NEW ENGLAND ZENITH FUND
STATEMENT OF ADDITIONAL INFORMATION
May 1, 1997
As revised December 19, 1997
This Statement of Additional Information is not a prospectus. This
Statement of Additional Information relates to the Prospectus dated
May 1, 1997, 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 8
Determination of Net Asset Values 20
Fund Performance 21
Trustees and Officers 27
Advisory Arrangements 29
Distribution Agreement 37
Other Services 37
Portfolio Transactions and Brokerage 38
Description of the Fund 40
Appendix A-1 (Description of Bond Ratings) 43
Appendix A-2 (Description of Commercial Paper 45
Ratings)
Appendix B 46
Appendix C 49
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 & Company, L.P. ("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 significant 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.
Morgan Stanley International Magnum Equity Series (formerly, Draycott
International Equity Series)
As disclosed in the Prospectus under the caption "Investment
Objectives and Policies -- Morgan Stanley International Magnum Equity
Series," the Morgan Stanley International Magnum Equity Series seeks
to attain its investment objective of long-term capital appreciation
primarily through investment in international equity securities.
The Series will invest primarily in international equity
securities; however, the Series' investment objective will be long-
term capital appreciation. The production of any current income will
be incidental to this objective. The countries in which the Series
may invest are those represented in the Morgan Stanley Capital
International Index (the "EAFE Index"), which includes Australia,
Japan, New Zealand, most of the nations in Western Europe and certain
developed countries in Asia such as Hong Kong and Singapore. The
Series may also invest up to 5% of its assets in non-EAFE countries.
Under normal circumstances at least 65% of the total assets of the
Series will be invested in equity securities of issuers in at least
three different countries outside the United States.
In managing the Series' portfolio, Morgan Stanley Asset Management,
Inc. ("MSAM") will first determine what percentage of the Series'
assets should be invested in each region represented in the EAFE
Index. This determination will be based on projections of
comparative interest rates, currencies, corporate profits and
economic growth among the various regions represented in the EAFE
Index. After these regional allocations are determined, the
portfolio manager for each region selects the stocks of issuers in
these respective region.
Alger Equity Growth Series
As disclosed in the Prospectus under the caption "Investment
Objectives and Policies -- Alger Equity Growth Series," the Alger
Equity Growth Series seeks to attain its investment objective of long-
term capital appreciation by investing primarily in a diversified,
actively managed portfolio of equity securities, principally in
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, 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 long-
term total return, it may sell securities to reflect changes in
Westpeak's assessment of the relative attractiveness of particular
investments. As a result, the Westpeak 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-the-
counter. Nonrated bonds are so categorized because the bond's rating
has been suspended or because the issuer did not seek a rating of the
bonds from Moody's or Standard & Poor's.
As described in the Prospectus, the average maturity of the Back Bay
Advisors Bond Income Series' portfolio will usually be between five
and fifteen years. Depending on market conditions, the Back Bay
Advisors Bond Income Series may take a defensive position by investing
a substantial portion of its assets in the money market instruments
eligible for purchase by the Back Bay Advisors Money Market Series.
No estimate can be made as to when or for how long the Series would
employ such defensive strategies.
The Back Bay Advisors Bond Income Series purchases and sells
portfolio investments in anticipation of or in response to changes in
yield relationships, markets or economic conditions. The Back Bay
Advisors Bond Income Series also invests to take advantage of
temporary disparities in the relative values of certain sectors of the
market for fixed-income securities. As a result of these policies,
the Back Bay Advisors Bond Income Series, under certain market
conditions, may experience high portfolio turnover, although specific
portfolio turnover rates are impossible to predict.
Since levels of interest rates vary from time to time, there can be
no assurance as to the Back Bay Advisors Bond Income Series' current
income for any particular period. Moreover, since all securities are
subject to price declines as well as price advances, at times the net
asset value per Back Bay Advisors Bond Income Series share may be less
than a shareholder's original cost. In recent years, prices for fixed-
income securities have generally been more volatile than they were in
prior periods, and this has increased the market risk of holding such
securities.
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'
subadviser, 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 some of the 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 Morgan Stanley International Magnum
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
Opportunities Series
Back Bay Advisors Bond Income Series
Reverse Repurchase Agreements and Salomon Brothers Strategic Bond
Dollar Rolls Opportunities Series
Salomon Brothers U.S. Government Series
Lending 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
Morgan Stanley International Magnum
Equity Series
Privately-Issued Mortgage Salomon Brothers Strategic Bond
Securities 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 Salomon Brothers Strategic Bond
Sovereign Debt Securities Opportunities Series
Futures and Options Morgan Stanley International Magnum
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 Morgan Stanley International Magnum
Transactions Equity Series
Davis Venture Value Series
Salomon Brothers Strategic Bond
Opportunities Series
Money Market Instruments - Obligations of foreign branches of U.S.
banks and other foreign securities are subject to risks of foreign
political, economic and legal developments, which include foreign
governmental restrictions adversely affecting payment of principal and
interest on the obligations, foreign withholding and other taxes on
interest income, and difficulties in obtaining and enforcing a
judgment against a foreign branch of a domestic bank. With respect to
bank obligations, different risks may result from the fact that
foreign banks are not necessarily subject to the same or similar
regulatory requirements that apply to domestic banks. For instance,
such branches may not be subject to the types of requirements imposed
on domestic banks with respect to mandatory reserves, loan
limitations, examinations, accounting, auditing, recordkeeping and the
public availability of information. Obligations of such branches will
be purchased by the Series only when the Series' adviser or subadviser
believes the risks are minimal.
The following constitutes a description of the money market
instruments which may be purchased by the Back Bay Advisors Money
Market Series, and by any of the Series, some of which may only invest
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.
Lending 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, Martin Luther King 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, Morgan Stanley International Magnum 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 fixed-
income securities maturing in 60 days or less, which are valued using
the amortized cost method) at market value where current market
quotations are readily available. Where current market quotations are
not readily available, a pricing service selected by Back Bay
Advisors, pursuant to the authorization of the Board of Trustees,
values the securities at fair value. The pricing service employed
will be one that determines valuations of normal institutional-sized
trading units of long-term debt securities. Such valuations are
determined by using methods based on market transactions for
comparable securities and on various relationships between securities
which are generally recognized by institutional traders. Other
securities for which current market quotations are not readily
available (including restricted securities, if any) and all other
assets are taken at fair value as determined in good faith by Back Bay
Advisors acting under the supervision of the Board of Trustees,
although the actual calculations may be made by a pricing service
selected by Back Bay Advisors acting pursuant to the direction of the
Board. Securities traded on a national securities exchange or
exchanges are valued at their last sale price on the principal
exchange, or if there is no reported sale, and in the case of over-the-
counter securities, at a bid price estimated by a broker.
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.. Total
return would be lower for these Series if these expense arrangements
had not been in effect. Total return does not reflect charges
assessed against the insurance company separate accounts or the
variable life insurance or variable annuity products for which the
Fund serves as an investment vehicle. Total return may be stated
alone or may be accompanied by investment return information for those
separate accounts or the variable life insurance or variable annuity
products.
Performance Comparisons
Yield and Total Return. Each Series may, from time to time, include
its total return in advertisements or in other written information
furnished to present and prospective owners of the variable life
insurance and variable annuity contracts supported by the Fund. The
Back Bay Advisors Bond Income Series, the Salomon Brothers U.S.
Government Series, the Salomon Brothers Strategic Bond Opportunities
Series and the Back Bay Advisors Money Market Series may, from time to
time, also include their yield in such advertisements or other written
information. These results may include comparisons to the yields of
money market funds reporting to IBC/Donoghue's Money Fund Report
("Donoghue's Report"). In addition, each Series may, from time to
time, provide a ranking of such performance figures relative to
similar figures for mutual funds whose performance has been monitored
by Lipper Analytical Services, Inc. ("Lipper"). Performance
information about a Series is based on the Series' past performance
and is not intended to indicate future performance.
Donoghue's Report is an independent service that collects data from
over 1,000 money market funds weekly and reports on the assets, 7- and
30-day yields, 12-month yields, average maturities and portfolio
breakdowns of such funds. 12-month yields represent total return
assuming reinvestment of dividends for up to one year.
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 International Fund Index is an index of 30 international
funds which are determined to reflect the general movement of the
entire universe of international funds tracked by Lipper Analytical
Services.
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
corporations, 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, AustralAsia, Far
East Index is an arithmetical average (weighted by market value) of
the performance (in U.S. dollars) of over 1,000 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, 1996:
Total Total 5-Year 10-Year
Return Return Average Average
For The For the 5- Annual Annual
Year Ended Year Total Total
Dec. 31, Period Return Return
1996 Ended
Dec. 31,
1996
Loomis Sayles Small Cap 30.67% -- -- --
Series
Morgan Stanley
International Magnum 6.67 -- -- --
Equity Series(a)
Alger Equity Growth Series 13.17 -- -- --
Capital Growth Series 21.08 67.76% 10.90% 16.34%
Loomis Sayles Avanti Growth 17.58 -- --
Series
Davis Venture Value Series 25.84 -- -- --
Westpeak Growth and Income 18.10 -- -- --
Series
Westpeak Stock Index Series 22.47 99.60 14.82 --
Loomis Sayles Balanced 16.91 -- -- --
Series
Back Bay Advisors Managed 15.01 76.25 12.00 --
Series
Salomon Brothers Strategic
Bond Opportunities Series 14.36 -- -- --
Back Bay Advisors Bond 4.61 49.25 8.34 8.91
Income Series
Salomon Brothers U.S.
Government Series 3.31 -- -- --
Back Bay Advisors Money 5.11 -- -- --
Market Series
S & P 500 22.96 103.05 15.22 15.29
Lehman Government/ 2.90 41.43 7.18 8.38
Corporate Index
Consumer Price Index 3.32 15.01 2.84 3.68
DJIA 28.91 132.91 18.42 16.66
(a) On May 1, 1997, Morgan Stanley Asset Management Inc. succeeded
Draycott Partners, Ltd. as subadviser to the Morgan Stanley
International Magnum Equity Series.
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; on 12/29/95 $0.78 per share and on 9/16/96
$0.036 and on 12/31/96 $1.03 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; on 12/29/95 $4.81 per share
and on 9/16/96 $0.9580 and on 12/31/96 $8.60 per share.
Since commencing operations on October 31, 1994, the Morgan Stanley
International Magnum Equity Series has made the following
distributions of income: on 12/28/94 $ 0.02 per share; on 12/29/95
$0.12 per share and on 12/31/96 $0.015 per share. Over the same
period, the Morgan Stanley International Magnum Equity Series has made
the following distributions of realized capital gains: on 12/28/94,
12/29/95 and 12/31/96 no realized capital gains, and paid-in capital
of $0.01, none and $0.16, 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; on 12/29/95 $0.01 per share and on 12/31/96
$0.027 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
and no realized capital gains on 12/31/96.
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; on 12/29/95 $3.48 and on
9/16/96 $0.012 per share and on 12/31/96 $3.07 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; on
12/29/95 $52.58 per share and on 9/16/96 $8.339 and on 12/31/96 $13.94
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; on
12/29/95 $0.40 per share and on 9/16/96 $0.016 and on 12/31/96 $0.10
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; on 12/29/95 $4.15 per
share and on 9/16/96 $2.082 and on 12/31/96 $7.335 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; on 12/29/95 $0.10 per share and on 9/16/96
$0.002 and on 12/31/96 $0.125 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; on 12/29/95 $0.20 per share and
on 9/16/96 $0.018 and on 12/31/96 $0.25 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; on
12/29/95 $1.71 per share and on 9/16/96 $0.032 and on 12/31/96 $1.79
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; on 12/29/95 capital gains of $5.69 per share and on 9/16/96
$1.068 on 12/31/96 $12.12 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; on 12/29/95 $1.85 per share and on
9/16/96$0.033 and on 12/31/96 $1.895 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 and on
9/16/96 $0.044 and on 12/31/96 $0.87 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; on 12/29/95 $0.26 per share and on 9/16/96
$0.001 and on 12/31/96 $0.27 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; on 12/29/95 $0.19 per share
and on 9/16/96 $0.044 and on 12/31/96 $0.10 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; on
12/29/95 $6.57 per share and on 9/16/96 $0.059 and on 12/31/96 $6.38
per share. Over the same period, the Back Bay Advisors Managed Series
has made the following distributions of realized capital gains: on
12/29/88 $0.38; on 12/27/89 $0.38; on 12/28/90 none; on 12/27/91 $1.15
per share; on 12/29/92 $1.07 per share; on 12/29/93 $2.65 per share;
on 12/28/94 none; on 12/29/95 $0.88 per share and on 9/16/96 $0.409
and on 12/31/96 $11.045 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; on 12/29/95 $0.55 per share and
on 9/16/96 $0.011 and on 12/31/96 $0.59 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; on 12/29/95
$0.22 per share and on 9/16/96 $0.011 and on 12/31/96 $0.174 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; on 12/29/95 $7.05 per
share and on 12/31/96 $7.70 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; on 12/29/95 none and on 9/16/96
$0.035 per share and on 12/31/96 $0.315.
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; on 12/29/95 $0.33 per share
and on 9/16/96$0.002 and on 12/31/96 $0.56 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; on 12/29/95 $0.08 and on 9/16/96 $0.015 and on
12/31/96 none 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 (46) -- Trustee; Pilot House, Lewis Wharf, Boston, MA
02110; Executive Vice President, Enterprise Transformation;
formerly, Senior Vice President and Chief Financial Officer,
Continental Cablevision, Inc. (cable television operator);
Director, Perini Corporation (construction).
JOSEPH M. HINCHEY (72) -- Trustee; 193 Wamphassuc 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. (71) -- Trustee; 217 Waterways Avenue., P.O.
Box 518, Boca Grande, Florida 33921; retired Chairman of the
Board, HBM/Creamer (advertising agency).
ROBERT B. KITTREDGE (76) -- 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 (72) -- 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 (60) -- Trustee; 26 East Main Street, Norton, MA
02766; President, Wheaton College; formerly, Academic Dean,
Wellesley College.
JOSEPH F. TURLEY (72) -- 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 of Bay
Banks, Inc. and President of BayBank Investment Management,
BayBanks, Inc.
JOHN W. FLYNN, (58) -- Trustee; 791 Main Street, Warren, RI 02885;
Retired; formerly, Vice Chairman, Chief Financial Officer, Fleet
Financial Group.
JOHN T. LUDES, (61) -- Trustee; 1700 E. Putnam Avenue, Old Greenwich,
CT 06870; President and Chief Operating Officer, American Brands;
formerly, President and CEO, Acushnet Company.
FREDERICK K. ZIMMERMANN* (45) -- 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* (49) -- Senior Vice President and Trustee; Senior Vice
President and Associate General Counsel, NELICO; Vice President,
General Counsel, Secretary and Clerk, New England Securities
Corp., Vice President and Counsel, The New England (1994-1996);
formerly, Second Vice President and Counsel, The New England.
JOHN F. GUTHRIE (53) -- Senior Vice President; Vice President, NELICO;
Senior Vice President, TNE Advisers, Inc.; formerly, Vice President-
Portfolio Strategy, The New England.
ALAN C. LELAND (44) -- Senior Vice President; Senior 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.
* Denotes interested trustee as defined in the Investment Company Act
of 1940, as amended
Previous positions during the past five years with NELICO or its
predecessor, New England Mutual Life Insurance Company, or 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
The Fund pays no compensation to its officers or to its trustees who
are interested persons thereof.
Each Trustee who is not an interested person receives 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.
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, 1996, 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
board of NEVA.
Aggregate Total Compensation
Compensation from the Fund and
Name of Trustee from the Fund NEVA
in 1996 in 1996
Nancy Hawthorne $26,053 $28,000
Joseph M. 27,966 30,000
Hinchey
Richard S. 26,053 28,000
Humphrey, Jr.
Robert B. 26,053 63,750(a)
Kittredge
Laurens MacLure 28,922 66,750(a)
Dale Rogers 24,186 26,000
Marshall
Joseph F. Turley 26,053 28,000
John J. Arena 13,091 14,000
John. W. Flynn 13,091 14,000
John T. Ludes 11,224 12,000
________________
(a) Also includes compensation paid by the portfolios of the
CGM Funds, a group of mutual funds for which CGM, 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, 1997, 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 Morgan Stanley
International Magnum Equity, Alger Equity Growth, Davis Venture Value,
Loomis Sayles Balanced, Salomon Brothers Strategic Bond Opportunities,
Salomon Brothers U.S. Government Series, 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 New England Life
Holdings, Inc., which is a wholly-owned subsidiary of NELICO, which in
turn is a wholly owned subsidiary of MetLife New England Holdings,
Inc. ("MetLife Holdings"). MetLife Holdings is wholly owned by
MetLife, a mutual insurance company. 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 (December 16,
1996 in the case of the Davis Venture Value Series and May 1, 1997 in
the case of the Morgan Stanley International Magnum Equity Series),
manages the assets of its Series in accordance with that Series'
investment objective and policies, makes investment decisions for that
Series and employs professional advisers and securities analysts who
provide research services to that Series. The Series pay no direct
fees to any of the subadvisers.
Back Bay Advisors, formed in 1986, is a limited partnership whose
sole general partner, Back Bay Advisors, Inc., is a wholly-owned
subsidiary of NEIC Holdings, Inc. ("NEIC Holdings"). New England
Investment Companies, L.P. ("NEIC") owns the entire limited
partnership interest in Back Bay Advisors. 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 $100 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 $7 billion in total
assets; it is subadviser to the 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 limited
partnership whose sole general partner is Loomis, Sayles & Company,
Incorporated is a wholly owned subsidiary of NEIC Holdings. NEIC
owns the entire limited partnership interest in Loomis Sayles.
MSAM conducts worldwide investment management business, providing a
broad range of portfolio management services to customers in the
United States and abroad. MSAM is a wholly-owned subsidiary of Morgan
Stanley Group Inc., Dean Witter, Discover & Co., which is a publicly
owned financial services corporation listed on the New York, London
and Pacific stock exchanges. MSAM, registered Investment Adviser
under the Investment Advisers Act of 1940, as amended, serves as
adviser to numerous open-end and closed-end investment companies.
Fred Alger Management Incorporated ("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. Fred M.
Alger III and his brother, David D. Alger are majority owners of Alger
Associates, Inc. and may be deemed to control that company and its
subsidiaries.
CGM is a limited partnership whose general partner, Kenbob, Inc.,
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,
NEVA and New England Growth Fund of the New England Funds. CGM also
provides investment advice to other institutional and individual
clients.
Westpeak is a limited partnership whose sole general partner,
Westpeak Investment Advisors, Inc., is a wholly-owned subsidiary of
NEIC Holdings. 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.
Davis Selected may also delegate any of its responsibilities to Davis
Selected-NY ("DSA-NY")
Salomon Brothers Asset Management Inc ("SBAM") which is a wholly-
owned subsidiary of Salomon Smith Barney Holdings, Inc 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.
On November 28, 1997, Travelers Group ("Travelers") and Salomon Inc
("Salomon"), the ultimate parent company of SBAM and Salomon Brothers
Asset Management Limited ("SBAM Ltd."), merged Salomon with and into
Smith Barney Holdings, Inc., a subsidiary of Travelers, to form a new
company called Salomon Smith Barney Holdings, Inc. (The
"Transaction"). As a result of the Transaction, Travelers is the
ultimate parent of SBAM and SBAM Ltd. Travelers is a diversified
financial services company engaged in the investment services, asset
management, consumer finance and life and property casualty insurance
services. SBAM and SBAM Ltd continue to serve as the subadvisers of
the Salomon Brothers Strategic Bond Opportunities Series. SBAM also
continue to serve as the subadviser of the Salomon Brothers U. S.
Government Series.
The Transaction is expected to be completed by the end of November
1997, subject to a number of conditions, including the receipt of U.S.
and foreign regulatory approvals and approval of Salomon stock
holders. Upon consummation of the Transaction, Travelers will become
the ultimate parent of SBAM and SBAM Ltd. which will continue to serve
as investment subadviser to each of the respective 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."
Annual Average Daily Net
Series Percentage Asset Value Levels
Rate
Loomis Sayles Small Cap Series 1.00% all assets
Morgan Stanley International 0.90% all assets
Magnum Equity Series
Alger Equity Growth Series 0.75% all assets
Capital Growth Series 0.70% the first $200
million
0.65% the next $300 million
0.60% amounts in excess of
$500 million
Loomis Sayles Avanti Growth Series 0.70% the first $200
0.65% million
0.60% the next $300 million
amounts in excess of
$500 million
Davis Venture Value Series 0.75% all assets
Annual Average Daily Net
Series Percentage Asset Value Levels
Rate
Westpeak Growth and Income Series 0.70% the first $200
0.65% million
0.60% the next $300 million
amounts in excess of
$500 million
Westpeak Stock Index Series 0.25% all assets
Loomis Sayles Balanced Series 0.70% all assets
Back Bay Advisors Managed Series 0.50% all assets
Salomon Brothers Strategic Bond 0.65% all assets
Opportunities Series
Back Bay Advisors Bond Income 0.40% the first $400
Series 0.35% million
0.30% the next $300 million
0.25% the next $300 million
amounts in excess of
$1 billion
Salomon Brothers U.S. Government 0.55% all assets
Series
Back Bay Advisors Money Market 0.35% the first $500
Series 0.30% million
0.25% the next $500 million
amounts in excess of
$1 billion
Sub-Advisory Fees. TNE Advisers pays each sub-adviser at the
following rates for providing sub-advisory services to the following
Series:
Annual Percentage
Rates Paid Average Daily Net Asset
Series by TNE Advisers to Value Levels
the Respective Sub-
Advisers
Loomis Sayles Small Cap 0.55% of the first $25
Series million
0.50% of the next $75 million
0.45% of the next $100
million
0.40% of amounts in excess of
$200 million
Morgan Stanley 0.75% of the first $10
International Magnum 0.60% million
Equity Series* 0.45% of the next $40 million
0.40% of the next $30 million
of amounts in excess of
$100 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
Growth million
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
Income Series million
0.40% of the next $75 million
0.35% of the next $100
million
0.30% of amounts in excess of
$200 million
Annual Percentage
Rates Paid Average Daily Net Asset
Series by TNE Advisers to Value Levels
the Respective Sub-
Advisers
Westpeak Stock Index 0.10% of all assets
Series
Loomis Sayles Balanced 0.50% of the first $25
Series million
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
Managed Series million
0.20% of amounts in excess of
$50 million
Salomon Brothers 0.35% of the first $50
Strategic Bond million
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
Income million
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
*Prior to May 1, 1997 the Subadvisory fee rate payable for the Morgan
Stanley International Magnum Equity Series was 0.75% of the first $10
million of the Series' average net assets, 0.60% of the next $40
million of such assets, 0.45% of such assets in excess of $50 million.
**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 sub-
advisory 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, 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 Morgan
Stanley International Magnum 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:
January 1, 1995 to May 1, 1995 to January 1, 1995 to
April 30, 1995 December 31, 1995 December 31, 1995
Series Amount Adviser Amount Adviser Amount Adviser
Paid Paid Paid Paid Paid Paid
Loomis TNE
Sayles $22,671 Loomis $124,433 Advisers -- --
Small Cap Sayles , Inc.
Series
Morgan
Stanley
Internatio TNE
nal Magnum -- -- -- -- $85,666 Advisers
Equity , Inc.
Series
Alger TNE
Equity -- -- -- -- $144,943 Advisers
Growth , Inc.
Series
Capital
Growth -- -- -- -- $5,232,5 CGM
Series 62
Loomis
Sayles TNE
Avanti $65,057 Loomis $195,829 Advisers -- --
Growth Sayles , Inc.
Series
Davis TNE
Venture -- -- -- -- $131,969 Advisers
Value , Inc.
Series
Westpeak TNE
Growth and $59,980 Westpeak $182,648 Advisers -- --
Income , Inc.
Series
Westpeak TNE
Stock $33,568 Westpeak $88,791 Advisers -- --
Index , Inc.
Series
Loomis TNE
Sayles -- -- -- -- $65,752 Advisers
Balanced , Inc.
Series
Back Bay Back Bay TNE
Advisors $207,821 Advisors $467,918 Advisers -- --
Managed , Inc.
Series
Salomon
Brothers TNE
Strategic -- -- -- -- $35,085 Advisers
Bond , Inc.
Opportunit
ies Series
Back Bay Back Bay TNE
Advisors $173,139 Advisors $399,140 Advisers -- --
Bond , Inc.
Income
Series
Salomon
Brothers TNE
U.S. -- -- -- -- $20,446 Advisers
Government , Inc.
Series
Back Bay Back Bay TNE
Advisors $84,329 Advisors $193,678 Advisers -- --
Money , Inc.
Market
Series
For the fiscal year end December 31, 1996, each Series (except the
Capital Growth Series) paid the following amounts in advisory fees to
TNE Advisers, Inc.
Series Amount Paid to TNE
Advisers, Inc.
Loomis Sayles Small Cap $240,646
Morgan Stanley International Magnum 70,553
Equity Series (1)
Alger Equity Growth Series 281,325
Loomis Sayles Avanti Growth Series 169,578
Davis Venture Value Series 198,620
Westpeak Growth and Income Series 165,074
Westpeak Stock Index Series 102,444
Loomis Sayles Balanced Series 83,980
Back Bay Advisors Managed Series 430,920
Salomon Brothers Strategic Bond 60,044
Opportunities Series
Back Bay Advisors Bond Income Series 311,174
Salomon Brothers U.S. Government 35,234
Series
Back Bay Advisors Money Market Series 201,904
(1) Prior to May 1, 1997, the Morgan Stanley International Magnum
Equity Series was subadvised by Draycott Partners, Ltd. On January
22, 1997, the Board of Trustees approved a new subadvisory
agreement with Morgan Stanley Asset Management Inc. which was
approved by shareholders on April 24, 1997, and the Series
consequently changed its name from the Draycott International
Equity Series to the Morgan Stanley International Magnum Equity
Series.
For the fiscal year ended December 31, 1996, the Capital Growth
Series paid CGM a total of $6,398,659 in advisory fees.
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 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 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 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.
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, MSAM and
Alger Management have responsibility for portfolio management for
other clients (including other registered investment companies and
affiliates of SBAM, Davis Selected, MSAM 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, MSAM
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, MSAM 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"), 225 Franklin Street, Boston, Massachusetts 02110, 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
Deloitte & Touche, LLP. Deloitte & Touche, LLP 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. Prior to January 1, 1997 the Fund's independent
accountants were Coopers & Lybrand, LLP, 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 1996 .
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, 1994, 1995 and 1996,
Back Bay Advisors paid New England Securities or New England Funds,
L.P., an affiliate of New England Securities, $51, 918, $71,233 and
$44,919, respectively, relating to the Back Bay Advisors Money Market
Series; $109,472, $126,352 and $68,830, respectively, relating to the
Back Bay Advisors Bond Income Series; and $104,256, $120,279 and
$63,191, respectively, relating to the Back Bay Advisors Managed
Series under a service 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, 1994, 1995
and 1996, $621,253, $734,743 and $1,574,016, 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 fiscal years ended December 31, 1994, 1995 and
1996 $29,614, $34,683 and $30,928, respectively, for the Loomis Sayles
Avanti Growth Series. Under the service agreement between New England
Securities and Westpeak, Westpeak paid New England Securities $25,381,
$31,668 and $30,331 for the fiscal years ended December 31, 1994, 1995
and 1996, respectively, for the Westpeak Growth and Income Series
$49,833, $49,914 and $32,318 for the fiscal years ended December 31,
1994, 1995 and 1996, 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 and
$24,599 for the fiscal years ended December 31, 1995 and 1996 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 Morgan Stanley International Magnum
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 Morgan Stanley International Magnum 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. For the fiscal year ended December 31, 1996, under a service
agreement between New England Funds, L.P. and TNE Advisers, Inc., TNE
Advisers, Inc. paid $18,011 for the Loomis Sayles Balanced Series,
$14,419 for the Morgan Stanley International Magnum Equity Series,
$10,000 for the Salomon Brothers U.S. Government Series, $11,629 for
the Salomon Brothers Strategic Bond Opportunities Series, $31,230 for
the Davis Venture Value Series and $38,435 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 1994, 1995 and 1996 was 82%, 73% and 98% respectively, for the
Back Bay Advisors Bond Income Series and 76%, 51% and 72%,
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 and 1996 were 0%, 72% and 59%, respectively.
Loomis Sayles Small Cap Series, Morgan Stanley International Magnum
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, Morgan Stanley International Magnum
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 1994, 1995 and 1996, brokerage
transactions for the Capital Growth Series aggregating $1,855,305,003,
$3,292,999,742 and $3,548,037,504, respectively, were allocated to
brokers providing research services and commissions of $2,659,378,
$4,129,082 and $4,124,163, respectively, were paid on those
transactions. For the fiscal years ending in 1994, 1995 and 1996 the
Westpeak Stock Index Series paid brokerage commissions aggregating
$10,918, $10,566 and $9,955, respectively. For the same periods, the
Back Bay Advisors Managed Series paid brokerage commissions
aggregating $21,159, $1,615 and $11,697, respectively. For the fiscal
years ending December 31, 1994, 1995 and 1996, the Loomis Sayles
Avanti Growth Series paid brokerage commissions of $67,095, $72,377
and $74,700 and $2,775, $2,080 and $1,300 were paid to brokers
providing research services. The Westpeak Growth and Income Series
paid brokerage commissions of $54,751, $61,252 and $106,927 for the
fiscal years ended 1994, 1995 and 1996, respectively. For the period
May 1, 1994 to December 31, 1994 and fiscal years ended December 31,
1995 and 1996, the Loomis Sayles Small Cap Series paid brokerage
commissions of $7,395, $97,195 and $462,358, respectively. For the
period October 31, 1994 to December 31, 1994, and the fiscal year end
1995 and 1996, the Morgan Stanley International Magnum Equity Series
paid brokerage commissions of $4,714, $85,037 and $127,196. The Davis
Venture Value Series paid brokerage commissions of $6,084 and $40,523
and $81,002 for the fiscal years ended 1994, 1995 and 1996. The Alger
Equity Growth Series paid brokerage commissions of $2,452, $69,052 and
$174,495 for the fiscal years ended 1994, 1995 and 1996.
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 Alger
Equity Growth Series paid $2,452, $69,052 and $174,495 in brokerage
commissions to Fred Alger and Company, Inc., an affiliated broker, for
the period October 31, 1994 to December 31, 1994 and the fiscal years
ended December 31, 1995 and 1996, respectively. The amount paid by
the Alger Equity Growth Series represents approximately 100%, 100% and
100% of that Series' aggregate brokerage commissions for the period
October 31, 1994 to December 31, 1994 and for the years ended December
31, 1995 and 1996. For the fiscal year ended December 31, 1996 the
Davis Venture Value Series paid a total of $5,316 in brokerage
commissions to Shelby Cullum Davis, Inc., an affiliated broker. This
amount represents 6.6% of the Series aggregate brokerage commissions
for the fiscal year ended December 31, 1996.
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, Morgan Stanley
International Magnum Equity, Davis Venture Value, Loomis Sayles
Balanced, Salomon Brothers Strategic Bond Opportunities 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, Morgan Stanley International Magnum 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 December 1, 1996, all of the outstanding voting securities of
the Fund were 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 received. 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.
FINANCIAL STATEMENTS
The financial statements of the Fund and the related reports of
independent accountants included in the Fund's annual report for the
year ended December 31, 1996 are incorporated herein by reference.
APPENDIX A-1
DESCRIPTION OF BOND RATINGS
Moody's Investors Service, Inc.
Aaa
Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally
referred to as "gilt edge". Interest payments are protected by a
large or by an exceptionally stable margin and principal is secure.
While the various protective elements are likely to change, such
changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa
Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are
generally known as high grade bonds. They are rated lower than the
best bonds because margins of protection may not be as large as in Aaa
securities or fluctuations of protective elements may be of greater
amplitude or there may be other elements present which make the long-
term risks appear somewhat larger than in Aaa securities. See Note 1.
A
Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors
giving security to principal and interest are considered adequate but
elements may be present which suggest a susceptibility to impairment
sometime in the future. See Note 1.
Baa
Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest
payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. Such
bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well. See Note 1.
Ba
Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often, the
protection of interest and principal payments may be very moderate,
and thereby not well safeguarded during both good and bad times over
the future. Uncertainty of position characterizes bonds in this
class.
B
Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or
of maintenance of other terms of the contract over any long period of
time may be small.
Caa
Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to
principal or interest.
Ca
Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other
marked shortcomings.
C
Bonds which are rated C are the lowest rated class of bonds, and
issues so rated can be regarded as having extremely poor prospects of
ever attaining any real investment standing.
Should no rating be assigned by Moody's, the reason may be one of the
following:
(1) An application for rating was not received or accepted.
(2) The issue or issuer belongs to a group of securities that
are not rated as a matter of policy.
(3) There is a lack of essential data pertaining to the issue or
issuer.
(4) The issue was privately placed, in which case the rating is
not published in Moody's publications.
_________________
Note 1: This rating may include the numerical modifier 1, 2 or 3 to
provide a more precise indication of relative debt quality within the
category, with 1 indicating the high end of the category, 2 the mid-
range and 3 nearer the low end.
Standard & Poor's 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 A-
1 category which has overwhelming safety characteristics is denoted "A-
1+."
A-2
Capacity for timely payment on issues with this designation is strong.
However, the relative degree of safety is not as overwhelming as for
issues designated A-1.
Moody's Investors Service, Inc.
P-1
The rating P-1 is the highest commercial paper rating assigned by
Moody's Investors Service, Inc. ("Moody's"). Among the factors
considered by Moody's in assigning ratings are the following:
(1) evaluation of the management of the issuer;
(2) economic evaluation of the issuer's industry or industries and
an appraisal of speculative-type risks which may be inherent in
certain areas;
(3) evaluation of the issuer's products in relation to competition
and customer acceptance;
(4) liquidity;
(5) amount and quality of long-term debt;
(6) trend of earnings over a period of ten years;
(7) financial strength of a parent company and the relationships
which exist with the issuer; and
(8) recognition by the management of obligations which may be
present or may arise as a result of public interest questions and
preparations to meet such obligations.
P-2
Issuers rated P-2 have a strong capacity for repayment of short-term
promissory obligations. This will normally be evidenced by many of
the characteristics cited above but to a lesser degree. Earnings
trends and coverage ratios, while sound, will be more subject to
variation. Capitalization characteristics, while still appropriate,
may be more affected by external conditions. Ample alternative
liquidity is maintained.
APPENDIX B
ABC and affiliates
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
ADVERTISING AND PROMOTIONAL LITERATURE
Advertising and promotional literature prepared by NELICO for
products it issues or administers may include references to TNE
Advisers or NEIC and its affiliates that perform advisory and
subadvisory functions for TNE Advisers also including, but not limited
to: Back Bay Advisors, Loomis Sayles, CGM and Westpeak. Reference
also may be made to the Funds of their respective fund groups, namely,
the Loomis Sayles Funds and the CGM Funds
NELICO's advertising and promotional literature may include
references to other NELICO or NEIC affiliates including, but not
limited to, New England Investment Associates, L. P., AEW Capital
Management, L.P., Marlborough Capital Advisors, L.P., Reich & Tang
Capital Management, Reich and Tang Mutual Funds, the Oakmark Family of
Funds and Jurika & Voyles and their fund groups.
References to subadvisers unaffiliated with TNE Advisers or
NELICO that perform subadvisory functions on behalf of New England
Zenith Fund and their respective fund groups may be contained in
NELICO's advertising and promotional literature including, but not
limited to, Alger, Davis Selected, Salomon Brothers and MSAM.
NELICO's advertising and promotional material may include, but is
not limited to, discussions of the following information about both
affiliated and unaffiliated entities:
Specific and general assessments and forecasts regarding the U.S.
economy, world economies, the economics of specific nations and
their impact on the Series
Specific and general investment emphasis, specialties, fields of
expertise, competencies, operations and functions
Specific and general investment philosophies, strategies, processes,
techniques and types of analysis
Specific and general sources of information, economic models,
forecasts and data services utilized, consulted or considered in the
course of providing advisory or other services
The corporate histories, founding dates and names of founders of the
entities
Awards, honors and recognition given to the firms
The names of those with ownership interest and the percentage of
ownership
The industries and sectors from which clients are drawn and specific
client names and background information on current individual,
corporate and institutional clients, including pension and profit
sharing plans
Current capitalization, levels of profitability and other financial
and statistical information
Identification of portfolio managers, researchers, economists,
principals and other staff members and employees
The specific credentials of the above individuals, including, but
not limited to, previous employment, current and past positions,
titles and duties performed, industry experience, educational
background and degrees, awards and honors
Current and historical statistics about:
-total dollar amount of assets managed
-TNE Advisers assets managed in total and/or by Series
-Asset managed by CGM in total and/or by Series
-the growth of assets
-asset types managed
-numbers of principal parties and employees, and the length of
their tenure, including officers, portfolio managers, researchers,
economists, technicians and support staff
-the above individuals' total and average number of years of
industry experience and the total and average length of their
service to the adviser or the subadviser
The general and specific strategies applied by the advisers in the
management of the New England Zenith Fund's portfolios including,
but not limited to:
-the pursuit of growth, value, income oriented, risk management or
other strategies
-the manner and degree to which the strategy is pursued
-whether the strategy is conservative, moderate or extreme and an
explanation of other features, attributes
-the types and characteristics of investments sought and specific
portfolio holdings
-the actual or potential impact and result from strategy
implementation
-through its own areas of expertise and operations, the value
added by subadvisers to the management process
-the disciplines it employs, e.g., in the case of Loomis Sayles,
the strict buy/sell guidelines and focus on sound value it
employs, and goals and benchmarks that it establishes in
management, e.g., CGM pursues growth 50% above the S&P 500
-the systems utilized in management, the features and
characteristics of those systems and the intended results from
such computer analysis, e.g., Westpeak's efforts to identify
overvalued and undervalued issues.
Specific and general references to portfolio managers and funds that
they serve as portfolio manager of, other than Series of the Fund,
and those families of funds, other than New England Zenith Fund.
Any such references will indicate that New England Zenith Funds and
the other funds of the managers differ as to performance,
objectives, investment restrictions and limitations, portfolio
composition, asset size and other characteristics, including fees
and expenses. References may also be made to industry rankings and
ratings of Series and other funds managed by the Series' adviser and
subadvisers, including, but not limited to, those provided by
Morningstar, Lipper Analytical Services, Forbes and Worth.
In addition, communications and materials developed by NELICO or
its affiliates may make reference to the following information about
NEIC and its affiliates:
NEIC is one of the largest publicly traded managers in the U.S.
listed on the New York Stock Exchange. NEIC maintains over $100
billion in assets under management. In addition, promotional
materials may include:
New England Securities Corporation ("NES") an indirect sudsidiary
of NELICO, may be referenced in Fund advertising and promotional
literature concerning the marketing services it provides to NEIC-
affiliated fund groups including: New England Funds, Loomis Sayles
Funds, Oakmark Funds and Reich & Tang Funds.
Additional information contained in advertising and promotional
literature may include: rankings and ratings of the Series
including, but not limited to, those of Morningstar and Lipper
Analytical Services; statistics about the advisers', fund groups' or a
specific fund's assets under management; the histories of the advisers
and biographical references to portfolio managers and other staff
including, but not limited to, background, credentials, honors, awards
and recognition received by the advisers and their personnel; and
commentary about the advisers, their funds and their personnel from
third-party sources including newspapers, magazines, periodicals,
radio, television or other electronic media.
References to the Series may be included in NELICO's advertising
and promotional literature about its 401(k) and retirement plans. The
information may include, but is not limited to:
Specific and general references to industry statistics regarding
401(k) and retirement plans including historical information and
industry trends and forecasts regarding the growth of assets,
numbers of plans, funding vehicles, participants, sponsors and
other demographic data relating to plans, participants and
sponsors, third party and other administrators, benefits
consultants and firms including, but not limited to, DC Xchange,
William Mercer and other organizations involved in 401(k) and
retirement programs with whom NELICO may or may not have a
relationship.
Specific and general reference to comparative ratings, rankings and
other forms of evaluation as well as statistics regarding the
NELICO as a 401(k) or retirement plan funding vehicle produced by,
including, but not limited to, Access Research, Dalbar, Investment
Company Institute and other industry authorities, research
organizations and publications.
Specific and general discussion of economic, legislative, and other
environmental factors affecting 401(k) and retirement plans,
including, but not limited to, statistics, detailed explanations or
broad summaries of:
-past, present and prospective tax regulation, Internal Revenue
Service requirements and rules, including, but not limited to,
reporting standards, minimum distribution notices, Form 5500, Form
1099R and other relevant forms and documents, Department of Labor
rules and standards and other regulation. This includes past,
current and future initiatives, interpretive releases and
positions of regulatory authorities about the past, current or
future eligibility, availability, operations, administration,
structure, features, provisions or benefits of 401(k) and
retirement plans
-information about the history, status and future trends of Social
Security and similar government benefit programs including, but
not limited to, eligibility and participation, availability,
operations and administration, structure and design, features,
provisions, benefits and costs
-current and prospective ERISA regulation and requirements.
Specific and general discussion of the benefits of 401(k)
investment and retirement plans, and, in particular, the NELICO
401(k) and retirement plans, to the participant and plan sponsor,
including explanations, statistics and other data, about:
-increased employee retention
-reinforcement or creation of morale
-deductibility of contributions for participants
-deductibility of expenses for employers
-tax deferred growth, including illustrations and charts
-loan features and exchanges among accounts
-educational services materials and efforts, including, but not
limited to, videos, slides, presentation materials, brochures, an
investment calculator, payroll stuffers, quarterly publications,
releases and information on a periodic basis and the availability
of wholesalers and other personnel.
Specific and general reference to the benefits of investing in
mutual funds for 401(k) and retirement plans, and, in particular,
New England Zenith Fund and investing in NELICO's 401(k) and
retirement plans, including, but not limited to:
-the significant economies of scale experienced by mutual fund
companies in the 401(k) and retirement benefits arena
-broad choice of investment options and competitive fees
-plan sponsor and participant statements and notices
-the plan prototype, summary descriptions and board resolutions
-plan design and customized proposals
-trusteeship, record keeping and administration
-the services of State Street Bank, including, but not limited to,
trustee services and tax reporting
-the services of DST and BFDS, including, but not limited to,
mutual fund processing support, participant 800 numbers and
participant 401(k) statements
-the services of Trust Consultants Inc. (TCI), including, but not
limited to, sales support, plan record keeping, document service
support, plan sponsor support, compliance testing and Form 5500
preparation.
Specific and general reference to the role of the investment dealer
and the benefits and features of working with a financial
professional including:
-access to expertise on investments
-assistance in interpreting past, present and future market trends
and economic events
-providing information to clients including participants during
enrollment and on an ongoing basis after participation
-promoting and understanding the benefits of investing, including
mutual fund diversification and professional management.
