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American Growth Series
Individual Variable Annuity Contracts
Offered by New England Variable Life Insurance Company
501 Boylston Street, Boston, Massachusetts 02116-3700
Prospectuses
April 10, 1995
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AMERICAN GROWTH SERIES
INDIVIDUAL VARIABLE ANNUITY CONTRACTS
ISSUED BY
NEW ENGLAND VARIABLE LIFE INSURANCE COMPANY
501 BOYLSTON STREET
BOSTON, MASSACHUSETTS 02116
(617) 578-2000
This prospectus offers individual flexible and single purchase payment
variable annuity contracts (the "Contracts") that are currently intended for
use with certain retirement plans that qualify for tax benefited treatment
under the Internal Revenue Code (the "Code"), for individual use, and for use
with plans and trusts not qualifying under the Code for tax benefited
treatment. All purchase payments made under the Contracts may be allocated to
New England Variable Annuity Separate Account (the "Variable Account"), a
separate investment account of New England Variable Life Insurance Company
("NEVLICO" or the "Company"). Assets of the Variable Account are invested in
shares of certain Series of the New England Zenith Fund (collectively, the
"Eligible Funds"). See "Investments of the Variable Account." The owner of a
Contract chooses the Eligible Funds in which the purchase payments are
invested and may change the Eligible Fund or Funds selected from time to time.
Any one or a combination of the following Eligible Funds may be selected,
within limits:
Back Bay Advisors Bond Income Series Draycott International Equity Series
Back Bay Advisors Money Market Alger Equity Growth Series
Series
Loomis Sayles Avanti Growth Series Venture Value Series
Westpeak Value Growth Series Salomon Brothers U.S. Government
Series
Loomis Sayles Small Cap Series Salomon Brothers Strategic Bond
Opportunities Series
Loomis Sayles Balanced Series
A Fixed Account option is also available in approved states. (See "The Fixed
Account" for more information.) Special limits apply to transfers of Contract
---------------------------------------------
Value to and from the Fixed Account.
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This prospectus sets forth concisely the information about the Contracts
that a prospective investor ought to know before investing. The prospectus
should be read carefully and retained for future reference.
Certain additional information about the Contracts is contained in a
Statement of Additional Information dated April 10, 1995, as it may be
supplemented from time to time, which has been filed with the Securities and
Exchange Commission and is incorporated herein by reference. The Table of
Contents of the Statement of Additional Information appears on page A-54 of
this prospectus. The Statement of Additional Information is available without
charge and may be obtained by writing to New England Securities Corporation
("New England Securities"), 399 Boylston St., Boston, Massachusetts 02116.
New England Securities serves as principal underwriter for the Variable
Account. New England Securities is a subsidiary of New England Mutual Life
Insurance Company ("The New England"), the parent company of NEVLICO.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is April 10, 1995.
THIS PROSPECTUS MUST BE ACCOMPANIED OR PRECEDED BY A CURRENT PROSPECTUS FOR
THE NEW ENGLAND ZENITH FUND AND SHOULD BE RETAINED FOR FUTURE REFERENCE.
AN INVESTMENT IN THE CONTRACT IS NOT A DEPOSIT OR OBLIGATION OF, OR
GUARANTEED OR ENDORSED BY, ANY FINANCIAL INSTITUTION AND IS NOT FEDERALLY
INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE
BOARD OR ANY OTHER GOVERNMENTAL AGENCY, AND INVOLVES RISK, INCLUDING THE
POSSIBLE LOSS OF PRINCIPAL.
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TABLE OF CONTENTS
OF
THE PROSPECTUS
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GLOSSARY OF SPECIAL TERMS USED IN THIS PROSPECTUS......................... A-4
HIGHLIGHTS................................................................ A-5
EXPENSE TABLE............................................................. A-8
HOW THE CONTRACT WORKS.................................................... A-13
THE COMPANY............................................................... A-14
THE VARIABLE ACCOUNT...................................................... A-14
INVESTMENTS OF THE VARIABLE ACCOUNT....................................... A-14
Investment Advice..................................................... A-16
Substitution of Investments........................................... A-16
GUARANTEED OPTION......................................................... A-16
THE CONTRACTS............................................................. A-17
Purchase Payments..................................................... A-17
Allocation of Purchase Payments....................................... A-18
Contract Value and Accumulation Unit Value............................ A-18
Payment on Death Prior to Annuitization............................... A-18
Transfer Privilege.................................................... A-20
Dollar Cost Averaging................................................. A-21
Surrenders............................................................ A-21
Systematic Withdrawals................................................ A-22
Suspension of Payments................................................ A-23
Ownership Rights...................................................... A-23
Requests and Elections................................................ A-23
Ten Day Right to Review............................................... A-23
ADMINISTRATION CHARGES, CONTINGENT DEFERRED SALES CHARGE AND OTHER DEDUC-
TIONS.................................................................... A-24
Administration Charges................................................ A-24
Mortality and Expense Risk Charge..................................... A-24
Contingent Deferred Sales Charge...................................... A-25
Premium Tax Charge.................................................... A-27
Other Expenses........................................................ A-27
Charges Under Contracts Purchased by Exchanging a Fund I, Preference
or Zenith Accumulator Contract....................................... A-28
ANNUITY PAYMENTS.......................................................... A-28
Election of Annuity................................................... A-28
Annuity Options....................................................... A-29
AMOUNT OF VARIABLE ANNUITY PAYMENTS....................................... A-30
FEDERAL INCOME TAX STATUS................................................. A-31
Introduction.......................................................... A-31
Taxation of NEVLICO................................................... A-32
Tax Status of the Contract............................................ A-32
Taxation of Annuities................................................. A-33
Qualified Contracts................................................... A-34
Withholding........................................................... A-36
Possible Changes in Taxation.......................................... A-36
Other Tax Consequences................................................ A-36
General............................................................... A-36
VOTING RIGHTS............................................................. A-36
DISTRIBUTION OF CONTRACTS................................................. A-37
</TABLE>
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THE FIXED ACCOUNT.......................................................... A-37
General Description of the Fixed Account............................... A-37
Contract Value and Fixed Account Transactions.......................... A-38
FINANCIAL STATEMENTS....................................................... A-38
INVESTMENT EXPERIENCE INFORMATION.......................................... A-39
AVERAGE ANNUAL TOTAL RETURN................................................ A-39
INVESTMENT ADVISER PERFORMANCE DATA FOR THE CLONED SERIES.................. A-43
APPENDIX A: Consumer Tips.................................................. A-52
APPENDIX B: Contingent Deferred Sales Charge............................... A-53
</TABLE>
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GLOSSARY OF SPECIAL TERMS USED IN THIS PROSPECTUS
ACCOUNT--A sub-account of the Variable Account or the Fixed Account.
ACCUMULATION UNIT--An accounting device used to calculate the Contract Value
prior to annuitization.
ACCUMULATION UNIT VALUE--The value of an Accumulation Unit, determined as of
the close of regular trading on the New York Stock Exchange on each day the
Exchange is open. The Accumulation Unit Value of a sub-account reflects the
net investment experience of the underlying Eligible Fund and daily deductions
for the Mortality and Expense Risk Charge and Administration Asset Charge.
ADMINISTRATION ASSET CHARGE--A charge deducted daily from the assets of each
sub-account of the Variable Account to cover the Company's cost of providing
certain administrative services relating to the Contracts and the Variable
Account. On an annualized basis, the charge equals .10% of daily net assets.
ADMINISTRATION CONTRACT CHARGE--A charge deducted annually from the Contract
Value in the Variable Account to cover the Company's cost of providing certain
administrative services relating to the Contracts and the Variable Account.
The charge is the lesser of: 2% of the total Contract Value and $30.
ANNUITANT--The person on whose life the Contract is issued.
ANNUITIZATION--Application of proceeds under the Contract to an annuity
option on the Maturity Date or upon an earlier surrender of the Contract.
ANNUITY UNIT--An accounting device used to calculate the dollar amount of
annuity payments.
BENEFICIARY--The person designated to receive Death Proceeds under a
Contract if a Contract Owner (or Annuitant, if the Contract Owner is not a
natural person) dies before annuitization of the Contract.
CONTINGENT ANNUITANT--If designated in the application, the person who
becomes the Annuitant under the Contract if the Annuitant dies prior to
annuitization. A Contingent Annuitant must be designated for individually
owned Contracts where the Contract Owner and Annuitant are not the same. The
Contingent Annuitant must be a Contract Owner. The Contingent Annuitant cannot
be changed after the death of the Annuitant.
CONTINGENT DEFERRED SALES CHARGE--A charge deducted upon certain full and
partial surrenders and application of Contract proceeds to certain annuity
payment options, or, in certain circumstances, upon withdrawal of amounts that
were applied to a payment option. In addition, in states where the maximum
maturity age permitted by law is less than 95, a Contingent Deferred Sales
Charge may apply at the Maturity Date.
CONTRACT DATE--The date shown as the Contract Date in the Contract.
CONTRACT OWNER--The person so designated in the application or as
subsequently changed.
CONTRACT VALUE--On or before annuitization, the value obtained by
multiplying the number of Accumulation Units credited to the Contract by the
appropriate current Accumulation Unit Value. Under Contracts with the Fixed
Account option, the Contract Value also includes the amount of Contract Value
allocated to the Fixed Account.
CONTRACT YEAR--A twelve month period commencing with the Contract Date and
with each Contract anniversary thereafter.
DEATH PROCEEDS (prior to annuitization)--The amount payable by the Company
upon receipt of due proof of the death of the Contract Owner (or of the death
of the first Contract Owner to die under a jointly owned Contract) and
election of payment prior to annuitization. For a Contract that is not owned
by an individual, the Death Proceeds are payable upon receipt of due proof of
the death of the Annuitant (and election of payment) prior to annuitization.
The Death Proceeds are guaranteed to be no less than the purchase payments
made, adjusted for any previous surrenders. However, after the first seven
Contract Years, a higher (but never a lower) guarantee may apply, depending on
your Contract Value. In certain states, the Death Proceeds will be reduced by
the applicable premium tax charge.
ELIGIBLE FUNDS--A term that currently includes 11 Series of the New England
Zenith Fund. Purchase payments allocated to the Variable Account may be
invested in shares of one or more of these Series, as described on pages A-14
to A-16.
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FIXED ACCOUNT--A part of the Company's general account to which net purchase
payments may be allocated under certain Contracts. The Fixed Account provides
guarantees of principal and interest. Special limits apply to transfers of
Contract Value to and from the Fixed Account. See page A-37.
MORTALITY AND EXPENSE RISK CHARGE--A charge deducted daily from the assets
of each sub-account of the Variable Account to compensate the Company for
assuming certain mortality and expense risks under the Contracts. On an
annualized basis, the charge equals 1.25% of daily net assets.
MATURITY DATE--The date on which annuity payments are to commence, unless
the Contract Owner applies the Contract Value to an annuity payment option at
an earlier date. The Maturity Date will be the date when the older of the
Contract Owner(s) and the Annuitant at his or her nearest birthday would be
age 95 (or the maximum age permitted by state law, if less).
PAYEE--Any person or entity entitled to receive payment in one sum or under
a payment option. The term includes (i) an Annuitant, (ii) a Beneficiary or
contingent Beneficiary who becomes entitled to payments upon death of the
Contract Owner (or Annuitant, if the Contract is not owned in an individual
capacity), and (iii) in the event of surrender or partial surrender of the
Contract, the Contract Owner.
PREMIUM TAX CHARGE--A charge to recover premium taxes which the Company pays
to certain states.
PURCHASE PAYMENTS--Amounts paid to the Company for investment in the
Contract.
SYSTEMATIC WITHDRAWALS--A method of distributing your Contract Value which
involves a series of partial surrenders.
TEN DAY RIGHT TO REVIEW--Within 10 days (or more if required by law) of your
receipt of an issued Contract you may return it to the Company or its agent
for cancellation. Upon cancellation of the Contract, the Company will return
to you the Contract Value (or, if required by state law, all purchase payments
made).
VARIABLE ACCOUNT--A separate investment account of the Company designated as
the New England Variable Annuity Separate Account. The Variable Account is
divided into sub-accounts, each of which invests in shares of one of the
Eligible Funds.
VARIABLE ANNUITY--An annuity providing for payments varying in amount in
accordance with the investment experience of the assets of a separate
investment account.
HIGHLIGHTS
This prospectus describes Contracts under which purchase payments are
allocated to the Variable Account. If the Fixed Account is available under
your Contract, you may allocate all or part of your purchase payments or
transfer all or part of your Contract Value to that account. For a description
of the Fixed Account, the rules regarding transactions which involve the Fixed
Account (such as special restrictions on transfers of Contract Value to and
from the Fixed Account), and the way in which the Fixed Account affects the
Contract Value, see "The Fixed Account". You should review "The Fixed Account"
carefully before allocating purchase payments or Contract Value to that
account.
TAX DEFERRED VARIABLE ANNUITIES:
The deferral of taxes on earnings under variable annuities is designed to
encourage long-term personal savings and supplemental retirement plans.
THE CONTRACT:
The American Growth Series is a variable annuity issued by NEVLICO. The
variable annuity provides for variable payments to commence at the Maturity
Date. The Contract Owner may, however, surrender the Contract and apply the
proceeds to an annuity payment option at an earlier date. The payments
generally are made on a monthly basis and will vary in amount according to the
payment option selected and the investment results of the underlying Eligible
Fund. (See "Annuity Payments".)
A-5
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PURCHASE PAYMENTS:
The minimum initial purchase payment required is $2,000 for Contracts used
in connection with retirement plans qualifying for tax benefited treatment
under the Code and $5,000 for all other Contracts. The maximum purchase
payment permitted is $1,000,000, unless the Company consents to a higher
amount. Any subsequent purchase payments must be at least $250. The Company
reserves the right to limit purchase payments made in any Contract Year or in
total under a Contract. No purchase payment may be made (1) within seven years
prior to the Contract's Maturity Date (except under Contracts issued in
Pennsylvania or New York), or (2) after a Contract Owner (or after the
Annuitant, if the Contract is not owned in an individual capacity) reaches age
86. (See "Purchase Payments".) Contracts can be purchased through insurance
agents of The New England who are registered representatives of New England
Securities. They may also be purchased through registered representatives of
broker-dealers that have selling agreements with New England Securities.
OWNERSHIP:
The Contracts may be purchased and owned by an individual, an employer, a
trust, a corporation, a partnership, a custodian or any entity specified in an
eligible employee benefit plan. The Contracts are available to the following
retirement plans which offer Federal tax benefits: individual retirement
accounts under Section 408(a) of the Code, individual retirement annuities
under Section 408(b) of the Code (both referred to as "IRAs"), and simplified
employee pension plans under Section 408(k) of the Code ("SEPs"). The
Contracts are not currently available to other plans that qualify for tax
benefits under the Code.
A Contract may have joint owners. If the Annuitant is not the Contract Owner
and the Contract Owner is an individual, then the Contract Owner must be the
Contingent Annuitant. Under a jointly owned Contract, if the Annuitant is not
one of the Contract Owners, then one Contract Owner must be the Contingent
Annuitant. Where a Contract is used to fund an IRA, the Contract Owner must be
the Annuitant, and no Contingent Annuitant will be allowed.
The Company relies on instructions from trustees and custodians, as Contract
Owners, who may exercise certain rights under the Contracts on behalf of plan
participants. In any event, references to "you" in this prospectus refer to
the Contract Owner(s) or to plan participants who may be entitled to instruct
their trustee or custodian with regard to the exercise of these rights. (See
"Ownership Rights".)
INVESTMENT OPTIONS:
You may allocate purchase payments to the Series of the New England Zenith
Fund that are Eligible Funds under the Contracts, or to the Fixed Account (if
available under your Contract). Your Contract Value may be distributed among
no more than 10 accounts (including the Fixed Account) at any time.
You may change your allocation of future purchase payments. You may also
transfer Contract Value between Eligible Funds without taxation. The Company
reserves the right to limit the number and amount of transfers and charge a
transfer fee. Currently the Company allows 12 transfers free of charge per
Contract Year prior to annuitization. Additional transfers are subject to a
$10 charge per transfer. However, special limits apply in situations which the
Company determines involve "market-timing". (See "Transfer Privilege" for more
information.) After variable annuity payments begin, the Company currently
allows one transfer per year in total. Special limits apply to transfers of
Contract Value to and from the Fixed Account. (See "The Fixed Account" for a
description of transfers involving that account.) Currently, the Company's
rules for transfers prior to annuitization generally require that the amount
transferred from any sub-account must be at least $100 (net of any transfer
fee), and the amount transferred to any sub-account must be at least $100. The
maximum amount which can be transferred is $500,000 per transaction.
CHARGES:
There are no deductions from purchase payments for sales charges. The
Company currently imposes a premium tax charge under Contracts on the lives of
Annuitants residing in states imposing premium taxes. Generally, the Company
deducts any applicable premium tax charge from the Contract Value on the date
when annuity payments begin. In Pennsylvania, South Dakota and Kentucky the
Company deducts the premium tax charge at the earliest of: a full or partial
surrender, annuitization or payment of the Death Proceeds (including
application of the Death Proceeds to the Beneficiary
A-6
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Continuation provision) due to the death of a Contract Owner (or Annuitant
under a Contract not owned in an individual capacity). (See "Premium Tax
Charge.") For assuming mortality and expense risks under the Contract, the
Company deducts an amount equal to an annual rate of 1.25% of the daily net
assets of the Variable Account, of which .70% represents a mortality risk
charge and .55% represents an expense risk charge. (See "Mortality and Expense
Risk Charge".) The Company deducts an amount equal to an annual rate of .10%
of the daily net assets of the Variable Account for administrative expenses
and also imposes an annual administration charge against your Contract Value
in the Variable Account, equal to the lesser of 2% of the total Contract Value
(including any Contract Value in the Fixed Account) and $30. (The annual
administration charge will be waived for any Contract Year in which the
Contract Value reaches certain amounts established by the Company. In
addition, the charge will not apply if the entire Contract Value is allocated
to the Fixed Account. See "Administration Charges".)
A Contingent Deferred Sales Charge will be imposed on certain full and
partial surrenders and applications of proceeds to certain payment options,
or, in certain circumstances, on withdrawal of amounts that were applied to a
payment option. (See "Contingent Deferred Sales Charge.") In addition, a
Contingent Deferred Sales Charge may apply at the Maturity Date under
Contracts issued in Pennsylvania or New York, if at that time a purchase
payment has been invested less than seven years. The Contingent Deferred Sales
Charge is a maximum of 7% of each purchase payment made. In no event will the
amount of the Contingent Deferred Sales Charge exceed the equivalent of 8% of
the first $50,000 of purchase payments and 6.5% of purchase payments in excess
of $50,000.
TEN DAY RIGHT TO REVIEW:
Within 10 days (or more where required by state insurance law) after you
receive the Contract you may return it to the Company or the Company's agent
for cancellation. The Company will return to you the Contract Value (or, if
required by state law or regulation, all purchase payments made). (See "Ten
Day Right to Review" on page A-23.)
PAYMENT ON DEATH:
The Contract provides for a payment to the Beneficiary if the Contract Owner
dies (or, if a Contract Owner under a jointly owned Contract dies) prior to
annuitization. (In the case of a Contract not owned in an individual capacity,
the Death Proceeds will be paid if the Annuitant dies prior to annuitization.)
The Death Proceeds are guaranteed not to be less than purchase payments made
under the Contract, adjusted for any previous surrenders and, in certain
states, reduced by a premium tax charge. However, on the seventh Contract
Anniversary, and at seven year intervals thereafter until the Contract Owner's
76th birthday, the guaranteed minimum Death Proceeds payable are recalculated
to determine whether a higher (but never a lower) guarantee will apply. (Under
a jointly owned Contract, the recalculation of the minimum Death Proceeds will
be made at seven year intervals prior to the 71st birthday of the older
Contract Owner.) The Death Proceeds payable will be the greater of the
guaranteed minimum Death Proceeds amount applicable to the Contract and the
current Contract Value. (See "Payment on Death Prior to Annuitization".)
SURRENDERS:
Generally, you may surrender the Contract for all or a portion of the
Contract Value by written request at any time prior to annuitization so long
as, after a partial surrender, the remaining Contract Value is at least
$1,000. Under the Company's current rules, a partial surrender must be at
least $100. (See "Surrenders".) The Federal tax laws impose penalties upon,
and in some cases prohibit, certain premature distributions from the Contracts
before or after the date on which the annuity payments are to begin. (See
"Federal Income Tax Status.") A Contingent Deferred Sales Charge will be
imposed in connection with certain Contract surrenders and applications of
proceeds to certain payment options, or, in certain circumstances, upon
subsequent withdrawal of amounts applied to a payment option. Upon a full
surrender, a pro rata portion of the annual $30 administration charge and, in
certain states, a premium tax charge will also be deducted. In any Contract
Year, an amount equal to the greater of (1) 10% of the Contract Value at the
beginning of the Contract Year and (2) the excess of the Contract Value over
purchase payments subject to the Contingent Deferred Sales Charge on the date
of the surrender may be surrendered without sales charge. (See "Contingent
Deferred Sales Charge" for more information.)
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EXPENSE TABLE
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CONTRACT OWNER TRANSACTION EXPENSES(1)
Sales Charge Imposed on Purchase Payments (as a percentage
of purchase payments)...................................... 0%
Maximum Contingent Deferred Sales Charge(2) (as a percentage
of each purchase payment).................................. 7%
Transfer Fee(3)............................................. $ 0
(first 12 per
Contract Year)
ANNUAL CONTRACT FEE
Administration Contract Charge (per Contract)(4)............ $30
SEPARATE ACCOUNT ANNUAL EXPENSES(5)
(as percentage of average net assets)
Mortality Risk Charge....................................... .70%
Expense Risk Charge......................................... .55%
Administration Asset Charge................................. .10%
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Total Separate Account Annual Expenses.................. 1.35%
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NEW ENGLAND ZENITH FUND
ANNUAL OPERATING EXPENSES(6) (AS A PERCENTAGE OF AVERAGE NET ASSETS AFTER
EXPENSE CAP OR EXPENSE DEFERRAL)
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BACK BAY BACK BAY LOOMIS LOOMIS
ADVISORS ADVISORS WESTPEAK SAYLES SAYLES LOOMIS DRAYCOTT
BOND MONEY VALUE AVANTI SMALL SAYLES INTERNATIONAL
INCOME MARKET GROWTH GROWTH CAP BALANCED EQUITY
SERIES SERIES SERIES SERIES SERIES SERIES SERIES
-------- -------- -------- ------ ------ -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Management Fee.......... .40% .35% .70% .70% 1.00% .70% .90%
Other Expenses.......... .14% .15% .15% .15% -- .15% .40%
---- ---- ---- ---- ----- ---- -----
Total Operating Ex-
penses............... .54% .50% .85% .85% 1.00% .85% 1.30%
</TABLE>
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SALOMON SALOMON
BROTHERS BROTHERS
ALGER EQUITY VENTURE U.S. STRATEGIC BOND
GROWTH VALUE GOVERNMENT OPPORTUNITIES
SERIES SERIES SERIES SERIES
------------ ------- ---------- --------------
<S> <C> <C> <C> <C>
Management Fee................... .70% .75% .55% .65%
Other Expenses................... .15% .15% .15% .20%
---- ---- ---- ----
Total Operating Expenses....... .85% .90% .70% .85%
</TABLE>
EXAMPLE (NOTE: The examples shown below are entirely hypothetical. They are
not representations of past or future performance or expenses. Actual
performance and/or expenses may be more or less than shown.(7)) For purchase
payments allocated to each of the Series indicated:
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1 YEAR 3 YEARS
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You would pay the following expenses on a $1,000 purchase
payment assuming
1) 5% annual return on the underlying New England Zenith
Fund Series and 2) that you surrender your Contract or that
you elect to annuitize under a period certain option for a
specified period of less than 15 years, at the end of each
time period:
Back Bay Advisors Bond Income.............................. $85.89 $113.61
Back Bay Advisors Money Market............................. 85.52 112.45
Westpeak Value Growth...................................... 88.78 122.49
Loomis Sayles Avanti Growth................................ 88.78 122.49
Loomis Sayles Small Cap.................................... 90.17 126.77
Loomis Sayles Balanced..................................... 88.78 122.49
Draycott International Equity.............................. 92.95 135.25
Alger Equity Growth........................................ 88.78 122.49
Venture Value.............................................. 89.24 123.92
Salomon Brothers U.S. Government........................... 87.39 118.21
Salomon Brothers Strategic Bond Opportunities.............. 88.78 122.49
</TABLE>
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1 YEAR 3 YEARS
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You would pay the following expenses on a $1,000 purchase
payment assuming
1) 5% annual return on the underlying New England Zenith
Fund Series and 2) that you do not surrender your Contract
or that you elect to annuitize under a life contingency
option, or under a period certain option for a minimum
specified period of 15 years, at the end of each time
period(8):
Back Bay Advisors Bond Income............................ $20.89 $64.49
Back Bay Advisors Money Market........................... 20.49 63.27
Westpeak Value Growth.................................... 24.00 73.84
Loomis Sayles Avanti Growth.............................. 24.00 73.84
Loomis Sayles Small Cap.................................. 25.50 78.34
Loomis Sayles Balanced................................... 24.00 73.84
Draycott International Equity............................ 28.49 87.27
Alger Equity Growth...................................... 24.00 73.84
Venture Value............................................ 24.50 75.34
Salomon Brothers U.S. Government......................... 22.50 69.33
Salomon Brothers Strategic Bond Opportunities............ 24.00 73.84
</TABLE>
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NOTES:
(1) Premium tax charges are not shown. They range from 0% (in most states) to
3.5% of Contract Value. The amount of the premium tax charge, if any, is
generally deducted from the Contract Value on the date selected by the
Contract Owner for the commencement of annuity benefits, and in three
states is deducted at the earliest of: a full or partial surrender,
annuitization, or payment of the Death Proceeds due to the death of the
Contract Owner (or Annuitant if the Contract is not owned in an individual
capacity). (See "Premium Tax Charge.")
(2) The Contingent Deferred Sales Charge applies to each purchase payment made
and declines annually over the first seven year period the purchase
payment is invested in the Contract until it reaches 0% for that purchase
payment. Amounts subject to the Contingent Deferred Sales Charge will be
determined by assuming that purchase payments are withdrawn (whether for a
surrender or annuitization) on a "first in-first out" basis. An amount
equal to the greater of (1) 10% of the Contract Value at the beginning of
the Contract Year and (2) the excess of the Contract Value over purchase
payments that are subject to the Contingent Deferred Sales Charge at the
time of surrender may be surrendered without sales charge in any one
Contract Year.
(3) The Company currently charges $10 for each transfer in excess of 12 during
a Contract Year, and reserves the right to impose a transfer fee on all
transfers. The Company also reserves the right to increase the amount of
the fee.
(4) This charge is not imposed after annuitization. As a percentage of the
estimated average Contract Value in the Variable Account, this fee equals
0.17%, based on an estimated average Contract Value of $17,647.
(5) These charges are not imposed after annuitization if annuity payments are
made on a fixed basis.
(6) Total Operating Expenses for the Back Bay Advisors Bond Income, Back Bay
Advisors Money Market, Westpeak Value Growth, and Loomis Sayles Avanti
Growth Series are based on the amount of such expenses incurred during the
most recent fiscal year applied against assets at December 31, 1994, after
giving effect to a voluntary expense cap by The New England, beginning
November 1, 1994. For the Back Bay Advisors Bond Income and Back Bay
Advisors Money Market Series, The New England will bear those expenses
(other than the management fee) that exceed 0.15% of average daily net
assets. For the Westpeak Value Growth and Loomis Sayles Avanti Growth
Series, The New England will bear all expenses that exceed 0.85% of
average daily net assets. Without this cap or any other expense
reimbursement arrangement, Total Operating Expenses for the Westpeak Value
Growth and Loomis Sayles Avanti Growth Series for the year ended December
31, 1994 would have been 1.36% and 1.25%, respectively. The Loomis Sayles
Small Cap Series was established after December 31, 1993. Total Operating
Expenses for the Loomis Sayles Small Cap Series take into account a
voluntary cap on expenses by The New England, which will bear all expenses
that exceed 1.00% of average daily net assets. Absent this cap or any
other expense reimbursement arrangement, Total Operating Expenses for the
Loomis Sayles Small Cap Series are estimated to be 1.70% of average daily
net assets for its first year of operations. For the six other Series
shown, the total operating expenses are after giving effect to a voluntary
expense deferral. Under the deferral, expenses other than the management
fee which exceed a certain limit are paid by the investment adviser in the
year they are incurred and transferred to the Series in a future year when
actual expenses of the Series are below the limit. The limit on expenses
other than the management fee for each of these Series is: .15% of average
daily net assets for the Salomon Brothers U.S. Government, Loomis Sayles
Balanced, Venture Value and Alger Equity Growth Series; .20% of average
daily net assets for the Salomon Brothers Strategic Bond Opportunities
Series; and .40% of average daily net assets for the Draycott
International Equity Series. It is estimated that, absent the voluntary
expense deferral, Total Operating Expenses for the Loomis Sayles Balanced,
Draycott International Equity, Alger Equity Growth, Venture Value, Salomon
Brothers U.S. Government and Salomon Brothers Strategic Bond Opportunities
Series during their first year of operations would be 0.89%, 1.52%, 0.87%,
1.01%, 0.91%, and 1.42%, respectively. The expense cap and deferral
arrangements are voluntary and may be terminated at any time. See attached
prospectus for New England Zenith Fund for more complete information.
(7) In these examples, the average Administration Contract Charge of 0.17% has
been used. (See (4), above.)
(8) If you subsequently withdraw the commuted value of amounts placed under
any of these options, the Company will deduct from the amount you receive
a portion of the Contingent Deferred Sales Charge amount that would have
been deducted when you originally applied the Contract proceeds to the
option. The applicable portion of the Contingent Deferred Sales Charge
will be based on the ratio of (1) the number of whole months remaining at
the time of withdrawal until the date when the Contingent Deferred Sales
Charge would expire, to (2) the number of whole months
A-11
<PAGE>
that were remaining, when the proceeds were applied to the option, until
the date when the Contingent Deferred Sales Charge would expire.
The preceding table lists the charges and expenses incurred with respect to
purchase payments invested under the Contracts. The items listed include
charges deducted from purchase payments, charges assessed against Variable
Account assets, and charges deducted from the assets of each of the Eligible
Funds and assumes that the entire purchase payment was allocated initially to
a single sub-account without any subsequent transfers. The purpose of the
table is to assist you in understanding the various costs and expenses you
will bear, directly and indirectly, as a Contract Owner.
- -------------------------------------------------------------------------------
A-12
<PAGE>
HOW THE CONTRACT WORKS
PURCHASE PAYMENT CONTRACT VALUE DAILY DEDUCTION FROM
ASSETS
. You can make a . Payments are . Mortality and
one-time allocated to your expense risk
investment or choice, within charge of 1.25% on
establish an limits, of an annualized
ongoing Eligible Fund basis is deducted
investment investments and/or from the Contract
program, the Fixed Account Value daily
subject to the
Company's . The Contract Value . Administration
minimum and reflects purchase Asset Charge of
maximum payments, 0.10% on an
purchase investment annualized basis
payment experience, is deducted from
guidelines interest credited the Contract Value
on Fixed Account daily
allocations,
ADDITIONAL PAYMENTS partial . Investment
surrenders, and advisory fees are
. Generally may Contract charges deducted from the
be made at any Eligible Fund
time, (subject . The Contract Value assets daily
to Company invested in the
limits), but Eligible Funds is
no purchase not guaranteed ANNUAL CONTRACT FEE
payments
allowed (1) . Earnings are . $30 Administration
during the accumulated free Contract Charge is
seven years of any current deducted from the
immediately income taxes (see Contract Value in
preceding the page A-33) the Variable
Maturity Date Account on each
(except under . You may change the anniversary while
Contracts allocation of the Contract is
issued in future payments, in-force, other
Pennsylvania within limits, at than under a
or New York), any time Payment Option.
or (2) after a (May be waived for
Contract Owner . Prior to certain large
(or the annuitization, you Contracts.) A pro
Annuitant, if may transfer rata portion is
not owned in Contract Value deducted on full
an individual among investment surrender and at
capacity) options. Currently the Maturity Date.
reaches age the Company allows
86. 12 transfers free
of charge per SURRENDER CHARGE
. Minimum $250 Contract Year.
(Special limits . Consists of
exist in Contingent
SURRENDERS situations that Deferred Sales
involve "market Charge based on
. Up to the timing".) purchase payments
greater of: made (see pages A-
10% of the . Allocations of 25 to A-27)
Contract Value payments and
at the transfers of
beginning of Contract Value are PREMIUM TAX CHARGE
the Contract limited in that
Year, and the Contract Value may . Where applicable,
excess of the not be allocated is deducted from
Contract Value among more than the Contract Value
over purchase ten accounts when annuity
payments that (including the benefits commence
are subject to Fixed Account) at (and, in certain
the Contingent any time. states, at the
Deferred Sales earliest of: full
Charge on the or partial
date of RETIREMENT BENEFITS surrender,
surrender can annuitization or
be withdrawn . Lifetime income payment of the
each year options Death Proceeds due
without to the death of a
incurring a . Fixed and/or Contract Owner or,
Contingent variable payout if applicable, of
Deferred Sales options the Annuitant.)
Charge
. Retirement
. Surrenders may benefits may be ADDITIONAL BENEFITS
be taxable taxable
. You pay no taxes
. Prior to age on your investment
59 1/2 a 10% as long as it
penalty tax remains in the
may apply Contract
. Contract may be
DEATH PROCEEDS surrendered at any
time for its
. Guaranteed not Contract Value,
to be less less any
than your applicable
total purchase Contingent
payment Deferred Sales
adjusted for Charge
any prior
surrenders . If available in
(and, where your state,
applicable, Contingent
net of premium Deferred Sales
tax charges) Charge may be
waived upon
. Death proceeds evidence of
pass to the terminal illness,
beneficiary confinement to a
without nursing home, or
probate permanent and
total disability.
. Death proceeds
may be taxable
A-13
<PAGE>
THE COMPANY
NEVLICO was organized as a stock life insurance company in Delaware in 1980
and is authorized to operate in all states, the District of Columbia and
Puerto Rico. NEVLICO's Home Office is in Wilmington, Delaware and its
Administrative Office is at 501 Boylston Street, Boston, Massachusetts 02116.
NEVLICO is a wholly-owned subsidiary of The New England, which was organized
in Massachusetts in 1835. The New England is the oldest chartered mutual life
insurance company in the United States. On December 31, 1994, The New England
had over $15 billion of assets and approximately $90 billion of life insurance
in force. As of December 31, 1994, The New England and its affiliates had over
$66 billion in assets under management.
THE VARIABLE ACCOUNT
The Variable Account was established by the Company as a separate investment
account under Delaware law on July 1, 1994, and is registered as a unit
investment trust under the Investment Company Act of 1940. The Variable
Account meets the definition of a "separate account" under Federal securities
laws.
Applicable law provides that the assets in the Variable Account equal to the
reserves and other contract liabilities of the Variable Account shall not be
chargeable with liabilities arising out of any other business the Company may
conduct. The Company believes this means that the assets of the Variable
Account equal to its reserves and other contract liabilities are not available
to meet the claims of the Company's general creditors and may only be used to
support the Contract Values under the Contracts. The income and realized and
unrealized capital gains or losses of the Variable Account are, in accordance
with the Contracts, credited to or charged against the Variable Account
without regard to other income, gains or losses of the Company. All
obligations arising under the Contracts are, however, general corporate
obligations of the Company.
Purchase payments are allocated to the sub-accounts of the Variable Account
that you elect. The value of Accumulation Units credited to your Contract and
the amount of the variable annuity payments depend on the investment
experience of the Eligible Fund in which each of your selected sub-accounts
invests. The Company does not guarantee the investment performance of the
Variable Account. Thus, you bear the full investment risk for all amounts
contributed to the Variable Account.
INVESTMENTS OF THE VARIABLE ACCOUNT
Purchase payments applied to the Variable Account will be invested in one or
more of the Eligible Funds listed below, at net asset value without deduction
of any sales charge, according to the selection you make in your application.
You may change your selection of Eligible Funds for future purchase payments
at any time without charge. (See "Requests and Elections.") You also may
transfer your Contract Value among the Eligible Funds, subject to certain
conditions. (See "Transfer Privilege.") Your Contract Value may be distributed
among no more than 10 accounts (including the Fixed Account) at any time. The
Company reserves the right to add Eligible Funds from time to time as
investments for the Variable Account.
BACK BAY ADVISORS MONEY MARKET SERIES
The Back Bay Advisors Money Market Series seeks the highest possible level
of current income consistent with preservation of capital. The Back Bay
Advisors Money Market Series invests in a variety of high quality money market
instruments.
BACK BAY ADVISORS BOND INCOME SERIES
The Back Bay Advisors Bond Income Series' investment objective is to provide
a high level of current income consistent with protection of capital and
moderate investment risk through investment primarily in U.S. Government and
corporate bonds.
A-14
<PAGE>
WESTPEAK VALUE GROWTH SERIES
The Westpeak Value Growth Series seeks long-term total return (capital
appreciation and dividend income) through investment primarily in equity
securities. Emphasis will be given to both undervalued securities ("value"
style) and securities of companies with growth potential ("growth" style).
LOOMIS SAYLES AVANTI GROWTH SERIES
The Loomis Sayles Avanti Growth Series seeks long-term growth of capital.
The Series normally will invest primarily in equity securities of companies
with medium and large capitalization (capitalization of $1 billion to $5
billion and over $5 billion, respectively), but will also invest a portion of
its assets in equity securities of companies with relatively small market
capitalization (under $1 billion).
LOOMIS SAYLES SMALL CAP SERIES
The Loomis Sayles Small Cap Series seeks long-term capital growth from
investments in common stocks or their equivalent. The Series will normally
invest at least 65% of its total assets in companies with market
capitalization of less than $500 million.
LOOMIS SAYLES BALANCED SERIES
The Loomis Sayles Balanced Series seeks a 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. Under normal conditions, the Series will invest at
least 25% of its assets in bonds and at least 50% of its assets in common
stocks.
DRAYCOTT INTERNATIONAL EQUITY SERIES
The Draycott International Equity Series seeks total return from long-term
growth of capital and dividend income. The Series will invest primarily in
common stocks of issuers either headquartered outside the U.S. or deriving a
substantial part of their revenues from countries outside of the U.S.
ALGER EQUITY GROWTH SERIES
The Alger Equity Growth Series' investment objective is long-term capital
appreciation. The Series seeks to achieve its investment objective by
investing primarily in a diversified, actively managed portfolio of equity
securities, with the majority of issuers having a total market capitalization
of $1 billion or greater.
VENTURE VALUE SERIES
The Venture Value Series' investment objective is growth of capital. The
Series will primarily invest in domestic common stocks (and securities
convertible into common stock) that 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.
SALOMON BROTHERS U.S. GOVERNMENT SERIES
The Salomon Brothers U.S. Government Series seeks a high level of current
income consistent with preservation of capital and maintenance of liquidity.
The Series will invest primarily in debt obligations and mortgage-backed
securities issued or guaranteed by the U.S. Government, its agencies or
instrumentalities and, to the extent allowed by state insurance law,
derivative securities such as collateralized mortgage obligations backed by
such securities.
A-15
<PAGE>
SALOMON BROTHERS STRATEGIC BOND OPPORTUNITIES SERIES
The Salomon Brothers Strategic Bond Opportunities Series seeks a high level
of total return consistent with preservation of capital. Assets will be
allocated 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) (or
unrated but deemed to be of equivalent quality in the subadviser's judgement)
and domestic corporate debt and international debt securities rated below
investment grade. Depending on market conditions, the Series may invest
without limit in below investment grade fixed-income securities. Securities of
below investment grade quality are considered high yield, high risk securities
and are commonly known as "junk bonds."
INVESTMENT ADVICE
The Back Bay Advisors Money Market Series and Back Bay Advisors Bond Income
Series receive investment advice from Back Bay Advisors, L.P. ("Back Bay
Advisors"). The Westpeak Value Growth Series receives investment advice from
Westpeak Investment Advisors, L.P. ("Westpeak"). The Loomis Sayles Avanti
Growth Series and Loomis Sayles Small Cap Series receive investment advice
from Loomis Sayles & Company, L.P. ("Loomis Sayles"). Back Bay Advisors,
Westpeak and Loomis Sayles are indirect subsidiaries of The New England. TNE
Advisers, Inc., a subsidiary of The New England, serves as investment adviser
for the remaining Eligible Funds. Each of these Eligible Funds also has a
subadviser. The Loomis Sayles Balanced Series receives investment subadvisory
services from Loomis Sayles. The Draycott International Equity Series receives
investment subadvisory services from Draycott Partners, Ltd., an indirect
subsidiary of The New England. The Alger Equity Growth Series receives
investment subadvisory services from Fred Alger Management, Inc. The Venture
Value Series receives investment subadvisory services from Selected/Venture
Advisers, L.P. The Salomon Brothers U.S. Government Series and Salomon
Brothers Strategic Bond Opportunities Series receive investment subadvisory
services from Salomon Brothers Asset Management. More complete information on
each Series of the New England Zenith Fund (the "Zenith Fund") is contained in
the attached Zenith Fund prospectus, which you should read carefully before
investing, as well as in the Zenith Fund's Statement of Additional
Information, which may be obtained free of charge by writing to New England
Securities, 399 Boylston St., Boston, Massachusetts, 02116.
A meeting of shareholders of the Zenith Fund has been scheduled for April
10, 1995. The Trustees of the Zenith Fund have approved new advisory
arrangements between the Zenith Fund and TNE Advisers, Inc. with respect to
the following Eligible Series: Back Bay Advisors Money Market Series, Back Bay
Advisors Bond Income Series, Westpeak Value Growth Series, Loomis Sayles
Avanti Growth Series, and Loomis Sayles Small Cap Series. TNE Advisers, Inc.
proposes to enter into a subadvisory agreement for each of the Series with,
respectively, Back Bay Advisors, Back Bay Advisors, Westpeak, Loomis Sayles,
and Loomis Sayles. The new advisory arrangements and the new subadvisory
agreements will be submitted to shareholders of the Series at the meeting
scheduled to be held on April 10, 1995. If approved, the new arrangements and
the new subadvisory agreements will take effect on or about May 1, 1995.
Under the proposed new advisory arrangements, TNE Advisers, Inc. will be
paid a management fee at the same rate received by the Series' present
advisers who will become the Series' subadvisers under the proposed
arrangements.
SUBSTITUTION OF INVESTMENTS
If investment in the Eligible Funds or a particular Series is no longer
possible or in the judgment of the Company becomes inappropriate for the
purposes of the Contract, the Company may substitute another Eligible Fund or
Funds without your consent. Substitution may be made with respect to both
existing investments and the investment of future purchase payments. However,
no such substitution will be made without any necessary approval of the
Securities and Exchange Commission.
GUARANTEED OPTION
Purchase payments may also be allocated to the Fixed Account option in
approved states. The Fixed Account is a part of the Company's general account
and provides guarantees of principal and interest. (See "The Fixed Account"
for more information.)
A-16
<PAGE>
THE CONTRACTS
The Contracts provide that your purchase payments will be invested by the
Company in the Eligible Fund or Funds you select and that, after the Maturity
Date, the Company will make variable annuity payments on a monthly basis
unless you select a fixed annuity option. You assume the risk of investment
gain or loss because the value of your Contract before annuitization and, in
the case of a variable payment option, the annuity payments after
annuitization, will vary with the investment performance of the Eligible Funds
in which your Contract is invested.
PURCHASE PAYMENTS
The minimum initial purchase payment currently required is $2,000 for
Contracts used in connection with retirement plans qualifying for tax
benefited treatment under the Code and $5,000 for all other Contracts. Any
subsequent purchase payments must be at least $250. The Company reserves the
right to limit purchase payments made under a Contract. The Company currently
reserves the right not to accept any purchase payment that, when combined with
the Contract Value under all Contracts owned by a single Contract Owner, would
exceed $1,000,000. Under its current rules, in no event will the Company
accept a purchase payment that, when combined with the Contract Value under
all Contracts owned by a single Contract Owner, would exceed $2,000,000. If a
Contract Owner selects a single purchase payment Contract in the application,
the Company reserves the right not to accept any additional purchase payments.
If a Contract Owner selects a flexible purchase payment Contract in the
application, the Company reserves the right to limit purchase payments in any
Contract Year to three times the amount shown in the application.
No purchase payments may be made (1) within seven years prior to the
--------------------------------------------------------------------
Contract's Maturity Date (except under contracts issued in Pennsylvania or New
- ------------------------------------------------------------------------------
York), or (2) after a Contract Owner (or the Annuitant, if the Contract is not
- ------------------------------------------------------------------------------
owned in an individual capacity) reaches age 86.
- ------------------------------------------------
The Company will determine whether to approve applications for new
Contracts, and will apply initial purchase payments under new Contracts, not
later than two business days after a completed application is received at the
Company's Administrative Office. If an application is not complete upon
receipt, the Company will apply the initial purchase payment not later than
two business days after it is completed. If an incomplete application is not
completed within five days after the Company receives it, however, the Company
will inform the applicant of the reasons for the delay and will refund any
purchase payment unless the applicant agrees to have the Company retain the
purchase payment until the application is completed. The Company reserves the
right to reject any application.
Exchange Offer. An owner of a Fund I, Preference or Zenith Accumulator
--------------
Variable Annuity contract (the "old contracts") issued by New England Mutual
Life Insurance Company ("The New England") may exchange an old contract for an
American Growth Series Contract (a "new contract"), provided that the owner's
age does not exceed the Company's maximum age at issue, and the Contract value
of the old contract (along with any purchase payments submitted with the
exchange application) is at least equal to the minimum initial purchase
payment for a new contract. The contract value of the old contract as of the
date the exchange is effected will be credited as the initial purchase payment
to the new contract for purposes of certain administrative rules and Contract
benefits. No charges will be deducted at the time of exchange. See "Charges
Under Fund I, Preference and Zenith Accumulator Contracts" for a comparison of
the charges under the old contracts and the new contracts.
The American Growth Series Contract provides an enhanced death benefit, more
options than offered by the Zenith Accumulator contract under the systematic
withdrawal feature, and access to an assortment of investment options that
differs from those currently available under the old contracts. For more
information, see "Payment at Death Prior to Annuitization", "Systematic
Withdrawals", "Investments of the Variable Account" and "Charges Under
Contracts Purchased by Exchanging a Fund I, Preference or Zenith Accumulator
Contract." In addition, the American Growth Series Contract offers a Fixed
Account option, which is not available under the Fund I or Preference
contracts. For more information, see "The Fixed Account." In specified
circumstances of Contract Owner illness or disability, the Company will waive
the contingent deferred sales charge on an American Growth Series contract.
For more information, see "Waiver of the Contingent Deferred Sales Charge"
under "Contingent Deferred Sales Charge." This benefit may not be available in
all states.
A-17
<PAGE>
The American Growth Series Contract is issued by NEVLICO, whereas the old
contracts were issued by The New England. Although The New England is the
parent of NEVLICO, it does not guarantee the obligations of NEVLICO.
ALLOCATION OF PURCHASE PAYMENTS
Purchase payments are converted into Accumulation Units of the sub-accounts
you select (subject to the limitation that the Contract Value may be allocated
among no more than ten accounts, including the Fixed Account, at any time).
The number of Accumulation Units of each sub-account to be credited to the
Contract is determined by dividing the net purchase payment by the
Accumulation Unit Value for the selected sub-accounts next determined
following receipt of the purchase payment at the Company's Administrative
Office (or, in the case of the initial purchase payment, next determined
following approval of the Contract application. In the case of an initial
purchase payment to be made by exchanging another variable annuity contract
issued by the Company, the payment will be applied using the Accumulation Unit
Value next determined following approval of the Contract application and
receipt of the proceeds of the other variable annuity contract.)
CONTRACT VALUE AND ACCUMULATION UNIT VALUE
The value of a Contract is determined by multiplying the number of
Accumulation Units credited to the Contract by the appropriate Accumulation
Unit Values. As described below, the Accumulation Unit Value of each sub-
account depends on the net investment experience of its corresponding Eligible
Fund and reflects fees and expenses borne by the Eligible Fund as well as
charges assessed against subaccount assets. The Accumulation Unit Value of
each sub-account was set at $1.00 on or about the date on which shares of the
corresponding Eligible Fund were first publicly available. The Accumulation
Unit Value is determined as of the close of regular trading on the New York
Stock Exchange on each day the Exchange is open for trading by multiplying the
most recent Accumulation Unit Value by the net investment factor for that day.
The net investment factor for any sub-account reflects the change in net asset
value per share of the corresponding Eligible Fund as of the close of regular
trading on the Exchange from the net asset value most recently determined, the
amount of dividends or other distributions made by that Eligible Fund since
the previous determination of net asset value per share, and daily deductions
for the Mortality and Expense Risk Charge and Administration Asset Charge,
equal, on an annual basis, to 1.35% of the average daily net asset value of
the sub-account. The net investment factor may be greater or less than one.
The formula for determining the net investment factor is described under the
caption "Net Investment Factor" in the Statement of Additional Information.
Under a Contract with the Fixed Account option, the total Contract Value
includes the amount of Contract Value held in the Fixed Account. (See "The
Fixed Account".)
PAYMENT ON DEATH PRIOR TO ANNUITIZATION
The Contract's Death Proceeds are payable to the Beneficiary if the Company
receives due proof of the death, prior to annuitization, of: (1) the Contract
Owner, (2) the first Contract Owner to die, in the case of a Contract with
joint owners, or (3) the Annuitant, in the case of a Contract that is not
owned in an individual capacity. (In situation (2) above, if there is no named
Beneficiary, the Death Proceeds will be paid to the surviving Contract Owner.)
The Contract's Death Proceeds at any time are the greater of the current
Contract Value and the applicable guaranteed minimum Death Proceeds amount.
For this purpose, the current Contract Value is the value next determined
after the later of the date when due proof of death is received at the
Administrative Office and the date when an election of payment in one sum or
under a payment option is received at the Administrative Office. In certain
states, the Death Proceeds payable will be reduced by the applicable premium
tax charge.
At the inception of the Contract, the guaranteed minimum Death Proceeds
------------------
amount is equal to your initial purchase payment. Thereafter, until the
seventh Contract Anniversary, any subsequent purchase payment will immediately
increase your guaranteed minimum Death Proceeds amount by the amount of the
purchase payment. Any partial surrender will immediately decrease your
guaranteed minimum Death Proceeds by the percentage of the Contract Value
being withdrawn.
A-18
<PAGE>
On the seventh Contract Anniversary, and every seventh year anniversary
thereafter until the Contract Owner's (or, if applicable, the Annuitant's)
76th birthday, the guaranteed minimum Death Proceeds payable under the
------------------
Contract are recalculated to determine whether a higher (but never a lower)
guarantee will apply. (For a jointly owned Contract, this recalculation is
made every seven years until the 71st birthday of the older Contract Owner.)
The purpose of the recalculation is to give you the benefit of any positive
investment experience under your Contract. Your Contract's previous investment
experience can cause the guaranteed minimum Death Proceeds amount to increase
on the recalculation date, but cannot cause it to decrease. The guaranteed
minimum determined on a recalculation date is the larger of:
(a) the guaranteed minimum Death Proceeds amount that applied to your
Contract just before the recalculation; and
(b) the Contract Value on the date of the recalculation.
The new guaranteed minimum Death Proceeds amount applies to your Contract
------------------
until the next recalculation date, or until you make a purchase payment or
surrender. In that case, the same adjustment will be made to the guaranteed
minimum Death Proceeds amount as is made during the first seven years.
Example: Assume that a Contract is issued with a $10,000 purchase payment on
11/1/94. No further purchase payments are made and, during the
first seven Contract Years, no partial surrenders are made. During
the first seven Contract Years, the guaranteed minimum Death
Proceeds amount is $10,000. Assume that on the Contract Anniversary
on 11/1/01, the Contract Value is $25,000. The minimum guaranteed
Death Proceeds amount is reset on that date to $25,000.
Assume that the Contract Value increases to $27,000 by 7/1/02, and
that you request a partial surrender of 20% of your Contract Value,
or $5,400, on that date. The guaranteed minimum Death Proceeds amount
immediately following the partial surrender is $20,000 [$25,000 -
.20($25,000)].
Assume that on 12/15/02 the Contract Value has decreased to $18,000.
The guaranteed minimum Death Proceeds amount remains at $20,000 and
the Death Proceeds payable on 12/15/02 are $20,000.
Under Exchanged Contracts. The initial guaranteed effective minimum Death
--------------------------
Proceeds amount under a Contract issued in exchange for the Fund I, Preference
or Zenith Accumulator variable annuity contracts issued by The New England
will be the greater of the minimum death benefit that applied to the exchanged
contract on the effective date of the exchange and the amount paid into the
American Growth Series Contract at issue. (See "Purchase Payments--Exchange
Offer".) The guaranteed minimum will be recalculated on each seven-year
anniversary of the effective date of the exchange.
Options for Death Proceeds. The Death Proceeds will be paid in a lump sum or
---------------------------
will be applied to provide one or more of the fixed or variable methods of
payment available (see "Annuity Options"). (Certain annuity options under the
Contract are not available for the Death Proceeds.) The Contract Owner may
elect the form of payment during his or her lifetime (or during the
Annuitant's lifetime, if the Contract is not owned in an individual capacity).
Such an election, particularly in the case of Contracts issued in connection
with retirement plans qualifying for tax benefited treatment, is subject to
any applicable requirements of Federal tax law. If the Contract Owner has not
made such an election, the Beneficiary may elect payment in a single sum, or
certain payment options that begin within one year of the date of death, or
may apply the Death Proceeds to the Beneficiary Continuation provision,
described below. However, if the Beneficiary does not make an election within
90 days after receipt by the Company of due proof of the Contract Owner's (or
Annuitant's where applicable) death, the Death Proceeds will be held within
the Contract under the Beneficiary Continuation provision.
The Contracts which are not used with a tax-qualified plan provide, as
required by the Code, that all of the Death Proceeds must be distributed
within five years after the death of the Contract Owner (or, if applicable, of
the Annuitant), or applied to a payment option payable over the life (or over
a period not extending beyond the life expectancy) of the Beneficiary, and the
payment option payments must start within one year of the date of death. If
the Contract Owner (or, if applicable, the Annuitant) dies on or after
annuitization, the remaining interest in the Contract must be distributed at
least as quickly as under the method of distribution in effect on the date of
death.
As described in the preceding paragraph, the Code permits payment of the
Death Proceeds to be deferred for a maximum period of five years from the date
of death of the Contract Owner (or, if applicable, of the Annuitant) if the
Owner (or Annuitant) dies before annuitization of the Contract. Under the
Beneficiary Continuation provision, unless the Beneficiary or Beneficiaries
elect payment of the Death Proceeds in a single sum within 90 days after the
Company receives due proof of death, or apply the Death Proceeds to a
permitted payment option within one year of the date of death, the Death
Proceeds
A-19
<PAGE>
will be held in the Contract and the Contract will be continued for the
maximum five year period, for each Beneficiary whose share of the Death
Proceeds meets the Company's published minimum (currently $5,000 for non-tax
qualified Contracts and $2,000 for tax qualified Contracts). For any
Beneficiary whose share of the Death Proceeds does not meet the published
minimum, the proceeds will be paid in a single sum if no election has been
made within the 90 day period described above. The Contract may not be
continued for any Beneficiary whose share of the Death Proceeds does not meet
the minimum. If the Contract is continued under the Beneficiary Continuation
provision, the Death Proceeds (reduced by any applicable premium tax charge)
become the Contract Value on the date the continuation is effected, and will
be allocated among the accounts in the same proportion as the Contract Value
on that date. If the Contract is continued, each Beneficiary will have the
right to make transfers and fully or partially surrender his or her portion of
the Contract Value, but may not make further purchase payments or exercise the
dollar cost averaging feature. No guaranteed minimum Death Proceeds amount or
---------------------
Contingent Deferred Sales Charge will apply once the Contract is continued by
the Beneficiary or Beneficiaries. Each Beneficiary's death benefit will equal
his or her share of the Contract Value on the date when due proof of his or
her death is received at the Administrative Office. At the end of the period
for which the Contract is continued (five years from the date of death of the
Contract Owner or, if applicable, of the Annuitant), the Company will pay the
Contract Value to the Beneficiaries.
--Special Options for Spouses. Under the Spousal Continuation provision, the
----------------------------
Contract may be continued after the death of a Contract Owner in certain
spousal arrangements. First, if a Contract has spousal joint owners who are
also the only Beneficiaries under the Contract, then upon the death of one
Contract Owner prior to annuitization under the Spousal Continuation
provision, the other may elect to continue the Contract rather than receive
the Death Proceeds. In addition, if only one spouse is the Contract Owner and
the other spouse is the Beneficiary, the surviving Beneficiary can elect to
continue the Contract in the event of the Contract Owner's death. In either of
these situations, the surviving spouse may elect to receive the Death Proceeds
(either in one sum or under a permitted payment option) or apply the Death
Proceeds to continue the Contract under the Beneficiary Continuation
provision, or may elect to forego the Death Proceeds and instead continue the
Contract under the Spousal Continuation provision with the spouse as the
Contract Owner. However, if the surviving spouse does not make an election
within 90 days after the Company receives due proof of death, the Contract
will automatically be continued under the Spousal Continuation provision with
the result that the surviving spouse will forego the right to receive the
Death Proceeds at that time. All terms and conditions of the Contract that
applied prior to the death will apply to a Contract continued under the
Spousal Continuation provision, except that the Maturity Date will be reset,
if necessary, based on the age of the surviving spouse. Spousal Continuation
will not be available if the reset Maturity Date would be greater than the
Company's permitted maximum. Except under Contracts issued in New York or
Pennsylvania, if the reset Maturity Date would be less than seven years after
the date of the most recent purchase payment made, no Contingent Deferred
Sales Charge will apply under the Contract.
TRANSFER PRIVILEGE
You may transfer your Contract Value among sub-accounts and/or the Fixed
Account without current taxation. The Company reserves the right to limit
transfers and to charge a transfer fee. Except as described below, the Company
currently allows 12 free transfers per Contract Year prior to annuitization.
Additional transfers are currently subject to a $10 charge per transfer. (A
single transfer charge is allocated among the sub-accounts and/or Fixed
Account from which Contract Value is transferred.) Currently all transfers
prior to annuitization are subject to a maximum of $500,000 per transfer.
Currently the Company's rules for transfers prior to annuitization require
that the amount transferred from any sub-account must be at least $100 (net of
any transfer fee) and the amount transferred to any sub-account must be at
least $100. (If the full amount of Contract Value in a sub-account is less
than $100, net of any transfer fee, the amount may be transferred to a sub-
account in which Contract Value is already invested, or it may be transferred
to any sub-account if it is transferred in combination with Contract Value
from another sub-account so that the total transferred to the new sub-account
is at least $100.) After variable annuity payments begin, the Company
currently allows one transfer per Contract year. In applying the $500,000
limit, NEVLICO will treat as one transfer all transfers requested by a
Contract Owner on the same day for all Contracts he or she owns. If the
$500,000 limitation is exceeded for multiple transfers requested on the same
day that are treated as a single transfer, no amount of the transfer will be
executed by NEVLICO. Transfers will be made at the Accumulation Unit Values
next determined after the request is received. However, Contract Owners should
be aware that because transfer limitations may prevent you from making a
transfer on the date you want to, your future Contract Value may be lower than
it would have been had the transfer been made on the desired date.
A-20
<PAGE>
For transfers that NEVLICO determines to be based on "market-timing" (e.g.,
transfers under different Contracts that are being requested under Powers of
Attorney with a common attorney-in-fact or that are in NEVLICO's determination
based on the recommendation of a common investment adviser or broker/dealer),
the current transfer limitation prior to annuitization is one transfer every
30 days, each transfer subject to a maximum of $500,000. In applying the
limitation of one $500,000 transfer every 30 days, NEVLICO will treat as one
transfer all transfers requested under different Contracts that are being
requested under Powers of Attorney with a common attorney-in-fact or that are,
in NEVLICO's determination, based on the recommendation of a common investment
adviser or broker/dealer. If the $500,000 limitation is exceeded for multiple
transfers requested on the same day that are treated as a single transfer, no
amount of the transfer will be executed by NEVLICO. If a transfer is executed
under one Contract and, within the next 30 days, a transfer request for
another Contract is determined by NEVLICO to be related to the executed
transfer under this paragraph's rules, the transfer request will not be
executed by NEVLICO. (In order for it to be executed, it would need to be
requested again after the 30-day period and it, along with any other transfer
requests that are collectively treated as a single transfer, would need to
total no more than $500,000).
NEVLICO's interest in applying these limitations on the maximum number and
size of transfers is to protect the interests of both Contract Owners who are
not engaging in significant transfer activity and Contract Owners who are
engaging in such activity. NEVLICO has determined that the actions of Contract
Owners engaging in significant transfer activity among sub-accounts may cause
an adverse effect on the performance of the underlying Eligible Funds. The
movement of significant sub-account values from one sub-account to another may
prevent the appropriate Eligible Fund from taking advantage of investment
opportunities because it must maintain a significant cash position in order to
handle redemptions. Such movement may also cause a substantial increase in
Eligible Fund transaction costs which must be indirectly borne by Contract
Owners.
Contract Owners will be notified, in advance, of any change in the transfer
fee or in the limitation on the number or amount of transfers.
See "Requests and Elections" for information regarding transfers made by
written request and by telephone.
For special rules regarding transfers involving the Fixed Account, see "The
Fixed Account". Transfers out of the Fixed Account are limited as to amount.
------------------------------------------------------------
Your Contract Value may be distributed among no more than ten accounts
(including the Fixed Account) at any time. Transfer requests not complying
with this rule will not be processed.
DOLLAR COST AVERAGING
The Company offers an automated transfer privilege referred to here as
dollar cost averaging. Under this feature you may request that an amount of
your Contract Value be transferred on the same day each month, prior to
annuitization, from any one sub-account of your choice or, alternatively, from
the Fixed Account (subject to the limitations on transfers out of the Fixed
Account) to one or more of the other sub-accounts and/or to the Fixed Account
(subject to the limitations on transfers into the Fixed Account). Currently, a
minimum of $100 must be transferred to each sub-account that you select under
this feature (or, if selected, to the Fixed Account). Transfers made under the
dollar cost averaging program are counted against the 12 free transfers per
year which NEVLICO currently allows. You may cancel your use of the dollar
cost averaging program at any time prior to the monthly transfer date.
The use of dollar cost averaging is subject to the limit that the Contract
Value may be distributed among no more than ten accounts (including the Fixed
Account) at any time. (See Appendix A.)
SURRENDERS
Prior to annuitization, you may surrender your Contract for all or part of
the Contract Value. You may receive the proceeds in cash or apply them to a
payment option. The proceeds you receive will be the Contract Value reduced by
the following amounts:
. any applicable Contingent Deferred Sales Charge;
. a pro rata portion of the Administration Contract Charge (on a full
surrender only);
. a premium tax charge (in certain states only).
A-21
<PAGE>
See "Administration Charges, Contingent Deferred Sales Charge and Other
Deductions" for a description of these charges and when they apply.
Federal tax laws, laws relating to employee benefit plans, or the terms of
benefit plans for which the Contracts may be purchased may restrict your right
to surrender the Contract. In addition, Federal tax laws impose penalties on
certain premature distributions from the Contracts. Full and partial
surrenders and systematic withdrawals prior to age 59 1/2 may be subject to a
10% penalty tax. (See "Federal Income Tax Status".) Because a surrender may
result in adverse tax consequences, you should consult a qualified tax advisor
before taking a distribution from the Contract.
To surrender, you must submit a request in proper form to the Company's
Administrative Office. (See "Requests and Elections".) If you are seeking a
waiver of the Contingent Deferred Sales Charge due to terminal illness,
confinement to a nursing home or permanent and total disability, the request
must include satisfactory evidence of one of these conditions. (See
"Administration Charges, Contingent Deferred Sales Charge and Other
Deductions".) If you wish to apply the proceeds to a payment option, you must
---------------------------------------------------------------
indicate that in your surrender request; otherwise you will receive the
- -----------------------------------------------------------------------
proceeds in a lump sum and may be taxed on them as a full distribution. The
- -----------------------------------------------------------------------
surrender request must be received at the Administrative Office before the
earlier of the Maturity Date and a Contract Owner's death (or, for Contracts
not owned in an individual capacity, before the Annuitant's death). Surrender
proceeds will normally be paid within seven days after receipt of a request in
proper form at the Administrative Office, but payment may, by law, be delayed
under certain circumstances. (See "Suspension of Payments".)
The amount of the surrender proceeds will be based on the Accumulation Unit
Values that are next determined after the complete surrender request is
received at the Administrative Office; however, if you choose to apply the
surrender proceeds to a payment option, the surrender proceeds will be based
on Accumulation Unit Values determined on a later date if you so specify in
your request. Company consent is required if the amount of a partial surrender
is less than the Company's published minimum, which is currently $100. After a
partial surrender, the remaining Contract Value must be at least $1,000,
unless the Company consents to a lower amount. Otherwise, at your option,
either the amount of the partial surrender will be reduced or the transaction
will be treated as a full surrender that is subject to the full amount of any
applicable Contingent Deferred Sales Charge. A partial surrender will reduce
your Contract Value in the sub-accounts in proportion to the amount of your
Contract Value in each sub-account, unless you request otherwise.
SYSTEMATIC WITHDRAWALS
The Systematic Withdrawal feature available in connection with the Contract
allows you to have a portion of the Contract Value withdrawn automatically on
a monthly basis prior to annuitization. You can elect to withdraw each month
either a fixed dollar amount (which you can change periodically) or the
investment gain in the Contract. Currently a withdrawal must be a minimum of
$100; if you choose to have the investment gain withdrawn and it is less than
$100 for a month, no withdrawal will be made that month. The Company reserves
the right to change the required minimum monthly withdrawal amount. If the New
York Stock Exchange is closed on the day when the withdrawal is to be made,
the withdrawal will be processed on the next business day. The Contingent
Deferred Sales Charge will apply to amounts received under the Systematic
Withdrawal program in the same manner as it applies to other partial
surrenders and surrenders of Contract Value. (See "Contingent Deferred Sales
Charge".) If you make a partial surrender or a purchase payment at the same
time that you are having the investment gain withdrawn under the Systematic
Withdrawal feature, the Systematic Withdrawal will be canceled effective as of
the next monthly withdrawal date; however, at your option, the Company will
resume Systematic Withdrawals on the following monthly withdrawal date (that
is, the second monthly withdrawal date after the purchase payment or partial
surrender). The amount of the Systematic Withdrawals will be adjusted to
reflect the purchase payment or partial surrender. Continuing to make purchase
payments under the Contract while you are making Systematic Withdrawals means
that you could incur any applicable Contingent Deferred Sales Charge on the
withdrawals at the same time that you are making the new purchase payments;
however, no Contingent Deferred Sales Charge will apply if you are having the
investment gain (rather than a fixed dollar amount) withdrawn. The Federal tax
laws may include systematic withdrawals in the Contract Owner's gross income
in the year in which the withdrawal occurs and will impose a penalty tax of
10% on certain systematic withdrawals which are premature distributions.
Additional terms and conditions for the systematic withdrawal program are set
forth in the application for the program.
A-22
<PAGE>
SUSPENSION OF PAYMENTS
The Company reserves the right to suspend or postpone the payment of any
amounts due under the Contract or transfers of Contract Values between sub-
accounts or to the Fixed Account when permitted under applicable Federal laws,
rules and regulations. Current Federal law permits such suspension or
postponement if (a) the New York Stock Exchange is closed (other than for
customary weekend and holiday closings); (b) trading on the Exchange is
restricted; (c) an emergency exists such that it is not reasonably practicable
to dispose of securities held in the Variable Account or to determine the
value of its assets; or (d) the Securities and Exchange Commission by order so
permits for the protection of securities holders.
OWNERSHIP RIGHTS
During the Annuitant's lifetime, all rights under the Contract belong solely
to the Contract Owner unless otherwise provided. These rights include the
right to change the Beneficiary, to change the payment option, to assign the
Contract (subject to the restrictions referred to below), and to exercise all
other rights, benefits, options and privileges conferred by the Contract or
allowed by the Company.
Those Contracts offered by the prospectus which are designed to qualify for
the favorable tax treatment described below under "Federal Income Tax Status"
contain restrictions on transfer or assignment, reflecting requirements of the
Code which must be satisfied in order to assure continued eligibility for such
tax treatment. In accordance with such requirements, ownership of such a
Contract may not be changed and the Contract may not be sold, assigned or
pledged as collateral for a loan or for any other purpose except under certain
limited circumstances. A Contract Owner contemplating a sale, assignment or
pledge of the Contract should carefully review its provisions and consult a
qualified tax adviser.
If Contracts offered by this prospectus are used in connection with deferred
compensation plans or retirement plans not qualifying for favorable Federal
tax treatment, such plans may also restrict the exercise of rights by the
Contract Owner.
REQUESTS AND ELECTIONS
Requests for sub-account transfers or reallocation of future purchase
payments may be made by written request (which may be telecopied) to the
Company at its Administrative Office or by telephoning The New England.
Written requests for such transfers or changes of allocation must be in a form
acceptable to the Company. Such written requests may be telecopied to 617-578-
5412. To request a transfer or change of allocation by telephone, please
contact your registered representative, or contact The New England at 1-800-
777-5897 between the hours of 9:00 a.m. and 4:00 p.m., Eastern Time. For
Contracts issued in New York, requests for transfers must be in writing.
Requests for transfer (that are within NEVLICO's current limits applicable to
transfers) or reallocation by telephone will be automatically permitted. The
Company and The New England will use reasonable procedures such as requiring
certain identifying information from the caller, tape recording the telephone
instructions, and providing written confirmation of the transaction, in order
to confirm that instructions communicated by telephone are genuine. Any
telephone instructions reasonably believed by the Company and The New England
to be genuine will be your responsibility, including losses arising from any
errors in the communication of instructions. As a result of this policy, you
will bear the risk of loss. If the Company and The New England do not employ
reasonable procedures to confirm that instructions communicated by telephone
are genuine, they may be liable for any losses due to unauthorized or
fraudulent transactions. All other requests and elections under a Contract
must be in writing signed by the proper party, must include any necessary
documentation and must be received at the Company's Administrative Office to
be effective. If acceptable to the Company, requests or elections relating to
Beneficiaries and ownership will take effect as of the date signed unless the
Company has already acted in reliance on the prior status. The Company is not
responsible for the validity of any written request or election.
TEN DAY RIGHT TO REVIEW
Within 10 days (or more where required by applicable state insurance law)
after you receive your Contract you may return it to the Company or its agent
for cancellation. Upon cancellation of the Contract, the Company will return
to you the Contract Value. If required by the insurance law or regulations of
the state in which your Contract is issued, however, the Company will refund
all purchase payments made.
A-23
<PAGE>
ADMINISTRATION CHARGES, CONTINGENT
DEFERRED SALES CHARGE AND OTHER DEDUCTIONS
ADMINISTRATION CHARGES
The Company's administrative services include issuing Contracts, maintaining
Contract Owner records and accounting, valuation, regulatory and reporting
services. To cover the cost of these services, the Company receives
Administration Charges generally equal, on an annual basis, to $30 per
Contract plus .10% of the daily net assets of each sub-account. In addition,
the Company charges a transfer fee for certain transfers of Contract Value
among the sub-accounts and/or the Fixed Account, as described below.
The annual Administration Contract Charge is deducted from the Contract
Value on each Contract anniversary for the prior Contract Year and will be
deducted on a pro rata basis at the Maturity Date or at the time of a full
surrender if it is not on a Contract anniversary. If two Contracts are issued
to permit the funding of a spousal IRA, the Administration Contract Charge
will be imposed only on the Contract to which the larger purchase payments
have been allocated in the Contract application. The charge is deducted
entirely from the Contract Value in the Variable Account, and not from the
Contract Value in the Fixed Account. The charge is the lesser of: 2% of the
total Contract Value (including any Contract Value in the Fixed Account) and
$30. The charge will be waived for a Contract Year if (1) the Contract Value
at the end of the year was at least $50,000, OR (2) you made at least $1,000
--
in net deposits (purchase payments minus partial surrenders) during that
Contract Year and the Contract Value at the end of the previous Contract Year
was at least $25,000. (A pro rata charge will always be made on a full
surrender and at the Maturity Date, however, regardless of the amount of your
Contract Value.) The Administration Contract Charge will be deducted from each
sub-account in the ratio of your interest therein to your total Contract Value
in the Variable Account.
The Administration Asset Charge is equal to an annual rate of .10% of net
assets and is deducted on a daily basis from each sub-account. As a percentage
of net assets, this charge will not increase over the life of a Contract, but
the total dollar amount of the charge will vary depending on the level of
Contract Value in the Variable Account. The Administration Asset Charge will
continue to be assessed after annuitization if annuity payments are made on a
variable basis. There is not necessarily a relationship between the amount of
this charge imposed on a given Contract and the amount of expenses that may be
attributable to that Contract. (See "Annuity Payments.")
The Company does not expect the Administration Charges to exceed the actual
costs (including overhead costs) of administering the Contracts. The Company
periodically will monitor the Administration Charges to determine whether they
exceed the actual cost of providing administrative services for the Contracts.
The Company reserves the right to charge a transfer fee for transfers of
Contract Value among sub-accounts and/or the Fixed Account. Currently, the
Company charges a $10 fee for each transfer in excess of 12 in a Contract Year
prior to annuitization. A single transfer charge is allocated among the sub-
accounts and/or Fixed Account from which Contract Value is transferred. The
Company reserves the right to change the amount of the transfer fee and the
rules for when it applies, but will notify Contract Owners in advance of any
such change. (See "Transfer Privilege".)
MORTALITY AND EXPENSE RISK CHARGE
The Company deducts a Mortality and Expense Risk Charge from the Variable
Account as compensation for assuming the mortality and expense risks under the
Contract. By assuming the expense risk under the Contract, the Company
guarantees that the dollar amount of the Administration Contract Charge and
the amount of the Administration Asset Charge as a percentage of Contract
Value (but not the amount of the transfer fee) will not increase over the life
of a Contract, regardless of the actual expenses. By assuming the mortality
risk, the Company guarantees that, although annuity payments will vary
according to the performance of the investments you select, annuity payments
will not be affected by the mortality experience (death rate) of persons
receiving such payments or of the general population. The Company assumes this
mortality risk by virtue of annuity rates in the Contract that cannot be
changed. The Company also assumes the risk of making a minimum death benefit
payment if the Contract Owner (or, if applicable, the Annuitant) dies prior to
annuitization. (See "Payment on Death.")
A-24
<PAGE>
The Mortality and Expense Risk Charge is computed and deducted on a daily
basis from each sub-account. The charge is at an annual rate of 1.25% of the
daily net assets of each such sub-account, of which .70% represents a
mortality risk charge and .55% represents an expense risk charge. The
Mortality and Expense Risk Charge as a percentage of Contract Value will not
increase over the life of a Contract. The Mortality and Expense Risk Charge
will continue to be assessed if annuity payments are made on a variable basis
either before or after the Maturity Date. (See "Annuity Payments.")
CONTINGENT DEFERRED SALES CHARGE
No charge for sales expenses is deducted from purchase payments when they
are made. However, a Contingent Deferred Sales Charge may apply on certain
events ("CDSC events"). The Contingent Deferred Sales Charge is intended to
assist in covering sales expenses related to the Contracts, including
commissions, preparation of sales literature and other promotional activity.
The Contingent Deferred Sales Charge may not cover the full amount of sales
expenses, and the excess will be recovered from the Company's general account,
including any income from the Mortality and Expense Risk Charge.
CDSC events are: (a) a full or partial surrender of your Contract (including
surrenders where you apply the proceeds to certain payment options), (b) in
certain circumstances, a withdrawal of the commuted value of amounts that you
applied to a payment option, or (c) under Contracts issued in Pennsylvania or
New York, the Maturity Date if at that date a purchase payment has been
invested for less than seven years.
The Contingent Deferred Sales Charge is taken into account in calculating
the proceeds payable on a full surrender. On a partial surrender, the
Contingent Deferred Sales Charge is deducted from the Contract Value remaining
after deduction of the surrender amount requested and is taken from the
Contract Value in the sub-accounts and the Fixed Account in the same
proportion as the Contract Value surrendered.
The Contingent Deferred Sales Charge equals a percentage of each purchase
payment. Each purchase payment is subject to the charge for seven years (12
month periods) from the date it is received by the Company, as follows:
<TABLE>
<CAPTION>
IF WITHDRAWN DURING YEAR CHARGE
------------------------ ------
<S> <C>
1................................... 7%
2................................... 6%
3................................... 5%
4................................... 4%
5................................... 3%
6................................... 2%
7................................... 1%
Thereafter............................ 0%
</TABLE>
In no event will the amount of the Contingent Deferred Sales Charge exceed
the equivalent of 8% of the first $50,000 of purchase payments and 6.5% of
purchase payments in excess of $50,000.
Whether amounts surrendered, withdrawn or applied to an annuity option are
considered to include purchase payments subject to the Contingent Deferred
Sales Charge depends on the following rules.
In any Contract Year you may surrender a portion of your Contract Value (the
"free withdrawal amount") without incurring the Contingent Deferred Sales
Charge. The free withdrawal amount for each Contract Year is equal to the
greater of (1) 10% of the Contract Value at the beginning of the Contract Year
and (2) the excess of the Contract Value over purchase payments subject to the
Contingent Deferred Sales Charge on the date of surrender. If not used, the
free withdrawal amount does not carry over to the next Contract Year.
A-25
<PAGE>
EXAMPLE: Assume that a single purchase payment of $10,000 is made into the
Contract. The following illustrates the free withdrawal amount
available under two hypothetical situations.
HYPOTHETICAL CONTRACT VALUE
<TABLE>
<CAPTION>
10% OF
BEGINNING OF MAXIMUM FREE
AT BEGINNING ON WITHDRAWAL YEAR CONTRACT WITHDRAWAL
OF CONTRACT YEAR DATE CONTRACT GAIN VALUE AMOUNT
---------------- ------------- ------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Situation 1:............ $12,500 $14,000 $4,000 $1,250 $4,000
Situation 2:............ $11,000 $10,000 $ 0 $1,100 $1,100
</TABLE>
EXAMPLE: Assume that a $10,000 purchase payment is made into the Contract on
6/1/95 and another $10,000 purchase payment is made on 2/1/96. The
following illustrates the Contingent Deferred Sales Charge that
would apply on partial surrenders in two hypothetical situations.
HYPOTHETICAL CONTRACT VALUE
<TABLE>
<CAPTION>
10% OF
BEGINNING OF MAXIMUM FREE
AT BEGINNING ON WITHDRAWAL YEAR CONTRACT WITHDRAWAL
OF CONTRACT YEAR DATE CONTRACT GAIN VALUE AMOUNT
---------------- ------------- ------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Situation 1: $7,000
partial surrender on
12/1/96............... $22,000 $25,000 $5,000 $2,200 $5,000
</TABLE>
The first $5,000 withdrawn would be free of the Contingent Deferred Sales
Charge. The remaining $2,000 of the withdrawal would be made from the oldest
purchase payment (i.e. the 6/1/95 purchase payment). A 6% Contingent
Deferred Sales Charge would apply to the $2,000, because the withdrawal
would be taking place in the second year following the date of the purchase
payment.
HYPOTHETICAL CONTRACT VALUE
<TABLE>
<CAPTION>
10% OF
BEGINNING OF MAXIMUM FREE
AT BEGINNING ON WITHDRAWAL YEAR CONTRACT WITHDRAWAL
OF CONTRACT YEAR DATE CONTRACT GAIN VALUE AMOUNT
---------------- ------------- ------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Situation 2: $25,000
surrender on 5/1/00.... $30,000 $33,000 $13,000 $3,000 $13,000
</TABLE>
The first $13,000 withdrawn would be free of the Contingent Deferred Sales
Charge. The remaining $12,000 of the withdrawal would be made by withdrawing
the $10,000 purchase payment made on 6/1/95 and $2,000 of the $10,000
purchase payment that was made on 2/1/96. The Contingent Deferred Sales
Charge that would apply is: 3% X $10,000 + 4% X $2,000, or $380. The
remaining amount of purchase payments that could be subject to the
Contingent Deferred Sales Charge (assuming no further purchase payments were
made) would be $8,000.
Amounts surrendered under the free withdrawal provision do not reduce the
total purchase payments that are potentially subject to the Contingent
Deferred Sales Charge under your Contract.
If your Contract Value is less than your total purchase payments due to a
free withdrawal, negative investment performance or deduction of the
Administration Contract Charge, the following rules apply for calculating the
Contingent Deferred Sales Charge: the deficiency will be attributed to your
most recent purchase payment first, and subsequent earnings will be credited
to that deficiency (and not treated as earnings) until Contract Value exceeds
purchase payments.
Waiver of Contingent Deferred Sales Charge. No Contingent Deferred Sales
-------------------------------------------
Charge will apply:
. After 30 days from issue of the Contract if you apply the proceeds to a
variable or fixed payment option involving a life contingency (described
under "Annuity Options"), or, for a minimum specified period of 15 years,
to either the
A-26
<PAGE>
Variable Income for a Specified Number of Years Option or the Variable
Income Payments to Age 100 Option (described under "Annuity Options"), or a
comparable fixed option. However, if you subsequently withdraw the commuted
value of amounts placed under any of those options, the Company will deduct
from the amount you receive a portion of the Contingent Deferred Sales
Charge amount that would have been deducted when you originally applied the
Contract proceeds to the option, taking into account the lapse of time from
annuitization to surrender. The applicable portion of the Contingent
Deferred Sales Charge will be based on the ratio of (1) the number of whole
months remaining, on the date of the withdrawal, until the date when the
Contingent Deferred Sales Charge would expire, to (2) the number of whole
months that were remaining, when the proceeds were applied to the option,
until the date when the Contingent Deferred Sales Charge would expire. (See
example in Appendix B.)
. On full or partial surrenders if the Contract Owner submits satisfactory
evidence to the Company that the Contract Owner (or one Contract Owner
under a jointly owned Contract, or the Annuitant, if the Contract is not
owned in an individual capacity) is terminally ill (as defined in the
Contract), has been confined to a nursing home for more than 90
continuous days, or is permanently and totally disabled (as defined in
the Contract). This benefit is only available to an original owner of the
Contract who was not over age 65 at issue of the Contract, and may not be
available in every state.
. If under the Spousal Continuation provision the Contract's Maturity Date
is reset to a date that is less than seven years after the most recent
purchase payment made under the Contract. The Contingent Deferred Sales
Charge will not apply to the Contract in these circumstances. This waiver
of the Contingent Deferred Sales Charge will not apply, however, to
Contracts issued in New York or Pennsylvania.
The Contracts may be sold directly, without compensation, to a registered
representative, to employees, officers, directors, and trustees of NEVLICO,
The New England and their affiliated companies, and spouses and immediate
family members (i.e. children, siblings, parents and grandparents) of the
foregoing, and to employees, officers, directors, trustees and registered
representatives of any broker/dealer authorized to sell the Contracts and of
any sub-adviser to the Eligible Funds, and spouses and immediate family
members of the foregoing. If sold under these circumstances, the Contracts
will be credited with an additional percentage of premium to reflect in part
or in whole any cost savings associated with the direct sale, but only if such
credit will not be unfairly discriminatory to any person.
PREMIUM TAX CHARGE
Certain states impose a premium tax on annuity purchase payments received by
insurance companies. The Company pays this tax when incurred, and recovers
this tax by imposing a premium tax charge on affected Contracts in accordance
with the following rules. Generally, the Company incurs a state premium tax
liability on the date when the Contract Owner elects to commence annuity
benefits. In those states, the Company deducts the premium tax charge from the
Contract Value on that date. However, for Contracts subject to the premium tax
law of states which impose a premium tax on purchase payments when they are
made (currently Pennsylvania, South Dakota and Kentucky), the Company deducts
the applicable premium tax charge at the earliest of: a full or partial
surrender of the Contract, the date when annuity benefits commence, or payment
of the Death Proceeds (including application of the Death Proceeds to the
Beneficiary Continuation provision) upon the death of a Contract Owner (or of
the Annuitant, if the Contract is not owned in an individual capacity). To
determine whether and when a premium tax charge will be imposed on a Contract,
the Company looks to the state of residence of the Annuitant when a surrender
is made, annuity benefits commence or Death Proceeds are paid. The Company
reserves the right to impose a premium tax charge when a premium tax is
incurred or at a later date.
Deductions for state premium tax charges currently range from 1/2% to 2.00%
of the Contract Value (or, if applicable, Death Proceeds) for Contracts used
with retirement plans qualifying for tax benefited treatment under the Code
and from 1% to 3.5% of the Contract Value (or, if applicable, Death Proceeds)
for all other Contracts. Premium tax rates are subject to being changed by
law, administrative interpretations or court decisions.
OTHER EXPENSES
A deduction for an investment advisory fee is made from, and certain other
expenses are paid out of, the assets of each Eligible Fund. (See "Expense
Table".) The prospectus and Statement of Additional Information of the
Eligible Funds describe these deductions and expenses.
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CHARGES UNDER CONTRACTS PURCHASED BY EXCHANGING A FUND I, PREFERENCE OR ZENITH
ACCUMULATOR CONTRACT
If a Contract is purchased by exchanging a variable annuity contract issued
by New England Variable Annuity Fund I (a "Fund I contract"), by New England
Retirement Investment Account (a "Preference contract"), or by The New England
Variable Account (a "Zenith Accumulator contract"), the charges described
above will apply except that the sales charges will be calculated as described
below.
A Contract issued by exchanging a Fund I or Preference contract will have no
Contingent Deferred Sales Charge on assets transferred. (Any remaining
surrender charge on the Preference contract will also be waived on the
exchange.) Subsequent purchase payments will be subject to the Contingent
Deferred Sales Charge described above. Assets transferred from the Fund I or
Preference contract will be treated as a purchase payment under the American
Growth Series contract for purposes of calculating the free withdrawal amount
and Contingent Deferred Sales Charge, but in no event will those assets be
subject to the charge. Total asset-based charges (including the investment
advisory fee) under the Fund I contracts currently equal approximately 1.25%.
However, beginning December 1, 1994, The New England intends to have Fund I
bear certain operating expenses which have previously been borne by The New
England. Deductions for sales and administrative expenses will be made from
ongoing purchase payments under the Fund I contracts. Any applicable premium
tax charges are deducted from purchase payments in Pennsylvania, South Dakota
and Kentucky and at an annuitization in North Carolina. The Preference
contracts have the same 1.25% asset-based charge for mortality and expense
risks which is imposed under the American Growth Series Contracts, but the
Preference contracts do not have an asset-based administration charge. The
Preference contracts impose a $30 annual administration charge, but the charge
is not limited to 2% of the contract value as it is under the American Growth
Series Contract, and there is no waiver of the charge for contracts which
reach certain asset levels as there is under the American Growth Series
Contract. There will be no contingent deferred sales charge under the
Preference contracts beginning in the seventh contract year, and there is no
limit on or charge for fund transfers, although transfers are subject to a $25
minimum. Any applicable premium tax charges are deducted from purchase
payments in Pennsylvania, South Dakota and Kentucky and at an annuitization in
North Carolina.
In the case of a Contract issued by exchanging a Zenith Accumulator
contract, the Company has applied for an SEC order permitting the following
terms of exchange. The assets transferred will be treated as a purchase
payment under the American Growth Series contract for purposes of calculating
the free withdrawal amount and Contingent Deferred Sales Charge under the
American Growth Series contract. However, if the transferred assets are
surrendered from the American Growth Series contract they will be subject to
the table of declining contingent deferred sales charge percentages that would
have applied under the Zenith Accumulator contract in the year of the
surrender. The Zenith Accumulator contracts and American Growth Series
Contracts impose the same aggregate amount of asset-based charges (the
administration asset charge and mortality and expense risk charge) and
generally the same annual administration contract charge, but the annual
administration contract charge under the Zenith Accumulator contract is not
limited to 2% of the contract value and is not waived for contracts which
reach certain asset levels, as it is under the American Growth Series
Contract. Under the Zenith Accumulator contract, the premium tax charge is
currently deducted in four states, from purchase payments in Pennsylvania,
South Dakota and Kentucky, and at annuitization in North Carolina. Fund
transfers under the Zenith Accumulator are not currently limited in number or
amount prior to annuitization, but a $10 fee is currently imposed for
transfers in excess of 12 per year, as it currently is under the American
Growth Series Contract. The American Growth Series Contract imposes higher
minimums for amounts transferred from and remaining in a sub-account.
If you are contemplating an exchange of a Fund I, Preference or Zenith
Accumulator contract for an American Growth Series Contract, you should
compare all charges (including investment advisory fees) deducted under your
existing contract and under the American Growth Series Contract, as well as
the investment options offered by each. In addition, you should keep in mind
the higher minimum ($250) for any subsequent purchase payments you may wish to
make to the American Growth Series Contract. See "Purchase Payments--
Exchanges" and "Payment on Death Prior to Annuitization--Under Exchanged
Contracts" for more information concerning the consequences of an exchange.
ANNUITY PAYMENTS
ELECTION OF ANNUITY
The Maturity Date of the Contract is based on the older of the Contract
Owner(s) and the Annuitant and is the date when that person, at his or her
nearest birthday, would be age 95 (or the maximum age allowed by state law).
If a Contract
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is acquired pursuant to an exchange from an old contract (see "The Contracts--
Purchase Payments"), the Maturity Date of the Contract would be set at age 95
(or the maximum allowed by state law) regardless of what the maturity date may
have been for the old Contract. The Contract Owner may not change the Maturity
Date to an earlier date. However, the Contract Owner may surrender the
Contract at any time before the Maturity Date and apply the surrender proceeds
to an annuity option.
If the Contract Owner and Annuitant are not the same and the Annuitant dies
prior to the Maturity Date, the Contract will continue for the benefit of the
Contingent Annuitant. The Maturity Date will be reset, if necessary, based on
the age of the older Contract Owner.
Ownership of the Contract may not be changed without Company consent. If
ownership is changed, a change in the Maturity Date may be required, based on
the new Contract Owner's age. The new Maturity Date will be based on the older
of the new Contract Owner and the Annuitant and will be the date when that
person, at his or her nearest birthday, would be age 95 (or the maximum age
allowed by state law).
The Contract that is issued to you will provide for variable annuity
payments to begin at the Maturity Date for the life of the Payee, but for at
least ten years. If you wish to change this payment option you may do so at
any time prior to the Maturity Date. You may elect to have annuity payments
under a Contract made on a variable basis or on a fixed basis, or may
designate a portion to be paid on a variable basis and a portion on a fixed
basis. If you select payments on a fixed basis, the amount of Contract Value
applied to the fixed payment option (net of any applicable charges described
under "Administration Charges, Contingent Deferred Sales Charge and Other
Deductions") will be transferred to the general account of the Company, and
the annuity payments will be fixed in amount and duration by the payment
option selected, the age of the Payee and, for Contracts issued in New York or
Oregon for use in situations not involving an employer-sponsored plan, by the
sex of the Payee. (See "Amount of Variable Annuity Payments".)
Contracts acquired by retirement plans qualifying for tax benefited
treatment may be subject to various requirements concerning the time by which
benefit payments must commence, the period over which such payments may be
made, the payment options that may be selected, and the minimum annual amounts
of such payments. Penalty taxes or other adverse tax consequences may occur
upon failure to meet such requirements.
ANNUITY OPTIONS
The Contract provides several annuity payment options. Prior to the Maturity
Date you may elect to have the Contract Value applied to one of these payment
options at maturity. If you make a full or partial surrender of the Contract,
you may elect in your surrender request to apply the surrender proceeds to a
payment option. You may also elect to have the Contract's Death Proceeds
applied to a payment option, or, if the Death Proceeds become payable and you
have not previously elected a payment option, the Beneficiary can elect to
apply the Death Proceeds to a payment option; however, the Variable Income
Payments to Age 100 Option and the Variable Life Income for Two Lives Option,
described below, and comparable fixed options, are not available for this
purpose.
The selection of an annuity payment option must be made by written request
to the Company and is subject to any applicable Federal tax law restrictions.
The amount of the Death Proceeds or of the Contract Value at the Maturity Date
that is applied to a payment option will be reduced by any applicable premium
tax charge. The Contract Value at the Maturity Date is also reduced by a pro
rata portion of the Administration Contract Charge and by any applicable
Contingent Deferred Sales Charge. The amount of Contract Value applied to a
payment option at a full or partial surrender will be reduced by any
applicable Contingent Deferred Sales Charge and premium tax charge, and, on a
full surrender, by a pro rata portion of the Administration Contract Charge.
The Contract offers the variable payment options listed below.
Variable Income for a Specified Number of Years. The Company will make
variable monthly payments for the number of years elected, which may not be
more than 30 except with the consent of the Company.
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Variable Life Income. The Company will make variable monthly payments
which will continue: while the Payee is living* ; while the Payee is living
but for at least ten years; or while the Payee is living but for at least
twenty years. (The latter two alternatives are referred to as Variable Life
Income with Period Certain Option.)
Variable Income Payments to Age 100. The Company will make variable
monthly payments for the number of whole years until the Payee is age 100.
THIS OPTION CANNOT BE SELECTED FOR DEATH PROCEEDS.
Variable Life Income for Two Lives. The Company will make variable
monthly payments which will continue: while either of two Payees is living
(Joint and Survivor Variable Life Income)*, while either of two Payees is
living but for at least 10 years (Joint and Survivor Variable Life Income,
10 Years Certain); while two Payees are living, and, after the death of one
while the other is still living, two-thirds to the survivor (Joint and 2/3
to Survivor Variable Life Income).* THIS OPTION CANNOT BE SELECTED FOR
DEATH PROCEEDS.
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* IT IS POSSIBLE UNDER THIS OPTION TO RECEIVE ONLY ONE ANNUITY PAYMENT IF THE
PAYEE DIES (OR PAYEES DIE) BEFORE THE DUE DATE OF THE SECOND PAYMENT OR TO
RECEIVE ONLY TWO ANNUITY PAYMENTS IF THE PAYEE DIES (OR PAYEES DIE) BEFORE
THE DUE DATE OF THE THIRD PAYMENT, AND SO ON.
Comparable fixed payment options are also available for all of the options
described above. In addition, other payment options (including other periods
certain) may be available from time to time, and you should consult the
Company as to their availability. If you do not elect a payment option by the
Maturity Date, variable payments under the Contract will be made while the
Payee is living but for at least ten years. (This is the Variable Life Income
with Period Certain Option.) If installments under an option would be less
than the Company's published minimum, then the Contract proceeds can be
applied to a payment option only with the consent of the Company.
The Payee under the Variable Income for a Specified Number of Years Option
or the Variable Income Payments to Age 100 Option may withdraw the commuted
value of the remaining payments. The Payee (or Payees) under the Variable Life
Income with Period Certain Option or the Joint and Survivor Variable Life
Income, 10 Years Certain Option may withdraw the commuted value of the
remaining period certain portion of the payment option. The commuted value of
such payments is calculated based on the assumed interest rate under the
Contract. The life income portion of the payment portion cannot be commuted,
and variable annuity payments based on that portion will resume at the
expiration of the period certain if the Annuitant is alive at that time. (See
"Amount of Variable Annuity Payments."). Amounts applied to a fixed payment
option may not be withdrawn.
The section of the prospectus entitled "Administration Charges, Contingent
Deferred Sales Charge and Other Deductions" describes whether a Contingent
Deferred Sales Charge will be deducted upon application of the Contract's
proceeds to a particular payment option or upon withdrawal of the commuted
value of any payments certain under a variable payment option.
Payees under the Variable Income for a Specified Number of Years Option or
the Variable Income Payments to Age 100 Option may convert to a variable
payment option involving a life contingency.
The availability of certain annuity payment options may be restricted on
account of Company policy and Federal tax law, which among other things, may
restrict payment to the life expectancy of the payee.
The Company continues to assess the Mortality and Expense Risk Charge if
annuity payments are made under any variable payment option (either before or
after the Maturity Date), including an option not involving a life contingency
and under which the Company bears no mortality risk.
AMOUNT OF VARIABLE ANNUITY PAYMENTS
At the Maturity Date (or any other application of proceeds to a payment
option), the Contract Value (reduced by any applicable charges) is applied
toward the purchase of monthly annuity payments. The amount of monthly
variable annuity payments will be determined on the basis of (i) annuity
purchase rates not lower than the rates set forth in the Life Income Tables
contained in the Contract that reflect the Payee's age, (ii) the assumed
interest rate selected, (iii) the type of payment option selected, and (iv)
the investment performance of the Eligible Funds selected.
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The annuity purchase rates are used to calculate the basic payment level
purchased by the Contract Value. These rates vary according to the age of the
Payee. The higher the Payee's age at annuitization, the greater the basic
payment level under options involving life contingencies, because the Payee's
life expectancy and thus the period of anticipated income payments will be
shorter. With respect to Contracts issued in New York or Oregon for use in
situations not involving an employer-sponsored plan, purchase rates used to
calculate the basic payment level will also reflect the sex of the Payee.
Under such Contracts, a given Contract Value will produce a higher basic
payment level for a male Payee than for a female Payee, reflecting the longer
life expectancy of the female Payee. If the Contract Owner has selected a
payment option that guarantees that payments will be made for a certain number
of years regardless of whether the Payee dies, the Contract Value will
purchase lower monthly benefits than under a life contingent option.
The dollar amount of the initial variable annuity payment will be at the
basic payment level. The assumed interest rate under the Contract will affect
both this basic payment level and the amount by which subsequent payments
increase or decrease. Each payment after the first will vary with the
difference between the net investment performance of the sub-accounts selected
and the assumed interest rate under the Contract. If the actual net investment
rate exceeds the assumed interest rate, the payments will increase.
Conversely, if the actual rate is less than the assumed interest rate, annuity
payments will decrease. If actual investment performance is equal to the
assumed interest rate, the monthly payments will remain level.
Unless otherwise provided, the assumed interest rate will be at an annual
effective rate of 3.5%. You may select as an alternative an assumed interest
rate equal to an annual effective rate of 0% or, if allowed by applicable law
or regulation, 5%. A higher assumed interest rate will produce a higher first
payment, a more slowly rising series of subsequent payments when the actual
net investment performance exceeds the assumed interest rate, and a more rapid
drop in subsequent payments when the actual net investment performance is less
than the assumed interest rate. A lower assumed interest rate will produce a
lower first payment, a more rapidly rising series of subsequent payments when
the actual net investment performance exceeds the assumed interest rate, and a
less rapid drop in subsequent payments when the actual net investment
performance is less than the assumed interest rate.
You may, even after variable annuity payments have commenced, direct that
all or a portion of your investment in one sub-account be transferred to
another sub-account of the Variable Account in the manner provided under
"Transfer Privilege".
The Company may require proof of age, sex (if applicable) and survival of
any person upon the continuation of whose life annuity payments depend.
For more information regarding payment options, you should refer to the
Statement of Additional Information and also to the Contract, which contains
detailed information about the various forms of options available, and other
matters also of importance.
FEDERAL INCOME TAX STATUS
INTRODUCTION
The following discussion is a general discussion of federal income tax
considerations relating to the Contract and is not intended as tax advice.
This discussion is not intended to address the tax consequences resulting from
all of the situations in which a person may be entitled to or may receive a
distribution under the Contract. Any person concerned about these tax
implications should consult a competent tax adviser before initiating any
transaction. This discussion is based upon NEVLICO's understanding of the
present federal income tax laws as they are currently interpreted by the
Internal Revenue service ("IRS"). No representation is made as to the
likelihood of the continuation of the present federal income tax laws or of
the current interpretation by the IRS. Moreover, no attempt has been made to
consider any applicable state or other tax laws.
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The Contract may be purchased on a non-tax qualified basis ("Non-Qualified
Contract") or purchased and used in connection with certain plans entitled to
special income tax treatment under section 408 of the Internal Revenue Code of
1986, as amended (the "Code"). The ultimate effect of federal income taxes on
the amounts held under a Contract, on annuity payments, and on the economic
benefit to the Contract Owner, the Annuitant, or the Beneficiary may depend on
the type of retirement plan, and on the tax status of the individual
concerned. In addition, certain requirements must be satisfied in purchasing a
Qualified Contract and receiving distributions from a Qualified Contract in
order to continue receiving favorable tax treatment. Therefore, purchasers of
Qualified Contracts should seek competent legal and tax advice regarding the
suitability of the Contract for their situation, the applicable requirements,
and the tax treatment of the rights and benefits of the Contract. The
following discussion assumes that a Qualified Contract is purchased with
proceeds from and/or contributions under retirement plans that qualify for the
intended special federal income tax treatment.
TAXATION OF NEVLICO
NEVLICO is taxed as a life insurance company under Part I of Subchapter L of
the Code. Since the Variable Account is not an entity separate from NEVLICO,
and its operations form a part of NEVLICO, it will not be taxed separately as
a "regulated investment company" under Subchapter M of the Code. Investment
income and realized capital gains are automatically applied to increase
reserves under the Contracts. Under existing federal income tax law, NEVLICO
believes that the Variable Account investment income and realized net capital
gains will not be taxed to the extent that such income and gains are applied
to increase the reserves under the Contracts.
Accordingly, NEVLICO does not anticipate that it will incur any federal
income tax liability attributable to the Variable Account and, therefore,
NEVLICO does not intend to make provisions for any such taxes. However, if
changes in the federal tax laws or interpretations thereof result in NEVLICO
being taxed on income or gains attributable to the Variable Account, then
NEVLICO may impose a charge against the Variable Account (with respect to some
or all Contracts) in order to set aside amounts to pay such taxes.
TAX STATUS OF THE CONTRACT
Diversification. Section 817(h) of the Code requires that with respect to
----------------
Non-Qualified Contracts, the investments of the Funds be "adequately
diversified" in accordance with Treasury regulations in order for the
Contracts to qualify as annuity contracts under federal tax law. The Variable
Account, through the Eligible Funds, intends to comply with the
diversification requirements prescribed by the Treasury in Reg. Sec. 1.817-5,
which affect how the Eligible Funds' assets may be invested.
In certain circumstances, owners of variable annuity contracts may be
considered the owners, for federal income tax purposes, of the assets of the
separate accounts used to support their contracts. In those circumstances,
income and gains from the separate account assets would be includible in the
variable contract owner's gross income. The IRS has stated in published
rulings that a variable contract owner will be considered the owner of
separate account assets if the contract owner possesses incidents of ownership
in those assets, such as the ability to exercise investment control over the
assets. The Treasury Department has also announced, in connection with the
issuance of regulations concerning diversification, that those regulations "do
not provide guidance concerning the circumstances in which investor control
for the investments of a segregated asset account may cause the investor
[i.e., the Contract Owner], rather than the insurance company, to be treated
----
as the owner of the assets in the account." This announcement also stated that
guidance would be issued by way of regulations or rulings on the "extent to
which policyholders may direct their investments to particular Sub-Accounts
without being treated as owners of the underlying assets." As of the date of
this prospectus, no guidance has been issued.
The ownership rights under the Contract are similar to, but different in
certain respects from, those described by the IRS in rulings in which it was
determined that contract owners were not owners of separate account assets.
For example, a Contract Owner has additional flexibility in allocating premium
payments and account values. These differences could result in a Contract
Owner being treated as the owner of a pro rata portion of the assets of the
Variable Account. In addition, NEVLICO does not know what standards will be
set forth, if any, in the regulations or rulings which the Treasury Department
has stated it expects to issue. NEVLICO therefore reserves the right to modify
the Contract as necessary to attempt to prevent a Contract Owner from being
considered the owner of a pro rata share of the assets of the Variable
Account.
Required Distributions. In order to be treated as an annuity contract for
-----------------------
federal income tax purposes, section 72(s) of the Code requires Non-Qualified
Contracts to provide that (a) if any Owner dies on or after the annuity date
but prior to the time the entire interest in the Contract has been
distributed, the remaining portion of such interest will be distributed at
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least as rapidly as under the method of distribution being used as of the date
of such owner's death; and (b) if any Owner dies prior to the annuity date,
the entire interest in the Contract will be distributed within five years
after the date of such Owner's death. These requirements will be considered
satisfied as to any portion of an owner's interest which is payable to or for
the benefit of a "designated beneficiary" and which is distributed over the
life of such "designated beneficiary" or over a period not extending beyond
the life expectancy of that beneficiary, provided that such distributions
begin within one year of the owner's death. The "designated beneficiary"
refers to a natural person designated by the owner as a Beneficiary and to
whom ownership of the contract passes by reason of death. However, if the
"designated beneficiary" is the surviving spouse of a deceased owner, the
contract may be continued with the surviving spouse as the new owner.
The Non-Qualified Contracts contain provisions which are intended to comply
with the requirements of section 72(s) of the Code, although no regulations
interpreting these requirements have yet been issued. NEVLICO intends to
review such provisions and modify them if necessary to assure that they comply
with the requirements of Code Section 72(s) when clarified by regulation or
otherwise. Other rules may apply to Qualified Contracts.
The following discussion is based on the assumption that the Contract
qualifies as an annuity contract for federal income tax purposes.
TAXATION OF ANNUITIES
In General. Section 72 of the Code governs taxation of annuities in general.
-----------
NEVLICO believes that a Contract Owner who is a natural person generally is
not taxed on increases in the value of a Contract until distribution occurs by
withdrawing all or part of the Contract Value (e.g., withdrawals or annuity
----
payments under the Annuity Option elected). For this purpose, the assignment,
pledge, or agreement to assign or pledge any portion of the Contract Value
(and in the case of a Qualified Contract, any portion of an interest in the
qualified plan) generally will be treated as a distribution. The taxable
portion of a distribution (in the form of a single sum payment or an annuity)
is taxable as ordinary income.
The owner of any annuity contract who is not a natural person generally must
include in income any increase in the excess of the Contract Value over the
"investment in the contract" (discussed below) during the taxable year. There
are some exceptions to this rule and prospective Contract Owners that are not
natural persons may wish to discuss these with a competent tax adviser.
The following discussion generally applies to a Contract owned by a natural
person.
Surrenders. In the case of a surrender under a Qualified Contract, including
-----------
Systematic Withdrawals, a ratable portion of the amount received is taxable,
generally based on the ratio of the "investment in the contract" to the
individual's total accrued benefit under the retirement plan. The "investment
in the contract" generally equals the amount of any non-deductible purchase
payments paid by or on behalf of any individual. For a Contract issued in
connection with qualified plans, the "investment in the contract" can be zero.
Special tax rules may be available for certain distributions from a Qualified
Contract.
With respect to Non-Qualified Contracts, partial surrenders, including
Systematic Withdrawals, are generally treated as taxable income to the extent
that the Contract Value immediately before the surrender exceeds the
"investment in the contract" at that time. Full surrenders are treated as
taxable income to the extent that the amount received exceeds the "investment
in the contract".
Annuity Payments. Although the tax consequences may vary depending on the
-----------------
annuity payment elected under the Contract, in general, only the portion of
the annuity payment that represents the amount by which the Contract Value
exceeds the "investment in the contract" will be taxed; after the "investment
in the contract" is recovered, the full amount of any additional annuity
payments is taxable. For variable annuity payments, the taxable portion is
generally determined by an equation that establishes a specific dollar amount
of each payment that is not taxed. The dollar amount is determined by dividing
the "investment in the contract" by the total number of expected periodic
payments. However, the entire distribution will be taxable once the recipient
has recovered the dollar amount of his or her "investment in the contract".
For fixed annuity payments, in general there is no tax on the portion of each
payment which represents the same ratio that the "investment in the contract"
bears to the total expected value of the annuity payments for the term of the
payments; however, the remainder of each annuity payment is taxable. Once the
"investment in the contract" has been fully recovered, the full amount of any
additional annuity payments is taxable. If annuity payments cease as a result
of an Annuitant's death before full recovery of the "investment in the
contract," consult a competent tax advisor regarding deductibility of the
unrecovered amount.
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Penalty Tax. In the case of a distribution pursuant to a Non-Qualified
------------
Contract, there may be imposed a federal income tax penalty equal to 10% of
the amount treated as taxable income. In general, however, there is no penalty
tax on distributions: (1) made on or after the date on which the taxpayer
attains age 59 1/2; (2) made as a result of death or disability of an owner;
(3) received in substantially equal periodic payments as a life annuity or a
joint and survivor annuity for the lives or life expectancies of the owner and
a "designated beneficiary". Other tax penalties may apply to certain
distributions pursuant to a Qualified Contract.
Taxation of Death Benefit Proceeds. Amounts may be distributed from the
-----------------------------------
Contract because of the death of a Contract Owner (or Annuitant if the
Contract Owner is not an individual). Generally, such amounts are includible
in the income of the recipient as follows: (1) if distributed in a lump sum,
they are taxed in the same manner as a full surrender as described above, or
(2) if distributed under an Annuity Option, they are taxed in the same manner
as annuity payments, as described above.
Transfers, Assignments, Exchanges and Maturity Dates. A transfer of
-----------------------------------------------------
ownership of a Contract, the designation of an Annuitant, Payee or other
Beneficiary who is not also an Owner, the selection of certain Maturity Dates,
the exchange of a Contract, or the receipt of a Contract in an exchange may
result in certain tax consequences that are not discussed herein. Anyone
contemplating any such designation, transfer, assignment, selection, or
exchange should contact a competent tax adviser with respect to the potential
tax effects of such a transaction.
Multiple Contracts. All deferred non-qualified annuity contracts that are
-------------------
issued by NEVLICO (or its affiliates) to the same owner during any calendar
year are treated as one annuity contract for purposes of determining the
amount includible in gross income under section 72(e) of the Code. In
addition, the Treasury Department has specific authority to issue regulations
that prevent the avoidance of section 72(e) through the serial purchase of
annuity contracts or otherwise. Congress has also indicated that the Treasury
Department may have authority to treat the combination purchase of an
immediate annuity contract and separate deferred annuity contracts as a single
annuity contract under its general authority to prescribe rules as may be
necessary to enforce the income tax laws.
QUALIFIED CONTRACTS
The Contract is designed for use as an Individual Retirement Annuity
("IRA"). Section 408(b) of the Code permits individuals to establish IRA's on
a tax benefited basis. The Contract is also designed for use with Simplified
Employee Pension Plans ("SEP"), which certain employers may adopt in order to
contribute to IRA's on their employees' behalf. The tax rules applicable to
participants and beneficiaries in these retirement plans vary according to the
type of plan and the terms and conditions of the plan. Special favorable tax
treatment may be available for certain types of contributions and
distributions. Adverse tax consequences may result from contributions in
excess of specified limits; distributions prior to age 59 1/2 (subject to
certain exceptions); distributions that do not conform to specified
commencement and minimum distribution rules; aggregate distributions in excess
of a specified annual amount; and in other specified circumstances.
NEVLICO makes no attempt to provide more than general information about use
of the Contracts with the various types of retirement plans. Contract Owners
and participants under retirement plans as well as Annuitants and
Beneficiaries are cautioned that the rights of any person to any benefits
under these Contracts may be subject to the terms and conditions of the plans
themselves, regardless of the terms and conditions of the Contract issued in
connection with such a plan. Some retirement plans are subject to distribution
and other requirements that are not incorporated in the administration of the
Contracts. Contract Owners are responsible for determining that contributions,
distributions and other transactions with respect to the Contracts satisfy
applicable law. Purchasers of Contracts for use with any retirement plan
should consult their legal counsel and tax adviser regarding the suitability
of the Contract under applicable federal and state tax laws and ERISA.
The sale of a Contract for use with an IRA may be subject to special
disclosure requirements of the Internal Revenue Service. Purchasers of a
Contract for use with IRAs will be provided with supplemental information
required by the Internal Revenue Service or other appropriate agency. Such
purchasers will have the right to revoke their purchase within seven days of
the earlier of the establishment of the IRA or their purchase. A Contract
issued in connection with an IRA will be amended as necessary to conform to
the requirements of the Code. Purchasers should seek competent advice as to
the suitability of the Contract for use with IRAs.
A-34
<PAGE>
(i) Plan Contribution Limits
SEPS
Statutory limitations on contributions to SEPs may limit the amount of money
that may be contributed to the Contract in any Contract Year. Any purchase
payments attributable to such contributions are tax deductible to the employer
and are not currently taxable to the Annuitants for whom the Contracts are
purchased. The contributions to the Contract and any increase in Contract
Value attributable to such contributions are not subject to taxation until
payments from the Contract are made to the Annuitant or his/her Beneficiaries.
IRA'S
The maximum tax deductible purchase payment which may be contributed each
year to an IRA is the lesser of $2,000 or 100 percent of includible
compensation if the taxpayer is not covered under an employer plan. A spousal
IRA is available if the taxpayer and spouse file a joint return and the spouse
earns no compensation (or elects to be treated as earning no compensation) and
is not yet age 70 1/2. The maximum tax deductible purchase payment which a
taxpayer may make to his or her own IRA and a spousal IRA, combined, is the
lesser of $2,250 or 100 percent of compensation of the working spouse. If
covered under an employer plan, taxpayers are permitted to make deductible
purchase payments; however, the deductions are phased out and eventually
eliminated, on a pro rata basis, for adjusted gross income between $25,000 and
$35,000 for an individual, between $40,000 and $50,000 for a married couple
filing jointly and between $0 and $10,000 for a married person filing
separately. A taxpayer may also make nondeductible purchase payments. However,
the total of deductible and nondeductible purchase payments may not exceed the
limits described above for deductible payments. For more information
concerning the contributions to IRAs, you should obtain a copy of IRS
Publication 590 on Individual Retirement Accounts. In addition to the above,
an individual may make a "rollover" contribution into an IRA with the proceeds
of a "lump sum" distribution (as defined in the Code) from a Qualified Plan.
(ii) Distributions from the Contract
IRAS AND SEPS
Payments made from the Contracts held under an IRA or a SEP are taxable
under Section 72 of the Code as ordinary income, in the year of receipt. Any
amount received in surrender of all or part of the Contract Value prior to
annuitization will, subject to restrictions and penalties discussed below,
also be included in income in the year of receipt. If there is any
"investment" in the Contract, a portion of each amount received is excluded
from gross income as a return of such investment. Distributions or withdrawals
prior to age 59 1/2 may be subject to a penalty tax of 10% of the amount
includible in income. This penalty tax does not apply: (i) to distributions of
excess contributions or deferrals; (ii) to distributions made on account of
the Annuitant's death, retirement, disability or early retirement at or after
age 55; (iii) when distribution from the Contract is in the form of an annuity
over the life or life expectancy of the Annuitant (or joint lives or life
expectancies of the Annuitant and his or her Beneficiary); or (iv) when
distribution is made pursuant to a divorce (in the case of IRAs) or a
qualified domestic relations order. In the case of IRAs, the exceptions for
distributions on account of early retirement at or after age 55 or made
pursuant to a qualified domestic relations order do not apply. A tax-free
rollover may be made once each year among individual retirement arrangements
subject to the conditions and limitations described in the Code.
If the Annuitant dies before distributions begin, distributions must be
completed within five years after death, unless payments begin within one year
after death and are made over the life (or life expectancy) of the
Beneficiary. If the Annuitant's spouse is the Beneficiary, distributions need
not begin until the Annuitant would have reached age 70 1/2. If the Annuitant
dies after annuity payments have begun, payments must continue to be made at
least as rapidly as payments made before death.
Annuity payments, periodic payments or annual distributions generally must
commence by April 1 of the calendar year following the year in which the
Annuitant attains age 70 1/2. Each annual distribution must equal or exceed a
"minimum distribution amount" which is determined by minimum distribution
rules under the plan. A penalty tax of up to 50% of the amount which should be
distributed may be imposed by the IRS for failure to distribute the required
minimum distribution amount. Other tax penalties may apply to aggregate annual
distributions in excess of $150,000.
A-35
<PAGE>
WITHHOLDING
Pension and annuity distributions generally are subject to withholding for
the recipient's federal income tax liability at rates that vary according to
the type of distribution and the recipient's tax status. Recipients, however,
generally are provided the opportunity to elect not to have tax withheld from
distributions.
POSSIBLE CHANGES IN TAXATION
In past years, legislation has been proposed that would have adversely
modified the federal taxation of certain annuities. For example, one such
proposal would have changed the tax treatment of non-qualified annuities that
did not have "substantial life contingencies" by taxing income as it is
credited to the annuity. Although as of the date of this prospectus Congress
is not actively considering any legislation regarding the taxation of
annuities, there is always the possibility that the tax treatment of annuities
could change by legislation or other means (such as IRS regulations, revenue
rulings, judicial decisions, etc.). Moreover, it is also possible that any
change could be retroactive (that is, effective prior to the date of the
change).
OTHER TAX CONSEQUENCES
As noted above, the foregoing discussion of the federal income tax
consequences is not exhaustive and special rules are provided with respect to
other tax situations not discussed in this Prospectus. Further, the federal
income tax consequences discussed herein reflect NEVLICO's understanding of
the current law and the law may change. Federal estate and gift tax
consequences of ownership or receipt of distributions under the Contract
depend on the individual circumstances of each Contract Owner or recipient of
a distribution. A competent tax adviser should be consulted for further
information.
GENERAL
At the time the initial purchase payment is paid, a prospective purchaser
must specify whether he or she is purchasing a Non-Qualified Contract or a
Qualified Contract. If the initial premium is derived from an exchange or
surrender of another annuity contract, NEVLICO may require that the
prospective purchaser provide the information with regard to the federal
income tax status of the previous annuity contract. NEVLICO will require that
persons purchase separate Contracts if they desire to invest monies qualifying
for different annuity tax treatment under the Code. Each such separate
Contract would require the minimum initial purchase payment stated above.
Additional purchase payments under a Contract must qualify for the same
federal income tax treatment as the initial purchase payment under the
Contract; NEVLICO will not accept an additional purchase payment under a
Contract if the federal income tax treatment of such purchase payment would be
different from that of the initial purchase payment.
VOTING RIGHTS
The Company is the legal owner of the Eligible Fund shares held in the
Variable Account and has the right to vote those shares at meetings of the
Eligible Fund shareholders. However, to the extent required by Federal
securities law, the Company will give you, as Contract Owner, the right to
instruct the Company how to vote the shares that are attributable to your
Contract.
Prior to annuitization, the number of votes as to which you have a right of
instruction is determined by applying your percentage interest in a sub-
account to the total number of votes attributable to the sub-account. After
annuitization, the number of votes attributable to your Contract is determined
by applying the percentage interest reflected by the reserve for your Contract
to the total number of votes attributable to the sub-account. After
annuitization the votes attributable to your Contract decrease as reserves
underlying the Contract decrease.
Contract Owners who are entitled to give voting instructions and the number
of shares as to which you have a right of instruction will be determined as of
the record date for the meeting. All Eligible Fund shares held in any sub-
account of the Variable Account or any other registered (or to the extent
voting privileges are granted by the issuing insurance company, unregistered)
separate accounts of the Company or any affiliate for which no timely
instructions are received will be voted
A-36
<PAGE>
for, against, or withheld from voting on any proposition in the same
proportion as the shares held in that sub-account for all policies or
contracts for which voting instructions are received.
All Eligible Fund shares held by the general investment account (or any
unregistered separate account for which voting privileges are not extended) of
the Company or its affiliates will be voted in the same proportion as the
aggregate of (i) the shares for which voting instructions are received and
(ii) the shares that are voted in proportion to such voting instructions.
The SEC requires the Eligible Fund Boards of Trustees to monitor events to
identify conflicts that may arise from the sale of shares to variable life and
variable annuity separate accounts of affiliated and, if applicable,
unaffiliated insurance companies. Conflicts could arise as a result of changes
in state insurance law or Federal income tax law, changes in investment
management of any portfolio of the Eligible Funds, or differences between
voting instructions given by variable life and variable annuity contract
owners, for example. If there is a material conflict, the Boards of Trustees
will have an obligation to determine what action should be taken, including
the removal of the affected sub-account(s) from the Eligible Fund(s), if
necessary. If the Company believes any Eligible Fund action is insufficient,
the Company will consider taking other action to protect Contract Owners.
There could, however, be unavoidable delays or interruptions of operations of
the Variable Account that the Company may be unable to remedy.
DISTRIBUTION OF CONTRACTS
New England Securities, the principal underwriter of the Contracts, is a
broker-dealer registered under the Securities Exchange Act of 1934 and a
member of the National Association of Securities Dealers, Inc. Except in
certain limited circumstances (such as sales of the Contracts to persons over
age 75), the Company will pay commissions of at least 3% of purchase payments
to the New England Securities registered representative involved in the sale
of a Contract. Additional compensation may be paid by the Company to the
general agent involved in the transaction. No commission is paid in connection
with the initial issuance of a Contract as a result of an exchange from a Fund
I, Preference or Zenith Accumulator contract.
New England Securities may enter into selling agreements with other broker-
dealers registered under the Securities Exchange Act of 1934 whose
representatives are authorized by applicable law to sell variable annuity
contracts. Commissions paid to such broker-dealers will also be at least 3% of
purchase payments (except as described in the preceding paragraph).
THE FIXED ACCOUNT
A Fixed Account option is included under Contracts issued in those states
where it has been approved by the state insurance department. In these states,
you may allocate net purchase payments and may transfer Contract Value in the
Variable Account to the Fixed Account, which is part of the Company's general
account. The Fixed Account offers diversification to a Variable Account
contract, allowing the Contract Owner to protect principal and earn, at least,
a guaranteed rate of interest.
Because of exemptive and exclusionary provisions, interests in the Fixed
Account have not been registered under the Securities Act of 1933, and neither
the Fixed Account nor the general account has been registered as an investment
company under the Investment Company Act of 1940. Therefore, neither the
general account, the Fixed Account nor any interests therein are generally
subject to the provisions of these Acts, and the Company has been advised that
the staff of the Securities and Exchange Commission does not review
disclosures relating to the general account. Disclosures regarding the Fixed
Account may, however, be subject to certain generally applicable provisions of
the Federal securities laws relating to the accuracy and completeness of
statements made in prospectuses.
GENERAL DESCRIPTION OF THE FIXED ACCOUNT
The Company's general account consists of all assets owned by the Company
other than those in the Variable Account and the Company's other separate
accounts. The Company has sole discretion over the investment of assets in the
general account, including those in the Fixed Account. Contract Owners do not
share in the actual investment experience of the
A-37
<PAGE>
assets in the Fixed Account. Instead, the Company guarantees that Contract
Values in the Fixed Account will earn interest at an effective annual rate of
at least 3%. The Company is not obligated to credit interest at a rate higher
than 3%, although in its sole discretion it may do so. Contract Values in the
Fixed Account will earn interest daily.
Any purchase payment or portion of Contract Value ("deposit") allocated to
the Fixed Account will earn interest at an annual rate determined by the
Company for that deposit for a 12 month period. At the end of each succeeding
12 month period, the Company will determine the interest rate that will apply
to that deposit plus accrued interest for the next 12 months. This renewal
rate may differ from the interest rate that is applied to new deposits made to
the Fixed Account on that same day.
CONTRACT VALUE AND FIXED ACCOUNT TRANSACTIONS
A Contract's total Contract Value will include its Contract Value in the
Variable Account and in the Fixed Account.
Unless you request otherwise, a partial surrender will reduce the Contract
Value in the sub-accounts of the Variable Account and the Fixed Account
proportionately. The annual Administration Contract Charge will be deducted
entirely from the Contract Value in the Variable Account, and not from the
Contract Value in the Fixed Account. (However, that charge is limited to the
lesser of $30 and 2% of the total Contract Value, including Contract Value in
the Fixed Account.) Except as described below, amounts in the Fixed Account
are subject to the same rights and limitations as are amounts in the Variable
Account with respect to transfers, surrenders and partial surrenders. The
following special rules apply to transfers involving the Fixed Account.
The amount of Contract Value which may be transferred from the Fixed Account
----------------------------------------------------------------------------
is limited to the greater of: 25% of the Contract Value in the Fixed Account
- ----------------------------------------------------------------------------
at the end of the first day of the Contract Year, and the amount of Contract
- ----------------------------------------------------------------------------
Value that was transferred from the Fixed Account in the previous Contract
- --------------------------------------------------------------------------
Year, except with the consent of the Company. (Also, after the transfer is
- --------------------------------------------------------------------------
made, the Contract Value may not be allocated among more than ten of the sub-
- -----------------------------------------------------------------------------
accounts and/or the Fixed Account.) The Company intends to restrict purchase
- -----------------------------------
payments and transfers of Contract Value into the Fixed Account: (1) if the
interest rate which would be credited to the deposit would be equivalent to an
annual effective rate of 3%; or (2) if the total Contract Value in the Fixed
Account exceeds a maximum amount published by the Company (currently
$500,000). In addition, the Company intends to restrict transfers of Contract
Value into the Fixed Account, and reserves the right to restrict purchase
payments into the Fixed Account, for 180 days following a transfer out of the
Fixed Account.
Amounts transferred to the sub-accounts from the Fixed Account will be on a
"last-in, first-out" basis; that is, they will be made in the reverse order in
which the deposits into the Fixed Account were made. Amounts surrendered from
the Fixed Account will be on a "first-in, first-out" basis.
The Company reserves the right to delay transfers, surrenders and partial
surrenders from the Fixed Account for up to six months.
FINANCIAL STATEMENTS
The financial statements of the Company may be found in the Statement of
Additional Information.
A-38
<PAGE>
INVESTMENT EXPERIENCE INFORMATION
The table below illustrates hypothetical average annual total returns for
each sub-account for the periods shown, based on the actual investment
experience of the New England Zenith Fund during those periods. It does not
represent what may happen in the future.
The Variable Account was not established until July, 1994. The Contracts
were not available until March 24, 1995. The Back Bay Advisors Bond Income and
Back Bay Advisors Money Market Series commenced operations on August 26, 1983.
The Westpeak Value Growth and Loomis Sayles Avanti Growth Series commenced
operations on April 30, 1993. The Small Cap Series commenced operations on May
1, 1994. The six other Eligible Funds did not commence operations until
October 31, 1994.
Calculations of average annual total return are based on the assumption that
a single investment of $1,000 was made at the beginning of each period shown.
The figures do not reflect the effect of any premium tax charge, which applies
in certain states, and which would reduce the results shown.
The average annual total return is related to surrender value and is
calculated as follows. The amount of the assumed $1,000 purchase payment for a
Contract issued at the beginning of the period is divided by the Accumulation
Unit Value of each sub-account at the beginning of the period shown to arrive
at the number of Accumulation Units purchased. The number of Accumulation
Units is reduced on each Contract anniversary to reflect deduction of the
annual $30 Administration Contract Charge from the Contract Value. Each such
$30 deduction reduces the number of units held under the Contract by an amount
equal to $30 divided by the Accumulation Unit Value on the date of the
deduction. The total number of units held under the Contract at the beginning
of the last Contract Year covered by the period shown is multiplied by the
Accumulation Unit Value on December 31, 1994 to arrive at the Contract Value
on that date. This Contract Value is then reduced by the applicable Contingent
Deferred Sales Charge and the portion of the $30 Administration Contract
Charge which would be deducted upon surrender to arrive at the surrender
value. The average annual total return is the annual compounded rate of return
which would produce the surrender value on December 31, 1994.
AVERAGE ANNUAL TOTAL RETURN
For purchase payment allocated to the Back Bay Advisors Bond Income Series
<TABLE>
<CAPTION>
PERIOD ENDING DECEMBER 31, 1994
-------------------------------
<S> <C>
1 Year.......................................................... -12.81%
5 Years......................................................... 4.00%
10 years........................................................ 6.12%
Since Inception................................................. 6.43%
For purchase payment allocated to the Back Bay Advisors Money Market Series
<CAPTION>
PERIOD ENDING DECEMBER 31, 1994
-------------------------------
<S> <C>
1 Year.......................................................... -5.77%
5 Years......................................................... 0.32%
10 years........................................................ 2.28%
Since Inception................................................. 2.89%
For purchase payment allocated to the Westpeak Value Growth Series
<CAPTION>
PERIOD ENDING DECEMBER 31, 1994
-------------------------------
<S> <C>
1 Year.......................................................... -10.90%
Since Inception................................................. -0.55%
For purchase payment allocated to the Loomis Sayles Avanti Growth Series
<CAPTION>
PERIOD ENDING DECEMBER 31, 1994
-------------------------------
<S> <C>
1 Year.......................................................... -10.74%
Since Inception................................................. -0.20%
</TABLE>
Information is available illustrating the impact of fund performance on
annuity payouts.
The following chart illustrates how the average annual total return was
determined for the five year period ending December 31, 1994 for the Back Bay
Advisors Bond Income Series based on the assumptions used in the above table.
The
A-39
<PAGE>
units column below shows the number of accumulation units hypothetically
purchased by the $1000 investment in the Series in the first year. The units
are reduced on each Contract anniversary to reflect the deduction of the $30
Administration Contract Charge. The example assumes no premium tax charge is
deducted.
The unit values of the sub-accounts reflect the change in the net asset
value of the underlying Eligible Funds plus the reinvestment of dividends from
net investment income and of distributions from net realized gains, if any.
The unit values also reflect the deduction of the Mortality and Expense Risk
Charge as well as the Administration Asset Charge.
<TABLE>
<CAPTION>
AVERAGE
UNIT CONTRACT SURRENDER ANNUAL TOTAL
DATE UNITS VALUE VALUE VALUE RETURN
- ---- -------- -------- -------- --------- ------------
<S> <C> <C> <C> <C> <C>
December 31, 1989............. 552.6279 1.809536 1000.00 937.00
December 31, 1990............. 537.0871 1.930406 1036.80 980.81 -1.92%
December 31, 1991............. 523.7334 2.246568 1176.60 1126.60 6.14%
December 31, 1992............. 511.2212 2.397657 1225.73 1185.73 5.84%
December 31, 1993............. 499.9592 2.663825 1331.80 1301.80 6.82%
December 31, 1994............. 488.1194 2.533842 1236.82 1216.82 4.00%
</TABLE>
The following charts illustrate what would have been the growth and value of
a $10,000 purchase payment if it had been invested in each of four Eligible
Funds on or about the date when those Eligible Funds first became available:
September 1, 1983 in the case of the Back Bay Advisors Money Market and Back
Bay Advisors Bond Income Series and May 1, 1993 in the case of the Westpeak
Value Growth and Loomis Sayles Avanti Growth Series. The figures shown do not
reflect the deduction of any premium tax charge on surrender. During the
period when the Contingent Deferred Sales Charge applies, the percentage
return on surrender value from year to year (after the 1st year) will be
greater than the percentage return on Contract Value for the same years. This
is because the percentage return on surrender value reflects not only
investment experience but also the annual reduction in the applicable
Contingent Deferred Sales Charge. In the first chart, the Contract Value and
surrender value on each date shown are calculated in the manner described in
the preceding illustrations of average annual total return, assuming that no
premium tax charge is deducted on surrender.
In the second and third charts, the difference between the Contract Value or
surrender value at the beginning and at the end of each year is divided by the
beginning Contract Value or surrender value to arrive at the annual percentage
change. The cumulative return information set forth in these charts is
determined by taking the difference between the $10,000 investment and the
ending Contract Value or surrender value and dividing it by $10,000. The
annual effective rate of return in this illustration is calculated in the same
manner as the average annual total return described in the preceding
illustration, assuming that no premium tax charge is deducted on surrender.
$10,000 SINGLE PURCHASE PAYMENT CONTRACT
BACK BAY ADVISORS BOND INCOME AND BACK BAY ADVISORS MONEY MARKET SERIES ISSUED
SEPTEMBER 1, 1983
WESTPEAK VALUE GROWTH AND LOOMIS SAYLES AVANTI GROWTH SERIES ISSUED
MAY 1, 1993
INVESTMENT RESULTS
<TABLE>
<CAPTION>
CONTRACT VALUE SURRENDER VALUE (1)
------------------------------------------- -------------------------------------------
BACK BAY BACK BAY LOOMIS BACK BAY BACK BAY LOOMIS
ADVISORS ADVISORS WESTPEAK SAYLES ADVISORS ADVISORS WESTPEAK SAYLES
BOND MONEY VALUE AVANTI BOND MONEY VALUE AVANTI
INCOME MARKET GROWTH GROWTH INCOME MARKET GROWTH GROWTH
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
As of December 31:
1983................... $10,322.81 $10,267.54 $ 9,660.92 $ 9,609.51
1984................... 11,453.60 11,175.37 10,843.60 10,565.37
1985................... 13,388.02 11,905.91 12,878.02 11,395.91
1986................... 15,137.28 12,515.01 14,727.28 12,105.01
1987................... 15,242.32 13,122.58 14,932.32 12,812.58
1988................... 16,250.76 13,896.84 16,040.76 13,686.84
1989................... 17,982.33 14,945.51 17,872.33 14,835.51
1990................... 19,151.99 15,916.87 19,141.99 15,906.87
1991................... 22,256.32 16,648.79 22,246.32 16,638.79
1992................... 23,723.05 17,018.60 23,713.05 17,008.60
1993................... 26,326.57 17,259.26 $11,357.58 $11,306.07 26,316.57 17,249.26 $10,637.58 $10,586.07
1994................... 25,012.44 17,679.32 11,004.10 10,972.12 25,002.44 17,669.32 10,390.70 10,359.67
</TABLE>
A-40
<PAGE>
ANNUAL PERCENTAGE CHANGE IN CONTRACT VALUE(1)
<TABLE>
<CAPTION>
LEHMAN
INTERMEDIATE
BACK BAY BACK BAY GOVERNMENT/
ADVISORS ADVISORS WESTPEAK LOOMIS DOW JONES S&P 500 CORPORATE CONSUMER
BOND MONEY VALUE SAYLES AVANTI INDUSTRIAL STOCK BOND PRICE
INCOME MARKET GROWTH GROWTH AVERAGE(2) INDEX(3) INDEX(4) INDEX(5)
-------- -------- -------- ------------- ---------- -------- ------------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
As of December 31:
1983................... 3.23% 2.68% 5.89% 1.71% 4.50% 1.07%
1984................... 10.95 8.84 1.30 6.22 14.38 3.95
1985................... 16.89 6.54 33.55 31.64 18.05 3.80
1986................... 13.07 5.12 27.10 18.62 13.12 1.10
1987................... .69 4.85 5.48 5.21 3.67 4.43
1988................... 6.62 5.90 16.14 16.50 6.78 4.42
1989................... 10.66 7.55 32.19 31.59 12.76 4.65
1990................... 6.50 6.50 -1.00 -3.12 9.17 6.11
1991................... 16.21 4.60 24.19 30.34 14.63 3.06
1992................... 6.59 2.22 7.39 7.61 7.17 2.90
1993................... 10.97 1.41 13.58% 13.06% 16.97 10.06 8.79 2.75
1994................... -4.99 -2.43 -3.11 -2.95 5.06 1.31 -1.95 2.78
Cumulative Return....... 150.12 76.79 10.04 9.72 378.41 312.26 185.02 49.52
Annual Effective Rate of
Return................. 8.42 5.15 5.90 5.72 14.81 13.31 9.68 3.61
</TABLE>
ANNUAL PERCENTAGE CHANGE IN SURRENDER VALUE(1)
<TABLE>
<CAPTION>
LEHMAN
INTERMEDIATE
BACK BAY BACK BAY LOOMIS GOVERNMENT/
ADVISORS ADVISORS WESTPEAK SAYLES DOW JONES S&P 500 CORPORATE CONSUMER
BOND MONEY VALUE AVANTI INDUSTRIAL STOCK BOND PRICE
INCOME MARKET GROWTH GROWTH AVERAGE(2) INDEX(3) INDEX(4) INDEX(5)
-------- -------- -------- ------ ---------- -------- ------------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
As of December 31:
1983................... -3.39% -3.90% 5.89% 1.71% 4.50% 1.07%
1984................... 12.24 9.95 1.30 6.22 14.38 3.95
1985................... 18.76 7.86 33.55 31.64 18.05 3.80
1986................... 14.36 6.22 27.10 18.62 13.12 1.10
1987................... 1.39 5.85 5.48 5.21 3.67 4.43
1988................... 7.42 6.82 16.14 16.50 6.78 4.42
1989................... 11.42 8.39 32.19 31.59 12.76 4.65
1990................... 7.10 7.22 -1.00 -3.12 9.17 6.11
1991................... 16.22 4.60 24.19 30.34 14.63 3.06
1992................... 6.59 2.22 7.39 7.61 7.17 2.90
1993................... 10.98 1.41 6.38 5.86 16.97 10.06 8.79 2.75
1994................... -4.99 2.44 -2.32 -2.14 5.06 1.31 -1.95 2.78
Cumulative Return....... 150.02 76.69 3.91 3.60 378.41 312.26 185.02 49.52
Annual Effective Rate of
Return................. 8.42 5.15 2.32 2.14 14.81 13.31 9.68 3.61
</TABLE>
- --------
NOTES:
(1) The Contract Values, surrender values, and annual percentage change figures
assume reinvestment of dividends and capital gain distributions. The
Contract Values are net of all deductions and expenses. Each surrender
value equals the Contract Value less any applicable Contingent Deferred
Sales Charge and a pro rata portion of the annual $30 Administration
Contract Charge, but does not reflect a deduction for the premium tax
charge. (See "Administration Charges, Contingent Deferred Sales Charge and
Other Deductions."). 1983 figures for the Back Bay Advisors Bond Income and
Back Bay Advisors Money Market Series are from September 1 through December
31, 1983. 1993 figures for the Westpeak Value Growth and Loomis Sayles
Avanti Growth Series are from May 1, 1993 through December 31, 1993.
(2) The Dow Jones Industrial Average is an unmanaged index of 30 large
industrial stocks traded on the New York Stock Exchange. The annual
percentage change figures have been adjusted to reflect reinvestment of
dividends. 1983 figures are from September 1 through December 31, 1983.
A-41
<PAGE>
(3) The S&P 500 Stock Index is an unmanaged weighted index of the stock
performance of 500 industrial, transportation, utility and financial
companies. The annual percentage change figures have been adjusted to
reflect reinvestment of dividends. 1983 figures are from September 1
through December 31, 1983.
(4) The Shearson Lehman Government/Corporate Bond Index (Intermediate) is a
monthly evaluation of the investment grade, taxable, fixed income market,
including: public obligations of the U.S. Treasury; publicly issued debt
of U.S. Government agencies and quasi-federal corporations, and corporate
debt guaranteed by the U.S. Government; and public, fixed-rate, non-
convertible, investment grade, domestic corporate debt. 1983 figures are
from September 1 through December 31, 1983.
(5) The Consumer Price Index is a measure of the purchasing power of
consumers' dollars based on a comparison of the costs of goods and
services today with the costs of the same goods and services at an earlier
date. 1983 figures are from September 1 through December 31, 1983.
The chart below illustrates what would have been the growth and value of a
$250 monthly investment under a Contract in each of the Eligible Funds if
purchase payments had been made on the first day of each month starting with
September 1, 1983 in the case of the Back Bay Advisors Bond Income and Back
Bay Advisors Money Market Series and May 1, 1993 in the case of the Westpeak
Value Growth and Loomis Sayles Avanti Growth Series. The figures shown do not
reflect the deduction of any premium tax charge on surrender. Each purchase
payment is divided by the Accumulation Unit Value of each sub-account on the
date of the investment to calculate the number of Accumulation Units
purchased. The total number of units under the Contract is reduced on each
Contract anniversary to reflect the $30 Administration Contract Charge, in the
same manner as described in the illustrations of average annual total return.
The Contract Value and the surrender value are calculated according to the
methods described in the preceding examples. The annual effective rate of
return in this illustration represents the compounded annual rate that the
hypothetical purchase payments shown would have had to earn in order to
produce the Contract Value and surrender value illustrated on December 31,
1994. See the Statement of Additional Information for a description of the
method of calculating the annual effective rate of return in this
illustration.
INVESTMENT RESULTS
SEPTEMBER 1, 1983--DECEMBER 31, 1994
FOR BOND INCOME AND MONEY MARKET SERIES
MAY 1, 1993--DECEMBER 31, 1994 FOR VALUE GROWTH AND AVANTI GROWTH SERIES
<TABLE>
<CAPTION>
CONTRACT VALUE SURRENDER VALUE
----------------------------------------- -----------------------------------------
CUMULATIVE BOND MONEY VALUE AVANTI BOND MONEY VALUE AVANTI
PAYMENTS* INCOME MARKET GROWTH GROWTH INCOME MARKET GROWTH GROWTH
---------- ---------- ---------- --------- --------- ---------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
As of December 31:
1983.................. $ 1,000 $ 1,011.27 $ 1,016.83 $ 932.93 $ 938.10
1984.................. 4,000 4,349.54 4,229.09 4,069.54 3,957.34
1985.................. 7,000 8,364.65 7,592.64 7,914.65 7,148.73
1986.................. 10,000 12,619.16 11,049.80 12,029.16 10,459.80
1987.................. 13,000 15,729.32 14,668.84 15,029.32 13,968.84
1988.................. 16,000 19,839.99 18,641.31 19,059.99 17,861.31
1989.................. 19,000 25,121.19 23,181.95 24,291.19 22,351.95
1990.................. 22,000 29,930.59 27,812.46 29,080.59 26,962.46
1991.................. 25,000 38,121.49 32,184.97 37,271.49 31,334.97
1992.................. 28,000 43,792.49 35,962.33 42,942.49 35,112.33
1993.................. 31,000 51,735.96 39,529.83 $2,121.35 $2,119.07 50,885.96 38,679.83 $1,961.35 $1,959.07
1994.................. 34,000 52,139.85 43,580.04 5,040.23 5,047.30 51,289.85 42,730.04 4,711.54 4,717.86
Annual Effective Rate
of Return............. 7.28% 4.27% 0.92% 1.08% 7.01% 3.94% -6.62% -6.48%
</TABLE>
- --------
NOTE: *Cumulative payments as of December 31, 1993 would be $2,000 and as of
December 31, 1994 would be $5,000 for Avanti Growth and Value Growth.
A-42
<PAGE>
The Variable Account may update the performance history of one or more of
its sub-accounts on a quarterly basis by illustrating the five year growth of
a $10,000 single payment using the same method of calculation described on
page A-40, but using the five year period ending with the date of the
quarterly illustration. Such illustrations will show the Contract Value at the
end of the period and the cumulative return and annual effective rate of
return for the period. The illustration may also include the cumulative return
and annual effective rate of return of an appropriate securities index and the
Consumer Price Index for the same period.
The Variable Account will make available illustrations showing historical
Contract Values and the annual effective rate of return, based upon
hypothetical purchase payment amounts and frequencies, which can be selected
by the client. The method of calculation described on page A-40 will be used,
but the illustration will reflect the effect of any premium tax charge
applicable in the state where the illustration is delivered. The beginning
date of the illustration can be selected by the client. Contract Values will
be shown as of the end of each calendar year in the period and as of the end
of the most recent calendar quarter.
Historical investment performance may also be illustrated by showing the
percentage change in the Accumulation Unit Value and annual effective rate of
return of a sub-account without reflecting the deduction of any Contingent
Deferred Sales Charge or the annual $30 Administration Contract Charge, both
of which have the effect of reducing historical performance. The percentage
change in unit value and annual effective rate of return of each sub-account
may be shown from inception of the Eligible Fund to the date of the report and
for the 1 and 5 year periods ending with the date of the report. The
percentage change in unit value and annual effective rate of return also may
be compared with the percentage change and annual effective rate for the Dow
Jones Industrial Average and S&P 500 Stock Index, unmanaged indices of stock
performance described in Notes (2) and (3) to the preceding illustration of
Annual Percentage Change in Contract Value and Annual Percentage Change in
Surrender Value for a $10,000 Single Purchase Payment Contract. The percentage
change is calculated by dividing the difference in unit or index values at the
beginning and end of the period by the beginning unit or index value. See the
Statement of Additional Information for a description of the method for
calculating the annual effective rate of return in this illustration.
From time to time the Company may advertise (in sales literature or
advertising material) performance rankings of the sub-accounts of the Variable
Account assigned by independent services, such as Variable Annuity Research
and Data Services ("VARDS"). VARDS monitors and ranks the performance of
variable annuity accounts on an industry-wide basis in each of the major
categories of investment objectives. The performance analysis prepared by
VARDS ranks accounts on the basis of total return calculated using
Accumulation Unit Values. Thus, the effect of the Contingent Deferred Sales
Charge and $30 Administration Contract Charge assessed under the Contracts is
not taken into consideration.
From time to time, articles discussing the Variable Account's investment
experience, performance rankings and other characteristics may appear in
national publications. Some or all of these publishers or ranking services
(including, but not limited to, Lipper Analytical Services, Inc. and
Morningstar) may publish their own rankings or performance reviews of variable
contract separate accounts, including the Variable Account. References to,
reprints or portions of reprints of such articles or rankings may be used by
the Company as sales literature or advertising material and may include
rankings that indicate the names of other variable contract separate accounts
and their investment experience.
INVESTMENT ADVISER PERFORMANCE DATA FOR THE CLONED SERIES
The tables below provide performance information calculated on a standard
and non-standard basis for sub-accounts investing in seven of the Eligible
Funds ("Cloned Series") that are newly-established and are modelled on
existing funds or portfolios ("Model Funds"). The figures shown do not reflect
the deduction of any premium tax charge. The Cloned Series are the Loomis
Sayles Small Cap Series, Loomis Sayles Balanced Series, Draycott International
Equity Series, Salomon Brothers U.S. Government Series, Salomon Brothers
Strategic Bond Opportunities Series, Venture Value Series and Alger Equity
Growth Series. Each Cloned Series will be managed in a manner substantially
similar to its corresponding Model Fund, and will have the same portfolio
managers as its corresponding Model Fund. More detailed information about the
Model Funds is provided below and in the attached prospectus for the New
England Zenith Fund. The information below reflects the level of annualized
expenses borne by each Model Fund during the period shown, which in virtually
all cases was at a higher level than the level of annualized expenses that are
projected to be borne by the corresponding Cloned Series for its initial
fiscal period, after giving effect to the voluntary expense cap or deferral
arrangement applicable to that Series. See "Investment Experience Information"
for an explanation of the performance calculations in the tables below and the
methods used for calculating them. THIS PERFORMANCE INFORMATION IS BASED ON A
FUND COMPARABLE TO EACH CLONED SERIES AND NOT ON THE CLONED SERIES ITSELF.
A-43
<PAGE>
LOOMIS SAYLES BALANCED SERIES. This Series is modelled on New England
Balanced Fund, which began pursuing its current investment objective on March
1, 1990, and is managed by Loomis Sayles & Company, L.P., the sub-adviser for
the Series.
HYPOTHETICAL PERFORMANCE
FOR A CONTRACT BASED ON
AVERAGE ANNUAL TOTAL RETURNS OF NEW ENGLAND BALANCED FUND
<TABLE>
<CAPTION>
PERIOD ENDING DECEMBER 31, 1994
-------------------------------
<S> <C>
1 Year........................................................... -12.05%
Since March 1, 1990 (current investment objective)............... 4.48%
</TABLE>
---------------------
$10,000 SINGLE PURCHASE PAYMENT CONTRACT ISSUED MARCH 1, 1990
<TABLE>
<CAPTION>
AS OF DECEMBER 31: CONTRACT VALUE SURRENDER VALUE
------------------ -------------- ---------------
<S> <C> <C>
1990...................................... $ 9,219.14 $ 8,620.55
1991...................................... 11,718.90 11,093.90
1992...................................... 13,139.65 12,614.93
1993...................................... 14,769.10 14,344.10
1994...................................... 14,138.80 13,813.80
</TABLE>
<TABLE>
<CAPTION>
ANNUAL PERCENT ANNUAL PERCENT
CHANGE IN CHANGE IN
AS OF DECEMBER 31: CONTRACT VALUE SURRENDER VALUE
------------------ -------------- ---------------
<S> <C> <C>
1990...................................... -7.81% -13.79%
1991...................................... 27.11% 28.69%
1992...................................... 12.12% 13.71%
1993...................................... 12.40% 13.71%
1994...................................... -4.27% -3.70%
Cumulative Return......................... 41.39% 38.14%
Annual Effective Rate of Return........... 7.42% 6.91%
</TABLE>
---------------------
$250 MONTHLY PURCHASE PAYMENT CONTRACT - PAYMENTS STARTING MARCH 1, 1990
<TABLE>
<CAPTION>
CUMULATIVE CONTRACT SURRENDER
AS OF DECEMBER 31, PAYMENTS VALUE VALUE
------------------ ---------- ---------- ----------
<S> <C> <C> <C>
1990.................................. $ 2,500 $ 2,411.23 $ 2,220.94
1991.................................. 5,500 6,348.83 5,963.83
1992.................................. 8,500 10,322.03 9,782.03
1993.................................. 11,500 14,794.83 14,129.83
1994.................................. 14,500 17,094.93 16,334.93
Annual Effective Rate of Return....... 6.75% 4.87%
</TABLE>
- -------------------------------------------------------------------------------
DRAYCOTT INTERNATIONAL EQUITY SERIES. This Series is modelled on New England
International Equity Fund and a separate account of the Company, both of which
are managed by Draycott Partners, Ltd., the sub-adviser for the Series. The
information shown below is based solely on the historical performance of New
England International Equity Fund, which commenced operations on May 21, 1992,
and whose performance the Company believes is representative of
A-44
<PAGE>
the historical performance realized by the two Model Funds for this Series.
The attached prospectus of the New England Zenith Fund provides information
concerning the composite returns of both Model Funds, taken together.
HYPOTHETICAL PERFORMANCE
FOR A CONTRACT BASED ON
AVERAGE ANNUAL TOTAL RETURNS OF NEW ENGLAND INTERNATIONAL EQUITY FUND
<TABLE>
<CAPTION>
PERIOD ENDING DECEMBER 31, 1994
-------------------------------
<S> <C>
1 Year............................................................ -2.60%
Since May 21, 1992 (Inception).................................... 5.17%
</TABLE>
---------------------
$10,000 SINGLE PURCHASE PAYMENT CONTRACT ISSUED JUNE 1, 1992
<TABLE>
<CAPTION>
AS OF DECEMBER 31: CONTRACT VALUE SURRENDER VALUE
------------------ -------------- ---------------
<S> <C> <C>
1992...................................... $ 9,309.19 $ 8,711.27
1993...................................... 11,841.36 11,223.86
1994...................................... 12,519.35 12,001.85
</TABLE>
<TABLE>
<CAPTION>
ANNUAL PERCENT ANNUAL PERCENT
CHANGE IN CHANGE IN
AS OF DECEMBER 31: CONTRACT VALUE SURRENDER VALUE
------------------ -------------- ---------------
<S> <C> <C>
1992...................................... -6.91% -12.89%
1993...................................... 27.20% 28.84%
1994...................................... 5.73% 6.93%
Cumulative Return......................... 25.19% 20.02%
Annual Effective Rate of Return........... 9.09% 7.32%
</TABLE>
---------------------
$250 MONTHLY PURCHASE PAYMENT CONTRACT - PAYMENTS STARTING JUNE 1, 1992
<TABLE>
<CAPTION>
CUMULATIVE CONTRACT SURRENDER
AS OF DECEMBER 31, PAYMENTS VALUE VALUE
------------------ ---------- --------- ---------
<S> <C> <C> <C>
1992.................................... $1,750 $1,716.89 $1,582.18
1993.................................... 4,750 5,486.92 5,154.42
1994.................................... 7,750 8,773.17 8,278.17
Annual Effective Rate of Return......... 9.56% 5.02%
</TABLE>
- -------------------------------------------------------------------------------
ALGER EQUITY GROWTH SERIES. This Series is modelled on three funds managed
by Fred Alger Management, Inc., the sub-adviser for the Series. The
information shown below is based solely on the historical performance of one
of these funds, the Alger American Growth Portfolio, a series of the Alger
American Fund, which commenced operations on January 9, 1989, and whose
performance the Company believes is representative of the historical
performance realized by all three Model Funds for this Series. The attached
prospectus of the New England Zenith Fund provides information concerning the
composite returns for all three Model Funds, taken together.
HYPOTHETICAL PERFORMANCE
FOR A CONTRACT BASED ON
AVERAGE ANNUAL TOTAL RETURNS OF ALGER AMERICAN GROWTH PORTFOLIO
<TABLE>
<CAPTION>
PERIOD ENDING DECEMBER 31, 1994
-------------------------------
<S> <C>
1 Year............................................................ -9.65%
5 Years........................................................... 10.49%
Since January 9, 1989 (Inception)................................. 12.72%
</TABLE>
---------------------
A-45
<PAGE>
$10,000 SINGLE PURCHASE PAYMENT CONTRACT ISSUED FEBRUARY 1, 1989
<TABLE>
<CAPTION>
AS OF DECEMBER 31: CONTRACT VALUE SURRENDER VALUE
------------------ -------------- ---------------
<S> <C> <C>
1989...................................... $11,976.36 $11,248.86
1990...................................... 12,134.51 11,507.01
1991...................................... 16,768.09 16,240.59
1992...................................... 18,558.25 18,133.25
1993...................................... 22,388.47 22,060.97
1994...................................... 22,018.46 21,790.96
<CAPTION>
ANNUAL PERCENT ANNUAL PERCENT
CHANGE IN CHANGE IN
AS OF DECEMBER 31: CONTRACT VALUE SURRENDER VALUE
------------------ -------------- ---------------
<S> <C> <C>
1989...................................... 19.76% 12.49%
1990...................................... 1.32% 2.29%
1991...................................... 38.19% 41.14%
1992...................................... 10.68% 11.65%
1993...................................... 20.64% 21.66%
1994...................................... -1.65% -1.22%
Cumulative Return......................... 120.18% 117.91%
Annual Effective Rate of Return........... 14.28% 14.07%
</TABLE>
---------------------
$250 MONTHLY PURCHASE PAYMENT CONTRACT - PAYMENTS STARTING FEBRUARY 1, 1989
<TABLE>
<CAPTION>
CUMULATIVE CONTRACT SURRENDER
AS OF DECEMBER 31, PAYMENTS VALUE VALUE
------------------ ---------- ---------- ----------
<S> <C> <C> <C>
1989.................................. $ 2,750 $ 3,010.39 $ 2,790.39
1990.................................. 5,750 6,170.24 5,767.74
1991.................................. 8,750 12,032.70 11,477.70
1992.................................. 11,750 16,684.08 16,006.58
1993.................................. 14,750 23,548.44 22,778.44
1994.................................. 17,750 26,193.66 25,361.16
Annual Effective Rate of Return....... 13.03% 11.94%
</TABLE>
- -------------------------------------------------------------------------------
VENTURE VALUE SERIES. This Series is modelled on two Model Funds managed by
Selected/Venture Advisers, L.P., the sub-adviser for the Series. The
information shown below is based solely on the historical performance of one
of these funds, the New York Venture Fund, which commenced operations on
February 17, 1969, and whose performance the Company believes is
representative of the historical performance realized by both Model Funds for
this Series. The attached prospectus of the New England Zenith Fund provides
information concerning the composite returns for both Model Funds, taken
together.
HYPOTHETICAL PERFORMANCE
FOR A CONTRACT BASED ON
AVERAGE ANNUAL TOTAL RETURNS OF NEW YORK VENTURE FUND
<TABLE>
<CAPTION>
PERIOD ENDING DECEMBER 31, 1994
-------------------------------
<S> <C>
1 Year........................................................... -10.91%
5 Years.......................................................... 7.29%
10 Years......................................................... 13.71%
Since February 17, 1969 (Inception).............................. 9.64%
</TABLE>
---------------------
A-46
<PAGE>
$10,000 SINGLE PURCHASE PAYMENT CONTRACT ISSUED MARCH 1, 1969
<TABLE>
<CAPTION>
AS OF DECEMBER 31: CONTRACT VALUE SURRENDER VALUE
------------------ -------------- ---------------
<S> <C> <C>
1969...................................... $ 12,426.22 $ 11,701.22
1970...................................... 9,020.06 8,527.92
1971...................................... 11,360.81 10,835.81
1972...................................... 13,837.20 13,412.20
1973...................................... 10,189.11 9,894.52
1974...................................... 8,006.94 7,842.54
1975...................................... 9,703.47 9,590.49
1976...................................... 11,529.00 11,504.00
1977...................................... 11,686.03 11,661.03
1978...................................... 13,975.63 13,950.63
1979...................................... 19,088.17 19,063.17
1980...................................... 27,098.41 27,073.41
1981...................................... 27,062.41 27,037.41
1982...................................... 33,449.22 33,424.22
1983...................................... 40,613.30 40,588.30
1984...................................... 41,967.57 41,942.57
1985...................................... 56,949.40 56,924.40
1986...................................... 68,210.85 68,185.85
1987...................................... 66,731.91 66,706.91
1988...................................... 79,288.18 79,263.18
1989...................................... 107,232.07 107,207.07
1990...................................... 101,752.46 101,727.46
1991...................................... 141,133.24 141,108.24
1992...................................... 156,210.83 156,185.83
1993...................................... 178,926.49 178,901.49
1994...................................... 173,772.66 173,747.66
</TABLE>
A-47
<PAGE>
<TABLE>
<CAPTION>
ANNUAL PERCENT ANNUAL PERCENT
CHANGE IN CHANGE IN
AS OF DECEMBER 31: CONTRACT VALUE SURRENDER VALUE
------------------ -------------- ---------------
<S> <C> <C>
1969...................................... 24.26% 17.01%
1970...................................... -27.41 -27.12
1971...................................... 25.95 27.06
1972...................................... 21.80 23.78
1973...................................... -26.36 -26.23
1974...................................... -21.42 -20.74
1975...................................... 21.19 22.29
1976...................................... 18.81 19.95
1977...................................... 1.36 1.37
1978...................................... 19.59 19.63
1979...................................... 36.58 36.65
1980...................................... 41.96 42.02
1981...................................... -0.13 -0.13
1982...................................... 23.60 23.62
1983...................................... 21.42 21.43
1984...................................... 3.33 3.34
1985...................................... 35.70 35.72
1986...................................... 19.77 19.78
1987...................................... -2.17 -2.17
1988...................................... 18.82 18.82
1989...................................... 35.24 35.25
1990...................................... -5.11 -5.11
1991...................................... 38.70 38.71
1992...................................... 10.68 10.69
1993...................................... 14.54 14.54
1994...................................... -2.88 -2.88
Cumulative Return......................... 1,637.73 1,637.48
Annual Effective Rate of Return........... 11.68 11.68
</TABLE>
---------------------
A-48
<PAGE>
$250 MONTHLY PURCHASE PAYMENT CONTRACT
PAYMENTS STARTING MARCH 1, 1969
<TABLE>
<CAPTION>
CUMULATIVE CONTRACT SURRENDER
AS OF DECEMBER 31, PAYMENTS VALUE VALUE
- ------------------ ---------- ----------- -----------
<S> <C> <C> <C>
1969....................................... $ 2,500 $ 2,765.93 $ 2,565.93
1970....................................... 5,500 4,887.68 4,571.21
1971....................................... 8,500 9,370.25 8,830.25
1972....................................... 11,500 14,706.62 14,041.62
1973....................................... 14,500 13,611.12 13,007.60
1974....................................... 17,500 13,461.89 12,996.36
1975....................................... 20,500 19,496.88 18,818.13
1976....................................... 23,500 26,453.14 25,588.14
1977....................................... 26,500 29,963.46 29,098.46
1978....................................... 29,500 39,093.84 38,228.84
1979....................................... 32,500 57,116.46 56,251.46
1980....................................... 35,500 84,944.29 84,079.29
1981....................................... 38,500 87,950.54 87,085.54
1982....................................... 41,500 112,637.15 111,754.65
1983....................................... 44,500 139,996.60 139,131.60
1984....................................... 47,500 147,963.64 147,098.64
1985....................................... 50,500 204,452.73 203,587.73
1986....................................... 53,500 248,113.30 247,248.30
1987....................................... 56,500 245,462.97 244,597.97
1988....................................... 59,500 294,946.91 294,081.91
1989....................................... 62,500 402,414.52 401,549.52
1990....................................... 65,500 384,920.31 384,055.31
1991....................................... 68,500 537,574.13 536,709.13
1992....................................... 71,500 598,438.32 597,573.32
1993....................................... 74,500 688,713.76 687,848.76
1994....................................... 77,500 671,987.45 671,032.45
Annual Effective Rate of Return............ 14.14% 14.13%
</TABLE>
- -------------------------------------------------------------------------------
SALOMON BROTHERS U.S. GOVERNMENT SERIES. This Series is modelled on two
accounts (the "Salomon U.S. Government Accounts") managed by Salomon Brothers
Asset Management Inc., the sub-adviser for the Series. Salomon Brothers Asset
Management Inc. has managed each of the accounts since December 6, 1991. The
information below is based solely on the performance of one of the Salomon
U.S. Government Accounts which the Company believes is representative of the
historical performance realized by both Salomon U.S. Government Accounts. The
attached prospectus of the New England Zenith Fund provides information
concerning the composite returns for both Salomon U.S. Government Accounts ,
taken together.
HYPOTHETICAL PERFORMANCE
FOR A CONTRACT BASED ON
AVERAGE ANNUAL TOTAL RETURNS OF A SALOMON U.S. GOVERNMENT ACCOUNT
<TABLE>
<CAPTION>
PERIOD ENDING DECEMBER 31, 1994
-------------------------------
<S> <C>
1 Year........................................................... -10.72%
Since December 6, 1991 (current sub-adviser)..................... -0.93%
</TABLE>
---------------------
A-49
<PAGE>
$10,000 SINGLE PURCHASE PAYMENT CONTRACT ISSUED JANUARY 1, 1992
<TABLE>
<CAPTION>
AS OF DECEMBER 31: CONTRACT VALUE SURRENDER VALUE
------------------ -------------- ---------------
<S> <C> <C>
1992...................................... $10,493.65 $ 9,801.20
1993...................................... 11,112.61 10,482.61
1994...................................... 10,787.64 10,275.04
<CAPTION>
ANNUAL PERCENT ANNUAL PERCENT
CHANGE IN CHANGE IN
AS OF DECEMBER 31: CONTRACT VALUE SURRENDER VALUE
------------------ -------------- ---------------
<S> <C> <C>
1992...................................... 4.94% -1.99%
1993...................................... 5.90 6.95
1994...................................... -2.92 -1.98
Cumulative Return......................... 7.88 2.75
Annual Effective Rate of Return........... 2.56 0.91
</TABLE>
---------------------
$250 MONTHLY PURCHASE PAYMENT CONTRACT - PAYMENTS STARTING JANUARY 1, 1992
<TABLE>
<CAPTION>
CUMULATIVE CONTRACT SURRENDER
AS OF DECEMBER 31, PAYMENTS VALUE VALUE
------------------ ---------- --------- ---------
<S> <C> <C> <C>
1992.................................... $3,000 $3,100.79 $2,860.79
1993.................................... 6,000 6,318.34 5,901.50
1994.................................... 9,000 9,093.38 8,564.61
Annual Effective Rate of Return......... 0.67% -3.19%
</TABLE>
- -------------------------------------------------------------------------------
SALOMON BROTHERS STRATEGIC BOND OPPORTUNITIES SERIES. This Series is
modelled on an account (the "Salomon Strategic Account") that commenced
operations on February 19, 1993, and is managed by Salomon Brothers Asset
Management Inc., the sub-adviser for the Series.
HYPOTHETICAL PERFORMANCE
FOR A CONTRACT BASED ON
AVERAGE ANNUAL TOTAL RETURNS OF THE SALOMON STRATEGIC ACCOUNT
<TABLE>
<CAPTION>
PERIOD ENDING DECEMBER 31, 1994
-------------------------------
<S> <C>
1 Year........................................................... -15.14%
Since February 19, 1993 (Inception).............................. -6.03%
</TABLE>
---------------------
$10,000 SINGLE PURCHASE PAYMENT CONTRACT ISSUED MARCH 1, 1993
<TABLE>
<CAPTION>
AS OF DECEMBER 31: CONTRACT VALUE SURRENDER VALUE
------------------ -------------- ---------------
<S> <C> <C>
1993...................................... $10,758.00 $10,051.69
1994...................................... 9,938.14 9,381.98
<CAPTION>
ANNUAL PERCENT ANNUAL PERCENT
CHANGE IN CHANGE IN
AS OF DECEMBER 31: CONTRACT VALUE SURRENDER VALUE
------------------ -------------- ---------------
<S> <C> <C>
1993...................................... 7.58% 0.52%
1994...................................... -7.62 -6.66
Cumulative Return......................... -0.62 -6.18
Annual Effective Rate of Return........... -0.34 -3.42
</TABLE>
---------------------
A-50
<PAGE>
$250 MONTHLY PURCHASE PAYMENT CONTRACT - PAYMENTS STARTING MARCH 1, 1993
<TABLE>
<CAPTION>
CUMULATIVE CONTRACT SURRENDER
AS OF DECEMBER 31, PAYMENTS VALUE VALUE
------------------ ---------- --------- ---------
<S> <C> <C> <C>
1993.................................... $2,500 $2,605.56 $2,406.56
1994.................................... 3,700 5,281.13 4,936.22
Annual Effective Rate of Return......... -4.17% -10.84%
</TABLE>
- --------------------------------------------------------------------------------
SMALL CAP SERIES. This Series is modelled on the Loomis Sayles Small Cap
Fund, Inc., which commenced operations on May 13, 1991, and is managed by
Loomis Sayles & Company, L.P., the sub-adviser for the Series.
HYPOTHETICAL PERFORMANCE
FOR A CONTRACT BASED ON
AVERAGE ANNUAL TOTAL RETURNS OF LOOMIS SAYLES SMALL CAP FUND, INC.
<TABLE>
<CAPTION>
PERIOD ENDING DECEMBER 31, 1994
-------------------------------
<S> <C>
1 Year........................................................... -17.86%
Since May 13, 1991 (Inception)................................... 11.09%
</TABLE>
---------------------
$10,000 SINGLE PURCHASE PAYMENT CONTRACT ISSUED JUNE 1, 1991
<TABLE>
<CAPTION>
AS OF DECEMBER 31: CONTRACT VALUE SURRENDER VALUE
------------------ -------------- ---------------
<S> <C> <C>
1991...................................... $12,581.54 $11,864.04
1992...................................... 14,008.21 13,390.71
1993...................................... 17,196.90 16,679.40
1994...................................... 15,404.68 14,987.18
</TABLE>
<TABLE>
<CAPTION>
ANNUAL PERCENT ANNUAL PERCENT
CHANGE IN CHANGE IN
AS OF DECEMBER 31: CONTRACT VALUE SURRENDER VALUE
------------------ -------------- ---------------
<S> <C> <C>
1991...................................... 25.82% 18.64%
1992...................................... 11.34% 12.87%
1993...................................... 22.76% 24.56%
1994...................................... -10.42% -10.15%
Cumulative Return......................... 54.05% 49.87%
Annual Effective Rate of Return........... 12.80% 11.94%
</TABLE>
---------------------
$250 MONTHLY PURCHASE PAYMENT CONTRACT - PAYMENTS STARTING JUNE 1, 1991
<TABLE>
<CAPTION>
CUMULATIVE CONTRACT SURRENDER
AS OF DECEMBER 31, PAYMENTS VALUE VALUE
------------------ ---------- ---------- ----------
<S> <C> <C> <C>
1991.................................. $ 1,750 $ 2,069.34 $ 1,929.34
1992.................................. 4,750 5,554.21 5,221.71
1993.................................. 7,750 10,158.22 9,663.22
1994.................................. 10,750 11,959.09 11,331.59
Annual Effective Rate of Return....... 5.89% 2.89%
</TABLE>
A-51
<PAGE>
APPENDIX A
CONSUMER TIPS
DOLLAR COST AVERAGING
Dollar cost averaging allows a person to take advantage of the historical
long-term stock market results, assuming that they continue, although it does
not guarantee a profit or protect against a loss. If an investor follows a
program of dollar cost averaging on a long-term basis and the stock fund
selected performs at least as well as the S&P 500 has historically, it is
likely although not guaranteed that the price at which shares are surrendered,
for whatever reason, will be higher than the average cost per share.
An investor using dollar cost averaging invests the same amount of money in
the same professionally managed fund at regular intervals over a long period
of time. Dollar cost averaging keeps an investor from investing too much when
the price of shares is high and too little when the price is low. When the
price of shares is low, the money invested buys more shares. When it is high,
the money invested buys fewer shares. If the investor has the ability and
desire to maintain this program over a long period of time (for example, 20
years), and the stock fund chosen follows the historical upward market trends,
the price at which the shares are sold should be higher than their average
cost. The price could be lower, however, if the fund chosen does not follow
these historical trends.
Investors contemplating the use of dollar cost averaging should consider
their ability to continue the on-going purchases so that they can take
advantage of periods of low price levels.
DIVERSIFICATION
Diversifying investment choices can enhance returns, by providing a wider
opportunity for safe returns, and reduce risks, by spreading the chance of
loss. Holding a single investment requires of that investment a safe return
because a loss may risk the entire investment. By diversifying, on the other
hand, an investor can more safely take a chance that some investments will
under-perform and that others will over-perform. Thus an investor can
potentially earn a better-than-average rate of return on a diversified
portfolio than on a single safe investment. This is because, although portions
of a diversified investment may be totally lost, other portions may perform at
above-average rates that more than compensate for the loss.
MISCELLANEOUS
<TABLE>
<C> <S>
Toll-free telephone service: --A recording of daily unit values is available
by calling 1-800-333-2501.
--Fund transfers and changes of future purchase
payment allocations can be made by calling 1-
800-777-5897 (Not available for fund transfers
under Contracts issued in New York.)
Written Communications: --All communications and inquiries regarding
address changes, premium payments, billing,
fund transfers, surrenders, maturities and any
other processing matters relating to your
Contract should be directed to:
New England Annuities
P.O. Box 642
Boston, Mass 02117
</TABLE>
A-52
<PAGE>
APPENDIX B
CONTINGENT DEFERRED SALES CHARGE
The following example illustrates how the Contingent Deferred Sales Charge
would apply if the commuted value of amounts that have been placed under
certain payment options is later withdrawn. As described in the prospectus in
the section "Contingent Deferred Sales Charge", no Contingent Deferred Sales
Charge will apply if at any time more than 30 days from issue of the Contract
you apply the proceeds to a variable or fixed payment option involving a life
contingency or, for a minimum specified period of 15 years, to either the
Variable Income for a Specified Number of Years Option or the Variable Income
Payments to Age 100 Option, or a comparable fixed option. However, if you
subsequently withdraw the commuted value of amounts placed under any of those
options, the Company will deduct from the amount you receive a portion of the
Contingent Deferred Sales Charge that was waived, based on the ratio of: (1)
the number of whole months remaining on the date of withdrawal until the date
when the Contingent Deferred Sales Charge would expire, to (2) the number of
whole months that were remaining when the proceeds were applied to the option,
until the date when the Contingent Deferred Sales Charge would expire.
As an example, assume that $100,000 of Contract Value (net of any premium
tax charge and Administration Contract Charge) is applied to the Variable
Income for a Specified Number of Years Option for a 20 year period. Assume
further that the proceeds are derived from a $30,000 purchase payment made ten
years ago, a $30,000 purchase payment made exactly two years ago, and
investment earnings, and that the Contingent deferred Sales Charge waived on
application of the proceeds to the payment option was $1,500. If the Payee
surrenders the commuted value of the proceeds under option six months later,
the Contingent Deferred Sales Charge would be $1,350 (representing the $1,500
waived at annuitization multiplied by 54/60, where 54 is the number of whole
months currently remaining until the Contingent Deferred Sales Charge would
expire, and 60 is the number of whole months that remained at the time of
annuitization until the Contingent Deferred Sales Charge would expire).
A-53
<PAGE>
TABLE OF CONTENTS
OF
STATEMENT OF ADDITIONAL INFORMATION
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
SERVICES TO THE VARIABLE ACCOUNT........................................... 3
PERFORMANCE COMPARISONS.................................................... 3
CALCULATION OF PERFORMANCE DATA............................................ 4
NET INVESTMENT FACTOR...................................................... 7
ANNUITY PAYMENTS........................................................... 7
EXPERTS.................................................................... 16
LEGAL MATTERS.............................................................. 16
FINANCIAL STATEMENTS....................................................... 17
</TABLE>
If you would like to obtain a copy of the Statement of Additional
Information, please complete the request for below and mail to:
New England Securities Corporation
399 Boylston Street
Boston, Massachusetts 02116
Please send a copy of the Statement of Additional
Information of New England Variable Annuity Separate
Account to:
_______________________________________________________
Name
_______________________________________________________
Street
_______________________________________________________
City State Zip
A-54
<PAGE>
NEW ENGLAND ZENITH FUND
501 Boylston Street
Boston, Massachusetts 02116
(617) 267-6600
PROSPECTUS--OCTOBER 31, 1994
New England Zenith Fund (the "Fund") offers fifteen investment portfolios,
eleven of which are contained herein: the Back Bay Advisors Money Market
Series, the Back Bay Advisors Bond Income Series, the Westpeak Value Growth
Series, the Loomis Sayles Avanti Growth Series, the Loomis Sayles Small Cap
Series, 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 and the Alger
Equity Growth Series (the "Series") with the following investment objectives:
BACK BAY ADVISORS MONEY MARKET SERIES--the highest possible level of current
income consistent with preservation of capital. Money market funds are neither
insured nor guaranteed by the U.S. Government and there can be no assurance
that the Series will maintain a stable net asset value of $100 per share.
BACK BAY ADVISORS BOND INCOME SERIES--a high level of current income
consistent with protection of capital and moderate investment risk.
WESTPEAK VALUE GROWTH SERIES--long-term total return through investment in
equity securities.
LOOMIS SAYLES AVANTI GROWTH SERIES--long-term growth of capital.
LOOMIS SAYLES SMALL CAP SERIES--long-term capital growth from investments in
common stocks or their equivalent.
LOOMIS SAYLES BALANCED SERIES--reasonable long-term investment return from a
combination of long-term capital appreciation and moderate current income.
DRAYCOTT INTERNATIONAL EQUITY SERIES--total return from long-term growth of
capital and dividend income, primarily through investment in international
equity securities.
SALOMON BROTHERS U.S. GOVERNMENT SERIES--a high level of current income
consistent with preservation of capital and maintenance of liquidity.
SALOMON BROTHERS STRATEGIC BOND OPPORTUNITIES SERIES--a high level of total
return consistent with preservation of capital.
VENTURE VALUE SERIES--growth of capital.
ALGER EQUITY GROWTH SERIES--long-term capital appreciation.
This Prospectus concisely describes the information that prospective
investors ought to know before investing. Please read this Prospectus
carefully and keep it for future reference.
A Statement of Additional Information (the "Statement") dated October 31,
1994, is available free of charge by writing to New England Securities
Corporation ("New England Securities"), 399 Boylston Street, Boston,
Massachusetts 02116. The Statement, which contains more detailed information
about the Fund, has been filed with the Securities and Exchange Commission
(the "SEC") and is incorporated by reference in this Prospectus.
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED
BY, ANY FINANCIAL INSTITUTION AND THE SHARES ARE NOT FEDERALLY INSURED BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER
AGENCY, AND INVOLVE RISK, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
B-1
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Financial Highlights....................................................... B-3
The Fund................................................................... B-8
Investment Objectives and Policies......................................... B-8
Investment Risks........................................................... B-13
Performance Information.................................................... B-21
Past Performance of Adviser and Subadvisers................................ B-22
Investment Restrictions.................................................... B-27
Management................................................................. B-30
Sale and Redemption of Shares.............................................. B-35
Net Asset Values and Portfolio Valuation................................... B-35
Dividends and Capital Gain Distributions................................... B-35
Taxes...................................................................... B-36
Organization and Capitalization of the Fund................................ B-36
Transfer Agent............................................................. B-36
Voting Rights.............................................................. B-36
Appendix A: Ratings of Secuirities......................................... B-37
</TABLE>
B-2
<PAGE>
FINANCIAL HIGHLIGHTS
These tables (except for the information relating to the six months ended
June 30, 1994) have been examined by the Fund's independent accountants, whose
reports thereon accompany the financial statements in the Statement of
Additional Information. The tables should be read in conjunction with the
financial statements and the notes thereto. For further performance
information about the Fund, please refer to the Fund's annual report, which is
available free of charge.
BACK BAY ADVISORS MONEY MARKET SERIES
<TABLE>
<CAPTION>
SIX
MONTHS
ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
---------------------------------------------------------------------------------------- --------
1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994(A)
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value, Begin-
ning of the Year....... $100.00 $100.00 $100.00 $100.00 $100.00 $100.00 $100.00 $100.00 $100.00 $100.00 $100.00
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Income From Investment
Operations
Net Investment Income... 10.17 7.94 6.58 6.33 7.25 8.85 7.88 6.03 3.73 2.93 1.60
Net Gains or Losses on
Investments (both
realized and
unrealized)............ 0.00 0.00 0.00 (0.01) 0.00 0.00 0.00 0.00 0.00 0.00 0.00
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total From Investment
Operations............. 10.17 7.94 6.58 6.32 7.25 8.85 7.88 6.03 3.73 2.93 1.60
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Less Distributions
Distributions
From Net Investment In-
come................... (10.17) (7.94) (6.58) (6.32) (7.25) (8.85) (7.88) (6.03) (3.73) (2.93) (1.60)
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total Distributions.. (10.17) (7.94) (6.58) (6.32) (7.25) (8.85) (7.88) (6.03) (3.73) (2.93) (1.60)
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Net Asset Value, End of
the Year............... $100.00 $100.00 $100.00 $100.00 $100.00 $100.00 $100.00 $100.00 $100.00 $100.00 $100.00
======= ======= ======= ======= ======= ======= ======= ======= ======= ======= =======
Total return (%)........ 10.6 8.2 6.8 6.6 7.4 9.2 8.2 6.2 3.8 3.0 1.6(b)
Ratio of Operating Ex-
penses to Average Net
Assets (%)............. 0.40 0.39 0.39 0.38 0.38 0.38 0.38 0.38 0.38 0.38 0.39(c)
Ratio of Net Investment
Income to Average Net
Assets (%)............. 10.19 7.96 6.61 6.37 7.26 8.85 7.87 6.01 3.71 2.93 3.26(c)
Net Assets, End of Pe-
riod (000)............. $22,824 $24,918 $26,794 $33,047 $38,929 $42,678 $60,071 $58,614 $61,607 $59,044 $67,101
</TABLE>
- --------
(a) Unaudited.
(b) Not annualized.
(c) Computed on an annualized basis.
B-3
<PAGE>
BACK BAY ADVISORS BOND INCOME SERIES
<TABLE>
<CAPTION>
SIX
MONTHS
ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
----------------------------------------------------------------------------------------- --------
1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994(B)
------- ------- ------- ------- ------- ------- ------- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of the Year.. $103.22 $111.94 $119.34 $123.45 $ 95.47 $ 92.75 $ 97.23 $ 97.61 $103.44 $ 103.47 $ 106.14
------- ------- ------- ------- ------- ------- ------- ------- ------- -------- --------
Income From Investment
Operations
Net Investment Income... 11.76 11.24 10.21 8.97 8.52 8.58 8.49 8.53 7.96 5.70 3.22
Net Gains or Losses on
Investments (both
realized and
unrealized)............ 0.83 7.76 6.66 (7.14) (0.54) 2.81 (0.65) 8.90 0.51 7.38 (8.18)
------- ------- ------- ------- ------- ------- ------- ------- ------- -------- --------
Total From Investment
Operations............. 12.59 19.00 16.87 1.83 7.98 11.39 7.84 17.43 8.47 13.08 (4.96)
------- ------- ------- ------- ------- ------- ------- ------- ------- -------- --------
Less Distributions
Distributions From Net
Investment Income...... (3.76) (11.60) (11.09) (18.71) (10.70) (6.91) (7.46) (9.47) (6.87) (6.20) 0.00
Distributions In Excess
of Net Investment
Income................. 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 (0.05) 0.00
Distributions From Net
Realized Capital Gains. (0.11) 0.00 (1.67) (11.10) 0.00 0.00 0.00 (2.13) (1.57) (4.16) 0.00
------- ------- ------- ------- ------- ------- ------- ------- ------- -------- --------
Total Distributions.. (3.87) (11.60) (12.76) (29.81) (10.70) (6.91) (7.46) (11.60) (8.44) (10.41) 0.00
------- ------- ------- ------- ------- ------- ------- ------- ------- -------- --------
Net Asset Value, End of
the Period............. $111.94 $119.34 $123.45 $ 95.47 $ 92.75 $ 97.23 $ 97.61 $103.44 $103.47 $ 106.14 $ 101.18
======= ======= ======= ======= ======= ======= ======= ======= ======= ======== ========
Total return (%)........ 12.6 18.7 15.8 1.4 8.4 12.3 8.1 18.0 8.2 12.6 (4.7)(c)
Ratio of Operating
Expenses to Average Net
Assets (%)............. 0.46 0.47 0.50 0.45 0.47 0.45 0.46 0.45 0.44 0.43 0.44 (d)
Ratio of Net Investment
Income to Average Net
Assets (%)............. 11.24 10.26 8.86 8.65 8.50 8.62 8.57 8.27 7.70 6.47 6.29 (d)
Portfolio Turnover Rate
(%) (a)................ 136 232 303 331 104 69 106 193 71 177 85 (d)
Net Assets, End of
Period (000)........... $11,658 $13,927 $16,379 $17,449 $15,750 $26,156 $40,631 $49,369 $83,057 $131,242 $127,440
</TABLE>
- --------
(a) The portfolio turnover calculations for fiscal 1985 and prior years
exclude transactions in U.S. Government securities maturing more than one
year from the date of acquisition. Portfolio turnover calculations in
subsequent years include such Government securities transactions.
(b) Unaudited.
(c) Not annualized.
(d) Computed on an annualized basis.
As of January 1, 1993, the Bond Income Series discontinued the use of
equalization accounting.
B-4
<PAGE>
WESTPEAK VALUE GROWTH SERIES
<TABLE>
<CAPTION>
APRIL 30(A) SIX MONTHS
TO ENDED
DEC. 31, 1993 JUNE 30, 1994(E)
------------- ----------------
<S> <C> <C>
Net Asset Value, Beginning of the
Period.............................. $100.00 $112.32
------- -------
Income From Investment Operations
Net Investment Income................ 0.92 0.82
Net Gains or Losses on Investments
(both realized and unrealized)...... 13.33 (7.41)
------- -------
Total From Investment Operations..... 14.25 (6.59)
------- -------
Less Distributions
Distributions From Net Investment
Income.............................. (0.92) 0.00
Distributions From Net Realized
Capital Gains....................... (1.00) 0.00
Distributions In Excess of Net
Realized Capital Gains.............. (0.01) 0.00
------- -------
Total Distributions................ (1.93) 0.00
------- -------
Net Asset Value, End of the Period... $112.32 $105.73
======= =======
Total return (%)..................... 14.2(b) (5.9)(b)
Ratio of Operating Expenses to
Average Net Assets (%).............. 0.85(c) 0.84 (c)
Ratio of Net Investment Income to
Average Net Assets (%).............. 2.16(c) 1.97 (c)
Portfolio Turnover Rate (%).......... 49(c) 151 (c)
Net Assets, End of Period (000)...... $ 9,082 $17,260
The Ratio of Expenses to Average Net
Assets without giving effect to the
voluntary expense limitation
described in Footnote (d) would have
been (%)............................ 0.94(c)(d) 0.84 (c)(d)
</TABLE>
- --------
(a) Commencement of operations.
(b) Not annualized.
(c) Computed on an annualized basis.
(d) During the periods presented, the Series' adviser voluntarily agreed to
reduce its fees and, if necessary, to assume expenses of the Series in
order to limit the Series' expenses to an annual rate of 0.85% of the
Series' average daily net assets.
(e) Unaudited.
B-5
<PAGE>
LOOMIS SAYLES AVANTI GROWTH SERIES
<TABLE>
<CAPTION>
APRIL 30(A) SIX MONTHS
TO ENDED
DEC. 31, 1993 JUNE 30, 1994(E)
------------- ----------------
<S> <C> <C>
Net Asset Value, Beginning of the
Period............................. $100.00 $113.67
------- -------
Income From Investment Operations
Net Investment Income............... 0.18 0.26
Net Gains or Losses on Investments
(both realized and unrealized)..... 14.56 (9.58)
------- -------
Total From Investment Operations.... 14.74 (9.32)
------- -------
Less Distributions
Distributions From Net Investment
Income............................. (0.18) 0.00
Distributions From Net Realized Cap-
ital Gains......................... (0.67) 0.00
Distributions From Paid-In Capital.. (0.22) 0.00
------- -------
Total Distributions.............. (1.07) 0.00
------- -------
Net Asset Value, End of the Period.. $113.67 $104.35
======= =======
Total return (%).................... 14.7 (b) (8.2)(b)
Ratio of Operating Expenses to Aver-
age Net Assets (%)................. 0.85 (c) 0.84 (c)
Ratio of Net Investment Income to
Average Net Assets (%)............. 0.46 (c) 0.60 (c)
Portfolio Turnover Rate (%)......... 21 (c) 53 (c)
Net Assets, End of Period (000)..... $11,972 $19,795
The Ratio of Expenses to Average Net
Assets without giving effect to the
voluntary expense limitation
described in Footnote (d) would
have been (%)...................... 0.89 (c)(d) 0.84 (c)(d)
</TABLE>
- --------
(a) Commencement of operations.
(b) Not annualized.
(c) Computed on an annualized basis.
(d) During the periods presented, the Series' adviser voluntarily agreed to
reduce its fees and, if necessary, to assume expenses of the Series in
order to limit the Series' expenses to an annual rate of 0.85% of the
Series' average daily net assets.
(e) Unaudited.
B-6
<PAGE>
LOOMIS SAYLES SMALL CAP SERIES
<TABLE>
<CAPTION>
MAY 1(A)
TO
JUNE 30, 1994 (B)
-----------------
<S> <C>
Net Asset Value, Beginning of the Period................... $100.00
-------
Income From Investment Operations.......................... 0.15
Net Investment Income
Net Gains or Losses on Investments.........................
(both realized and unrealized) (3.87)
-------
Total From Investment Operations........................... (3.72)
-------
Less Distributions
Distributions
From Net Investment Income................................. 0.00
Distributions
In Excess of Net Investment Income......................... 0.00
Distributions
From Net Realized Capital Gains............................ 0.00
Distributions
From Paid-In Capital....................................... 0.00
-------
Total Distributions..................................... 0.00
-------
Net Asset Value, End of the Period......................... $ 96.28
=======
Total return (%)........................................... (3.7)(c)
Ratio of Operating Expenses to Average Net Assets (%)...... 1.00 (d)
Ratio of Net Investment Income to Average Net Assets (%)... 0.91 (d)
Portfolio Turnover Rate (%) (a)............................ 18 (d)
Net Assets, End of Period (000)............................ $ 1,926
The Ratio of Expenses to Average Net Assets without giving
effect to the voluntary expense limitation
described in Footnote (e) would have been (%)............. 1.16 (d)(e)
</TABLE>
- --------
(a) Commencement of operations.
(b) Unaudited.
(c) Not annualized.
(d) Computed on an annualized basis.
(e) During the period presented, the Series' adviser voluntarily agreed to
reduce its fees and, if necessary, to assume expenses of the Series in
order to limit the Series' expenses to an annual rate of 1.00% of the
Series' average daily net assets.
B-7
<PAGE>
THE FUND
The Fund is a diversified, open-end management investment company organized
in 1987 as a Massachusetts business trust under the laws of Massachusetts. The
Fund is a series type company with fifteen investment portfolios, eleven of
which are contained herein: the Back Bay Advisors Money Market Series, the
Back Bay Advisors Bond Income Series, the Westpeak Value Growth Series, the
Loomis Sayles Avanti Growth Series, the Loomis Sayles Small Cap Series, 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 and the Alger Equity Growth
Series.
Shares in the Fund are not offered directly to the general public and,
currently, are available only to separate accounts established by New England
Variable Life Insurance Company ("NEVLICO"), New England Mutual Life Insurance
Company ("The New England") or subsidiaries of The New England as an
investment vehicle for variable life insurance or variable annuity products,
although not all Series may be available to all separate accounts. In the
future, however, such shares may be offered to separate accounts of insurance
companies unaffiliated with NEVLICO or The New England.
INVESTMENT OBJECTIVES AND POLICIES
BACK BAY ADVISORS MONEY MARKET SERIES
The Back Bay Advisors Money Market Series seeks the highest possible level
of current income consistent with preservation of capital through investment
in a managed portfolio of high quality money market instruments including:
. obligations backed by the full faith and credit of the United
States Government, such as bills, notes and bonds issued by the U.S.
Treasury or by such government agencies as the Farmers' Home
Administration or the Small Business Administration;
. other obligations issued or guaranteed by the United States
Government or its agencies, authorities or instrumentalities, such
as obligations of the Tennessee Valley Authority, Federal Land Banks
and the Federal National Mortgage Association (together with full
faith and credit obligations, "U.S. Government Securities");
. obligations of banks or savings and loan associations (such as
bankers' acceptances and certificates of deposit, including
Eurodollar obligations of foreign branches of U.S. banks and dollar
denominated obligations of U.S. and United Kingdom branches of
foreign banks) whose net assets exceed $100,000,000;
. commercial paper and other corporate debt obligations rated in the
highest rating category by Standard & Poor's Corporation ("Standard
& Poor's" or "S&P") or Moody's Investors Service, Inc. ("Moody's")
or, if unrated, of comparable quality as determined by Back Bay
Advisors, L.P. ("Back Bay Advisors"), the Series' investment
adviser, under guidelines approved by the Fund's Trustees; and
. repurchase agreements relating to any of the above.
The Back Bay Advisors Money Market Series may invest up to 100% of its
assets in certificates of deposit, bankers' acceptances and other bank
obligations.
All the Back Bay Advisors Money Market Series' money market instruments
mature in less than 397 days and its dollar-weighted average portfolio
maturity is 90 days or less. The Series calculates the maturity of repurchase
agreements by reference to the repurchase date, not by reference to the
maturity of the underlying security.
By investing only in high quality, short-term securities, the Back Bay
Advisors Money Market Series seeks to minimize credit risk and market risk.
Credit risk is the risk that the obligor will default in the payment of
principal and/or interest. In a repurchase agreement transaction, credit risk
relates to the performance by the other party of its obligation to repurchase
the underlying security from the Fund. If the other party defaults on that
obligation, the Fund may face various delays and risks of loss. Market risk is
the risk that the market value of the securities will change as a result of
changes in market rates
B-8
<PAGE>
of interest. The Fund expects that those changes will be minimal and that the
Back Bay Advisors Money Market Series will be able to maintain the net asset
value of its shares at a constant of $100, although this cannot be assured.
The Eurodollar obligations of foreign branches of U.S. banks and U.S. and
United Kingdom branches of foreign banks in which the Back Bay Advisors Money
Market Series may invest may be subject to certain risks which do not apply to
obligations of domestic branches of U.S. banks. These risks may relate to
foreign economic, political and legal developments and to the fact that
foreign banks and foreign branches of U.S. banks may be subject to different
regulatory requirements.
BACK BAY ADVISORS BOND INCOME SERIES
The investment objective of the Back Bay Advisors Bond Income Series is to
provide a high level of current income consistent with protection of capital
and moderate investment risk through investment primarily in U.S. Government
and corporate bonds. In general, fixed-income securities, such as the bonds in
which the Series may invest, are subject to credit risk (the risk that the
obligor will default in the payment of principal and/or interest) and to
market risk (the risk that the market value of the securities will change as a
result of changes in market rates of interest).
At least 80% of the Series' assets will consist of securities rated AAA, AA,
A or BBB by S&P or Aaa, Aa, A or Baa by Moody's or unrated but determined by
Back Bay Advisors to be of comparable quality to securities in those rating
categories. The Series may not invest more than 10% of its total net assets in
obligations of foreign issuers. Investments in foreign securities will subject
the Series to special considerations related to political, economic and legal
conditions outside of the U.S. These considerations include the possibility of
unfavorable currency exchange rates, exchange control regulations (including
currency blockage), expropriation, nationalization, withholding taxes on
income and difficulties in enforcing judgments. Foreign securities may be less
liquid and more volatile than comparable U.S. securities. Some foreign issuers
are subject to less comprehensive accounting and disclosure requirements than
similar U.S. issuers. Transactions in foreign securities include currency
conversion costs. Brokerage and custodial costs for foreign securities may be
higher than for U.S. securities. The Series will invest in these securities
only when Back Bay Advisors believes the associated risks are minimal.
Up to 20% of the Series' assets may be invested in securities rated BB or Ba
or lower (or in unrated securities that Back Bay Advisors determines to be of
comparable quality). During the fiscal year ended December 31, 1993, 6.0% of
the average month-end net assets of the Back Bay Advisors Bond Income Series
was invested in fixed-income securities rated in the rating category (BB or
Ba) just below investment grade and no assets were invested in fixed-income
securities rated below this level. Securities rated BB or lower by S&P or Ba
or lower by Moody's (or unrated but determined to be of comparable quality by
Back Bay Advisors) are considered high yield, high risk securities and are
commonly known as "junk bonds." The Series will acquire no security rated
below BB or Ba (or unrated but determined to be of comparable quality by Back
Bay Advisors). If a security held by the Series is downgraded below BB or Ba,
Back Bay Advisors will determine at that time whether the Series will continue
to hold the security, taking into account the current conditions.
The average maturity of the Back Bay Advisors Bond Income Series' portfolio
will usually be between five and fifteen years.
WESTPEAK VALUE GROWTH SERIES
The Westpeak Value Growth Series seeks long-term total return (capital
appreciation and dividend income) through investment in equity securities.
Emphasis will be given to both undervalued securities ("value" style) and
securities of companies with growth potential ("growth" style). The Westpeak
Value Growth Series will ordinarily invest substantially all its assets in
equity securities.
The assets of the Westpeak Value Growth Series that are not invested in
equity securities will be held in cash or invested in repurchase agreements,
short-term U.S. Government securities or commercial paper or other corporate
money market securities rated A-2 or higher by Moody's or P-2 or higher by
Standard & Poor's (or unrated but considered to be of comparable quality by
the Series' investment adviser, Westpeak Investment Advisors, L.P.
["Westpeak"]).
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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. See
"Futures and other Hedging Transactions" under "Investment Risks" below and
"Futures" in the Statement of Additional Information.
LOOMIS SAYLES AVANTI GROWTH SERIES
The Loomis Sayles Avanti Growth Series seeks long-term growth of capital.
The Series ordinarily invests substantially all of its assets in equity
securities. Investments are selected based on their growth potential; current
income is not a consideration. The Series normally will invest primarily in
equity securities of companies with medium and large capitalization
(capitalization of $1 billion to $5 billion and over $5 billion,
respectively), but will also invest a portion of its assets in equity
securities of companies with relatively small market capitalization (under $1
billion). The Series may invest a limited portion of its assets in securities
of foreign issuers.
Loomis, Sayles & Company, L.P. ("Loomis Sayles"), the Series' adviser,
selects investments based upon fundamental research and analysis of individual
companies and industries. The adviser selects investments for the Series based
on qualitative and quantitative criteria including, among others, industry
dominance and competitive position, consistent earnings growth, a history of
high profitability, the adviser's expectation of continued high profitability
and overall financial strength, although not every investment will have all of
these characteristics.
The Series may invest in convertible securities, including corporate bonds,
notes or preferred stocks that can be converted into common stocks or other
equity securities.
LOOMIS SAYLES SMALL CAP SERIES
The Loomis Sayles Small Cap Series' investment objective is long-term
capital growth from 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
The Loomis Sayles Balanced Series' investment objective is 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 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
The Draycott International Equity Series seeks total return from long-term
growth of capital and dividend income, primarily through investment in
international equity securities.
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The Draycott International Equity Series seeks to achieve its objective by
investing primarily in common stocks, although the Series may invest in any
type of equity securities. Normally the Series will invest at least 65% of its
total assets in equity securities of issuers headquartered outside the United
States, and substantially all of its assets (other than cash and short-term
investments) in such equity securities or equity securities of issuers
(including closed-end investment companies) that derive a substantial part of
their revenues or profits from countries outside the United States. Under
normal conditions, the Series' portfolio will contain equity securities of
issuers from at least three countries outside the United States.
The Series' subadviser, Draycott Partners, Ltd. ("Draycott"), will make
investment decisions on behalf of the Series by, first, selecting countries
where it anticipates sustainable growth that will exceed current market
expectations. Within the selected countries, the subadviser will identify
economic sectors that appear to present the most potential for risk-adjusted
growth and, finally, within the chosen economic sectors, the subadviser will
select securities that are expected to offer the best value.
SALOMON BROTHERS U.S. GOVERNMENT SERIES
The Salomon Brothers U.S. Government Series' investment objective is to
provide a high level of current income consistent with preservation of capital
and maintenance of liquidity.
The Series seeks to achieve its objective by investing primarily in debt
obligations (including mortgage backed securities) issued or guaranteed by the
U.S. Government or its agencies, authorities or instrumentalities or
derivative securities (such as collateralized mortgage obligations) backed by
such securities.
At least 80% of the total assets of the Salomon Brothers U.S. Government
Series will be invested in:
(1) mortgage backed securities guaranteed by the Government National
Mortgage Association that are supported by the full faith and credit of the
U.S. Government. Such securities entitle the holder to receive all interest
and principal payments due, whether or not payments are actually made on
the underlying mortgages;
(2) U.S. Treasury obligations;
(3) debt obligations issued or guaranteed by agencies or
instrumentalities of the U.S. Government which are backed by their own
credit but are not necessarily backed by the full faith and credit of the
U.S. Government;
(4) mortgage backed securities guaranteed by agencies or
instrumentalities of the U.S. Government which are supported by their own
credit but not the full faith and credit of the U.S. Government, such as
the Federal Home Loan Mortgage Corporation and the Federal National
Mortgage Association; and
(5) collateralized mortgage obligations issued by private issuers for
which the underlying mortgage backed securities serving as collateral are
backed (i) by the credit of the U.S. Government agency or instrumentality
which issues or guarantees the mortgage backed securities, or (ii) by the
full faith and credit of the U.S. Government.
Under normal market conditions, at least 65% of the Series' total assets
will be invested in securities issued or guaranteed by the U.S. Government or
an agency, authority or instrumentality thereof. For purposes of this policy,
securities that are not issued or guaranteed by the U.S. Government or an
agency, authority or instrumentality will not count toward the 65%, even if
they are backed by mortgages (or other collateral) that are so guaranteed.
The Series may purchase or write options on securities, options on
securities indices and options on futures contracts and buy or sell futures on
financial instruments and securities indices.
Up to 20% of the total assets of the Series may be invested in marketable
debt securities of domestic issuers and of foreign issuers (payable in U.S.
dollars) rated at the time of purchase Baa or higher by Moody's or BBB or
higher by S&P, or, if unrated, deemed to be of equivalent quality in the
Series' subadviser's judgment, convertible securities (including those issued
in the Euromarket), securities carrying warrants to purchase equity securities
and privately placed debt securities.
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The Series may lend securities it owns so long as such loans do not
represent more than 20% of the Series' total assets.
SALOMON BROTHERS STRATEGIC BOND OPPORTUNITIES SERIES
The Salomon Brothers Strategic Bond Opportunities Series' investment
objective is to seek a high level of total return consistent with preservation
of capital.
Based upon the Series' subadviser's assessment of the relative risks and
opportunities available in various market segments, assets will be allocated
among U.S. Government obligations, mortgage backed securities, domestic and
sovereign corporate debt and international debt securities rated investment
grade (BBB or higher by S&P or Baa or higher by Moody's) (or unrated but
deemed to be of equivalent quality in the subadviser's judgment) and domestic
and sovereign corporate debt and international debt securities rated below
investment grade.
Depending on market conditions, the Series may invest without limit in below
investment grade fixed-income securities. Securities of below investment grade
quality are considered high yield, high risk securities and are commonly know
as "junk bonds." See "Investment Risks--Lower Rated Fixed-Income Securities"
below.
In addition, the Series may invest in securities issued or guaranteed as to
principal or interest by the U.S. Government or its agencies or
instrumentalities, including mortgage backed securities, preferred stocks,
convertible securities (including those issued in the Euromarket), securities
carrying warrants to purchase equity securities, privately placed debt
securities, stripped mortgage securities, zero coupon securities and inverse
floaters.
The Series may invest up to 100% of its assets in foreign securities. There
is no limit on the value of the portfolio's assets that may be invested in any
one country or in assets denominated in any one country's currency.
The Series may also invest in debt obligations issued or guaranteed by a
foreign sovereign government or one of its agencies or political subdivisions
and debt obligations issued or guaranteed by supranational organizations.
Supranational entities include international organizations designated or
supported by governmental entities to promote economic reconstruction or
development and international banking institutions and related government
agencies. Examples include the International Bank for Reconstruction and
Development (the "World Bank"), the European Coal and Steel Community, the
Asian Development Bank and the Inter-American Development Bank. Such
supranational issued instruments may be denominated in multi-national currency
units.
The Series currently intends to invest substantially all of its assets in
fixed-income securities. In order to maintain liquidity, the Series may invest
up to 20% of its assets in high-quality short-term money market instruments.
The Series may purchase and sell (or write) exchange-listed and over-the-
counter put and call options on securities, financial futures contracts and
fixed income indices and other financial instruments, enter into financial
futures contracts, enter into interest rate transactions, and enter into
currency transactions. Interest rate transactions may take the form of swaps,
structured notes, caps, floors and collars, and currency transactions may take
the form of currency forward contracts, currency futures contracts, currency
swaps and options on currencies or currency futures contracts. See "Futures
and Other Hedging Transactions" under "Investment Risks" below and "Futures"
in the Statement of Additional Information.
The Series may lend securities it owns so long as such loans do not
represent more than 20% of the Series' total assets.
VENTURE VALUE SERIES
The Venture Value Series' investment objective is growth of capital.
The Series will primarily invest in domestic common stocks (and securities
convertible into common stock) 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.
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The Series may invest in foreign securities, and may hedge currency
fluctuation risks related thereto. The Series may invest in U.S. registered
investment companies that primarily invest in foreign securities, provided
that no such investment may cause more than 10% of the Series' total assets to
be invested in such companies. The Series may invest in restricted securities
which may include Rule 144A securities.
The Series may write covered call options on its portfolio securities, but
currently intends to invest in such options only to the extent that less than
5% of its net assets would be subject to the options.
The Series may lend securities it owns so long as such loans do not exceed
5% of the Series' net assets.
ALGER EQUITY GROWTH SERIES
The Alger Equity Growth Series' investment objective is to seek long-term
capital appreciation. The Series' assets will be invested 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.
The Series seeks to achieve its objective by investing in equity securities,
such as common or preferred stocks or securities convertible into or
exchangeable for equity securities, including warrants and rights. Except
during temporary defensive periods, the Series invests at least 85% of its net
assets in equity securities and at least 65% of its total assets in equity
securities of companies that, at the time of purchase of the securities, have
total market capitalization of $1 billion or greater; the Series may invest up
to 35% of its total assets in equity securities of companies that, at the time
of purchase, have total market capitalization of less than $1 billion. The
Series anticipates that it will invest primarily in companies whose securities
are traded on domestic stock exchanges or in the over-the-counter market.
The Series may invest in bank and thrift obligations, obligations issued or
guaranteed by the U.S. Government or by its agencies or instrumentalities,
foreign bank obligations and obligations of foreign branches of domestic
banks, and variable rate master demand notes.
The Series may also hold up to 15% of its net assets in money market
instruments and repurchase agreements, purchase restricted securities
(including Rule 144A securities) and enter into "short sales against the box."
The Series may lend securities it owns so long as such loans do not exceed
33 1/3% of the Series' total assets.
ADDITIONAL INFORMATION
Equity securities are securities that represent an ownership interest (or
the right to acquire such an interest) in a company, and include common and
preferred stocks and securities exercisable for or convertible into common or
preferred stocks (such as warrants, convertible debt securities and
convertible preferred stock).
The Westpeak Value Growth Series, Loomis Sayles Avanti Growth Series, Loomis
Sayles Small Cap Series, Draycott International Equity Series, Venture Value
Series and Alger Equity Growth Series seek to attain their objectives by
normally investing their assets primarily in equity securities. When the
particular Series' adviser or subadviser deems it appropriate, however, any of
these Series may, for temporary defensive purposes, hold all or a substantial
portion of its assets in cash or fixed-income investments, including U.S.
Government obligations, investment grade (and comparable unrated) corporate
bonds or notes, money market instruments, bankers acceptances and repurchase
agreements. In addition, the Draycott International Equity Series may invest
temporarily in foreign government, agency or corporate debt obligations. No
estimate can be made as to when or for how long a Series will employ these
defensive strategies.
INVESTMENT RISKS
. EQUITY SECURITIES (WESTPEAK VALUE GROWTH, LOOMIS SAYLES AVANTI GROWTH,
LOOMIS SAYLES SMALL CAP, LOOMIS SAYLES BALANCED, DRAYCOTT INTERNATIONAL
EQUITY, VENTURE VALUE AND ALGER EQUITY GROWTH SERIES)
Equity securities are more volatile and more risky than some other forms of
investment. Therefore, the value of your investment in a Series may
sometimes decrease instead of increase. Investments in companies with
relatively small
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capitalization may involve greater risk than is usually associated with
more established companies. These companies often have sales and earnings
growth rates which exceed those of companies with larger capitalization.
Such growth rates may in turn be reflected in more rapid share price
appreciation. However, companies with smaller capitalization often have
limited product lines, markets or financial resources and they may be
dependent upon a relatively small management group. The securities may have
limited marketability and may be subject to more abrupt or erratic
movements in price than securities of companies with larger capitalization
or the market averages in general. The net asset value of a Series that
invests in companies with smaller capitalization, therefore, may fluctuate
more widely than market averages.
. CONVERTIBLE SECURITIES (LOOMIS SAYLES AVANTI GROWTH, LOOMIS SAYLES
BALANCED, DRAYCOTT INTERNATIONAL EQUITY, SALOMON BROTHERS STRATEGIC BOND
OPPORTUNITIES, VENTURE VALUE AND ALGER EQUITY GROWTH SERIES)
Convertible securities include debt securities or preferred stock that are
convertible into stock as well as 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 debt and preferred stock usually provide a higher
yield than the underlying equity securities, however, so that the price
decline of a convertible security may sometimes be less substantial than
that of the underlying equity securities. The value of convertible
securities that pay dividends or interest, like the value of all fixed-
income securities, generally fluctuates inversely with changes in interest
rates. Warrants have no voting rights, pay no dividends and have no rights
with respect to the assets of the corporation issuing them. They do not
represent ownership of the securities for which they are exercisable, but
only the right to buy such securities at a particular price. The Loomis
Sayles Avanti Growth Series will not purchase any convertible debt security
or convertible preferred stock that has not been rated at the time of
acquisition investment grade by one major rating agency or that is not
rated but is determined to be of comparable quality by the Series' adviser.
. FIXED-INCOME SECURITIES (ALL SERIES)
Because interest rates vary, it is impossible to predict the income of a
Series for any particular period. The net asset value will vary as a result
of changes in the value of the bonds and other securities in the Series'
portfolio.
Fixed-income securities are subject to market and credit risk. Market risk
relates to changes in a security's value as a result of changes in interest
rates generally. Generally, rising interest rates correlate with falling
share values. Credit risk relates to the ability of the issuer to make
payments of principal and interest. U.S. Government Securities generally do
not involve the credit risks associated with 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.
. LOWER RATED FIXED-INCOME SECURITIES (BACK BAY ADVISORS BOND INCOME, LOOMIS
SAYLES BALANCED AND SALOMON BROTHERS STRATEGIC BOND OPPORTUNITIES SERIES)
Lower rated fixed-income securities (also known as "junk bonds") and
corporate fixed-income securities generally provide higher yields than U.S.
Government and many foreign government securities, but are subject to
greater credit and market risk than higher quality fixed-income securities.
Lower rated fixed-income securities are considered predominantly
speculative with respect to the ability of the issuer to meet principal and
interest payments. Achievement of the investment objective of a Series
investing in lower rated fixed-income securities may be more dependent on
the investment adviser's own credit analysis than is the case for higher
quality bonds. The market for lower rated fixed-income securities may be
more severely affected than some other financial markets by economic
recession or substantial interest rate increases, by changing public
perceptions of this market or by legislation that limits the ability of
certain categories of financial institutions to invest in these securities.
In addition, the secondary market may be less liquid for lower rated fixed-
income securities. This lack of liquidity at certain times may affect the
valuation of these securities and may make the valuation and sale of these
securities more difficult.
. MORTGAGE-RELATED SECURITIES (BACK BAY ADVISORS BOND INCOME, LOOMIS SAYLES
BALANCED, SALOMON BROTHERS U.S. GOVERNMENT AND SALOMON BROTHERS STRATEGIC
BOND OPPORTUNITIES SERIES)
Mortgage-related securities, such as GNMA or FNMA certificates, differ from
traditional debt securities. Among the major differences are that interest
and principal payments are made more frequently, usually monthly, and that
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principal may be prepaid at any time because the underlying mortgage loans
generally may be prepaid at any time. As a result, if a Series purchases
these assets at a premium, a faster-than-expected prepayment rate will
reduce yield to maturity, and a slower-than-expected prepayment rate will
have the opposite effect of increasing yield to maturity. If a Series
purchases mortgage-related securities at a discount, faster-than-expected
prepayments will increase, and slower-than-expected prepayments will
reduce, yield to maturity. Prepayments, and resulting amounts available for
reinvestment by the Series, are likely to be greater during a period of
declining interest rates and, as a result, are likely to be reinvested at
lower interest rates. Accelerated prepayments on securities purchased at a
premium may result in a loss of principal if the premium has not been fully
amortized at the time of prepayment. Although these securities will
decrease in value as a result of increases in interest rates generally,
they are likely to appreciate less than other fixed-income securities when
interest rates decline because of the risk of prepayments.
. COLLATERALIZED MORTGAGE OBLIGATIONS (BACK BAY ADVISORS BOND INCOME, LOOMIS
SAYLES BALANCED, SALOMON BROTHERS U.S. GOVERNMENT SERIES AND SALOMON
BROTHERS STRATEGIC BOND OPPORTUNITIES SERIES)
A collateralized mortgage obligation ("CMO") is a security backed by a
portfolio of mortgages or mortgage securities held under an indenture. The
underlying mortgages or mortgage securities are issued or guaranteed by the
U.S. Government or an agency or instrumentality thereof, but the
obligations purchased by a Series will in many cases not be so issued or
guaranteed. The issuer's obligation to make interest and principal payments
is secured by the underlying portfolio of mortgages or mortgage securities.
CMOs are issued with a number of classes or series which have different
maturities and which may represent interests in some or all of the interest
or principal on the underlying collateral or a combination thereof. In the
event of sufficient early prepayments on such mortgages, the class or
series of CMO first to mature generally will be retired prior to its
maturity. The early retirement of a particular class or series of CMO held
by a Series would have the same effect as the prepayment of mortgages
underlying a mortgage pass-through security.
. ""STRIPPED'' MORTGAGE SECURITIES (SALOMON BROTHERS U.S. GOVERNMENT AND
SALOMON BROTHERS STRATEGIC BOND OPPORTUNITIES SERIES)
"Stripped" mortgage securities are issued by agencies or instrumentalities
of the U.S. Government or private issuers. Stripped mortgage securities are
usually structured with two classes that receive different proportions of
the interest and principal distribution on a pool of mortgage assets. In
some cases, one class will receive all of the interest (the interest-only
or "IO" class), while the other class will receive all of the principal
(the principal-only or "PO" class). Stripped mortgage securities have
greater market volatility than other types of mortgage securities. If the
underlying mortgage assets experience greater than anticipated payments of
principal, the Series may fail to recoup fully its investments in IOs. The
staff of the SEC has indicated that it views stripped mortgage securities
as illiquid. Until further clarification of the matter is provided by the
staff, the Series will treat its investment in stripped mortgage securities
as illiquid. As a result, these investments, together with any other
illiquid investments, will not exceed 15% of the Series' net assets.
. REPURCHASE AGREEMENTS (ALL SERIES)
In repurchase agreements, a Series buys securities from a seller, usually a
bank or brokerage firm, with the understanding that the seller will
repurchase the securities at a higher price at a later date. Such
transactions afford an opportunity for a Series to earn a return on
available cash at minimal market risk, although the Series may be subject
to various delays and risks of loss if the seller is unable to meet its
obligation to repurchase.
. REVERSE REPURCHASE AGREEMENTS AND DOLLAR ROLL AGREEMENTS (SALOMON BROTHERS
U.S. GOVERNMENT AND SALOMON BROTHERS STRATEGIC BOND OPPORTUNITIES SERIES)
The Series may enter into reverse repurchase agreements and dollar roll
agreements with banks and brokers to enhance return.
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 and also has the opportunity to earn a return
on the collateral furnished by the counterparties to secure its obligation
to redeliver the securities.
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Dollar rolls are transactions 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 both the securities sold and those to be purchased. 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 segregated accounts with its custodians in which
they will maintain cash, U.S. Government Securities or other liquid high
grade debt obligations equal in value to their 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 or dollar roll 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 not considered borrowings by the
Series for purpose of the Series' fundamental investment restriction with
respect to borrowings.
. OPTIONS (DRAYCOTT INTERNATIONAL EQUITY, SALOMON BROTHERS U.S. GOVERNMENT,
SALOMON BROTHERS STRATEGIC BOND OPPORTUNITIES AND VENTURE VALUE SERIES)
A Series may seek to increase its current return by writing covered call
options and covered put options, with respect to securities it holds or
intends to buy, through the facilities of options exchanges and directly
with market makers in the over-the-counter market. A Series receives a
premium from writing a call or put option, which increases the Series'
current return if the option expires unexercised or is closed out at a net
profit.
At times when a Series has written call options on a substantial portion of
its portfolio, the Series' ability to profit and its risk of loss from
changes in market prices of portfolio securities will be limited.
Appreciation in securities covering the options would likely be partially
or wholly offset by losses on the options. The termination of options
positions under such conditions would generally result in the realization
of short-term capital losses, which would reduce the Series' current
return. Accordingly, a Series may seek to realize capital gains to offset
realized losses by selling securities.
As described in the Statement, over-the-counter options involve certain
special risks (including liquidity and credit risks) not necessarily
present with exchange-listed options. A Series will treat as illiquid any
over-the-counter options and assets maintained as "cover" for over-the-
counter options that the Series has written.
The options markets of foreign countries are small compared to those of the
United States and consequently are characterized in most cases by less
liquidity than are the U.S. markets. In addition, foreign markets may be
subject to less detailed reporting requirements and regulatory controls
than U.S. markets. See "Foreign Securities" below.
. FUTURES AND OTHER HEDGING TRANSACTIONS (WESTPEAK VALUE GROWTH, LOOMIS
SAYLES BALANCED, DRAYCOTT INTERNATIONAL EQUITY, SALOMON BROTHERS U.S.
GOVERNMENT, SALOMON BROTHERS STRATEGIC BOND OPPORTUNITIES AND VENTURE VALUE
SERIES)
Futures contracts are exchange-traded obligations to buy or sell a
particular security on a specified future date (or to pay or receive
amounts based on the value of a securities index or currency on that date).
The use of futures transactions entails certain special risks. In
particular, the variable degree of correlation between price movements of
futures contracts and price movements in the related securities or currency
position of a Series could create the possibility that losses on the
futures contracts are greater than gains in the value of the Series'
position. In addition, futures markets could be illiquid in some
circumstances. As a result, in certain markets, a Series might not be able
to close out a transaction without incurring substantial losses. Although a
Series' use of futures transactions for hedging should tend to minimize the
risk of loss due to a decline in the value of the hedged position, at the
same time it will tend to limit any potential gain to a Series that might
result from an increase in value of the position. The daily variation
margin requirements for futures contracts create a greater ongoing
potential financial risk than would purchases of options, in which case the
exposure is limited to the cost of the initial premium.
B-16
<PAGE>
Each of these Series may, at the discretion of its adviser or subadviser,
engage in foreign currency exchange transactions, in connection with the
purchase and sale of portfolio securities, to protect the value of specific
portfolio positions or in anticipation of changes in relative values of
currencies in which current or future Series' portfolio holdings are
denominated or quoted.
For hedging purposes, each of these Series may also buy put or call options
on securities that it holds or intends to buy. In addition to engaging in
options transactions on established exchanges, a Series may purchase over-
the-counter options from brokerage firms and other financial institutions.
Each of these Series may invest in options and futures contracts on various
securities indices to hedge against changes in the value of securities it
holds or expects to acquire. These Series may also invest in options on
index futures.
No Series will invest more than 5% of its net assets in futures or premiums
for options on futures that are traded on a U.S. commodities exchange.
Certain asset segregation requirements apply when a Series becomes
obligated under a hedging instrument. There is no assurance that a Series'
hedging strategies will be effective. These strategies involve costs and
the risk of loss to the Series. See Part II of the Statement for more
information.
. SWAPS (SALOMON BROTHERS STRATEGIC BOND OPPORTUNITIES SERIES)
The Series may enter into interest rate, currency and index swaps. The
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 Series
anticipates purchasing at a later date. 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). A
currency swap is an agreement to exchange cash flows on a notional amount
based on changes in the relative values of the specified currencies. The
Series will maintain cash and appropriate liquid assets in a segregated
custodial account to cover its current obligations under swap agreements.
Because swap agreements are not exchange-traded, but are private contracts
into which the Series and a swap counterparty enter as principals, the
Series may experience a loss or delay in recovering assets if the
counterparty were to default on its obligations.
. STRUCTURED NOTES (SALOMON BROTHERS STRATEGIC BOND OPPORTUNITIES SERIES)
The Salomon Brothers Strategic Bond Opportunities Series is permitted to
invest in a broad category of instruments know as "structured notes." These
instruments are debt obligations issued by industrial corporations,
financial institutions or governmental or international agencies.
Traditional debt obligations typically obligate the issuer to repay the
principal plus a specified rate of interest. Structured notes, by contrast,
obligate the issuer to pay amounts of principal or interest that are
determined by reference to changes in some external factor or factors. For
example, the issuer's obligations could be determined by reference to
changes in the value of a commodity (such as gold or oil), a foreign
currency, an index of securities (such as the S&P 500 Index) or an interest
rate (such as the U.S. Treasury Bill rate). In some cases, the obligations
of the issuer are determined by reference to changes over time in the
difference (or "spread") between two or more external factors (such as the
U.S. prime lending rate and the London Inter-Bank Offering Rate). In some
cases, the issuer's obligations may fluctuate inversely with changes in an
external factor or factors (for example, if the U.S. prime lending rate
goes up, the issuer's interest payment obligations are reduced). In some
cases, the obligations of the issuer may be determined by some multiple of
the change in an external factor or factors (for example, three times the
change in the U.S. Treasury bill rate). In some cases, the issuer's
obligations remain fixed (as with a traditional debt instrument) so long as
an external factor or factors do not change by more than the specified
amount (for example, if the U.S. Treasury bill rate does not exceed some
specified maximum); but if the external factor or factors change by more
than the specified amount, the issuer's obligations may be sharply reduced.
Structured notes can serve many different purposes in the management of the
Series. For example, they can be used to increase the Series' exposure to
changes in the value of assets that the Series would not ordinarily
purchase directly (such as gold or oil). They can also be used to hedge the
risks associated with other investments the Series holds.
B-17
<PAGE>
For example, if a structured note has an interest rate that fluctuates
inversely with general changes in market interest rates, the value of the
structured note would generally move in the opposite direction to the value
of traditional debt obligations, thus moderating the effect of interest
rate changes in the value of the Series' portfolio as a whole.
Structured notes involve special risks. As with any debt obligation,
structured notes involve the risk that the issuer will become insolvent or
otherwise default on its payment obligations. The risk is in addition to
the risk that the issuer's obligations (and thus the value of the Series'
investment) will be reduced because of adverse changes in the external
factor or factors to which the obligations are linked. The value of
structured notes will in many cases be more volatile (that is, will change
more rapidly or severely) than the value of traditional debt instruments.
Volatility will be especially high if the issuer's obligations are
determined by reference to some multiple of the change in the external
factor or factors. Many structured notes have limited or no liquidity, so
that the Series would be unable to dispose of the investment prior to
maturity. (The Series is not permitted to invest more than 15% of its net
assets in illiquid investments.) As with all investments, successful use of
structured notes depends in significant part on the accuracy of the
subadviser's analysis of the issuer's creditworthiness and financial
prospects, and of the subadviser's forecast as to changes in relevant
economic and financial market conditions and factors. In instances where
the issuer of a structured note is a foreign entity, the usual risks
associated with investments in foreign securities (described below) apply.
. FOREIGN SECURITIES (BACK BAY ADVISORS BOND INCOME, LOOMIS SAYLES AVANTI
GROWTH, LOOMIS SAYLES SMALL CAP, LOOMIS SAYLES BALANCED, DRAYCOTT
INTERNATIONAL EQUITY, SALOMON BROTHERS U.S. GOVERNMENT, SALOMON BROTHERS
STRATEGIC BOND OPPORTUNITIES, VENTURE VALUE AND ALGER EQUITY GROWTH SERIES)
Each of these Series may invest in securities of issuers organized or
headquartered outside the United States or primarily traded outside the
United States ("foreign securities"). In the case of the Loomis Sayles
Small Cap, Back Bay Advisors Bond Income, Loomis Sayles Avanti Growth and
Salomon Brothers U.S. Government Series, the Series will not purchase a
foreign security if, as a result, the Series' holdings of foreign
securities would exceed 20% (10% in the case of the Back Bay Advisors Bond
Income Series) of the Series' total assets.
Although investing in foreign securities may increase a Series'
diversification and reduce portfolio volatility, foreign securities may
present risks not associated with investments in comparable securities of
U.S. issuers. There may be less information publicly available about a
foreign corporate or government issuer than about a U.S. issuer, and
foreign corporate issuers are not generally subject to accounting, auditing
and financial reporting standards and practices comparable to those in the
United States. The securities of some foreign issuers are less liquid and
at times more volatile than securities of comparable U.S. issuers. Foreign
brokerage commissions and securities custody costs are often higher than in
the United States. With respect to certain foreign countries, there is a
possibility of governmental expropriation of assets, confiscatory taxation,
political or financial instability and diplomatic developments that could
affect the value of investments in those countries. A Series' receipt of
interest on foreign government securities may depend on the availability of
tax or other revenues to satisfy the issuer's obligations.
A Series' investments in foreign securities may include investments in
countries whose economies or securities markets are not yet highly
developed. Special considerations associated with these investments (in
addition to the considerations regarding foreign investments generally) may
include, among others, greater political uncertainties, an economy's
dependence on revenues from particular commodities or on international aid
or development assistance, currency transfer restrictions, highly limited
numbers of potential buyers for such securities and delays and disruptions
in securities settlement procedures.
Since most foreign securities are denominated in foreign currencies or
trade primarily in securities markets in which settlements are made in
foreign currencies, the value of these investments and the net investment
income available for distribution to shareholders of a Series investing in
these securities may be affected favorably or unfavorably by changes in
currency exchange rates or exchange control regulations. Changes in the
value relative to the U.S. dollar of a foreign currency in which a Series'
holdings are denominated will result in a change in the U.S. dollar value
of the Series' assets and the Series' income available for distribution.
B-18
<PAGE>
In addition, although part of a Series' income may be received or realized
in foreign currencies, the Series will be required to compute and
distribute its income in U.S. dollars. Therefore, if the value of a
currency relative to the U.S. dollar declines after a Series' income has
been earned in that currency, translated into U.S. dollars and declared as
a dividend, but before payment of the dividend, the Series could be
required to liquidate portfolio securities to pay the dividend. Similarly,
if the value of a currency relative to the U.S. dollar declines between the
time a Series accrues expenses in U.S. dollars and the time such expenses
are paid, the amount of such currency required to be converted into U.S.
dollars will be greater than the equivalent amount in such currency of such
expenses at the time they were incurred.
. WHEN-ISSUED SECURITIES (DRAYCOTT INTERNATIONAL EQUITY, SALOMON BROTHERS
U.S. GOVERNMENT, SALOMON BROTHERS STRATEGIC BOND OPPORTUNITIES, VENTURE
VALUE AND ALGER EQUITY GROWTH SERIES)
If the value of a "when-issued" security being purchased falls between the
time a Series commits to buy it and the payment date, the Series may
sustain a loss. The risk of this loss is in addition to the Series' risk of
loss on the securities actually in its portfolio at the time. In addition,
when the Series buys a security on a when-issued basis, it is subject to
the risk that market rates of interest will increase before the time the
security is delivered, with the result that the yield on the security
delivered to the Series may be lower than the yield available on other,
comparable securities at the time of delivery. The Series will maintain
cash or liquid high grade assets in a segregated account in an amount
sufficient to satisfy its outstanding obligations to buy securities on a
"when-issued" basis.
. INVESTMENT COMPANY SECURITIES (WESTPEAK VALUE GROWTH, LOOMIS SAYLES AVANTI
GROWTH, DRAYCOTT INTERNATIONAL EQUITY AND VENTURE VALUE SERIES)
Each of these Series may invest up to 10% of its assets in securities of
investment companies. As a shareholder of an investment company, each
Series may indirectly bear investment management fees and other expenses of
that investment company, which are in addition to the management fees the
Series pays its adviser and other expenses the Series incurs directly. The
Venture Value Series may only invest in securities of investment companies
investing primarily in foreign securities.
. LENDING OF PORTFOLIO SECURITIES (BACK BAY ADVISORS BOND INCOME, SALOMON
BROTHERS U.S. GOVERNMENT, SALOMON BROTHERS STRATEGIC BOND OPPORTUNITIES,
VENTURE VALUE AND ALGER EQUITY GROWTH SERIES)
To the extent that any of the above Series lend that Series' portfolio
securities, such lending must be fully collateralized by cash, letters of
credit or U.S. Government securities at all times, but involves some credit
risk to the Series if the other party should default on its obligations and
the Series is delayed in or prevented from recovering the collateral.
. ""SHORT SALES AGAINST THE BOX" (ALGER EQUITY GROWTH SERIES)
The above Series may sell securities "short against the box." While a short
sale is the sale of a security the Series does not own, it is "against the
box" if at all times when the short position is open the Series owns an
equal amount of the securities sold short (or securities convertible into,
or exchangeable without further consideration for, securities of the same
issue as the securities sold short).
. ILLIQUID SECURITIES (ALL SERIES)
Each Series may invest up to 15% of its assets (10% in the case of the Back
Bay Advisors Money Market Series) in "illiquid securities," that is,
securities which are not readily resaleable, including securities whose
disposition is restricted by federal securities laws. The Series may
purchase "Rule 144A securities." These are privately offered securities
that can be resold only to certain qualified institutional buyers. Rule
144A securities are treated as illiquid, unless the Series' adviser or
subadviser has determined, under guidelines established by the Fund's
trustees, that the particular issue of Rule 144A securities is liquid.
. ZERO COUPON SECURITIES (BACK BAY ADVISORS BOND INCOME, LOOMIS SAYLES
BALANCED, SALOMON BROTHERS U.S. GOVERNMENT AND SALOMON BROTHERS STRATEGIC
BOND OPPORTUNITIES SERIES)
Zero coupon securities involve special risk considerations. Zero coupon
securities are debt securities that pay no cash income but are sold at
substantial discounts from their value at maturity. When a zero coupon
security is held to
B-19
<PAGE>
maturity, its entire return, which consists of the amortization of
discount, comes from the difference between its purchase price and its
maturity value. The difference is known at the time of purchase, so that
investors holding zero coupon securities until maturity know at the time of
their investment what the return on their investment will be. Certain zero
coupon securities also are sold at substantial discounts from their
maturity value and provide for the commencement of regular interest
payments at a deferred date.
Zero coupon securities tend to be subject to greater price fluctuations in
response to changes in interest rates than are ordinary interest-paying
debt securities with similar maturities. The value of zero coupon
securities appreciates more during periods of declining interest rates and
depreciates more during periods of rising interest rates. Zero coupon
securities may be issued by a wide variety of corporate and governmental
issuers. Although zero coupon securities are generally not traded on a
national securities exchange, many such securities are widely traded by
brokers and dealers and, if so, will not be considered illiquid.
Current federal income tax law requires the holder of a zero coupon
security to accrue income with respect to these securities prior to the
receipt of cash payments. To maintain its qualification as a regulated
investment company and avoid liability for federal income and excise taxes,
the Series may be required to distribute income accrued with respect to
these securities and may have to dispose of portfolio securities under
disadvantageous circumstances in order to generate cash to satisfy these
distribution requirements.
Note: Except for the investment objective of the Back Bay Advisors Money
Market, Back Bay Advisors Bond Income, Westpeak Value Growth, Loomis Sayles
Avanti Growth and Loomis Sayles Small Cap Series, or except as otherwise
explicitly stated in this Prospectus or the Statement, each Series' investment
policies may be changed at any time without shareholder approval.
PORTFOLIO TURNOVER
Portfolio turnover is not a limiting factor with respect to investment
decisions for any Series. High portfolio turnover involves correspondingly
greater brokerage commissions and other transaction costs, which will be borne
directly by the relevant Series. For additional information about such costs
see "Taxes" and "Management" below, and "Portfolio Transactions and Brokerage"
in the Statement. For information about the past portfolio turnover rates of
the Back Bay Advisors Bond Income, Westpeak Value Growth, Loomis Sayles Avanti
Growth and Loomis Sayles Small Cap Series, see "Financial Highlights."
Although it is not possible to predict the portfolio turnover rates with
certainty, the subadvisers of the following Series expect that such Series'
portfolio turnover rate will usually not exceed the following annual rates:
Loomis Sayles Small Cap Series, 300%; Loomis Sayles Balanced Series, 75%;
Draycott International Equity Series, 60%; Salomon Brothers U.S. Government
Series, 300%; Salomon Brothers Strategic Bond Opportunities Series, 300%;
Venture Value Series, 50% and Alger Equity Growth Series, 100%. Turnover in
excess of 100% involves higher levels of brokerage commissions and possibly
increased realization of taxable gains, as compared to many mutual funds.
RESOLVING MATERIAL CONFLICTS
Currently, shares in the Fund are available only to separate accounts
established by NEVLICO, The New England or subsidiaries of The New England as
an investment vehicle for variable life insurance or variable annuity
products. In the future, however, such shares may be offered to separate
accounts of insurance companies unaffiliated with NEVLICO or The New England.
A potential for certain conflicts of interest exists between the interests
of variable life insurance contract owners and variable annuity contract
owners. Pursuant to conditions imposed in connection with related regulatory
relief granted by the SEC, the Fund's board of trustees (the "Board of
Trustees") has an obligation to monitor events to identify conflicts that may
arise from the sale of shares to both variable life insurance and variable
annuity separate accounts or to separate accounts of insurance companies not
affiliated with The New England. Such events might include changes in state
insurance law or federal income tax law, changes in investment management of
any portfolio of the Fund, or differences between voting instructions given by
variable life insurance and variable annuity contract owners. Insurance
companies investing in the Fund will be responsible for proposing and
executing any necessary remedial action and the Board of Trustees has an
obligation to determine whether such proposed action adequately remedies any
such conflicts.
B-20
<PAGE>
PERFORMANCE INFORMATION
Information about the performance of the Back Bay Advisors Money Market,
Back Bay Advisors Bond Income, Westpeak Value Growth, Loomis Sayles Avanti
Growth and Loomis Sayles Small Cap Series is set forth below and, from time to
time, the Fund may use this information in advertisements. Performance
-----------
information about a Series is based on that Series' past performance and is
- ---------------------------------------------------------------------------
not intended to indicate future performance. The Fund serves as the underlying
- --------------------------------------------
investment vehicle for variable life insurance and variable annuity products
and its shares cannot be purchased directly. Therefore, such performance
information does not reflect any of the 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. Where relevant,
performance information about those variable life insurance or variable
annuity products is contained in the prospectus applicable to those products.
Each Series may include its total return in advertisements or other written
material. Total return is measured by comparing the value of a hypothetical
$1,000 investment in the Series at the beginning of the relevant period to the
value of the investment at the end of the period (assuming immediate
reinvestment of any dividends or capital gains distributions). Total return
reflects the bearing of certain expenses by The New England and its affiliates
pursuant to an expense agreement between The New England and the Fund (the
"Expense Agreement") which is in effect for the Series until November 1, 1994.
If the Expense Agreement had not been in effect, each Series' total return
would have been lower.
TOTAL RETURN
<TABLE>
<CAPTION>
AVERAGE ANNUAL AVERAGE ANNUAL
6 MONTHS TOTAL RETURN TOTAL RETURN
ENDED FOR THE TEN FOR THE FIVE
PERIOD JUNE 30, YEARS ENDING YEARS ENDING
RETURN 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 6/30/94 6/30/94
------ ----- ----- ----- ---- ----- ----- ----- ----- ---- ----- -------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Back Bay Advi-
sors
Money Market
Series 10.6% 8.2% 6.8% 6.6% 7.4% 9.2% 8.2% 6.2% 3.8% 3.0% 1.6% 6.6% 5.4%
Back Bay Advi-
sors
Bond Income Se-
ries 12.6% 18.7% 15.8% 1.4% 8.4% 12.3% 8.1% 18.0% 8.2% 12.6% -4.7% 11.0% 9.1%
Westpeak Value
Growth
Series(2) -- -- -- -- -- -- -- -- -- 14.2%(2) -5.9% -- --
Loomis Sayles
Avanti Growth
Series(3) -- -- -- -- -- -- -- -- -- 14.7%(3) -8.2% -- --
Loomis Sayles
Small
Cap Series(4) -- -- -- -- -- -- -- -- -- -- -3.7%(4) -- --
S&P 500(5) 6.2% 31.6% 18.6% 5.2% 16.5% 31.6% -3.1% 30.3% 7.6% 10.1% -3.4% 15.1% 10.4%
Lehman
Intermediate
Government/
Corporate Bond
Index(6) 14.4% 18.1% 13.1% 3.7% 6.8% 12.8% 9.2% 14.6% 7.2% 8.8% -2.6% 10.4% 8.2%
Consumer Price
Index(7) 4.0% 3.8% 1.1% 4.4% 4.4% 4.7% 6.1% 3.1% 2.9% 2.8% 1.3% 3.6% 3.5%
Dow Jones
Industrial
Average (8) 1.3% 33.5% 27.1% 5.5% 16.1% 32.2% -1.0% 24.2% 7.4% 17.0% -2.0% 16.5% 11.8%
<CAPTION>
AVERAGE ANNUAL
TOTAL RETURN
SINCE COMMENCE-
PERIOD MENT OF OFFERING
RETURN THROUGH 6/30/94
------ ----------------
<S> <C>
Back Bay Advi-
sors
Money Market
Series 6.9%(1)
Back Bay Advi-
sors
Bond Income Se-
ries 10.4%(1)
Westpeak Value
Growth
Series(2) 6.3%(2)
Loomis Sayles
Avanti Growth
Series(3) 4.5%(3)
Loomis Sayles
Small
Cap Series(4) -3.7%(4)
S&P 500(5) 13.5%
Lehman
Intermediate
Government/
Corporate Bond
Index(6) 10.9%
Consumer Price
Index(7) 3.7%
Dow Jones
Industrial
Average (8) 14.8%
</TABLE>
- -------
(1) The Back Bay Advisors Money Market Series and Back Bay Advisors Bond
Income Series commenced operations on August 26, 1983 and their Average
Annual Total Returns Since Commencement of Offering have been calculated
for the period beginning with that date. These returns would not change if
they had been calculated for the period beginning with September 1, 1983,
which is the period for which the Average Annual Total Returns Since
Commencement of Offering have been calculated for the S&P 500, Lehman
Intermediate Government/Corporate Bond Index, Consumer Price Index and Dow
Jones Industrial Average (unless otherwise indicated).
(2) For the period beginning April 30, 1993, when the Westpeak Value Growth
Series became publicly available.
(3) For the period beginning April 30, 1993, when the Loomis Sayles Avanti
Growth Series became publicly available.
(4) For the period beginning May 1, 1994, when the Loomis Sayles Small Cap
Series commenced operations, but did not become publicly available.
Average annual total return for the period May 1, 1994 through June 30,
1994 is presented on an unannualized basis.
B-21
<PAGE>
(5) The S&P 500 Stock Index is an unmanaged weighted index of the stock
performance of 500 industrial, transportation, utility and financial
companies. Investment results shown assume the reinvestment of dividends.
(6) The Lehman Intermediate Government/Corporate Bond Index is a subset of the
Lehman Government/Corporate Bond Index covering all issues with maturities
between 1 and 10 years which is comprised of taxable, publicly-issued,
non-convertible debt obligations issued or guaranteed by the U.S.
Government or its agencies and another Lehman index that is comprised of
taxable, fixed rate publicly issued, investment grade non-convertible
corporate debt obligations.
(7) 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 of groups.
(8) The Dow Jones Industrial Average is a market value-weighted and unmanaged
index of 30 large industrial stocks traded on the New York Stock Exchange.
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. 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 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.
YIELD
Back Bay Advisors Money Market Series
-------------------------------------
The Back Bay Advisors Money Market Series may advertise its yield and
"effective" (or "compound") yield (and its total return). The yield of the
Back Bay Advisors Money Market Series is the income earned by the Series over
a seven-day period on an annualized basis, i.e. the income earned in the
period is assumed to be earned every seven days over a 52-week period and is
stated as a percentage of the investment. "Effective" (or "compound") yield is
calculated similarly but, when annualized, the income earned by the investment
is assumed to be reinvested in the Series' shares and thus compounded in the
course of a 52-week period. The effective yield will be higher than the yield
because of the compounding effect of this assumed reinvestment.
For the seven-day period ended June 30, 1994, the yield for the Back Bay
Advisors Money Market Series was 3.70%. The effective yield for the same
period was 3.77%.
Back Bay Advisors Bond Income, Loomis Sayles Balanced, Salomon Brothers U.S.
----------------------------------------------------------------------------
Government and Salomon Brothers Strategic Bond Opportunities Series
- -------------------------------------------------------------------
Each of these Series may advertise its yield in addition to its total
return. The yield will be computed in accordance with the SEC's standardized
formula by dividing the net investment income per share earned during a recent
30-day period by the net asset value of a Series share (reduced by any earned
income expected to be declared shortly as a dividend) on the last trading day
of the period. Yield calculations will reflect any waiver of fees and/or
bearing of expenses by The New England and its affiliates.
PAST PERFORMANCE OF ADVISER AND SUBADVISERS
INVESTMENT ADVISERS' PERFORMANCE DATA
The performance information outlined below relates to all of the accounts,
including mutual funds, managed by the subadvisers of the Alger Equity Growth
Series, Draycott International Equity Series, Loomis Sayles Balanced Series,
Venture Value Series, Salomon Brothers Strategic Bond Opportunities Series and
Salomon Brothers U.S. Government Series and the adviser of the Loomis Sayles
Small Cap Series that have investment objectives and policies substantially
similar to the respective Series that they manage. THE FOLLOWING INFORMATION
HAS NOT BEEN ADJUSTED TO REFLECT ANY OF THE CHARGES ASSESSED AGAINST THE
INSURANCE COMPANY SEPARATE ACCOUNTS FOR WHICH THE FOLLOWING SERIES MAY SERVE
AS AN INVESTMENT VEHICLE. IF THESE CHARGES WERE INCLUDED, THE RESULTS WOULD BE
LOWER. Each subadviser and adviser believes that the differences between the
size of the accounts that it manages and the expected size of the Series
B-22
<PAGE>
it manages, that has substantially similar investment objectives and policies
as the accounts, do not affect the relevance of the information shown below to
prospective purchasers of insurance contracts for which the Series may serve
as an investment vehicle. The information below does not represent the
performance of the actual Series listed above. THESE SERIES ARE NEWLY
ORGANIZED (EXCEPT LOOMIS SAYLES SMALL CAP FUND, WHICH COMMENCED INVESTMENT
OPERATIONS ON MAY 1, 1994) AND HAVE NO PERFORMANCE RECORD OF THEIR OWN. THE
INFORMATION BELOW SHOULD NOT BE CONSIDERED A PREDICTION OF THE FUTURE
PERFORMANCE OF ANY SERIES. THE PERFORMANCE MAY BE HIGHER OR LOWER THAN THE
PERFORMANCE OF A FUND OR ACCOUNT WHICH HAS SUBSTANTIALLY SIMILAR INVESTMENT
OBJECTIVES AND POLICIES.
ALGER ACCOUNTS
David D. Alger, portfolio manager of the Alger Equity Growth Series, also
serves as the portfolio manager of other accounts that have substantially the
same investment objective and investment policies as the Alger Equity Growth
Series (the "Alger Accounts"). The following table sets forth the dollar
weighted annual total return of the Alger Accounts for each of the last seven
calendar years and total return for the period January 1, 1994 through June
30, 1994. Also shown are the number and average period-end net assets of the
Alger Accounts for each period and the dollar weighted average annual total
returns of the Alger Accounts for the one, three and five year periods ended
June 30, 1994. The total return information shown below has been adjusted to
give effect to the higher of the level of the actual expenses of the Accounts
during the periods shown or the anticipated level of expenses that the Series
will bear under the expense deferral arrangement described under "Management."
PERFORMANCE INFORMATION ABOUT THE ALGER ACCOUNTS
<TABLE>
<CAPTION>
VALUE OF ACCOUNTS
TOTAL NUMBER OF AT PERIOD END
YEARS ENDED DECEMBER 31, RETURN ACCOUNTS EXPENSES* (DOLLARS IN MILLIONS)
- ------------------------ ------ --------- --------- ---------------------
<S> <C> <C> <C> <C>
1987.................... (0.41)% 1 3.00% $ 5.3
1988.................... 6.40 1 3.01 5.1
1989.................... 35.05 1 3.32 5.8
1990.................... 2.25 2 3.04 7.6
1991.................... 42.82 2 2.47 22.7
1992.................... 11.66 2 1.73 53.5
1993.................... 21.51 2 1.50 116.0
6 months Ended June 30,
1994................... (9.77) 3 1.38 163.3
</TABLE>
- --------
* In cases where there is more than one account and the expense levels of the
accounts differ, the expense levels are averaged on a dollar weighted basis.
Expenses for periods of less than one year have been annualized.
AVERAGE ANNUAL TOTAL RETURNS THROUGH JUNE 30, 1994:
<TABLE>
<S> <C>
1 Year................................ 5.06%
3 Year................................ 14.38%
5 Year................................ 15.86%
</TABLE>
DRAYCOTT ACCOUNTS
The team of Nicholas D.P. Carn, Timothy S. Griffen, Gregory D. Eckersley and
Nigel Hankin, portfolio managers of the Draycott International Equity Series,
also serve as portfolio managers of other accounts that have substantially the
same investment objective and investment policies as the Draycott
International Equity Series (the "Draycott Accounts"). The following table
sets forth the dollar weighted total return for the period May 1, 1991
(commencement of the operations of the first Draycott Account) through
December 31, 1991, annual total return for the years ended December 31, 1992
and 1993 and total return for the period January 1, 1994 through June 30,
1994. Also shown are the average annual total returns of the Draycott Accounts
for the one year and three year periods ended June 30, 1994. The information
shown below has been adjusted to give effect to the higher of the level of the
actual expenses of the Accounts during the periods shown or the anticipated
level of expenses that the Series will bear under the expense deferral
arrangement described under "Management."
B-23
<PAGE>
PERFORMANCE INFORMATION ABOUT THE DRAYCOTT ACCOUNTS
<TABLE>
<CAPTION>
VALUE OF ACCOUNTS
NUMBER OF AT PERIOD END
TOTAL RETURN ACCOUNTS EXPENSES* (DOLLARS IN MILLIONS)
------------ --------- --------- ---------------------
<S> <C> <C> <C> <C>
May 1, 1991 through De-
cember 31, 1991........ (8.48)% 1 1.30% $ 9.2
Years Ended December 31,
1992.................. (7.41) 1 1.30 13.4
1993.................. 31.14 2 1.30 106.7
6 months Ended June 30,
1994................... 9.18 2 1.33 233.3
</TABLE>
- --------
* In cases where there is more than one account and expense levels of the
accounts differ, the expense levels are averaged on a dollar weighted basis.
Expenses for periods of less than one year have been annualized.
AVERAGE ANNUAL TOTAL RETURN FOR PERIODS ENDED JUNE 30, 1994:
<TABLE>
<S> <C>
1 Year................................. 19.1%
3 Year................................. 7.9%
</TABLE>
LOOMIS SAYLES BALANCED FUND
Douglas D. Ramos and Meri Anne Beck, portfolio managers of the Loomis Sayles
Balanced Series, also serve as portfolio managers of the New England Balanced
Fund, another mutual fund that has substantially the same investment objective
and investment policies as the Loomis Sayles Balanced Series. As of June 30,
1994, the New England Balanced Fund had $201.8 million in net assets. The
following table sets forth the total return of the New England Balanced Fund
Class A shares for the period March 1, 1990, when the Fund began to be
operated as a balanced fund, through December 31, 1990. (Prior to March 1,
1990, the Fund had different portfolio managers and was operated as a growth
and income fund.) The table also sets forth the annual total return of the
Fund's Class A shares for the years ended December 31, 1991, 1992 and 1993,
and the total return for the period January 1, 1994 through June 30, 1994, and
the expense levels of the Class A shares of the Fund for those periods. Also
shown are the average annual total returns for the one and three year periods
and the period from March 1, 1990 through June 30, 1994. All of the expense
levels of the New England Balanced Fund for the periods indicated are higher
than the expense levels anticipated for the Loomis Sayles Balanced Series
under the expense deferral arrangement described under "Management." The
information shown below has been adjusted to give effect to the higher level
of expenses of New England Balanced Fund.
PERFORMANCE INFORMATION ABOUT NEW ENGLAND BALANCED FUND (CLASS A SHARES)
<TABLE>
<CAPTION>
NET ASSET VALUE
TOTAL AT PERIOD END
YEARS ENDED DECEMBER 31, RETURN EXPENSES** (DOLLARS IN MILLIONS)
- ------------------------ ------ ---------- ---------------------
<S> <C> <C> <C>
1990*.................................. (6.8)% 1.58% $ 52.1
1991................................... 29.2 1.53 67.5
1992................................... 13.9 1.48 90.5
1993................................... 14.2 1.41 153.3
6 months Ended June 30, 1994........... (3.5) 1.43 155.4
</TABLE>
AVERAGE ANNUAL TOTAL RETURNS THROUGH JUNE 30, 1994:
<TABLE>
<S> <C>
1 Year................................. 3.7%
3 Year................................. 11.5%
since March 1, 1990*................... 10.0%
</TABLE>
- --------
* The Fund began pursuing its current investment policies on March 1, 1990.
**Expenses for periods of less than one year have been annualized.
B-24
<PAGE>
LOOMIS SAYLES SMALL CAP FUND
Barbara C. Friedman and Jeffrey C. Petherick, portfolio managers of the
Loomis Sayles Small Cap Series, also serve as portfolio managers of the Loomis
Sayles Small Cap Fund, another mutual fund that has the same investment
objective and investment policies as the Loomis Sayles Small Cap Series. The
following table sets forth the total return of the Loomis Sayles Small Cap
Fund for the period May 13, 1991 (commencement of Fund operations) through
December 31, 1991, the annual total return for the years ended December 31,
1992 and 1993 and the total return for the period January 1, 1994 through June
30, 1994. Also shown are the average annual total returns of the Loomis Sayles
Small Cap Fund for the one year, three year and since inception period ended
June 30, 1994. The information shown below reflects expense levels of the
Loomis Sayles Small Cap Fund, of all of which were higher than the expense
levels anticipated for the Loomis Sayles Small Cap Series, which will be
subject to a voluntary expense limit of 1.00%, described under "Management."
PERFORMANCE INFORMATION ABOUT THE LOOMIS SAYLES SMALL CAP FUND
<TABLE>
<CAPTION>
NET ASSET VALUE AT
TOTAL PERIOD END
YEAR ENDED DECEMBER 31, RETURN EXPENSES** (DOLLARS IN MILLIONS)
- ----------------------- ------ ---------- ---------------------
<S> <C> <C> <C>
1991*.................................. 30.5% 1.50% $15
1992................................... 13.1 1.50 39
1993................................... 24.7 1.35 68
6 months Ended June 30, 1994........... (9.9) 1.35 80
</TABLE>
AVERAGE ANNUAL TOTAL RETURNS THROUGH JUNE 30, 1994:
<TABLE>
<S> <C>
1 Year................................. 3.3%
3 Year................................. 18.9%
Since Inception*....................... 18.0%
</TABLE>
- --------
* The Loomis Sayles Small Cap Fund commenced operations on May 13, 1991.
** Expenses for periods of less than one year have been annualized.
NEW YORK VENTURE ACCOUNTS
Shelby M.C. Davis, the portfolio manager of the Venture Value Series, also
serves as the portfolio manager of other portfolios that have substantially
the same investment objective and investment policies as the Venture Value
Series ("New York Venture Accounts"). The following table sets forth the
dollar weighted annual total return of the New York Venture Accounts for the
years ended July 31, 1985 through 1994. Also shown are the average annual
total returns of the New York Venture Accounts for the one, three, five and
ten year periods ended July 31, 1994. The information shown below has been
adjusted to give effect to the higher of the actual expenses of the New York
Venture Accounts during the periods shown or the anticipated expense levels of
the Venture Value Series.
PERFORMANCE INFORMATION ABOUT NEW YORK VENTURE ACCOUNTS
<TABLE>
<CAPTION>
NET ASSET VALUE
NUMBER OF AT YEAR END
YEAR ENDED JULY 31, TOTAL RETURN ACCOUNTS EXPENSES (DOLLARS IN MILLIONS)
------------------- ------------ --------- -------- ---------------------
<S> <C> <C> <C> <C>
1985.................. 37.83% 1 1.05% $122.9
1986.................. 32.95 1 0.99 146.8
1987.................. 25.22 1 0.93 232.1
1988.................. (3.30) 1 1.01 167.8
1989.................. 33.44 1 0.97 319.1
1990.................. 8.12 1 0.97 344.9
1991.................. 14.29 1 0.97 421.2
1992.................. 18.62 1 0.91 494.2
1993.................. 20.00 2 0.90 762.0
1994.................. 5.88 2 0.90 1,101.0
</TABLE>
B-25
<PAGE>
AVERAGE ANNUAL TOTAL RETURN THROUGH JULY 31, 1994:
<TABLE>
<S> <C>
1 Year............................... 5.88%
3 Year............................... 14.65%
5 Year............................... 13.24%
10 Year............................... 18.62%
</TABLE>
SALOMON BROTHERS STRATEGIC AND U.S. GOVERNMENT ACCOUNTS
Steven Guterman, Peter Wilby and David Scott, portfolio managers of the
Salomon Brothers Strategic Bond Opportunities Series, also serve as portfolio
managers of the Salomon Strategic Account, another portfolio that has the same
investment objective and policies as the Salomon Brothers Strategic Bond
Opportunities Series. Mr. Guterman and Roger Lavan, the portfolio managers of
the Salomon Brothers U.S. Government Series, also serve as portfolio managers
of other accounts (the "Salomon U.S. Government Accounts") that have
substantially the same investment objective and investment policy as the
Salomon Brothers U.S. Government Series. The following tables set forth the
dollar weighted total returns, for the period March 1, 1993 (commencement of
operations of the Salomon Strategic Account) through December 31, 1993, the
period January 1, 1994 through June 30, 1994 for the Salomon Strategic Account
and the dollar weighted annual total returns for the years ended December 31,
1992 and 1993 and total return for the period January 1, 1994 through June 30,
1994 for each of the Salomon U.S. Government Accounts. Also shown are the
number of accounts and average period-end assets and the average annual total
returns for the one year ended June 30, 1994 for the Salomon Strategic Account
and the one and two years ended June 30, 1994 for each of the Salomon U.S.
Government Accounts. The information shown below has been adjusted to give
effect to the higher of the actual expenses of the Salomon Strategic Account
and the Salomon U.S. Government Accounts, respectively, during the periods
shown or the anticipated level of expenses that each of the Salomon Brothers
Strategic Bond Opportunities Series and the Salomon Brothers U.S. Government
Series will bear under the expense deferral arrangement described under
"Management."
PERFORMANCE INFORMATION ABOUT THE SALOMON STRATEGIC ACCOUNT
<TABLE>
<CAPTION>
NET ASSET ACCOUNT
NUMBER OF AT PERIOD END
TOTAL RETURN ACCOUNTS EXPENSES* (DOLLARS IN MILLIONS)
------------ --------- --------- ---------------------
<S> <C> <C> <C> <C>
March 1, 1993 through
December 31, 1993...... 8.73% 1 1.00% $53.6
6 months Ended June 30,
1994................... (4.55) 1 0.96 79.2
</TABLE>
- --------
* Expenses for periods of less than one year have been annualized.
AVERAGE ANNUAL TOTAL RETURN FOR ONE YEAR PERIOD ENDED JUNE 30, 1994:
(0.17%)
PERFORMANCE INFORMATION ABOUT THE SALOMON U.S. GOVERNMENT ACCOUNTS
<TABLE>
<CAPTION>
VALUE OF ACCOUNTS
TOTAL NUMBER OF AT PERIOD END
YEARS ENDED DECEMBER 31, RETURN ACCOUNTS EXPENSES* (DOLLARS IN MILLIONS)
- ------------------------ ------ --------- --------- ---------------------
<S> <C> <C> <C> <C>
1992........................... 6.27% 2 0.72% $266.4
1993........................... 7.63 2 0.93 398.1
6 months Ended June 30,1994.... (1.86) 2 0.98 343.6
</TABLE>
- --------
* In cases where there is more than one account and expenses of the accounts
differ, the expenses are averaged on a dollar weighted basis. Expenses for
periods of less than one year have been annualized.
AVERAGE ANNUAL TOTAL RETURN THROUGH JUNE 30, 1994:
<TABLE>
<S> <C>
1 Year............................... (0.03%)
2 Year............................... 4.64%
</TABLE>
B-26
<PAGE>
INVESTMENT RESTRICTIONS
The following is a description of restrictions on the investments to be made
by the eleven Series. Except as specifically listed below, and except for
restrictions marked with an asterisk, these restrictions may not be changed
without the approval of a majority of the outstanding voting securities of the
relevant Series.
INVESTMENT RESTRICTIONS APPLICABLE TO THE BACK BAY ADVISORS MONEY MARKET AND
BACK BAY ADVISORS BOND INCOME SERIES
Each of the Series listed above will not:
(1) Purchase any securities (other than U.S. Government Securities) if,
as a result, more than 5% of the Series' total assets (taken at current
value) would be invested in securities of a single issuer.
(2) Purchase any security (other than U.S. Government Securities) if, as
a result, more than 25% of the Series' total assets (taken at current
value) would be invested in any one industry. For purposes of this
restriction, telephone, gas and electric public utilities are each regarded
as separate industries and finance companies whose financing activities are
related primarily to the activities of their parent companies are
classified in the industry of their parents. For the purposes of the Back
Bay Advisors Money Market Series, this restriction does not apply to bank
obligations.
(3) Purchase securities on margin (but it may obtain such short-term
credits as may be necessary for the clearance of purchases and sales of
securities); or make short sales, except where, by virtue of ownership of
other securities, it has the right to obtain, without payment of further
consideration, securities equivalent in kind and amount to those sold, and
no Series will deposit or pledge more than 10% of its total assets (taken
at current value) as collateral for such sales.
(4) Acquire more than 10% of the total value of any class of the
outstanding securities of an issuer (taking all preferred stock issues of
an issuer as a single class and debt issues of an issuer as a single class)
or acquire more than 10% of the outstanding voting securities of an issuer.
(5) Borrow money, except as a temporary measure for extraordinary or
emergency purposes (but not for the purpose of investment) up to an amount
not in excess of 10% of its total assets (taken at cost), or 5% of its
total assets (taken at current value), whichever is lower; provided,
however, that the Back Bay Advisors Bond Income Series may loan its
portfolio securities. (See "Loans of Portfolio Securities" above.)
(6) Invest more than 5% of its total assets (taken at current value) in
securities of businesses (including predecessors) less than three years
old.
(7) Purchase or retain securities of any issuer if, to the knowledge of
the Fund, officers and trustees of the Fund or officers and directors of
any investment adviser of the Fund who individually own beneficially more
than 1/2 of 1% of the securities of that company, together own beneficially
more than 5%.
(8) Act as underwriter except to the extent that, in connection with the
disposition of portfolio securities, it may be deemed to be an underwriter
under the federal securities laws; or purchase any security restricted as
to disposition under the federal securities laws; provided, however, that,
subject to the Fund's limitation on illiquid investments stated below, the
Back Bay Advisors Bond Income Series may invest up to 10% of its total
assets (taken at current value) in such restricted securities.
(9) Make investments for the purpose of exercising control or management.
(10) Participate on a joint or joint and several basis in any trading
account in securities. (The "bunching" of orders for the purchase or sale
of portfolio securities with New England Mutual Life Insurance Company
("The New England"), Back Bay Advisors or accounts under their management
to reduce acquisition costs, to average prices among such accounts to
facilitate such transactions, is not considered participating in a trading
account in securities.)
(11) Invest in the securities of other investment companies, except in
connection with a merger, consolidation or similar transaction, and except
that the Back Bay Advisors Bond Income Series may invest in securities of
other investment companies by purchases in the open market involving only
customary broker's commissions. (Under the
B-27
<PAGE>
Investment Company Act of 1940 (the "1940 Act") each Series generally may
not (a) invest more than 10% of its total assets (taken at current value)
in the securities of other investment companies, (b) own securities of any
one investment company having a value in excess of 5% of that Series' total
assets (taken at current value), or (c) own more than 3% of the outstanding
voting stock of any one investment company.)
(12) Buy or sell oil, gas or other mineral leases, rights or royalty
contracts, commodities or commodity contracts or real estate. This
restriction does not prevent any Series from purchasing securities of
companies investing in real estate or of companies which are not
principally engaged in the business of buying or selling such leases,
rights or contracts.
(13) Pledge, mortgage or hypothecate more than 15% of its total assets
(taken at cost).
Restrictions (1) and (2) apply to securities subject to repurchase
agreements but not to the repurchase agreements themselves.
Each of the Series listed above will not purchase any illiquid security if,
as a result, more than 15% (10% in the case of the Back Bay Advisors Money
Market Series) of its net assets (taken at current value) would be invested in
such securities.
INVESTMENT RESTRICTIONS APPLICABLE TO INDIVIDUAL SERIES
In addition to the foregoing investment restrictions, the following
investment restrictions are applicable to individual Series as noted below.
BACK BAY ADVISORS MONEY MARKET SERIES
The Back Bay Advisors Money Market Series will not:
(1) Make loans, except by purchase of debt obligations in which the Back
Bay Advisors Money Market Series may invest consistent with its objective
and investment policies. This restriction does not apply to repurchase
agreements.
(2) Write or purchase puts, calls or combinations thereof.
BACK BAY ADVISORS BOND INCOME SERIES
The Back Bay Advisors Bond Income Series will not:
(1) Make loans, except by purchase of bonds, debentures, commercial
paper, corporate notes and similar evidences of indebtedness, which are
part of an issue to the public or to financial institutions, by entering
into repurchase agreements or by lending portfolio securities to the extent
set forth above under "Loans of Portfolio Securities" above.
(2) Write or purchase puts, calls or a combination thereof except that
the Back Bay Advisors Bond Income Series may purchase warrants or other
rights to subscribe to securities of companies issuing such warrants or
rights, or of parents or subsidiaries of such companies, provided that such
warrants or other rights to subscribe are attached to, or a part of, a unit
offering involving other securities.
In order to comply with certain state requirements applicable to restriction
(13) above, as a matter of operating policy subject to change without
shareholder approval, the Back Bay Advisors Bond Income Series will not pledge
more than 2% of its assets.
INVESTMENT RESTRICTIONS APPLICABLE TO THE WESTPEAK VALUE GROWTH, LOOMIS SAYLES
AVANTI GROWTH, LOOMIS SAYLES SMALL CAP, LOOMIS SAYLES BALANCED, DRAYCOTT
INTERNATIONAL EQUITY, SALOMON BROTHERS U.S. GOVERNMENT, SALOMON BROTHERS
STRATEGIC BOND OPPORTUNITIES, VENTURE VALUE AND ALGER EQUITY GROWTH SERIES
Each of the Series listed above will not:
*(1) With respect to 75% of the Series' total assets, purchase any
security (other than U.S. Government obligations) if, as a result, more
than 5% of the Series' total assets (taken at current value) would then be
invested in
B-28
<PAGE>
securities of a single issuer and, with respect to the Series' total
assets, purchase any security (other than U.S. Government obligations) if,
as a result, more than 10% of such assets would then be invested in
securities of a single issuer;
(2) Purchase any security (other than U.S. Government Securities) if, as
a result, more than 25% of the Series' total assets (taken at current
value) would be invested in any one industry (in the utilities category,
gas, electric, water and telephone companies will be considered as being in
separate industries, and each foreign country's government (together with
subdivisions thereof) will be considered to be a separate industry);
*(3) Purchase securities on margin (but it may obtain such short-term
credits as may be necessary for the clearance of purchases and sales of
securities), or make short sales except where, by virtue of ownership of
other securities, it has the right to obtain, without payment of further
consideration, securities equivalent in kind and amount to those sold, and
the Series will not deposit or pledge more than 10% of its total assets
(taken at current value) as collateral for such sales. (For this purpose,
the deposit or payment by the Series of initial or variation margin in
connection with futures contracts or related options transactions is not
considered the purchase of a security on margin);
*(4) Acquire more than 10% of any class of securities of an issuer
(taking all preferred stock issues of an issuer as a single class and all
debt issues of an issuer as a single class) or acquire more than 10% of the
outstanding voting securities of an issuer;
(5) Borrow money in excess of 10% of its total assets (taken at cost) or
5% of its total assets (taken at current value), whichever is lower, and
then only as a temporary measure for extraordinary or emergency purposes;
*(6) Pledge more than 15% of its total assets (taken at cost). (For the
purpose of this restriction, collateral arrangements with respect to
options, futures contracts and options on futures contracts and with
respect to initial and variation margin are not deemed to be a pledge of
assets);
*(7) Invest more than 5% of its total assets (taken at current value) in
securities of businesses (including predecessors) less than three years
old;
*(8) Purchase or retain securities of any issuer if officers and trustees
of the Fund or officers and directors of any investment adviser of the Fund
who individually own more than 1/2 of 1% of the shares or securities of
that issuer, together own more than 5%;
(9) Make loans, except by entering into repurchase agreements (including
reverse repurchase agreements) or by purchase of bonds, debentures,
commercial paper, corporate notes and similar evidences of indebtedness,
which are a part of an issue to the public or to financial institutions, or
through the lending of the Series' portfolio securities;
(10) Buy or sell oil, gas or other mineral leases, rights or royalty
contracts, real estate or commodities or commodity contracts, except that
the Series may buy and sell futures contracts and related options. (This
restriction does not prevent the Series from purchasing securities of
companies investing in the foregoing);
(11) Act as underwriter, except to the extent that, in connection with
the disposition of portfolio securities, it may be deemed to be an
underwriter under certain federal securities laws;
*(12) Make investments for the purpose of exercising control or
management;
*(13) Participate on a joint or joint and several basis in any trading
account in securities. (The "bunching" of orders for the purchase or sale
of portfolio securities for a Series with that Series' adviser or
subadviser or accounts under their management to reduce brokerage
commissions, to average prices among them or to facilitate such
transactions is not considered a trading account in securities for purposes
of this restriction);
*(14) Write, purchase or sell options or warrants or, in the case of the
Loomis Sayles Small Cap Series, combinations of both, except that the
Series may (a) acquire warrants or rights to subscribe to securities of
companies issuing such warrants or rights, or of parents or subsidiaries of
such companies, (b) write, purchase and sell put and call options on
securities or securities indices, and (c) enter into currency forward
contracts;
B-29
<PAGE>
*(15) Purchase any illiquid security if, as a result, more than 15% of
its net assets (taken at current value) would be invested in such
securities;
*(16) Invest in the securities of other investment companies, except by
purchases in the open market involving only customary brokers' commissions.
Under the 1940 Act, the Series may not (a) invest more than 10% of its
total assets (taken at current value) in such securities, (b) own
securities of any one investment company having a value in excess of 5% of
the total assets of the Series (taken at current value), or (c) own more
than 3% of the outstanding voting stock of any one investment company; or
(17) Issue senior securities. (For the purpose of this restriction none
of the following is deemed to be a senior security: any pledge or other
encumbrance of assets permitted by restriction (6) above; any borrowing
permitted by restriction (5) above; any collateral arrangements with
respect to options, futures contracts and options on futures contracts and
with respect to initial and variation margin; the purchase or sale of
options, forward contracts, futures contracts or options on futures
contracts; and the issuance of shares of beneficial interest permitted from
time to time by the provisions of the Trust's Declaration of Trust and by
the 1940 Act, the rules thereunder, or any exemption therefrom.)
Restriction (5) does not apply to reverse repurchase agreements.
VARIABLE CONTRACT RELATED INVESTMENT RESTRICTIONS
Separate accounts supporting variable life insurance and variable annuity
contracts are subject to certain diversification requirements imposed by
regulations adopted under the Internal Revenue Code. Because the Fund is
intended as an investment vehicle for variable life insurance and variable
annuity separate accounts, Section 817(h) of the Internal Revenue Code
requires that the Fund's investments, and accordingly the investments of each
Series, be "adequately diversified" in accordance with Treasury Regulations.
Failure to do so means the variable life insurance and variable annuity
contracts would cease to qualify as life insurance and annuities for federal
tax purposes. Regulations specifying the diversification requirements have
been issued by the Department of Treasury. The Fund intends to comply with
these requirements.
MANAGEMENT
The Fund's Board of Trustees supervises the affairs of the Fund as conducted
by the Series' advisers. Pursuant to separate advisory agreements, and subject
in each case to the supervision of the Fund's Board of Trustees, Back Bay
Advisors advises the Back Bay Advisors Money Market Series and the Back Bay
Advisors Bond Income Series; Westpeak advises the Westpeak Value Growth
Series; and Loomis Sayles advises the Loomis Sayles Small Cap Series and the
Loomis Sayles Avanti Growth Series. TNE Advisers, Inc. is the investment
adviser of 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 and the
Alger Equity Growth Series and has entered into subadvisory agreements for
these Series with Loomis Sayles, Draycott, Salomon Brothers Asset Management
Inc, Salomon Brothers Asset Management Inc, Selected/Venture Advisers, L.P.,
and Fred Alger Management, Inc., respectively. TNE Advisers, Inc. was
organized in 1994 and has not previously served as investment adviser to a
mutual fund.
Back Bay Advisors, Westpeak, Loomis Sayles and Draycott are each
independently-operated subsidiaries of New England Investment Companies, L.P.
("NEIC"). The general partners of each of Back Bay Advisors, Westpeak and
Loomis Sayles are special purpose corporations which are indirectly wholly-
owned subsidiaries of NEIC, whose sole general partner, New England Investment
Companies, Inc., is a wholly-owned subsidiary of The New England.
BACK BAY ADVISORS, 399 Boylston Street, Boston, Massachusetts 02116,
provides discretionary investment management services to mutual funds and
other institutional investors. The New England itself served as adviser to the
Back Bay Advisors Money Market Series and the Back Bay Advisors Bond Income
Series until September 10, 1986, when it transferred these advisory functions
to Back Bay Advisors, incident to a reorganization effected in order to
maintain The New England's investment advisory activities in a separate
corporate entity for administrative and regulatory purposes. Catherine L.
Bunting, Senior Vice President of Back Bay Advisors, has served as the Back
Bay Advisors Bond Income Series' portfolio manager since January 1989.
B-30
<PAGE>
WESTPEAK, 1050 Walnut Street, Boulder, CO 80302, was organized in 1991.
Gerald H. Scriver, President and Chief Executive Officer of Westpeak and
Senior Vice President of the Fund, and Philip J. Cooper, CFA, Senior Vice
President of portfolio management of Westpeak and Vice President of the Fund,
have served as the portfolio managers of the Westpeak Value Growth Series
since its inception in 1993. Both Mr. Scriver and Mr. Cooper have been with
Westpeak since its inception in 1991. Prior to joining Westpeak in 1991, Mr.
Scriver was Director of Quantitative Strategies of INVESCO and Mr. Cooper was
Portfolio Manager of United Asset Management Services.
LOOMIS SAYLES, One Financial Center, Boston, MA 02111, was founded in 1926
and is one of the country's oldest and largest investment firms. Richard W.
Hurckes, Vice President of Loomis Sayles and Vice President of the Fund, and
Scott Pape, Vice President of Loomis Sayles and Vice President of the Fund,
have served as the portfolio managers of the Loomis Sayles Avanti Growth
Series since its inception in 1993. Mr. Hurckes has been employed by Loomis
Sayles for more than five years. Prior to the time he joined Loomis Sayles in
1991, Mr. Pape was Equity Portfolio Manager of the Illinois State Board of
Investment.
Barbara C. Friedman and Jeffrey C. Petherick, who are Vice Presidents of
Loomis Sayles and the Fund, have served as portfolio managers of the Loomis
Sayles Small Cap Series since its inception in May, 1994. Ms. Friedman was a
partner and portfolio manager at Harvard Management Company prior to joining
Loomis Sayles in 1990. Mr. Petherick was an analyst at Masco Corporation prior
to joining Loomis Sayles in 1990.
The investment adviser 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 is TNE Advisers, Inc., 501 Boylston
Street, Boston, MA 02116. TNE Advisers, Inc. is a wholly-owned subsidiary of
The New England. TNE Advisers, Inc. oversees, evaluates and monitors the
subadvisers' provision of investment advisory services to the Series and
provides general business management and administration to the Series. TNE
Advisers, Inc. has contracted with New England Funds, L.P. to provide certain
administrative services to support the Series.
Subject to the supervision of TNE Advisers, Inc., each subadviser manages
its Series in accordance with the Series' investment objective and policies,
makes investment decisions for that Series, places orders to purchase and sell
securities for that Series and employs professional advisers and securities
analysts who provide research services to that Series. The Series advised by
TNE Advisers, Inc. pay no direct fees to any of the subadvisers described
below.
Loomis Sayles subadvises the Loomis Sayles Balanced Series; Douglas D. Ramos
and Meri Anne Beck, who are Vice Presidents of the Fund and Loomis Sayles,
serve as its portfolio managers. Both Mr. Ramos and Ms. Beck have been
employed by Loomis Sayles for more than five years.
DRAYCOTT PARTNERS, LTD. ("Draycott"), 8 City Road, London EC2Y 1HE
subadvises the Draycott International Equity Series. Draycott was organized in
1991 to provide investment advice and management services to institutional
investors' accounts and to mutual funds distributed both to institutional and
retail customers. Draycott is a member of the Investment Management Regulatory
Organization Limited ("IMRO"), the United Kingdom regulator of investment
advisers. In addition to the Series, Draycott currently manages three separate
investment accounts of The New England that invest substantially all of their
assets in international equity securities and one mutual fund. Nicholas D.P.
Carn, Chief Investment Officer, President and Chief Executive Officer of
Draycott, Timothy S. Griffen, Senior Portfolio Manager and Pacific Rim
Specialist of Draycott, Gregory D. Eckersley, Portfolio Manager and United
Kingdom Specialist of Draycott, and Nigel Hankin, Portfolio Manager and
European Specialist of Draycott, will serve as the portfolio managers of the
Draycott International Equity Series. Prior to Draycott's organization in
1991, Mr. Carn was Managing Director, International Equities Group, Mr.
Griffen was a Vice President and Portfolio Manager and Mr. Hankin was European
Fund Manager, all at CIGNA International Investment Advisors, Ltd. and Mr.
Eckersley was an Investment Manager at Century Asset Management, London.
Short-term U.S. cash management services for the Draycott International
Equity Series are provided by Back Bay Advisors as subadviser to Draycott. For
these services, Draycott has agreed to compensate Back Bay Advisors at the
annual rate of 0.08% of the value of the Series' average daily net assets.
SALOMON BROTHERS ASSET MANAGEMENT INC ("SBAM"), 7 World Trade Center, New
York, New York 10048, the subadviser to the Salomon Brothers U.S. Government
Series and the Salomon Brothers Strategic Bond Opportunities Series, is an
indirect, wholly-owned subsidiary of Salomon Inc ("SI") and was incorporated
in 1987.
B-31
<PAGE>
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 compensate SBAM
Limited at the rate of one-third of the compensation payable to SBAM by TNE
Advisers, Inc. SBAM Limited is an indirect, wholly-owned subsidiary of Salomon
Inc. SBAM Limited is a member of IMRO and is registered as an investment
adviser in the United States pursuant to the Investment Advisers Act of 1940.
Steven Guterman is primarily responsible for the day-to-day management of
the Salomon Brothers U.S. Government Series and the mortgage-backed securities
and U.S. government securities portion of the Salomon Brothers Strategic Bond
Opportunities Series. Mr. Guterman co-manages the Salomon Brothers U.S.
Government Series with Roger Lavan. Peter J. Wilby is primarily responsible
for the day-to-day management of the High Yield and Emerging Market Debt
Securities portions of the Salomon Brothers Strategic Bond Opportunities
Series. Beth Semmel assists Mr. Wilby in the day-to-day management of the
Strategic Bond Opportunities Series. David Scott is primarily responsible for
the international portion of the Salomon Brothers Strategic Bond Opportunities
Series.
Mr. Guterman joined SBAM in 1990 and Salomon Brothers Inc in 1983. He
initially worked in the mortgage research group where he became a Research
Director and later traded derivative mortgage-backed securities for Salomon
Brothers Inc. Mr. Lavan joined SBAM in 1990. Prior to joining SBAM, Mr. Lavan
spent four years analyzing portfolios for Salomon's Fixed Income Sales Group
and Product Support Divisions. Mr. Wilby, who joined SBAM in 1989, was
previously employed by Prudential Capital Management Group ("Prudential")
where he served as director of Prudential's credit research unit and as a
corporate and sovereign credit analyst with Prudential. Mr. Wilby later
managed high yield bonds and leveraged equities in the mutual funds and
institutional portfolios at Prudential. Ms. Semmel joined SBAM in May of 1993.
Prior to joining SBAM, Ms. Semmel spent four years as a high yield bond
analyst at Morgan Stanley Asset Management. Mr. Scott has been with SBAM since
April, 1994. Previously, he was a portfolio manager for J.P. Morgan Investment
Management in London from 1990-94 where he was responsible for global and non-
dollar portfolios. Before joining J.P. Morgan, Mr. Scott was employed by
Mercury Asset Management where he had responsibility for captive insurance
portfolios.
SELECTED/VENTURE ADVISERS, L.P. ("Selected/Venture"), 124 East Marcy Street,
Santa Fe, New Mexico 87501, subadvises the Venture Value Series. Venture
Advisers, Inc. is the sole general partner of Selected/Venture.
Selected/Venture manages investment and business operations and also acts as
investment adviser for seven mutual funds. As of May 1, 1994, Shelby M.C.
Davis became the controlling shareholder of Venture Advisers, Inc. Shelby M.C.
Davis is the primary portfolio manager for the Venture Value Series. Since
1968, he has been a director of Venture Advisers, Inc. and, as discussed
above, effective May 1, 1994, he assumed control of Selected/Venture. He is
also a director and officer of all investment companies managed by
Selected/Venture.
FRED ALGER MANAGEMENT, INC. ("Alger Management"), 75 Maiden Lane, New York,
New York 10038, subadvises the Alger Equity Growth Series. Alger Management is
a wholly-owned subsidiary of Fred Alger & Company, Incorporated which in turn
is a wholly-owned subsidiary of Alger Associates, Inc., a financial services
holding company. Fred M. Alger III and his brother, David D. Alger, own
approximately 53 percent and 17 percent, respectively, of Alger Associates,
Inc. and may be deemed to control that company and its subsidiaries. David D.
Alger, Executive Vice President of Alger Management, is primarily responsible
for the day-to-day management of the Alger Equity Growth Series. He has been
employed by Alger Management as Executive Vice President and Director of
Research since 1971 and he serves as portfolio manager for other mutual funds
and investment accounts managed by Alger Management.
FEES AND EXPENSES. For advisory services rendered during the fiscal year
ended December 31, 1993, Back Bay Advisors was paid 0.35% of the Back Bay
Advisors Money Market Series' average net assets and 0.40% of the Back Bay
Advisors Bond Income Series' average net assets.
The Westpeak Value Growth Series and the Loomis Sayles Avanti Growth Series
pay Westpeak and Loomis Sayles, respectively, advisory fees at the annual rate
of 0.70% of the first $200 million of the relevant Series' average net assets,
0.65% of the next $300 million of such assets and 0.60% of such assets in
excess of $500 million. Westpeak and Loomis Sayles have each voluntarily
agreed, until December 1, 1994, to reduce their respective advisory fees and,
if necessary, to assume expenses to the extent necessary to limit each of the
Westpeak Value Growth and Loomis Sayles Avanti Growth Series' expenses to an
annual rate of 0.85% of the average daily net assets of those Series.
B-32
<PAGE>
For rendering advisory services to the Loomis Sayles Small Cap Series,
Loomis Sayles is paid a fee at the annual rate of 1.00% of the Series' average
net assets. Although this fee rate is higher than the advisory fee rate of
most mutual funds in general, many other funds with similar investment
objectives have the same or higher fee rates. Loomis Sayles has voluntarily
agreed, until December 1, 1994, to reduce its advisory fees and/or bear other
expenses of the Loomis Sayles Small Cap Series, to the extent necessary to
limit Loomis Sayles Small Cap Series' total operating expenses to an annual
rate of 1.00% of the average daily net assets.
Pursuant to a voluntary expense agreement, effective November 1, 1994,
relating to the Back Bay Advisors Money Market and Back Bay Advisors Bond
Income Series and, beginning December 1, 1994, relating to the Loomis Sayles
Small Cap, Loomis Sayles Avanti Growth and the Westpeak Value Growth Series,
The New England will bear the expenses (other than the advisory fees 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, The New England will bear such expenses of the Series in
excess of 1.00% of the Series' average daily net assets. As a result of the
voluntary expense agreement (and assuming the Series incur the same level of
advisory fees as in 1993 and no taxes, interest or extraordinary expenses),
the Series' expense ratios during the continuation of the voluntary expense
agreement are expected to be:
<TABLE>
<CAPTION>
TOTAL EXPENSE RATIO
SERIES UNDER NEW AGREEMENT
------ -------------------
<S> <C>
Back Bay Advisors Money Market Series.................. .50%
Back Bay Advisors Bond Income Series................... .54%
Westpeak Value Growth Series........................... .85%
Loomis Sayles Small Cap Series......................... 1.00%
Loomis Sayles Avanti Growth Series..................... .85%
</TABLE>
The New England may terminate this expense agreement at any time.
Prior to November 1, 1994, The New England had agreed to pay the charges and
expenses of preparing, printing and distributing prospectuses and reports to
shareholders, custodial and transfer agent charges and expenses, auditing,
accounting and legal fees and certain other expenses in connection with the
affairs of the Fund and the expenses of shareholders' and trustees' meetings.
TNE Advisers, Inc. is paid a management fee from the Series it manages as
follows:
<TABLE>
<CAPTION>
MANAGEMENT FEE PAID BY SERIES TO
TNE ADVISERS, INC.
SERIES (% OF AVERAGE NET ASSETS)
------ --------------------------------
<S> <C>
Loomis Sayles Balanced................... .70%
Draycott International Equity............ .90%
Salomon Brothers U.S. Government......... .55%
Salomon Brothers Strategic Bond Opportu-
nities.................................. .65%
Venture Value............................ .75%
Alger Equity Growth...................... .70%
</TABLE>
TNE Advisers, Inc. pays each subadviser at the following rates for providing
advisory services to the Series: 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% on
B-33
<PAGE>
the next $400 million of average net 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.
Pursuant to an expense deferral arrangement in effect beginning November 1,
1994, relating 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
and the Alger Equity Growth Series, which TNE Advisers, Inc. may terminate at
any time, TNE Advisers, Inc. has agreed to pay the expenses of the Series'
operations (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 the Series to repay TNE Advisers, Inc.
such expenses in future years, if any, when a Series' expenses fall below the
stated expense limit that pertains to that Series; such deferred expenses may
be charged to a Series in a subsequent year to the extent that the charge 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. For the Loomis Sayles
Balanced Series, TNE Advisers, Inc. has agreed to defer such expenses in
excess of 0.85% of net assets until a subsequent year, if any, when total
expenses are less than 0.85% of net assets; for the Draycott International
Equity Series, TNE Advisers, Inc. has agreed to defer such expenses in excess
of 1.30% of net assets until a subsequent year, if any, when total expenses
are less than 1.30% of net assets; for the Salomon Brothers U.S. Government
Series, TNE Advisers, Inc. has agreed to defer such expenses in excess of
0.70% of net assets until a subsequent year, if any, when total expenses are
less than 0.70% of net assets; for the Salomon Brothers Strategic Bond
Opportunities Series, TNE Advisers, Inc. has agreed to defer such expenses in
excess of 0.85% of net assets until a subsequent year, if any, when total
expenses are less than 0.85% of net assets; for the Venture Value Series, TNE
Advisers, Inc. has agreed to defer such expenses in excess of 0.90% of net
assets until a subsequent year, if any, when total expenses are less than
0.90% of net assets; for the Alger Equity Growth Series, TNE Advisers, Inc.
has agreed to defer such expenses in excess of 0.85% of net assets until a
subsequent year, if any, when total expenses are less than 0.85% of net
assets. These expense limits can be prospectively discontinued by TNE
Advisers, Inc. 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.
In addition to the management fee paid to TNE Advisers, Inc., the Loomis
Sayles Balanced, Draycott International Equity, Salomon Brothers U.S.
Government, Salomon Brothers Strategic Bond Opportunities, Venture Value and
Alger Equity Growth Series pay all expenses not borne by TNE Advisers, Inc.,
the subadvisers or the Distributor, including, but not limited to, the charges
and expenses of the respective Series' custodian, independent auditors and
legal counsel, all brokerage commissions and transfer taxes in connection with
portfolio transactions, all taxes and filing fees, the fees and expenses for
registration or qualification of its shares under federal or state securities
laws, all expenses of shareholders' and trustees' meetings and preparing,
printing and mailing prospectuses and reports to shareholders and the
compensation of trustees of the Fund who are not directors, officers or
employees of The New England or its affiliates, other than affiliated
registered investment companies.
The Fund incurred total expenses during the one-year period ended December
31, 1993 as follows: $462,818 for the Back Bay Advisors Bond Income Series,
$232,679 for the Back Bay Advisors Money Market Series, $31,881 for the Loomis
Sayles Avanti Growth Series and $27,090 for the Westpeak Value Growth Series;
these expenses equaled 0.43% of the Back Bay Advisors Bond Income Series'
average net assets, 0.38% of the Back Bay Advisors Money Market Series'
average net assets, 0.85% of the Loomis Sayles Avanti Growth Series' average
net assets and 0.85% of the Westpeak Value Growth Series average net assets.
These expense figures do not include portfolio brokerage commissions, which
are not deducted from the Series' assets in the same manner as other charges
and expenses; rather, brokerage commissions are part of the purchase price
paid for portfolio securities and reduce the proceeds received on the sale of
portfolio securities. For the period April 30 through December 31, 1993, the
Loomis Sayles Avanti Growth Series paid a total of $10,000 in brokerage
commissions and the Westpeak Value Growth Series paid a total of $12,000 in
brokerage commissions. These brokerage commissions equaled 0.18% of the Loomis
Sayles Avanti Growth Series' average net assets and 0.25% of the Westpeak
Value Growth Series' average net assets. Portfolio transactions of the Back
Bay Advisors Money Market Series and Back Bay Advisors Bond Income Series are
generally on a net basis without a stated commission.
B-34
<PAGE>
Each Series' adviser has contracted with New England Securities or New
England Funds, L.P., an affiliate of New England Securities, for New England
Securities or New England Funds, L.P. to provide executive and other personnel
for the administration of Fund affairs. Also, pursuant to the rules of the
SEC, the Fund may pay brokerage commissions to New England Securities on
behalf of the Back Bay Advisors Bond Income Series on purchases and sales of
securities for the investment portfolio of the Series. Subject to procedures
adopted by the Fund's trustees, Fund brokerage transactions may be executed by
brokers that are affiliated with any adviser or subadivser.
Fund shares are offered through New England Securities, 399 Boylston Street,
Boston, Massachusetts 02116, the principal underwriter for the Fund. New
England Securities is a wholly-owned subsidiary of The New England.
SALE AND REDEMPTION OF SHARES
Shares of each Series are purchased or redeemed depending, among other
things, on the amount of premium payments invested and the surrender and
transfer requests effected on any given day pursuant to the variable life
insurance and variable annuity contracts supported by the Fund. Such
transactions can be made only on those days during which the New York Stock
Exchange is open for trading. Purchases and redemptions of Fund shares are
effected at the net asset value per share determined as of the close of
regular trading on the New York Stock Exchange on the day such purchase order
or redemption request is received.
The Fund may suspend the right of redemption for any Series and may postpone
payment for any period when the New York Stock Exchange is closed for other
than weekends or holidays, or if permitted by the rules of the SEC, during
periods when trading on the New York Stock Exchange is restricted or during an
emergency which makes it impracticable for a Series to dispose of securities
or fairly to determine the value of its net assets, or during any other period
permitted by the SEC for the protection of investors.
NET ASSET VALUES AND PORTFOLIO VALUATION
Back Bay Advisors, Westpeak, Loomis Sayles, Draycott, SBAM, Selected/Venture
and Alger Management, under the direction of the Board of Trustees, determine
the value of each Series' securities at their fair value as determined in good
faith by the respective Series' adviser or subadviser (or a pricing service
selected by the adviser or subadviser) under the direction of the Fund's Board
of Trustees. The net asset value of each Series' shares is determined as of
the close of regular trading on the New York Stock Exchange each day it is
open. Each Series' total net assets are divided by the number of outstanding
shares of that Series to determine the net asset value per share for that
Series.
The Back Bay Advisors Money Market Series' investment portfolio, and any
fixed-income securities with remaining maturities of 60 days or less held by
any other Series, are valued at amortized cost. Other portfolio securities of
each Series (other than the Back Bay Advisors Money Market Series) are valued
at market value where current market quotations are readily available and
otherwise are taken at fair value as determined in good faith by the Board of
Trustees, although the actual calculations may be made by persons acting
pursuant to the direction of the Board.
The Back Bay Advisors Money Market Series seeks to maintain a constant net
asset value per share of $100, although this cannot be assured. The net asset
value per share for the other Series will vary depending on the value of each
Series' investment portfolio.
DIVIDENDS AND CAPITAL GAIN DISTRIBUTIONS
BACK BAY ADVISORS MONEY MARKET SERIES
The net investment income of the Back Bay Advisors Money Market Series is
declared daily and paid monthly as a dividend. Although the Back Bay Advisors
Money Market Series does not expect to realize any long-term capital gains, if
such gains are realized they will be distributed once a year.
B-35
<PAGE>
OTHER SERIES
It is the policy of each Series other than the Back Bay Advisors Money
Market Series to pay annually as dividends substantially all net investment
income and to distribute annually all net realized capital gains, if any,
after offsetting any capital loss carryovers. See "Taxes." Dividends from net
investment income may be paid more or less often if the Board of Trustees
deems it appropriate.
Federal income tax law requires each Series to distribute prior to calendar
year end virtually all of its ordinary income for such year and virtually all
of the capital gain net income realized by the Series in the one-year period
ending October 31 (or December 31, if the Series so elects) of such year and
not previously distributed.
Dividends and distributions of each Series are automatically reinvested in
shares of the respective Series.
TAXES
Each Series is treated as a separate taxable entity for federal income tax
purposes and intends to qualify as a regulated investment company under the
Internal Revenue Code of 1986, as amended. So long as a Series distributes all
of its net investment income and net capital gains to its shareholders, the
Series itself does not pay any federal income tax. Dividends from net
investment income of each of the Series and distributions of each Series' net
short-term gains, if any, are ordinary income to its shareholders.
Distributions of any Series' net realized long-term capital gains, if any, are
long-term capital gains to its shareholders. Whether or not taxes must be paid
by the shareholders of a Series on distributions received from that Series
will depend on the tax status of NEVLICO's or The New England's separate
accounts and the tax status of any other shareholders. For the purposes of the
foregoing, each Series' shareholders are the separate accounts investing
directly in the Fund and are not the owners of the variable life insurance or
variable annuity contracts for which the Fund serves as an investment vehicle.
For a description of the tax consequences for such contract owners, see the
relevant prospectus applicable to such contracts.
ORGANIZATION AND CAPITALIZATION OF THE FUND
The Fund was originally organized in 1983 as a Massachusetts corporation and
was reorganized into a Massachusetts business trust on February 27, 1987. The
Fund is registered as a diversified, open-end management company under the
1940 Act and is authorized to issue an unlimited number of shares of each
Series. Shareholders may address inquiries about the Fund to New England
Securities, 399 Boylston Street, Boston, Massachusetts 02116.
As of the date of this prospectus, all of the outstanding voting securities
of the Fund are owned by separate accounts of The New England and/or NEVLICO,
or, in the case of certain series, by those separate accounts and the general
account of The New England. Therefore, The New England and NEVLICO are
presumed to be in control (as that term is defined in the 1940 Act) of the
Fund. However, the staff of the SEC is presently of the view that The New
England and NEVLICO are each required to 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 that The New England is required to vote any
shares held in its general account in the same proportion as all other Fund
shares are voted. The New England and NEVLICO currently intend to vote their
shares in a manner consistent with this view.
The Fund does not generally hold annual meetings of shareholders and will
hold shareholders meetings only when required by law. Shareholders may remove
trustees from office by votes cast at a shareholder meeting or by written
consent.
TRANSFER AGENT
The transfer agent and the dividend paying agent for the Fund is The New
England, 501 Boylston Street, Boston, Massachusetts 02116.
VOTING RIGHTS
NEVLICO and The New England will vote shares attributable to the variable
life insurance and variable annuity contracts investing in the Fund in
accordance with instructions received from the owners of those contracts in
the manner set forth in the prospectus applicable to such contracts. Fund
shareholders are entitled to one vote for each full share held (with
fractional votes for fractional shares held).
B-36
<PAGE>
APPENDIX A
RATINGS OF SECURITIES
Description of Moody's Investors Service, Inc. corporate bond ratings:
Aaa, Aa, A--Bonds which are rated AAA or Aa are judged to be of high quality
by all standards and are generally known as high grade bonds. Bonds rated Aa
are rated lower than Aaa securities because margins of protection may not be
as large as in the latter or fluctuation 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. Bonds which are
rated A possess many favorable investment attributes and are to be considered
as upper medium grade obligations. Factors giving security to principal and
interest are considered adequate, but elements may be present which suggest a
susceptibility to impairment sometime in the future.
Baa--Bonds which are rated Baa are considered medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present, but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba--Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B--Bonds which are rated B generally lack characteristics of 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
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 can be
regarded as having extremely poor prospects of ever attaining any real
investment standing.
Description of Standard & Poor's Corporation corporate bond ratings:
AAA, AA, A--Bonds rated AAA have the highest rating assigned by Standard &
Poor's to a debt obligation. Capacity to pay interest and repay principal is
extremely strong. Bonds rated AA have a very strong capacity to pay interest
and repay principal and differ from the highest rated issues only in small
degree. Bonds rated A have a strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions than bonds in high rated
categories.
BBB--Bonds rated BBB are regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit adequate
protection parameters, adverse economic conditions or changing circumstances
are more likely to lead to a weakened capacity to repay principal and pay
interest for bonds in this category than for bonds in higher rated categories.
BB-B-CCC-CC--Bonds rated BB, B, CCC and CC are regarded, on balance, as
predominantly speculative with respect to the issuer's 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.
CI--The rating CI is reserved for income bonds on which no income is being
paid.
D--Bonds rated D are in default, and payment of interest and/or repayment of
principal is in arrears.
B-37
<PAGE>
501 Boylston Street
Boston, Massachusetts 02116-3700
- --------------------------------------------------------------------------------
EQUAL OPPORTUNITY EMPLOYER M/F
(C)1995 New England Variable Life Insurance Company
NEA-17-95
<PAGE>
Supplement Dated February 10, 1995 to the New England Zenith Fund
Prospectus Dated May 1, 1994, as Supplemented on October 31, 1994
Supplement Dated February 10, 1995 to the New England Zenith Fund
Prospectus Dated October 31, 1994
The Trustees of New England Zenith Fund (the "Trust") have approved new
advisory arrangements between the Trust and TNE Advisers, Inc. with respect to
the Back Bay Advisors Money Market Series, Back Bay Advisors Bond Income Series,
Westpeak Value Growth Series, Loomis Sayles Avanti Growth Series, Westpeak Stock
Index Series, Back Bay Advisors Managed Series and Loomis Sayles Small Cap
Series (the "Series"). TNE Advisors, Inc. proposes to enter into a subadvisory
agreement for each of the aforementioned Series with Back Bay Advisors, L.P.
("Back Bay Advisors"), Back Bay Advisors, Westpeak Investment Advisors, L.P.
("Westpeak"), Loomis Sayles & Company, L.P. ("Loomis Sayles"), Westpeak, Back
Bay Advisors and Loomis Sayles, respectively. The new advisory arrangements and
the new subadvisory agreements will be submitted to shareholders of the Series
at a meeting scheduled to be held on April 10, 1995. If approved, the new
arrangements and the new subadvisory agreements will take effect on or about May
1, 1995.
Under the proposed new advisory arrangements, TNE Advisors, Inc. will be
paid a management fee at the same rate received by the Series' present advisers
who will become the Series' subadvisers under the proposed arrangements.
TNE Advisers, Inc. proposes to pay Back Bay Advisors for providing
subadvisory services to the Back Bay Advisors Money Market Series at the annual
rate of 0.15% of the first $100 million of the Series' average net assets and
0.10% of such assets in excess of $100 million; to the Back Bay Advisors Bond
Income Series at the annual rate of 0.25% of the first $50 million of the
Series' average net assets, 0.20% of the next $200 million of such assets and
0.15% of such assets in excess of $250 million; and to the Back Bay Advisors
Managed Series at the annual rate of 0.25% of the first $50 million of the
Series' average net assets and 0.20% of such assets in excess of $50 million.
TNE Advisers, Inc. proposes to pay Westpeak for providing subadvisory
services to the Westpeak Value Growth Series at the annual rate of 0.50% for the
first $25 million of the Series' average net assets, 0.40% of the next $75
million of such assets, 0.35% of the next $100 million of such assets and 0.30%
of such assets in excess of $200 million, and to the Westpeak Stock Index Series
at the annual rate of 0.10% of the Series' average net assets.
TNE Advisers, Inc. proposes to pay Loomis Sayles for providing subadvisory
services to the Loomis Sayles Avanti Growth Series at the annual rate of 0.50%
of the first $25 million of the Series' average net assets, 0.40% of the next
$75 million of such assets, 0.35% of the next $100 million of such assets and
0.30% of such assets in excess of $200 million, and to the Loomis Sayles Small
Cap Series at the annual rate of 0.55% of the first $25 million of the Series'
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.
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