed and floating-rate debt
instruments. The generation of income is a secondary objective. The Portfolio
has three classes of stock authorized, Class A, Class B and Class C. The Class A
shares of the Portfolio are available to corporate, institutional and individual
investors ("Institutional Investors") and either are sold directly to
Institutional Investors or are sold through financial intermediaries that do not
receive compensation from the Manager or Distributor. The Class B shares of the
Portfolio are subject to a service fee pursuant to the Portfolio's Rule 12b-1
Distribution and Service Plan and are sold through financial intermediaries who
provide servicing to Class B shareholders for which they receive compensation
from the Manager or the Distributor. The Class C shares of the Portfolio are
available to qualified retirement plan clients of life insurance companies
("Insurance Company Investors") and, as are the Class B shares, the Class C
shares are subject to a service fee pursuant to the Portfolio's 12b-1 Plan and
either are sold directly to Insurance Company Investors or are sold through
financial intermediaries who provide servicing to Class C shareholders for which
they receive compensation from the Manager or Distributor. Unlike the Class B
and Class C shares, the Class A shares are not subject to a service fee. In all
other respects, the Class A, Class B and Class C shares represent the same
interest in the income and assets of the Portfolio.
The Fund's financial statements are prepared in accordance with generally
accepted accounting principles for investment companies as follows:
a) Valuation of Securities -
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). All other securities for which market prices are not
readily available are priced on the basis of valuations provided by a
pricing service approved by the Board of Directors, which uses information
with respect to transactions in bonds, quotations from bond dealers, market
transactions in comparable securities and various relationships between
securities in determining value. The valuations provided by such pricing
service will be based upon fair market value determined most likely on the
basis of the factors listed above. 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.
b) Foreign Currency Translation -
Portfolio securities and other assets and liabilities denominated in
foreign currencies are translated into U.S. dollars based on the exchange
rate of such currencies against U.S. dollars on the date of valuation.
Purchases and sales of securities and income items denominated in foreign
currencies are translated into U.S. dollars at the exchange rate in effect
on the transaction date. When the Portfolio purchases or sells foreign
securities it will customarily enter into a foreign exchange contract to
minimize foreign exchange risk from the trade date to the settlement date
of such transactions.
The Fund does not separately report the effect of changes in foreign
exchange rates from changes in market prices on securities held. Such
changes are included in net realized and unrealized gain or loss from
investments.
Realized foreign exchange gains or losses arise from sales of foreign
currencies, currency gains or losses realized between the trade and
settlement dates on securities transactions and the difference between the
recorded amounts of interest, and foreign withholding taxes, and the U.S.
dollar equivalent of the amounts actually received or paid. Net unrealized
foreign exchange gains and losses arise from changes in foreign exchange
rates of foreign currency denominated assets and liabilities other than
investments in securities held at the end of the reporting period.
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
================================================================================
1. Summary of Accounting Policies. (Continued)
c) Federal Income Taxes -
It is the Fund's policy to comply with the requirements of the Internal
Revenue Code applicable to regulated investment companies and to distribute
all of its taxable income to its shareholders. Therefore, no provision for
federal income tax is required.
d) Dividends and Distributions -
Dividends from investment income are declared daily and paid monthly.
Capital gains distributions if any, will be made at least annually and in
no event later than sixty days after the end of the Fund's fiscal year.
e) Organization Costs -
Organization expenses are being deferred and amortized on a staight line
basis over a period of five years from the Fund's commencement of
operations. The proceeds of any redemptions by the original shareholder of
the initial shares will be reduced by a pro rata portion of any then
unamortized organizational expenses, based on the ratio of the shares
redeemed to the total initial shares outstanding immediately prior to the
redemption.
f) Use of Estimates -
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that effect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of increases and decreases in
net assets from operations during the reporting period. Actual results
could differ from those estimates.
g) General -
Securities transactions are recorded on a trade date basis. Interest income
is accrued as earned. Realized gains and losses from securities
transactions are recorded on the identified cost basis. Discounts and
premiums on securities purchased are amortized using the effective interest
method over their respective lives. It is the Fund's policy to take
possession of securities as collateral under repurchase agreements and to
determine on a daily basis that the value of such securities are sufficient
to cover the value of the repurchase agreements.
2. Investment Management Fees and Other Transactions with Affiliates.
Under the Investment Management Contract, the Portfolio pays an investment
management fee to Back Bay Advisors, L.P. (the "Manager") equal to .35% of the
Portfolio's average daily net assets.
Pursuant to an Administrative Services Agreement, the Portfolio pays to Reich &
Tang Asset Management L.P. (the "Administrator") an annual fee equal to .15% of
the Portfolio's average 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.
Pursuant to a Distribution and Service Plan adopted under Securities and
Exchange Commission Rule 12b-1, the Portfolio and Reich & Tang Distributors,
Inc. (the "Distributor") have entered into a Shareholder Servicing Agreement
(with respect to the Class B and Class C shares of the Fund only). For its
services under the Shareholder Servicing Agreement, the Distributor receives
from the Portfolio with respect only to Class B and Class C shares, a service
fee equal to .25% per annum of the average daily net assets.
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
BACK BAY FUNDS, INC.
TOTAL RETURN BOND FUND
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
================================================================================
2. Investment Management Fees and Other Transactions with Affiliates.
(Continued)
The Manager and the Administrator at their discretion may voluntarily waive all
or a portion of the Management Fees and Administration Fees and to voluntarily
reimburse the Portfolio's other operating expenses to the extent necessary to
maintain the Total Portfolio Operating Expenses at not more than .40%, .65% and
.80% of the Portfolio's average net assets with respect to the Class A, B and C
shares, respectively.
During the year ended November 30, 1999, the Manager and the Distributor
voluntarily waived investment management fees and Shareholder servicing fees of
$150,595 and $6, respectively, and reimbursed other operating expenses of
$73,153.
Fees are paid to Directors who are unaffiliated with the Manager on the basis of
$1,000 per annum plus $250 per meeting attended.
Included in the statement of operations under the caption "Custodian expenses"
are expense offsets of $3. Included under the caption "Shareholder servicing and
related shareholder expenses" are fees of $25,000 paid to Reich & Tang Services,
L.P. an affiliate of the Administrator as servicing agent for the Fund.
3. Capital Stock.
At November 30, 1999, 20,000,000,000 shares of $.001 par value stock were
authorized and capital paid in amounted to $36,573,268. Transactions in capital
stock were as follows:
<TABLE>
<CAPTION>
Year December 22, 1997
Ended (Commencement of Sales) to
November 30, 1999 November 30, 1998
----------------------------------- -------------------------------------
Shares Amount Shares Amount
------ ------ ------ ------
Class A
-------
<S> <C> <C> <C> <C>
Sold................................ 1,613,850 $ 15,953,554 4,723,139 $ 47,413,044
Issued on reinvestment of dividends. 273,357 2,695,239 137,847 1,398,689
Redeemed............................ ( 2,304,842) ( 22,012,741) ( 887,767) ( 8,964,598)
-------------- -------------- -------------- ---------------
Net increase (decrease)............. ( 417,635) ( 3,363,948) 3,973,219 $ 39,847,135
============== ============== ============== ===============
<CAPTION>
Class B
-------
<S> <C> <C> <C> <C>
Sold................................ -- -- -- --
Issued on reinvestment of dividends. -- -- 4 37
Redeemed............................ -- -- -- --
-------------- -------------- -------------- ---------------
Net increase (decrease)............. -0- -0- 4 37
============== ============== ============== ===============
<CAPTION>
Class C
-------
<S> <C> <C> <C> <C>
Sold................................ -- -- -- --
Issued on reinvestment of dividends. -- -- 4 37
Redeemed............................ -- -- -- --
-------------- -------------- -------------- ---------------
Net increase (decrease)............. -0- -0- 4 37
============== ============== ============== ===============
</TABLE>
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<PAGE>
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4. Investment Transactions.
Purchases and sales of investment securities, other than short-term investments,
totaled $69,049,799 and $70,490,249, respectively. Accumulated undistributed net
realized losses on November 30, 1999 amounted to $1,488,529. At November 30,
1999, the Fund had tax basis capital losses of $1,371,842 which may be carried
forward to offset future gains. Such losses expire in November 30, 2007.
5. Financial Highlights.
<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>
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BACK BAY FUNDS, INC.
TOTAL RETURN BOND FUND
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
================================================================================
5. Financial Highlights. (Continued)
<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>
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BACK BAY FUNDS, INC. - TOTAL RETURN BOND FUND
REPORT OF INDEPENDENT ACCOUNTANTS
================================================================================
To The Board of Directors and Shareholders
Back Bay Funds, Inc. - Total Return Bond Fund
In our opinion, the accompanying statement of assets and liabilities, including
the statement of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Back Bay Funds, Inc. - Total Return
Bond Fund (the "Fund") at November 30, 1999, and the results of its operations,
the changes in its net assets and the financial highlights for the year then
ended, in conformity with generally accepted accounting principles. These
financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Fund's management; our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audit, which included confirmation of securities at November
30, 1999 by correspondence with the custodian and brokers, provides a reasonable
basis for the opinion expressed above. The financial statements for the period
from December 22, 1997 (Commencement of sales) to November 30, 1998, including
the financial highlights for the period then ended were audited by other
independent accountants whose report dated December 28, 1998 expressed an
unqualified opinion on those financial statements.
PricewaterhouseCoopers LLP
New York, NY
January 13, 2000
- --------------------------------------------------------------------------------
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BACK BAY FUNDS, INC. TOTAL RETURN BOND FUND
CHANGE IN INDEPENDENT ACCOUNTANTS
================================================================================
On August 13, 1999, McGladrey & Pullen, LLP (McGladrey) resigned as independent
auditors of the Fund pursuant to an agreement by PricewaterhouseCoopers LLP
(PwC) to acquire McGladrey's investment company practice. The McGladrey partners
and professionals serving the Fund at the time of the acquisition joined PwC.
The report of McGladrey on the financial statements of the Fund during the past
fiscal year contained no adverse opinion or a disclaimer of opinion, and was not
qualified or modified as to uncertainty, audit scope or accounting principles.
In connection with its audit for the most recent fiscal year and through August
13, 1999, there were no disagreements with McGladrey on any matter of accounting
principle or practices, financial statement disclosure, or auditing scope or
procedure, which disagreements, if not resolved to the satisfaction of McGladrey
would have caused it to make reference to the subject matter of disagreement in
connection with its report.
Effective August 13, 1999, the Fund, with the approval of its Board of Directors
and its Audit Committee, engaged PwC as its independent auditors.
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This report is submitted for the general information
of the shareholders of the Fund. It is not
authorized for distribution to prospective investors
in the Fund unless preceded or accompanied by an
effective prospectus, which includes information
regarding the Fund's objectives and policies,
experience of its management, marketability of
shares, and other information.
- ------------------------------------------------------
BB1199P
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
BACK BAY
FUNDS, INC.
TOTAL RETURN BOND FUND
November 30, 1999
Annual Report
[GRAPHIC OMITTED]
Back Bay Advisors, L.P.
-----------------------
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<PAGE>
