NEW ENGLAND ZENITH FUND
Supplement dated July 13, 1995
to New England Zenith Fund Statement of Additional Information dated
May 1, 1995
The following information reflects changes in the investment policies
of the Loomis Sayles Small Cap Series (the "Series") of New England
Zenith Fund (the "Fund"), as set forth on page 7 of the Statement of
Additional Information:
Loomis, Sayles & Company, L. P. ("Loomis Sayles") manages the
Series by investing primarily in stocks of small cap companies with
good earnings growth potential that Loomis Sayles believes are
undervalued by the market. Loomis Sayles seeks to build a core
small cap portfolio of solid growth companies' stock with a smaller
emphasis on special situations and turnarounds (companies that have
experienced significant business problems but which Loomis Sayles
believes have favorable prospects for recovery), as well as
unrecognized stocks.
In addition, reference to Barbara Friedman as Vice President of the
Fund, as set forth on page 30 of the Statement of Additional
Information, is no longer effective.
<PAGE>
NEW ENGLAND ZENITH FUND
STATEMENT OF ADDITIONAL INFORMATION
May 1, 1995
This Statement of Additional Information is not a prospectus. This
Statement of Additional Information relates to the Prospectus dated
May 1, 1995, and should be read in conjunction therewith. A copy of
the Prospectus may be obtained from New England Securities
Corporation, 399 Boylston Street, Boston, Massachusetts 02116.
TABLE OF CONTENTS
Page
Investment Objectives and Policies 3
Miscellaneous Investment Practices 9
Determination of Net Asset Values 21
Fund Performance 23
Trustees and Officers 28
Advisory Arrangements 32
Distribution Agreement 40
Other Services 40
Portfolio Transactions and Brokerage 41
Description of the Fund 43
Appendix A-1 (Description of Bond Ratings) 46
Appendix A-2 (Description of Commercial Paper Ratings) 49
Appendix B 50
Appendix C Financial Statements and report of independent accountants
52
INVESTMENT OBJECTIVES AND POLICIES
The investment objectives and policies of each Series
(collectively and individually the "Series") of New England Zenith
Fund (the "Fund") are summarized on the front page of the Prospectus
and in the text of the Prospectus following the caption "Investment
Objectives and Policies." There can be no assurance that any of the
Series will achieve its objective. The investment policies of each
Series set forth in the Prospectus and in this Statement of Additional
Information may be changed without shareholder approval, except for
any policy as to which the Prospectus or this Statement of Additional
Information explicitly indicates that such approval is required, and
except for the investment objectives of the Money Market, Bond Income,
Capital Growth, Value Growth, Avanti Growth, Stock Index, Managed and
Small Cap Series, which have fundamental investment objectives.
The terms "shareholder approval" and "approval of a majority of
the outstanding voting securities," as used in the Prospectus and this
Statement of Additional Information, mean, with respect to a Series,
approval by the lesser of (i) 67% of the shares of the Series
represented at a meeting at which more than 50% of the outstanding
shares of such Series are represented or (ii) more than 50% of the
outstanding shares of such Series.
Back Bay Advisors Money Market Series
The text of the Prospectus following the caption "Investment
Objectives and Policies -- Back Bay Advisors Money Market Series"
gives a description of the money market instruments in which the Back
Bay Advisors Money Market Series may invest. For a fuller description
of those money market instruments and some of the risks relating
thereto, see "Money Market Instruments," below. The Back Bay Advisors
Money Market Series will invest only in securities which the Series'
subadvisers, Back Bay Advisors, L.P. ("Back Bay Advisors"), acting
pursuant to guidelines established by the Fund's Board of Trustees has
determined are of high quality and present minimal credit risk.
As indicated in the Prospectus, all the Back Bay Advisors Money
Market Series' money market instruments mature in less than 397 days
and the average maturity of the Back Bay Advisors Money Market Series'
portfolio securities based on their dollar value will not exceed 90
days at the time of each investment. Money market instruments
maturing in less than 397 days tend to yield less than obligations of
comparable quality having longer maturities. See "Valuation of
Portfolio Securities" and "Fund Performance." Where obligations of
greater than one year are used to secure the Back Bay Advisors Money
Market Series' repurchase agreements, the repurchase agreements
themselves will have very short maturities. If the disposition of a
portfolio security results in a dollar-weighted average portfolio
maturity in excess of 90 days, the Back Bay Advisors Money Market
Series will invest its available cash in such a manner as to reduce
its dollar-weighted average portfolio maturity to 90 days or less as
soon as reasonably practicable.
In seeking to provide the highest possible level of current
income consistent with preservation of capital, the Back Bay Advisors
Money Market Series may not necessarily invest in money market
instruments paying the highest available yield at a particular time.
The Back Bay Advisors Money Market Series, consistent with its
investment objective, attempts to maximize income by engaging in
portfolio trading and by buying and selling portfolio investments in
anticipation of or in response to changing economic and money market
conditions and trends. The Series may also invest to take advantage
of what are believed to be temporary disparities in the yields of
different segments of the high grade money market or among particular
instruments within the same segment of the market. These policies, as
well as the relatively short maturity of obligations to be purchased
by the Series, may result in frequent changes in the Series'
investment portfolio of money market instruments.
The value of the securities in the Series' investment portfolio
can be expected to vary inversely to changes in prevailing interest
rates. Thus, if interest rates increase after a security is
purchased, that security, if sold, might be sold at less than cost.
Conversely, if interest rates decline after purchase, the security, if
sold, might be sold at a profit. In either instance, if the security
were held to maturity, no gain or loss would normally be realized as a
result of these fluctuations. Substantial redemptions of shares of
the Back Bay Advisors Money Market Series could require the sale of
portfolio investments at a time when a sale might not be desirable.
Back Bay Advisors Bond Income Series
The text of the Prospectus following the caption "Investment
Objectives and Policies -- Back Bay Advisors Bond Income Series" gives
a description of the securities in which the Back Bay Advisors Bond
Income Series may invest. Although at least 80% of the Series' bond
investments will carry investment grade ratings (see Appendix A-1)
from one of the recognized rating services, the Series may purchase
nonrated or lower-rated bonds, which may be traded only over-the-
counter. Nonrated bonds are so categorized because the bond's rating
has been suspended or because the issuer did not seek a rating of the
bonds from Moody's or Standard & Poor's.
As described in the Prospectus, the average maturity of the Back
Bay Advisors Bond Income Series' portfolio will usually be between
five and fifteen years. Depending on market conditions, the Back Bay
Advisors Bond Income Series may take a defensive position by investing
a substantial portion of its assets in the money market instruments
eligible for purchase by the Back Bay Advisors Money Market Series.
No estimate can be made as to when or for how long the Series would
employ such defensive strategies.
The Back Bay Advisors Bond Income Series purchases and sells
portfolio investments in anticipation of or in response to changes in
yield relationships, markets or economic conditions. The Back Bay
Advisors Bond Income Series also invests to take advantage of
temporary disparities in the relative values of certain sectors of the
market for fixed-income securities. As a result of these policies,
the Back Bay Advisors Bond Income Series, under certain market
conditions, may experience high portfolio turnover, although specific
portfolio turnover rates are impossible to predict.
Since levels of interest rates vary from time to time, there can
be no assurance as to the Back Bay Advisors Bond Income Series'
current income for any particular period. Moreover, since all
securities are subject to price declines as well as price advances, at
times the net asset value per Back Bay Advisors Bond Income Series
share may be less than a shareholder's original cost. In recent
years, prices for fixed-income securities have generally been more
volatile than they were in prior periods, and this has increased the
market risk of holding such securities.
Capital Growth Series
As disclosed in the Prospectus under the caption "Investment
Objectives and Policies -- Capital Growth Series," the Capital Growth
Series seeks to attain its investment objective of long-term growth of
capital through investment primarily in equity securities of companies
whose earnings are expected to grow at a faster rate than the United
States economy. The selection of common stocks for the Capital Growth
Series' investment portfolio is based on the assessment of the Series'
adviser, Capital Growth Management Limited Partnership ("CGM"), that
the common stock is attractively priced relative to its earnings and
growth potential.
The Series does not consider current income as a significant
factor in selecting its investments. However, during periods when
management considers that economic or market conditions make it
desirable, the Series may take a defensive position by investing a
substantial portion of its assets in cash or fixed-income securities
(bonds, notes and money market instruments). No estimate can be made
as to when or for how long the Fund will employ such defensive
strategies; however, in the past, such periods have been as long as
one year.
The Capital Growth Series does not currently intend to invest in
restricted securities, options or warrants although, subject to its
investment restrictions, it may do so in the future. See "Investment
Restrictions."
Although the Capital Growth Series' objective is long-term
capital growth, it frequently sells securities to reflect changes in
market, industry or individual company conditions or outlook even
though it may only have held those securities for a short period. As
a result of these policies, the Capital Growth Series, under certain
market conditions, may experience high portfolio turnover, although
specific portfolio turnover rates are impossible to predict. In
recent years, the portfolio turnover rate of the Capital Growth Series
has fluctuated considerably as a result of strategic shifts in
portfolio holdings designed to maintain an optimum portfolio structure
in view of general market conditions and movements in individual stock
prices.
Westpeak Value Growth Series
As disclosed in the Prospectus under the caption "Investment
Objectives and Policies -- Westpeak Value Growth Series," the Westpeak
Value Growth Series seeks long-term total return (capital appreciation
and dividend income) through investment in equity securities, both in
securities that the Series' subadviser, Westpeak Investment Advisors,
L.P. ("Westpeak"), believes are undervalued ("value" style) and
securities of companies that Westpeak believes have growth potential
("growth" style). The Westpeak Value Growth Series will ordinarily
invest substantially all of its assets in equity securities.
Although the Westpeak Value Growth Series' objective is long-term
total return, it may sell securities to reflect changes in Westpeak's
assessment of the relative attractiveness of particular investments.
As a result, the Westpeak Value Growth Series, under certain market
conditions, may experience high portfolio turnover. High portfolio
turnover involves correspondingly higher brokerage commissions than
would be experienced by a similar fund with lower turnover.
The assets of the Westpeak Value Growth Series that are not
invested in equity securities will be held in cash or invested as
described below under "Money Market Instruments."
Loomis Sayles Avanti Growth Series
As disclosed in the Prospectus under the caption "Investment
Objectives and Policies -- Loomis Sayles Avanti Growth Series," the
Loomis Sayles Avanti Growth Series seeks to attain its investment
objective of long-term growth of capital through ordinarily investing
substantially all of its assets in equity securities. Investments are
selected by the Series' subadviser, Loomis, Sayles & Company, L.P.
("Loomis Sayles"), based on their growth potential; current income is
not a consideration.
Although the Loomis Sayles Avanti Growth Series' objective is
long-term capital growth, it may sell securities to reflect changes in
Loomis Sayles' assessment of the relative attractiveness of particular
investments. As a result, the Loomis Sayles Avanti Growth Series,
under certain market conditions, may experience high portfolio
turnover. High portfolio turnover involves correspondingly higher
brokerage commissions than would be experienced by a similar fund with
lower turnover. In addition, the Series may invest cash temporarily
in money market instruments and related repurchase agreements, as
described below under "Money Market Instruments."
Westpeak Stock Index Series
As disclosed in the Prospectus under the caption "Investment
Objectives and Policies -- Westpeak Stock Index Series," the Westpeak
Stock Index Series uses the Standard & Poor's 500 Composite Stock
Index ("S&P 500 Index") as the standard of performance comparison
because that index currently represents a significant percentage of
the total market value of all United States publicly traded common
stocks, is well known to investors, and is commonly regarded as
representative of the performance of United States publicly traded
common stocks taken as a whole.
The S&P 500 Index is composed of 500 common stocks, most of which
are listed on the New York Stock Exchange. Standard & Poor's, which
is not a sponsor of or in any other way affiliated with the Fund,
chooses the 500 stocks included in the S&P 500 Index on the basis of
market value and industry diversification. The S&P 500 Index assigns
relative values to the stocks included in the index, weighted
according to each stock's total market value relative to the total
market value of the other stocks included in the index. The stocks
included in the S&P 500 Index may change from time to time.
The Westpeak Stock Index Series is not managed through
traditional methods of investment management, which typically attempt
to use economic, financial and market analysis to select undervalued
stocks or stocks of companies that may experience above-average
growth, nor will the adverse financial situation of a company
necessarily result in the elimination of its stock from the Westpeak
Stock Index Series' portfolio. As described in the Prospectus, stocks
will be selected in an attempt to approximate the performance of the
S&P 500 Index and to minimize tracking error. From time to time,
adjustments may be made in the Westpeak Stock Index Series' investment
portfolio, but such changes should be infrequent compared to those of
most management investment companies. Westpeak currently expects that
such adjustments will ordinarily be made on a monthly basis, but such
adjustments could be made more or less frequently, depending on
changes in the size of the Westpeak Stock Index Series, among other
factors. As a consequence of the relative infrequency of portfolio
adjustments, brokerage and other transaction costs are expected to be
relatively low. However, these costs and other expenses may cause the
return of the Westpeak Stock Index Series to be lower than the return
of the S&P 500 Index. In addition, the relative infrequency of
portfolio adjustments may result in increased tracking error, to the
extent that new cash that has come into the Series is held, or
invested in money market instruments and repurchase agreements,
pending the next portfolio adjustment, rather than invested
immediately in common stocks included in the S&P 500 Index.
It is the Westpeak Stock Index Series' policy to be fully
invested in common stocks. However, the Westpeak Stock Index Series
may hold a portion of its assets, which will not exceed 5% (not
including additional cash that has come into the Series and is pending
investment in common stocks), in cash to meet redemptions and other
day-to-day operating expenses. The Series may also engage in futures
transactions to reduce tracking error. In addition, the Westpeak
Stock Index Series may invest cash temporarily in money market
instruments and repurchase agreements, as described below under
"Miscellaneous Investment Practices -- Money Market Instruments".
Such temporary investments will only be made with cash held to
maintain liquidity or pending investment, and will not be made for
defensive purposes in the event or in anticipation of a general
decline in the market prices of stocks in which the Series invests. A
defensive investment posture is precluded by the Westpeak Stock Index
Series' investment objective to provide investment results that
correspond to the price and yield performance of a universe of common
stocks. Investors in the Westpeak Stock Index Series therefore bear
the risk of general declines in stock prices in the stock markets.
The index that the Westpeak Stock Index Series uses as a standard
of comparison in seeking to achieve its objective may be changed
without shareholder approval. At some time in the future, another
index may be selected if such a standard of comparison is deemed more
appropriate than the S&P 500 Index as an indicator of the performance
of United States publicly traded common stocks.
Back Bay Advisors Managed Series
As indicated in the Prospectus following the caption "Investment
Objective and Policies -- Back Bay Advisors Managed Series," the Back
Bay Advisors Managed Series' investment portfolio will generally
contain a mix of (1) common stocks, (2) notes and bonds and (3) money
market instruments. Each of these categories of investments involves
certain risks.
The text of the Prospectus following the caption "Investment
Objective and Policies -- Back Bay Advisors Money Market Series,"
contains a description of the money market instruments and related
repurchase agreements in which the Back Bay Advisors Managed Series
may invest; for a fuller description, see "Money Market Instruments,"
below.
The portion of the Back Bay Advisors Managed Series' investment
portfolio consisting of notes and bonds will be invested in bonds of
the types in which the Back Bay Advisors Bond Income Series is
permitted to invest. These investments may include both bonds in the
four highest rating categories of Moody's or Standard & Poor's (which
are described in Appendix A-1 hereto) and lesser rated or non-rated
bonds (the risks associated with which are described in the Prospectus
under "Investment Objectives and Policies -- Back Bay Advisors Bond
Income Series"). The Series will purchase and sell securities for the
bond portion of its portfolio in anticipation of or in response to
changes in yield relationships, markets or economic conditions. The
bond portion of the Series' investment portfolio will also be invested
to take advantage of temporary disparities in the relative values of
certain sectors of the market for fixed-income securities. As a
result of these policies, the bond portion of the Series' portfolio,
under certain market conditions, may experience high portfolio
turnover.
Because the securities in its portfolio are subject to price
declines as well as price advances, at times the net asset value per
Back Bay Advisors Managed Series share may be less than a
shareholder's original cost. There can be no assurance that the Back
Bay Advisors Managed Series' investment objective will be attained.
Loomis Sayles Small Cap Series
As indicated in the Prospectus following the caption "Investment
Objective and Policies -- Loomis Sayles Small Cap Series," the Loomis
Sayles Small Cap Series seeks to attain its investment objective of
long-term capital growth through investments in common stocks or their
equivalent. The Series seeks to achieve its objective by giving
emphasis to both undervalued securities and securities of companies
with significant growth potential. The Series will normally invest at
least 65% of its total assets in companies with market capitalization
of less than $500 million and may invest up to 35% of its assets in
larger companies. Current income is not a consideration in selecting
the Series' investments. The Series may invest a limited portion of
its assets in securities of foreign issuers.
Loomis Sayles Balanced Series
As disclosed in the Prospectus under the caption "Investment
Objectives and Policies -- Loomis Sayles Balanced Series," the Loomis
Sayles Balanced Series seeks to attain its investment objective of
reasonable long-term investment return from a combination of long-term
capital appreciation and moderate current income.
The Series is "flexibly managed" in that sometimes it invests
more heavily in equity securities and at other times it invests more
heavily in fixed-income securities, depending on its subadviser's view
of the economic and investment outlook. Most of the Series'
investments are normally in dividend-paying common stocks of
recognized investment quality that are expected to achieve growth in
earnings and dividends over the long-term. Fixed-income securities
include notes, bonds, non-convertible preferred stock and money market
instruments. The Series may invest in adjustable rate mortgage
securities, asset-backed securities, STRIPS and inverse floaters,
subject to a limit of 5% of the Series' assets for each of these types
of instruments. The Series invests at least 25% of its assets in
fixed-income senior securities and, under normal market conditions,
more than 50% of its assets in equity securities. The Series also may
invest in foreign securities.
Draycott International Equity Series
As disclosed in the Prospectus under the caption "Investment
Objectives and Policies -- Draycott International Equity Series," the
Draycott International Equity Series seeks to attain its investment
objective of total return from long-term growth of capital primarily
through investment in international equity securities.
Salomon Brothers U.S. Government Series
As disclosed in the Prospectus under the caption "Investment
Objectives and Policies -- Salomon Brothers U.S. Government Series,"
the Salomon Brothers U.S. Government Series seeks to attain its
investment objective of providing a high level of current income
consistent with preservation of capital and maintenance of liquidity
by investing primarily in debt obligations and, to the extent allowed
by state law and regulation, in mortgage backed securities issued or
guaranteed by the U. S. Government its agencies, authorities or
instrumentalities or derivative securities such as collateralized
mortgage obligations ("CMOs") backed by such securities.
Salomon Brothers Strategic Bond Opportunities Series
As disclosed in the Prospectus under the caption "Investment
Objectives and Policies -- Salomon Brothers Strategic Bond
Opportunities Series," the Salomon Brothers Strategic Bond
Opportunities Series seeks to attain its investment objective of a
high level of total return consistent with preservation of capital by
assessing the relative risks and opportunities available in various
market segments and allocating assets primarily among U.S. Government
obligations, mortgage backed securities, domestic corporate debt and
international debt securities rated investment grade (BBB or higher
by S&P or Baa or higher by Moody's) and domestic and sovereign
corporate debt and international debt securities rated below
investment grade.
Venture Value Series
As disclosed in the Prospectus under the caption "Investment
Objectives and Policies -- Venture Value Series," the Venture Value
Series seeks to attain its investment objective of growth of capital
by investing in domestic common stocks that the Series' subadviser
believes have capital growth potential due to factors such as
undervalued assets or earnings potential, product development and
demand, favorable operating ratios, resources for expansion,
management abilities, reasonableness of market price, and favorable
overall business prospects. The Series will generally invest
predominantly in equity securities of companies with market
capitalizations of at least $250 million. It may also invest in
issues with smaller capitalizations.
Alger Equity Growth Series
As disclosed in the Prospectus under the caption "Investment
Objectives and Policies -- Alger Equity Growth Series," the Alger
Equity Growth Series seeks to attain its investment objective of long-
term capital appreciation by investing primarily in a diversified,
actively managed portfolio of equity securities, primarily of
companies having a total market capitalization of $1 billion or
greater. These companies may still be in the developmental stage,
may be older companies that appear to be entering a new stage of
growth progress, or may be companies providing products or services
with a high unit volume growth rate.
CS First Boston Strategic Equity Opportunities Series
As disclosed in the Prospectus under the caption "Investment
Objectives and Policies -- CS First Boston Strategic Equity
Opportunities Series," the CS First Boston Strategic Equity
Opportunities Series seeks to attain its investment objective of
capital appreciation by ordinarily investing the majority of its
assets in U.S. and foreign stocks, including unrecognized and
misperceived stocks with improving fundamentals.
The Series will invest at least 65% of its total assets in a
diversified portfolio of equity securities; up to 35% of the Series'
assets may be invested in fixed-income securities, including bonds,
convertible bonds and notes and securities rated below investment
grade (BB or lower by S&P and Ba or lower by Moody's) (also known as
"junk bonds").
MISCELLANEOUS INVESTMENT PRACTICES
The following information relates to certain investment practices
in which certain Series may engage. The table indicates which Series
may engage in each of these practices.
Practices Series
Money Market Instruments All Series
U.S. Government Securities All Series
Convertible Securities Capital Growth Series
Loomis Sayles Avanti Growth
Series
Loomis Sayles Balanced Series
Draycott International Equity
Series
Salomon Brothers Strategic
Bond Opportunities
Series
Venture Value Series
Alger Equity Growth Series
CS First Boston Strategic
Equity Opportunities
Series
Reverse Repurchase Agreements and Dollar Rolls Salomon Brothers U.S.
Government Series
Salomon Brothers Strategic
Bond Opportunities
Series
CS First Boston Strategic
Equity Opportunities
Series
Loans of Portfolio Securities Back Bay Advisors Bond Income
Series
Back Bay Advisors Managed
Series
Salomon Brothers U.S.
Government Series
Salomon Brothers Strategic
Bond Opportunities
Series
Venture Value Series
Alger Equity Growth Series
CS First Boston Strategic
Equity Opportunities
Series
Privately-Issued Mortgage Securities Salomon Brothers U.S.
Government Series
Salomon Brothers Strategic Bond
Opportunities Series
Asset-Backed Securities; Types of Loomis Sayles Balanced Series
Credit Support Salomon Brothers U.S.
Government Series
Salomon Brothers Strategic
Bond Opportunities
Series
STRIPS Loomis Sayles Balanced Series
Salomon Brothers U.S.
Government Series
Salomon Brothers Strategic Bond
Opportunities Series
Stripped Mortgage Securities Salomon Brothers U.S.
Government Series
Salomon Brothers Strategic Bond
Opportunities Series
Swaps, Caps, Floors, Collars, Etc. Salomon Brothers Strategic Bond
Opportunities Series
Eurodollar Futures and Options Salomon Brothers U.S.
Government Series
Salomon Brothers Strategic Bond
Opportunities Series
High Yield Foreign Sovereign Debt Securities Salomon Brothers Strategic
Bond Opportunities
Series
CS First Boston Strategic
Equity Opportunities
Series
Futures and Options Westpeak Value Growth Series
Westpeak Stock Index Series
Back Bay Advisors Managed
Series
Loomis Sayles Balanced Series
Draycott International Equity
Series
Salomon Brothers U.S.
Government Series
Salomon Brothers Strategic Bond
Opportunities Series
Venture Value Series
CS First Boston Strategic
Equity Opportunities
Series
Foreign Currency Hedging Transactions Draycott International Equity
Series
Salomon Brothers Strategic
Bond Opportunities
Series
Venture Value Series
CS First Boston Strategic
Equity Opportunities
Series
Money Market Instruments - Obligations of foreign branches of U.S.
banks and other foreign securities are subject to risks of foreign
political, economic and legal developments, which include foreign
governmental restrictions adversely affecting payment of principal and
interest on the obligations, foreign withholding and other taxes on
interest income, and difficulties in obtaining and enforcing a
judgment against a foreign branch of a domestic bank. With respect to
bank obligations, different risks may result from the fact that
foreign banks are not necessarily subject to the same or similar
regulatory requirements that apply to domestic banks. For instance,
such branches may not be subject to the types of requirements imposed
on domestic banks with respect to mandatory reserves, loan
limitations, examinations, accounting, auditing, recordkeeping and the
public availability of information. Obligations of such branches will
be purchased by the Series only when the Series' adviser or subadviser
believes the risks are minimal.
The following constitutes a description of the money market
instruments which may be purchased by the Back Bay Advisors Money
Market Series, and by any of the Series for temporary defensive
purposes.
U.S. Government Securities -- are bills, certificates of
indebtedness, notes and bonds issued by agencies, authorities and
instrumentalities of the U.S. Government. Some obligations, such as
those issued by the U.S. Treasury, the Government National Mortgage
Association, the Farmers' Home Administration and the Small Business
Administration, are backed by the full faith and credit of the U.S.
Treasury. Other obligations are backed by the right of the issuer to
borrow from the U.S. Treasury or by the credit of the agency,
authority or instrumentality itself. Such obligations include, but
are not limited to, obligations issued by the Tennessee Valley
Authority, the Bank for Cooperatives, Federal Home Loan Banks, Federal
Intermediate Credit Banks, Federal Land Banks and the Federal National
Mortgage Association.
Repurchase Agreements -- are agreements by which a Series
purchases a security (usually a U.S. Government Security) and obtains
a simultaneous commitment from the seller (a member bank of the
Federal Reserve System or, to the extent permitted by the 1940 Act, a
recognized securities dealer) to repurchase the security at an agreed
upon price and date. The resale price is in excess of the purchase
price and reflects an agreed upon market rate unrelated to the coupon
rate on the purchased security. Such transactions afford the Fund the
opportunity to earn a return on temporarily available cash at minimal
market risk. While the underlying security may be a bill, certificate
of indebtedness, note or bond issued by an agency, authority or
instrumentality of the United States Government, the obligation of the
seller is not guaranteed by the U.S. Government and there is a risk
that the seller may fail to repurchase the underlying security. In
such event, the Fund may be able to exercise rights with respect to
the underlying security, including possible disposition of the
security in the market. However, the Fund may be subject to various
delays and risks of loss, including (a) possible declines in the value
of the underlying security during the period while the Fund seeks to
enforce its rights thereto, (b) possible reduced levels of income and
lack of access to income during this period and (c) inability to
enforce rights and the expenses involved in attempted enforcement.
Certificates of Deposit -- are certificates issued against funds
deposited in a bank, are for a definite period of time, earn a
specified rate of return and are normally negotiable.
Bankers' Acceptances -- are short-term credit instruments used to
finance the import, export, transfer or storage of goods. They are
termed "accepted" when a bank guarantees their payment at maturity.
Eurodollar Obligations -- are obligations of foreign branches of
U.S. banks.
Commercial Paper -- refers to promissory notes issued by
corporations in order to finance their short-term credit needs. For a
description of commercial paper ratings see Appendix A-1.
U.S. Government Securities - The Series may invest in some or
all of the following U.S. Government Securities, as well as in other
types of securities issued or guaranteed by the U.S. Government or
its agencies, authorities or instrumentalities:
. U.S. Treasury Bills - Direct obligations of the United States
Treasury which are issued in maturities of one year or less. No
interest is paid on Treasury bills; instead, they are issued at a
discount and repaid at full face value when they mature. They are
backed by the full faith and credit of the United States Government.
. U.S. Treasury Notes and Bonds - Direct obligations of the United
States Treasury issued in maturities that vary between one and 40
years, with interest normally payable every six months. These
obligations are backed by the full faith and credit of the United
States Government.
. "Ginnie Maes" - Debt securities issued by a mortgage banker or
other mortgagee which represent an interest in a pool of mortgages
insured by the Federal Housing Administration or the Farmer's Home
Administration or guaranteed by the Veterans Administration. The
Government National Mortgage Association ("GNMA") guarantees the
timely payment of principal and interest when such payments are due,
whether or not these amounts are collected by the issuer of these
certificates on the underlying mortgages. Mortgages included in
single family or multi-family residential mortgage pools backing an
issue of Ginnie Maes have a maximum maturity of up to 30 years.
Scheduled payments of principal and interest are made to the
registered holders of Ginnie Maes (such as the Fund) each month.
Unscheduled prepayments may be made by homeowners, or as a result of
a default. Prepayments are passed through to the registered holder
(such as the Fund, which reinvests any prepayments) of Ginnie Maes
along with regular monthly payments of principal and interest.
. "Fannie Maes" - The Federal National Mortgage Association
("FNMA") is a government-sponsored corporation owned entirely by
private stockholders that purchases residential mortgages from a list
of approved seller/servicers. Fannie Maes are pass-through
securities issued by FNMA that are guaranteed as to timely payment of
principal and interest by FNMA but are not backed by the full faith
and credit of the United States Government.
. "Freddie Macs" - The Federal Home Loan Mortgage Corporation
("FHLMC") is a corporate instrumentality of the United States
Government. Freddie Macs are participation certificates issued by
FHLMC that represent an interest in residential mortgages from
FHLMC's National Portfolio. FHLMC guarantees the timely payment of
interest and ultimate collection of principal, but Freddie Macs are
not backed by the full faith and credit of the United States
Government.
As described in the prospectus, U.S. Government Securities do
not involve the credit risks associated with investments in other
types of fixed-income securities, although, as a result, the yields
available from U.S. Government Securities are generally lower than
the yields available from corporate fixed-income securities. Like
other fixed-income securities, however, the values of U.S. Government
Securities change as interest rates fluctuate. Fluctuations in the
value of portfolio securities will not affect interest income on
existing portfolio securities but will be reflected in the Series'
net asset value. Since the magnitude of these fluctuations will
generally be greater at times when the Series' average maturity is
longer, under certain market conditions, a Series may, for temporary
defensive purposes, accept lower current income from short-term
investments rather than investing in higher yielding long-term
securities.
Convertible Securities - The Series listed above may invest in
convertible securities, including corporate bonds, notes or preferred
stocks of U.S. or foreign issuers that can be converted into (that
is, exchanged for) common stocks or other equity securities.
Convertible securities also include other securities, such as
warrants, that provide an opportunity for equity participation.
Because convertible securities can be converted into equity
securities, their values will normally vary in some proportion with
those of the underlying equity securities. Convertible securities
usually provide a higher yield than the underlying equity, however,
so that the price decline of a convertible security may sometimes be
less substantial than that of the underlying equity security.
Reverse Repurchase Agreements and Dollar Roll Agreements - The
Series may enter into reverse repurchase agreements and dollar roll
agreements with qualified institutions to seek to enhance returns.
Reverse repurchase agreements involve sales by the Series of
portfolio assets concurrently with an agreement by the Series to
repurchase the same assets at a later date at a fixed price. During
the reverse repurchase agreement period, the Series continues to
receive principal and interest payments on these securities.
The Series may enter into dollar rolls in which the Series sells
securities for delivery in the current month and simultaneously
contracts to repurchase substantially similar (same type and coupon)
securities on a specified future date. During the roll period, the
Series forgoes principal and interest paid on the securities. The
Series is compensated by the difference between the current sales
price and the forward price for the future purchase (often referred
to as the "drop") as well as by the interest earned on the cash
proceeds of the initial sale.
The Series will establish a segregated account with its
custodian in which it will maintain cash, U.S. Government securities
or other liquid high-grade debt obligations equal in value to its
obligations in respect of reverse repurchase agreements and dollar
rolls. Reverse repurchase agreements and dollar rolls involve the
risk that the market value of the securities retained by the Series
may decline below the price of the securities the Series has sold but
is obligated to repurchase under the agreement. In the event the
buyer of securities under a reverse repurchase agreement files for
bankruptcy or becomes insolvent, the Series' use of the proceeds of
the agreement may be restricted pending a determination by the other
party, or its trustee or receiver, whether to enforce the Series'
obligation to repurchase the securities. Reverse repurchase
agreements and dollar rolls are considered borrowings by the Series.
Loans of Portfolio Securities - The Series listed above may lend
its portfolio securities to broker-dealers under contracts calling
for cash collateral equal to at least the market value of the
securities loaned, marked to market on a daily basis. (The Series
(except the Salomon Brothers U.S. Government and CS First Boston
Strategic Equity Opportunities Series) at the present time have no
intention to engage in the lending of portfolio securities.) The
Series will continue to benefit from interest or dividends on the
securities loaned and will also receive interest through investment
of the cash collateral in short-term liquid investments, which may
include shares of money market funds subject to any investment
restriction described in the Prospectus. No loans will be made if,
as a result, the aggregate amount of such loans outstanding at any
one time would exceed 15% of the respective Series' total assets
(taken at current value). Any voting rights, or rights to consent,
relating to securities loaned pass to the borrower. However, if a
material event affecting the investment occurs, such loans will be
called so that the securities may be voted by the Series. A Series
pays various fees in connection with such loans, including shipping
fees and reasonable custodian and placement fees.
Privately-Issued Mortgage Securities - The Series listed above
may invest in privately-issued pass through securities that provide
for the monthly principal and interest payments made by individual
borrowers to pass through to investors on a corporate basis, and in
privately issued collateralized mortgage obligations ("CMOs"; see the
general description under "Investment Risks" in the Prospectus).
Privately-issued mortgage securities are issued by private
originators of, or investors in, mortgage loans, including mortgage
bankers, commercial banks, investment banks, savings and loan
associations and special purpose subsidiaries of the foregoing.
Since privately-issued mortgage certificates are not guaranteed by an
entity having the credit status of GNMA or FHLMC, such securities
generally are structured with one or more types of credit
enhancement. For a description of the types of credit enhancements
that may accompany privately-issued mortgage securities, see "Types
of Credit Support" below. A Series will not limit its investments to
asset-backed securities with credit enhancements.
Asset Backed Securities As with mortgage securities, asset-
backed securities are often backed by a pool of assets representing
the obligation of a number of different parties and use similar
credit enhancement techniques. For a description of the types of
credit enhancement that may accompany privately-issued mortgage
securities, see "Types of Credit Support" below. A Series will not
limit its investments to asset-backed securities with credit
enhancements. Although asset-backed securities are not generally
traded on a national securities exchange, many such securities are
widely traded by brokers and dealers, and in such cases will not be
considered illiquid securities for the purposes of the investment
policy that limits a Series' investments in illiquid securities to
15% of net assets.
Types of Credit Support - Mortgage securities and asset-backed
securities are often backed by a pool of assets representing the
obligations of a number of different parties. To lessen the effect
of failure by obligors on underlying assets to make payments, such
securities may contain elements of credit support. Such credit
support falls into two categories: (i) liquidity protection and (ii)
protection against losses resulting from ultimate default by an
obligor on the underlying assets. Liquidity protection refers to the
provision of advances, generally by the entity administering the pool
of assets, to ensure that the pass-through of payments due on the
underlying pool occurs in a timely fashion. Protection against
losses resulting from ultimate default enhances the likelihood of
ultimate payment of the obligations on at least a portion of the
assets in the pool. Such protection may be provided through
guarantees, insurance policies or letters of credit obtained by the
issuer or sponsor from third parties, through various means of
structuring the transaction or through a combination of such
approaches. A Series will not pay any additional fees for such
credit support, although the existence of credit support may increase
the price of a security.
The ratings of mortgage securities and asset-backed securities
for which third-party credit enhancement provides liquidity
protection or protection against losses from default are generally
dependent upon the continued creditworthiness of the provider of the
credit enhancement. The ratings of such securities could be subject
to reduction in the event of deterioration in the creditworthiness of
the credit enhancement provider even in cases where the delinquency
and loss experience on the underlying pool of assets is better than
expected.
Examples of credit support arising out of the structure of the
transaction include "senior subordinated securities" (multiple class
securities with one or more classes subordinate to other classes as
to the payment of principal and interest, with the result that
defaults on the underlying assets are borne first by the holders of
the subordinated class), creation of "reserve funds" (where cash or
investments, sometimes funded from a portion of the payments on the
underlying assets, are held in reserve against future losses) and
"over-collateralization" (where the scheduled payments on, or the
principal amount of, the underlying assets exceed those required to
make payment of the securities and pay any servicing or other fees).
The degree of credit support provided for each issue is generally
based on historical information with respect to the level of credit
risk associated with the underlying assets. Delinquency or loss in
excess of that which is anticipated could adversely affect the return
on an investment in such security.
STRIPS - In addition to the U.S. Government securities discussed
above, the Series listed above may invest in separately traded
interest components of securities issued or guaranteed by the United
States Treasury. The interest components of selected securities are
traded independently under the Separate Trading of Registered
Interest and Principal of Securities program ("STRIPS"). Under the
STRIPS program, the interest components are individually numbered and
separately issued by the United States Treasury at the request of
depository financial institutions, which then trade the component
parts independently.
Stripped Mortgage Securities - Stripped mortgage securities are
derivative multiclass mortgage securities. Stripped mortgage
securities may be issued by agencies or instrumentalities of the U.S.
Government, or by private issuers, including savings and loan
associations, mortgage banks, commercial banks, investment banks and
special purpose subsidiaries of the foregoing. Stripped mortgage
securities have greater volatility than other types of mortgage
securities in which the Series invests. Although stripped mortgage
securities are purchased and sold by institutional investors through
several investment banking firms acting as brokers or dealers, the
market for such securities has not yet been fully developed.
Accordingly, stripped mortgage securities are generally illiquid.
Stripped mortgage securities are usually structured with two
classes that receive different proportions of the interest and
principal distributions on a pool of mortgage assets. A common type
of stripped mortgage security will have one class receiving some of
the interest and most of the principal from the mortgage assets,
while the other class will receive most of the interest and the
remainder of the principal. In the most extreme case, 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). The yield to maturity on an IO class is extremely
sensitive not only to changes in prevailing interest rates but also
the rate of principal payments (including prepayments) on the related
underlying mortgage assets, and a rapid rate of principal payments
may have a material adverse effect on the Series' yield to maturity.
If the underlying mortgage assets experience greater than anticipated
prepayments of principal, the Series may fail to fully recoup its
initial investment in these securities even if the securities are
rated in a top rating category.
As interest rates rise and fall, the value of IOs tends to move
in the same direction as interest rates. The value of other mortgage
securities, like other debt instruments, will tend to move in the
opposite direction of interest rates. Accordingly, investing in IOs,
in conjunction with the other mortgage securities described herein,
may reduce fluctuations in a Series' net asset value.
In addition to the stripped mortgage securities described above,
the Series listed above may invest in similar securities such as
"Super POs," "Levered IOs" and "IOettes," all of which are more
volatile than conventional POs or IOs. Risks associated with
instruments such as Super POs are similar in nature to those risks
related to investments in POs. Risks connected with Levered IOs and
IOettes are similar in nature to those associated with IOs. The
Series may also invest in other similar instruments developed in the
future that are deemed consistent with the investment objectives,
policies and restrictions of the Series.
Under the Internal Revenue Code of 1986, as amended (the
"Code"), POs may generate taxable income from the current accrual of
original issue discount, without a corresponding distribution of cash
to the portfolio.
Swaps, Caps, Floors, Collars, Etc. - The Series listed above may
enter into interest rate, currency and index swaps, the purchase or
sale of related caps, floors and collars and other derivatives. A
Series 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 any increase in
the price of securities a portfolio anticipates purchasing at a later
date. A Series will use these transactions for non-speculative
purposes and will not sell interest rate caps or floors if it does
not own securities or other instruments providing the income the
portfolio may be obligated to pay. Interest rate swaps involve the
exchange by a Series 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). The purchase of an interest rate cap
entitles the purchaser to receive payments on a notional principal
amount from the party selling the cap to the extent that a specified
index exceeds a predetermined interest rate or amount. The purchase
of an interest rate floor entitles the purchaser to receive payments
of interest on a notional principal amount from the party selling the
interest rate floor to the extent that a specified index falls below
a predetermined interest rate or amount. A collar is a combination
of a cap and a floor that preserves a certain return within a
predetermined range of interest rates or values. A currency swap is
an agreement to exchange cash flows on a notional amount based on
changes in the values of the reference currencies.
A Series will usually enter into interest rate swaps on a net
basis, that is, two payment streams are netted out in a cash
settlement on the payment date or dates specified in the instrument,
with the portfolio receiving or paying, as the case may be, only the
net amount of the two payments. To the extent that a Series
maintains in a segregated account with its custodian assets
sufficient to meet its obligations under swaps, caps, floors, collars
and other similar derivatives (see below) these investments will not
constitute senior securities under the Investment Company Act of 1940
(the "1940 Act"), as amended, and, thus, will not be treated as being
subject to the Series' borrowing restrictions. A Series will not
enter into any swap, cap, floor, collar or other derivative
transaction unless the counterparty is deemed creditworthy by that
Series' subadviser. If a counterparty defaults, the Series may have
contractual remedies pursuant to the agreements related to the
transaction. The swap market has grown substantially in recent years
with a large number of banks and investment banking firms acting both
as principals and as agents utilizing standardized swap
documentation. As a result, the swap market has become relatively
liquid. Caps, floors and collars are more recent innovations for
which standardized documentation has not yet been fully developed
and, for that reason, they are less liquid than swaps.
The liquidity of swap agreements will be determined by a Series'
subadviser based on various factors, including (1) the frequency of
trades and quotations, (2) the number of dealers and prospective
purchasers in the marketplace, (3) dealer undertakings to make a
market, (4) the nature of the security (including any demand or
tender features), and (5) the nature of the marketplace for trades
(including the ability to assign or offset a portfolio's rights and
obligations relating to the investment). Such determination will
govern whether a swap will be deemed to be within the 15% restriction
on investments in securities that are not readily marketable.
Each Series will maintain cash and appropriate liquid assets in
a segregated custodial account to cover its current obligations under
swap agreements. If a Series enters into a swap agreement on a net
basis, it will segregate assets with a daily value at least equal to
the excess, if any, of the Series' accrued obligations under the swap
agreement over the accrued amount the Series is entitled to receive
under the agreement. If a Series enters into a swap agreement on
other than a net basis, it will segregate assets with a value equal
to the full amount of the Series' accrued obligations under the
agreement.
Eurodollar Futures and Options - The Series listed above may
make investments in Eurodollar instruments, which are typically
dollar-denominated futures contracts or options on those contracts
that are linked to the London Interbank Offered Rate ("LIBOR"),
although foreign currency denominated instruments are available from
time to time. Eurodollar futures contracts enable purchasers to
obtain a fixed rate for the lending of funds and sellers to obtain a
fixed rate for borrowings. A Series might use Eurodollar futures
contracts and options thereon to hedge against changes in LIBOR, to
which many interest rate swaps and fixed income instruments are
linked.
High Yield/High Risk Foreign Sovereign Debt Securities - The
Series listed above may invest in the sovereign debt of foreign
countries which have issued or have announced plans to issue Brady
Bonds, and expect that a substantial portion of their investments in
sovereign debt securities will consist of Brady Bonds. Brady Bonds
are debt securities issued under the framework of the Brady Plan, an
initiative announced by then U.S. Treasury Secretary Nicholas F.
Brady in 1989 as a mechanism for debtor nations to restructure their
outstanding external commercial bank indebtedness. In restructuring
its external debt under the Brady Plan framework, a debtor nation
negotiates with its existing bank lenders as well as multilateral
institutions such as the World Bank and the International Monetary
Fund (the "IMF"). The Brady Plan framework, as it has developed,
contemplates the exchange of commercial bank debt for newly issued
bonds (Brady Bonds). Brady Bonds may also be issued in respect of
new money being advanced by existing lenders in connection with the
debt restructuring. The World Bank and/or the IMF support the
restructuring by providing funds pursuant to loan agreements or other
arrangements which enable the debtor nation to collateralize the new
Brady Bonds or to repurchase outstanding bank debt at a discount.
Under these arrangements with the World Bank or the IMF, debtor
nations have been required to agree to the implementation of certain
domestic monetary and fiscal reforms. Such reforms have included the
liberalization of trade and foreign investment, the privatization of
state-owned enterprises and the setting of targets for public
spending and borrowing. These policies and programs seek to promote
the debtor country's economic growth and development. Investors
should recognize that the Brady Plan only sets forth general guiding
principles for economic reform and debt reduction, emphasizing that
solutions must be negotiated on a case-by-case basis between debtor
nations and their creditors. Investors should recognize that Brady
Bonds have been issued only recently, and accordingly do not have a
long payment history.
Agreements implemented under the Brady Plan to date are designed
to achieve debt and debt-service reduction through specific options
negotiated by a debtor nation with its creditors. As a result, the
financial packages offered by each country differ. The types of
options have included the exchange of outstanding commercial bank
debt for bonds issued at 100% of face value of such debt, which carry
a below-market stated rate of interest (generally known as par
bonds), bonds issued at a discount from face value of such debt
(generally known as discount bonds), bonds bearing an interest rate
which increases over time and bonds issued in exchange for the
advancement of new money by existing lenders. Regardless of the
stated face amount and stated interest rate of the various types of
Brady Bonds, a Series will purchase Brady Bonds in secondary markets,
as described below, in which the price and yield to the investor
reflect market conditions at the time of purchase. Brady Bonds
issued to date have traded at a deep discount from their face value.
Certain Brady Bonds have been collateralized as to principal due at
maturity (typically 30 years from the date of issuance) by U.S.
Treasury zero coupon bonds with a maturity equal to the final
maturity of such Brady Bonds, although the collateral is not
available to investors until the final maturity of the Brady Bonds.
Collateral purchases are financed by the IMF, the World Bank and the
debtor nations' reserves. In addition, interest payments on certain
types of Brady Bonds may be collateralized by cash or high-grade
securities in amounts that typically represent between 12 and 18
months of interest accruals on these instruments with the balance of
the interest accruals being uncollateralized. A Series may purchase
Brady Bonds with no or limited collateralization, and will be relying
for payment of interest and (except in the case of principal
collateralized Brady Bonds) principal primarily on the willingness
and ability of the foreign government to make payment in accordance
with the terms of the Brady Bonds. Brady Bonds issued to date are
purchased and sold in secondary markets through U.S. securities
dealers and other financial institutions and are generally maintained
through European transnational securities depositories.
Futures and Options
Futures Contracts. A futures contract is an agreement between
two parties to buy and sell a commodity or financial instrument (e.g.,
an interest-bearing security, a currency or, in the case of futures
contracts on the S&P 500 Index, the value of the basket of securities
comprising the Index) for a specified price on a specified future
date. In the case of futures on an index, the seller and buyer agree
to settle in cash, at a future date, based on the difference in value
of the contract between the date it is opened and the settlement date.
The value of each contract is equal to the value of the index from
time to time multiplied by a specified dollar amount. For example,
long-term municipal bond index futures trade in contracts equal to
$1000 multiplied by the Bond Buyer Municipal Bond Index.
When a trader, such as a Series, enters into a futures contract,
it is required to deposit with (or for the benefit of) its broker, as
"initial margin," an amount of cash or short-term high-quality
securities (such as U.S. Treasury Bills) equal to approximately 2% to
20% of the delivery or settlement price of the contract (depending on
applicable exchange rules). Initial margin is held to secure the
performance of the holder of the futures contract. As the value of
the contract changes, the value of futures contract positions
increases or declines. At the end of each trading day, the amount of
such increase or decline is received or paid respectively by and to
the holders of these positions. The amount received or paid is known
as "variation margin" or "maintenance margin." A Series with a long
position in a futures contract will establish a segregated account
with the Series' custodian containing cash or certain liquid assets
equal to the purchase price of the contract (less any margin on
deposit). For short positions in futures contracts, a Series will
establish a segregated account with the custodian with cash or high
grade liquid debt assets that, when added to the amounts deposited as
margin, equal the market value of the instruments or currency
underlying the futures contracts.
Although futures contracts by their terms may require actual
delivery and acceptance of securities, in most cases the contracts are
closed out before settlement. Closing out a futures sale is effected
by purchasing a futures contract for the same aggregate amount of the
specific type of financial instrument or commodity and with the same
delivery date. Similarly, the closing out of a futures purchase is
effected by the purchaser selling an offsetting futures contract.
Gain or loss on a futures position is equal to the net variation
margin received or paid over the time the position is held, plus or
minus the amount received or paid when the position is closed, minus
brokerage commissions.
The Westpeak Stock Index Series may purchase and sell futures
contracts on the S&P 500 Index solely for the purpose of reducing the
risk of tracking error arising from holding cash from new investments
in the Series or in anticipation of shareholder redemptions. The Back
Bay Advisors Managed Series may purchase and sell futures contracts on
interest-bearing securities or indices thereof, or on indices of stock
prices (such as the S&P 500 Index), to increase or decrease its
portfolio exposure to common stocks or to increase or decrease its
portfolio exposure to notes and bonds. The Westpeak Value Growth
Series may engage in transactions in futures contracts solely for the
purpose of maintaining full exposure of the portfolio to the movements
of broad equity markets at times when the Series holds a cash position
pending investment in stocks or in anticipation of redemptions.
Options. An option on a futures contract obligates the writer,
in return for the premium received, to assume a position in a futures
contract (a short position if the option is a call and a long
position if the option is a put), at a specified exercise price at
any time during the period of the option. Upon exercise of the
option, the delivery of the futures position by the writer of the
option to the holder of the option generally will be accompanied by
delivery of the accumulated balance in the writer's futures margin
account, which represents the amount by which the market price of the
futures contract, at exercise, exceeds, in the case of a call, or is
less than, in the case of a put, the exercise price of the option.
The premium paid by the purchaser of an option will reflect, among
other things, the relationship of the exercise price to the market
price and volatility of the underlying contract, the remaining term
of the option, supply and demand and interest rates. Options on
futures contracts traded in the United States may only be traded on a
United States board of trade licensed by the Commodity Futures
Trading Commission.
An option on a security entitles the holder to receive (in the
case of a call option) or to sell (in the case of a put option) a
particular security at a specified exercise price. An "American
style" option allows exercise of the option at any time during the
term of the option. A "European style" option allows an option to be
exercised only at the end of its term. Options on securities may be
traded on or off a national securities exchange.
A call option on a futures contract written by a Series is
considered by the Series to be covered if the Series owns the
security subject to the underlying futures contract or other
securities whose values are expected to move in tandem with the
values of the securities subject to such futures contract, based on
historical price movement volatility relationships. A call option on
a security written by a Series is considered to be covered if the
Series owns a security deliverable under the option. A written call
option is also covered if the Series holds a call on the same futures
contract or security as the call written where the exercise price of
the call held (a) is equal to or less than the exercise price of the
call written or (b) is greater than the exercise price of the call
written if the difference is maintained by the Series in cash,
Treasury bills or other high grade liquid obligations in a segregated
account with its custodian.
A put option on a futures contract written by a Series, or a put
option on a security written by a Series, is covered if the Series
maintains cash, U.S. Treasury bills or other high-grade liquid debt
obligations with a value equal to the exercise price in a segregated
account with the Series' custodian, or else holds a put on the same
futures contract (or security, as the case may be) as the put written
where the exercise price of the put held is equal to or greater than
the exercise price of the put written.
If the writer of an option wishes to terminate its position, it
may effect a closing purchase transaction by buying an option
identical to the option previously written. The effect of the
purchase is that the writer's position will be canceled. Likewise,
the holder of an option may liquidate its position by selling an
option identical to the option previously purchased.
Closing a written call option will permit the Series to write
another call option on the portfolio securities used to cover the
closed call option. Closing a written put option will permit the
Series to write another put option secured by the segregated cash,
U.S. Treasury bills or other high-grade liquid obligations used to
secure the closed put option. Also, effecting a closing transaction
will permit the cash or proceeds from the concurrent sale of any
futures contract or securities subject to the option to be used for
other Series investments. If a Series desires to sell particular
securities covering a written call option position, it will close out
its position or will designate from its portfolio comparable
securities to cover the option prior to or concurrent with the sale
of the covering securities.
The Series will realize a profit from closing out an option if
the price of the offsetting position is less than the premium
received from writing the option or is more than the premium paid to
purchase the option; the Series will realize a loss from closing out
an option transaction if the price of the offsetting option position
is more than the premium received from writing the option or is less
than the premium paid to purchase the option. Because increases in
the market price of a call option will generally reflect increases in
the market price of the covering securities, any loss resulting from
the closing of a written call option position is expected to be
offset in whole or in part by appreciation of such covering
securities.
Since premiums on options having an exercise price close to the
value of the underlying securities or futures contracts usually have
a time value component (i.e. a value that diminishes as the time
within which the option can be exercised grows shorter) an option
writer may profit from the lapse of time even though the value of the
futures contract (or security in some cases) underlying the option
(and of the security deliverable under the futures contract) has not
changed. Consequently, profit from option writing may or may not be
offset by a decline in the value of securities covering the option.
If the profit is not entirely offset, the Series will have a net gain
from the options transaction, and the Series' total return will be
enhanced. Likewise, the profit or loss from writing put options may
or may not be offset in whole or in part by changes in the market
value of securities acquired by the Series when the put options are
closed.
An over-the-counter option (an option not traded on a national
securities exchange) may be closed out only with the other party to
the original option transaction. While a Series will seek to enter
into over-the-counter options only with dealers who agree to or are
expected to be capable of entering into closing transactions with the
Series, there can be no assurance that the Series will be able to
liquidate an over-the-counter option at a favorable price at any time
prior to its expiration. Accordingly, the Series might have to
exercise an over-the-counter option it holds in order to realize any
profit thereon and thereby would incur transactions costs on the
purchase or sale of the underlying assets. If the Series cannot
close out a covered call option written by it, it will not be able to
sell the underlying security until the option expires or is
exercised. Furthermore, over-the-counter options are not subject to
the protections afforded purchasers of listed options by the Options
Clearing Corporation or other clearing organization.
The staff of the Securities and Exchange Commission (the "SEC")
has taken the position that over-the-counter options on U.S.
Government Securities and the assets used as cover for written over-
the-counter options on U.S. Government Securities should generally be
treated as illiquid securities. However, if a dealer recognized by
the Federal Reserve Bank of New York as a "primary dealer" in U.S.
Government Securities is the other party to an option contract
written by a mutual fund such as a Series, and such Series has the
absolute right to repurchase the option from the dealer at a formula
price established in a contract with the dealer, the SEC staff has
agreed that the Series only needs to treat as illiquid that amount of
the "cover" assets equal to the amount by which (i) the formula price
exceeds (ii) any amount by which the market value of the securities
subject to the options exceeds the exercise price of the option (the
amount by which the option is "in-the-money").
Risks Related to Futures and Options. The use of futures
contracts and options involves risks. One risk arises because of the
imperfect correlation between movements in the price of futures
contracts or options and movements in the price of the underlying
securities or index. The Series' use of futures contracts or options
will not be fully effective unless the Series can compensate for such
imperfect correlation. There is no assurance that the Series will be
able to effect such compensation.
The correlation between the price movement of a futures contract
or option and the related security (or index) may be distorted due to
differences in the nature of the markets. If the price of the futures
contract or option moves more than the price of the security or index,
the Series would experience either a loss or a gain on the future or
option that is not completely offset by movements in the price of the
security or index. In an attempt to compensate for imperfect price
movement correlations, a Series may purchase or sell futures contracts
or options in a greater amount than the related securities or index
position if the volatility of the related securities or index is
historically greater than the volatility of the futures contracts or
options. Conversely, the Series may purchase or sell fewer contracts
or options if the volatility of the price of the securities or index
is historically less than that of the contracts or options.
There are many reasons why changes in the values of futures
contracts or options may not correlate perfectly with changes in the
value of the underlying security of index. For example, all
participants in the futures market are subject to margin deposit and
maintenance requirements. Rather than meeting additional margin
deposit requirements, investors may close futures contracts through
offsetting transactions, which could distort the normal relationship
between the index and futures markets. Secondly, the deposit
requirements in the futures market are less onerous than margin
requirements in the securities market, and as a result the futures
market may attract more speculators than does the securities market.
In addition, trading hours for index futures or options may not
correspond perfectly to hours of trading on the exchange where the
underlying securities trade. This may result in a disparity between
the price of futures or options and the value of the underlying
security or index due to the lack of continuous arbitrage between the
futures or options price and the value of the underlying security or
index. Hedging transactions using securities indices also involve
the risk that movements in the price of the index may not correlate
with price movements of the particular portfolio securities being
hedged (since a Series will typically not own all of the securities
included in a particular index.)
Price movement correlation also may be distorted by the limited
liquidity of certain futures or options markets and the participation
of speculators in such markets. If an insufficient number of
contracts are traded, commercial users may not deal in futures
contracts or options because they do not want to assume the risk that
they may not be able to close out their positions within a reasonable
amount of time. In such instance, futures and options market prices
may be driven by different forces than those driving the market in the
underlying securities, and price spreads between these markets may
widen. The participation of speculators in the market generally
enhances its liquidity. Nonetheless, speculative trading spreads
between futures markets may create temporary price distortions
unrelated to the market in the underlying securities.
Positions in futures contracts and related options are
established or closed out only on an exchange or board of trade
regulated by the Commodity Futures Trading Commission. There is no
assurance that a liquid market on an exchange or board of trade will
exist for any particular contract or at any particular time. The
liquidity of markets in futures contracts may be adversely affected by
"daily price fluctuation limits" established by commodity exchanges
which limit the amount of fluctuation in a futures price during a
single trading day. Once the daily limit has been reached in a
contract, no trades may be entered into at a price beyond the limit,
which may prevent the liquidation of open futures positions. Prices
have in the past exceeded the daily limit on a number of consecutive
trading days. If there is not a liquid market at a particular time,
it may not be possible to close a futures position at such time, and,
in the event of adverse price movements, the Series would continue to
be required to make daily cash payments of variation margin. However,
if futures or options are used to hedge portfolio securities, an
increase in the price of the securities, if any, may partially or
completely offset losses on the futures contract.
An exchange-traded option may be closed out only on a national
securities or commodities exchange which generally provides a liquid
secondary market for an option of the same series. If a liquid
secondary market for an exchange-traded option does not exist, it
might not be possible to effect a closing transaction with respect to
a particular option, with the result that the Series would have to
exercise the option in order to realize any profit. If the Series
that has written an option is unable to effect a closing purchase
transaction in a secondary market, it will not be able to sell the
underlying security until the option expires or it delivers the
underlying security upon exercise. Reasons for the absence of a
liquid secondary market on an exchange include the following: (i)
there may be insufficient trading interest in certain options; (ii)
restrictions may be imposed by an exchange on opening transactions or
closing transactions or both; (iii) trading halts, suspensions or
other restrictions may be imposed with respect to particular classes
or series of options or underlying securities; (iv) unusual or
unforeseen circumstances may interrupt normal operations on an
exchange; (v) the facilities of an exchange or the Options Clearing
Corporation or other clearing organization may not at all times be
adequate to handle current trading volume or (vi) one or more
exchanges could, for economic or other reasons, decide or be
compelled at some future date to discontinue the trading of options
(or a particular class or series of options), in which event the
secondary market on that exchange (or in that class or series of
options) would cease to exist, although outstanding options on that
exchange that had been issued by the Options Clearing Corporation as
a result of trades on that exchange would continue to be exercisable
in accordance with their terms.
Because the specific procedures for trading foreign futures and
options on futures exchanges are still evolving, additional or
different margin requirements as well as settlement procedures may be
applicable to foreign futures and options at the time the Series
purchases foreign futures or options.
The successful use of transactions in futures and options depends
in part on the ability of the Series to forecast correctly the
direction and extent of interest rate or securities price movements
within a given time frame. To the extent interest rates or securities
prices move in a direction opposite to that anticipated, a Series may
realize a loss that is not fully or partially offset by an increase in
the value of portfolio securities. In addition, whether or not
interest rates or securities prices move during the period that the
Series holds futures or options positions, the Series will pay the
cost of taking those positions (i.e., brokerage costs). As a result,
the Series' total return for such period may be less than if it had
not engaged in the futures or option transaction.
Future Developments. The above discussion relates to the
Series' proposed use of futures contracts, options and options on
futures contracts currently available. The relevant markets and
related regulations are still in the developing stage. In the event
of future regulatory or market developments, the Series may also use
additional types of futures contracts or options and other similar or
related investment techniques.
Foreign Currency Hedging Transactions - To protect against a
change in the foreign currency exchange rate between the date on
which a Series contracts to purchase or sell a security that settles
in a foreign currency and the settlement date for the purchase or
sale, or to "lock in" the equivalent of a dividend or interest
payment in another currency, the Series might purchase or sell a
foreign currency on a spot (or cash) basis at the prevailing spot
rate. If conditions warrant, a Series may also enter into contracts
with banks or broker-dealers to purchase or sell foreign currencies
at a future date ("forward contracts"). The Series will maintain
cash or high-quality debt obligations in a segregated account with
the custodian in an amount at least equal to (i) the difference
between the current value of the Series' liquid holdings that settle
in the relevant currency and the Series' outstanding net obligations
under currency forward contracts in that currency, or (ii) the
current amount, if any, that would be required to be paid to enter
into an offsetting forward currency contract which would have the
effect of closing out the original forward contract. The Series' use
of currency hedging transactions may be limited by tax
considerations. The Series may also purchase or sell foreign
currency futures contracts traded on futures exchanges. Foreign
currency futures contract transactions involve risks similar to those
of other futures transactions. See "Futures and Options," above.
DETERMINATION OF NET ASSET VALUES
As described in the text of the Prospectus following the caption
"Net Asset Values and Portfolio Valuation," the value of each Series'
portfolio assets is determined by that Series' adviser (subadviser, in
the case of Series that have a subadviser). The net asset value of
each Series' shares is determined as of the close of regular trading
on the New York Stock Exchange on each day the New York Stock Exchange
is open and there is a sufficient degree of trading in a Series'
portfolio securities that the current net asset value of a Series'
shares is materially affected. The New York Stock Exchange is
currently expected to be closed on weekend days and on the following
holidays each year: New Year's Day, Presidents Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day. Expenses of each Series are paid or accrued each day.
Back Bay Advisors Money Market Series
As described in the text of the Prospectus following the caption
"Net Asset Values and Portfolio Valuation," the portfolio of the Back
Bay Advisors Money Market Series will be valued at amortized cost.
Under the amortized cost method of valuation, securities are valued at
cost on the date of purchase. Thereafter the values of securities
purchased at a discount or premium are increased or decreased
incrementally each day so that at maturity the purchase discount or
premium is fully amortized and the value of the security is equal to
its principal amount. Due to fluctuations in interest rates, the
amortized cost value of the securities of the Back Bay Advisors Money
Market Series may at times be more or less than their market value.
By using amortized cost valuation, the Back Bay Advisors Money
Market Series seeks to maintain a constant net asset value of $100 per
share despite minor shifts in the market value of its portfolio
securities. The yield on a shareholder's investment may be more or
less than that which would be recognized if the net asset value per
share of the Back Bay Advisors Money Market Series were not constant
and were permitted to fluctuate with the market value of the portfolio
securities of the Back Bay Advisors Money Market Series. However, as
a result of the following procedures, the Fund believes any difference
will normally be minimal. Quarterly, the Trustees monitor the
deviation between the net asset value per share of the Back Bay
Advisors Money Market Series as determined by using available market
quotations and its amortized cost price per share. Back Bay Advisors
makes such comparisons at least weekly and will advise the Trustees
promptly in the event of any significant deviation. If the deviation
exceeds 1/2 of 1% for the Back Bay Advisors Money Market Series, the
Board of Trustees will consider what action, if any, should be
initiated to provide fair valuation of the portfolio securities of the
Back Bay Advisors Money Market Series and prevent material dilution or
other unfair results to shareholders. Such action may include selling
portfolio securities prior to maturity; withholding dividends; or
utilizing a net asset value per share as determined by using available
market quotations.
Back Bay Advisors Bond Income Series
As described in the text of the Prospectus following the caption
"Net Asset Values and Portfolio Valuation," the Back Bay Advisors Bond
Income Series values certain portfolio securities (other than fixed-
income securities maturing in 60 days or less, which are valued using
the amortized cost method) at market value where current market
quotations are readily available. Where current market quotations are
not readily available, a pricing service selected by Back Bay
Advisors, pursuant to the authorization of the Board of Trustees,
values the securities at fair value. The pricing service employed
will be one that determines valuations of normal institutional-sized
trading units of long-term debt securities. Such valuations are
determined by using methods based on market transactions for
comparable securities and on various relationships between securities
which are generally recognized by institutional traders. Other
securities for which current market quotations are not readily
available (including restricted securities, if any) and all other
assets are taken at fair value as determined in good faith by Back Bay
Advisors acting under the supervision of the Board of Trustees,
although the actual calculations may be made by a pricing service
selected by Back Bay Advisors acting pursuant to the direction of the
Board. Securities traded on a national securities exchange or
exchanges are valued at their last sale price on the principal
exchange, or if there is no reported sale, and in the case of over-the-
counter securities, at a bid price estimated by a broker.
Capital Growth, Westpeak Value Growth, Loomis Sayles Avanti Growth,
Westpeak Stock Index, Loomis Sayles Small Cap, Loomis Sayles Balanced,
Draycott International Equity, Salomon Brothers U.S. Government,
Salomon Brothers Strategic Bond Opportunities, Venture Value, Alger
Equity Growth and CS First Boston Strategic Equity Opportunities
Series
As described in the text of the Prospectus following the caption
"Net Asset Values and Portfolio Valuation," each of the Series listed
above values its portfolio securities (other than fixed-income
securities maturing in 60 days or less, which are valued using the
amortized cost method) at market value where current market quotations
are readily available and otherwise values them at fair value as
determined in good faith by the Trustees or by the particular Series'
adviser or subadviser under the supervision of the Board of Trustees.
Each of the advisers and subadvisers have been authorized to delegate
certain price determinations to pricing services or facilities which
they select. Securities traded on a national securities exchange or
exchanges are valued at their last sale price on the principal
exchange or, if there is no reported sale during the day, and in the
case of over-the-counter securities, at the last reported bid price
estimated by a broker.
Back Bay Advisors Managed Series
Equity securities traded on a national securities exchange or
exchanges are valued at their last sale price on the principal
exchange or, if there is no reported sale during the day, and in the
case of over-the-counter securities, at the last bid price. Debt
securities are valued at market value where current market quotations
are readily available. Where current market quotations are not
readily available, a pricing service selected by Back Bay Advisors,
acting pursuant to the authorization of the Board of Trustees, values
the securities at fair value. The pricing service employed will be
one that determines valuations of normal institutional-sized trading
units of long-term debt securities. Such valuations are determined by
using methods based on market transactions for comparable securities
and on various relationships between securities which are generally
recognized by institutional traders. Other securities for which
current market quotations are not readily available (including
restricted securities, if any) and all other assets are taken at fair
value as determined in good faith by Back Bay Advisors acting under
the supervision of the Board of Trustees, although the actual
calculations may be made by a pricing service selected by Back Bay
Advisors acting pursuant to the direction of the Board.
FUND PERFORMANCE
Calculations of Yield and Return
Yield of the Back Bay Advisors Bond Income Series, the Salomon
Brothers U.S. Government Series and the Salomon Brothers Strategic
Bond Opportunities Series. As summarized in the Prospectus under the
caption "Performance Information," the yield of each of these Series
will be computed in accordance with the SEC's standardized formula by
annualizing net investment income per share for a recent 30-day period
and dividing that amount by a share's net asset value (reduced by any
earned income expected to be declared shortly as a dividend) on the
last trading day of that period. Net investment income will reflect
amortization of any market value premium or discount of fixed-income
securities (except for obligations backed by mortgages or other
assets) and may include recognition of a pro rata portion of the
stated dividend rate of dividend paying portfolio securities.
These Series' yield will vary from time to time depending upon
market conditions, the composition of the Series' portfolio and the
operating expenses of the Series. These factors and possible
differences in the methods used in calculating yield should be
considered when comparing the Back Bay Advisors Bond Income Series'
yield to yields published for other investment companies and other
investment vehicles. Yield should also be considered relative to
changes in the value of the Series' shares and to the relative risks
associated with the investment objectives and policies of the Series.
Yield information may be useful in reviewing such Series' performance
and providing a basis for comparison with other investment
alternatives, although the yields of the Series do not take into
account any of the fees imposed in connection with the purchase of
variable insurance contracts offered by New England Variable Life
Insurance Company ("NEVLICO") or variable annuity contracts offered by
New England Life Insurance Company ("The New England"). Yield may be
stated with or without giving effect to any expense limitations in
effect for the Series.
At any time in the future, yields may be higher or lower than
past yields and there can be no assurance that any historical results
will continue.
Investors are specifically advised that share prices, expressed
as the net asset value per share, will vary just as yields will vary.
An investor's focus on the yield of a Series to the exclusion of
consideration of the share price may result in the investor's
misunderstanding the total return he or she may derive from the
Series.
Yield of the Back Bay Advisors Money Market Series. The Back Bay
Advisors Money Market Series' yield represents the net change,
exclusive of capital changes, in the value of a hypothetical account
having a balance of one share at the beginning of the period for which
yield is determined (the "base period"). Current yield for the base
period (for example, seven calendar days) is calculated by dividing
(i) the net change in the value of the account for the base period by
(ii) the number of days in the base period. The resulting number is
then multiplied by 365 in order to determine such net change on an
annualized basis. This amount is divided by the value of the account
as of the beginning of the base period, normally $100, in order to
state the current yield as a percentage. Yield may also be calculated
on an "effective" or a "compound" basis, which assumes continual
reinvestment throughout an entire year of net income earned at the
same rate as net income is earned by the account for the base period.
Yield is calculated without regard to realized and unrealized gains
and losses. The yield of the Back Bay Advisors Money Market Series
will vary depending on prevailing interest rates, the operating
expenses of the Series and the quality, maturity and type of
instruments held in the portfolio of that Series. Yield information
may be useful in reviewing such Series' performance and providing a
basis for comparison with other investment alternatives, although the
yield of the Back Bay Advisors Money Market Series does not take into
account any of the fees imposed in connection with the purchase of
variable insurance contracts offered by NEVLICO or variable annuity
contracts offered by The New England. However, unlike certain bank
deposits or other investments which pay a fixed yield for a stated
period of time, money market fund yields fluctuate. Consequently no
yield quotation should be considered as representative of what the
yield of the Back Bay Advisors Money Market Series may be for any
specified period in the future.
Calculation of Total Return. As summarized in the Prospectus
under the heading "Performance Information," total return is a measure
of the change in value of an investment in a Series over the period
covered, which assumes that any dividends or capital gain
distributions are automatically reinvested in the Series rather than
paid to the investor in cash. Total return may be higher or lower
than past performance and there can be no assurance that any
historical results will continue.
The formula for total return used by a Series includes three
steps: (1) adding to the total number of shares purchased by a
hypothetical $1,000 investment in a Series all additional shares that
would have been purchased if all dividends and distributions paid or
distributed during the period had been automatically reinvested; (2)
calculating the value of the hypothetical initial investment as of the
end of the period by multiplying the total number of shares owned at
the end of the period by the net asset value per share on the last
trading day of the period; and (3) dividing this account value for the
hypothetical investor by the amount of the initial investment and
annualizing the result for periods of less than one year. Total
return reflects the bearing or deferral of certain expenses by The New
England and its affiliates (see "Allocation of Expenses" below).
Total return would be lower for these Series if these expense
arrangements had not been in effect. Total return does not reflect
charges assessed against the insurance company separate accounts or
the variable life insurance or variable annuity products for which the
Fund serves as an investment vehicle. Total return may be stated
alone or may be accompanied by investment return information for those
separate accounts or the variable life insurance or variable annuity
products.
Performance Comparisons
Yield and Total Return. Each Series may, from time to time,
include its total return in advertisements or in other written
information furnished to present and prospective owners of the
variable life insurance and variable annuity contracts supported by
the Fund. The Back Bay Advisors Bond Income Series, the Salomon
Brothers U.S. Government Series, the Salomon Brothers Strategic Bond
Opportunities Series and the Back Bay Advisors Money Market Series
may, from time to time, also include their yield in such
advertisements or other written information. These results may
include comparisons to the yields of money market funds reporting to
IBC/Donoghue's Money Fund Report ("Donoghue's Report"). In addition,
each Series may, from time to time, provide a ranking of such
performance figures relative to similar figures for mutual funds whose
performance has been monitored by Lipper Analytical Services, Inc.
("Lipper"). Performance information about a Series is based on the
Series' past performance and is not intended to indicate future
performance.
Donoghue's Report is an independent service that collects data
from over 1,000 money market funds weekly and reports on the assets, 7-
and 30-day yields, 12-month yields, average maturities and portfolio
breakdowns of such funds. 12-month yields represent total return
assuming reinvestment of dividends for up to one year.
The Lipper is an independent service that monitors the
performance of over 750 variable annuity and variable life mutual
funds, calculates total return and, in some cases, yield for such
funds.
Total return (and yield in the case of the Back Bay Advisors Bond
Income Series, the Back Bay Advisors Money Market Series, the Salomon
Brothers U.S. Government Series and the Salomon Brothers Strategic
Bond Opportunities Series) may also be used to compare the performance
of a Series against certain widely acknowledged standards or indices
for stock and bond market performance, including the S&P 500 Index,
the Dow Jones Industrial Average, the Lehman Government/Corporate Bond
Index, the Lehman Intermediate Government/Corporate Bond Index, the
S&P/BARRA Growth Index, the S&P/BARRA Value Index, the Lipper Balanced
Fund Average, the Lipper Variable Insurance Products Performance
Growth and Income Average, the Lehman Brothers Government Bond Index,
the First Boston High Yield Index, the Russell 2000 Index, the Lehman
Aggregate Bond Index, the Lehman Intermediate Government Index and the
Morgan Stanley Capital International Europe, Australia, Far East
Index, or against the U.S. Bureau of Labor Statistics' Consumer Price
Index.
The S&P 500 Index is a market value-weighted and unmanaged index
showing the changes in the aggregate market value of 500 stocks
relative to the base period 1941-43. The S&P 500 Index is composed
almost entirely of common stocks of companies listed on the New York
Stock Exchange, although the common stocks of a few companies listed
on the American Stock Exchange or traded over-the-counter are
included. The 500 companies represented include 385 industrial, 15
transportation, 55 financial services and 45 utilities concerns.
The Dow Jones Industrial Average ("DJIA") is a market value-
weighted and unmanaged index of 30 large industrial stocks traded on
the New York Stock Exchange.
The Lehman Government/Corporate Bond Index is a measure of the
market value of approximately 5,300 bonds with a face value currently
in excess of $1.3 trillion. To be included in the Lehman
Government/Corporate Bond Index, an issue must have amounts
outstanding in excess of $1 million, have at least one year to
maturity and be rated "Baa" or higher ("investment grade") by a
nationally recognized rating agency.
The Lehman Intermediate Government/Corporate Bond Index is an
unmanaged index of investment grade bonds issued by the U.S.
Government and U.S. corporations having maturities between one and ten
years.
The Consumer Price Index, published by the U.S. Bureau of Labor
Statistics, is a statistical measure of changes, over time, in the
prices of goods and services in major expenditure groups.
The S&P/BARRA Growth Index is an unmanaged index of more than 150
large capitalization stocks that have high historical earnings growth
and predicted above average earnings growth. The S&P/BARRA Value
Index is an unmanaged index of more than 300 large capitalization
stocks characterized by low price-to-book ratios, high yield and low
price-to-earnings ratios. Both the S&P/BARRA Growth Index and the
S&P/BARRA Value Index are compiled by BARRA.
The Lipper Balanced Fund Average is a measure of the performance
of the largest open-end balanced mutual funds.
The Lipper Variable Insurance Products Performance Growth and
Income Average represents a grouping of funds underlying annuity
products which have growth and income as their investment objectives.
The Lehman Brothers Government Bond Index is an index which
includes most public obligations of the U.S. Treasury, agencies and
quasi-federal corporations and corporate debt guaranteed by the U.S.
Government having a maturity of at least one year.
The First Boston High Yield Index is an unmanaged index of bonds
issued by the U.S. Government and its agencies having maturities
between one and ten years.
The Lehman Aggregate Bond Index is an index which includes most
obligations of the U.S. Treasury, agencies and quasi-federal
corportions, most publicly issued investment grade corporate bonds,
and most bonds backed by mortgage pools of GNMA, FNMA and FHLMC.
The Lehman Intermediate Government Bond Index is an index which
includes most obligations of the U.S. Treasury, agencies and quasi-
federal corportions having maturities of one to ten years.
The Russell 2000 Index is an index which consists of 2000 small
market capitalization stocks having an average market cap of $160
million.
The Morgan Stanley Capital International Europe, Australia, Far
East Index is an arithmetical average (weighted by market value) of
the performance (in U.S. dollars) of 1,036 companies representing the
stock markets of Europe, Australia, New Zealand and the Far East.
From time to time, articles about a Series regarding performance,
rankings and other Series characteristics may appear in national
publications including, but not limited to, the Wall Street Journal,
Forbes, Fortune, CDA Investment Technologies and Money Magazine (see
Appendix B). In particular, some or all of these publications may
publish their own rankings or performance reviews of mutual funds,
including the Fund. References to or reprints or portions of reprints
of such articles, which may be include rankings that list the names of
other funds and their performance, may be used as Fund or variable
contract sales literature or advertising material.
The following table presents certain total return information for
certain Series and certain indexes and averages for periods ended
December 31, 1994:
Total Return Total 5-Year 10-Year
For The Return Average Average
Year Ended For the 5- Annual Annual
Dec. 31, Year Total Total Return
1994 Period Return
Ended
Dec. 31,
1994
Capital Growth -7.1% 49.2% 8.3% 24.5%
Series
Back Bay Advisors -3.4% 50.1% 8.5% 9.8%
Bond Income
Series
Back Bay Advisors 4.0% 27.7% 5.0% 6.3%
Money Market
Series
Back Bay Advisors -1.1% 44.8% 7.7% ---%
Managed Series
Westpeak Stock 1.1% 48.8% 8.3% ---%
Index Series
Westpeak Value -1.2% ---% ---% ---%
Growth Series (1)
Loomis Sayles
Avanti Growth -0.3% ---% ---% ---%
Series
Loomis Sayles
Small Cap -3.2% ---% ---% ---%
Series(2)
Loomis Sayles -0.1%(3) ---% ---% ---%
Balanced Series
Draycott 2.6%(3) ---% ---% ---%
International
Equity Series
Salomon Brothers 0.6%(3) ---% ---% ---%
U.S. Government
Series
Salomon Brothers -1.4%(3) ---% ---% ---%
Strategic Bond
Opportunities
Series
Venture Value -3.5%(3) ---% ---% ---%
Series
Alger Equity -4.2%(3) ---% ---% ---%
Growth Series
CS First Boston
Strategic -4.7%(3) ---% ---% ---%
Equity
Opportunities
Series
S & P 500 1.3% 51.6% 8.7% 14.4%
Lehman -2.0% 45.0% 7.4% 9.1%
Government/
Corporate Index
Consumer Price 2.8% 18.7% 3.5% 3.6%
Index
DJIA 5.1% 63.0% 10.3% 16.2%
(1) For the period beginning April 30, 1993, when the Loomis Sayles
Avanti Growth and the Westpeak Value Growth Series commenced sales of
shares to the public.
(2) For the period beginning May 1, 1994, when the Loomis Sayles
Small Cap Series commenced operations.
(3) For the period beginning October 31, 1994 when the Series
commenced sales of shares to the public.
No brokerage commissions or other fees were factored into the
values of the S&P 500, which is an index of an unmanaged group of
common stocks. No adjustments have been made for a shareholder's tax
liability on dividends and capital gains distributions.
Since inception, the Capital Growth Series has made the following
distributions of income: on 1/20/84 $0.21 per share; on 1/25/85 $1.12
per share; on 1/24/86 $0.90 per share; on 1/23/87 $0.44 per share; on
12/31/87 $0.66 per share; on 12/29/88 $9.55 per share; on 9/14/89
$0.13 per share; on 12/29/89 $2.59 per share; on 12/28/90 $2.11 per
share; on 12/27/91 $3.22 per share; on 12/29/92 $4.07; on 12/29/93
$2.18 per share and on 12/28/94 $5.15 per share. Over the same
period, the Capital Growth Series has made the following distributions
of realized capital gains: on 1/20/84 $0.49 per share; on 1/24/86
$45.74 per share; on 1/23/87 $122.84 per share; on 12/31/87 $19.59 per
share; on 1/28/88 $0.30 per share; on 12/28/90 none; on 12/27/91
$32.37 per share; on 12/31/92 none; on 12/29/93 $16.75 per share; on
7/22/94 $0.41 per share and on 12/28/94 $8.92 per share.
Since inception, the Back Bay Advisors Bond Income Series has
made the following distributions of income: on 1/20/84 $3.76 per
share; on 1/25/85 $11.60 per share; on 1/24/86 $11.09 per share; on
1/23/87 $10.04 per share; on 12/31/87 $8.67 per share; on 12/29/88
$10.70 per share; on 12/27/89 $6.91 per share; on 12/28/90 $7.46 per
share; on 12/27/91 $9.47 per share; on 12/29/92 $6.87 per share; on
12/29/93 $6.25 per share and on 12/28/94 $7.05 per share. Over the
same period, the Back Bay Advisors Bond Income Series has made the
following distributions of realized capital gains: on 1/20/84 $0.11
per share; on 1/24/86 $1.67 per share; on 1/23/87 $11.10 per share; on
12/28/90 none; on 12/27/91 $2.13 per share; on 12/29/92 $1.57 per
share; on 12/29/93 $4.16 per share and on 12/28/94 none.
Since commencing the sale of shares to the public on May 1, 1987,
the Westpeak Stock Index Series has made the following distributions
of income: on 12/31/87 $2.23 per share; on 12/29/88 $3.44 per share;
on 12/27/89 $3.74 per share; on 12/28/90 $3.99 per share; on 12/27/91
$3.56 per share; on 12/29/92 $8.35 per share; on 12/29/93 $1.54 per
share and on 12/28/94 $1.82 per share. Over the same period, the
Westpeak Stock Index Series has made the following distributions of
realized capital gains: on 12/31/87 $0.41 per share; on 12/29/88 $0.81
per share; on 12/27/89 $1.64 per share; on 12/28/90 none; on 1/29/91
$0.05; on 12/27/91 $0.39 per share; on 12/29/92 $67.41 per share; on
5/20/93 $0.29 per share; on 12/29/93 $0.695 per share and on 12/28/94
$0.16 per share. In addition, the Westpeak Stock Index Series made a
distribution of paid-in capital on 12/28/94 of $0.03.
Since commencing the sale of shares to the public on May 1, 1987,
the Back Bay Advisors Managed Series has made the following
distributions of income: on 12/31/87 $2.73 per share; on 12/29/88
$5.24 per share; on 12/27/89 $4.22 per share; on 12/28/90 $5.52 per
share; on 12/27/91 $6.41 per share; on 12/29/92 $5.13 per share; on
5/20/93 $0.02 per share; on 12/29/93 $4.335 per share and on 12/28/94
$5.38 per share. Over the same period, the Back Bay Advisors Managed
Series has made the following distributions of realized capital gains:
on 12/29/88 $0.38; on 12/27/89 $0.38; on 12/28/90 none; on 12/27/91
$1.15 per share; on 12/29/92 $1.07 per share; on 12/29/93 $2.645 per
share and on 12/28/94 none.
Since commencing the sale of shares to the public on April 30,
1993, the Westpeak Value Growth Series has made the following
distributions of income: on 12/29/93 $0.92 per share and on 12/28/94
$1.92 per share. Over the same period, the Westpeak Value Growth
Series has made the following distributions of realized capital gains:
on 12/29/93 $1.01 per share and on 12/28/94 none. In addition, the
Westpeak Value Growth Series made a distribution of paid-in capital on
12/28/94 of $0.02.
Since commencing the sale of shares to the public on April 30,
1993, the Loomis Sayles Avanti Growth Series has made the following
distributions of income: on 12/29/93 $0.175 per share and on 12/28/94
$0.60 per share. Over the same period, the Loomis Sayles Avanti
Growth Series has made the following distributions of realized capital
gains: on 12/29/93 $0.885 per share and on 12/28/94 none.
Since commencing operations on May 1, 1994, the Loomis Sayles
Small Cap Series has made the following distributions: on 12/28/94,
income of $0.15 per share and no realized capital gains.
Since commencing operations October 31, 1994, the Loomis Sayles
Balanced Series has made the following distributions: on 12/28/94,
income of $0.05 per share and no realized capital gains.
Since commencing operations on October 31, 1994, the Draycott
International Equity Series has made the following distributions: on
12/28/94, income of $ 0.02 per share, no realized capital gains, and
paid-in capital of $0.01.
Since commencing operations on October 31, 1994, the Salomon
Brothers U.S. Government Series has made the following distributions:
on 12/28/94, income of $ 0.10 per share and no realized capital gains.
Since commencing on October 31, 1994, the Salomon Brothers
Strategic Bond Opportunities Series has made the following
distributions: on 12/28/94, income of $ 0.12 per share and no realized
capital gains.
Since commencing operations on October 31, 1994, the Venture
Value Series has made the following distributions: on 12/28/94, income
of $0.03 per share and no realized capital gains.
Since commencing operations on October 31, 1994, the Alger Equity
Growth Series has made the following distributions: on 12/28/94,
income of 0.02 per share and no realized capital gains.
Since commencing operations on October 31, 1994, the CS First
Boston Strategic Equity Opportunities Series has made the following
distributions: on 12/28/94, income of $0.04 per share and no realized
capital gains of none per share.
TRUSTEES AND OFFICERS
Trustees and officers of the Fund and their principal occupations
during the past five years or more are as follows:
NANCY HAWTHORNE -- Trustee; Pilot House, Lewis Wharf, Boston, MA
02110; Senior Vice President and Chief Financial Officer,
Continental Cablevision, Inc. (cable television operator);
formerly, Senior Vice President and Treasurer, Continental
Cablevision, Inc.; Director, Perini Corporation (construction).
JOSEPH M. HINCHEY -- Trustee; 193 Wamphassue Road, Stonington,
Connecticut 06378; Retired; formerly, Senior Vice President-
Finance, Analog Devices, Inc. (manufacturer of electronic
devices); Trustee, Union College and Citizens Scholarship
Foundation of America, Inc.; Director, New England Security
Insurance and Chemet Corporation (manufacturer of metallurgical
products).
RICHARD S. HUMPHREY, JR. -- Trustee; 217 Waterways Avenue., P.O. Box
518, Boca Grande, Florida 33921; Director, RYKA, Inc.
(manufacturer of athletic footwear for women); retired Chairman of
the Board, HBM/Creamer (advertising agency).
ROBERT B. KITTREDGE -- Trustee; 21 Sturdivant Street, Cumberland
Foreside, ME 04110; Retired; Trustee, CGM Trust and CGM Capital
Development Fund; formerly, Vice President, General Counsel and
Director, Loomis, Sayles & Company, Inc.
LAURENS MACLURE -- Trustee; 183 Sohier Street, Cohasset, MA 02025;
Retired; Trustee, CGM Trust and CGM Capital Development Fund;
Director, Blue Cross of Massachusetts (health insurance).
DALE ROGERS MARSHALL -- Trustee; 26 East Main Street, Norton, MA 02766;
President, Wheaton College, formerly, Academic Dean, Wellesley
College.
JOSEPH F. TURLEY -- Trustee; 5680 N. AIA #304, Indian River Shores, FL
32963; Retired; Director, The Gillette Company (manufacturers of
personal care products) and EG&G, Inc. (a diversified technical
company); formerly, President and Chief Operating Officer, The
Gillette Company.
FREDERICK K. ZIMMERMANN* -- Chairman of the Board, Chief Executive
Officer, President and Trustee; Chief Investment Officer and
Executive Vice President, The New England; formerly, Senior Vice
President, Vice President and Controller, The New England;
Chairman of the Board and President, TNE Advisers, Inc.; Director
and Vice President - Investments, NEVLICO; Chairman of the Board
and President, New England Pension and Annuity Company.
ANNE M. GOGGIN* -- Senior Vice President and Trustee; Vice President
and Counsel, The New England; Vice President, General Counsel,
Secretary and Clerk, New England Securities Corp.
G. KENNETH HEEBNER -- Senior Vice President; Associate, Capital Growth
Management Limited Partnership ("CGM").
ROBERT L. KEMP -- Senior Vice President; Associate, CGM.
GERALD H. SCRIVER -- Senior Vice President; President, Director and
Chief Executive Officer, Westpeak Investment Advisors, L. P.
("Westpeak"); formerly Senior Vice President, INVESCO Funds Group.
.
DONALD R. SHEPHERD -- Senior Vice President; Chairman of the Board and
Chief Executive Officer, Loomis, Sayles & Company, L.P. ("Loomis
Sayles").
CHARLES T. WALLIS -- Senior Vice President; President and Chief
Executive Officer, Back Bay Advisors, L.P.; Director, New England
Funds, L.P.
MERI ANNE BECK -- Vice President; Vice President, Senior Partner and
Fixed Income Portfolio Manager, Loomis Sayles; formerly, Senior
Portfolio Manager and Investment Strategist, TSA Capital
Management.
HAROLD BJORNSON -- Vice President; Vice President, Back Bay Advisors;
formerly, Assistant Vice President, New England Securities.
* Trustee deemed an "interested person" of the Trusts, as
defined in the Investment Company Act of 1940.
CATHERINE L. BUNTING -- Vice President; Vice President, Back Bay
Advisors.
PHILIP J. COOPER -- Vice President; Vice President, Westpeak;
formerly, Portfolio Manager, United Asset Management Services.
CHRISTINE A. CREELMAN -- Vice President; Vice President, Back Bay
Advisors.
BEVERLY J. DeWITT -- Secretary; Chief Legal Officer and Clerk, TNE
Advisers, Inc.; Attorney, The New England; Assistant Secretary and
Clerk, Westpeak; Assistant Secretary, New England Securities Corp;
formerly, Attorney, Choate, Hall and Stewart.
PETER H. DUFFY -- Assistant Treasurer; Vice President, New England
Funds, L.P.
BARBARA C. FRIEDMAN -- Vice President; Vice President, Loomis Sayles;
formerly, Partner and Portfolio Manager, Harvard Management
Company.
JOHN F. GUTHRIE -- Senior Vice President; Vice President of Portfolio
Strategy, The New England; Senior Vice President, TNE Advisers, Inc.
RICHARD W. HURCKES -- Vice President; Vice President, Loomis Sayles.
J. SCOTT NICHOLSON -- Vice President; Senior Vice President, Back Bay
Advisors.
ALAN C. LELAND -- Vice President; Chief Financial Officer, TNE
Advsiers, Inc.; Vice President, The New England.
PETER PALFREY -- Vice President; Vice President, Back Bay Advisors;
formerly, Investment Vice President, MONY Capital Management.
SCOTT PAPE -- Vice President ; Vice President, Loomis Sayles;
formerly, Equity Portfolio Manager, Illinois State Board of
Investment.
JEFFREY C. PETHERICK -- Vice President; Vice President, Loomis Sayles;
formerly, Analyst, Masco Corporation.
DOUGLAS D. RAMOS -- Vice President; Vice President, Loomis Sayles;
formerly, Equity Portfolio Manager, Illinois State Board of
Investment.
FRANK NESVET -- Treasurer; Senior Vice President and Chief Financial
Officer, New England Funds, L.P.; formerly, Executive Vice
President, SuperShare Services Corporation.
SHEILA M. BARRY -- Assistant Secretary; Vice President & Senior
Counsel, New England Funds, L.P.
Previous positions during the past five years with The New
England, Back Bay Advisors, CGM, Westpeak, Loomis Sayles or New
England Funds, L.P. are omitted, if not materially different. Each of
the Fund's Trustees is also a manager of New England Variable Annuity
Fund I for which New England Securities acts as a principal
underwriter and CGM as investment adviser.
Except as indicated above, the address of each trustee and
officer of the Fund affiliated with The New England is 501 Boylston
Street, Boston, Massachusetts 02116. The address of each trustee or
officer of the Fund affiliated with Back Bay Advisors, New England
Funds, L.P. or New England Securities is 399 Boylston Street, Boston,
Massachusetts. The address of each trustee and officer affiliated
with CGM is One International Place, Boston, Massachusetts. Mr.
Hurckes' and Mr. Pape's address is Three First National Plaza,
Chicago, Illinois and Mr. Scriver's and Mr. Cooper's address is 1050
Walnut Street, Suite 300, Boulder, Colorado. Mr. Shepherd's address
is 595 Fifth Street West, Sonoma, California and Mr. Petherick's
address is 1533 North Woodward, Suite 300, Bloomfield Hills, Michigan.
Mr. Ramos' and Ms. Beck's address is 155 Lake Avenue, Suite 1030,
Pasadena, California.
The officers and trustees of the Fund who are "interested
persons" receive no compensation from the Fund, for their services in
such capacities, although they do receive compensation from The New
England, Back Bay Advisors, CGM, Westpeak, Loomis Sayles or New
England Funds, L.P. for services rendered in other capacities.
Trustees Fees
New England Zenith Fund pays no compensation to its officers or
to its trustees who are interested persons thereof.
Until May 1, 1995, each Trustee who is not an interested person
of the Fund received, in the aggregate for serving on the boards of
the Fund and twenty one other mutual fund portfolios, a retainer fee
at the annual rate of $40,000 and meeting attendance fees of $2,500
for each meeting of the boards he or she attended and $1,500 for each
meeting he or she attended of a committee of the board of which he or
she was a member. Each committee chairman received an additional
retainer fee at the annual rate of $2,500. These fees were allocated
among the Series and the twenty one other mutual fund portfolios based
on a formula that took into account, among other factors, the net
assets of each Series and each mutual fund.
Effective May 1, 1995, each Trustee who is not an interested
person will receive for serving as Trustee of the Fund and on the
board of New England Variable Annuity Fund I ("NEVA") a retainer fee
at an annual rate of $20,000, and meeting attendance fees of $2,000
for each board meeting attended and a special, one-time fee of $5,000
relating to the services of the board in conjunction with the
restructuring of the boards. In addition, the chairman of the Contract
Review and Governance Committee will receive a retainer at the annual
rate of $3,000, and the chairman of the Audit Committee will receive a
retainer at the annual rate of $2,000. The compensation will be
allocated among the Series and NEVA based on a formula that takes into
account, among other factors, the assets of each Series, and NEVA.
During the fiscal year ended December 31, 1994, the persons who
were then Trustees of the Fund received the amounts set forth below
for serving as a Trustee of the Fund and for also serving on the
governing boards of twenty one other mutual fund portfolios (the
"Other Portfolios"). As of December 31, 1994, there were a total of
thirty-five portfolios or series in the Fund and the Other Funds
combined.
Aggregate Total
Aggregate Compensation Compensation
Compensation from from the Fund
from the Fund the Other and
in 1994 Portfolios Other
in 1994 Portfolios
in 1994
Name of Trustee
Kenneth J. Cowan $14,459 $44,916 $59,375
Joseph M. Hinchey 13,790 43,085 56,875
Richard S. 13,790 43,085 56,875
Humphrey, Jr.
Robert B. Kittredge 14,179 75,100 89,279(a)
Laurens MacLure 14,848 76,931 91,779(a)
Sandra O. Moose 12,728 40,147 52,875
James H. Scott 13,790 43,085 56,875
John A. Shane 13,531 42,344 55,875
Joseph F. Turley 14,179 44,196 58,375
Pendleton P. White 14,179 44,196 58,375
________________
(a) Also includes compensation paid by the portfolios of the
CGM Funds, a group of mutual funds for which Capital Growth
Management Limited Partnership, the investment adviser of the
Fund's Capital Growth Series, serves as investment adviser.
The Fund provides no pension or retirement benefits to Trustees,
but has adopted a deferred payment arrangement under which each
Trustee may elect not to receive fees from the Fund on a current basis
but to receive in a subsequent period an amount equal to the value
that such fees would have if they had been invested in each Series on
the normal payment date for such fees. As a result of this method of
calculating the deferred payments, each Series, upon making the
deferred payments, will be in the same financial position as if the
fees had been paid on the normal payment dates.
At March 31, 1995, the officers and trustees of the Fund as a
group owned less than 1% of the outstanding shares of the Fund.
ADVISORY ARRANGEMENTS
Advisory Structure. Pursuant to separate advisory agreements
dated October 31, 1994, TNE Advisers, Inc., has agreed to manage the
investment and reinvestment of assets of the Loomis Sayles Balanced,
Draycott International Equity, Salomon Brothers U.S. Government,
Salomon Brothers Strategic Bond Opportunities, Venture Value, Alger
Equity Growth and CS First Boston Strategic Equity Opportunities
Series. Pursuant to separate advisory agreements, each dated May 1,
1995, TNE Advisers, Inc. has agreed to manage the investment and
reinvestment of the assets of the Back Bay Advisors Money Market, Back
Bay Advisors Bond Income, Westpeak Value Growth, Loomis Sayles Avanti
Growth, Westpeak Stock Index, Back Bay Advisors Managed and Loomis
Sayles Small Cap Series. TNE Advisers, Inc. has delegated certain of
these responsibilities, including responsibility for determining what
investments such Series should purchase, hold or sell and directing
all trading for the Series' account, for each of the above Series to
subadvisers under subadvisory agreements described below. Pursuant to
an advisory agreement dated September 1, 1993 (which replaced a
substantially identical agreement dated March 1, 1990), CGM has agreed
to manage the investment and reinvestment of the assets of the Capital
Growth Series.
In each case, advisory services are provided subject to the
supervision and control of the Fund's trustees. Each advisory
agreement also provides that the relevant investment adviser will
furnish or pay the expenses of the applicable Series for office space,
facilities and equipment, services of executive and other personnel of
the Fund and certain administrative services. TNE Advisers, Inc. has
subcontracted with New England Funds, L.P. to provide, at no extra
cost to the Series it advises, certain administrative services to the
Fund. CGM, in the case of the Capital Growth Series, has
subcontracted with New England Funds, L.P. to provide such services
for that Series.
TNE Advisers, Inc. is a wholly-owned subsidiary of The New
England organized in 1994. TNE Advisers, Inc. oversees, evaluates and
monitors the subadvisers' provision of investment advisory services to
all of the Series (except the Capital Growth Series) and provides
general business management and administration to those Series.
Subject to the supervision of TNE Advisers, Inc. each subadviser,
pursuant to Subadvisory Agreements dated either October 31, 1994 (in
the case of the Loomis Sayles Balanced, Draycott International Equity,
Salomon Brothers U.S. Government, Salomon Brothers Strategic Bond
Opportunities, Venture Value, Alger Equity Growth and CS First Boston
Strategic Equity Opportunities Series) or May 1, 1995, (in the case of
the Back Bay Advisors Money Market, Back Bay Advisors Bond Income,
Westpeak Value Growth, Loomis Sayles Avanti Growth, Westpeak Stock
Index, Back Bay Advisors Managed and Loomis Sayles Small Cap Series)
manages the assets of its Series in accordance with that Series'
investment objective and policies, makes investment decisions for that
Series and employs professional advisers and securities analysts who
provide research services to that Series. The Series pay no direct
fees to any of the subadvisers.
BBA, formed in 1986, is a subsidiary of NEIC. NEIC's sole
general partner, New England Investment Companies, Inc., is a
subsidiary of The New England. NEIC and its seven subsidiary or
affiliated asset management firms, collectively, have more than $60
billion of assets under management or administration. BBA provides
investment management services to institutional clients, including
other registered investment companies and accounts of The New England
and its affiliates. BBA specializes in fixed-income management and
currently manages over $6.2 billion in total assets; it is
subadviser to the Back Bay Advisors Money Market, Back Bay Advisors
Bond Income and Back Bay Advisors Managed Series.
Loomis Sayles, subadviser to the Loomis Sayles Avanti Growth,
Loomis Sayles Small Cap and Loomis Sayles Balanced Series, was
organized in 1926 and is one of the oldest and largest investment
counsel firms in the country. An important feature of the Loomis
Sayles investment approach is its emphasis on investment research.
Recommendations and reports of the Loomis Sayles research department
are circulated throughout the Loomis Sayles organization and are
available to the individuals in the Loomis Sayles organization who
have been assigned the responsibility for making investment decisions
for the Funds' portfolios. Loomis Sayles provides investment advice
to numerous other institutional and individual clients. These
clients include other registered investment companies and some
accounts of The New England and its affiliates ("New England
Accounts"). Loomis Sayles is a subsidiary of NEIC.
Westpeak is a wholly-owned subsidiary of NEIC. Organized in
1991, Westpeak provides investment management services to a mutual
fund and other institutional clients, including accounts of The New
England and its affiliates; it is subadviser to the Westpeak Value
Growth and Westpeak Stock Index Series.
Draycott, formed in 1991, is a subsidiary of NEIC that provides
investment management services to a mutual fund and to institutional
clients, including separate accounts of The New England; it is
subadviser to the Draycott International Equity Series.
Salomon Brothers Asset Management Inc ("SBAM") is a wholly-owned
subsidiary of Salomon Inc which provides investment advisory services
for individuals, other mutual funds and institutional clients; it is
subadviser to the Salomon Brothers U.S. Government Series and the
Salomon Brothers Strategic Bond Opportunities Series.
Selected/Venture Advisors, L.P. ("Selected/Venture") provides
investment advisory services for mutual funds and other clients; it is
subadviser to the Venture Value Series. Venture Advisers, Inc., the
general partner of Selected/Venture, is controlled by Shelby M.C.
Davis.
Fred Alger Management Inc. ("Alger Management") provides
investment management services to mutual funds and to other
institutions and individuals; it is subadviser to the Alger Equity
Growth Series. Alger Management, a wholly-owned subsidiary of Fred
Alger Company, Inc., which in turn is a wholly-owned subsidiary of
Alger Associates, Inc., a financial services holding company.
Frederick M. Alger III and his brother, David D. Alger, own
approximately 53% and 17%, respectively, of Alger Associates, Inc. and
may be deemed to control that company and its subsidiaries.
CS First Boston Investment Management Corporation ("CS First
Boston Management"), organized in 1984, provides investment management
services to clients worldwide in equity and fixed income markets. It
is subadviser to the CS First Boston Strategic Equity Opportunities
Series and is an indirect subsidiary of CS First Boston, Inc.
CGM is a limited partnership whose general partner is a
corporation owned in equal shares by Robert L. Kemp and G. Kenneth
Heebner. In addition to advising the Capital Growth Series, CGM acts
as investment adviser of CGM Capital Development Fund, CGM Trust, New
England Variable Annuity Fund I and New England Growth Fund of the
New England Funds. CGM also provides investment advice to other
institutional and individual clients.
Advisory Fees. Each Series pays its adviser compensation at the
annual percentage rates of the corresponding levels of that Series'
average daily net asset values (the adviser of the Capital Growth
Series is CGM, the adviser of each other Series is TNE Advisers).
Annual Average Daily Net
Series Percentage Asset Value
Rate Levels
Back Bay Advisors .35% the first $500
Money Market .30% million
Series .25% the next $500
million
amounts in excess
of
$1 billion
Back Bay Advisors .40% the first $400
Bond Income .35% million
Series the next $300
million
.30% the next $300
million
.25% amounts in excess
of
$1 billion
Capital Growth .70% the first $200
Series million
.65% the next $300
million
.60% amounts in excess
of $500 million
Westpeak Value .70% the first $200
Growth Series million
.65% the next $300
million
.60% amounts in excess
of $500 million
Loomis Sayles .70% the first $200
Avanti Growth million
Series
.65% the next $300
million
.60% amounts in excess
of $500 million
Westpeak Stock .25% all assets
Index Series
Back Bay Advisors .50% all assets
Managed Series
Loomis Sayles 1.00% all assets
Small Cap Series
Loomis Sayles .70% all assets
Balanced Series
Draycott .90% all assets
International
Equity Series
Salomon Brothers .55% all assets
U.S. Government
Series
Salomon Brothers .65% all assets
Strategic Bond
Opportunities
Series
Venture Value .75% all assets
Series
Alger Equity .70% all assets
Growth Series
CS First Boston .80% all assets
Strategic Equity
Opportunities
Series
Subadvisory Fees. TNE Advisers, Inc. pays each subadviser at the
following rates for providing advisory services to the following
Series: for the Back Bay Advisors Money Market Series, TNE Advisers,
Inc. pays Back Bay Advisors at the annual rate of 0.15% of the first
$100 million of average net assets, 0.10% of the next $400 million of
such assets, 0.10% of the next $500 million of such assets and 0.10%
of such assets in excess of $1 billion; for the back Bay Advisors
Bond Income Series, TNE Advisers, Inc. pays Back Bay Advisors at the
annual rate of 0.25% of the first $50 million of average net assets,
0.20% of the next $200 million of such assets, 0.15% of the next $150
million of such assets, 0.15% of the next $300 million of such assets,
0.15% of the next $300 million of such assets, and 0.15% of such
assets in excess of $1 billion; for the Westpeak Value Growth Series,
TNE Advisers, Inc. pays Westpeak at the annual rate of 0.50% of the
first $25 million of average net assets, 0.40% of the next $75 million
of such assets, 0.35% of the next $100 million of such assets, 0.30%
of the next $300 million of such assets, 0.30% of the next $300
million of such assets and 0.30% of such assets in excess of $500
million; for the Loomis Sayles Avanti Growth Series, TNE Advisers,
Inc. pays Loomis Sayles at the annual rate of 0.50% of the first $25
million of average net assets, 0.40% of the next $75 million of such
assets, 0.35% of the next $100 million of such assets, 0.30% of the
next $300 million of such assets and 0.30% of such assets in excess of
$500 million; for the Westpeak Stock Index Series, TNE Advisers, Inc.
pays Westpeak at the annual rate of 0.10% of average net assets; for
the Back Bay Advisors Managed Series, TNE Advisers, Inc. pays Back Bay
Advisors at the annual rate of 0.25% of the first $50 million of
average net assets and 0.20% of such assets in excess of $50 million;
for the Loomis Sayles Small Cap Series, TNE Advisers, Inc. pays Loomis
Sayles at the annual rate of 0.55% of the first $25 million of average
net assets, 0.50% of the next $75 million of such assets, 0.45% of the
next $100 million of such assets and 0.40% of such assets in excess of
$200 million; for the Loomis Sayles Balanced Series, TNE Advisers,
Inc. pays Loomis Sayles at the annual rate of 0.50% of the first $25
million of average net assets, 0.40% of the next $75 million of such
assets and 0.30% of such assets in excess of $100 million; for the
Draycott International Equity Series, TNE Advisers, Inc. pays Draycott
at the annual rate of 0.75% of the first $10 million of average net
assets, 0.60% of the next $40 million of such assets and 0.45% of such
assets in excess of $50 million; for the Salomon Brothers U.S.
Government Series, TNE Advisers, Inc. pays SBAM at the annual rate of
0.225% of the first $200 million of average net assets, 0.15% of the
next $300 million of such assets and 0.10% of such assets in excess of
$500 million; for the Salomon Brothers Strategic Bond Opportunities
Series, TNE Advisers, Inc. pays SBAM at the annual rate of 0.35% of
the first $50 million of average net assets, 0.30% of the next $150
million of such assets, 0.25% of the next $300 million of such assets
and 0.20% of such assets in excess of $500 million; for the Venture
Value Series, TNE Advisers, Inc. pays Selected/Venture at the annual
rate of 0.45% of the first $100 million of average net assets, 0.40%
of the next $400 million of such assets and 0.35% of such assets in
excess of $500 million; for the Alger Equity Growth Series, TNE
Advisers, Inc. pays Alger Management at the annual rate of 0.45% of
the first $10 million of average net assets, 0.40% of the next $90
million of such assets, 0.35% of the next $150 million of such assets,
0.30% of the next $250 million of such assets and 0.25% of such assets
in excess of $500 million; for the CS First Boston Strategic Equity
Opportunities Series, TNE Advisers, Inc. pays CS First Boston
Management at the annual rate of 0.45% of the first $200 million of
average net assets, 0.40% of the next $300 million of such assets,
0.35% of the next $500 million of such assets and 0.30% of such assets
in excess of $1 billion. In addition to this fee, at the end of the
third full year of operations of the CS First Boston Strategic Equity
Opportunities Series, TNE Advisers, Inc. will pay CS First Boston
Management an amount equal to three times a fee (the "Fulcrum Fee"),
which Fulcrum Fee shall be the following percentage of the average
daily net assets of the Series during the first three years of the
Series' operations: if the average annual return of the Series during
such three-year period is greater than or equal to the average annual
return of the S&P 500 Index during the same period plus 0.40% but less
than the S&P 500 Index plus 0.50%, the Fulcrum Fee shall be 0.01%; if
the average annual return of the Series during the three-year period
is greater than or equal to that of the S&P 500 Index plus 0.50% but
less than that of the S&P 500 Index plus 0.60%, the Fulcrum Fee shall
be 0.03%; and if the average annual return of the Series during the
three-year period is greater than or equal to that of the S&P 500
Index plus 0.60%, the Fulcrum Fee shall be 0.05%. At the end of each
full year subsequent to the third full year of operations of the CS
First Boston Strategic Equity Opportunities Series, TNE Advisers, Inc.
will pay CS First Boston Management the Fulcrum Fee as described in
the previous sentence as a percentage of the Series' average daily net
assets over the immediately previous three-year period and based on
the average annual return of the Series relative to the S&P 500 Index
during the same three-year period.
Short-term U.S. cash management services for the Draycott
International Equity Series are provided by BBA as subadviser to
Draycott. For these services, Draycott has agreed to compensate BBA
at the annual rate of 0.08% of the value of the Series' average daily
net assets.
In connection with SBAM's service as subadviser to the Strategic
Bond Opportunities Series, SBAM's London based affiliate, Salomon
Brothers Asset Management Limited ("SBAM Limited"), Victoria Plaza,
111 Buckingham Palace Road, London SW1W OSB, England, serves as
subadviser to SBAM relating to currency transactions and investments
in non-dollar denominated debt securities for the benefit of the
Salomon Brothers Strategic Bond Opportunities Series. For these
services, SBAM has agreed to pay SBAM Limited one-third of the
compensation that SBAM receives for serving as subadviser to the
Series. SBAM Limited is an indirect, wholly-owned subsidiary of
Salomon Inc.
For the fiscal year ended December 31, 1992, the Back Bay
Advisors Money Market Series, the Back Bay Advisors Bond Income
Series, the Westpeak Stock Index Series and the Back Bay Advisors
Managed Series paid advisory fees of $212,366, $269,931, $52,718 and
$309,442, respectively, to BBA. For that same period, the Capital
Growth Series paid $2,632,793 to CGM.
For the fiscal year ended December 31, 1993, the Back Bay
Advisors Money Market Series, the Back Bay Advisors Bond Income Series
and the Back Bay Advisors Managed Series paid advisory fees of
$213,811, $429,841 and $501,403, respectively, to BBA and for that
same period, the Capital Growth Series paid $3,729,518 to CGM. For
the period April 30 to December 31, 1993, the Westpeak Value Growth
Series paid advisory fees of $18,667 to Westpeak and the Loomis Sayles
Avanti Growth Series paid advisory fees of $23,455 to Loomis Sayles.
For the period January 1, 1993 to July 31, 1993, the Westpeak Stock
Index Series paid advisory fees of $22,166 to Back Bay Advisors and
for the period August 1,1993 to December 31, 1993, paid advisory fees
of $27,101 to Westpeak.
For the fiscal year ended December 31, 1994, the Back Bay
Advisors Money Market Series, the Back Bay Advisors Bond Income Series
and the Back Bay Advisors Managed Series paid advisory fees of
$231,326, $515,084 and $613,249, respectively, to BBA. For that same
period, the Capital Growth Series paid advisory fees of $$4,396,663 to
CGM, the Westpeak Value Growth Series and the Westpeak Stock Index
Series paid advisory fees of $111,827 and $83,095, respectively, to
Westpeak and the Loomis Sayles Avanti Growth Series paid advisory fees
of $132,596 to Loomis Sayles. For the period May 1, 1994 to December
31, 1994, the Loomis Sayles Small Cap Series paid no advisory fees to
Loomis Sayles. For the period October 31, 1994 to December 31, 1994,
the Loomis Sayles Balanced, the Draycott International Equity, Salomon
Brothers U.S. Government, Salomon Brothers Strategic Bond
Opportunities, Venture Value, Alger Equity Growth and the CS First
Boston Strategic Equity Opportunities Series paid no advisory fees to
TNE Advisers, Inc.
Expense Deferral Arrangement. Pursuant to an Expense Deferral
Agreement in effect beginning November 1, 1994 between the Fund and by
TNE Advisers, Inc. pertaining to the Loomis Sayles Balanced Series,
the Draycott International Equity Series, the Salomon Brothers U.S.
Government Series, the Salomon Brothers Strategic Bond Opportunities
Series, the Venture Value Series, the Alger Equity Growth Series and
the CS First Boston Strategic Equity Opportunities Series, which TNE
Advisers, Inc. may terminate at any time, TNE Advisers, Inc. has
agreed to pay the expenses of each such Series (exclusive of any
brokerage costs, interest, taxes or extraordinary expenses) in excess
of stated expense limits, which limits vary from Series to Series,
subject to the obligation of such Series to repay such amounts to TNE
Advisers, Inc. in future years, if any, when the particular Series'
expenses fall below the stated expense limit that pertains to that
Series; such deferred expenses may be charged to that Series in a
subsequent year to the extent that it does not cause the total
expenses in such subsequent year to exceed the Series' stated expense
limit; provided, however, that no Series is obligated to repay any
expense paid by TNE Advisers, Inc. more than two years after the end
of the fiscal year in which such expense was incurred. Under the
Expense Deferral Agreement, TNE Advisers, Inc. has agreed to defer
such expenses in excess of the following stated expense limits:
Loomis Sayles Balanced Series, 0.85% of net assets; Draycott
International Equity Series, 1.30% of net assets; Salomon Brothers
U.S. Government Series, 0.70% of net assets; Salomon Brothers
Strategic Bond Opportunities Series, 0.85% of net assets; Venture
Value Series, 0.90% of net assets; Alger Equity Growth Series, 0.85%
of net assets; and CS First Boston Strategic Equity Opportunities
Series, 1.05% of net assets. TNE Advisers, Inc. may at any time
terminate its obligations to bear future expenses of any Series, but
any expenses that were deferred while a Series' expense limit was in
place can never be charged to that Series unless that Series' expenses
fall below the limit.
Voluntary Expense Agreement. Pursuant to a voluntary expense
agreement pertaining to the Back Bay Advisors Money Market, Back Bay
Advisors Bond Income, Back Bay Advisors Managed, Westpeak Stock Index,
Loomis Sayles Small Cap, Loomis Sayles Avanti Growth and Westpeak
Value Growth Series, TNE Advisers, Inc. bears the expenses (other than
the advisory fees and any brokerage costs, interest, taxes or
extraordinary expenses) of the Series (except the Loomis Sayles Small
Cap Series) in excess of 0.15% of the respective Series' average daily
net assets. In the case of the Loomis Sayles Small Cap Series, TNE
Advisers, Inc. bears such expenses of the Series in excess of 1.00% of
the Series' average daily net assets. Similar voluntary expense
agreements by The New England have been in effect with respect to the
Capital Growth Series since November 1, 1994 and were in effect with
respect to the Back Bay Advisors Money Market, Back Bay Advisors Bond
Income, Back Bay Advisors Managed and Westpeak Stock Index Series from
November 1, 1994 through April 30, 1995 and with respect to the Loomis
Sayles Small Cap, Loomis Sayles Avanti Growth and Westpeak Value
Growth Series from December 1, 1994 through April 30, 1995. As a
result of the voluntary expense agreements (and assuming the Series
incur the same level of advisory fees as in 1994 and no taxes,
interest or extraordinary expenses), the Series' expense ratios during
the continuation of the voluntary expense agreements are expected to
be:
Total Expense Ratio Under
Series Voluntary Expense
Agreement
Capital Growth Series 0.70%
Back Bay Advisors Money Market Series 0.50%
Back Bay Advisors Bond Income Series 0.54%
Back Bay Advisors Managed Series 0.64%
Westpeak Value Growth Series 0.85%
Westpeak Stock Index Series 0.40%
Loomis Sayles Small Cap Series 1.00%
Loomis Sayles Avanti Growth Series 0.85%
The current voluntary expense agreements may be prospectively
discontinued by TNE Advisers, Inc. or The New England, as the case
may be, at any time. Prior to November 1, 1994, the Series that are
now subject to the current voluntary expense agreements benefited from
an Expense Agreement between the Fund and The New England. Under that
Agreement, The New England paid the charges and expenses of preparing,
printing and distributing prospectuses and reports to shareholders,
custodial and transfer agent charges and expenses, legal, auditing and
accounting fees, and the expenses of shareholders' and trustees'
meetings.
Each advisory and subadvisory agreement provides that it will
continue in effect after two years from the date of its execution only
if it is approved at least annually thereafter (i) by the trustees of
the Fund or by vote of a majority of the outstanding voting securities
of the applicable Series and (ii) by vote of a majority of the
trustees who are not interested persons of (i) the Fund or (ii) the
applicable Series' investment adviser or subadviser. Any amendment to
any advisory or subadvisory agreement must be approved by vote of a
majority of the outstanding voting securities of the applicable Series
and by vote of a majority of the trustees who are not interested
persons of (i) the Fund or (ii) the applicable Series' investment
adviser or subadviser. Each agreement may be terminated without
penalty by the trustees or by the shareholders of the applicable
Series, upon sixty days' written notice, or by the applicable Series'
investment adviser, upon ninety days' written notice, and each
terminates automatically in the event of its assignment. In addition,
each subadvisory agreement may be terminated without penalty upon
ninety days' written notice by the relevant subadviser. Each advisory
agreement will automatically terminate if the Fund shall at any time
be required by New England Securities, which is an indirectly wholly-
owned subsidiary of The New England, to eliminate all reference to the
words "New England" in its name, unless the continuance of such
agreement after such change of name is approved by a majority of the
outstanding voting securities of the applicable Series and by a
majority of the trustees who are not interested persons of (i) the
Fund or (ii) the applicable Series' investment adviser.
Each advisory agreement provides that if the total ordinary
business expenses of a particular Series for any fiscal year exceed
the lowest applicable limitations (based on a percentage of average
net assets or income) prescribed by any state in which shares of that
Series are qualified for sale, the applicable Series' investment
adviser shall pay such excess. Each advisory agreement provides,
however, that the advisory fee shall not be reduced nor shall any of
such expenses be paid to an extent or under circumstances which might
result in the inability of any Series or of the Fund, taken as a
whole, to qualify as a regulated investment company under the Internal
Revenue Code of 1986, as amended. The term "expenses" for this
purpose excludes brokerage commissions, taxes, interest and
extraordinary expenses.
As required by state insurance licensing authorities, each
Series' investment adviser has also undertaken, separately from the
advisory agreements, to be liable for negligence in the performance of
any administrative services with respect to the Fund which are
supplemental to their management of the investment and reinvestment of
that Series' assets.
Each advisory and subadvisory agreement provides that the
relevant investment adviser or subadviser shall not be subject to any
liability in connection with the performance of its services
thereunder in the absence of willful misfeasance, bad faith, gross
negligence or reckless disregard of its obligations and duties.
Certain officers and employees of Back Bay Advisors who are also
officers of the Fund have responsibility for portfolio management of
the other advisory accounts and clients (including other Series of the
Fund and other registered investment companies, and accounts of
affiliates of Back Bay Advisors) that may invest in securities in
which the Series for which Back Bay Advisors acts as a subadviser may
invest. Where Back Bay Advisors 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 accounts.
Where advisory accounts have competing interests in a limited
investment opportunity, BBA will allocate an investment purchase
opportunity based on the relative time that competing accounts have
had funds available for investment, and the relative amounts of
available funds, and will allocate an investment sale opportunity
based on relative cash requirements and the time that 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.
It is believed that the ability of the Series for which Back Bay
Advisors acts as subadviser to participate in larger volume
transactions in this manner will in some cases produce better
executions for the Series. However, in some cases, this procedure
could have a detrimental effect on the price and amount of a security
available to a Series or the price at which a security may be sold.
The trustees are of the view that the benefits of retaining Back Bay
Advisors as subadviser outweigh the disadvantages, if any, that might
result from participating in such transactions.
Certain officers of Loomis Sayles who are also officers of the
Fund have responsibility for the management of other client
portfolios. The Chicago office of Loomis Sayles buys and sells
portfolio securities for the Loomis Sayles Avanti Growth Series, the
Pasadena office buys and sells portfolio securities for the Loomis
Sayles Balanced Series and the Boston and Detroit offices buy and sell
portfolio securities for the Loomis Sayles Small Cap Series. These
and other offices of Loomis Sayles buy securities independently of one
another. The other investment companies and clients served by Loomis
Sayles sometimes invest in securities in which the Series advised by
Loomis Sayles also invest. If one of these Series and such other
clients advised by the same office of Loomis Sayles desire to buy or
sell the same portfolio securities at about the same time, purchases
and sales will be allocated, to the extent practicable, on a pro rata
basis in proportion to the amounts desired to be purchased or sold for
each. It is recognized that in some cases the practices described in
this paragraph could have a detrimental effect on the price or amount
of a security which that Series purchases or sells. In other cases,
however, it is believed that these practices may benefit the Series.
It is the opinion of the trustees of the Fund that the desirability of
retaining Loomis Sayles as subadviser for these Series outweighs the
disadvantages, if any, which might result from these practices.
Certain officers of Westpeak, some of whom are officers of the
Fund, have responsibility for portfolio management for other clients
(including affiliates of Westpeak), some of which may invest in
securities in which the Westpeak Value Growth Series or the Westpeak
Stock Index Series also may invest. When these Series and other
clients desire to purchase or sell the same security at or about the
same time, the purchase and sale orders are ordinarily placed and
confirmed separately but may be combined to the extent practicable and
allocated as nearly as practicable on a pro rata basis in proportion
to the amounts desired to be purchased or sold for each. It is
believed that the ability of those clients to participate in larger
volume transactions will in some cases produce better executions for
the Westpeak Value Growth Series and the Westpeak Stock Index Series.
However, in some cases this procedure could have a detrimental effect
on the price and amount of a security available to a Series or the
price at which a security may be sold. It is the opinion of the
trustees of the Fund that the desirability of retaining Westpeak as
subadviser for the Westpeak Value Growth Series and the Westpeak Stock
Index Series outweighs the disadvantages, if any, which might result
from these practices.
Certain officers and employees of Draycott have responsibility
for portfolio management for other clients (including affiliates of
Draycott), some of which may invest in securities in which the
Draycott International Equity Series also may invest. When the
Series and other clients desire to purchase or sell the same security
at or about the same time, purchase and sale orders are ordinarily
placed and confirmed separately but may be combined to the extent
practicable and allocated as nearly as practicable on a pro rata
basis in proportion to the amounts desired to be purchased or sold
for each. It is believed that the ability of those clients to
participate in larger volume transactions will in some cases produce
better executions for the Draycott International Equity Series.
However, in some cases this procedure could have a detrimental effect
on the price and amount of a security available to the Draycott
International Equity Series or the price at which a security may be
sold. It is the opinion of the trustees that the desirability of
retaining Draycott as subadviser to the Series outweighs the
disadvantages, if any, which might result from such procedure.
Various officers and trustees of the Fund also serve as officers
or trustees of other investment companies advised by CGM. The other
investment companies and clients served by CGM (including accounts of
affiliates of CGM) sometimes invest in securities in which the Capital
Growth Series also invests. If the Capital Growth Series and such
other investment companies or clients advised by CGM desire to buy or
sell the same portfolio securities at the same time, purchases and
sales will be allocated to the extent practicable on a pro rata basis
in proportion to the amounts desired to be purchased or sold for each.
It is recognized that in some cases the practices described in this
paragraph could have a detrimental effect on the price or amount of
the securities which the Capital Growth Series purchases or sells. In
other cases, however, it is believed that these practices may benefit
the Capital Growth Series. It is the opinion of the trustees that the
desirability of retaining CGM as adviser for the Capital Growth Series
outweighs the disadvantages, if any, which might result from these
practices.
Certain officers and employees of SBAM, Selected/Venture, Alger
Management and CS First Boston Management have responsibility for
portfolio management for other clients (including other registered
investment companies and affiliates of SBAM, Selected/Venture or Alger
Management) some of which may invest in securities in which the
respective Series that these subadvisers manage also invest. In such
circumstances, SBAM, Selected/Venture, Alger Management or CS First
Boston Management may determine that orders for the purchase or sale
of the same security for the Series it manages and one or more other
registered investment companies or other accounts it manages should be
combined, in which event the transactions will be priced and allocated
in a manner deemed by SBAM, Selected/Venture, Alger Management or CS
First Boston Management, respectively, to be equitable and in the best
interests of the respective Series that it manages and its other
accounts. It is recognized that in some cases the practices described
in this paragraph could have a detrimental effect on the price or
amount of a security that a Series purchases or sells. In other
cases, however, it is believed that these practices may benefit a
Series. It is the opinion of the trustees that the desirability of
retaining SBAM, Selected/Venture, Alger Management and CS First Boston
Management as subadvisers for the respective Series outweighs the
disadvantages, if any, which might result from these practices.
DISTRIBUTION AGREEMENT
Under an agreement with the Fund, New England Securities, a
Massachusetts corporation, serves as the general distributor of shares
of each Series, which are sold at net asset value without any sales
charge. The offering of each Series' shares is continuous. Shares
are offered for sale only to certain insurance company separate
accounts. New England Securities receives no compensation from the
Fund or purchasers of Fund shares for acting as distributor. The
agreement does not obligate New England Securities to sell a specific
number of shares. New England Securities is a wholly-owned subsidiary
of The New England.
New England Securities controls the words "New England" in the
Fund's name and if it should cease to be the Fund's distributor, the
Fund may be required to change its name and delete these words. New
England Securities also acts as general distributor for New England
Retirement Investment Account, New England Variable Annuity Fund I,
The New England Variable Account and New England Variable Life
Separate Account.
OTHER SERVICES
Custodial Arrangements. State Street Bank and Trust Company
("State Street Bank"), Boston, Massachusetts 02102, is the Fund's
custodian. As such, State Street Bank holds in safekeeping
certificated securities and cash belonging to each Series and, in such
capacity, is the registered owner of securities held in book-entry
form belonging to the Series. Upon instruction, State Street Bank
receives and delivers cash and securities of the Series in connection
with Series transactions and collects all dividends and other
distributions made with respect to Series portfolio securities. State
Street Bank also maintains certain accounts and records of the Fund
and calculates the total net asset value, total net income and net
asset value per share of each Series on a daily basis.
Independent Accountants. The Fund's independent accountants are
Coopers & Lybrand, One Post Office Square, Boston, Massachusetts
02109. Coopers & Lybrand conducts an annual audit of each Series,
assists in the preparation of federal and state income tax returns and
consults with the Fund as to matters of accounting and federal and
state income taxation. A table of selected per share data and ratios
for each of the Series appears in the Prospectus. This table and the
financial statements included in this Statement of Additional
Information are included in reliance on the report of Coopers &
Lybrand for the years 1987 through 1994 and on the report of the
Fund's former independent accountants, Price Waterhouse, for the years
1985 and 1986, given on the authority of said firms as experts in
auditing and accounting.
Other Arrangements. Office space, facilities, equipment and/or
certain administrative services for the Fund (and, where applicable,
other mutual funds) under the investment management of CGM or TNE
Advisers, Inc. are currently furnished by New England Funds, L.P.,
under separate service agreements with those investment advisers.
Under a service agreement between Back Bay Advisors and New England
Securities for fiscal years ended December 31, 1992, 1993 and 1994,
Back Bay Advisors paid New England Securities or New England Funds,
L.P., an affiliate of New England Securities, $50,936, $51,918 and
$56,134, respectively, relating to the Back Bay Advisors Money Market
Series; $57,324, $91,245 and $109,472, respectively, relating to the
Back Bay Advisors Bond Income Series; and $52,362, $85,151 and
$104,256, respectively, relating to the Back Bay Advisors Managed
Series under a service agreement. For the fiscal year ended December
31, 1992 and the period January 1, 1993 through July 31, 1993, Back
Bay Advisors paid New England Securities or New England Funds, L.P.
$17,920 and $ 7,552, respectively, for the Westpeak Stock Index
Series, which it managed prior to August 1, 1993, under such
agreement. Under a service agreement between New England Securities
and CGM, CGM paid New England Securities or New England Funds, L.P.,
for fiscal years ended December 1992, 1993 and 1994, $350,370,
$530,147 and $621,253, respectively, relating to the Capital Growth
Series. Under a service agreement between Loomis Sayles and New
England Funds, L.P., Loomis Sayles paid New England Funds, L.P. for
the period April 30, 1993 through December 31, 1993 and the fiscal
year ended December 31, 1994 $5,497 and $29,614, respectively, for the
Avanti Growth Series. Under the service agreement between New England
Securities and Westpeak, Westpeak paid New England Securities $4,735
for the period April 30, 1993 to December 31, 1993 and $25,381 for the
fiscal year ended December 31, 1994, respectively, for the Westpeak
Value Growth Series and $16,164 and $49,833 for the period August 1,
1993 to December 31, 1993 and for the fiscal year ended December 31,
1994, respectively, for the Westpeak Stock Index Series. Under a
service agreement between Loomis, Sayles and New England Funds, L.P.,
Loomis Sayles paid New England Funds, L.P. for the period May 1, 1994
to December 31, 1994, $2,007, for the Loomis Sayles Small Cap Series.
For the period October 31, 1994 through December 31, 1994, under
the service agreement between New England Funds, L.P. and TNE
Advisers, Inc., TNE Advisers, Inc. paid $1,666 for the Loomis Sayles
Balanced Series, $1,666 for the Draycott International Equity Series,
$1,666 the Salomon Brothers U.S. Government Series, $1,666 for the
Salomon Brothers Strategic Bond Opportunities Series, $1,666 for the
Venture Value Series, $1,666 for the Alger Equity Growth Series, and
$1,666 for the CS First Boston Strategic Equity Opportunities Series.
PORTFOLIO TRANSACTIONS AND BROKERAGE
Some of the Fund's portfolio transactions are placed with brokers
and dealers who provide the investment advisers or subadvisers with
supplementary investment and statistical information or furnish market
quotations to the Fund or other investment companies advised by the
investment advisers or subadvisers. Although it is not possible to
assign an exact dollar value to these services, they may, to the
extent used, tend to reduce the expenses of the investment advisers or
subadvisers. The services may also be used by the investment advisers
or subadvisers in connection with their other advisory accounts and in
some cases may not be used with respect to the Fund.
Back Bay Advisors Money Market Series and Back Bay Advisors Bond
Income Series; Certain Portfolio Transactions of the Back Bay Advisors
Managed and Loomis Sayles Balanced Series
It is expected that the portfolio transactions of the Back Bay
Advisors Money Market Series and the Back Bay Advisors Bond Income
Series, and portfolio transactions of the Back Bay Advisors Managed
Series and the Loomis Sayles Balanced Series in bonds, notes and money
market instruments, will generally be with issuers or dealers on a net
basis without a stated commission. Portfolio turnover for the years
1992, 1993 and 1994 was 71%, 177% and 82%, respectively, for the Back
Bay Advisors Bond Income Series and 36%, 22% and 76%, respectively,
for the Back Bay Advisors Managed Series.
Capital Growth Series, Loomis Sayles Avanti Growth Series, Loomis
Sayles Small Cap Series, Back Bay Advisors Managed Series (Common
Stock Transactions), Loomis Sayles Balanced Series (Common Stock
Transactions), Draycott International Equity Series, Venture Value
Series and Alger Equity Growth Series
In placing orders for the purchase and sale of portfolio
securities, CGM, in the case of the Capital Growth Series, Loomis
Sayles, in the case of the Loomis Sayles Avanti Growth Series, the
Loomis Sayles Small Cap Series and the Loomis Sayles Balanced Series,
Back Bay Advisors in the case of investments in common stocks by the
Back Bay Advisors Managed Series, Draycott, in the case of the
Draycott International Equity Series, Selected/Venture, in the case of
the Venture Value Series, and Alger Management, in the case of the
Alger Equity Growth Series, each select only brokers which it believes
are financially responsible, will provide efficient and effective
services in executing, clearing and settling an order and will charge
commission rates which, when combined with the quality of the
foregoing services, will produce best price and execution for the
transaction. This does not necessarily mean that the lowest available
brokerage commission will be paid. However, the commissions are
believed to be competitive with generally prevailing rates. The
Series' advisers or subadvisers will use their best efforts to obtain
information as to the general level of commission rates being charged
by the brokerage community from time to time and will evaluate the
overall reasonableness of brokerage commissions paid on transactions
by reference to such data. In making such evaluation, all factors
affecting liquidity and execution of the order, as well as the amount
of the capital commitment by the broker in connection with the order,
are taken into account. The Capital Growth Series, Loomis Sayles
Avanti Growth Series, Loomis Sayles Small Cap Series, Loomis Sayles
Balanced Series, Back Bay Advisors Managed Series, Draycott
International Equity Series, Venture Value Series and Alger Equity
Growth Series will not pay a broker a commission at a higher rate than
otherwise available for the same transaction in recognition of the
value of research services provided by the broker or of any other
services provided by the broker which do not contribute to the best
price and execution of the transaction.
For the fiscal years ending in 1992, 1993 and 1994, brokerage
transactions for the Capital Growth Series aggregating $1,529,395,968,
$1,745,079,465 and $1,855,305,003, respectively, were allocated to
brokers providing research services and commissions of $2,619,232,
$2,851,197 and $2,659,378, respectively, were paid on those
transactions. For the fiscal years ending in 1992, 1993 and 1994, the
Westpeak Stock Index Series paid brokerage commissions aggregating
$15,000, $21,000, and $10,918, respectively. For the same periods,
the Back Bay Advisors Managed Series paid brokerage commissions
aggregating $14,000, $17,000 and $21,159, respectively. For the
period April 30, 1993 to December 31, 1993, the Loomis Sayles Avanti
Growth Series and the Westpeak Value Growth Series paid brokerage
commissions aggregating $10,000 and $12,000, respectively; for the
fiscal year ending December 31, 1994, the Loomis Sayles Avanti Growth
Series paid brokerage commissions of $67,095 and, for the same period,
the Westpeak Value Growth Series paid brokerage commissions of
$54,751. For the period May 1, 1994 to December 31, 1994, the Loomis
Sayles Small Cap Series paid brokerage commissions of $7,395. For the
period October 31, 1994 to December 31, 1994, the Draycott
International Equity Series paid brokerage commissions of $4,714, the
Venture Value Series paid brokerage commissions of $6,084, the Alger
Equity Growth Series paid brokerage commissions of $2,452 and the CS
First Boston Strategic Equity Opportunities Series paid brokerage
commissions of $5,228.
Westpeak Value Growth Series, Westpeak Stock Index Series, CS First
Boston Strategic Equity Opportunity Series, Salomon Brothers U.S.
Government Series and Salomon Brothers Strategic Bond Opportunities
Series
In placing orders for the purchase and sale of securities,
Westpeak, in the case of the Westpeak Value Growth Series and the
Westpeak Stock Index Series, CS First Boston Management, in the case
of the CS First Boston Strategic Equity Opportunities Series, and
SBAM, in the case of Salomon Brothers U.S. Government Series and
Salomon Brothers Strategic Bond Opportunities Series, always seeks
best execution. Westpeak, CS First Boston Management and SBAM each
selects only brokers or dealers which it believes are financially
responsible, will provide efficient and effective services in
executing, clearing and settling an order and will charge commission
rates which, when combined with the quality of the foregoing services,
will produce best price and execution. This does not necessarily mean
that the lowest available brokerage commission will be paid.
Westpeak, CS First Boston Management or SBAM will each use its best
efforts to obtain information as to the general level of commission
rates being charged by the brokerage community from time to time and
will evaluate the overall reasonableness of brokerage commissions paid
on transactions by reference to such data. In making such evaluation,
all factors affecting liquidity and execution of the order, as well as
the amount of the capital commitment by the broker in connection with
the order, are taken into account. Westpeak, CS First Boston
Management or SBAM may cause the Series they manage to pay a broker-
dealer that provides brokerage and research services to Westpeak, CS
First Boston Management or SBAM an amount of commission for effecting
a securities transaction for a Series in excess of the amount another
broker-dealer would have charged effecting that transaction.
Westpeak, CS First Boston Management or SBAM, as the case may be, must
determine in good faith that such greater commission is reasonable in
relation to the value of the brokerage and research services provided
by the executing broker-dealer viewed in terms of that particular
transaction or Westpeak's, CS First Boston Management's or SBAM's
overall responsibilities to the Fund and its other clients.
Westpeak's, CS First Boston Management's or SBAM's authority to cause
the Series it manages to pay such greater commissions is also subject
to such policies as the trustees of the Fund may adopt from time to
time.
Affiliated Brokerage
A Series may pay brokerage commissions to an affiliated broker
for acting as the respective Series' agent on purchases and sales of
securities for the portfolio of the Series. SEC rules require that
commissions paid to an affiliated broker of a mutual fund for
portfolio transactions not exceed "usual and customary" brokerage
commissions. The rules define "usual and customary" commissions to
include amounts which are "reasonable and fair compared to the
commission, fee or other remuneration received or to be received by
other brokers in connection with comparable transactions involving
similar securities being purchased or sold on a securities exchange
during a comparable period of time." The Trustees, including those
who are not "interested persons" of the Fund, have adopted procedures
for evaluating the reasonableness of commissions paid to affiliated
brokers and will review these procedures periodically. The Westpeak
Stock Index Series paid $480, $0 and $0 in brokerage commissions to
New England Securities, an affiliated broker of the Series, in 1992,
1993, and 1994, respectively. The Back Bay Advisors Managed Series
paid $5,136, $17,268 and $0 in brokerage commissions to New England
Securities, an affiliated broker of the Series, in 1992, 1993 and
1994, respectively. The Back Bay Advisors Bond Income Series paid no
commissions to New England Securities during those periods. The Alger
Equity Growth Series paid $2,452 in brokerage commissions to Fred
Alger and Company, Inc., an affiliated broker, for the period October
31, 1994 to December 31, 1994. The CS First Boston Strategic Equity
Opportunities Series paid $38 in brokerage commissions to CS First
Boston Corp., an affiliated broker, for the period October 31, 1994
to December 31, 1994. The amounts paid by the Westpeak Stock Index
Series represent approximately 3%, 0% and 0% of that Series' aggregate
brokerage commissions involving the payment of commissions for fiscal
years 1992, 1993 and 1994 respectively. The amount paid by the Back
Bay Advisors Managed Series represents approximately 36%, 100% and 0%
of that Series' aggregate brokerage commissions in 1992, 1993 and 1994
respectively. The amount paid by the Back Bay Advisors Bond Income
Series represents approximately 0%, 0% and 0% of the Series' aggregate
brokerage commissions in 1992, 1993 and 1994, respectively. The
amount paid by the Alger Equity Growth Series represents approximately
100% of that Series' aggregate brokerage commissions for the period
October 31, 1994 to December 31, 1994. The amount paid by the CS
First Boston Strategic Equity Opportunities Series represents
approximately .72% of that Series' aggregate brokerage commissions for
the period October 31, 1994 to December 31, 1994.
DESCRIPTION OF THE FUND
The Fund is organized as a Massachusetts business trust under the
laws of Massachusetts pursuant to an Agreement and Declaration of
Trust (the "Declaration of Trust") dated December 16, 1986. On
February 27, 1987, the Fund succeeded to the operations of The New
England Zenith Fund, Inc., a Massachusetts corporation incorporated on
January 7, 1983 as NEL Series Fund, Inc. On November 1, 1985, the
name of that corporation was changed to Zenith Fund, Inc. and on July
17, 1986 it was changed again to The New England Zenith Fund, Inc.
The Back Bay Advisors Money Market, Back Bay Advisors Bond Income and
Capital Growth Series all commenced investment operations in 1983.
The Westpeak Stock Index Series commenced operations on March 30,
1987. The Back Bay Advisors Managed Series commenced investment
operations on May 1, 1987. The Westpeak Value Growth Series and the
Loomis Sayles Avanti Growth Series commenced investment operations in
April 1993. The Loomis Sayles Small Cap Series commenced investment
operations on May 1, 1994. The Loomis Sayles Balanced, Draycott
International Equity, Salomon Brothers U.S. Government, Salomon
Brothers Strategic Bond Opportunities, Venture Value, Alger Equity
Growth and CS First Boston Strategic Equity Opportunities Series
commenced investment operations on October 31, 1994.
The Declaration of Trust permits the trustees to issue an
unlimited number of full and fractional shares of each of the Back Bay
Advisors Money Market, Back Bay Advisors Bond Income, Capital Growth,
Westpeak Value Growth, Loomis Sayles Avanti Growth, Westpeak Stock
Index, Back Bay Advisors Managed, Loomis Sayles Small Cap, Loomis
Sayles Balanced, Draycott International Equity, Salomon Brothers U.S.
Government, Salomon Brothers Strategic Bond Opportunities, Venture
Value, Alger Equity Growth and CS First Boston Strategic Equity
Opportunities Series. Interests in the Fund portfolios described in
the Prospectus and in this Statement of Additional Information are
represented by shares of such Series. Each share of a Series
represents an equal proportionate interest in such Series with each
other share and is entitled to a proportionate interest in the
dividends and distributions from such Series. The shares of the
Series do not have any preemptive rights. Upon liquidation of any
Series, whether pursuant to liquidation of the Fund or otherwise,
shareholders of such Series are entitled to share pro rata in the net
assets of such Series available for distribution to shareholders. The
Declaration of Trust also permits the trustees to charge shareholders
directly for custodial, transfer agency and servicing expenses.
The Declaration of Trust also permits the trustees, without
shareholder approval, to subdivide any series of shares into various
sub-series of shares with such dividend preferences and other rights
as the trustees may designate. While the trustees have no current
intention to exercise this power, it is intended to allow them to
provide for an equitable allocation of the impact of any future
regulatory requirements which might affect various classes of
shareholders differently. The trustees may also, without shareholder
approval, establish one or more additional separate portfolios for
investments in the Fund or merge two or more existing portfolios.
Shareholders' investments in such a portfolio would be evidenced by a
separate series of shares. The Fund is a "series" company as that
term is used in Section 18(f) of the 1940 Act.
The Declaration of Trust provides for the perpetual existence of
the Fund. The Fund or any Series, however, may be terminated at any
time by vote of at least two-thirds of the outstanding shares of each
Series affected. The Declaration of Trust further provides that the
trustees may terminate the Fund or any Series upon written notice to
the shareholders thereof.
The assets received by the Fund for the issue or sale of shares
of each Series and all income, earnings, profits, losses and proceeds
therefrom, subject only to the rights of creditors, are allocated to
that Series, and constitute the underlying assets of the Series. The
underlying assets of each Series are segregated and are charged with
the expenses in respect of that Series and with a share of the general
expenses of the Fund. Any general expenses of the Fund not readily
identifiable as belonging to a particular Series are allocated by or
under the direction of the trustees in such manner as the trustees
determine to be fair and equitable. While the expenses of the Funds
are allocated to the separate books of account of each Series, certain
expenses may be legally chargeable against the assets of all Series.
As of December 31, 1994, The New England, a mutual insurance
company organized under the laws of Massachusetts and located at 501
Boylston Street, Boston, Massachusetts 02116, and its subsidiaries
owned beneficially all of the outstanding shares of the Fund. So long
as The New England owns more than 25% of the outstanding voting
securities of the Fund, it will be presumed to be in control (as that
term is defined in the 1940 Act) of the Fund. However, the staff of
the SEC is currently of the view that The New England is required to
vote its shares in the same proportion as the votes of those shares
attributable to the variable life insurance and variable annuity
contracts investing in the Fund. The New England currently intends to
vote its shares in a manner consistent with this view. In addition,
The New England and New England Variable Life Insurance Company, a
subsidiary of The New England ("NEVLICO"), each own shares of the Fund
attributable to variable life insurance policies or variable annuity
contracts or to charges assessed under such contracts. All shares of
the Fund so owned by The New England and NEVLICO are voted in
accordance with instructions of the holders of the underlying policies
or contracts. The New England and NEVLICO will vote their Fund shares
that are held in a separate account in the same proportion as the
voting instructions received from the variable life insurance or
variable annuity contracts issued by the separate account and The New
England will vote any shares held in its general account in the same
proportion as all other Fund shares are voted.
Voting Rights
Fund shareholders are entitled to one vote for each full share
held (with fractional votes for fractional shares held) and may vote
on the election of trustees and, in certain circumstances, as to the
termination of the Fund and on other matters submitted to the vote of
shareholders. The Declaration of Trust provides that on any matter
submitted to a vote of all Fund shareholders, all Fund shares entitled
to vote shall be voted together irrespective of Series unless the
rights of a particular Series would be adversely affected by the vote,
in which case a separate vote of that Series shall also be required to
decide the question. Also, a separate vote shall be held whenever
required by the 1940 Act or any rule thereunder. Rule 18f-2 under the
1940 Act provides that, in effect, a Series shall be deemed to be
affected by a matter unless it is clear that the interests of each
Series in the matter are substantially identical or that the matter
does not affect any interest of such Series. In addition, the
Declaration of Trust provides that the shareholders of any particular
Series shall not be entitled to vote on any matters as to which such
Series is not affected. For example, the advisory agreement of a
Series, and changes in the investment objective or restrictions of a
Series, will be voted on only by that Series. On the other hand,
shareholders of all Series vote together in the election of trustees
of the Fund and in the selection of independent public accountants.
Voting rights are not cumulative.
There will normally be no meetings of shareholders for the
purpose of electing trustees except that in accordance with the 1940
Act (i) the Fund will hold a shareholders' meeting for the election of
trustees at such time as less than a majority of the trustees holding
office have been elected by shareholders and (ii) if, as a result of a
vacancy in the Board of Trustees, less than two-thirds of the trustees
holding office have been elected by the shareholders, that vacancy may
only be filled by a vote of the shareholders. In addition, trustees
may be removed from office by a written consent signed by the holders
of two-thirds of the outstanding shares at a meeting duly called for
the purpose, which meeting shall be held upon the written request of
the holders of not less than 10% of the outstanding shares. Upon
written request by the holders of shares having a net asset value
constituting 1% of the outstanding shares stating that such
shareholders wish to communicate with the other shareholders for the
purpose of obtaining the signatures necessary to demand a meeting to
consider removal of a trustee, the Fund has undertaken to provide a
list of shareholders or to disseminate appropriate materials (at the
expense of the requesting shareholders). Except as set forth above,
the trustees shall continue to hold office and may appoint successor
trustees.
No amendment may be made to the Declaration of Trust without the
affirmative vote of a majority of the outstanding shares of the Fund
except (i) to change the Fund's name or to cure technical problems in
the Declaration of Trust and (ii) to establish, designate or modify
new and existing series or sub-series of Fund shares or other
provisions relating to Fund shares in response to applicable laws or
regulations.
Shareholder and Trustee Liability
Under Massachusetts law shareholders could, under certain
circumstances, be held personally liable for the obligations of the
Fund. However, the Declaration of Trust disclaims shareholder
liability for acts or obligations of the Fund and requires that notice
of such disclaimer be given in each agreement, obligation or
instrument entered into or executed by the Fund or the trustees. The
Declaration of Trust provides for indemnification out of the relevant
Series' property for all loss and expense of any shareholder held
personally liable for the obligations of the Series in which the
shareholder owns shares. Thus, the risk of a shareholder incurring
financial loss on account of shareholder liability is considered
remote since it is limited to circumstances in which the disclaimer is
inoperative and a Series itself would be unable to meet its
obligations. For purposes of such liability, the Fund's shareholders
are the separate accounts investing directly in the Fund and not the
owners of variable life insurance or variable annuity contracts or
purchasers of other insurance products.
The Declaration of Trust further provides that the trustees will
not be liable for errors of judgment or mistakes of fact or law.
However, nothing in the Declaration of Trust protects a trustee
against any liability to which the trustee would otherwise be subject
by reason of willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of his or her
office. The By-Laws of the Fund provide for indemnification by the
Fund of the trustees and officers of the Fund except with respect to
any matter as to which any such person did not act in good faith in
the reasonable belief that his or her action was in or not opposed to
the best interests of the Fund. Such person may not be indemnified
against any liability to the Fund or the Fund's shareholders to which
he or she would otherwise be subject by reason of willful misfeasance,
bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of his or her office.
APPENDIX A-1
DESCRIPTION OF BOND RATINGS
Moody's Investors Service, Inc.
Aaa
Bonds which are rated Aaa are judged to be of 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. See Note 1.
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. See Note 1.
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. See Note 1.
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 the
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.
Should no rating be assigned by Moody's, the reason may be one of the
following:
(1) An application for rating was not received or accepted.
(2) The issue or issuer belongs to a group of securities that
are not rated as a matter of policy.
(3) There is a lack of essential data pertaining to the issue or
issuer.
(4) The issue was privately placed, in which case the rating is
not published in Moody's publications.
_________________
Note 1: This rating may include the numerical modifier 1, 2 or 3 to
provide a more precise indication of relative debt quality within the
category, with 1 indicating the high end of the category, 2 the mid-
range and 3 nearer the low end.
Standard & Poor's Corporation
AAA
This is the highest rating assigned by Standard & Poor's Corporation
("S&P") to a debt obligation and indicates an extremely strong
capacity to pay principal and interest.
AA
Bonds rated AA also qualify as high quality debt obligations. Capacity
to pay principal and interest is very strong, and in the majority of
instances they differ from AAA issues only in small degree.
A
Bonds rated A have strong capacity to pay principal and interest
although they are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions.
BBB
Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit protection
parameters, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity to pay principal and
interest for bonds in this category than for bonds in the A category.
BB, B, CCC, CC
Bonds rated BB, B, CCC and CC are regarded, on balance, as
predominantly speculative with respect to capacity to pay interest and
repay principal in accordance with the terms of the obligation. BB
indicates the lowest degree of speculation and CC the highest degree
of speculation. While such bonds will likely have some quality and
protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions.
C
The rating C 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 "B" may be modified
by the addition of a plus or minus sign to show relative standing
within the major rating categories.
APPENDIX A-2
DESCRIPTION OF COMMERCIAL PAPER RATINGS
Standard & Poor's Corporation
A-1
Commercial paper rated A-1 by S&P has the following characteristics:
Liquidity ratios are adequate to meet cash requirements. Long-term
senior debt is rated "A" or better. The issuer has access to at least
two additional channels of borrowing. Basic earnings and cash flow
have an upward trend with allowance made for unusual circumstances.
Typically, the issuer's industry is well established and the issuer
has a strong position within the industry. The reliability and
quality of management are unquestioned. Commercial paper within the A-
1 category which has overwhelming safety characteristics is denoted "A-
1+."
A-2
Capacity for timely payment on issues with this designation is strong.
However, the relative degree of safety is not as overwhelming as for
issues designated A-1.
Moody's Investors Service, Inc.
P-1
The rating P-1 is the highest commercial paper rating assigned by
Moody's Investors Service, Inc. ("Moody's"). Among the factors
considered by Moody's in assigning ratings are the following:
(1) evaluation of the management of the issuer;
(2) economic evaluation of the issuer's industry or industries
and an appraisal of speculative-type risks which may be inherent in
certain areas;
(3) evaluation of the issuer's products in relation to
competition and customer acceptance;
(4) liquidity;
(5) amount and quality of long-term debt;
(6) trend of earnings over a period of ten years;
(7) financial strength of a parent company and the relationships
which exist with the issuer; and
(8) recognition by the management of obligations which may be
present or may arise as a result of public interest questions and
preparations to meet such obligations.
P-2
Issuers rated P-2 have a strong capacity for repayment of short-term
promissory obligations. This will normally be evidenced by many of
the characteristics cited above but to a lesser degree. Earnings
trends and coverage ratios, while sound, will be more subject to
variation. Capitalization characteristics, while still appropriate,
may be more affected by external conditions. Ample alternative
liquidity is maintained.
APPENDIX B
ABC and affiliates Dow Jones News Service
Atlanta Constitution Economist
Atlanta Journal FACS of the Week
Austin American Statesman Financial News Network
Baltimore Sun Financial Planning
Barron's Financial Services Week
Bond Buyer Financial World
Boston Business Journal Forbes
Boston Globe Fort Worth Star-Telegram
Boston Herald Fortune
Broker World Fox Network and affiliates
Business Radio Network Fund Action
Business Week Hartford Courant
CBS and affiliates Houston Chronicle
CFO INC
Changing Times Indianapolis Star
Chicago Sun Times Institutional Investor
Chicago Tribune Investment Dealers Digest
Christian Science Monitor Investment Vision
Christian Science Monitor News Investor's Daily
Service Journal of Commerce
Cincinnati Enquirer Kansas City Star
Cincinnati Post LA Times
CNBC Leckey, Andrew (syndicated
CNN column)
Columbus Dispatch Life Association News
Dallas Morning News Miami Herald
Dallas Times-Herald Milwaukee Sentinel
Denver Post Money
Des Moines Register Money Maker
Detroit Free Press Money Management Letter
Donoghue's Money Fund Report Morningstar
Dorfman, Dan (syndicated column) National Public Radio
National Underwriter
NBC and affiliates
New England Business
New England Cable News
New Orleans Times-Picayune
New York Daily News
New York Times
Newark Star Ledger
Newsday
Newsweek
Nightly Business Report
Orange County Register
Orlando Sentinel
Pension World
Pensions and Investments
Personal Investor
Philadelphia Inquirer
Porter, Sylvia (syndicated
column)
Portland Oregonian
Public Broadcasting Service
Quinn, Jane Bryant (syndicated
column)
Registered Representative
Research Magazine
Resource
Reuters
Rukeyser's Business (syndicated
column)
Sacramento Bee
San Francisco Chronicle
San Francisco Examiner
San Jose Mercury
Seattle Post-Intelligencer
Seattle Times
Smart Money
St. Louis Post Dispatch
St. Petersburg Times
Standard & Poor's Outlook
Standard & Poor's Stock Guide
Stanger's Investment Advisor
Stockbroker's Register
Strategic Insight
Tampa Tribune
Time
Tobias, Andrew (syndicated
column)
UPI
US News and World Report
USA Today
Value Line
Wall St. Journal
Wall Street Letter
Wall Street Week
Washington Post
WBZ
WBZ-TV
WCVB-TV
WEEI
WHDH
Worcester Telegram
Worth Magazine
WRKO
APPENDIX C
FINANCIAL STATEMENTS AND REPORTS OF INDEPENDENT ACCOUNTANTS
