NEW ENGLAND ZENITH FUND
STATEMENT OF ADDITIONAL INFORMATION May 1, 1996
As Revised August 30, 1996
This Statement of Additional Information is not a prospectus.
This Statement of Additional Information relates to the Prospectus
dated May 1, 1996, and should be read in conjunction therewith. A
copy of the Prospectus may be obtained from New England
Securities Corporation, 399 Boylston Street, Boston, Massachusetts
02116.
TABLE OF CONTENTS
Page
Investment Objectives and Policies 3
Miscellaneous Investment Practices 9
Determination of Net Asset Values 21
Fund Performance 23
Trustees and Officers 31
Advisory Arrangements 33
Distribution Agreement 42
Other Services 43
Portfolio Transactions and Brokerage 44
Description of the Fund 46
Appendix A-1 (Description of Bond Ratings) 50
Appendix A-2 (Description of Commercial Paper Ratings) 53
Appendix B 54
Appendix C Financial Statements and Report of Independent
Accountants 57
INVESTMENT OBJECTIVES AND POLICIES
The investment objectives and policies of each Series
(collectively and individually the "Series") of New England Zenith
Fund (the "Fund") are summarized on the front page of the Prospectus
and in the text of the Prospectus following the caption "Investment
Objectives and Policies." There can be no assurance that any of the
Series will achieve its objective. The investment policies of each
Series set forth in the Prospectus and in this Statement of
Additional Information may be changed without shareholder approval,
except for any policy as to which the Prospectus or this Statement
of Additional Information explicitly indicates that such approval is
required, and except for the investment objectives of the Money
Market, Bond Income, Capital Growth, Growth and Income, Avanti
Growth, Stock Index, Managed and Small Cap Series, which have
fundamental investment objectives.
The terms "shareholder approval" and "approval of a majority of
the outstanding voting securities," as used in the Prospectus and
this Statement of Additional Information, mean, with respect to a
Series, approval by the lesser of (i) 67% of the shares of the
Series represented at a meeting at which more than 50% of the
outstanding shares of such Series are represented or (ii) more than
50% of the outstanding shares of such Series.
Loomis Sayles Small Cap Series
As indicated in the Prospectus following the caption
"Investment Objective and Policies -- Loomis Sayles Small Cap
Series," the Loomis Sayles Small Cap Series seeks to attain its
investment objective of long-term capital growth through investments
in common stocks or their equivalent.
Loomis Sayles, the Series' subadviser, manages the Series by
investing primarily in stocks of small cap companies with good
earnings growth potential that Loomis Sayles believes are
undervalued by the market. Typically, such companies have market
capitalization of less than $1 billion, have better than average
growth rates at below average price/earnings ratios and have strong
balance sheets and cash flow. Loomis Sayles seeks to build a core
small cap portfolio of solid growth company stocks, with a smaller
emphasis on special situations and turnarounds (companies that have
experienced signficiant business problems but which Loomis Sayles
believes have favorable prospects for recovery), as well as
unrecognized stocks.
Under unusual market conditions as determined by Loomis Sayles,
all or any portion of the Series may be invested, for temporary,
defensive purposes, in short-term debt instruments or in cash. In
addition, under normal conditions, a portion of the Series' assets
may be invested in short-term assets for liquidity purposes or
pending investment in other securities. Short-term investments may
include U.S. Government securities, certificates of deposit,
commercial paper and other obligations of corporate issuers rated in
the top two rating categories by a major rating agency or, if
unrated, determined to be of comparable quality by the subadviser,
and repurchase agreements that are fully collateralized by cash,
U.S. Government securities or
high-quality money market instruments.
Draycott International Equity Series
As disclosed in the Prospectus under the caption "Investment
Objectives and Policies -- Draycott International Equity Series,"
the Draycott International Equity Series seeks to attain its
investment objective of total return from long-term growth of
capital primarily through investment in international equity
securities.
Alger Equity Growth Series
As disclosed in the Prospectus under the caption "Investment
Objectives and Policies -- Alger Equity Growth Series," the Alger
Equity Growth Series seeks to attain its investment objective of
longterm capital appreciation by investing primarily in a
diversified, actively managed portfolio of equity securities,
primarily of companies having a total market capitalization of $1
billion or greater. These companies may still be in the
developmental stage, may be older companies that appear to be
entering a new stage of growth progress, or may be companies
providing products or services with a high unit volume growth rate.
Capital Growth Series
As disclosed in the Prospectus under the caption "Investment
Objectives and Policies -- Capital Growth Series," the Capital
Growth Series seeks to attain its investment objective of long-term
growth of capital through investment primarily in equity securities
of companies whose earnings are expected to grow at a faster rate
than the United States economy. The selection of common stocks for
the Capital Growth Series' investment portfolio is based on the
assessment of the Series' adviser, Capital Growth Management Limited
Partnership ("CGM"), that the common stock is attractively priced
relative to its earnings and growth potential.
The Series does not consider current income as a significant
factor in selecting its investments. However, during periods when
management considers that economic or market conditions make it
desirable, the Series may take a defensive position by investing a
substantial portion of its assets in cash or fixed-income securities
(bonds, notes and money market instruments). No estimate can be
made as to when or for how long the Series will employ such
defensive strategies; however, in the past, such periods have been
as long as one year.
The Capital Growth Series does not currently intend to invest
in restricted securities, options or warrants although, subject to
its investment restrictions, it may do so in the future. See
"Investment Restrictions."
Although the Capital Growth Series' objective is long-term
capital growth, it frequently sells securities to reflect changes in
market, industry or individual company conditions or outlook even
though it may only have held those securities for a short period.
As a result of these policies, the Capital Growth Series, under
certain market conditions, may experience high portfolio turnover,
although specific portfolio turnover rates are impossible to
predict. In recent years, the portfolio turnover rate of the
Capital Growth Series has fluctuated considerably as a result of
strategic shifts in portfolio holdings designed to maintain an
optimum portfolio structure in view of general market conditions and
movements in individual stock prices.
Loomis Sayles Avanti Growth Series
As disclosed in the Prospectus under the caption "Investment
Objectives and Policies -- Loomis Sayles Avanti Growth Series," the
Loomis Sayles Avanti Growth Series seeks to attain its investment
objective of long-term growth of capital through ordinarily
investing substantially all of its assets in equity securities.
Investments are selected by the Series' subadviser, Loomis, Sayles &
Company, L.P. ("Loomis Sayles"), based on their growth potential;
current income is not a consideration.
Although the Loomis Sayles Avanti Growth Series' objective is
long-term capital growth, it may sell securities to reflect changes
in Loomis Sayles' assessment of the relative attractiveness of
particular investments. As a result, the Loomis Sayles Avanti
Growth Series, under certain market conditions, may experience high
portfolio turnover. High portfolio turnover involves
correspondingly higher brokerage commissions than would be
experienced by a similar fund with lower turnover. In addition, the
Series may invest cash temporarily in money market instruments and
related repurchase agreements, as described below under
"Miscellaneous Investment Practices--Money Market Instruments."
Davis Venture Value Series
As disclosed in the Prospectus under the caption "Investment
Objectives and Policies -- Davis Venture Value Series," the Davis
Venture Value Series seeks to attain its investment objective of
growth of capital by investing in domestic common stocks that the
Series' subadviser believes have capital growth potential due to
factors such as undervalued assets or earnings potential, product
development and demand, favorable operating ratios, resources for
expansion, management abilities, reasonableness of market price, and
favorable overall business prospects. The Series will generally
invest predominantly in equity securities of companies with market
capitalizations of at least $250 million. It may also invest in
issues with smaller capitalizations.
Westpeak Growth and Income Series
As disclosed in the Prospectus under the caption "Investment
Objectives and Policies -- Westpeak Growth and Income Series," the
Westpeak Growth and Income Series seeks long-term total return
(capital appreciation and dividend income) through investment in
equity securities, both in securities that the Series' subadviser,
Westpeak Investment Advisors, L.P. ("Westpeak"), believes are
undervalued ("value" style) and securities of companies that
Westpeak believes have growth potential ("growth" style). The
Westpeak Growth and Income Series will ordinarily invest
substantially all of its assets in equity securities.
Although the Westpeak Growth and Income Series' objective is
longterm total return, it may sell securities to reflect changes in
Westpeak's assessment of the relative attractiveness of particular
investments. As a result, the Westpeak Growth and Income Series,
under certain market conditions, may experience high portfolio
turnover. High portfolio turnover involves correspondingly higher
brokerage commissions than would be experienced by a similar fund
with lower turnover.
The assets of the Westpeak Growth and Income Series that are not
invested in equity securities will be held in cash or invested as
described below under "Miscellaneous Investment Practices--Money
Market Instruments."
Westpeak Stock Index Series
As disclosed in the Prospectus under the caption "Investment
Objectives and Policies -- Westpeak Stock Index Series," the
Westpeak Stock Index Series uses the Standard & Poor's 500 Composite
Stock Index ("S&P 500 Index") as the standard of performance
comparison because that index currently represents a significant
percentage of the total market value of all United States publicly
traded common stocks, is well known to investors, and is commonly
regarded as representative of the performance of United States
publicly traded common stocks taken as a whole.
The S&P 500 Index is composed of 500 common stocks, most of
which are listed on the New York Stock Exchange. Standard & Poor's,
which is not a sponsor of or in any other way affiliated with the
Series, chooses the 500 stocks included in the S&P 500 Index on the
basis of market value and industry diversification. The S&P 500
Index assigns relative values to the stocks included in the index,
weighted according to each stock's total market value relative to
the total market value of the other stocks included in the index.
The stocks included in the S&P 500 Index may change from time to
time.
The Westpeak Stock Index Series is not managed through
traditional methods of investment management, which typically
attempt to use economic, financial and market analysis to select
undervalued stocks or stocks of companies that may experience above-
average growth, nor will the adverse financial situation of a
company necessarily result in the elimination of its stock from the
Westpeak Stock Index Series' portfolio. As described in the
Prospectus, stocks will be selected in an attempt to approximate the
performance of the S&P 500 Index and to minimize tracking error.
From time to time, adjustments may be made in the Westpeak Stock
Index Series' investment portfolio, but such changes should be
infrequent compared to those of most management investment
companies. Westpeak currently expects that such adjustments will
ordinarily be made on a monthly basis, but such adjustments could be
made more or less frequently, depending on changes in the size of
the Westpeak Stock Index Series, among other factors. As a
consequence of the relative infrequency of portfolio adjustments,
brokerage and other transaction costs are expected to be relatively
low. However, these costs and other expenses may cause the return
of the Westpeak Stock Index Series to be lower than the return of
the S&P 500 Index. In addition, the relative infrequency of
portfolio adjustments may result in increased tracking error, to the
extent that new cash that has come into the Series is held, or
invested in money market instruments and repurchase agreements,
pending the next portfolio adjustment, rather than invested
immediately in common stocks included in the S&P 500 Index.
It is the Westpeak Stock Index Series' policy to be fully
invested in common stocks. However, the Westpeak Stock Index Series
may hold a portion of its assets, which will not exceed 5% (not
including additional cash that has come into the Series and is
pending investment in common stocks), in cash to meet redemptions
and other day-to-day operating expenses. The Series may also engage
in futures transactions to reduce tracking error. In addition, the
Westpeak Stock Index Series may invest cash temporarily in money
market instruments and repurchase agreements, as described below
under "Miscellaneous Investment Practices -- Money Market
Instruments". Such temporary investments will only be made with cash
held to maintain liquidity or pending investment, and will not be
made for defensive purposes in the event or in anticipation of a
general decline in the market prices of stocks in which the Series
invests. A defensive investment posture is precluded by the
Westpeak Stock Index Series' investment objective to provide
investment results that correspond to the price and yield
performance of a universe of common stocks. Investors in the
Westpeak Stock Index Series therefore bear the risk of general
declines in stock prices in the stock markets.
The index that the Westpeak Stock Index Series uses as a
standard
of comparison in seeking to achieve its objective may be changed
without shareholder approval. At some time in the future, another
index may be selected if such a standard of comparison is deemed
more appropriate than the S&P 500 Index as an indicator of the
performance of United States publicly traded common stocks.
Loomis Sayles Balanced Series
As disclosed in the Prospectus under the caption "Investment
Objectives and Policies -- Loomis Sayles Balanced Series," the
Loomis Sayles Balanced Series seeks to attain its investment
objective of reasonable long-term investment return from a
combination of long-term capital appreciation and moderate current
income.
The Series is "flexibly managed" in that sometimes it invests
more heavily in equity securities and at other times it invests more
heavily in fixed-income securities, depending on its subadviser's
view of the economic and investment outlook. Most of the Series'
investments are normally in dividend-paying common stocks of
recognized investment quality that are expected to achieve growth in
earnings and dividends over the long-term. Fixed-income securities
include notes, bonds, non-convertible preferred stock and money
market instruments. The Series may invest in adjustable rate
mortgage securities, asset-backed securities, STRIPS and inverse
floaters, subject to a limit of 5% of the Series' assets for each of
these types of instruments. The Series invests at least 25% of its
assets in fixed-income senior securities and, under normal market
conditions, more than 50% of its assets in equity securities. The
Series also may invest in foreign securities.
Back Bay Advisors Managed Series
As indicated in the Prospectus following the caption
"Investment Objective and Policies -- Back Bay Advisors Managed
Series," the Back Bay Advisors Managed Series' investment portfolio
will generally contain a mix of (1) common stocks, (2) notes and
bonds and (3) money market instruments. Each of these categories of
investments involves certain risks.
The text of the Prospectus following the caption "Investment
Objective and Policies -- Back Bay Advisors Money Market Series,"
contains a description of the money market instruments and related
repurchase agreements in which the Back Bay Advisors Managed Series
may invest; for a fuller description, see "Miscellaneous Investment
Practices--Money Market Instruments," below.
The portion of the Back Bay Advisors Managed Series' investment
portfolio consisting of notes and bonds will be invested in bonds of
the types in which the Back Bay Advisors Bond Income Series is
permitted to invest. These investments may include both bonds in
the four highest rating categories of Moody's or Standard & Poor's
(which are described in Appendix A-1 hereto) and lesser rated or non-
rated bonds (the risks associated with which are described in the
Prospectus under "Investment Objectives and Policies -- Back Bay
Advisors Bond Income Series"). The Series will purchase and sell
securities for the bond portion of its portfolio in anticipation of
or in response to changes in yield relationships, markets or
economic conditions. The bond portion of the Series' investment
portfolio will also be invested to take advantage of temporary
disparities in the relative values of certain sectors of the market
for fixed-income securities. As a result of these policies, the
bond portion of the Series' portfolio, under certain market
conditions, may experience high portfolio turnover.
Because the securities in its portfolio are subject to price
declines as well as price advances, at times the net asset value per
Back Bay Advisors Managed Series share may be less than a
shareholder's original cost. There can be no assurance that the
Back Bay Advisors Managed Series' investment objective will be
attained.
Salomon Brothers Strategic Bond Opportunities Series
As disclosed in the Prospectus under the caption "Investment
Objectives and Policies -- Salomon Brothers Strategic Bond
Opportunities Series," the Salomon Brothers Strategic Bond
Opportunities Series seeks to attain its investment objective of a
high level of total return consistent with preservation of capital
by assessing the relative risks and opportunities available in
various market segments and allocating assets primarily among U.S.
Government obligations, mortgage backed securities, domestic
corporate debt and international debt securities rated investment
grade (BBB or higher by S&P or Baa or higher by Moody's) and
domestic and sovereign corporate debt and international debt
securities rated below investment grade.
Back Bay Advisors Bond Income Series
The text of the Prospectus following the caption "Investment
Objectives and Policies -- Back Bay Advisors Bond Income Series"
gives a description of the securities in which the Back Bay Advisors
Bond Income Series may invest. Although at least 80% of the Series'
bond investments will carry investment grade ratings (see Appendix
A-1) from one of the recognized rating services, the Series may
purchase nonrated or lower-rated bonds, which may be traded only
over-thecounter. Nonrated bonds are so categorized because the
bond's rating has been suspended or because the issuer did not seek
a rating of the bonds from Moody's or Standard & Poor's.
As described in the Prospectus, the average maturity of the
Back Bay Advisors Bond Income Series' portfolio will usually be
between five and fifteen years. Depending on market conditions, the
Back Bay Advisors Bond Income Series may take a defensive position
by investing a substantial portion of its assets in the money market
instruments eligible for purchase by the Back Bay Advisors Money
Market Series. No estimate can be made as to when or for how long
the Series would employ such defensive strategies.
The Back Bay Advisors Bond Income Series purchases and sells
portfolio investments in anticipation of or in response to changes
in yield relationships, markets or economic conditions. The Back
Bay Advisors Bond Income Series also invests to take advantage of
temporary disparities in the relative values of certain sectors of
the market for fixed-income securities. As a result of these
policies, the Back Bay Advisors Bond Income Series, under certain
market conditions, may experience high portfolio turnover, although
specific portfolio turnover rates are impossible to predict.
Since levels of interest rates vary from time to time, there
can be no assurance as to the Back Bay Advisors Bond Income Series'
current income for any particular period. Moreover, since all
securities are subject to price declines as well as price advances,
at times the net asset value per Back Bay Advisors Bond Income
Series share may be less than a shareholder's original cost. In
recent years, prices for fixed-income securities have generally been
more volatile than they were in prior periods, and this has
increased the market risk of holding such securities.
Salomon Brothers U.S. Government Series
As disclosed in the Prospectus under the caption "Investment
Objectives and Policies -- Salomon Brothers U.S. Government Series,"
the Salomon Brothers U.S. Government Series seeks to attain its
investment objective of providing a high level of current income
consistent with preservation of capital and maintenance of liquidity
by investing primarily in debt obligations and, to the extent
allowed by state law and regulation, in mortgage backed securities
issued or guaranteed by the U. S. Government its agencies,
authorities or instrumentalities or derivative securities such as
collateralized mortgage obligations ("CMOs") backed by such
securities.
Back Bay Advisors Money Market Series
The text of the Prospectus following the caption "Investment
Objectives and Policies -- Back Bay Advisors Money Market Series"
gives a description of the money market instruments in which the
Back Bay Advisors Money Market Series may invest. For a fuller
description of those money market instruments and some of the risks
relating thereto, see "Money Market Instruments," below. The Back
Bay Advisors Money Market Series will invest only in securities
which the Series' subadvisers, Back Bay Advisors, L.P. ("Back Bay
Advisors"), acting pursuant to guidelines established by the Fund's
Board of Trustees has determined are of high quality and present
minimal credit risk.
As indicated in the Prospectus, all the Back Bay Advisors Money
Market Series' money market instruments mature in less than 397 days
and the average maturity of the Back Bay Advisors Money Market
Series' portfolio securities based on their dollar value will not
exceed 90 days at the time of each investment. Money market
instruments maturing in less than 397 days tend to yield less than
obligations of comparable quality having longer maturities. See
"Valuation of Portfolio Securities" and "Fund Performance." Where
obligations of greater than one year are used to secure the Back Bay
Advisors Money Market Series' repurchase agreements, the repurchase
agreements themselves will have very short maturities. If the
disposition of a portfolio security results in a dollar-weighted
average portfolio maturity in excess of 90 days, the Back Bay
Advisors Money Market Series will invest its available cash in such
a manner as to reduce its dollar-weighted average portfolio maturity
to 90 days or less as soon as reasonably practicable.
In seeking to provide the highest possible level of current
income consistent with preservation of capital, the Back Bay
Advisors Money Market Series may not necessarily invest in money
market instruments paying the highest available yield at a
particular time. The Back Bay Advisors Money Market Series,
consistent with its investment objective, attempts to maximize
income by engaging in portfolio trading and by buying and selling
portfolio investments in anticipation of or in response to changing
economic and money market conditions and trends. The Series may
also invest to take advantage of what are believed to be temporary
disparities in the yields of different segments of the high grade
money market or among particular instruments within the same segment
of the market. These policies, as well as the relatively short
maturity of obligations to be purchased by the Series, may result in
frequent changes in the Series' investment portfolio of money market
instruments.
The value of the securities in the Series' investment portfolio
can be expected to vary inversely to changes in prevailing interest
rates. Thus, if interest rates increase after a security is
purchased, that security, if sold, might be sold at less than cost.
Conversely, if interest rates decline after purchase, the security,
if sold, might be sold at a profit. In either instance, if the
security were held to maturity, no gain or loss would normally be
realized as a result of these fluctuations. Substantial redemptions
of shares of the Back Bay Advisors Money Market Series could require
the sale of portfolio investments at a time when a sale might not be
desirable.
MISCELLANEOUS INVESTMENT PRACTICES
The following information relates to certain investment
practices in which certain Series may engage. The table indicates
which Series may engage in each of these practices.
Practices Series
Money Market Instruments All
Series
U.S. Government Securities All Series
Convertible Securities Draycott International Equity
Series
Alger Equity Growth Series
Capital Growth Series
Loomis Sayles Avanti Growth Series
Loomis Sayles Balanced
Series Back Bay Advisors
Managed Series
Salomon Brothers Strategic
Bond OpportunitiesSeries
Back Bay Advisors Bond Income Series
Reverse Repurchase Agreements Salomon Brothers Strategic
and Dollar Rolls Bond Opportunites Series
Salomon Brothers U.S.
Government Series
Loans of Portfolio Securities Alger Equity Growth Series
Davis Venture Value Series
Back Bay Advisors Managed Series
Salomon Brothers Strategic
Bond Opportunities Series
Back Bay Advisors Bond Income
Series
Salomon Brothers U.S.
Government Series
Privately-Issued Mortgage Securities Salomon Brothers Strategic Bond
Opportunities Series
Salomon Brothers U.S.
Government Series
Asset-Backed Securities; Types of Loomis Sayles Balanced Series
Credit Support Salomon Brothers Strategic
Bond Opportunities
Series
Salomon Brothers U.S.
Government Series
STRIPS Loomis Sayles Balanced Series
Salomon Brothers Strategic
Bond Opportunities Series
Salomon Brothers U.S.
Government Series
Stripped Mortgage Securities Salomon Brothers Strategic
Bond Opportunities Series
Salomon Brothers U.S.
Government Series
Loomis Sayles Balanced Fund
Swaps, Caps, Floors, Collars, Etc. Salomon Brothers Strategic
Bond Opportunities Series
Eurodollar Futures and Options Salomon Brothers Strategic
Bond Opportunities Series
Salomon Brothers U.S.
Government Series
High Yield/High Risk Foreign Sovereign Salomon Brothers Strategic
Bond Debt Securities Opportunities Series
Futures and Options Draycott International Equity
Series
Davis Venture Value Series
Westpeak Growth and Income Series
Westpeak Stock Index Series
Loomis Sayles Balanced Series
Back Bay Advisors Managed Series
Salomon Brothers Strategic
Bond Opportunities Series
Salomon Brothers U.S.
Government Series
Foreign Currency Hedging Transactions Draycott International Equity
Series
Davis Venture Value Series
Salomon Brothers Strategic Bond
Opportunites Series
Money Market Instruments - Obligations of foreign branches of U.S.
banks and other foreign securities are subject to risks of foreign
political, economic and legal developments, which include foreign
governmental restrictions adversely affecting payment of principal
and interest on the obligations, foreign withholding and other taxes
on interest income, and difficulties in obtaining and enforcing a
judgment against a foreign branch of a domestic bank. With respect
to bank obligations, different risks may result from the fact that
foreign banks are not necessarily subject to the same or similar
regulatory requirements that apply to domestic banks. For instance,
such branches may not be subject to the types of requirements imposed
on domestic banks with respect to mandatory reserves, loan
limitations, examinations, accounting, auditing, recordkeeping and
the public availability of information. Obligations of such branches
will be purchased by the Series only when the Series' adviser or
subadviser believes the risks are minimal.
The following constitutes a description of the money market
instruments which may be purchased by the Back Bay Advisors Money
Market Series, and by any of the Series for temporary defensive
purposes.
U.S. Government Securities -- are bills, certificates of
indebtedness, notes and bonds issued by agencies, authorities and
instrumentalities of the U.S. Government. Some obligations, such as
those issued by the U.S. Treasury, the Government National Mortgage
Association, the Farmers' Home Administration and the Small Business
Administration, are backed by the full faith and credit of the U.S.
Treasury. Other obligations are backed by the right of the issuer to
borrow from the U.S. Treasury or by the credit of the agency,
authority or instrumentality itself. Such obligations include, but
are not limited to, obligations issued by the Tennessee Valley
Authority, the Bank for Cooperatives, Federal Home Loan Banks,
Federal Intermediate Credit Banks, Federal Land Banks and the Federal
National Mortgage Association.
Repurchase Agreements -- are agreements by which a Series
purchases a security (usually a U.S. Government Security) and
obtains a simultaneous commitment from the seller (a member bank of
the Federal Reserve System or, to the extent permitted by the 1940
Act, a recognized securities dealer) to repurchase the security at
an agreed upon price and date. The resale price is in excess of the
purchase price and reflects an agreed upon market rate unrelated to
the coupon rate on the purchased security. Such transactions afford
the Series the opportunity to earn a return on temporarily available
cash at minimal market risk. While the underlying security may be a
bill, certificate of indebtedness, note or bond issued by an agency,
authority or instrumentality of the United States Government, the
obligation of the seller is not guaranteed by the U.S. Government
and there is a risk that the seller may fail to repurchase the
underlying security. In such event, the Series may be able to
exercise rights with respect to the underlying security, including
possible disposition of the security in the market. However, the
Series may be subject to various delays and risks of loss, including
(a) possible declines in the value of the underlying security during
the period while the Series seeks to enforce its rights thereto, (b)
possible reduced levels of income and lack of access to income
during this period and (c) inability to enforce rights and the
expenses involved in attempted enforcement.
Certificates of Deposit -- are certificates issued against
funds deposited in a bank, are for a definite period of time, earn a
specified rate of return and are normally negotiable.
Bankers' Acceptances -- are short-term credit instruments used
to finance the import, export, transfer or storage of goods. They
are termed "accepted" when a bank guarantees their payment at
maturity.
Eurodollar Obligations -- are obligations of foreign branches
of U.S. banks.
Commercial Paper -- refers to promissory notes issued by
corporations in order to finance their short-term credit needs. For
a description of commercial paper ratings see Appendix A-1.
U.S. Government Securities - The Series may invest in some or
all of the following U.S. Government Securities, as well as in other
types of securities issued or guaranteed by the U.S. Government or
its agencies, authorities or instrumentalities:
U.S. Treasury Bills - Direct obligations of the United States
Treasury which are issued in maturities of one year or less. No
interest is paid on Treasury bills; instead, they are issued at a
discount and repaid at full face value when they mature. They are
backed by the full faith and credit of the United States Government.
U.S. Treasury Notes and Bonds - Direct obligations of the
United States Treasury issued in maturities that vary between one and 40
years, with interest normally payable every six months. These
obligations are backed by the full faith and credit of the United
States Government.
"Ginnie Maes" - Debt securities issued by a mortgage banker or
other mortgagee which represent an interest in a pool of mortgages
insured by the Federal Housing Administration or the Farmer's Home
Administration or guaranteed by the Veterans Administration. The
Government National Mortgage Association ("GNMA") guarantees the
timely payment of principal and interest when such payments are due,
whether or not these amounts are collected by the issuer of these
certificates on the underlying mortgages. Mortgages included in
single family or multi-family residential mortgage pools backing an
issue of Ginnie Maes have a maximum maturity of up to 30 years.
Scheduled payments of principal and interest are made to the
registered holders of Ginnie Maes (such as the Fund) each month.
Unscheduled prepayments may be made by homeowners, or as a result of
a default. Prepayments are passed through to the registered holder
(such as the Fund, which reinvests any prepayments) of Ginnie Maes
along with regular monthly payments of principal and interest.
"Fannie Maes" - The Federal National Mortgage Association
("FNMA") is a government-sponsored corporation owned entirely by
private stockholders that purchases residential mortgages from a
list of approved seller/servicers. Fannie Maes are pass-through
securities issued by FNMA that are guaranteed as to timely payment
of principal and interest by FNMA but are not backed by the full
faith and credit of the United States Government.
. "Freddie Macs" - The Federal Home Loan Mortgage Corporation
("FHLMC") is a corporate instrumentality of the United States
Government. Freddie Macs are participation certificates issued by
FHLMC that represent an interest in residential mortgages from
FHLMC's National Portfolio. FHLMC guarantees the timely payment of
interest and ultimate collection of principal, but Freddie Macs are
not backed by the full faith and credit of the United States
Government.
As described in the prospectus, U.S. Government Securities do
not involve the credit risks associated with investments in other
types of fixed-income securities, although, as a result, the yields
available from U.S. Government Securities are generally lower than
the yields available from corporate fixed-income securities. Like
other fixed-income securities, however, the values of U.S.
Government Securities change as interest rates fluctuate.
Fluctuations in the value of portfolio securities will not affect
interest income on existing portfolio securities but will be
reflected in the Series' net asset value. Since the magnitude of
these fluctuations will generally be greater at times when the
Series' average maturity is longer, under certain market conditions,
a Series may, for temporary defensive purposes, accept lower current
income from short-term investments rather than investing in higher
yielding long-term securities.
Convertible Securities - The Series listed above may invest in
convertible securities, including corporate bonds, notes or
preferred stocks of U.S. or foreign issuers that can be converted
into (that is, exchanged for) common stocks or other equity
securities. Convertible securities also include other securities,
such as warrants, that provide an opportunity for equity
participation. Because convertible securities can be converted into
equity securities, their values will normally vary in some
proportion with those of the underlying equity securities.
Convertible securities usually provide a higher yield than the
underlying equity, however, so that the price decline of a
convertible security may sometimes be less substantial than that of
the underlying equity security.
Reverse Repurchase Agreements and Dollar Roll Agreements - The
Series may enter into reverse repurchase agreements and dollar roll
agreements with qualified institutions to seek to enhance returns.
Reverse repurchase agreements involve sales by the Series of
portfolio assets concurrently with an agreement by the Series to
repurchase the same assets at a later date at a fixed price. During
the reverse repurchase agreement period, the Series continues to
receive principal and interest payments on these securities.
The Series may enter into dollar rolls in which the Series
sells securities for delivery in the current month and simultaneously
contracts to repurchase substantially similar (same type and coupon)
securities on a specified future date. During the roll period, the
Series forgoes principal and interest paid on the securities. The
Series is compensated by the difference between the current sales
price and the forward price for the future purchase (often referred
to as the "drop") as well as by the interest earned on the cash
proceeds of the initial sale.
The Series will establish a segregated account with its
custodian in which it will maintain cash, U.S. Government securities
or other liquid high-grade debt obligations equal in value to its
obligations in respect of reverse repurchase agreements and dollar
rolls. Reverse repurchase agreements and dollar rolls involve the
risk that the market value of the securities retained by the Series
may decline below the price of the securities the Series has sold
but is obligated to repurchase under the agreement. In the event
the buyer of securities under a reverse repurchase agreement files
for bankruptcy or becomes insolvent, the Series' use of the proceeds
of the agreement may be restricted pending a determination by the
other party, or its trustee or receiver, whether to enforce the
Series' obligation to repurchase the securities. Reverse repurchase
agreements and dollar rolls are considered borrowings by the Series.
Loans of Portfolio Securities - The Series listed above may
lend its portfolio securities to broker-dealers under contracts
calling for cash collateral equal to at least the market value of
the securities loaned, marked to market on a daily basis. (The
Series (except the Salomon Brothers U.S. Government Series) at the
present time have no intention to engage in the lending of portfolio
securities.) The Series will continue to benefit from interest or
dividends on the securities loaned and will also receive interest
through investment of the cash collateral in short-term liquid
investments, which may include shares of money market funds subject
to any investment restriction described in the Prospectus. No loans
will be made if, as a result, the aggregate amount of such loans
outstanding at any one time would exceed 15% of the respective
Series' total assets (taken at current value). Any voting rights,
or rights to consent, relating to securities loaned pass to the
borrower. However, if a material event affecting the investment
occurs, such loans will be called so that the securities may be
voted by the Series. A Series pays various fees in connection with
such loans, including shipping fees and reasonable custodian and
placement fees.
Privately-Issued Mortgage Securities - The Series listed above
may invest in privately-issued pass through securities that provide
for the monthly principal and interest payments made by individual
borrowers to pass through to investors on a corporate basis, and in
privately issued collateralized mortgage obligations ("CMOs"; see
the general description under "Investment Risks" in the Prospectus).
Privately-issued mortgage securities are issued by private
originators of, or investors in, mortgage loans, including mortgage
bankers, commercial banks, investment banks, savings and loan
associations and special purpose subsidiaries of the foregoing.
Since privately-issued mortgage certificates are not guaranteed by
an entity having the credit status of GNMA or FHLMC, such securities
generally are structured with one or more types of credit
enhancement. For a description of the types of credit enhancements
that may accompany privately-issued mortgage securities, see "Types
of Credit Support" below. A Series will not limit its investments
to asset-backed securities with credit enhancements.
Asset Backed Securities As with mortgage securities, asset
backed securities are often backed by a pool of assets representing
the obligation of a number of different parties and use similar
credit enhancement techniques. For a description of the types of
credit enhancement that may accompany privately-issued mortgage
securities, see "Types of Credit Support" below. A Series will not
limit its investments to asset-backed securities with credit
enhancements. Although asset-backed securities are not generally
traded on a national securities exchange, many such securities are
widely traded by brokers and dealers, and in such cases will not be
considered illiquid securities for the purposes of the investment
policy that limits a Series' investments in illiquid securities to
15% of net assets.
Types of Credit Support - Mortgage securities and asset-backed
securities are often backed by a pool of assets representing the
obligations of a number of different parties. To lessen the effect
of failure by obligors on underlying assets to make payments, such
securities may contain elements of credit support. Such credit
support falls into two categories: (i) liquidity protection and
(ii) protection against losses resulting from ultimate default by an
obligor on the underlying assets. Liquidity protection refers to
the provision of advances, generally by the entity administering the
pool of assets, to ensure that the pass-through of payments due on
the underlying pool occurs in a timely fashion. Protection against
losses resulting from ultimate default enhances the likelihood of
ultimate payment of the obligations on at least a portion of the
assets in the pool. Such protection may be provided through
guarantees, insurance policies or letters of credit obtained by the
issuer or sponsor from third parties, through various means of
structuring the transaction or through a combination of such
approaches. A Series will not pay any additional fees for such
credit support, although the existence of credit support may
increase the price of a security.
The ratings of mortgage securities and asset-backed securities
for which third-party credit enhancement provides liquidity
protection or protection against losses from default are generally
dependent upon the continued creditworthiness of the provider of the
credit enhancement. The ratings of such securities could be subject
to reduction in the event of deterioration in the creditworthiness
of the credit enhancement provider even in cases where the
delinquency and loss experience on the underlying pool of assets is
better than expected.
Examples of credit support arising out of the structure of the
transaction include "senior subordinated securities" (multiple class
securities with one or more classes subordinate to other classes as
to the payment of principal and interest, with the result that
defaults on the underlying assets are borne first by the holders of
the subordinated class), creation of "reserve funds" (where cash or
investments, sometimes funded from a portion of the payments on the
underlying assets, are held in reserve against future losses) and
"over-collateralization" (where the scheduled payments on, or the
principal amount of, the underlying assets exceed those required to
make payment of the securities and pay any servicing or other fees).
The degree of credit support provided for each issue is generally
based on historical information with respect to the level of credit
risk associated with the underlying assets. Delinquency or loss in
excess of that which is anticipated could adversely affect the
return on an investment in such security.
STRIPS - In addition to the U.S. Government securities
discussed above, the Series listed above may invest in separately
traded interest components of securities issued or guaranteed by the
United States Treasury. The interest components of selected
securities are traded independently under the Separate Trading of
Registered Interest and Principal of Securities program ("STRIPS").
Under the STRIPS program, the interest components are individually
numbered and
separately issued by the United States Treasury at the request of
depository financial institutions, which then trade the component
parts independently.
Stripped Mortgage Securities - Stripped mortgage securities are
derivative multiclass mortgage securities. Stripped mortgage
securities may be issued by agencies or instrumentalities of the
U.S. Government, or by private issuers, including savings and loan
associations, mortgage banks, commercial banks, investment banks and
special purpose subsidiaries of the foregoing. Stripped mortgage
securities have greater volatility than other types of mortgage
securities in which the Series invests. Although stripped mortgage
securities are purchased and sold by institutional investors through
several investment banking firms acting as brokers or dealers, the
market for such securities has not yet been fully developed.
Accordingly, stripped mortgage securities are generally illiquid.
Stripped mortgage securities are usually structured with two
classes that receive different proportions of the interest and
principal distributions on a pool of mortgage assets. A common type
of stripped mortgage security will have one class receiving some of
the interest and most of the principal from the mortgage assets,
while the other class will receive most of the interest and the
remainder of the principal. In the most extreme case, one class
will receive all of the interest (the interest-only or "IO" class),
while the other class will receive all of the principal (the
principal-only or "PO" class). The yield to maturity on an IO class
is extremely sensitive not only to changes in prevailing interest
rates but also the rate of principal payments (including
prepayments) on the related underlying mortgage assets, and a rapid
rate of principal payments may have a material adverse effect on the
Series' yield to maturity. If the underlying mortgage assets
experience greater than anticipated prepayments of principal, the
Series may fail to fully recoup its initial investment in these
securities even if the securities are rated in a top rating
category.
As interest rates rise and fall, the value of IOs tends to move
in the same direction as interest rates. The value of other
mortgage securities, like other debt instruments, will tend to move
in the opposite direction of interest rates. Accordingly, investing
in IOs, in conjunction with the other mortgage securities described
herein, may reduce fluctuations in a Series' net asset value.
In addition to the stripped mortgage securities described
above, the Series listed above may invest in similar securities such
as "Super POs," "Levered IOs" and "IOettes," all of which are more
volatile than conventional POs or IOs. Risks associated with
instruments such as Super POs are similar in nature to those risks
related to investments in POs. Risks connected with Levered IOs and
IOettes are similar in nature to those associated with IOs. The
Series may also invest in other similar instruments developed in the
future that are deemed consistent with the investment objectives,
policies and restrictions of the Series.
Under the Internal Revenue Code of 1986, as amended (the
"Code"), POs may generate taxable income from the current accrual of
original issue discount, without a corresponding distribution of
cash to the portfolio.
Swaps, Caps, Floors, Collars, Etc. - The Series listed above
may enter into interest rate, currency and index swaps, the purchase
or sale of related caps, floors and collars and other derivatives.
A Series will enter into these transactions primarily to seek to
preserve a return or spread on a particular investment or portion of
its portfolio, to protect against currency fluctuations, as a
duration management technique or to protect against any increase in
the price of securities a portfolio anticipates purchasing at a
later date. A Series will use these transactions for non-
speculative purposes and will not sell interest rate caps or floors
if it does not own securities or other instruments providing the
income the portfolio may be obligated to pay. Interest rate swaps
involve the exchange by a Series with another party of their
respective commitments to pay or receive interest (for example, an
exchange of floating rate payments for fixed rate payments with
respect to a notional amount of principal). The purchase of an
interest rate cap entitles the purchaser to receive payments on a
notional principal amount from the party selling the cap to the
extent that a specified index exceeds a predetermined interest rate
or amount. The purchase of an interest rate floor entitles the
purchaser to receive payments of interest on a notional principal
amount from the party selling the interest rate floor to the extent
that a specified index falls below a predetermined interest rate or
amount. A collar is a combination of a cap and a floor that
preserves a certain return within a predetermined range of interest
rates or values. A currency swap is an agreement to exchange cash
flows on a notional amount based on changes in the values of the
reference currencies.
A Series will usually enter into interest rate swaps on a net
basis, that is, two payment streams are netted out in a cash
settlement on the payment date or dates specified in the instrument,
with the portfolio receiving or paying, as the case may be, only the
net amount of the two payments. To the extent that a Series
maintains in a segregated account with its custodian assets
sufficient to meet its obligations under swaps, caps, floors,
collars and other similar derivatives (see below) these investments
will not constitute senior securities under the Investment Company
Act of 1940 (the "1940 Act"), as amended, and, thus, will not be
treated as being subject to the Series' borrowing restrictions. A
Series will not enter into any swap, cap, floor, collar or other
derivative transaction unless the counterparty is deemed
creditworthy by that Series' subadviser. If a counterparty
defaults, the Series may have contractual remedies pursuant to the
agreements related to the transaction. The swap market has grown
substantially in recent years with a large number of banks and
investment banking firms acting both as principals and as agents
utilizing standardized swap documentation. As a result, the swap
market has become relatively liquid. Caps, floors and collars are
more recent innovations for which standardized documentation has not
yet been fully developed and, for that reason, they are less liquid
than swaps.
The liquidity of swap agreements will be determined by a
Series' subadviser based on various factors, including (1) the
frequency of trades and quotations, (2) the number of dealers and
prospective purchasers in the marketplace, (3) dealer undertakings
to make a market, (4) the nature of the security (including any
demand or tender features), and (5) the nature of the marketplace
for trades (including the ability to assign or offset a portfolio's
rights and obligations relating to the investment). Such
determination will govern whether a swap will be deemed to be within
the 15% restriction on investments in securities that are not
readily marketable.
Each Series will maintain cash and appropriate liquid assets in
a segregated custodial account to cover its current obligations
under swap agreements. If a Series enters into a swap agreement on
a net basis, it will segregate assets with a daily value at least
equal to the excess, if any, of the Series' accrued obligations
under the swap agreement over the accrued amount the Series is
entitled to receive under the agreement. If a Series enters into a
swap agreement on other than a net basis, it will segregate assets
with a value equal to the full amount of the Series' accrued
obligations under the agreement.
Eurodollar Futures and Options - The Series listed above may
make investments in Eurodollar instruments, which are typically
dollar-denominated futures contracts or options on those contracts
that are linked to the London Interbank Offered Rate ("LIBOR"),
although foreign currency denominated instruments are available from
time to time. Eurodollar futures contracts enable purchasers to
obtain a fixed rate for the lending of funds and sellers to obtain a
fixed rate for borrowings. A Series might use Eurodollar futures
contracts and options thereon to hedge against changes in LIBOR, to
which many interest rate swaps and fixed income instruments are
linked.
High Yield/High Risk Foreign Sovereign Debt Securities - The
Series listed above may invest in the sovereign debt of foreign
countries which have issued or have announced plans to issue Brady
Bonds, and expect that a substantial portion of their investments in
sovereign debt securities will consist of Brady Bonds. Brady Bonds
are debt securities issued under the framework of the Brady Plan, an
initiative announced by then U.S. Treasury Secretary Nicholas F.
Brady in 1989 as a mechanism for debtor nations to restructure their
outstanding external commercial bank indebtedness. In restructuring
its external debt under the Brady Plan framework, a debtor nation
negotiates with its existing bank lenders as well as multilateral
institutions such as the World Bank and the International Monetary
Fund (the "IMF"). The Brady Plan framework, as it has developed,
contemplates the exchange of commercial bank debt for newly issued
bonds (Brady Bonds). Brady Bonds may also be issued in respect of
new money being advanced by existing lenders in connection with the
debt restructuring. The World Bank and/or the IMF support the
restructuring by providing funds pursuant to loan agreements or
other arrangements which enable the debtor nation to collateralize
the new Brady Bonds or to repurchase outstanding bank debt at a
discount. Under these arrangements with the World Bank or the IMF,
debtor nations have been required to agree to the implementation of
certain domestic monetary and fiscal reforms. Such reforms have
included the liberalization of trade and foreign investment, the
privatization of state-owned enterprises and the setting of targets
for public spending and borrowing. These policies and programs seek
to promote the debtor country's economic growth and development.
Investors should recognize that the Brady Plan only sets forth
general guiding principles for economic reform and debt reduction,
emphasizing that solutions must be negotiated on a case-by-case
basis between debtor nations and their creditors. Investors should
recognize that Brady Bonds have been issued only recently, and
accordingly do not have a long payment history.
Agreements implemented under the Brady Plan to date are
designed to achieve debt and debt-service reduction through specific
options negotiated by a debtor nation with its creditors. As a
result, the financial packages offered by each country differ. The
types of options have included the exchange of outstanding
commercial bank debt for bonds issued at 100% of face value of such
debt, which carry a below-market stated rate of interest (generally
known as par bonds), bonds issued at a discount from face value of
such debt (generally known as discount bonds), bonds bearing an
interest rate which increases over time and bonds issued in exchange
for the advancement of new money by existing lenders. Regardless of
the stated face amount and stated interest rate of the various types
of Brady Bonds, a Series will purchase Brady Bonds in secondary
markets, as described below, in which the price and yield to the
investor reflect market conditions at the time of purchase. Brady
Bonds issued to date have traded at a deep discount from their face
value. Certain Brady Bonds have been collateralized as to principal
due at maturity (typically 30 years from the date of issuance) by
U.S. Treasury zero coupon bonds with a maturity equal to the final
maturity of such Brady Bonds, although the collateral is not
available to investors until the final maturity of the Brady Bonds.
Collateral purchases are financed by the IMF, the World Bank and the
debtor nations' reserves. In addition, interest payments on certain
types of Brady Bonds may be collateralized by cash or high-grade
securities in amounts that typically represent between 12 and 18
months of interest accruals on these instruments with the balance of
the interest accruals being uncollateralized. A Series may purchase
Brady Bonds with no or limited collateralization, and will be
relying for payment of interest and (except in the case of principal
collateralized Brady Bonds) principal primarily on the willingness
and ability of the foreign government to make payment in accordance
with the terms of the Brady Bonds. Brady Bonds issued to date are
purchased and sold in secondary markets through U.S. securities
dealers and other financial institutions and are generally
maintained through European transnational securities depositories.
Futures and Options
Futures Contracts. A futures contract is an agreement between
two parties to buy and sell a commodity or financial instrument
(e.g., an interest-bearing security, a currency or, in the case of
futures contracts on the S&P 500 Index, the value of the basket of
securities comprising the Index) for a specified price on a
specified future date. In the case of futures on an index, the
seller and buyer agree to settle in cash, at a future date, based on
the difference in value of the contract between the date it is
opened and the settlement date. The value of each contract is equal
to the value of the index from time to time multiplied by a
specified dollar amount. For example, long-term municipal bond
index futures trade in contracts equal to $1000 multiplied by the
Bond Buyer Municipal Bond Index.
When a trader, such as a Series, enters into a futures
contract, it is required to deposit with (or for the benefit of) its
broker, as "initial margin," an amount of cash or short-term high-
quality securities (such as U.S. Treasury Bills) equal to
approximately 2% to 20% of the delivery or settlement price of the
contract (depending on applicable exchange rules). Initial margin
is held to secure the performance of the holder of the futures
contract. As the value of the contract changes, the value of
futures contract positions increases or declines. At the end of
each trading day, the amount of such increase or decline is received
or paid respectively by and to the holders of these positions. The
amount received or paid is known as "variation margin" or
"maintenance margin." A Series with a long position in a futures
contract will establish a segregated account with the Series'
custodian containing cash or certain liquid assets equal to the
purchase price of the contract (less any margin on deposit). For
short positions in futures contracts, a Series will establish a
segregated account with the custodian with cash or high grade liquid
debt assets that, when added to the amounts deposited as margin,
equal the market value of the instruments or currency underlying the
futures contracts.
Although futures contracts by their terms may require actual
delivery and acceptance of securities, in most cases the contracts
are closed out before settlement. Closing out a futures sale is
effected by purchasing a futures contract for the same aggregate
amount of the specific type of financial instrument or commodity and
with the same delivery date. Similarly, the closing out of a futures
purchase is effected by the purchaser selling an offsetting futures
contract.
Gain or loss on a futures position is equal to the net
variation margin received or paid over the time the position is
held, plus or minus the amount received or paid when the position is
closed, minus brokerage commissions.
The Westpeak Stock Index Series may purchase and sell futures
contracts on the S&P 500 Index solely for the purpose of reducing
the risk of tracking error arising from holding cash from new
investments in the Series or in anticipation of shareholder
redemptions. The Back Bay Advisors Managed Series may purchase and
sell futures contracts on interest-bearing securities or indices
thereof, or on indices of stock prices (such as the S&P 500 Index),
to increase or decrease its portfolio exposure to common stocks or
to increase or decrease its portfolio exposure to notes and bonds.
The Westpeak Growth and Income Series may engage in transactions in
futures contracts solely for the purpose of maintaining full
exposure of the portfolio to the movements of broad equity markets
at times when the Series holds a cash position pending investment in
stocks or in anticipation of redemptions.
Options. An option on a futures contract obligates the writer,
in return for the premium received, to assume a position in a
futures contract (a short position if the option is a call and a
long position if the option is a put), at a specified exercise price
at any time during the period of the option. Upon exercise of the
option, the delivery of the futures position by the writer of the
option to the holder of the option generally will be accompanied by
delivery of the accumulated balance in the writer's futures margin
account, which represents the amount by which the market price of
the futures contract, at exercise, exceeds, in the case of a call,
or is less than, in the case of a put, the exercise price of the
option. The premium paid by the purchaser of an option will reflect,
among other things, the relationship of the exercise price to the
market price and volatility of the underlying contract, the
remaining term of the option, supply and demand and interest rates.
Options on futures contracts traded in the United States may only be
traded on a United States board of trade licensed by the Commodity
Futures Trading Commission.
An option on a security entitles the holder to receive (in the
case of a call option) or to sell (in the case of a put option) a
particular security at a specified exercise price. An "American
style" option allows exercise of the option at any time during the
term of the option. A "European style" option allows an option to
be exercised only at the end of its term. Options on securities may
be traded on or off a national securities exchange.
A call option on a futures contract written by a Series is
considered by the Series to be covered if the Series owns the
security subject to the underlying futures contract or other
securities whose values are expected to move in tandem with the
values of the securities subject to such futures contract, based on
historical price movement volatility relationships. A call option
on a security written by a Series is considered to be covered if the
Series owns a security deliverable under the option. A written call
option is also covered if the Series holds a call on the same
futures contract or security as the call written where the exercise
price of the call held (a) is equal to or less than the exercise
price of the call written or (b) is greater than the exercise price
of the call written if the difference is maintained by the Series in
cash, Treasury bills or other high grade liquid obligations in a
segregated account with its custodian.
A put option on a futures contract written by a Series, or a
put option on a security written by a Series, is covered if the
Series maintains cash, U.S. Treasury bills or other high-grade
liquid debt obligations with a value equal to the exercise price in
a segregated account with the Series' custodian, or else holds a put
on the same futures contract (or security, as the case may be) as
the put written where the exercise price of the put held is equal to
or greater than the exercise price of the put written.
If the writer of an option wishes to terminate its position, it
may effect a closing purchase transaction by buying an option
identical to the option previously written. The effect of the
purchase is that the writer's position will be canceled. Likewise,
the holder of an option may liquidate its position by selling an
option identical to the option previously purchased.
Closing a written call option will permit the Series to write
another call option on the portfolio securities used to cover the
closed call option. Closing a written put option will permit the
Series to write another put option secured by the segregated cash,
U.S. Treasury bills or other high-grade liquid obligations used to
secure the closed put option. Also, effecting a closing transaction
will permit the cash or proceeds from the concurrent sale of any
futures contract or securities subject to the option to be used for
other Series investments. If a Series desires to sell particular
securities covering a written call option position, it will close
out its position or will designate from its portfolio comparable
securities to cover the option prior to or concurrent with the sale
of the covering securities.
The Series will realize a profit from closing out an option if
the price of the offsetting position is less than the premium
received from writing the option or is more than the premium paid to
purchase the option; the Series will realize a loss from closing out
an option transaction if the price of the offsetting option position
is more than the premium received from writing the option or is less
than the premium paid to purchase the option. Because increases in
the market price of a call option will generally reflect increases
in the market price of the covering securities, any loss resulting
from the closing of a written call option position is expected to be
offset in whole or in part by appreciation of such covering
securities.
Since premiums on options having an exercise price close to the
value of the underlying securities or futures contracts usually have
a time value component (i.e. a value that diminishes as the time
within which the option can be exercised grows shorter) an option
writer may profit from the lapse of time even though the value of
the futures contract (or security in some cases) underlying the
option (and of the security deliverable under the futures contract)
has not changed. Consequently, profit from option writing may or
may not be offset by a decline in the value of securities covering
the option. If the profit is not entirely offset, the Series will
have a net gain from the options transaction, and the Series' total
return will be enhanced. Likewise, the profit or loss from writing
put options may or may not be offset in whole or in part by changes
in the market value of securities acquired by the Series when the
put options are closed.
An over-the-counter option (an option not traded on a national
securities exchange) may be closed out only with the other party to
the original option transaction. While a Series will seek to enter
into over-the-counter options only with dealers who agree to or are
expected to be capable of entering into closing transactions with
the Series, there can be no assurance that the Series will be able
to liquidate an over-the-counter option at a favorable price at any
time prior to its expiration. Accordingly, the Series might have to
exercise an over-the-counter option it holds in order to realize any
profit thereon and thereby would incur transactions costs on the
purchase or sale of the underlying assets. If the Series cannot
close out a covered call option written by it, it will not be able
to sell the underlying security until the option expires or is
exercised. Furthermore, over-the-counter options are not subject to
the protections afforded purchasers of listed options by the Options
Clearing Corporation or other clearing organization.
The staff of the Securities and Exchange Commission (the "SEC")
has taken the position that over-the-counter options on U.S.
Government Securities and the assets used as cover for written over
the-counter options on U.S. Government Securities should generally
be treated as illiquid securities. However, if a dealer recognized
by the Federal Reserve Bank of New York as a "primary dealer" in
U.S. Government Securities is the other party to an option contract
written by a mutual fund such as a Series, and such Series has the
absolute right to repurchase the option from the dealer at a formula
price established in a contract with the dealer, the SEC staff has
agreed that the Series only needs to treat as illiquid that amount
of the "cover" assets equal to the amount by which (i) the formula
price exceeds (ii) any amount by which the market value of the
securities subject to the options exceeds the exercise price of the
option (the amount by which the option is "in-the-money").
Risks Related to Futures and Options. The use of futures
contracts and options involves risks. One risk arises because of
the imperfect correlation between movements in the price of futures
contracts or options and movements in the price of the underlying
securities or index. The Series' use of futures contracts or
options will not be fully effective unless the Series can compensate
for such imperfect correlation. There is no assurance that the
Series will be able to effect such compensation.
The correlation between the price movement of a futures
contract or option and the related security (or index) may be
distorted due to differences in the nature of the markets.
If the price of the futures contract or option moves more than the
price of the security or index, the Series would experience either a
loss or a gain on the future or option that is not completely
offset by movements in the price of the security or index.
In an attempt to compensate for imperfect price movement
correlations, a Series may purchase or sell futures contracts
or options in a greater amount than the related
securities or index position if the volatility of the related
securities or index is historically greater than the volatility of
the futures contracts or options. Conversely, the Series may
purchase or sell fewer contracts or options if the volatility of the
price of the securities or index is historically less than that of
the contracts or options.
There are many reasons why changes in the values of futures
contracts or options may not correlate perfectly with changes in the
value of the underlying security of index. For example, all
participants in the futures market are subject to margin deposit and
maintenance requirements. Rather than meeting additional margin
deposit requirements, investors may close futures contracts through
offsetting transactions, which could distort the normal relationship
between the index and futures markets. Secondly, the deposit
requirements in the futures market are less onerous than margin
requirements in the securities market, and as a result the futures
market may attract more speculators than does the securities market.
In addition, trading hours for index futures or options may not
correspond perfectly to hours of trading on the exchange where the
underlying securities trade. This may result in a disparity between
the price of futures or options and the value of the underlying
security or index due to the lack of continuous arbitrage between
the futures or options price and the value of the underlying
security or index. Hedging transactions using securities indices
also involve the risk that movements in the price of the index may
not correlate with price movements of the particular portfolio
securities being hedged (since a Series will typically not own all
of the securities included in a particular index.)
Price movement correlation also may be distorted by the limited
liquidity of certain futures or options markets and the
participation of speculators in such markets. If an insufficient number of
contracts are traded, commercial users may not deal in futures
contracts or options because they do not want to assume the risk
that they may not be able to close out their positions within a
reasonable amount of time. In such instance, futures and options
market prices may be driven by different forces than those driving
the market in the underlying securities, and price spreads between
these markets may widen. The participation of speculators in the
market generally enhances its liquidity. Nonetheless, speculative
trading spreads between futures markets may create temporary price
distortions unrelated to the market in the underlying securities.
Positions in futures contracts and related options are
established or closed out only on an exchange or board of trade
regulated by the Commodity Futures Trading Commission. There is no
assurance that a liquid market on an exchange or board of trade will
exist for any particular contract or at any particular time. The
liquidity of markets in futures contracts may be adversely affected
by "daily price fluctuation limits" established by commodity
exchanges which limit the amount of fluctuation in a futures price
during a single trading day. Once the daily limit has been reached
in a contract, no trades may be entered into at a price beyond the
limit, which may prevent the liquidation of open futures positions.
Prices have in the past exceeded the daily limit on a number of
consecutive trading days. If there is not a liquid market at a
particular time, it may not be possible to close a futures position
at such time, and, in the event of adverse price movements, the
Series would continue to be required to make daily cash payments of
variation margin. However, if futures or options are used to hedge
portfolio securities, an increase in the price of the securities, if
any, may partially or completely offset losses on the futures
contract.
An exchange-traded option may be closed out only on a national
securities or commodities exchange which generally provides a liquid
secondary market for an option of the same series. If a liquid
secondary market for an exchange-traded option does not exist, it
might not be possible to effect a closing transaction with respect
to a particular option, with the result that the Series would have
to exercise the option in order to realize any profit. If the
Series that has written an option is unable to effect a closing
purchase transaction in a secondary market, it will not be able to
sell the underlying security until the option expires or it delivers
the underlying security upon exercise. Reasons for the absence of a
liquid secondary market on an exchange include the following: (i)
there may be insufficient trading interest in certain options; (ii)
restrictions may be imposed by an exchange on opening transactions
or closing transactions or both; (iii) trading halts, suspensions or
other restrictions may be imposed with respect to particular classes
or series of options or underlying securities; (iv) unusual or
unforeseen circumstances may interrupt normal operations on an
exchange; (v) the facilities of an exchange or the Options Clearing
Corporation or other clearing organization may not at all times be
adequate to handle current trading volume or (vi) one or more
exchanges could, for economic or other reasons, decide or be
compelled at some future date to discontinue the trading of options
(or a particular class or series of options), in which event the
secondary market on that exchange (or in that class or series of
options) would cease to exist, although outstanding options on that
exchange that had been issued by the Options Clearing Corporation as
a result of trades on that exchange would continue to be exercisable
in accordance with their terms.
Because the specific procedures for trading foreign futures and
options on futures exchanges are still evolving, additional or
different margin requirements as well as settlement procedures may
be applicable to foreign futures and options at the time the Series
purchases foreign futures or options.
The successful use of transactions in futures and options
depends in part on the ability of the Series to forecast correctly
the direction and extent of interest rate or securities price
movements within a given time frame. To the extent interest rates
or securities prices move in a direction opposite to that
anticipated, a Series may realize a loss that is not fully or
partially offset by an increase in the value of portfolio
securities. In addition, whether or not interest rates or
securities prices move during the period that the Series holds
futures or options positions, the Series will pay the cost of taking
those positions (i.e., brokerage costs). As a result, the Series'
total return for such period may be less than if it had not engaged
in the futures or option transaction.
Future Developments. The above discussion relates to the
Series' proposed use of futures contracts, options and options on
futures contracts currently available. The relevant markets and
related regulations are still in the developing stage. In the event
of future regulatory or market developments, the Series may also use
additional types of futures contracts or options and other similar
or related investment techniques.
Foreign Currency Hedging Transactions - To protect against a
change in the foreign currency exchange rate between the date on
which a Series contracts to purchase or sell a security that settles
in a foreign currency and the settlement date for the purchase or
sale, or to "lock in" the equivalent of a dividend or interest
payment in another currency, the Series might purchase or sell a
foreign currency on a spot (or cash) basis at the prevailing spot
rate. If conditions warrant, a Series may also enter into contracts
with banks or broker-dealers to purchase or sell foreign currencies
at a future date ("forward contracts"). The Series will maintain
cash or high-quality debt obligations in a segregated account with
the custodian in an amount at least equal to (i) the difference
between the current value of the Series' liquid holdings that settle
in the relevant currency and the Series' outstanding net obligations
under currency forward contracts in that currency, or (ii) the
current amount, if any, that would be required to be paid to enter
into an offsetting forward currency contract which would have the
effect of closing out the original forward contract. The Series'
use of currency hedging transactions may be limited by tax
considerations. The Series may also purchase or sell foreign
currency futures contracts traded on futures exchanges. Foreign
currency futures contract transactions involve risks similar to
those of other futures transactions. See "Futures and Options,"
above.
DETERMINATION OF NET ASSET VALUES
As described in the text of the Prospectus following the
caption "Net Asset Values and Portfolio Valuation," the value of
each Series' portfolio assets is determined by that Series' adviser
(subadviser, in the case of Series that have a subadviser). The net
asset value of each Series' shares is determined as of the close of
regular trading on the New York Stock Exchange on each day the New
York Stock Exchange is open and there is a sufficient degree of
trading in a Series' portfolio securities that the current net asset
value of a Series' shares is materially affected. The New York
Stock Exchange is currently expected to be closed on weekend days
and on the following holidays each year: New Year's Day, Presidents
Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day. Expenses of each Series are
paid or accrued each day.
Loomis Sayles Small Cap, Draycott International Equity, Alger Equity
Growth, Capital Growth, Loomis Sayles Avanti Growth, Davis Venture
Value, Westpeak Growth and Income, Westpeak Stock Index, Loomis
Sayles Balanced, Salomon Brothers Strategic Bond Opportunities, Salomon
Brothers U.S. Government Series
As described in the text of the Prospectus following the
caption "Net Asset Values and Portfolio Valuation," each of the
Series listed above values its portfolio securities (other than
fixed-income securities maturing in 60 days or less, which are
valued using the amortized cost method) at market value where
current market quotations are readily available and otherwise values
them at fair value as determined in good faith by the Trustees or by
the particular Series' adviser or subadviser under the supervision
of the Board of Trustees. Each of the advisers and subadvisers has
been authorized to delegate certain price determinations to pricing
services or facilities which they select. Securities traded on a
national securities exchange or exchanges are valued at their last
sale price on the principal exchange or, if there is no reported
sale during the day, and in the case of over-the-counter securities,
at the last reported bid price estimated by a broker.
Back Bay Advisors Managed Series
Equity securities traded on a national securities exchange or
exchanges are valued at their last sale price on the principal
exchange or, if there is no reported sale during the day, and in the
case of over-the-counter securities, at the last bid price. Debt
securities are valued at market value where current market
quotations are readily available. Where current market quotations
are not readily available, a pricing service selected by Back Bay
Advisors, acting pursuant to the authorization of the Board of
Trustees, values the securities at fair value. The pricing service
employed will be one that determines valuations of normal
institutional-sized trading units of long-term debt securities.
Such valuations are determined by using methods based on market
transactions for comparable securities and on various relationships
between securities which are generally recognized by institutional
traders. Other securities for which current market quotations are
not readily available (including restricted securities, if any) and
all other assets are taken at fair value as determined in good faith
by Back Bay Advisors acting under the supervision of the Board of
Trustees, although the actual calculations may be made by a pricing
service selected by Back Bay Advisors acting pursuant to the
direction of the Board.
Back Bay Advisors Bond Income Series
As described in the text of the Prospectus following the
caption "Net Asset Values and Portfolio Valuation," the Back Bay
Advisors Bond Income Series values certain portfolio securities
(other than fixedincome securities maturing in 60 days or less,
which are valued using the amortized cost method) at market value
where current market quotations are readily available. Where
current market quotations are not readily available, a pricing
service selected by Back Bay Advisors, pursuant to the
authorization of the Board of Trustees, values the securities at
fair value. The pricing service employed will be one that
determines valuations of normal institutional-sized trading units of
long-term debt securities. Such valuations are determined by using
methods based on market transactions for comparable securities and
on various relationships between securities which are generally
recognized by institutional traders. Other securities for which
current market quotations are not readily available (including
restricted securities, if any) and all other assets are taken at
fair value as determined in good faith by Back Bay Advisors acting
under the supervision of the Board of Trustees, although the actual
calculations may be made by a pricing service selected by Back Bay
Advisors acting pursuant to the direction of the Board. Securities
traded on a national securities exchange or exchanges are valued at
their last sale price on the principal
exchange, or if there is no reported sale, and in the case of over-
thecounter securities, at a bid price estimated by a broker.
Back Bay Advisors Money Market Series
As described in the text of the Prospectus following the caption
"Net Asset Values and Portfolio Valuation," the portfolio of the Back
Bay Advisors Money Market Series will be valued at amortized cost.
Under the amortized cost method of valuation, securities are valued
at cost on the date of purchase. Thereafter the values of securities
purchased at a discount or premium are increased or decreased
incrementally each day so that at maturity the purchase discount or
premium is fully amortized and the value of the security is equal to
its principal amount. Due to fluctuations in interest rates, the
amortized cost value of the securities of the Back Bay Advisors Money
Market Series may at times be more or less than their market value.
By using amortized cost valuation, the Back Bay Advisors Money
Market Series seeks to maintain a constant net asset value of $100
per share despite minor shifts in the market value of its portfolio
securities. The yield on a shareholder's investment may be more or
less than that which would be recognized if the net asset value per
share of the Back Bay Advisors Money Market Series were not constant
and were permitted to fluctuate with the market value of the
portfolio securities of the Back Bay Advisors Money Market Series.
However, as a result of the following procedures, the Fund believes
any difference will normally be minimal. Quarterly, the Trustees
monitor the deviation between the net asset value per share of the
Back Bay Advisors Money Market Series as determined by using
available market quotations and its amortized cost price per share.
Back Bay Advisors makes such comparisons at least weekly and will
advise the Trustees promptly in the event of any significant
deviation. If the deviation exceeds 1/2 of 1% for the Back Bay
Advisors Money Market Series, the Board of Trustees will consider
what action, if any, should be initiated to provide fair valuation of
the portfolio securities of the Back Bay Advisors Money Market Series
and prevent material dilution or other unfair results to
shareholders. Such action may include selling portfolio securities
prior to maturity; withholding dividends; or utilizing a net asset
value per share as determined by using available market quotations.
FUND PERFORMANCE
Calculations of Yield and Return
Yield of the Back Bay Advisors Bond Income Series, the Salomon
Brothers U.S. Government Series and the Salomon Brothers Strategic
Bond Opportunities Series. As summarized in the Prospectus under the
caption "Performance Information," the yield of each of these Series
will be computed in accordance with the SEC's standardized formula by
annualizing net investment income per share for a recent 30-day
period and dividing that amount by a share's net asset value (reduced
by any earned income expected to be declared shortly as a dividend)
on the last trading day of that period. Net investment income will
reflect amortization of any market value premium or discount of fixed-
income securities (except for obligations backed by mortgages or
other assets) and may include recognition of a pro rata portion of
the stated dividend rate of dividend paying portfolio securities.
These Series' yield will vary from time to time depending upon
market conditions, the composition of the Series' portfolio and the
operating expenses of the Series. These factors and possible
differences in the methods used in calculating yield should be
considered when comparing the Back Bay Advisors Bond Income Series'
yield to yields published for other investment companies and other
investment vehicles. Yield should also be considered relative to
changes in the value of the Series' shares and to the relative risks
associated with the investment objectives and policies of the Series.
Yield information may be useful in reviewing such Series' performance
and providing a basis for comparison with other investment
alternatives, although the yields of the Series do not take into
account any of the fees imposed in connection with the purchase of
variable life insurance policies or variable annuity contracts
offered by New England Life Insurance Company ("NELICO") or
Metropolitan Life Insurance Company ("MetLife"). Yield may be stated
with or without giving effect to any expense limitations in effect
for the Series.
At any time in the future, yields may be higher or lower than
past yields and there can be no assurance that any historical results
will continue.
Investors are specifically advised that share prices, expressed
as the net asset value per share, will vary just as yields will vary.
An investor's focus on the yield of a Series to the exclusion of
consideration of the share price may result in the investor's
misunderstanding the total return he or she may derive from the
Series.
Yield of the Back Bay Advisors Money Market Series. The Back
Bay Advisors Money Market Series' yield represents the net change,
exclusive of capital changes, in the value of a hypothetical account
having a balance of one share at the beginning of the period for
which yield is determined (the "base period"). Current yield for the
base period (for example, seven calendar days) is calculated by
dividing (i) the net change in the value of the account for the base
period by (ii) the number of days in the base period. The resulting
number is then multiplied by 365 in order to determine such net
change on an annualized basis. This amount is divided by the value
of the account as of the beginning of the base period, normally $100,
in order to state the current yield as a percentage. Yield may also
be calculated on an "effective" or a "compound" basis, which assumes
continual reinvestment throughout an entire year of net income earned
at the same rate as net income is earned by the account for the base
period. Yield is calculated without regard to realized and unrealized
gains and losses. The yield of the Back Bay Advisors Money Market
Series will vary depending on prevailing interest rates, the
operating expenses of the Series and the quality, maturity and type
of instruments held in the portfolio of that Series. Yield
information may be useful in reviewing such Series' performance and
providing a basis for comparison with other investment alternatives,
although the yield of the Back Bay Advisors Money Market Series does
not take into account any of the fees imposed in connection with the
purchase of variable insurance policies or variable annuity contracts
offered by NELICO or MetLife. However, unlike certain bank deposits
or other investments which pay a fixed yield for a stated period of
time, money market fund yields fluctuate. Consequently no yield
quotation should be considered as representative of what the yield of
the Back Bay Advisors Money Market Series may be for any specified
period in the future.
Calculation of Total Return. As summarized in the Prospectus
under the heading "Performance Information," total return is a
measure of the change in value of an investment in a Series over the
period covered, which assumes that any dividends or capital gain
distributions are automatically reinvested in the Series rather than
paid to the investor in cash. Total return may be higher or lower
than past performance and there can be no assurance that any
historical results will continue.
The formula for total return used by a Series includes three
steps: (1) adding to the total number of shares purchased by a
hypothetical $1,000 investment in a Series all additional shares that
would have been purchased if all dividends and distributions paid or
distributed during the period had been automatically reinvested; (2)
calculating the value of the hypothetical initial investment as of
the end of the period by multiplying the total number of shares owned
at the end of the period by the net asset value per share on the last
trading day of the period; and (3) dividing this account value for
the hypothetical investor by the amount of the initial investment and
annualizing the result for periods of less than one year. Total
return reflects the bearing or deferral of certain expenses by New
England Mutual Life Insurance Company ("The New England") or TNE
Advisers, Inc. (see "Allocation of Expenses" below). Total return
would be lower for these Series if these expense arrangements had not
been in effect. Total return does not reflect charges assessed
against the insurance company separate accounts or the variable life
insurance or variable annuity products for which the Fund serves as
an investment vehicle. Total return may be stated alone or may be
accompanied by investment return information for those separate
accounts or the variable life insurance or variable annuity products.
Performance Comparisons
Yield and Total Return. Each Series may, from time to time,
include its total return in advertisements or in other written
information furnished to present and prospective owners of the
variable life insurance and variable annuity contracts supported by
the Fund. The Back Bay Advisors Bond Income Series, the Salomon
Brothers U.S. Government Series, the Salomon Brothers Strategic Bond
Opportunities Series and the Back Bay Advisors Money Market Series
may, from time to time, also include their yield in such
advertisements or other written information. These results may
include comparisons to the yields of money market funds reporting to
IBC/Donoghue's Money Fund Report ("Donoghue's Report"). In addition,
each Series may, from time to time, provide a ranking of such
performance figures relative to similar figures for mutual funds
whose performance has been monitored by Lipper Analytical Services,
Inc. ("Lipper"). Performance information about a Series is based on
the Series' past performance and is not intended to indicate future
performance.
Donoghue's Report is an independent service that collects data
from over 1,000 money market funds weekly and reports on the assets,
7and 30-day yields, 12-month yields, average maturities and portfolio
breakdowns of such funds. 12-month yields represent total return
assuming reinvestment of dividends for up to one year.
Lipper is an independent service that monitors the performance
of over 750 variable annuity and variable life mutual funds,
calculates total return and, in some cases, yield for such funds.
Total return (and yield in the case of the Back Bay Advisors
Bond Income Series, the Back Bay Advisors Money Market Series, the
Salomon Brothers U.S. Government Series and the Salomon Brothers
Strategic Bond Opportunities Series) may also be used to compare the
performance of a Series against certain widely acknowledged standards
or indices for stock and bond market performance, including, but not
limited to, the S&P 500 Index, the Dow Jones Industrial Average, the
Lehman Government/Corporate Bond Index, the Lehman Intermediate
Government/Corporate Bond Index, the S&P/BARRA Growth Index, the
S&P/BARRA Value Index, the Lipper Variable Balanced Fund Average, the
Lipper Variable Growth and Income Average, the Lipper Variable A-
Rated Corporate Bond Fund Average, the Lipper Variable Flexible
Portfolio Fund Average, the Lipper Variable General Bond Fund
Average, the Lipper Variable Growth Fund Average, the Lipper Variable
International Fund Average, the Lipper Variable Intermediate
Investment Grade Debt Fund Average, the Lipper Variable Small Company
Fund Average, the
Lipper Variable S&P 500 Index Fund Average, the Lipper Variable U.S.
Mortgage and GNMA Fund Average, the Russell 2000 Index, the Lehman
Brothers Aggregate Bond Index, the Lehman Brothers Intermediate
Government Bond Index and the Morgan Stanley Capital International
Europe, Australia, Far East Index, or against the U.S. Bureau of
Labor Statistics' Consumer Price Index.
The S&P 500 Index is a market value-weighted and unmanaged
index showing the changes in the aggregate market value of 500
stocks relative to the base period 1941-43. The S&P 500 Index is
composed almost entirely of common stocks of companies listed on the
New York Stock Exchange, although the common stocks of a few
companies listed on the American Stock Exchange or traded over-the-
counter are included. The 500 companies represented include 385
industrial, 15 transportation, 55 financial services and 45
utilities concerns.
The Dow Jones Industrial Average ("DJIA") is a market value
weighted and unmanaged index of 30 large industrial stocks traded on
the New York Stock Exchange.
The Lehman Government/Corporate Bond Index is a measure of the
market value of approximately 5,300 bonds with a face value
currently in excess of $1.3 trillion. To be included in the Lehman
Government/Corporate Bond Index, an issue must have amounts
outstanding in excess of $1 million, have at least one year to
maturity and be rated "Baa" or higher ("investment grade") by a
nationally recognized rating agency.
The Lehman Intermediate Government/Corporate Bond Index is an
unmanaged index of investment grade bonds issued by the U.S.
Government and U.S. corporations having maturities between one and
ten years.
The Consumer Price Index, published by the U.S. Bureau of Labor
Statistics, is a statistical measure of changes, over time, in the
prices of goods and services in major expenditure groups.
The S&P/BARRA Growth Index is an unmanaged index of more than
150 large capitalization stocks that have high historical earnings
growth and predicted above average earnings growth. The S&P/BARRA
Value Index is an unmanaged index of more than 300 large
capitalization stocks characterized by low price-to-book ratios,
high yield and low price-to-earnings ratios. Both the S&P/BARRA
Growth Index and the S&P/BARRA Value Index are compiled by BARRA.
The Lipper Variable Balanced Fund Average is a measure of the
performance of the largest open-end balanced mutual funds.
The Lipper Variable Growth and Income Average represents a
grouping of funds underlying annuity products which have growth and
income as their investment objectives.
The Lipper Variable A-Rated Corporate Bond Fund Average is an
average of the total return performance (calculated on net asset
value) of funds with similar investment objectives as calculated by
Lipper Analytical Services.
Lipper Variable Flexible Portfolio Fund Average is an average
of the total return performance (calculated on net asset value) of
funds with similar investment objectives as calculated by Lipper
Analytical Services.
The Lipper Variable General Bond Fund Average is an average of
the total return performance (calculated on net asset value) of
funds with similar investment objectives as calculated by Lipper
Analytical Services.
Lipper Variable Growth Fund Average is an average of the total
return performance (calculated on net asset value) of funds with
similar investment objectives as calculated by Lipper Analytical
Services.
The Lipper Variable International Fund Average is an average of
the total return performance (calculated on net asset value) of
funds with similar investment objectives as calculated by Lipper
Analytical Services.
The Lipper Variable Intermediate Investment Grade Debt Fund
Average is an average of the total return performance (calculated on
net asset value) of funds with similar investment objectives as
calculated by Lipper Analytical Services.
The Lipper Variable Small Company Fund Average is an average of
the total return performance (calculated on net asset value) of
funds with similar investment objectives as calculated by Lipper
Analytical Services.
The Lipper Variable S&P 500 Index Fund Average is an average of
the total return performance (calculated on net asset value) of
funds with similar investment objectives as calculated by Lipper
Analytical Services.
The Lehman Brothers Aggregate Bond Index is an index which
includes most obligations of the U.S. Treasury, agencies and quasi
federal corportions, most publicly issued investment grade corporate
bonds, and most bonds backed by mortgage pools of GNMA, FNMA and
FHLMC.
The Lehman Brothers Intermediate Government Bond Index is an
index which includes most obligations of the U.S. Treasury, agencies
and quasi-federal corporations having maturities of one to ten
years.
The Russell 2000 Index is an index which consists of 2000 small
market capitalization stocks having an average market cap of $160
million.
The Morgan Stanley Capital International Europe, Australia, Far
East Index is an arithmetical average (weighted by market value) of
the performance (in U.S. dollars) of 1,036 companies representing
the stock markets of Europe, Australia, New Zealand and the Far
East.
From time to time, articles about a Series regarding
performance, rankings and other Series characteristics may appear in
national publications including, but not limited to, the Wall Street
Journal, Forbes, Fortune, CDA Investment Technologies and Money
Magazine (see Appendix B). In particular, some or all of these
publications may publish their own rankings or performance reviews
of mutual funds, including the Fund. References to or reprints or
portions of reprints of such articles, which may be include rankings
that list the names of other funds and their performance, may be
used as Fund or variable contract sales literature or advertising
material.
The following table presents certain total return information
for certain Series and certain indexes and averages for periods
ended December 31, 1995:
<TABLE>
Total Return Total 5-Year 10-Year
For The Return Average Average
Year Ended For the 5- Annual Annual
Dec. 31, Year Total Total Return
1995 Period Return
Ended
Dec. 31,
1995
<S> <C> <C> <C> <C>
Loomis Sayles Small
Cap Series 28.9% -- -- -
Draycott
International 6.0% -- -- -
Equity Series
Alger Equity Growth
Series 48.7% -- -- -
Capital Growth 38.0% 113.4% 16.4% 22.0%
Series
Loomis Sayles
Avanti Growth 30.4% -- -- --
Series
Davis Venture Value 39.3% -- -- -
Series
Westpeak Growth and
Income Series 36.5% -- -- --
Westpeak Stock
Index Series 36.9% 112.6% 16.3% --
Loomis Sayles
Balanced Series 24.8% -- -- --
Back Bay Advisors
Managed Series 31.3% 84.2% 13.0% --
Salomon Brothers
Strategic Bond
Opportunities
Series 19.4% -- -- --
Back Bay Advisors
Bond Income 21.2% 68.3% 11.0% 10.0%
Series
Salomon Brothers
U.S. Government 15.0% -- -- --
Series
Back Bay Advisors
Money Market
Series 5.6% 24.7% 4.5% 6.1%
S & P 500 37.4% 115.3% 16.5% 14.8%
Lehman Government/
Corporate Index 15.3% 51.1% 8.6% 8.8%
Consumer Price 2.6% 14.8% 2.8% 3.5%
Index
DJIA 37.0% 124.4% 17.6% 16.4%
</TABLE>
No brokerage commissions or other fees were factored into the
values of the S&P 500, which is an index of an unmanaged group of
common stocks. No adjustments have been made for a shareholder's
tax liability on dividends and capital gains distributions.
Since commencing operations on May 1, 1994, the Loomis Sayles
Small Cap Series has made the following distributions of income: on
12/28/94 $0.15 per share and on 12/29/95 $0.78 per share. Over the
same period, the Loomis Sayles Small Cap Series had made the
following distributions of realized capital gains: none on 12/28/94
and on 12/29/95 $4.81 per share.
Since commencing operations on October 31, 1994, the Draycott
International Equity Series has made the following distributions of
income: on 12/28/94 $ 0.02 per share and on 12/29/95 $0.12 per
share. Over the same period, the Draycott International Equity
Series has made the following distributions of realized capital
gains: on 12/28/94 and 12/29/95 no realized capital gains, and paid-
in capital of $0.01 and none, respectively.
Since commencing operations on October 31, 1994, the Alger
Equity Growth Series has made the following distributions of income:
on 12/28/94 $0.02 per share and on 12/29/95 $0.01 per share. Over
the same period, the Alger Equity Growth Series has made the
following distributions of realized capital gains: on 12/28/94 no
realized capital gains and on 12/29/95 $0.41 per share.
Since inception, the Capital Growth Series has made the
following distributions of income: on 1/20/84 $0.21 per share; on
1/25/85 $1.12 per share; on 1/24/86 $0.90 per share; on 1/23/87
$0.44 per share; on 12/31/87 $0.66 per share; on 12/29/88 $9.55 per
share; on 9/14/89 $0.13 per share; on 12/29/89 $2.59 per share; on
12/28/90 $2.11 per share; on 12/27/91 $3.22 per share; on 12/29/92
$4.07; on 12/29/93 $2.18 per share; on 12/28/94 $5.15 per share, and
on 12/29/95 $3.48 per share. Over the same period, the Capital
Growth Series has made the following distributions of realized
capital gains: on 1/20/84 $0.49 per share; on 1/24/86 $45.74 per
share; on 1/23/87 $122.84 per share; on 12/31/87 $19.59 per share;
on 1/28/88 $0.30 per share; on 12/28/90 none; on 12/27/91 $32.37 per
share; on 12/31/92 none; on 12/29/93 $16.75 per share; on 7/22/94
$0.41 per share; on 12/28/94 $8.92 per share and on 12/29/95 $52.58
per share.
Since commencing the sale of shares on April 30, 1993, the
Loomis Sayles Avanti Growth Series has made the following
distributions of income: on 12/29/93 $0.175 per share; on 12/28/94
$0.60 per share and on 12/29/95 $0.40 per share. Over the same
period, the Loomis Sayles Avanti Growth Series has made the
following distributions of realized capital gains: on 12/29/93
$0.885 per share; on 12/28/94 none and on 12/29/95 $4.15 per share.
Since commencing operations on October 31, 1994, the Davis
Venture Value Series has made the following distributions of income:
on 12/28/94 $0.03 per share and on 12/29/95 $0.10 per share. Over
the same period, the Series has made the following distributions of
realized capital gains: on 12/28/94 no realized capital gains and on
12/29/95 $0.20 per share.
Since commencing the sale of shares on April 30, 1993, the
Westpeak Growth and Income Series has made the following
distributions of income: on 12/29/93 $0.92 per share; on 12/28/94
$1.92 per share and on 12/29/95 $1.71 per share. Over the same
period, the Westpeak Growth and Income Series has made the following
distributions of realized capital gains: on 12/29/93 $1.01 per
share; on 12/28/94 no capital gains but a distribution of paid-in
capital was made on 12/28/94 of $0.02 per share and on 12/29/95
capital gains of $5.69 per share.
Since commencing the sale of shares on May 1, 1987, the
Westpeak Stock Index Series has made the following distributions of
income: on 12/31/87 $2.23 per share; on 12/29/88 $3.44 per share; on
12/27/89 $3.74 per share; on 12/28/90 $3.99 per share; on 12/27/91
$3.56 per share; on 12/29/92 $8.35 per share; on 12/29/93 $1.54 per
share; on 12/28/94 $1.82 per share and on 12/29/95 $1.85 per share.
Over the same period, the Westpeak Stock Index Series has made the
following distributions of realized capital gains: on 12/31/87 $0.41
per share; on 12/29/88 $0.81 per share; on 12/27/89 $1.64 per share;
on 12/28/90 none; on 1/29/91 $0.05; on 12/27/91 $0.39 per share; on
12/29/92 $67.41 per share; on 5/20/93 $0.29 per share; on 12/29/93
$0.695 per share and on 12/28/94 $0.16 per share and a distribution
of paid-in capital on 12/28/94 of $0.03 per share; on 12/29/95 $1.18
per share.
Since commencing operations October 31, 1994, the Loomis Sayles
Balanced Series has made the following distributions of income: on
12/28/94 $0.05 per share and on 12/29/95 $0.26 per share. Over the
same period, the Loomis Sayles Balanced Series has made the
following distributions of realized capital gains: on 12/28/94 none
and on 12/29/95 $0.19 per share.
Since commencing the sale of shares on May 1, 1987, the Back
Bay Advisors Managed Series has made the following distributions of
income: on 12/31/87 $2.73 per share; on 12/29/88 $5.24 per share; on
12/27/89 $4.22 per share; on 12/28/90 $5.52 per share; on 12/27/91
$6.41 per share; on 12/29/92 $5.13 per share; on 5/20/93 $0.02 per
share; on 12/29/93 $4.36 per share; on 12/28/94 $5.38 per share and
on 12/29/95 $6.57 per share. Over the same period, the Back Bay
Advisors Managed Series has made the following distributions of
realized capital gains: on 12/29/88 $0.38; on 12/27/89 $0.38; on
12/28/90 none; on 12/27/91 $1.15 per share; on 12/29/92 $1.07 per
share; on 12/29/93 $2.65 per share; on 12/28/94 none; on 12/29/95
$0.88 per share.
Since commencing on October 31, 1994, the Salomon Brothers
Strategic Bond Opportunities Series has made the following
distributions of income: on 12/28/94 $ 0.12 per share and on
12/29/95 $0.55 per share. Over the same period, the Series has made
the following distributions of realized capital gains: on 12/28/94
no realized capital gains and on 12/29/95 $0.22 per share.
Since inception, the Back Bay Advisors Bond Income Series has
made the following distributions of income: on 1/20/84 $3.76 per
share; on 1/25/85 $11.60 per share; on 1/24/86 $11.09 per share; on
1/23/87 $10.04 per share; on 12/31/87 $8.67 per share; on 12/29/88
$10.70 per share; on 12/27/89 $6.91 per share; on 12/28/90 $7.46 per
share; on 12/27/91 $9.47 per share; on 12/29/92 $6.87 per share; on
12/29/93 $6.25 per share; on 12/28/94 $7.05 per share and on
12/29/95 $7.05 per share. Over the same period, the Back Bay
Advisors Bond Income Series has made the following distributions of
realized capital gains: on 1/20/84 $0.11 per share; on 1/24/86 $1.67
per share; on 1/23/87 $11.10 per share; on 12/28/90 none; on
12/27/91 $2.13 per share; on 12/29/92 $1.57 per share; on 12/29/93
$4.16 per share; on 12/28/94 none; and on 12/29/95 none.
Since commencing operations on October 31, 1994, the Salomon
Brothers U.S. Government Series has made the following distributions
of income: on 12/28/94 $ 0.10 per share and on 12/29/95 $0.33 per
share. Over the same period, the Salomon Brothers U.S. Government
Series has made the following distributions of realized capital
gains: on 12/28/94 no realized capital gains and on 12/29/95 $0.08
per share.
TRUSTEES AND OFFICERS
Trustees and officers of the Fund (ages in parentheses) and their
principal occupations during the past five years or more are as
follows:
NANCY HAWTHORNE (44) -- Trustee; Pilot House, Lewis Wharf, Boston,
MA 02110; Senior Vice President and Chief Financial Officer,
Continental Cablevision, Inc. (cable television operator);
formerly, Senior Vice President and Treasurer, Continental
Cablevision, Inc.; Director, Perini Corporation (construction).
JOSEPH M. HINCHEY (70) -- Trustee; 193 Wamphassue Road, Stonington,
Connecticut 06378; Retired; formerly, Senior Vice President
Finance, Analog Devices, Inc. (manufacturer of electronic
devices); Trustee, Union College and Citizens Scholarship
Foundation of America, Inc.; Director, New England Security
Insurance and Chemet Corporation (manufacturer of metallurgical
products).
RICHARD S. HUMPHREY, JR. (70) -- Trustee; 217 Waterways Avenue.,
P.O. Box 518, Boca Grande, Florida 33921; Director, RYKA, Inc.
(manufacturer of athletic footwear for women); retired Chairman
of the Board, HBM/Creamer (advertising agency).
ROBERT B. KITTREDGE (75) -- Trustee; 21 Sturdivant Street,
Cumberland Foreside, ME 04110; Retired; Trustee, CGM Trust and
CGM Capital Development Fund; formerly, Vice President, General
Counsel and Director, Loomis, Sayles & Company, Inc.
LAURENS MACLURE (70) -- Trustee; 183 Sohier Street, Cohasset, MA
02025; Retired; Trustee, CGM Trust and CGM Capital Development
Fund; Director, Blue Cross of Massachusetts (health insurance).
DALE ROGERS MARSHALL (58) -- Trustee; 26 East Main Street, Norton,
MA 02766; President, Wheaton College; formerly, Academic
Dean, Wellesley College.
JOSEPH F. TURLEY (70) -- Trustee; 5680 N. AIA #304, Indian River
Shores, FL 32963; Retired; Director, The Gillette Company
(manufacturers of personal care products) and EG&G, Inc. (a
diversified technical company); formerly, President and Chief
Operating Officer, The Gillette Company.
JOHN J. ARENA, (60) -- Trustee; 330 Beacon Street, Boston, MA 02116;
Retired; formerly, Vice Chairman of the Board of Directors and
President of BayBank Investment Management, BayBanks, Inc.
JOHN W. FLYNN, (57) -- Trustee; 791 Main Street, Warren, RI 02885;
Retired; formerly, Vice Chairman, Chief Financial Officer, Fleet
Financial Group.
JOHN T. LUDES, (60) -- Trustee; 1700 E. Putnam Avenue, Old Greenwich,
CT 06870; President and Chief Operating Officer, American Brands;
formerly, President, Acushnet Company.
FREDERICK K. ZIMMERMANN* (44) -- Chairman of the Board, Chief
Executive Officer, President and Trustee; Chief Investment
Officer and Executive Vice President, NELICO; formerly, Senior
Vice President, Vice President and Controller, The New England;
Chairman of the Board and President, TNE Advisers, Inc.;
Director and Vice President - Investments, NELICO until 1996;
Chairman of the Board and President, New England Pension and
Annuity Company.
ANNE M. GOGGIN* (47) -- Senior Vice President and Trustee; Vice
President and Counsel, NELICO; Vice President, General Counsel,
Secretary and Clerk, New England Securities Corp., Vice
President and Counset, The New England (1994-1996); formerly,
Second Vice President and Counsel, The New England.
BEVERLY J. DeWITT (46) -- Secretary; Counsel, NELICO; Chief Legal
Officer, Secretary and Clerk, TNE Advisers, Inc.; Assistant
Secretary and Clerk, Westpeak; Assistant Secretary, New England
Securities Corp; formerly, Attorney, The New England.
JOHN F. GUTHRIE (52) -- Senior Vice President; Vice President,
NELICO; Senior Vice President, TNE Advisers, Inc.; formerly, Vice
PresidentPortfolio Strategy, The New England.
ALAN C. LELAND (44) -- Vice President; Vice President, NELICO; Chief
Financial Officer, TNE Advisers, Inc.; formerly, Vice President,
The New England.
FRANK NESVET (52) -- Treasurer; Senior Vice President and Chief
Financial Officer, New England Funds, L.P.; formerly, Executive
Vice President, SuperShare Services Corporation.
Previous positions during the past five years with NELICO or its
predecessor, New England Mutual Life Insurance Company, Back Bay
Advisors, CGM, Westpeak, Loomis Sayles or New England Funds, L.P. are
omitted, if not materially different. The Fund's Trustees also serve
as managers of New England Variable Annuity Fund I, for which New
England Securities acts as a principal underwriter and CGM as
investment adviser.
Except as indicated above, the address of each trustee and
officer of the Fund affiliated with NELICO is 501 Boylston Street,
Boston, Massachusetts 02116. The address of each trustee or officer
of the Fund affiliated with Back Bay Advisors, New England Funds,
L.P. or New England Securities is 399 Boylston Street, Boston,
Massachusetts. The address of each trustee and officer affiliated
with CGM is One International Place, Boston, Massachusetts.
The officers and trustees of the Fund who are "interested
persons" receive no compensation from the Fund, for their services in
such capacities, although they do receive compensation from NELICO,
Back Bay Advisors, CGM, Westpeak, Loomis Sayles or New England Funds,
L.P. for services rendered in other capacities.
Trustees Fees
New England Zenith Fund pays no compensation to its officers or
to its trustees who are interested persons thereof.
Until May 1, 1995, each Trustee who was not an interested person
of the Fund received, in the aggregate for serving on the boards of
the Fund and twenty one other mutual fund portfolios, a retainer fee
at the annual rate of $40,000 and meeting attendance fees of $2,500
for each meeting of the boards he or she attended and $1,500 for each
meeting he or she attended of a committee of the board of which he or
she was a member. Each committee chairman received an additional
retainer fee at the annual rate of $2,500. These fees were
allocated among the Series and the twenty one other mutual fund
portfolios based on a formula that took into account, among other
factors, the net assets of each Series and each mutual fund.
Effective May 1, 1995, each Trustee who is not an interested
person receive for serving as Trustee of the Fund and on the board
of New England Variable Annuity Fund I ("NEVA") a retainer fee at an
annual rate of $20,000, and meeting attendance fees of $2,000 for
each board meeting attended. In addition, the chairman of the
Contract Review and Governance Committee receives a retainer at the
annual rate of $3,000, and the chairman of the Audit Committee
receives a retainer at the annual rate of $2,000. Also in 1995,
each Trustee who was not an interested person received a special,
one-time fee of $5,000 relating to the services of the board in
conjunction with the restructuring of the boards. The compensation
is allocated among the Series and NEVA based on a formula that takes
into account, among other factors, the assets of each Series, and
NEVA.
During the fiscal year ended December 31, 1995, the persons who
were then Trustees of the Fund received the amounts set forth below
for serving as a Trustee of the Fund and for also serving on the
governing boards of twenty-one other mutual fund portfolios (the
"Other Portfolios"). As of December 31, 1995, there were a total of
thirty-five portfolios or series in the Fund and the Other Funds
combined.
<TABLE>
Aggregate
Aggregate Compensation Total
Compensation from Compensation
from the Fund the Other from the Fund
in 1995 Portfolios and
in 1995 Other
Portfolios
in 1995
<S> <C> <C> <C>
Name of Trustee
Nancy Hawthorne $24,307 $2,026 $26,333
Joseph M. Hinchey $34,314 $15,811 $50,125
Richard S. $32,485 $15,682 $48,167
Humphrey, Jr.
Robert B. Kittredge $31,860 $46,807(b) $78,667
Laurens MacLure $34,398 $47,102(b) $81,500
Dale Rogers $24,307 $2,026 $26,333
Marshall
Joseph F. Turley $32,485 $15,682 $48,167
Kenneth J. Cowan(a) $7,038 $62,253 $69,291
Sandra O. Moose (a) $6,153 $50,097 $56,250
James H. Scott (a) $6,778 $52,222 $59,000
John A. Shane (a) $6,153 $56,847 $63,000
Pendleton P. White (a) $6,153 $56,847 $63,000
________________
</TABLE>
(a) Resigned as a trustee of the Trust effective May 1, 1995.
(b) Also includes compensation paid by the portfolios of the
CGM Funds, a group of mutual funds for which Capital Growth
Management Limited Partnership, the investment adviser of the
Fund's Capital Growth Series, serves as investment adviser.
The Fund provides no pension or retirement benefits to
Trustees, but has adopted a deferred payment arrangement under which
each Trustee may elect not to receive fees from the Fund on a
current basis but to receive in a subsequent period an amount equal
to the value that such fees would have if they had been invested in
each Series on the normal payment date for such fees. As a result of this
method of calculating the deferred payments, each Series, upon making the
deferred payments, will be in the same financial position as if the
fees had been paid on the normal payment dates.
At March 31, 1996, the officers and Trustees of the Fund as a
group owned less than 1% of the outstanding shares of the Fund.
ADVISORY ARRANGEMENTS
Advisory Structure. Pursuant to separate advisory agreements
dated August 30, 1996, TNE Advisers, Inc., has agreed to manage the
investment and reinvestment of assets of the Draycott International
Equity, Alger Equity Growth, Davis Venture Value, Loomis Sayles
Balanced, Salomon Brothers Strategic Bond Opportunities and Salomon
Brothers U.S. Government Series. Pursuant to separate advisory
agreements with the Fund, each dated August 30, 1996, TNE Advisers,
Inc. has agreed to manage the investment and reinvestment of the
assets of the Loomis Sayles Small Cap, Loomis Sayles Avanti Growth,
Westpeak Growth and Income, Westpeak Stock Index, Back Bay Advisors
Managed, Back Bay Advisors Bond Income and Back Bay Advisors Money
Market Series. TNE Advisers, Inc. has delegated certain of these
responsibilities, including responsibility for determining what
investments such Series should purchase, hold or sell and directing
all trading for the Series' account, for each of the above Series to
subadvisers under subadvisory agreements described below. Pursuant
to an advisory agreement dated August 30, 1996, CGM has agreed to
manage the investment and reinvestment of the assets of the Capital
Growth Series.
In each case, advisory services are provided subject to the
supervision and control of the Fund's trustees. Each advisory
agreement also provides that the relevant investment adviser will
furnish or pay the expenses of the applicable Series for office
space, facilities and equipment, services of executive and other
personnel of the Fund and certain administrative services. TNE
Advisers, Inc. has subcontracted with New England Funds, L.P. to
provide, at no extra cost to the Series it advises, certain
administrative services to the Fund. CGM, in the case of the
Capital Growth Series, has subcontracted with New England Funds,
L.P. to provide such services for that Series.
TNE Advisers, Inc. is a wholly-owned subsidiary of NELICO
organized in 1994. TNE Advisers, Inc. oversees, evaluates and
monitors the subadvisers' provision of investment advisory services
to all of the Series (except the Capital Growth Series) and provides
general business management and administration to all of the Series
(except the Capital Growth Series).
Subject to the supervision of TNE Advisers, Inc. each
subadviser, pursuant to Subadvisory Agreements dated August 30,
1996, manages the assets of its Series in accordance with that
Series' investment objective and policies, makes investment
decisions for that Series and employs professional advisers and
securities analysts who provide research services to that Series.
The Series pay no direct fees to any of the subadvisers.
Back Bay Advisors, formed in 1986, is a subsidiary of NEIC.
NEIC's sole general partner, New England Investment Companies, Inc.,
is a wholly-owned subsidiary of MetLife New England Holdings, Inc.,
which is a wholly-owned subsidiary of MetLife. NEIC and its
subsidiary or affiliated asset management firms, collectively, have
more than $84 billion of assets under management or administration.
Back Bay Advisors provides investment management services to
institutional clients, including other registered investment
companies and accounts of NELICO and its affiliates. Back Bay
Advisors specializes in fixed-income management and currently
manages over $6 billion in total assets; it is subadviser to Back
Bay Advisors Managed, Back Bay Advisors Bond Income and Back Bay
Money Market Series.
Loomis Sayles, subadviser to the Loomis Sayles Small Cap,
Loomis Sayles Avanti Growth and Loomis Sayles Balanced Series, was
organized in 1926 and is one of the oldest and largest investment
counsel firms in the country. An important feature of the Loomis
Sayles investment approach is its emphasis on investment research.
Recommendations and reports of the Loomis Sayles research department
are circulated throughout the Loomis Sayles organization and are
available to the individuals in the Loomis Sayles organization who
have been assigned the responsibility for making investment
decisions for the Funds' portfolios. Loomis Sayles provides
investment advice to numerous other institutional and individual
clients. These clients include other registered investment
companies and some accounts of NELICO and its affiliates ("New
England Accounts"). Loomis Sayles is a subsidiary of NEIC.
Draycott, formed in 1991, provides investment management
services to mutual funds and to institutional clients, which may
include MetLife and its affiliates; it is subadviser to the Draycott
International Equity Series. Draycott was a wholly-owned subsidiary
of NEIC until December 29, 1995, when NEIC sold Draycott to Cursitor
Holdings Limited ("Cursitor"), an international investment
management firm. Effective February 29, 1996, Cursitor Alliance
LLC, a newly formed Delaware limited liability company, acquired the
stock of Cursitor. Cursitor Alliance LLC is owned (directly and
indirectly) 93% by Alliance Capital Management L.P. and 7% by an
entity owned by the principals of Cursitor. At February 29, 1996,
Cursitor Alliance LLC had approximately $17 billion in assets under
management. Alliance Capital Management Corporation ("ACMC") is the
sole general partner of, and the owner of a 1% general partnership
interest in, Alliance Capital. ACMC is an indirect, wholly-owned
subsidiary of The Equitable Life Assurance Society of the United
States ("The Equitable"), which is a wholly-owned subsidiary of The
Equitable Companies Incorporated, a holding company controlled by
AXA, a French insurance holding company. As of February 29, 1996,
The Equitable owned, directly and indirectly, approximately 59% of
the outstanding limited partnership interest in Alliance Capital.
Fred Alger Management Inc. ("Alger Management") provides
investment management services to mutual funds and to other
institutions and individuals; it is subadviser to the Alger Equity
Growth Series. Alger Management is a wholly-owned subsidiary of
Fred Alger Company, Inc., which in turn is a wholly-owned subsidiary
of Alger Associates, Inc., a financial services holding company.
Frederick M. Alger III and his brother, David D. Alger, own
approximately 53% and 17%, respectively, of Alger Associates, Inc.
and may be deemed to control that company and its subsidiaries.
CGM is a limited partnership whose general partner is a
corporation controlled equally by Robert L. Kemp and G. Kenneth
Heebner. In addition to advising the Capital Growth Series, CGM
acts as investment adviser of CGM Capital Development Fund, CGM
Trust, New England Variable Annuity Fund I and New England Growth
Fund of the New England Funds. CGM also provides investment advice
to other institutional and individual clients.
Westpeak is a wholly-owned subsidiary of NEIC. Organized in
1991, Westpeak provides investment management services to a mutual
fund and other institutional clients, including accounts of MetLife
and its affiliates; it is subadviser to the Westpeak Growth and
Income and Westpeak Stock Index Series.
Davis Selected Advisors, L.P. ("Davis Selected") provides
investment advisory services for mutual funds and other clients; it
is subadviser to the Davis Venture Value Series. Venture Advisers,
Inc., the general partner of Davis Selected, is controlled by Shelby
M.C. Davis.
Salomon Brothers Asset Management Inc ("SBAM") is a wholly-
owned subsidiary of Salomon Inc which provides investment advisory
services for individuals, other mutual funds and institutional
clients; it is subadviser to the Salomon Brothers U.S. Government
Series and the Salomon Brothers Strategic Bond Opportunities Series.
Advisory Fees. Each Series pays its adviser compensation at
the annual percentage rates of the corresponding levels of that
Series' average daily net asset values (the adviser of the Capital
Growth Series is CGM, the adviser of each other Series is TNE
Advisers), subject to any fee reductions or deferrals as described
in the Prospectus under "Voluntary Expense Agreement" or "Expense
Deferral Arrangement."
<TABLE>
Annual Average Daily Net
Series Percentage Asset Value
Rate Levels
<S> <C> <C>
Loomis Sayles Small 1.00% all assets
Cap Series
Draycott .90% all assets
International
Equity Series
Alger Equity Growth .75% all assets
Series
Capital Growth .70% the first $200
Series million
.65% the next $300
million
.60% amounts in excess
of $500 million
Loomis Sayles .70% the first $200
Avanti Growth .65% million
Series the next $300
million
.60% amounts in excess
of $500 million
Davis Venture Value .75% all assets
Series
Westpeak Growth and .70% the first $200
Income Series million
.65% the next $300
million
.60% amounts in excess
of $500 million
Westpeak Stock .25% all assets
Index Series
Loomis Sayles .70% all assets
Balanced Series
Back Bay Advisors .50% all assets
Managed Series
Salomon Brothers .65% all assets
Strategic Bond
Opportunities
Series
Back Bay Advisors .40% the first $400
Bond Income million
Series .35% the next $300
million
.30% the next $300
million
.25% amounts in excess
of $1 billion
Salomon Brothers .55% all assets
U.S. Government
Series
Back Bay Advisors .35% the first $500
Money Market .30% million
Series .25% the next $500
million amounts in excess of
$1 billion
</TABLE>
Subadvisory Fees.
Sub-Advisory Fees. TNE Advisers pays each sub-adviser at the
following rates for providing sub-advisory services to the
following Series:
<TABLE>
Series Annual Percentage Average Daily Net Asset
Rates Paid Value Levels
by TNE
Advisers to the
Respective
Sub-Advisers
<S> <C> <C>
Loomis Sayles Small Cap 0.55% of the first $25 million
Series
0.50% of the next $75 million
0.45% of the next $100 million
0.40% of amounts in excess of
$200 million
Draycott International 0.75% of the first $10 million
Equity Series
0.60% of the next $40 million
0.45% of amounts in excess of
$50 million
Alger Equity Growth 0.45% of the first $100
Series* million
0.40% of the next $400 million
0.35% of amounts in excess of
$500 million
Loomis Sayles Avanti 0.50% of the first $25 million
Growth
Series 0.40% of the next $75 million
0.35% of the next $100 million
0.30% of amounts in excess of
$200 million
Davis Venture Value 0.45% of the first $100
Series million
0.40% of the next $400 million
0.35% of amounts in excess of
$500 million
Westpeak Growth and 0.50% of the first $25 million
Income Series
0.40% of the next $75 million
0.35% of the next $100 million
0.30% of amounts in excess of
$200 million
Westpeak Stock Index 0.10% of all assets
Series
Loomis Sayles Balanced 0.50% of the first $25
million
Series
0.40% of the next $75 million
0.30% of amounts in excess
of
$100 million
Back Bay Advisors 0.25% of the first $50
million
Managed Series
0.20% of amounts in excess
of
$50 million
Salomon Brothers 0.35% of the first $50
million
Strategic Bond
Opportunities Series 0.30% of the next $150
million
0.25% of the next $300
million
0.20% of amounts in excess of
$500 million
Back Bay Advisers Bond 0.25% of the first $50 million
Income Series 0.20% of the next $200 million
0.15% of amounts in excess of
$250 million
Salomon Brothers U.S. 0.225% of the first $200
Government million
Series 0.150% of the next $300 million
0.100% of amounts in excess of
$500 million
Back Bay Advisors Money 0.15% of the first $100
Market million
Series 0.10% of amounts in excess of
$100 million
</TABLE>
*Prior to May 1, 1996, the advisory fee rate for the Alger Equity
Growth Series was 0.70% of average net assets and the sub-advisory fee
rate was 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. Effective May 1,
1996, Alger Management has agreed with TNE Advisers, Inc. that the
subadvisory fee payable by TNE Advisers, Inc. to Alger Management
will be reduced by 0.05% of the first $240 million of the excess of
the Series' average daily net assets over $10 million, and by 0.10%
of the excess of the Series' average daily net assets over $250
million. This fee reduction benefits TNE Advisers, Inc., but does not
reduce the advisory fees payable by the Series. The fee reduction
agreement will expire on (a) January 1, 1998 or (b) at such time as TNE
Advisers, Inc. has recovered certain expenses (generally, those
expenses borne by TNE Advisers, Inc. under the Expense Deferral
Arrangement prior to January 1, 1996 which are not recovered from
the Series), whichever comes first.
In connection with SBAM's service as subadviser to the
Strategic Bond Opportunities Series, SBAM's London based affiliate,
Salomon Brothers Asset Management Limited ("SBAM Limited"), Victoria
Plaza, 111 Buckingham Palace Road, London SW1W OSB, England, serves
as subadviser to SBAM relating to currency transactions and
investments in non-dollar denominated debt securities for the
benefit of the Salomon Brothers Strategic Bond Opportunities Series.
For these services, SBAM has agreed to pay SBAM Limited one-third of
the compensation that SBAM receives for serving as subadviser to the
Series. SBAM Limited is an indirect, wholly-owned subsidiary of
Salomon Inc.
For the fiscal year ended December 31, 1993, the Back Bay
Advisors Money Market Series, the Back Bay Advisors Bond Income
Series and the Back Bay Advisors Managed Series paid advisory fees
of $213,811, $429,841 and $501,403, respectively, to Back Bay
Advisors and for that same period, the Capital Growth Series paid
$3,729,518 to CGM. For the period April 30 to December 31, 1993,
the Westpeak Growth and Income Series paid advisory fees of $18,667
to Westpeak and the Loomis Sayles Avanti Growth Series paid advisory
fees of $23,455 to Loomis Sayles. For the period January 1, 1993 to
July 31, 1993, the Westpeak Stock Index Series paid advisory fees of
$22,166 to Back Bay Advisors and for the period August 1,1993 to
December 31, 1993, paid advisory fees of $27,101 to Westpeak.
For the fiscal year ended December 31, 1994, the Back Bay
Advisors Managed Series, the Back Bay Advisors Bond Income Series
and the Back Bay Advisors Money Market Series paid advisory fees of
$613,249, $515,084 and $231,326, respectively, to Back Bay Advisors.
For that same period, the Capital Growth Series paid advisory fees
of $4,396,663 to CGM, the Westpeak Growth and Income Series and the
Westpeak Stock Index Series paid advisory fees of $111,827 and
$83,095, respectively, to Westpeak and the Loomis Sayles Avanti
Growth Series paid advisory fees of $132,596 to Loomis Sayles. For
the period May 1, 1994 to December 31, 1994, the Loomis Sayles Small
Cap Series paid no advisory fees to Loomis Sayles. For the period
October 31, 1994 to December 31, 1994, the Loomis Sayles Balanced,
the Draycott International Equity, Salomon Brothers U.S. Government,
Salomon Brothers Strategic Bond Opportunities, Davis Venture Value
and the Alger Equity Growth Series paid no advisory fees to TNE
Advisers, Inc.
For the following periods in 1995, the following amounts of
advisory fees were paid by the following Series:
<TABLE>
January 1, 1995 to May 1, 1995 to January 1, 1995
to April 30, 1995 December 31, 1995 December 31, 1995
<S> <C> <C> <C> <C> <C> <C>
Series Amount Adviser Amount Adviser Amount Adviser
Paid Paid Paid Paid Paid Paid
Loomis
Sayles $22,671 Loomis $124,433 TNE -- --
Small Sayles Advisers
Cap ,Inc.
Series
Draycott
Internat -- -- -- -- $85,666 TNE
ional Advisers, Inc.
Equity
Series
Alger TNE
Equity -- -- -- -- $144,943 Advisers, Inc.
Growth
Series
Capital
Growth -- -- -- -- $5,232,562 CGM
Series
Loomis
Sayles $65,057 Loomis $195,829 TNE -- --
Avanti Sayles Advisers, Inc.
Growth
Series
Davis TNE
Venture -- -- -- -- $131,969 Advisers, Inc.
Value
Series
Westpeak
Growth $59,980 Westpeak $182,648 TNE -- --
and Advisers, Inc.
Income
Series
Westpeak
Stock $33,568 Westpeak $88,791 TNE -- --
Index Advisers, Inc.
Series
Loomis
Sayles -- -- -- -- $65,752 TNE
Balanced Advisers, Inc.
Series
Back Bay
Advisors $207,821 Back Bay $467,918 TNE -- --
Managed Advisors Advisers, Inc.
Series
Salomon
Brothers
Strategic -- -- -- -- $35,085 TNE
Bond Advisers, Inc.
Opportun
ities
Series
Back Bay
Advisors $173,139 Back Bay $399,140 TNE -- --
Bond Advisors Advisers
Income , Inc.
Series
Salomon
Brothers
U.S. -- -- -- -- $20,446 TNE
Government Advisers, Inc.
Series
Back Bay
Advisors $84,329 Back Bay $193,678 TNE -- -
Money Advisors Advisers, Inc.
Market
Series
Each advisory and subadvisory agreement provides that it will
continue in effect after two years from the date of its execution
only if it is approved at least annually thereafter (i) by the
trustees of the Fund or by vote of a majority of the outstanding
voting securities of the applicable Series and (ii) by vote of a
majority of the trustees who are not interested persons of (i) the
Fund or (ii) the applicable Series' investment adviser or subadviser.
Any amendment to any advisory or subadvisory agreement must be
approved by vote of a majority of the outstanding voting securities
of the applicable Series and by vote of a majority of the trustees
who are not interested persons of (i) the Fund or (ii) the applicable
Series' investment adviser or subadviser. Each agreement may be
terminated without penalty by the trustees or by the shareholders of
the applicable Series, upon sixty days' written notice, or by the
applicable Series' investment adviser, upon ninety days' written
notice, and each terminates automatically in the event of its
assignment. In addition, each subadvisory agreement may be
terminated without penalty upon ninety days' written notice by the
relevant subadviser. Each advisory agreement will automatically
terminate if the Fund shall at any time be required by New England
Securities, which is a wholly-owned subsidiary of NELICO, to
eliminate all reference to the words "New England" in its name,
unless the continuance of such agreement after such change of name is
approved by a majority of the outstanding voting securities of the
applicable Series and by a majority of the trustees who are not
interested persons of (i) the Fund or (ii) the applicable Series'
investment adviser.
Each advisory agreement provides that if the total ordinary
business expenses of a particular Series for any fiscal year exceed
the lowest applicable limitations (based on a percentage of average
net assets or income) prescribed by any state in which shares of that
Series are qualified for sale, the applicable Series' investment
adviser shall pay such excess. Each advisory agreement provides,
however, that the advisory fee shall not be reduced nor shall any of
such expenses be paid to an extent or under circumstances which might
result in the inability of any Series or of the Fund, taken as a
whole, to qualify as a regulated investment company under the
Internal Revenue Code of 1986, as amended. The term "expenses" for
this purpose excludes brokerage commissions, taxes, interest and
extraordinary expenses.
As required by state insurance licensing authorities, each
Series' investment adviser has also undertaken, separately from the
advisory agreements, to be liable for negligence in the performance
of any administrative services with respect to the Fund which are
supplemental to their management of the investment and reinvestment
of that Series' assets.
Each advisory and subadvisory agreement provides that the
relevant investment adviser or subadviser shall not be subject to any
liability in connection with the performance of its services
thereunder in the absence of willful misfeasance, bad faith, gross
negligence or reckless disregard of its obligations and duties.
Certain officers and employees of Back Bay Advisors who are also
officers of the Fund have responsibility for portfolio management of
the other advisory accounts and clients (including other Series of
the
Fund and other registered investment companies, and accounts of
affiliates of Back Bay Advisors) that may invest in securities in
which the Series for which Back Bay Advisors acts as a subadviser may
invest. Where Back Bay Advisors determines that an investment
purchase or sale opportunity is appropriate and desirable for more
than one advisory account, purchase and sale orders may be executed
separately or may be combined and, to the extent practicable,
allocated by Back Bay Advisors to the participating accounts.
Where advisory accounts have competing interests in a limited
investment opportunity, Back Bay Advisors will allocate an investment
purchase opportunity based on the relative time that competing
accounts have had funds available for investment, and the relative
amounts of available funds, and will allocate an investment sale
opportunity based on relative cash requirements and the time that the
competing accounts have had investments available for sale. It is
Back Bay Advisors' policy to allocate, to the extent practicable,
investment opportunities to each client over a period of time on a
fair and equitable basis relative to its other clients.
It is believed that the ability of the Series for which Back Bay
Advisors acts as subadviser to participate in larger volume
transactions in this manner will in some cases produce better
executions for the Series. However, in some cases, this procedure
could have a detrimental effect on the price and amount of a security
available to a Series or the price at which a security may be sold.
The trustees are of the view that the benefits of retaining Back Bay
Advisors as subadviser outweigh the disadvantages, if any, that might
result from participating in such transactions.
Certain officers of Loomis Sayles who are also officers of the
Fund have responsibility for the management of other client
portfolios. The Detroit office of Loomis Sayles buys and sell
portfolio securities for the Loomis Sayles Small Cap Series. The
Chicago office of Loomis Sayles buys and sells portfolio securities
for the Loomis Sayles Avanti Growth Series. The Pasadena office buys
and sells portfolio securities for the Loomis Sayles Balanced Series.
These and other offices of Loomis Sayles buy securities independently
of one another. The other investment companies and clients served by
Loomis Sayles sometimes invest in securities in which the Series
advised by Loomis Sayles also invest. If one of these Series and
such other clients advised by the same office of Loomis Sayles desire
to buy or sell the same portfolio securities at about the same time,
purchases and sales will be allocated, to the extent practicable, on
a pro rata basis in proportion to the amounts desired to be purchased
or sold for each. It is recognized that in some cases the practices
described in this paragraph could have a detrimental effect on the
price or amount of a security which that Series purchases or sells.
In other cases, however, it is believed that these practices may
benefit the Series. It is the opinion of the trustees of the Fund
that the desirability of retaining Loomis Sayles as subadviser for
these Series outweighs the disadvantages, if any, which might result
from these practices.
Certain officers of Westpeak, some of whom are officers of the
Fund, have responsibility for portfolio management for other clients
(including affiliates of Westpeak), some of which may invest in
securities in which the Westpeak Growth and Income Series or the
Westpeak Stock Index Series also may invest. When these Series and
other clients desire to purchase or sell the same security at or
about the same time, the purchase and sale orders are ordinarily
placed and confirmed separately but may be combined to the extent
practicable and allocated as nearly as practicable on a pro rata
basis in proportion to the amounts desired to be purchased or sold
for each. It is believed that the ability of those clients to
participate in larger volume transactions will in some cases produce
better executions for the Westpeak Growth and Income Series and the
Westpeak Stock Index Series. However, in some cases this procedure could
have a detrimental effect on the price and amount of a security available
to a Series or the price at which a security may be sold. It is the
opinion of the trustees of the Fund that the desirability of
retaining Westpeak as subadviser for the Westpeak Growth and Income
Series and the Westpeak Stock Index Series outweighs the
disadvantages, if any, which might result from these practices.
Certain officers and employees of Draycott have responsibility
for portfolio management for other clients (including affiliates of
Draycott), some of which may invest in securities in which the
Draycott International Equity Series also may invest. When the
Series and other clients desire to purchase or sell the same security
at or about the same time, purchase and sale orders are ordinarily
placed and confirmed separately but may be combined to the extent
practicable and allocated as nearly as practicable on a pro rata
basis in proportion to the amounts desired to be purchased or sold
for each. It is believed that the ability of those clients to
participate in larger volume transactions will in some cases produce
better executions for the Draycott International Equity Series.
However, in some cases this procedure could have a detrimental effect
on the price and amount of a security available to the Draycott
International Equity Series or the price at which a security may be
sold. It is the opinion of the trustees that the desirability of
retaining Draycott as subadviser to the Series outweighs the
disadvantages, if any, which might result from such procedure.
Various officers and trustees of the Fund also serve as officers
or trustees of other investment companies advised by CGM. The other
investment companies and clients served by CGM (including accounts of
affiliates of CGM) sometimes invest in securities in which the
Capital Growth Series also invests. If the Capital Growth Series and
such other investment companies or clients advised by CGM desire to
buy or sell the same portfolio securities at the same time, purchases
and sales will be allocated to the extent practicable on a pro rata
basis in proportion to the amounts desired to be purchased or sold
for each. It is recognized that in some cases the practices described
in this paragraph could have a detrimental effect on the price or
amount of the securities which the Capital Growth Series purchases or
sells. In other cases, however, it is believed that these practices
may benefit the Capital Growth Series. It is the opinion of the
trustees that the desirability of retaining CGM as adviser for the
Capital Growth Series outweighs the disadvantages, if any, which
might result from these practices.
Certain officers and employees of SBAM, Davis Selected and Alger
Management have responsibility for portfolio management for other
clients (including other registered investment companies and
affiliates of SBAM, Davis Selected or Alger Management) some of which
may invest in securities in which the respective Series that these
subadvisers manage also invest. In such circumstances, SBAM, Davis
Selected or Alger Management may determine that orders for the
purchase or sale of the same security for the Series it manages and
one or more other registered investment companies or other accounts
it manages should be combined, in which event the transactions will
be priced and allocated in a manner deemed by SBAM, Davis Selected or
Alger Management, respectively, to be equitable and in the best
interests of the respective Series that it manages and its other
accounts. It is recognized that in some cases the practices
described in this paragraph could have a detrimental effect on the
price or amount of a security that a Series purchases or sells. In
other cases, however, it is believed that these practices may benefit
a Series. It is the opinion of the trustees that the desirability of
retaining SBAM, Davis Selected and Alger Management as subadvisers
for the respective Series outweighs the disadvantages, if any, which
might result from these practices.
DISTRIBUTION AGREEMENT
Under an agreement with the Fund, New England Securities, a
Massachusetts corporation, serves as the general distributor of
shares of each Series, which are sold at net asset value without any
sales charge. The offering of each Series' shares is continuous.
Shares are offered for sale only to certain insurance company
separate accounts. New England Securities receives no compensation
from the Fund or purchasers of Fund shares for acting as distributor.
The agreement does not obligate New England Securities to sell a
specific number of shares. New England Securities is a wholly-owned
subsidiary of NELICO.
New England Securities controls the words "New England" in the
Fund's name and if it should cease to be the Fund's distributor, the
Fund may be required to change its name and delete these words. New
England Securities also acts as general distributor for New England
Retirement Investment Account, New England Variable Annuity Fund I,
The New England Variable Account, New England Variable Annuity
Separate Account and New England Variable Life Separate Account.
OTHER SERVICES
Custodial Arrangements. State Street Bank and Trust Company
("State Street Bank"), Boston, Massachusetts 02102, is the Fund's
custodian. As such, State Street Bank holds in safekeeping
certificated securities and cash belonging to each Series and, in
such capacity, is the registered owner of securities held in book-
entry form belonging to the Series. Upon instruction, State Street
Bank receives and delivers cash and securities of the Series in
connection with Series transactions and collects all dividends and
other distributions made with respect to Series portfolio securities.
State Street Bank also maintains certain accounts and records of the
Fund and calculates the total net asset value, total net income and
net asset value per share of each Series on a daily basis.
Independent Accountants. The Fund's independent accountants are
Coopers & Lybrand, One Post Office Square, Boston, Massachusetts
02109. Coopers & Lybrand conducts an annual audit of each Series,
assists in the preparation of federal and state income tax returns
and consults with the Fund as to matters of accounting and federal
and state income taxation. A table of selected per share data and
ratios for each of the Series appears in the Prospectus. This table
and the financial statements included in this Statement of Additional
Information are included in reliance on the report of Coopers &
Lybrand for the years 1987 through 1994 and on the report of the
Fund's former independent accountants, Price Waterhouse, for the
years 1985 and 1986, given on the authority of said firms as experts
in auditing and accounting.
Other Arrangements. Office space, facilities, equipment and/or
certain administrative services for the Fund (and, where applicable,
other mutual funds) under the investment management of CGM or TNE
Advisers, Inc. are currently furnished by New England Funds, L.P.,
under separate service agreements with those investment advisers.
Under a service agreement between Back Bay Advisors and New England
Securities for fiscal years ended December 31, 1993, 1994 and 1995,
Back Bay Advisors paid New England Securities or New England Funds,
L.P., an affiliate of New England Securities, $51,918, $51, 918 and
$71,233, respectively, relating to the Back Bay Advisors Money Market
Series; $91,245, $109,472 and and $126,352, respectively, relating
to the Back Bay Advisors Bond Income Series; and $85,151, $104,256
and $120,279, respectively, relating to the Back Bay Advisors Managed
Series under a service agreement. For the fiscal year ended December
31, 1992 and the period January 1, 1993 through July 31, 1993, Back
Bay Advisors paid New England Securities or New England Funds, L.P.
$17,920 and $ 7,552, respectively, for the Westpeak Stock Index
Series, which it managed prior to August 1, 1993, under such
agreement. Under a service agreement between New England Securities
and CGM, CGM paid New England Securities or New England Funds, L.P.,
for fiscal years ended December 31, 1993, 1994 and 1995, $530,147,
$621,253 and $734,743, respectively, relating to the Capital Growth
Series. Under a service agreement between Loomis Sayles and New
England Funds, L.P., Loomis Sayles paid New England Funds, L.P. for
the period April 30, 1993 through December 31, 1993 and the fiscal
years ended December 31, 1994 and 1995 $5,497, $29,614 and $34,683,
respectively, for the Avanti Growth Series. Under the service
agreement between New England Securities and Westpeak, Westpeak paid
New England Securities $4,735 for the period April 30, 1993 to
December 31, 1993 and $25,381 and $31,668 for the fiscal years ended
December 31, 1994 and 1995, respectively, for the Westpeak Growth and
Income Series and $16,164, $49,833 and $49,914 for the period August
1, 1993 to December 31, 1993 and for the fiscal years ended December
31, 1994 and 1995, respectively, for the Westpeak Stock Index Series.
Under a service agreement between Loomis, Sayles and New England
Funds, L.P., Loomis Sayles paid New England Funds, L.P. $2,007 for
the period May 1, 1994 to December 31, 1994, and $10,604 for the
fiscal year ended December 31, 1995 for the Loomis Sayles Small Cap
Series.
For the period October 31, 1994 through December 31, 1994, under
the service agreement between New England Funds, L.P. and TNE
Advisers, Inc., TNE Advisers, Inc. paid $1,666 for the Loomis Sayles
Balanced Series, $1,666 for the Draycott International Equity Series,
$1,666 the Salomon Brothers U.S. Government Series, $1,666 for the
Salomon Brothers Strategic Bond Opportunities Series, $1,666 for the
Davis Venture Value Series and $1,666 for the Alger Equity Growth
Series; for the fiscal year ended December 31, 1995, TNE Advisers,
Inc. paid $10,044 for the Loomis Sayles Balanced Series, $10,044 for
the Draycott International Equity Series, $10,044 for the Salomon
Brothers U.S. Government Series, $10,044 for the Salomon Brothers
Strategic Bond Opportunities Series, $11,503 for the Venture Value
Series and $13,133 for the Alger Equity Growth Series.
PORTFOLIO TRANSACTIONS AND BROKERAGE
Some of the Fund's portfolio transactions are placed with
brokers and dealers who provide the investment advisers or
subadvisers with supplementary investment and statistical information
or furnish market quotations to the Fund or other investment
companies advised by the investment advisers or subadvisers.
Although it is not possible to assign an exact dollar value to these
services, they may, to the extent used, tend to reduce the expenses
of the investment advisers or subadvisers. The services may also be
used by the investment advisers or subadvisers in connection with
their other advisory accounts and in some cases may not be used with
respect to the Fund.
Certain Portfolio Transactions of Loomis Sayles Balanced, Back Bay
Advisors Managed, Back Bay Advisors Bond Income and Back Bay Advisors
Money Market Series
It is expected that the portfolio transactions of the Loomis
Sayles Balanced, Back Bay Advisors Managed Series, Back Bay Advisors
Bond Income and Back Bay Advisors Money Market Series in bonds, notes
and money market instruments, will generally be with issuers or
dealers on a net basis without a stated commission. Portfolio
turnover for the years 1993, 1994 and 1995 was 177%, 82% and 73%
respectively, for the Back Bay Advisors Bond Income Series and 22%,
76% and 51%, respectively, for the Back Bay Advisors Managed Series.
The Loomis Sayles Balanced Series' portfolio turnover rates for the
periods May 1, 1994 through December 31, 1994 and the fiscal year
ended December 31, 1995 were 0% and 72%, respectively.
Loomis Sayles Small Cap Series, Draycott International Equity Series,
Alger Equity Growth Series, Capital Growth Series, Loomis Sayles
Avanti Growth Series, Davis Venture Value Series, Loomis Sayles
Balanced Series and Back Bay Advisors Managed Series (Common Stock
Transactions)
In placing orders for the purchase and sale of portfolio
securities, CGM, in the case of the Capital Growth Series, Loomis
Sayles, in the case of the Loomis Sayles Avanti Growth Series, the
Loomis Sayles Small Cap and the Loomis Sayles Balanced Series, Back
Bay Advisors, in the case of investments in common stocks by the Back
Bay Advisors Managed Series, Draycott, in the case of the Draycott
International Equity Series, Davis Selected, in the case of the Davis
Venture Value Series, and Alger Management, in the case of the Alger
Equity Growth Series, each selects only brokers which it believes are
financially responsible, will provide efficient and effective
services in executing, clearing and settling an order and will charge
commission rates which, when combined with the quality of the
foregoing services, will produce best price and execution for the
transaction. This does not necessarily mean that the lowest
available brokerage commission will be paid. However, the
commissions are believed to be competitive with generally prevailing
rates. The Series' advisers or subadvisers will use their best
efforts to obtain information as to the general level of commission
rates being charged by the brokerage community from time to time and
will evaluate the overall reasonableness of brokerage commissions
paid on transactions by reference to such data. In making such
evaluation, all factors affecting liquidity and execution of the
order, as well as the amount of the capital commitment by the broker
in connection with the order, are taken into account. The Capital
Growth Series, Loomis Sayles Avanti Growth Series, Loomis Sayles
Small Cap Series, Loomis Sayles Balanced Series, Back Bay Advisors
Managed Series, Draycott International Equity Series, Davis Venture
Value Series and Alger Equity Growth Series will not pay a broker a
commission at a higher rate than otherwise available for the same
transaction in recognition of the value of research services provided
by the broker or of any other services provided by the broker which
do not contribute to the best price and execution of the transaction.
For the fiscal years ending in 1993, 1994 and 1995, brokerage
transactions for the Capital Growth Series aggregating
$1,745,079,465, $1,855,305,003 and $3,292,999,742, respectively, were
allocated to brokers providing research services and commissions of
$2,851,197, $2,659,378 and $4,129,082, respectively, were paid on
those transactions. For the fiscal years ending in 1993, 1994 and
1995 the Westpeak Stock Index Series paid brokerage commissions
aggregating $21,000, $10,918 and $10,566, respectively. For the same
periods, the Back Bay Advisors Managed Series paid brokerage
commissions aggregating $17,000, $21,159 and $1,615, respectively.
For the period April 30, 1993 to December 31, 1993, the Loomis Sayles
Avanti Growth Series and the Westpeak Growth and Income Series paid
brokerage commissions aggregating $10,000 and $12,000, respectively;
for the fiscal years ending December 31, 1994 and December 31, 1995,
the Loomis Sayles Avanti Growth Series paid brokerage commissions of
$67,095 and $72,377 (100% of which was paid to brokers providing
research services) and, for the same periods, the Westpeak Growth and
Income Series paid brokerage commissions of $54,751 and $61,252.
For the period May 1, 1994 to December 31, 1994 and fiscal year ended
December 31, 1995, the Loomis Sayles Small Cap Series paid brokerage
commissions of $7,395 and $97,195, respectively (100% of which was
paid to brokers providing research services). For the period October
31, 1994 to December 31, 1994, the Draycott International Equity
Series paid brokerage commissions of $4,714, the Davis Venture Value
Series paid brokerage commissions of $6,084 and the Alger Equity
Growth Series paid brokerage commissions of $2,452 (100% of which was
paid to brokers providing research services). For the fiscal year
ended December 31, 1995, the Draycott International Equity Series
paid brokerage commissions of $82,922, the Davis Venture Value Series
paid brokerage commissions of $40,523, the Loomis Sayles Balanced
Series paid brokerage commission of $25,690 ($120 of which was
allotted to brokers providing research services), and the Alger
Equity Growth Series paid brokerage commissions of $69,052 (100% of
which was paid to brokers providing research services).
Westpeak Growth and Income Series, Westpeak Stock Index Series,
Salomon Brothers Strategic Bond Opportunities Series and Salomon
Brothers U.S. Government Series
In placing orders for the purchase and sale of securities,
Westpeak, in the case of the Westpeak Growth and Income and Westpeak
Stock Index Series, and SBAM, in the case of Salomon Brothers
Strategic Bond Opportunities and Salomon Brothers U.S. Government
Series, always seeks best execution. Westpeak and SBAM each selects
only brokers or dealers which it believes are financially
responsible, will provide efficient and effective services in
executing, clearing and settling an order and will charge commission
rates which, when combined with the quality of the foregoing
services, will produce best price and execution. This does not
necessarily mean that the lowest available brokerage commission will
be paid. Westpeak or SBAM will each use its best efforts to obtain
information as to the general level of commission rates being charged
by the brokerage community from time to time and will evaluate the
overall reasonableness of brokerage commissions paid on transactions
by reference to such data. In making such evaluation, all factors
affecting liquidity and execution of the order, as well as the amount
of the capital commitment by the broker in connection with the order,
are taken into account. Westpeak or SBAM may cause the Series they
manage to pay a broker-dealer that provides brokerage and research
services to Westpeak or SBAM an amount of commission for effecting a
securities transaction for a Series in excess of the amount another
broker-dealer would have charged effecting that transaction.
Westpeak or SBAM, as the case may be, must determine in good faith
that such greater commission is reasonable in relation to the value
of the brokerage and research services provided by the executing
broker-dealer viewed in terms of that particular transaction or
Westpeak's or SBAM's overall responsibilities to the Fund and its
other clients. Westpeak's or SBAM's authority to cause the Series it
manages to pay such greater commissions is also subject to such
policies as the trustees of the Fund may adopt from time to time.
Affiliated Brokerage
A Series may pay brokerage commissions to an affiliated broker
for acting as the respective Series' agent on purchases and sales of
securities for the portfolio of the Series. SEC rules require that
commissions paid to an affiliated broker of a mutual fund for
portfolio transactions not exceed "usual and customary" brokerage
commissions. The rules define "usual and customary" commissions to
include amounts which are "reasonable and fair" compared to the
commission, fee or other remuneration received or to be received by
other brokers in connection with comparable transactions involving
similar securities being purchased or sold on a securities exchange
during a comparable period of time." The Trustees, including those
who are not "interested persons" of the Fund, have adopted procedures
for evaluating the reasonableness of commissions paid to affiliated
brokers and will review these procedures periodically. The Westpeak
Stock Index Series paid $0, $0 and $0 in brokerage commissions to New
England Securities, an affiliated broker of the Series, in 1993,
1994, and 1995, respectively. The Back Bay Advisors Managed Series
paid $17,268, $0 and $0 in brokerage commissions to New England
Securities, an affiliated broker of the Series, in 1993, 1994 and
1995, respectively. The Back Bay Advisors Bond Income Series paid no
commissions to New England Securities during those periods. The
Alger Equity Growth Series paid $2,452 and $69,052 in brokerage
commissions to Fred Alger and Company, Inc., an affiliated broker,
for the period October 31, 1994 to December 31, 1994 and the year
ended December 31, 1995, respectively. The amounts paid by the
Westpeak Stock Index Series represent approximately 0% , 0% and 0% of
that Series' aggregate brokerage commissions involving the payment of
commissions for fiscal years 1993, 1994 and 1995 respectively. The
amount paid by the Back Bay Advisors Managed Series represents
approximately 100%, 0% and 0% of that Series' aggregate brokerage
commissions in 1993, 1994 and 1995 respectively. The amount paid by
the Back Bay Advisors Bond Income Series represents approximately 0%,
0% and 0% of the Series' aggregate brokerage commissions in 1993,
1994 and 1995, respectively. The amount paid by the Alger Equity
Growth Series represents approximately 100% and 100% of that Series'
aggregate brokerage commissions for the period October 31, 1994 to
December 31, 1994 and for the year ended December 31, 1995.
DESCRIPTION OF THE FUND
The Fund is organized as a Massachusetts business trust under
the laws of Massachusetts pursuant to an Agreement and Declaration of
Trust (the "Declaration of Trust") dated December 16, 1986. On
February 27, 1987, the Fund succeeded to the operations of The New
England Zenith Fund, Inc., a Massachusetts corporation incorporated
on January 7, 1983 as NEL Series Fund, Inc. On November 1, 1985, the
name of that corporation was changed to Zenith Fund, Inc. and on July
17, 1986 it was changed again to The New England Zenith Fund, Inc.
The Capital Growth, Back Bay Advisors Bond Income and Back Bay
Advisors Money Market Series all commenced investment operations in
1983. The Westpeak Stock Index Series commenced operations on March
30, 1987. The Back Bay Advisors Managed Series commenced investment
operations on May 1, 1987. The Loomis Sayles Avanti Growth and the
Westpeak Growth and Income Series commenced investment operations in
April 1993. The Loomis Sayles Small Cap Series commenced investment
operations on May 1, 1994. The Alger Equity Growth, Draycott
International Equity, Davis Venture Value, Loomis Sayles Balanced,
Salomon Brothers Strategic Bond Opportunties and Salomon Brothers
U.S. Government Series commenced investment operations on October 31,
1994.
The Declaration of Trust permits the Trustees to issue an
unlimited number of full and fractional shares of each of the Loomis
Sayles Small Cap, Draycott International Equity, Alger Equity Growth,
Capital Growth, Loomis Sayles Avanti Growth, Davis Venture Value,
Westpeak Growth and Income, Westpeak Stock Index, Loomis Sayles
Balanced, Back Bay Advisors Managed, Salomon Brothers Strategic Bond
Opportunities, Back Bay Advisors Bond Income, Salomon Brothers U.S.
Government and Back Bay Advisors Money Market Series. Interests in
the Fund portfolios described in the Prospectus and in this Statement
of Additional Information are represented by shares of such Series.
Each share of a Series represents an equal proportionate interest in
such Series with each other share and is entitled to a proportionate
interest in the dividends and distributions from such Series. The
shares of the Series do not have any preemptive rights. Upon
liquidation of any Series, whether pursuant to liquidation of the
Fund or otherwise, shareholders of such Series are entitled to share
pro rata in the net assets of such Series available for distribution
to shareholders. The Declaration of Trust also permits the trustees
to charge shareholders directly for custodial, transfer agency and
servicing expenses.
The Declaration of Trust also permits the Trustees, without
shareholder approval, to subdivide any series of shares into various
sub-series of shares with such dividend preferences and other rights
as the trustees may designate. While the trustees have no current
intention to exercise this power, it is intended to allow them to
provide for an equitable allocation of the impact of any future
regulatory requirements which might affect various classes of
shareholders differently. The trustees may also, without shareholder
approval, establish one or more additional separate portfolios for
investments in the Fund or merge two or more existing portfolios.
Shareholders' investments in such a portfolio would be evidenced by a
separate series of shares. The Fund is a "series" company as that
term is used in Section 18(f) of the 1940 Act.
The Declaration of Trust provides for the perpetual existence of
the Fund. The Fund or any Series, however, may be terminated at any
time by vote of at least two-thirds of the outstanding shares of each
Series affected. The Declaration of Trust further provides that the
trustees may terminate the Fund or any Series upon written notice to
the shareholders thereof.
The assets received by the Fund for the issue or sale of shares
of each Series and all income, earnings, profits, losses and proceeds
therefrom, subject only to the rights of creditors, are allocated to
that Series, and constitute the underlying assets of the Series. The
underlying assets of each Series are segregated and are charged with
the expenses in respect of that Series and with a share of the
general expenses of the Fund. Any general expenses of the Fund not
readily identifiable as belonging to a particular Series are
allocated by or under the direction of the trustees in such manner as
the trustees determine to be fair and equitable. While the expenses
of the Funds are allocated to the separate books of account of each
Series, certain expenses may be legally chargeable against the assets
of all Series.
As of August 30, 1996, all of the outstanding voting securities
of the Fund are owned by separate accounts of MetLife and/or NELICO,
and may, from time to time, be owned by those separate accounts and
the general account of NELICO and its affiliates. Therefore, MetLife
and NELICO 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 MetLife and NELICO are each required to
vote their Fund shares that are held in a registered separate account
(and, to the extent voting privileges are granted by the issuing
insurance company, in unregistered separate accounts) in the same
proportion as the voting instructions received from owners of the
variable life insurance or variable annuity contracts issued by the
separate account, and that MetLife and NELICO each is required to
vote any shares held in general account (or in any unregistered
separate account for which voting privileges were not extended) in
the same proportion as all other Fund shares are voted. MetLife and
NELICO currently intend to vote their shares in a manner consistent
with this view.
Voting Rights
Fund shareholders are entitled to one vote for each full share
held (with fractional votes for fractional shares held). NELICO and
MetLife are the legal owners of shares attributable to variable life
insurance and variable annuity contracts issued by their separate
accounts, and have the right to vote those shares. Pursuant to the
current view of the SEC staff, NELICO and MetLife will vote their
shares in accordance with instructions received from owners of
variable life insurance and variable annuity contracts issued by
separate accounts that are registered under the 1940 Act. All Fund
shares held by separate accounts of NELICO and MetLife that are
registered with the SEC (and, to the extent voting privileges are
granted by the issuing insurance company, by unregistered separate
accounts) for which no timely instructions are received will be voted
for, voted against, or withheld from voting on any proposition in the
same proportion as the shares held in that separate account for all
contracts for which voting instructions are recieved. All Fund
shares held by the general investment account (or any unregistered
separate account for which voting privileges are not extended) of
NELICO and 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 are received.
There will normally be no meetings of shareholders for the
purpose of electing trustees except that in accordance with the 1940
Act (i) the Fund will hold a shareholders' meeting for the election
of trustees at such time as less than a majority of the trustees
holding office have been elected by shareholders and (ii) if, as a
result of a vacancy in the Board of Trustees, less than two-thirds of
the trustees holding office have been elected by the shareholders,
that vacancy may only be filled by a vote of the shareholders. In
addition, trustees may be removed from office by a written consent
signed by the holders of two-thirds of the outstanding shares at a
meeting duly called for the purpose, which meeting shall be held upon
the written request of the holders of not less than 10% of the
outstanding shares. Upon written request by the holders of shares
having a net asset value constituting 1% of the outstanding shares
stating that such shareholders wish to communicate with the other
shareholders for the purpose of obtaining the signatures necessary to
demand a meeting to consider removal of a trustee, the Fund has
undertaken to provide a list of shareholders or to disseminate
appropriate materials (at the expense of the requesting
shareholders). Except as set forth above, the trustees shall
continue to hold office and may appoint successor trustees.
No amendment may be made to the Declaration of Trust without the
affirmative vote of a majority of the outstanding shares of the Fund
except (i) to change the Fund's name or to cure technical problems in
the Declaration of Trust and (ii) to establish, designate or modify
new and existing series or sub-series of Fund shares or other
provisions relating to Fund shares in response to applicable laws or
regulations.
Shareholder and Trustee Liability
Under Massachusetts law shareholders could, under certain
circumstances, be held personally liable for the obligations of the
Fund. However, the Declaration of Trust disclaims shareholder
liability for acts or obligations of the Fund and requires that
notice of such disclaimer be given in each agreement, obligation or
instrument entered into or executed by the Fund or the trustees. The
Declaration of Trust provides for indemnification out of the relevant
Series' property for all loss and expense of any shareholder held
personally liable for the obligations of the Series in which the
shareholder owns shares. Thus, the risk of a shareholder incurring
financial loss on account of shareholder liability is considered
remote since it is limited to circumstances in which the disclaimer
is inoperative and a Series itself would be unable to meet its
obligations. For purposes of such liability, the Fund's shareholders
are the separate accounts investing directly in the Fund and not the
owners of variable life insurance or variable annuity contracts or
purchasers of other insurance products.
The Declaration of Trust further provides that the trustees will
not be liable for errors of judgment or mistakes of fact or law.
However, nothing in the Declaration of Trust protects a trustee
against any liability to which the trustee would otherwise be subject
by reason of willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of his or
her
office. The By-Laws of the Fund provide for indemnification by the
Fund of the trustees and officers of the Fund except with respect to
any matter as to which any such person did not act in good faith in
the reasonable belief that his or her action was in or not opposed to
the best interests of the Fund. Such person may not be indemnified
against any liability to the Fund or the Fund's shareholders to which
he or she would otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of his or her office.
APPENDIX A-1
DESCRIPTION OF BOND RATINGS
Moody's Investors Service, Inc.
Aaa
Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally
referred to as "gilt edge". Interest payments are protected by a
large or by an exceptionally stable margin and principal is secure.
While the various protective elements are likely to change, such
changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa
Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are
generally known as high grade bonds. They are rated lower than the
best bonds because margins of protection may not be as large as in
Aaa securities or fluctuations of protective elements may be of
greater amplitude or there may be other elements present which make
the longterm risks appear somewhat larger than in Aaa securities.
See Note 1.
A
Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors
giving security to principal and interest are considered adequate but
elements may be present which suggest a susceptibility to impairment
sometime in the future. See Note 1.
Baa
Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest
payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. Such
bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well. See Note 1.
Ba
Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often, the
protection of interest and principal payments may be very moderate,
and thereby not well safeguarded during both good and bad times over
the future. Uncertainty of position characterizes bonds in this
class.
B
Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments
or of maintenance of other terms of the contract over any long period
of time may be small.
Caa
Bonds which are rated Caa are of poor standing. Such issues may be
in default or there may be present elements of danger with respect to
principal or interest.
Ca
Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other
marked shortcomings.
C
Bonds which are rated C are the lowest rated class of bonds, and
issues so rated can be regarded as having extremely poor prospects of
ever attaining any real investment standing.
Should no rating be assigned by Moody's, the reason may be one of the
following:
(1) An application for rating was not received or accepted.
(2) The issue or issuer belongs to a group of securities that
are not rated as a matter of policy.
(3) There is a lack of essential data pertaining to the issue
or issuer.
(4) The issue was privately placed, in which case the rating is
not published in Moody's publications.
_________________
Note 1: This rating may include the numerical modifier 1, 2 or 3 to
provide a more precise indication of relative debt quality within the
category, with 1 indicating the high end of the category, 2 the mid
range and 3 nearer the low end.
Standard & Poor's Ratings Group
AAA
This is the highest rating assigned by Standard & Poor's Corporation
("S&P") to a debt obligation and indicates an extremely strong
capacity to pay principal and interest.
AA
Bonds rated AA also qualify as high quality debt obligations.
Capacity to pay principal and interest is very strong, and in the
majority of instances they differ from AAA issues only in small
degree.
A
Bonds rated A have strong capacity to pay principal and interest
although they are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions.
BBB
Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit protection
parameters, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity to pay principal and
interest for bonds in this category than for bonds in the A category.
BB, B, CCC, CC
Bonds rated BB, B, CCC and CC are regarded, on balance, as
predominantly speculative with respect to capacity to pay interest
and repay principal in accordance with the terms of the obligation.
BB indicates the lowest degree of speculation and CC the highest
degree of speculation. While such bonds will likely have some
quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions.
C
The rating C is reserved for income bonds on which no interest is
being paid.
D
Bonds rated D are in default, and payment of interest and/or
repayment of principal is in arrears.
Plus (+) or Minus (-): The ratings from "AA" to "B" may be modified
by the addition of a plus or minus sign to show relative standing
within the major rating categories.
APPENDIX A-2
DESCRIPTION OF COMMERCIAL PAPER RATINGS
Standard & Poor's Corporation
A-1
Commercial paper rated A-1 by S&P has the following characteristics:
Liquidity ratios are adequate to meet cash requirements. Long-term
senior debt is rated "A" or better. The issuer has access to at
least two additional channels of borrowing. Basic earnings and cash
flow have an upward trend with allowance made for unusual
circumstances. Typically, the issuer's industry is well established
and the issuer has a strong position within the industry. The
reliability and
quality of management are unquestioned. Commercial paper within the
A1 category which has overwhelming safety characteristics is denoted
"A1+."
A-2
Capacity for timely payment on issues with this designation is
strong. However, the relative degree of safety is not as overwhelming
as for issues designated A-1.
Moody's Investors Service, Inc.
P-1
The rating P-1 is the highest commercial paper rating assigned by
Moody's Investors Service, Inc. ("Moody's"). Among the factors
considered by Moody's in assigning ratings are the following:
(1) evaluation of the management of the issuer;
(2) economic evaluation of the issuer's industry or industries
and an appraisal of speculative-type risks which may be inherent in
certain areas;
(3) evaluation of the issuer's products in relation to
competition and customer acceptance;
(4) liquidity;
(5) amount and quality of long-term debt;
(6) trend of earnings over a period of ten years;
(7) financial strength of a parent company and the
relationships which exist with the issuer; and
(8) recognition by the management of obligations which may be
present or may arise as a result of public interest questions and
preparations to meet such obligations.
P-2
Issuers rated P-2 have a strong capacity for repayment of short-
term promissory obligations. This will normally be evidenced by
many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, will be more
subject to variation. Capitalization characteristics, while still
appropriate, may be more affected by external conditions. Ample
alternative liquidity is maintained.
APPENDIX B
ABC and affiliates
Atlanta Constitution
Atlanta Journal
Austin American Statesman
Baltimore Sun
Barron's
Bond Buyer
Boston Business Journal
Boston Globe
Boston Herald
Broker World
Business Radio Network
Business Week
CBS and affiliates
CFO
Changing Times
Chicago Sun Times
Chicago Tribune
Christian Science Monitor
Christian Science Monitor News Service
Cincinnati Enquirer
Cincinnati Post
CNBC
CNN
Columbus Dispatch
Dallas Morning News
Dallas Times-Herald
Denver Post
Des Moines Register
Detroit Free Press
Donoghue's Money Fund Report
Dorfman, Dan (syndicated column)
Dow Jones News Service
Economist
FACS of the Week
Financial News Network
Financial Planning
Financial Services Week
Financial World
Forbes
Fort Worth Star-Telegram
Fortune
Fox Network and affiliates
Fund Action
Hartford Courant
Houston Chronicle
INC
Indianapolis Star
Institutional Investor
Investment Dealers Digest
Investment Vision
Investor's Daily
Journal of Commerce
Kansas City Star
LA Times
Leckey, Andrew (syndicated column)
Life Association News
Miami Herald
Milwaukee Sentinel
Money
Money Maker
Money Management Letter
Morningstar
National Public Radio
National Underwriter
NBC and affiliates
New England Business
New England Cable News
New Orleans Times-Picayune
New York Daily News
New York Times
Newark Star Ledger
Newsday
Newsweek
Nightly Business Report
Orange County Register
Orlando Sentinel
Pension World
Pensions and Investments
Personal Investor
Philadelphia Inquirer
Porter, Sylvia (syndicated column)
Portland Oregonian
Public Broadcasting Service
Quinn, Jane Bryant (syndicated column)
Registered Representative
Research Magazine
Resource
Reuters
Rukeyser's Business (syndicated
column) Sacramento Bee
San Francisco Chronicle
San Francisco Examiner
San Jose Mercury
Seattle Post-Intelligencer
Seattle Times
Smart Money
St. Louis Post Dispatch
St. Petersburg Times
Standard & Poor's Outlook
Standard & Poor's Stock Guide
Stanger's Investment Advisor
Stockbroker's Register
Strategic Insight
Tampa Tribune
Time
Tobias, Andrew (syndicated column)
UPI
US News and World Report
USA Today
Value Line
Wall St. Journal
Wall Street Letter
Wall Street Week
Washington Post
WBZ
WBZ-TV
WCVB-TV
WEEI
WHDH
Worcester Telegram
Worth Magazine
WRKO
APPENDIX C
FINANCIAL STATEMENTS AND REPORTS OF INDEPENDENT
ACCOUNTANTS
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