<PAGE>
NEW ENGLAND ZENITH FUND
New England Zenith Fund (the "Fund") is a mutual fund that provides a range of
investment options. The following nine separate investment portfolios (the
"Series") are offered through this Prospectus.
EQUITY SERIES
FIXED-INCOME SERIES
Alger Equity Growth Series
Davis Venture Value Series
Salomon Brothers Strategic Goldman Sachs Midcap Value Series
Bond Opportunities Series Loomis Sayles Small Cap Series
Salomon Brothers U.S. Government Series Westpeak Growth and Income Series
EQUITY AND FIXED-INCOME SERIES INTERNATIONAL EQUITY SERIES
Morgan Stanley International
Loomis Sayles Balanced Series Magnum Equity Series
This Prospectus is designed to help you decide whether to invest in the Fund
and which Series best match your investment objectives. The Prospectus is
divided into four Sections:
I A brief overview of the structure of the Fund and the Series.
II Summaries of each Series, including investment objectives and principal
investment strategies and risks.
III More detailed descriptions of each Series, including the investment
process and additional investment risks.
IV Other information about the Fund, including information on purchases and
redemptions, portfolio valuation, securities pricing and financial
highlights.
The Securities and Exchange Commission has not approved or disapproved these
securities or passed on the accuracy or adequacy of this prospectus. Any
representation to the contrary is a criminal offense.
APRIL 30, 1999
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
Section I--Overview of New England Zenith Fund............................. B-3
Section II--Summary Information about each Series ......................... B-5
Section III--Additional Information about each Series ..................... B-21
Section IV--Other Information About The Fund............................... B-42
Financial Highlights....................................................... B-44
</TABLE>
<TABLE>
<CAPTION>
ADDITIONAL
SERIES SUMMARY INFORMATION
------ ------- -----------
<S> <C> <C>
Salomon Brothers Strategic Bond Opportunities Series........ B-5 B-22
Salomon Brothers U.S. Government Series..................... B-7 B-25
Loomis Sayles Balanced Series............................... B-9 B-27
Alger Equity Growth Series.................................. B-11 B-30
Davis Venture Value Series.................................. B-12 B-31
Goldman Sachs Midcap Value Series........................... B-13 B-33
Loomis Sayles Small Cap Series.............................. B-15 B-37
Westpeak Growth and Income Series........................... B-17 B-39
Morgan Stanley International Magnum Equity Series........... B-19 B-40
</TABLE>
B-2
<PAGE>
SECTION I--OVERVIEW OF NEW ENGLAND ZENITH FUND
ORGANIZATION
The Fund is a mutual fund consisting of multiple investment portfolios, the
Series. New England Investment Management, Inc. ("NEIM") (formerly TNE
Advisers, Inc.) is the investment adviser to all the Series. NEIM has
contracted with subadvisers to make the day-to-day investment decisions for
all the Series.
INVESTORS
Fund shares are offered only to SEPARATE ACCOUNTS established by New England
Life Insurance Company ("New England Financial") and Metropolitan Life
Insurance Company ("Metropolitan Life") or their affiliates (the "Separate
Accounts"). The Fund serves as the investment vehicle for variable life
insurance, variable annuity and group annuity products of New England
Financial and Metropolitan Life or their affiliates. The general public may
not directly purchase Fund shares. The performance information in the
Prospectus does not reflect charges associated with the Separate Accounts or
variable contracts that an investor in the Fund may pay under insurance or
annuity contracts.
A SEPARATE ACCOUNT is a pool of assets set aside by an insurance company to
fund payments under a specified group of insurance policies or contracts.
TYPES OF INVESTMENTS
Each Series invests in a variety of securities. Securities generally fall into
two main categories: equity and fixed-income.
Equity Securities
Equity securities include common stocks, preferred stocks and other
instruments related to common and preferred stocks. Generally, common and
preferred stocks represent ownership interests in a corporation. Stocks often
pay a DIVIDEND.
A DIVIDEND is a payment made by a company to a shareholder that typically is
based on the issuer's performance. A dividend may be paid as cash or
additional securities.
Investment advisers often characterize stocks as growth stocks or value
stocks. Generally, an investment adviser considers a stock to be a growth
stock if it expects the company's earnings to grow relatively rapidly.
Generally, value stocks are the stocks of companies that an investment adviser
believes are inexpensive relative to other stocks under current market
conditions. A stock may display characteristics of both classifications.
Therefore, it is possible that a stock may be characterized as a growth stock
by some investment professionals and as a value stock by other investment
professionals.
Stocks are also often categorized according to the market capitalization of
the issuer. Market capitalization is calculated by multiplying the total
number of outstanding shares of an issuer by the market price of those shares.
Some mutual funds invest primarily in stocks of issuers with larger
capitalizations, while other mutual funds invest primarily in stocks of
issuers with medium or small capitalizations.
B-3
<PAGE>
Fixed-income Securities
Fixed-income securities represent an obligation of an issuer to repay money
that it has borrowed. Generally, the issuer agrees to pay the investor interest
in return for the use of the money until the MATURITY DATE, as set forth in the
terms of the security. The rate of interest may be fixed or variable.
The MATURITY DATE is the date on which a fixed-income security "matures." This
is the date on which the borrower must pay back the borrowed amount, the
principal.
B-4
<PAGE>
SECTION II--SUMMARY INFORMATION ABOUT EACH SERIES
SALOMON BROTHERS STRATEGIC BOND OPPORTUNITIES SERIES
INVESTMENT OBJECTIVE
The investment objective of the Salomon Brothers Strategic Bond Opportunities
Series ("Strategic Bond") is a high level of total return consistent with
preservation of capital.
PRINCIPAL INVESTMENT STRATEGIES
Salomon Brothers Asset Management Inc ("SBAM"), Strategic Bond's subadviser,
invests substantially all of Strategic Bond's assets in three classes of fixed-
income securities: (1) U.S. investment grade securities (including U.S.
Government obligations), (2) U.S. and foreign HIGH YIELD DEBT, and (3) foreign
government securities.
INVESTMENT GRADE: Moody's and Standard & Poor's are rating agencies that assign
a "credit rating" to fixed-income securities and issuers based on the agency's
evaluation of the risk that the issuer will default on its obligations.
Securities or issuers that earn one of the top four ratings from Moody's or
Standard & Poor's are considered "investment grade." In this Prospectus,
unrated securities that, in the subadviser's judgment, are of similar quality
to other securities rated investment grade are also referred to as investment
grade.
Fixed-income securities that are below investment grade quality are referred to
as HIGH YIELD DEBT. High yield debt is typically riskier than investment grade
securities.
PRINCIPAL INVESTMENT RISKS
Investing in Strategic Bond involves risks. Strategic Bond may not perform as
well as other investments, and it is possible for investors to lose money.
Factors that could harm the investment performance of Strategic Bond include:
. A general decline in U.S. or foreign fixed-income security markets.
. Poor performance of the classes of fixed-income securities held by
Strategic Bond.
. Poor performance of individual fixed-income securities held by Strategic
Bond, which may be due to interest rate risk and credit risk.
. The risks associated with investments in foreign securities, which may be
subject to less regulation and additional regional, national and currency
risk. These risks are discussed more fully in Section III.
B-5
<PAGE>
INVESTMENT PERFORMANCE RECORD
The bar chart below shows the annual total return of Strategic Bond for each
full calendar year since the Series began operations. The table following the
bar chart compares the average annual total returns of Strategic Bond to the
returns of a relevant broad-based securities market index and to returns of a
group of other similar mutual funds underlying variable insurance products.
This information helps illustrate the volatility of Strategic Bond's returns,
and does not reflect charges associated with the Separate Accounts or variable
contracts that an investor in the Fund may pay under insurance or annuity
contracts.
[SALOMON BROTHERS CHART APPEARS HERE]
YEAR TOTAL RETURN
---- ------------
1995 19.4%
1996 14.4%
1997 11.1%
1998 2.0%
During the period shown above, the highest quarterly return was 9.8% for the
second quarter of 1995, and the lowest quarterly return was -2.4% for the third
quarter of 1998. Past performance of a Series does not necessarily indicate how
that Series will perform in the future.
AVERAGE ANNUAL TOTAL RETURN FOR PERIODS ENDING DECEMBER 31
<TABLE>
<CAPTION>
LIFE OF THE SERIES
PAST ONE YEAR (OCTOBER 31, 1994)
------------- -----------------------
<S> <C> <C>
Strategic Bond........................... 2.0% 10.7%
Lehman Brothers Aggregate Bond Index..... 8.7% 9.7%
Lipper Variable Products General Bond
Fund Average............................ 5.1% Data only available for
</TABLE> full one-year periods
B-6
<PAGE>
SALOMON BROTHERS U.S. GOVERNMENT SERIES
INVESTMENT OBJECTIVE
The investment objective of the Salomon Brothers U.S. Government Series (the
"U.S. Government Series") is a high level of current income consistent with
preservation of capital and maintenance of liquidity.
PRINCIPAL INVESTMENT STRATEGIES
Salomon Brothers Asset Management Inc ("SBAM"), subadviser to the U.S.
Government Series, generally invests at least 80% of the assets of the U.S.
Government Series in fixed-income securities issued or guaranteed by the U.S.
Government or its agencies, authorities or instrumentalities ("U.S. Government
Securities") or in collateralized mortgage obligations ("CMOs") that relate to
such securities. The U.S. Government Series may also invest up to 20% of its
assets in INVESTMENT GRADE fixed-income securities that are not U.S. Government
Securities.
INVESTMENT GRADE: Moody's and Standard & Poor's are rating agencies that assign
a "credit rating" to fixed-income securities and issuers based on the agency's
evaluation of the risk that the issuer will default on its obligations.
Securities or issuers that earn one of the top four ratings from Moody's or
Standard & Poor's are considered "investment grade." In this Prospectus,
unrated securities that, in the subadviser's judgment, are of similar quality
to other securities rated investment grade are also referred to as investment
grade.
PRINCIPAL INVESTMENT RISKS
Investing in the U.S. Government Series involves risks. The U.S. Government
Series may not perform as well as other investments, and it is possible for
investors to lose money. Factors that could harm the investment performance of
the U.S. Government Series include:
. A general decline in fixed-income security markets.
. Poor performance of the types of fixed-income securities in which U.S.
Government Series invests relative to other fixed-income securities.
. Poor performance of individual fixed-income securities held by the U.S.
Government Series, which may be due to interest rate risk and credit
risk.
B-7
<PAGE>
INVESTMENT PERFORMANCE RECORD
The bar chart below shows the annual total return of the U.S Government Series
for each full calendar year since the Series began operations. The table
following the bar chart compares the average annual total returns of the U.S
Government Series to the returns of a relevant broad-based securities market
index and to returns of a group of other similar mutual funds underlying
variable insurance products. This information helps illustrate the volatility
of the returns of the U.S. Government Series, and does not reflect charges
associated with the Separate Accounts or variable contracts that an investor in
the Fund may pay under insurance or annuity contracts.
[GRAPH APPEARS HERE]
YEAR TOTAL RETURN
---- ------------
1995 15.0%
1996 3.3%
1997 8.6%
1998 7.5%
During the period shown above, the highest quarterly return was 5.5% for the
second quarter of 1995, and the lowest quarterly return was -1.5% for the first
quarter of 1996. Past performance of a Series does not necessarily indicate how
that Series will perform in the future.
AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDING DECEMBER 31
<TABLE>
<CAPTION>
LIFE OF THE SERIES
PAST ONE YEAR (OCTOBER 31, 1994)
------------- -----------------------
<S> <C> <C>
U.S. Government Series................... 7.5% 8.3%
Lehman Brothers Intermediate Government
Bond Index.............................. 8.5% 8.2%
Lipper Variable Products U.S. Mortgage
and GNMA Fund Average................... 7.3% Data only available for
full one-year periods
</TABLE>
B-8
<PAGE>
LOOMIS SAYLES BALANCED SERIES
INVESTMENT OBJECTIVE
The investment objective of the Loomis Sayles Balanced Series (the "Balanced
Series") is reasonable long-term investment return from a combination of long-
term capital appreciation and moderate current income.
PRINCIPAL INVESTMENT STRATEGIES
Loomis, Sayles & Company, L.P. ("Loomis Sayles"), subadviser to the Balanced
Series, invests the assets of the Balanced Series in a mix of U.S. equity and
fixed-income securities. The Balanced Series invests at least 25% of its assets
in fixed-income securities. Loomis Sayles has the flexibility to invest the
remaining 75% of the assets of the Balanced Series in either equity or fixed-
income securities, depending on its economic and investment outlook, although
under normal market conditions more than 50% of the total assets of the
Balanced Series will be invested in stocks that Loomis Sayles regards as value
stocks.
PRINCIPAL INVESTMENT RISKS
Investing in the Balanced Series involves risks. The Balanced Series may not
perform as well as other investments, and it is possible for investors to lose
money. Factors that could harm the investment performance of the Balanced
Series include:
. A general decline in stock markets or fixed-income markets.
. Poor performance of individual equity securities or poor performance of
fixed-income securities held by the Balanced Series, which may be due to
interest rate risk and credit risk.
. Poor performance of equity securities relative to fixed-income securities
when Loomis Sayles emphasizes investment in equity securities, or poor
performance of fixed-income securities relative to equity securities when
Loomis Sayles is relatively heavily invested in fixed-income securities.
. Potentially rapid price changes (volatility) of equity securities.
B-9
<PAGE>
INVESTMENT PERFORMANCE RECORD
The bar chart below shows the annual total return of the Balanced Series for
each full calendar year since the Series began operations. The table following
the bar chart compares the average annual total returns of the Balanced Series
to the returns of a relevant broad-based securities market index and to returns
of a group of other similar mutual funds underlying variable insurance
products. This information helps illustrate the volatility of the returns of
the Balanced Series, and does not reflect charges associated with the Separate
Accounts or variable contracts that an investor in the Fund may pay under
insurance or annuity contracts.
[GRAPH APPEARS HERE]
YEAR TOTAL RETURN
---- ------------
1995 24.8%
1996 16.9%
1997 16.2%
1998 9.1%
During the period shown above, the highest quarterly return was 9.7% for the
fourth quarter of 1998, and the lowest quarterly return was -6.4% for the third
quarter of 1998. Past performance of a Series does not necessarily indicate how
that Series will perform in the future.
AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDING DECEMBER 31
<TABLE>
<CAPTION>
LIFE OF THE SERIES
PAST ONE YEAR (OCTOBER 31, 1994)
------------- -----------------------
<S> <C> <C>
Balanced Series.......................... 9.1% 15.9%
S&P 500 Index............................ 28.7% 28.4%
Lehman Brothers Government/Corporate Bond
Index................................... 9.5% 9.9%
Lipper Variable Products Balanced Fund
Average................................. 14.9% Data only available for
</TABLE> full one-year periods
B-10
<PAGE>
ALGER EQUITY GROWTH SERIES
INVESTMENT OBJECTIVE
The investment objective of the Alger Equity Growth Series ("Equity Growth") is
long-term capital appreciation.
PRINCIPAL INVESTMENT STRATEGIES
Fred Alger Management, Inc. ("Alger"), Equity Growth's investment subadviser,
invests Equity Growth's assets primarily in growth stocks. Alger will
ordinarily invest at least 65% of Equity Growth's total assets in equity
securities of issuers with market capitalization of $1 billion or greater.
PRINCIPAL INVESTMENT RISKS
Investing in Equity Growth involves risks. Equity Growth may not perform as
well as other investments, and it is possible for investors to lose money.
Factors that could harm the investment performance of Equity Growth include:
. A general decline in U.S. stock markets.
. Poor performance of individual stocks held by Equity Growth.
. Potentially rapid price changes (volatility) of equity securities.
INVESTMENT PERFORMANCE RECORD
The bar chart below shows the annual total return of Equity Growth for each
full calendar year since the Series began operations. The table following the
bar chart compares the average annual total returns of Equity Growth to the
returns of a relevant broad-based securities market index and to returns of a
group of other similar mutual funds underlying variable insurance products.
This information helps illustrate the volatility of Equity Growth's returns,
and does not reflect charges associated with the Separate Accounts or variable
contracts that an investor in the Fund may pay under insurance or annuity
contracts.
[CHART FOR ALGER EQUITY GROWTH APPEARS HERE]
YEAR TOTAL RETURN
---- ------------
1995 48.8%
1996 13.2%
1997 25.6%
1998 47.8%
During the period shown above, the highest quarterly return was 26.1% for the
fourth quarter of 1998, and the lowest quarterly return was -7.1% for the third
quarter of 1998. Past performance of a Series does not necessarily indicate how
that Series will perform in the future.
AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDING DECEMBER 31
<TABLE>
<CAPTION>
LIFE OF SERIES
PAST ONE YEAR (OCTOBER 31, 1994)
------------- -----------------------
<S> <C> <C>
Equity Growth............................ 47.8% 30.1%
S&P 500 Index............................ 28.7% 28.4%
Lipper Variable Products Growth Fund
Average................................. 24.7% Data only available for
</TABLE> full one-year periods
B-11
<PAGE>
DAVIS VENTURE VALUE SERIES
INVESTMENT OBJECTIVE
The investment objective of the Davis Venture Value Series ("Venture Value") is
growth of capital.
PRINCIPAL INVESTMENT STRATEGIES
Davis Selected Advisers, L.P. ("Davis Selected"), Venture Value's subadviser,
invests Venture Value's assets primarily in U.S. common stocks of companies
that have a market capitalization of at least $5 billion and that it believes
are of high quality and are selling at attractive prices. Davis Selected
generally selects stocks with the intention of holding them for the long term.
Davis Selected believes that managing risk is the key to delivering superior
long-term investment results; therefore, it considers how much could
potentially be lost on an investment before considering how much might be
gained.
PRINCIPAL INVESTMENT RISKS
Investing in Venture Value involves risks. Venture Value may not perform as
well as other investments, and it is possible for investors to lose money.
Factors that could harm the investment performance of Venture Value include:
. A general decline in the U.S. stock market.
. Poor performance of individual stocks held by Venture Value.
. Potentially rapid price changes (volatility) of equity securities.
INVESTMENT PERFORMANCE RECORD
The bar chart below shows the annual total return of Venture Value for each
full calendar year since the Series began operations. The table following the
bar chart compares the average annual total returns of Venture Value to the
returns of a relevant broad-based securities market index and to returns of a
group of other similar mutual funds underlying variable insurance products.
This information helps illustrate the volatility of Venture Value's returns,
and does not reflect charges associated with the Separate Accounts or variable
contracts that an investor in the Fund may pay under insurance or annuity
contracts.
[SALOMON BROTHERS CHART APPEARS HERE]
YEAR TOTAL RETURN
---- ------------
1995 39.3%
1996 25.8%
1997 33.5%
1998 14.4%
During the period shown above, the highest quarterly return was 21.2% for the
fourth quarter of 1998, and the lowest quarterly return was -14.5% for the
third quarter of 1998. Past performance of a Series does not necessarily
indicate how that Series will perform in the future.
AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDING DECEMBER 31
<TABLE>
<CAPTION>
LIFE OF SERIES
PAST ONE YEAR (OCTOBER 31, 1994)
------------- -----------------------
<S> <C> <C>
Venture Value............................ 14.4% 25.6%
S&P 500 Index............................ 28.7% 28.4%
Lipper Variable Products Growth Fund
Average................................. 24.7% Data only available for
</TABLE> full one-year periods
B-12
<PAGE>
GOLDMAN SACHS MIDCAP VALUE SERIES
INVESTMENT OBJECTIVE
The investment objective of the Goldman Sachs Midcap Value Series ("Midcap
Value") is long-term capital appreciation.
PRINCIPAL INVESTMENT STRATEGIES
Goldman Sachs Asset Management ("GSAM"), a separate operating division of
Goldman, Sachs & Co., invests, under normal circumstances, most of Midcap
Value's assets in equity securities that GSAM believes are relatively
underpriced and at least 65% of its total assets in equity securities of
companies with public stock market capitalizations within the range of the
market capitalization of companies constituting the Russell Midcap Index. GSAM
may invest up to 25% of Midcap Value's total assets in foreign securities
(including up to 15% of its total assets in securities issued in emerging
markets and securities the prices of which are quoted in foreign currencies).
In addition GSAM may invest 35% of Midcap Value's total assets in fixed-income
securities, including up to 10% of its total assets in HIGH YIELD DEBT. Midcap
Value does not focus on dividend income.
INVESTMENT GRADE: Moody's and Standard & Poor's are rating agencies that assign
a "credit rating" to fixed-income securities and issuers based on the agency's
evaluation of the risk that the issuer will default on its obligations.
Securities or issuers that earn one of the top four ratings from Moody's or
Standard & Poor's are considered "investment grade." In this Prospectus,
unrated securities that, in the subadviser's judgment, are of similar quality
to other securities rated investment grade are also referred to as investment
grade.
Fixed-income securities that are below investment grade quality are referred to
as HIGH YIELD DEBT. High yield debt is typically riskier than investment grade
securities.
PRINCIPAL INVESTMENT RISKS
Investing in Midcap Value involves risks. Midcap Value may not perform as well
as other investments, and it is possible for investors to lose money. Factors
that could harm the investment performance of Midcap Value include:
. A general decline in U.S. or foreign stock markets or fixed-income
securities markets.
. Poor performance of individual stocks or fixed-income securities held by
Midcap Value.
. Potentially rapid price changes (volatility) of equity securities.
. The risks associated with investments in foreign securities. Foreign
securities may be subject to less regulation and additional regional,
national and currency risk. These risks are discussed more fully in
Section III.
B-13
<PAGE>
INVESTMENT PERFORMANCE RECORD
The bar chart below shows the annual total return of Midcap Value for each full
calendar year since the Series began operations. The table following the bar
chart compares the average annual total returns of Midcap Value to the returns
of a relevant broad-based securities market index and to returns of a group of
other similar mutual funds underlying variable insurance products. This
information helps illustrate the volatility of Midcap Value's returns, and does
not reflect charges associated with the Separate Accounts or variable contracts
that an investor in the Fund may pay under insurance or annuity contracts. On
May 1, 1998, GSAM succeeded Loomis Sayles as subadviser to Midcap Value. The
performance information set forth below relates to the life of the Series and
therefore, reflects the management of both GSAM and Loomis Sayles.
[CHART FOR GSAM AND LOOMIS SAYLES APPEARS HERE]
YEAR TOTAL RETURN
---- ------------
1994 -0.3%
1995 30.4%
1996 17.6%
1997 17.4%
1998 -5.5%
During the period shown above, the highest quarterly return was 16.4% for the
second quarter of 1997, and the lowest quarterly return was -19.8% for the
third quarter of 1998. Past performance of a Series does not necessarily
indicate how that Series will perform in the future.
AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDING DECEMBER 31
<TABLE>
<CAPTION>
LIFE OF THE SERIES
PAST ONE YEAR PAST FIVE YEARS (APRIL 30, 1993)
------------- --------------- -----------------------
<S> <C> <C> <C>
Midcap Value............. -5.5% 11.1% 12.5%
Russell Midcap Index..... 10.1% 17.3% 17.4%
Lipper Variable Products
Midcap Fund Average..... 18.3% 14.5% Data only available for
full one-year periods
</TABLE>
B-14
<PAGE>
LOOMIS SAYLES SMALL CAP SERIES
INVESTMENT OBJECTIVE
The investment objective of the Loomis Sayles Small Cap Series ("Small Cap") is
long-term capital growth from investments in common stocks or their
equivalents.
PRINCIPAL INVESTMENT STRATEGIES
Loomis, Sayles & Company, L.P. ("Loomis Sayles"), Small Cap's subadviser will
invest, under normal market conditions, at least 65% of Small Cap's total
assets in equity securities of U.S. companies with market capitalizations that
fall within the capitalization range of those companies constituting the
Russell 2000 Index. Small Cap invests in both value and growth stocks.
PRINCIPAL INVESTMENT RISKS
Investing in Small Cap involves risks. Small Cap may not perform as well as
other investments, and it is possible for investors to lose money. Factors that
could harm the investment performance of Small Cap include:
. A general decline in the U.S stock market.
. Poor performance of individual stocks held by Small Cap.
. Potentially rapid price changes (volatility) of equity securities.
. Poor performance of small capitalization issuers relative to the
performance of issuers with larger capitalizations.
INVESTMENT PERFORMANCE RECORD
The bar chart below shows the annual total return of Small Cap for each full
calendar year since the Series began operations. The table following the bar
chart compares the average annual total returns of Small Cap to the returns of
a relevant broad-based securities market index and to returns of a group of
other similar mutual funds underlying variable insurance products. This
information helps illustrate the volatility of Small Cap's returns, and does
not reflect charges associated with the Separate Accounts or variable contracts
that an investor in the Fund may pay under insurance or annuity contracts.
[GRAPH FOR LOOMIS SAYLES APPEARS HERE]
YEAR TOTAL RETURN
---- ------------
1995 28.9%
1996 30.7%
1997 24.9%
1998 -1.7%
B-15
<PAGE>
During the period shown above, the highest quarterly return was 17.4% for the
fourth quarter of 1998, and the lowest quarterly return was -18.5% for the
third quarter of 1998. Past performance of a Series does not necessarily
indicate how that Series will perform in the future.
AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDING DECEMBER 31
<TABLE>
<CAPTION>
LIFE OF THE SERIES
PAST ONE YEAR (MAY 2, 1994)
------------- -----------------------
<S> <C> <C>
Small Cap................................ -1.7% 16.0%
Russell 2000 Index....................... -2.6% 14.5%
Lipper Variable Products Small Company
Fund Average............................ 1.4% Data only available for
full one-year periods
</TABLE>
B-16
<PAGE>
WESTPEAK GROWTH AND INCOME SERIES
INVESTMENT OBJECTIVE
The investment objective of the Westpeak Growth and Income Series ("Growth and
Income") is long-term total return through investment in equity securities.
PRINCIPAL INVESTMENT STRATEGIES
Westpeak Investment Advisors, L.P., Growth and Income's subadviser, is not
limited to either the growth or value style of investing. Westpeak sometimes
invests more of Growth and Income's assets in value stocks, and sometimes
invests more heavily in growth stocks. Growth and Income invests primarily in
stocks of large capitalization U.S. companies, such as those included in the
S&P 500 Index, but it may also invest in securities of other large
capitalization companies. Westpeak emphasizes individual stock selection rather
than targeting particular industries or sectors that it believes may outperform
other sectors.
PRINCIPAL INVESTMENT RISKS
Investing in Growth and Income involves risks. Growth and Income may not
perform as well as other investments, and it is possible for investors to lose
money. Factors that could harm the investment performance of Growth and Income
include:
. A general decline in the U.S. stock market.
. Poor performance of individual stocks held by Growth and Income.
. Potentially rapid price changes (volatility) of equity securities.
. Poor performance of growth stocks relative to value stocks when Westpeak
emphasizes investment in growth stocks, or poor performance of value
stocks relative to growth stocks when Westpeak emphasizes investment in
value stocks.
B-17
<PAGE>
INVESTMENT PERFORMANCE RECORD
The bar chart below shows the annual total return of Growth and Income for each
full calendar year since the Series began operations. The table following the
bar chart compares the average annual total returns of Growth and Income to the
returns of a relevant broad-based securities market index and to returns of a
group of other similar mutual funds underlying variable insurance products.
This information helps illustrate the volatility of Growth and Income's
returns, and does not reflect charges associated with the Separate Accounts or
variable contracts that an investor in the Fund may pay under insurance or
annuity contracts.
[CHART OF TOTAL RETURNS APPEARS HERE]
YEAR TOTAL RETURN
---- ------------
1994 -1.2%
1995 36.5%
1996 18.1%
1997 33.5%
1998 24.4%
During the period shown above, the highest quarterly return was 19.5% for the
fourth quarter of 1998, and the lowest quarterly return was -12.3% for the
third quarter of 1998. Past performance of a Series does not necessarily
indicate how that Series will perform in the future.
AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDING DECEMBER 31
<TABLE>
<CAPTION>
LIFE OF THE SERIES
PAST ONE YEAR PAST FIVE YEARS (APRIL 30, 1993)
------------- --------------- -----------------------
<S> <C> <C> <C>
Growth & Income.......... 24.4% 21.5% 21.5%
S&P 500 Index............ 28.7% 24.1% 22.6%
Lipper Variable Products
Growth and Income Fund
Average................. 16.5% 18.8% Data only available for
</TABLE> full one-year periods
B-18
<PAGE>
MORGAN STANLEY INTERNATIONAL MAGNUM EQUITY SERIES
INVESTMENT OBJECTIVE
The investment objective of the Morgan Stanley International Magnum Equity
Series ("International Equity") is long-term capital appreciation through
investment primarily in international equity securities.
PRINCIPAL INVESTMENT STRATEGIES
Morgan Stanley Asset Management ("MSAM") is International Equity's subadviser.
On December 1, 1998, Morgan Stanley Asset Management Inc. changed its name to
Morgan Stanley Dean Witter Investment Management Inc. but continues to do
business in certain instances (including as subadviser to International Equity)
using the name Morgan Stanley Asset Management. MSAM invests International
Equity's assets in a diversified portfolio of stocks of foreign issuers
domiciled in EAFE COUNTRIES. MSAM seeks to achieve superior long-term returns
by creating a diversified portfolio of stocks that MSAM believes are
undervalued. To achieve this goal, MSAM implements a combination of strategic
geographic asset allocation and fundamental, value-oriented stock selection
implemented by regional experts around the globe.
EAFE COUNTRIES are countries included in the Morgan Stanley Capital
International EAFE Index. This index consists of companies headquartered in
approximately 20 countries, including Australia, New Zealand, many nations in
Western Europe and the more developed nations of Asia, such as Japan, Hong Kong
and Singapore.
PRINCIPAL INVESTMENT RISKS
Investing in International Equity involves risks. International Equity may not
perform as well as other investments, and it is possible for investors to lose
money. Factors that could harm the investment performance of International
Equity include:
. A general decline in foreign stock markets.
. Poor performance of the stock markets in which International Equity
invests relative to the performance of other stock markets.
. Poor performance of individual stocks held by International Equity.
. Potentially rapid price changes (volatility) of equity securities.
. The risks associated with investments in foreign securities. Foreign
securities may be subject to less regulation and additional regional,
national and currency risk. These risks are discussed more fully in
Section III.
B-19
<PAGE>
INVESTMENT PERFORMANCE RECORD
The bar chart below shows the annual total return of International Equity for
each full calendar year since the Series began operations. The table following
the bar chart compares the average annual total returns of International Equity
to the returns of a relevant broad-based securities market index and to returns
of a group of other similar mutual funds underlying variable insurance
products. This information helps illustrate the volatility of International
Equity's returns, and does not reflect charges associated with the Separate
Accounts or variable contracts that an investor in the Fund may pay under
insurance or annuity contracts. On May 1, 1997, MSAM succeeded Draycott
Partners, Ltd. as subadviser to International Equity. The performance
information set forth below relates to the life of the Series and, therefore,
reflects the management of both MSAM and Draycott Partners, Ltd.
[GRAPH APPEARS HERE]
YEAR TOTAL RETURN
---- ------------
1995 6.0%
1996 6.9%
1997 -1.3%
1998 7.3%
During the period shown above, the highest quarterly return was 14.8% for the
first quarter of 1998, and the lowest quarterly return was -17.1% for the third
quarter of 1998. Past performance of a Series does not necessarily indicate how
that Series will perform in the future.
AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDING DECEMBER 31
<TABLE>
<CAPTION>
LIFE OF THE SERIES
PAST ONE YEAR (OCTOBER 31, 1994)
------------- -----------------------
<S> <C> <C>
International Equity..................... 7.3% 5.1%
Morgan Stanley Capital International EAFE
Index................................... 20.6% 8.0%
Lipper Variable Products International
Fund Average............................ 13.4% Data only available for
</TABLE> full one-year periods
B-20
<PAGE>
SECTION III--ADDITIONAL INFORMATION ABOUT EACH SERIES
This Section contains additional information that may help you decide whether
and how much to invest in each Series. This Section discusses the principal
strategies and risks of investing in each Series. However, each Series may
invest in securities and engage in certain investment practices not discussed
below or in the Summary. For more information about these securities,
strategies and related risks, please see "Investment Risks" in the Fund's
Statement of Additional Information (the "SAI"). Please call the toll free
number listed on the back cover of the Prospectus to receive a free copy of the
SAI.
TEMPORARY DEFENSIVE POSITIONS
Each Series may, for temporary defensive purposes, hold all or a substantial
portion of its assets in cash or fixed-income investments. The types of
securities in which a Series may invest include U.S. Government securities,
investment grade fixed-income securities, money market instruments and
REPURCHASE AGREEMENTS. No estimate can be made as to when or for how long a
Series may employ a defensive strategy. Although a defensive strategy may help
insulate a Series from a downturn in securities markets, it could prevent the
Series from capturing the gains it would otherwise achieve if the Series did
not employ a defensive strategy.
REPURCHASE AGREEMENTS are agreements under which a Series purchases one or more
securities from another party, usually a bank or a brokerage firm, with the
understanding that the counterparty will buy the securities back from the
Series at a later date. Repurchase agreements allow a Series to earn a return
on available cash at relatively low credit risk.
PORTFOLIO TURNOVER
Each Series may engage in active and frequent trading of portfolio securities
to achieve its principal investment strategies. As a result, the Series may
experience high portfolio turnover. High portfolio turnover results in higher
brokerage and other transaction costs.
INVESTMENT RESTRICTIONS
Each Series is restricted as to the types of investments it may make. These
restrictions are described in detail in the SAI. Some investment restrictions
are "fundamental," which means that the Fund's Trustees may only change them
after obtaining shareholder approval. The investment objective of each Series
may be changed without shareholder approval except for Small Cap and Growth
Income.
INVESTMENT PERCENTAGE REQUIREMENTS AND CAPITALIZATION
Several of the Series have adopted policies that set minimum or maximum
percentages of their assets to be allocated to certain types of investments or
to certain ranges of market capitalization. These percentage requirements and
capitalization ranges apply at the time an investment is made; a change in the
value of an investment after it is acquired is not treated as a violation of
these policies or ranges.
B-21
<PAGE>
SALOMON BROTHERS STRATEGIC BOND OPPORTUNITIES SERIES
PRINCIPAL INVESTMENT STRATEGIES
SBAM invests substantially all of Strategic Bond's assets in three classes of
fixed-income securities: (1) U.S. investment grade securities (including U.S.
Government obligations), (2) U.S. and foreign high yield debt, and (3) foreign
government securities.
Investment Selection
SBAM determines how to invest Strategic Bond assets in several steps:
SBAM has an investment committee consisting of senior portfolio managers which
analyzes current interest rate trends and their impact on potential economic
scenarios. This committee meets every month to revise its estimate of interest
rate and general market trends. Based on this analysis, Strategic Bond's
portfolio managers allocate assets among the various classes of securities in
which the Series invests. Once this allocation is set, SBAM focuses on specific
investment opportunities within those areas.
SBAM considers many factors when selecting individual fixed-income securities,
including the interest rate of the security, the interval at which the interest
rate adjusts, the date of maturity of the security and the creditworthiness of
the issuer. SBAM also considers Strategic Bond's likely need for liquidity,
which can be influenced by redemptions (and opportunities for purchases of
other securities), and the DURATION of the portfolio, which will generally be
approximately 4.5 years.
DURATION is an estimate of how much a bond fund's share price will fluctuate in
response to a change in interest rates. To see how the price could shift,
multiply the Series' duration by the change in rates. If interest rates rise by
one percentage point, the share price of a fund with an average duration of
five years would decline by about 5%. If rates decrease by a percentage point,
the fund's share price would rise by 5%.
PRINCIPAL INVESTMENT RISKS
Fixed-income Securities
The value of most fixed-income securities generally will rise when interest
rates decline and fall when interest rates rise. Fixed-income securities
involve both CREDIT RISK and MARKET RISK. Some fixed-income securities also
involve the risk that an issuer will repay the principal or repurchase the
security before it matures. If this happens, the holder will no longer receive
any interest on that security. The holder could buy another security, but that
other security might pay a lower interest rate. Also, if the holder paid a
PREMIUM when it bought the security, the holder may receive less from the
issuer than it paid for the security.
CREDIT RISK is the risk that the security's issuer will not pay the interest,
dividends or principal that it has promised to pay.
MARKET RISK is the risk that the value of the security will fall because of
changes in market rates of interest or other factors.
Some securities pay a higher interest rate than the current market rate. An
investor may have to pay more than the security's principal to compensate the
seller for the value of higher interest rate. This additional payment is a
PREMIUM.
Foreign Securities
In addition to the risks associated with fixed-income securities generally,
foreign securities present additional risks.
Regulation and Access to Information. Changes in foreign countries' laws may
harm the performance and liquidity of the
B-22
<PAGE>
Series' investments in those countries. Additionally, many countries have less
stringent financial reporting requirements than the United States, so it may be
difficult to obtain information to evaluate the business potential of foreign
issuers.
Regional and National Risk. News and events unique to particular regions and
foreign countries will affect non-U.S. markets and issuers. These same events
may not affect the U.S. economy or similar issuers located in the United States
in the same manner. As a result, movements in the prices of foreign securities
may not correlate with the prices of U.S. securities.
Currency Risk. As many investments in foreign countries are denominated in
foreign currencies, changes in the value of those countries' currencies
relative to the U.S. dollar may affect the value of those investments. These
changes may occur in response to events unrelated to the value of the security
in the issuer's home country. SBAM may use certain techniques, such as FORWARD
CONTRACTS or FUTURES CONTRACTS, to manage these risks. However, SBAM cannot
assure that these techniques will be effective.
A FORWARD CONTRACT is an agreement to buy or sell securities or currencies on a
specified future date at a specific price.
A FUTURES CONTRACT is an obligation to buy or sell an asset on a specified
future date or an obligation to pay or receive money based on the value of some
securities index or currency or interest rate on a specified future date.
Typically, futures contracts are traded on an exchange (rather than entered
into between two parties). Futures contracts are one kind of DERIVATIVE.
A DERIVATIVE is a financial instrument whose value is based on (derived from)
changes in the value of something else, such as a currency, an interest rate or
a security.
Forward Contracts and Futures
The Series may seek to avoid the risk of an unfavorable shift in currency rates
by entering into forward contracts or buying or selling futures contracts or
options on futures contracts.
Forward contracts. By entering into a forward contract, Strategic Bond is
giving up the potential gains (and avoiding the potential losses) that may
occur if the actual exchange rate on the specified date is different from the
exchange rate established in the contract.
Futures contracts. If the price of a futures contract changes more than the
price of the security or index on which the contract is based, Strategic Bond
could make or lose more money than if it had invested directly in the
underlying security or index. This added volatility increases the risk of these
investments. In addition, investors may be unwilling to buy or sell futures
contracts under some market conditions. If this happens, Strategic Bond might
not be able to close out futures transactions without incurring substantial
losses.
Emerging Markets
Strategic Bond may invest in emerging markets, which are generally located in
the Asia-Pacific Region, Eastern Europe, Latin and South America and Africa. In
addition to the risks of foreign securities described above (which are
potentially greater for emerging markets securities than for other foreign
securities), emerging markets securities may be subject to other risks,
including increased risks of reduced liquidity, high inflation rates, political
uncertainty, high administrative and regulatory costs, repatriation of income
and less advantageous investment terms relative to foreign nationals.
B-23
<PAGE>
High Yield Debt
High yield debt has a higher credit risk and market risk than investment grade
fixed-income securities. Issuers could have high credit risk for many reasons,
including problems with product development, distribution or competition in
their markets or a high degree of LEVERAGE. High yield debt has higher market
risk for a variety of reasons, including greater sensitivity to interest rate
changes and economic downturns, and the difficulty some issuers may have when
trying to obtain additional financing. Also, high yield debt may be difficult
to value, and if other investors believe that a certain issuer's securities are
overvalued, the holder may be unable to sell those securities for what it
believes is an adequate price.
LEVERAGE in this context is a measure of how much a company has borrowed in
relation to its shareholders' equity.
High Yield, High Risk Foreign Securities
SBAM may invest up to 100% of Strategic Bond's total assets in high yield, high
risk foreign securities. High yield, high risk foreign securities are typically
issued by emerging countries, and will therefore be subject to emerging market
risks in addition to risks of foreign securities described above. Other risks
may include high interest rates and under collateralization.
PORTFOLIO MANAGEMENT
As of December 31, 1998, SBAM managed approximately $29 billion in assets. SBAM
is located at 7 World Trade Center, New York, New York 10048.
SBAM may delegate to its affiliate, Salomon Brothers Asset Management Limited
("SBAM Ltd."), any of its responsibilities with respect to transactions of
Strategic Bond in foreign currencies and debt securities denominated in foreign
currencies. SBAM Ltd. is located at Victoria Plaza, 111 Buckingham Palace Road,
London SW1W OSB, England.
Roger Lavan is primarily responsible for the day-to-day management of the
investment grade portion of Strategic Bond's portfolio. Mr. Lavan joined SBAM
as the Director and Portfolio Manager in 1990.
Peter Wilby is primarily responsible for the day-to-day management of the high
yield and foreign sovereign securities portion of Strategic Bond's portfolio.
Mr. Wilby joined SBAM in 1989 and is a Managing Director of SBAM.
David Scott is primarily responsible for the day-to-day management of currency
transactions and certain non-dollar denominated debt securities investments of
Strategic Bond's portfolio. Mr. Scott joined SBAM in 1994 and is a Managing
Director of SBAM.
During the year ended December 31, 1998, Strategic Bond paid 0.65% of its
average net assets in investment advisory fees and its total operating expenses
were 0.85% of such assets.
B-24
<PAGE>
SALOMON BROTHERS U.S. GOVERNMENT SERIES
PRINCIPAL INVESTMENT STRATEGIES
SBAM generally invests at least 80% of the assets of
the U.S. Government Series in U.S. Government
Securities or in CMOs that relate to such securities.
The U.S. Government Series may also invest up to 20%
of its assets in investment grade fixed-income
securities that are not U.S. Government Securities.
Investment Selection
SBAM determines how to invest assets of the U.S.
Government Series in several steps.
SBAM has an investment committee consisting of senior
portfolio managers which analyzes current interest
rate trends and their impact on potential economic
scenarios. This committee meets every month to revise
its estimate of interest rate and general economic
trends. Based on this analysis, portfolio managers of
the Series allocate assets among various classes of
securities, including U.S. Treasury securities and
securities of agencies or instrumentalities of the
U.S. Government, mortgage-backed assets and investment
grade fixed-income securities. The mortgage-backed
assets in which the Series invests include GNMA and
FNMA mortgage-backed securities and other privately
issued mortgage-backed securities, including CMOs.
SBAM considers many factors when selecting individual fixed-income securities,
including the interest rate of the security, the interval at which that
interest rate adjusts, the date of maturity of the security and the
creditworthiness of the issuer. SBAM also considers the U.S. Government Series'
likely need for liquidity, which can be influenced by redemptions and
opportunities for purchases of other securities, and the DURATION of the
portfolio, which typically fluctuates between 2.5 and 5 years.
DURATION is an estimate of how much a bond fund's share price will fluctuate in
response to a change in interest rates. To see how the price could shift,
multiply the Series' duration by the change in rates. If interest rates rise by
one percentage point, the share price of a fund with an average duration of
five years would decline by about 5%. If rates decrease by a percentage point,
the fund's share price would rise by 5%.
PRINCIPAL INVESTMENT RISKS
Fixed-income Securities
The value of most fixed-income securities generally will rise when interest
rates decline and fall when interest rates rise. Fixed-income securities
involve both CREDIT RISK and MARKET RISK. Some fixed-income securities also
involve the risk that an issuer will repay the principal or repurchase the
security before it matures. If this happens, the holder will no longer receive
any interest on that security. The holder could buy another security, but that
other security might pay a lower interest rate. Also, if the holder paid a
PREMIUM when it bought the security, the holder may receive less from the
issuer than it paid for the security.
CREDIT RISK is the risk that the security's issuer will not pay the interest,
dividends or principal that it has promised to pay.
MARKET RISK is the risk that the value of the security will fall because of
changes in market rates of interest or other factors.
Some securities pay a higher interest rate than the current market rate. An
investor may have to pay more than the security's principal to compensate the
seller for the value of the higher interest rate. This additional payment is
called a PREMIUM.
B-25
<PAGE>
Collateralized Mortgage Obligations (CMOs). One type of security in which the
U.S. Government Series can invest is a CMO. CMOs are fixed-income securities
that are collateralized by a portfolio of mortgages or mortgage securities. The
underlying mortgages or mortgage securities of the CMOs purchased by the U.S.
Government Series are issued or guaranteed by the U.S. Government or one of its
agencies or instrumentalities, but the CMOs themselves may not be so issued or
guaranteed. Therefore, CMOs are often riskier than other U.S. Government
Securities.
PORTFOLIO MANAGEMENT
As of December 31, 1998, SBAM managed approximately $29 billion in assets. SBAM
is located at 7 World Trade Center, New York, New York 10048.
Roger Lavan has been primarily responsible for the day-to-day management of
U.S. Government Bond since 1997. Mr. Lavan joined SBAM as Director and
Portfolio Manager in 1990 and served as a co-portfolio manager of U.S.
Government Bond from its inception until 1997.
During the year ended December 31, 1998, U.S. Government Bond paid 0.55% of its
average net assets in investment advisory fees and its total operating expenses
were 0.70% of such assets.
B-26
<PAGE>
LOOMIS SAYLES BALANCED SERIES
PRINCIPAL INVESTMENT STRATEGIES
Loomis Sayles invests the assets of the Balanced Series in a mix of equity and
fixed-income securities. The Balanced Series invests at least 25% of its assets
in fixed-income securities. Loomis Sayles has the flexibility to invest the
remaining 75% of the assets of the Balanced Series in either equity or fixed-
income securities, depending on its economic and investment outlook, although
under normal market conditions more than 50% of the total assets of the
Balanced Series will be invested in stocks that Loomis Sayles regards as value
stocks.
Investment Selection
Loomis Sayles usually invests approximately 60 to 65% of the total assets of
the Balanced Series in equity securities, although this equity allocation can
shift, depending on Loomis Sayles' longer-term outlook for returns on both
equity and fixed-income securities. When allocating assets, Loomis Sayles
considers, among other things, the valuation level of the general markets, the
valuation level of stocks in the Balanced Series' portfolio, the forecast
earnings growth for those companies, trends in inflation, the level of interest
rates and the expected direction of change in economic growth.
Equity Holdings
The Balanced Series' equity holdings generally consist of value stocks with a
minimum market capitalization of $2 billion. When selecting stocks for the
Balanced Series, Loomis Sayles screens all market sectors for stocks that have
below-average price/earnings ratios on next year's earnings. Loomis Sayles then
uses a proprietary quantitative model to review each stock that it believes
will improve its earnings outlook and ranks each stock within its industry
group based on valuation, earnings momentum and balance sheet strength. Stocks
for which Loomis Sayles analysts have positive opinions and which have high
quantitative rankings become leading purchase candidates for the Balanced
Series, at the discretion of the portfolio managers.
Fixed-income Holdings
The Balanced Series' fixed-income holdings may consist of a variety of
securities including U.S. Treasury and agency issues, mortgage-backed
securities, asset-backed securities, and corporate bonds. The emphasis,
however, is on corporate bonds. The selection process for corporate bonds is a
bottom-up process in which individual securities are selected from Loomis
Sayles' corporate credit universe of approximately 600 issuers. Specific issues
are selected based upon credit fundamentals, yield spread versus U.S. Treasury
issues and maturity considerations. Holdings are limited to a maximum 5%
position in any one credit issuer, no more than 50% in any one sector (i.e.,
utilities, finance, or industrial bonds) and no
B-27
<PAGE>
more than 20% in any one industry. Once a security is identified as a possible
purchase candidate, the portfolio managers consider market conditions, supply
and demand, and other economic factors when making a purchase decision.
PRINCIPAL INVESTMENT RISKS
Equity Securities
In general, equity securities are considered more volatile than fixed-income
securities. The prices of equity securities will rise and fall in response to
events that affect entire financial markets or industries (changes in inflation
or consumer demand, for example) and to events that affect particular companies
(news about the success or failure of a new product, for example).
Growth Stocks and Value Stocks. The prices of growth stocks may be more
sensitive to changes in current or expected earnings than the prices of other
stocks. The price of value stocks may fall, or simply may not increase very
much, if the market does not agree with the subadviser's view of the value of
the stock.
Market Capitalization. The stocks of large capitalization companies do not
always have as much growth potential as smaller and medium capitalization
stocks.
Fixed-income Securities
The value of most fixed-income securities generally will rise when interest
rates decline and fall when interest rates rise. Fixed-income securities
involve both CREDIT RISK and MARKET RISK. Some fixed-income securities also
involve the risk that an issuer will repay the principal or repurchase the
security before it matures. If this happens, the holder will no longer receive
any interest on that security. The holder could buy another security, but that
other security might pay a lower interest rate. Also, if the holder paid a
PREMIUM when it bought the security, the holder may receive less from the
issuer than it paid for the security.
CREDIT RISK is the risk that the security's issuer will not pay the interest,
dividends or principal that it has promised to pay.
MARKET RISK is the risk that the value of the security will fall because of
changes in market rates of interest or other factors.
Some securities pay a higher interest rate than the current market rate. An
investor may have to pay more than the security's principal to compensate the
seller for the value of higher interest rate. This additional payment is a
PREMIUM.
When-Issued Securities
Loomis Sayles may purchase WHEN-ISSUED SECURITIES. If a Series has made a
commitment to purchase a when-issued security, the Series is obligated to
purchase that security on the settlement date, which is usually one week to one
month after the purchase commitment. If the value of the security falls (or
rises) before the settlement date, the Series will be exposed to that change in
value, because the price it must pay for the security is fixed at the time of
its purchase commitment. Favorable or unfavorable news about particular issuers
or markets could cause the value of the security to fall (or increase) more
than Loomis Sayles expected, and the Balanced Series may have to pay more (or
less) than it would otherwise have been willing to pay if it had not made the
purchase commitment. The Balanced Series will have cash or cash equivalents in
a segregated account sufficient to pay for any when-issued security at time of
settlement.
A WHEN-ISSUED SECURITY is a security that a buyer commits to purchase on some
future date, when that security is issued (the settlement date). The price of
the when-issued security that the buyer will pay is fixed at the time of the
purchase commitment.
B-28
<PAGE>
PORTFOLIO MANAGEMENT
Loomis Sayles has been in the investment management business since 1926. As of
December 31, 1998, Loomis Sayles managed approximately $64 billion in assets.
Loomis Sayles' address is One Financial Center, Boston, Massachusetts 02110.
Tricia Mills and Tom Kolefas manage the equity portion of the Series, and Meri
Anne Beck, Barr Segal and John Hyll manage the fixed-income portion of the
Series. Ms. Mills has served as portfolio manager since the Series inception,
and Mr. Kolefas has served as portfolio manager since September 1998. Ms. Beck
and Mr. Hyll have had portfolio management responsibility for the Series'
fixed-income investments since 1994. Mr. Segal has served as portfolio manager
since July 1997, and has been a member of the Series' fixed-income securities
investment team since 1996. Messrs. Hyll and Segal and Mses. Beck and Mills are
Vice Presidents of Loomis Sayles. Mses. Beck and Mills and Mr. Hyll have been
employed by Loomis Sayles for more than five years. Prior to 1996, Mr. Segal
was a Senior Portfolio Manager at TWC Group. Mr. Kolefas joined Loomis Sayles
in 1996. Prior to 1996, Mr. Kolefas was employed as a portfolio manager at
Mackay Shields Financial Corporation.
During the year ended December 31, 1998, the Balanced Series paid 0.70% of its
average net assets in investment advisory fees and its total operating expenses
were 0.82% of such assets.
B-29
<PAGE>
ALGER EQUITY GROWTH SERIES
PRINCIPAL INVESTMENT STRATEGIES
Alger invests Equity Growth's assets primarily in growth stocks. Alger will
ordinarily invest at least 65% of Equity Growth's total assets in equity
securities of issues with market capitalization of $1 billion or greater.
Stock Selection
Alger seeks out and invests primarily in companies that are traded on domestic
stock exchanges or in the domestic over-the-counter market. The companies Alger
chooses for the portfolio of the Series may still be in the development stage,
may be older companies that appear to be entering a new stage of growth
progress due to factors like management changes or development of new
technologies, products or markets, or may be companies providing products or
services with a high unit volume growth rate. Alger focuses on fundamental
characteristics of individual companies and does not allocate assets based on
specific industry sectors.
PRINCIPAL INVESTMENT RISKS
Equity Securities
In general, equity securities are considered more volatile than fixed-income
securities. The prices of equity securities will rise and fall in response to
events that affect entire financial markets or industries (changes in inflation
or consumer demand, for example) and to events that affect particular companies
(news about the success or failure of a new product, for example).
Growth Stocks and Value Stocks. The prices of growth stocks may be more
sensitive to changes in current or expected earnings than the prices of other
stocks. The price of value stocks may fall, or simply may not increase very
much, if the market does not agree with the subadviser's view of the value of
the stock.
Market Capitalization. The stocks of large capitalization companies do not
always have as much growth potential as smaller and medium capitalization
issuers.
PORTFOLIO MANAGEMENT
As of December 31, 1998, Alger managed approximately $10.5 billion in assets
for seven mutual funds and other institutional investors. Alger's address is
One World Trade Center, Suite 9333, New York, New York 10038.
David D. Alger and Ron Tartaro have served as Equity Growth's portfolio
managers since its inception in October 1994. Mr. Alger became Alger's
President in 1995 and served as Executive Vice President and Director of
Research before 1995. Mr. Tartaro has been employed by Alger since 1990 and has
been a Senior Vice President since 1995.
During the year ended December 31, 1998, Equity Growth paid 0.75% of its
average net assets in investment advisory fees and its total operating expenses
were 0.83% of such assets.
B-30
<PAGE>
DAVIS VENTURE VALUE SERIES
PRINCIPAL INVESTMENT STRATEGIES
Davis Selected invests Venture Value's assets primarily in U.S. common stocks
of companies that have a market capitalization of at least $5 billion and that
Davis Selected believes are of high quality and are selling at attractive
prices. Davis Selected generally selects stocks with the intention of holding
them for the long term. Davis Selected believes that managing risk is the key
to delivering superior long-term investment results; therefore, it considers
how much could potentially be lost on an investment before considering how much
might be gained.
Stock selection
Davis Selected has developed a list of ten characteristics that it believes
allow companies to sustain long-term growth and minimize risks to enhance their
potential for superior long-term returns. Although few companies exhibit all
ten characteristics, Davis Selected searches for companies that possess:
. Excellent management.
. Managers who own stock in their own company.
. Strong returns on investments of an issuer's capital.
. A lean expense structure.
. A dominant or growing market share in a growing market.
. A proven record as an acquirer.
. A strong balance sheet.
. Products or services that are not likely to become obsolete.
. Successful international operations.
. Innovation in all aspects of operations.
Davis Selected does not have particular allocation strategies, and emphasizes
individual stock selection rather than industry sectors. Davis Selected relies
heavily on its evaluation of the management of potential investments, and will
ordinarily visit the managers at their place of business to gain insight into
the relative value of different companies.
PRINCIPAL INVESTMENT RISKS
Equity Securities
In general, equity securities are considered more volatile than fixed-income
securities. The prices of equity securities will rise and fall in response to
events that affect entire financial markets or industries (changes in inflation
or consumer demand, for example) and to events that affect particular companies
(news about the success or failure of a new product, for example).
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Growth Stocks and Value Stocks. The prices of growth stocks may be more
sensitive to changes in current or expected earnings than the prices of other
stocks. The price of value stocks may fall, or simply may not increase very
much, if the market does not agree with the subadviser's view of the value of
the stock.
Market Capitalization. The stocks of large capitalization companies do not
always have as much growth potential as smaller and medium capitalization
stocks.
PORTFOLIO MANAGEMENT
As of December 31, 1998, Davis Selected, together with its affiliated
institutional asset management companies, managed approximately $22 billion in
assets. Davis Selected's address is 124 East Mercy Street, Santa Fe, New Mexico
87501. Davis Selected may delegate to Davis Selected Advisers-NY, Inc. any of
its responsibilities related to Venture Value. Davis Selected Advisers-NY, Inc.
is a wholly owned subsidiary of Davis Selected and is located at 609 Fifth
Avenue, New York, New York 10017.
Christopher C. Davis and Kenneth C. Feinberg are co-portfolio managers of
Venture Value. Christopher Davis has been the portfolio manager for Venture
Value and other equity funds managed by Davis Selected since February 1997.
Christopher Davis was co-portfolio manager of Venture Value with Shelby M.C.
Davis from October 1995 until February 1997. Prior to co-managing Venture
Value's portfolio, Christopher Davis worked as Shelby Davis' assistant
portfolio manager and research analyst. Mr. Feinberg has co-managed other
equity funds for Davis Selected since May 1998 and became co-portfolio manager
of Venture Value in April 1999. Mr. Feinberg was a research analyst at Davis
Selected from December 1994 until May 1998, and before that he was an Assistant
Vice President of Investor Relations for Continental Corp.
As Chief Investment Officer, Shelby Davis provides investment themes and
strategies to, and helps select individual stocks for, Venture Value.
During the year ended December 31, 1998, Venture Value paid 0.75% of its
average net assets in investment advisory fees and its total operating expenses
were 0.83% of such assets.
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<PAGE>
GOLDMAN SACHS MIDCAP VALUE SERIES
PRINCIPAL INVESTMENT STRATEGIES
GSAM invests, under normal circumstances, most of Midcap Value's assets in
equity securities that GSAM believes are relatively underpriced and at least
65% of its total assets in equity securities of companies with public stock
market capitalizations within the range of the market capitalization of
companies constituting the Russell Midcap Index. GSAM may invest up to 25% of
Midcap Value's total assets in foreign securities (including up to 15% of its
total assets in securities issued in emerging markets and securities the prices
of which are quoted in foreign currencies). In addition, GSAM may invest up to
35% of Midcap Value's total assets in fixed-income securities, including up to
10% of its total assets in high yield debt. Midcap Value does not focus on
dividend income.
Stock Selection
GSAM evaluates securities using a value approach, employing fundamental
analysis to identify securities that are, in its view, underpriced relative to
a combination of such companies' long-term earning prospects, growth potential,
future cash flows and dividend-paying ability. GSAM may also invest Midcap
Value's assets in securities of companies that have experienced difficulties
and that GSAM believes are available at attractive prices. Factors that GSAM
considers when evaluating a company as a potential investment include:
. High quality of the company's core business.
. The company's competitiveness and market position.
. The degree of regulation in markets in which the company operates.
. A record of success by the company's management team.
. The level of the company's financial leverage.
. A sustainable return on capital invested in the company's business.
PRINCIPAL INVESTMENT RISKS
Equity Securities
In general, equity securities are considered more volatile than fixed-income
securities. The prices of equity securities will rise and fall in response to
events that affect entire financial markets or industries (changes in inflation
or consumer demand, for example) and to events that affect particular companies
(news about the success or failure of a new product, for example).
Growth Stocks and Value Stocks. The prices of growth stocks may be more
sensitive to changes in current or expected earnings than the prices of other
stocks. The price of value stocks may fall, or simply may not increase very
much, if the market does not agree with the subadviser's view of the value of
the stock.
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<PAGE>
Market Capitalization. The stocks of smaller capitalization companies involve
potentially greater risks and higher volatility than those of larger, more
established companies.
Fixed-income Securities
The value of most fixed-income securities generally will rise when interest
rates decline and fall when interest rates rise. Fixed-income securities
involve both CREDIT RISK and MARKET RISK. Some fixed-income securities also
involve the risk that an issuer will repay the principal or repurchase the
security before it matures. If this happens, the holder will no longer receive
any interest on that security. The holder could buy another security, but that
other security might pay a lower interest rate. Also, if the holder paid a
PREMIUM when it bought the security, the holder might receive less from the
issuer than it paid for the security.
CREDIT RISK is the risk that the security's issuer will not pay the interest,
dividends or principal that it has promised to pay.
MARKET RISK is the risk that the value of the security will fall because of
changes in market rates of interest or other factors.
Some securities pay a higher interest rate than the current market rate. An
investor may have to pay more than the security's principal to compensate the
seller for the value of the higher interest rate. This additional payment is
called a PREMIUM.
High yield debt
High yield debt has a higher credit risk and market risk than investment grade
fixed-income securities. Issuers could have high credit risk for many reasons,
including problems with product development or distribution, reductions in
market share or overall sales, competition in their markets or a high degree of
LEVERAGE. High yield debt has higher market risk for a variety of reasons,
including greater sensitivity to interest rate changes and economic downturns,
and the difficulty some issuers may have when trying to obtain additional
financing. Also, high yield debt may be difficult to value, and if other
investors believe that a certain issuer's securities are overvalued, the holder
may be unable to sell those securities for what it believes is an adequate
amount.
LEVERAGE in this context is a measure of how much a company has borrowed in
relation to its shareholders' equity.
Foreign Securities
In addition to the risks associated with securities generally, foreign
securities present additional risks.
Regulation and Access to Information. Changes in foreign countries' laws may
harm the performance and liquidity of the Series' investments in those
countries. Additionally, many countries have less stringent financial reporting
requirements than the United States, so it may be difficult to obtain
information to evaluate the business potential of foreign issuers.
Regional and National Risk. News and events unique to particular regions and
foreign countries will affect non-U.S. markets and issuers. These same events
may not affect the U.S. economy or similar issuers located in the United States
in the same manner. As a result, movements in the prices of foreign securities
may not correlate with the prices of U.S. securities.
Currency Risk. As many investments in foreign countries are denominated in
foreign currencies, changes in the value of those countries' currencies
relative to the U.S. dollar may affect the value of those investments. These
changes may occur in response to
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<PAGE>
events unrelated to the value of the security in the issuer's home country.
GSAM may use certain techniques, such as FORWARD CONTRACTS or FUTURES
CONTRACTS, to manage these risks. However, GSAM cannot assure that these
techniques will be effective.
A FORWARD CONTRACT is an agreement to buy or sell securities or currencies on a
specified future date at a specific price.
A FUTURES CONTRACT is an obligation to buy or sell an asset on a specified
future date, or to pay or receive money based on the value of some securities
index or currency or interest rate on a specified future date. Typically,
futures contracts are traded on an exchange (rather than entered into between
two parties). Futures contracts are one kind of DERIVATIVE.
A DERIVATIVE is a financial instrument whose value is based on (derived from)
changes in the value of something else, such as a currency, an interest rate or
a security.
Forward Contracts and Futures
The Series may attempt to avoid the risk of an unfavorable shift in currency
rates by entering into forward contracts or buying or selling futures contracts
or options on futures contracts. The Series may also purchase futures contracts
(or options on futures contracts) to maintain exposure to the broad equity
markets or, in some cases, to increase overall returns for non-hedging
purposes.
Forward contracts. By entering into a forward contract, Midcap Value is giving
up the potential gains (and avoiding the potential losses) that may occur if
the actual exchange rate on the specified date is different from the exchange
rate established in the contract.
Futures contracts. If the price of a futures contract changes more than the
price of the security or index on which the contract is based, Midcap Value
could make or lose more money than if it had invested directly in the
underlying security or index. This added volatility increases the risk of these
investments. In addition, investors may be unwilling to buying or selling
futures contracts under some market conditions. If this happens, GSAM might not
be able to close out futures transactions without incurring substantial losses.
Emerging Markets
Midcap Value may invest in emerging markets, which are generally located in the
Asia-Pacific Region, Eastern Europe, Latin and South America and Africa. In
addition to the risks of foreign securities described above (which are
potentially greater for emerging markets securities than for other foreign
securities), emerging markets securities may be subject to other risks,
including increased risks of reduced liquidity, high inflation rates, political
uncertainty, high administrative and regulatory costs, repatriation of income
and less advantageous investment terms relative to foreign nationals.
PORTFOLIO MANAGEMENT
As of December 31, 1998, GSAM managed approximately $195 billion in assets.
GSAM is located at One New York Plaza, New York, New York 10004.
Paul D. Farrell is the manager of a team of portfolio managers (the "Midcap
Value Team") that makes the day-to-day investment decisions for Midcap Value.
Mr. Farrell joined GSAM in 1991 and in 1998 became responsible for managing the
Midcap Value Team.
Eileen A. Aptman, Matthew B. McLennan, and Karma Wilson, all of whom are Vice
Presidents of GSAM, constitute the Midcap Value Team, and have served as
portfolio managers of Midcap Value
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<PAGE>
since September 1998. Ms. Aptman joined GSAM in 1993. Mr. McLennan joined GSAM
in 1995. From 1994 to 1995 he worked in the Investment Banking Division of
Goldman Sachs in Australia. Ms. Wilson joined GSAM in 1994. Prior to 1994 she
was an investment analyst with Bankers Trust Australia Ltd.
During the year ended December 31, 1998, Midcap Value paid 0.73% of its average
net assets in investment advisory fees and its total operating expenses were
0.88% of such assets.
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<PAGE>
LOOMIS SAYLES SMALL CAP SERIES
PRINCIPAL INVESTMENT STRATEGIES
Loomis Sayles, under normal market conditions, will invest at least 65% of
Small Cap's total assets in equity securities of U.S. companies with market
capitalizations that fall within the capitalization range of those companies
constituting the Russell 2000 Index. Small Cap invests in both value and growth
stocks.
Stock Selection
Loomis Sayles begins with a universe of approximately 3000 companies that
generally fall within the market capitalization range of the Russell 2000
Index. Small Cap's portfolio managers, with the assistance of Loomis Sayles'
research analysts, conduct fundamental analysis on these companies to identify
companies that Loomis Sayles believes have strong earnings prospects and growth
potential and that appear to the portfolio managers to be the most undervalued
in the current market. Finally, Loomis Sayles builds a diversified portfolio
across many economic sectors so that Small Cap is partially protected against
the inherent volatility of small capitalization companies. Portfolio managers
and research analysts regularly monitor the performance of the stocks held by
Small Cap and the fundamentals of the companies that have issued those stocks.
PRINCIPAL INVESTMENT RISKS
Equity Securities
In general, equity securities are considered more volatile than fixed-income
securities. The prices of equity securities will rise and fall in response to
events that affect entire financial markets or industries (changes in inflation
or consumer demand, for example) and to events that affect particular companies
(news about the success or failure of a new product, for example).
Growth Stocks and Value Stocks. The prices of growth stocks may be more
sensitive to changes in current or expected earnings than the prices of other
stocks. The price of value stocks may fall, or simply may not increase very
much, if the market does not agree with the subadviser's view of the value of
the stock.
Market Capitalization. The stocks of small capitalization companies may
underperform the broad equity markets and may be more volatile than other
stocks.
Real Estate Investment Trusts (REITs). One category of equity securities in
which Small Cap invests are REIT's. REITs are generally categorized as equity
REITs or mortgage REITs, although some REITs have characteristics of both
classifications. Equity REITs invest directly in real property and receive
income from rent collection and sale of those properties. These REITs may
decline in value when the property they own declines in value. Mortgage REITs
invest in real estate mortgages and receive income
B-37
<PAGE>
from interest payments on those mortgages. These REITs are particularly subject
to CREDIT RISK and MARKET RISK, although equity REITs are also sensitive to
market risk.
CREDIT RISK is the risk that the security's issuer will not pay the interest,
dividends or principal that it has promised to pay.
MARKET RISK is the risk that the value of the security will fall because of
changes in market rates of interest or other factors.
PORTFOLIO MANAGEMENT
Loomis Sayles has been in the investment management business since 1926. As of
December 31, 1998, Loomis Sayles managed approximately $64 billion in assets.
Loomis Sayles' address is One Financial Center, Boston, Massachusetts 02110.
Christopher R. Ely and Jeffrey C. Petherick are the lead Portfolio Managers of
Small Cap. The other Portfolio Managers are Mary C. Champagne, Philip C. Fine
and David L. Smith.
Mr. Petherick, a Vice President of Loomis Sayles, has managed (or co-managed)
the Series since its inception and joined Loomis Sayles more than five years
ago. Mr. Ely, a Vice President of Loomis Sayles, has co-managed the Series
since April 1999 and joined Loomis Sayles in 1996. Before joining Loomis
Sayles, Mr. Ely was a Senior Vice President and portfolio manager at Keystone
Investment Management Company, Inc. Ms. Champagne, a Vice President of Loomis
Sayles, has co-managed the Series since 1995 and joined Loomis Sayles more than
five years ago. Mr. Fine, a Vice President of Loomis Sayles, has co-managed the
Series since April 1999 and joined Loomis Sayles in 1996. Before joining Loomis
Sayles, Mr. Fine was a Vice President and portfolio manager at Keystone
Investment Management Company, Inc. Mr. Smith, a Vice President of Loomis
Sayles, has co-managed the Series since April 1999 and joined Loomis Sayles in
1996. Before joining Loomis Sayles, Mr. Smith was a Vice President and
portfolio manager at Keystone Investment Management Company, Inc.
During the year ended December 31, 1998, Small Cap paid 1.00% of its average
net assets in investment advisory fees and its total operating expenses were
1.00% of such assets.
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<PAGE>
WESTPEAK GROWTH AND INCOME SERIES
PRINCIPAL INVESTMENT STRATEGIES
Westpeak is not limited to either the growth or value style of investing.
Westpeak sometimes invests more of Growth and Income's assets in value stocks,
and sometimes invests more heavily in growth stocks. Growth and Income invests
primarily in stocks of large capitalization U.S. companies, such as those
included in the S&P 500 Index, but it may also invest such assets in securities
of smaller companies, such as those included in the Russell 1000 Index.
Westpeak emphasizes individual stock selection rather than targeting particular
industries or sectors which it believes may outperform other sectors.
Stock Selection
Westpeak uses the following procedure to select stocks for Growth and Income:
. Westpeak collects extensive amounts of information on a large universe of
companies.
. Westpeak then develops a profile of characteristics that Westpeak
believes Growth and Income's portfolio should possess to best achieve the
investment objective of the Series. Westpeak considers many factors when
developing this profile, including historic earnings and other
fundamentals, market expectations for corporate earnings and overall
growth prospects. Westpeak regularly revises the profile in response to
changing market conditions.
. Westpeak then ranks each of the companies in a variety of categories
based on the information it has collected about those companies.
. Westpeak then uses fundamental research, quantitative analysis and
judgment to select stocks that, when assembled in a single portfolio,
will most closely replicate the profile Westpeak builds for Growth and
Income.
PRINCIPAL INVESTMENT RISKS
Equity Securities
In general, equity securities are considered more volatile than fixed-income
securities. The prices of equity securities will rise and fall in response to
events that affect entire financial markets or industries (changes in inflation
or consumer demand, for example) and to events that affect particular companies
(news about the success or failure of a new product, for example).
Growth Stocks and Value Stocks. The prices of growth stocks may be more
sensitive to changes in current or expected earnings than the prices of other
stocks. The price of value stocks may fall, or simply may not increase very
much, if the market does not agree with the subadviser's view of the value of
the stock.
Market Capitalization. The stocks of large capitalization companies do not
always have as much growth potential as smaller and medium capitalization
stocks.
PORTFOLIO MANAGEMENT
As of December 31, 1998, Westpeak managed approximately $6.2 billion in assets.
Westpeak manages several other mutual funds as well as equity portfolios for
corporate and public retirement plans, insurance and trust companies, and other
large institutional investors. Westpeak is located at 1011 Walnut Street,
Boulder, Colorado 80302.
Gerald H. Scriver is Westpeak's President, Chief Executive Officer and Chief
Investment Officer, and Philip J. Cooper, CFA, is its Executive Vice President,
Director of Portfolio Management. Mr. Scriver and Mr. Cooper have both served
as the portfolio managers of Growth and Income since its inception in 1993 and
both have been with Westpeak since it was established in 1991.
During the year ended December 31, 1998, Growth and Income paid 0.70% of its
average net assets in investment advisory fees and its total operating expenses
were 0.78% of such assets.
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<PAGE>
MORGAN STANLEY INTERNATIONAL MAGNUM EQUITY SERIES
PRINCIPAL INVESTMENT STRATEGIES
MSAM invests International Equity's assets in a diversified portfolio of stocks
of foreign issuers domiciled in EAFE countries. MSAM may also invest up to 5%
of the Series' total assets in non-EAFE countries. MSAM seeks to achieve
superior long-term returns by creating a diversified portfolio of stocks that
MSAM believes are undervalued. To achieve this goal, MSAM implements a
combination of strategic geographic asset allocation and fundamental, value-
oriented stock selection implemented by regional experts around the globe.
Stock Selection
MSAM evaluates potential investments for International Equity in several steps.
The New York-based portfolio management team decides upon the appropriate
allocation of International Equity's assets among Europe, Japan and developed
Asia (including Australia/New Zealand). This regional allocation is based on a
variety of factors, including relative valuations, earnings expectations,
macroeconomic factors and input from the regional stock selection teams and
from MSAM's Asset Allocation Committee, which is made up of several of MSAM's
most senior investment officers.
Once the allocations to Europe, Asia and Japan have been determined, overseas
investment teams in London (for European stocks), Tokyo (for Japanese stocks)
and Singapore (for Asian stocks) decide which stocks International Equity
should purchase in their respective geographic regions. These three regional
portfolio management teams look for stocks that they believe to be undervalued
by the market. The regional specialists analyze each company's finances,
products and management, typically meeting with a company's management before
its stock is purchased.
PRINCIPAL INVESTMENT RISKS
Equity Securities
In general, equity securities are considered more volatile than fixed-income
securities. The prices of equity securities will rise and fall in response to
events that affect entire financial markets or industries (changes in inflation
or consumer demand, for example) and to events that affect particular companies
(news about the success or failure of a new product, for example).
Growth Stocks and Value Stocks. The prices of growth stocks may be more
sensitive to changes in current or expected earnings than the prices of other
stocks. The price of value stocks may fall, or simply may not increase very
much, if the market does not agree with the subadviser's view of the value of
the stock.
Foreign Securities
In addition to the risks associated with equity securities generally, foreign
securities present additional risks.
Regulation and Access to Information. Changes in foreign countries' laws may
harm the performance and liquidity of the Series' investments in those
countries.
Additionally, many countries have less stringent financial reporting
requirements than the United States, so it may be difficult to obtain
information to evaluate the business potential of foreign issuers.
Regional and National Risk. News and events unique to particular regions and
foreign countries will affect non-U.S. markets and issuers. These same events
may not affect the U.S. economy or similar issuers located in the United States
in the same manner. As a result, movements in the prices of foreign securities
may not correlate with the prices of U.S. securities.
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<PAGE>
Currency Risk. As many investments in foreign countries are denominated in
foreign currencies, changes in the value of those countries' currencies
relative to the U.S. dollar may affect the value of those investments. These
changes may occur in response to events unrelated to the value of the security
in the issuer's home country. MSAM may use certain techniques, such as FORWARD
CONTRACTS or FUTURES CONTRACTS, to manage these risks. However, MSAM cannot
assure that these techniques will be effective.
A FORWARD CONTRACT is an agreement to buy or sell securities or currencies on a
specified future date at a specific price.
A FUTURES CONTRACT is an obligation to buy or sell an asset on a specified
future date, or to pay or receive money based on the value of some securities
index or currency or interest rate on a specified future date. Typically,
futures contracts are traded on an exchange (rather than entered into between
two parties). Futures contracts are one kind of DERIVATIVE.
A DERIVATIVE is a financial instrument whose value is based on (derived from)
changes in the value of something else, such as a currency, an interest rate or
a security.
Forward Contracts and Futures
The Series may attempt to avoid the risk of an unfavorable shift in currency
rates by entering into forward contracts or buying or selling futures contracts
or options on futures contracts. The Series may also purchase futures contracts
(or options on futures contracts) to maintain exposure to the broad equity
markets.
Forward contracts. By entering into a forward contract, International Equity is
giving up the potential gains (and avoiding the potential losses) that may
occur if the actual exchange rate on the specified date is different from the
exchange rate established in the contract.
Futures contracts. If the price of a futures contract changes more than the
price of the security or index on which the contract is based, International
Equity could make or lose more money than if it had invested directly in the
underlying security or index. This added volatility increases the risk of these
investments. In addition, investors may be unwilling to buy or sell futures
contracts under some market conditions. If this happens, International Equity
might not be able to close out futures transactions without incurring
substantial losses.
PORTFOLIO MANAGEMENT
As of December 31, 1998, MSAM, together with its affiliated institutional asset
management companies, managed approximately $163.4 billion in assets. MSAM's
address is 1221 Avenue of the Americas, New York, New York 10020.
Francine J. Bovich, a Managing Director of Morgan Stanley & Co. Incorporated
and MSAM, joined MSAM in 1993. She is primarily responsible for managing
International Equity's portfolio. Previously, Ms. Bovich was a Principal and
Executive Vice President of Westwood Management Corp., a registered investment
adviser. Barton Biggs, Managing Director of MSAM, heads MSAM's Asset Allocation
Committee.
During the year ended December 31, 1998, International Equity paid 0.90% of its
average net assets in investment advisory fees and its total operating expenses
were 1.30% of such assets.
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<PAGE>
SECTION IV--OTHER INFORMATION ABOUT THE FUND
INVESTMENT ADVISORY SERVICES
NEIM was organized in 1994 by New England Financial to serve as the investment
adviser of the Fund. NEIM is located at 501 Boylston Street, Boston,
Massachusetts 02116. Each Series pays NEIM an investment advisory fee. NEIM has
contracted with subadvisers to make the day-to-day investment decisions for
these Series and NEIM pays each subadviser's fees. NEIM also provides a full
range of administrative and accounting services to these Series.
ADVISER/SUBADVISER RELATIONSHIP
The Fund has received an exemptive order from the Securities and Exchange
Commission that permits NEIM to enter into new subadvisory agreements with
either a current or a new subadviser that is not an affiliate of the Fund or
NEIM, without obtaining shareholder approval. The Fund's Board of Trustees must
approve any new subadvisory agreements under this order, and the Fund must
comply with certain other conditions.
The exemptive order also permits the Fund to continue to employ an existing
subadviser without shareholder approval after events that would otherwise cause
an automatic termination of a subadvisory agreement (and the need for a
shareholder vote). This continuation must be approved by the Board of Trustees.
The Fund will notify shareholders of any subadviser changes and any other event
of which notification is required under the order.
PURCHASE AND REDEMPTION OF SHARES
The Separate Accounts may purchase or redeem shares of a Series on each day
that the New York Stock Exchange (the "NYSE") is open for business. The Fund
sells and redeems shares of each Series at the net asset value for that Series
calculated at the close of regular trading on the NYSE, ordinarily 4:00 p.m.
Eastern time each day. These transactions are made on the same day that the
purchase order or redemption request is received by the Fund from the Separate
Accounts. No transactions occur on those days that the NYSE is closed for
trading.
The Fund may suspend the right of redemption for any Series and may postpone
payment for any period when the NYSE is closed for other than weekends or
holidays. The Fund may also postpone payment when trading on the NYSE is
restricted or during an emergency in which disposing of securities or fairly
determining the value of net assets is impracticable. The Fund may also suspend
redemption rights when the SEC permits such suspension for the protection of
investors.
SHARE VALUATION AND PRICING
Net Asset Value
Each Series determines the net asset value of its shares as of the close of
regular trading on each day that the NYSE is open. The net asset value per
share for each Series is calculated by dividing the Series' total net assets by
its number of outstanding shares.
Securities Valuation
Any fixed-income securities with remaining maturities of 60 days or less held
by any Series are valued at amortized cost. Other portfolio securities of each
Series normally are valued at market value. On the rare occasions when no
current market value is available for a portfolio security, the Fund's Board of
Trustees is responsible for making a good faith determination of fair value,
although the Board has delegated responsibility for day-to-day fair value
calculations to the subadvisers of the Series.
Because foreign exchanges are not always closed at the same time that the NYSE
is closed, the price of securities primarily traded on foreign exchanges may
increase or decrease when the NYSE is closed. Therefore, the net asset value of
Series that hold these securities may change on days that Separate Accounts
will not be able to purchase or redeem Fund shares.
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<PAGE>
YEAR 2000
The Fund depends on the smooth functioning of computer systems for both its
internal operations and overall investment performance. Many computer systems
in use today cannot distinguish between the year 1900 and the year 2000. If
computer systems fail to process information properly relating to the year
2000, the Fund's operations and services could be harmed, and the securities in
which the Fund invests may not perform as well as they otherwise might.
NEIM, the subadvisers and certain other service providers to the Series have
reported that each expects to modify its systems, as necessary, prior to
January 1, 2000 to address the so-called "year 2000 problem." However, there
can be no assurance that the problems will be corrected, and Fund operations
and services provided to shareholders may be affected. Although the subadvisers
to certain of the Series may consider the year 2000 problem when evaluating
investment opportunities, there can be no assurance that improperly functioning
computers will not affect specific issuers or broad markets.
DIVIDENDS AND CAPITAL GAIN DISTRIBUTIONS
Other Series
Currently, each Series annually pays as dividends substantially all net
investment income (including any short-term capital gains). These Series also
annually distribute all net realized capital gains, if any, after offsetting
any capital loss carryovers. Each Series may pay dividends from net investment
income more or less often if the Fund's Board of Trustees deems it appropriate
and if such change would not cause the Series to fail to qualify as regulated
investment company under the Internal Revenue Code.
Federal income tax law requires each Series to distribute prior to calendar
year-end virtually all of its ordinary income for such year. Also, each Series
must distribute virtually all of its capital gain net income realized but not
previously distributed in the one-year period ending October 31 (or December
31, if the Series so elects) of such year.
Dividends and distributions of each Series are automatically reinvested in
additional shares of that Series.
TAXES
Each Series is a separate entity for federal income tax purposes and intends to
qualify as a regulated investment company under the Internal Revenue Code. So
long as a Series distributes all of its net investment income and net capital
gains to its shareholders, the Series itself does not pay any federal income
tax. Although each Series intends to operate so that it will have no federal
income tax liability, if any such liability is incurred, the investment
performance of such Series will be adversely affected. In addition, Series
investing in foreign securities and currencies may be subject to foreign taxes.
These taxes could reduce the investment performance of such Series.
In order for contract holders to receive the favorable tax treatment that is
generally available to holders of variable annuity and variable life contracts,
the separate accounts underlying such contracts, as well as the Series in which
such accounts invest, must meet certain diversification requirements. Each
Series intends to comply with these requirements. If a Series does not meet
such requirements, income allocable to the variable annuity and variable life
contracts, including accumulated investment earnings, would be taxable
immediately to the holders of such contracts. For a description of the tax
consequences for variable annuity and variable life contract owners, see the
prospectus for those contracts.
B-43
<PAGE>
FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand each Series'
financial performance for the past 5 years (or the life of the Series, for
these Series that have not been in existence for 5 years). Certain information
reflects financial results for a single share of the relevant Series. The total
returns in the table represent the rate that an investor would have earned (or
lost) on an investment in the Series (assuming reinvestment of all dividends
and distributions). The information for the years ended December 31, 1997 and
1998 has been audited by Deloitte & Touche, LLP, whose report for 1998, along
with the Fund's financial statements, are included in the annual report which
is available upon request. Prior to 1997, PriceWaterhouseCoopers L.L.P. acted
as the Fund's independent accountants and provided reports which accompanied
the financial statements for those periods.
B-44
<PAGE>
SALOMON BROTHERS STRATEGIC BOND OPPORTUNITIES SERIES
<TABLE>
<CAPTION>
OCTOBER 31, 1994(A) YEAR ENDED DECEMBER 31,
TO ---------------------------------
DECEMBER 31, 1994 1995 1996 1997 1998
------------------- ------ ------- ------- -------
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period.... $10.00 $ 9.74 $ 10.85 $ 11.62 $ 12.01
------ ------ ------- ------- -------
Income from Investment
Operations
Net Investment Income... 0.12 0.58 0.51 0.75 0.80
Net Gains or (Losses) on
Investments (both
realized and
unrealized)............ (0.26) 1.30 1.05 0.54 (0.56)
------ ------ ------- ------- -------
Total from
Investment
Operations......... (0.14) 1.88 1.56 1.29 0.24
------ ------ ------- ------- -------
Less Distributions
Distributions from Net
Investment Income...... (0.12) (0.55) (0.60) (0.76) (0.79)
Distributions from Net
Realized Capital Gains. 0.00 (0.22) (0.19) (0.14) (0.02)
Distributions in excess
of Net Realized Capital
Gains.................. 0.00 0.00 0.00 0.00 (0.01)
------ ------ ------- ------- -------
Total Distributions. (0.12) (0.77) (0.79) (0.90) (0.82)
------ ------ ------- ------- -------
Net Asset Value, End of
Period................. $ 9.74 $10.85 $ 11.62 $ 12.01 $ 11.43
====== ====== ======= ======= =======
Total Return (%)........ (1.4)(b) 19.4 14.4 11.1 2.0
Ratio of Operating
Expenses to Average Net
Assets (%)(d).......... 0.85 (c) 0.85 0.85 0.85 0.85
Ratio of Net Investment
Income to Average Net
Assets (%)............. 7.05 (c) 8.39 7.79 7.32 7.20
Portfolio Turnover Rate
(%).................... 403 (c) 202 176 258 283
Net Assets, End of
Period (000)........... $3,450 $9,484 $35,808 $71,202 $95,450
The Ratio of Operating
Expenses to Average Net
Assets without giving
effect to the voluntary
expense limitation
would have been (%).... 2.01 (c) 2.44 1.19 0.87 --
</TABLE>
- --------
(a) Commencement of operations.
(b) Not computed on an annualized basis.
(c) Computed on an annualized basis.
(d) During the periods presented, NEIM voluntarily agreed to reduce its fees or
to bear the operating expenses (does not include brokerage costs, interest,
taxes, or extraordinary expenses) of the Series in excess of an annual
expense limit of 0.85% of the Series' average daily net assets, subject to
the obligation of the Series to repay NEIM such expenses in future years,
if any, when the Series' total operating expenses fall below this stated
expense limit; such deferred expenses may be charged to the Series in a
subsequent year to the extent the charge does not cause the total operating
expenses in such subsequent year to exceed the 0.85% expense limit;
provided, however, that the Series is not obligated to repay any expense
paid by NEIM more than two years after the end of the fiscal year in which
such expense was incurred.
B-45
<PAGE>
SALOMON BROTHERS U.S. GOVERNMENT SERIES
<TABLE>
<CAPTION>
OCTOBER 31, 1994(A) YEAR ENDED DECEMBER 31,
TO ---------------------------------
DECEMBER 31, 1994 1995 1996 1997 1998
------------------- ------ ------- ------- -------
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period.... $10.00 $ 9.96 $ 11.04 $ 10.83 $ 11.14
------ ------ ------- ------- -------
Income from Investment
Operations
Net Investment Income... 0.10 0.33 0.58 0.53 0.47
Net Gains or (Losses) on
Investments (both
realized and
unrealized)............ (0.04) 1.16 (0.21) 0.40 0.37
------ ------ ------- ------- -------
Total from
Investment
Operations......... 0.06 1.49 0.37 0.93 0.84
------ ------ ------- ------- -------
Less Distributions
Distributions from Net
Investment Income...... (0.10) (0.33) (0.56) (0.53) (0.45)
Distributions from Net
Realized Capital Gains. 0.00 (0.08) (0.02) (0.05) (0.06)
Distributions in Excess
of Net Realized Capital
Gains.................. 0.00 0.00 0.00 (0.04) 0.00
------ ------ ------- ------- -------
Total Distributions. (0.10) (0.41) (0.58) (0.62) (0.51)
------ ------ ------- ------- -------
Net Asset Value, End of
Period................. $ 9.96 $11.04 $ 10.83 $ 11.14 $ 11.47
====== ====== ======= ======= =======
Total Return (%)........ 0.6 (b) 15.0 3.3 8.6 7.5
Ratio of Operating
Expenses to Average Net
Assets (%)(d).......... 0.70 (c) 0.70 0.70 0.70 0.70
Ratio of Net Investment
Income to Average Net
Assets (%)............. 5.70 (c) 5.62 6.13 6.42 5.70
Portfolio Turnover Rate
(%).................... 1,409 (c) 415 388 572 496
Net Assets, End of
Period (000)........... $2,012 $7,542 $13,211 $22,143 $45,807
The Ratio of Operating
Expenses to Average Net
Assets without giving
effect to the voluntary
expense limitation
would have been (%).... 2.54 (c) 2.90 1.37 0.98 0.77
</TABLE>
- --------
(a) Commencement of operations.
(b) Not computed on an annualized basis.
(c) Computed on an annualized basis.
(d) During the periods presented, NEIM voluntarily agreed to reduce its fees or
to bear the operating expenses (does not include brokerage costs, interest,
taxes, or extraordinary expenses) of the Series in excess of an annual
expense limit of 0.70% of the Series' average daily net assets, subject to
the obligation of the Series to repay NEIM such expenses in future years,
if any, when the Series' total operating expenses fall below this stated
expense limit; such deferred expenses may be charged to the Series in a
subsequent year to the extent the charge does not cause the total operating
expenses in such subsequent year to exceed the 0.70% expense limit;
provided, however, that the Series is not obligated to repay any expense
paid by NEIM more than two years after the end of the fiscal year in which
such expense was incurred.
B-46
<PAGE>
LOOMIS SAYLES BALANCED SERIES
<TABLE>
<CAPTION>
OCTOBER 31, 1994(A) YEAR ENDED DECEMBER 31,
TO ------------------------------------
DECEMBER 31, 1994 1995 1996 1997 1998
------------------- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period.... $10.00 $ 9.94 $ 11.95 $ 13.55 $ 14.86
------ ------- ------- -------- --------
Income from Investment
Operations
Net Investment Income... 0.05 0.26 0.27 0.28 0.38
Net Gains or (Losses) on
Investments (both
realized and
unrealized)............ (0.06) 2.20 1.73 1.90 0.97
------ ------- ------- -------- --------
Total from
Investment
Operations......... (0.01) 2.46 2.00 2.18 1.35
------ ------- ------- -------- --------
Less Distributions
Distributions from Net
Investment Income...... (0.05) (0.26) (0.27) (0.27) (0.38)
Distributions in Excess
of Net Realized Capital
Gains.................. 0.00 (0.19) (0.13) (0.60) (0.32)
------ ------- ------- -------- --------
Total Distributions. (0.05) (0.45) (0.40) (0.87) (0.70)
------ ------- ------- -------- --------
Net Asset Value, End of
Period................. $ 9.94 $ 11.95 $ 13.55 $ 14.86 $ 15.51
====== ======= ======= ======== ========
Total Return (%)........ (0.1)(b) 24.8 16.9 16.2 9.1
Ratio of Operating
Expenses to Average Net
Assets (%)(d).......... 0.85 (c) 0.85 0.85 0.85 0.82
Ratio of Net Investment
Income to Average Net
Assets (%)............. 4.16 (c) 4.03 3.08 2.79 2.72
Portfolio Turnover Rate
(%).................... 0 (c) 72 59 60 72
Net Assets, End of
Period (000)........... $2,722 $18,823 $58,525 $137,443 $190,577
The Ratio of Operating
Expenses to Average Net
Assets without giving
effect to the voluntary
expense limitation
would have been (%).... 3.73 (c) 1.85 0.99 0.86 0.82
</TABLE>
- --------
(a) Commencement of operations.
(b) Not computed on an annualized basis.
(c) Computed on an annualized basis.
(d) During the periods presented, NEIM voluntarily agreed to reduce its fees or
to bear the operating expenses (does not include brokerage costs, interest,
taxes, or extraordinary expenses) of the Series in excess of an annual
expense limit of 0.85% of the Series' average daily net assets, subject to
the obligation of the Series to repay NEIM such expenses in future years,
if any, when the Series' total operating expenses fall below this stated
expense limit; such deferred expenses may be charged to the Series in a
subsequent year to the extent the charge does not cause the total operating
expenses in such subsequent year to exceed the 0.85% expense limit;
provided, however, that the Series is not obligated to repay any expense
paid by NEIM more than two years after the end of the fiscal year in which
such expense was incurred.
B-47
<PAGE>
ALGER EQUITY GROWTH SERIES
<TABLE>
<CAPTION>
OCTOBER 31, 1994(A) YEAR ENDED DECEMBER 31,
TO -------------------------------------
DECEMBER 31, 1994 1995 1996 1997 1998
------------------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period.... $10.00 $ 9.56 $ 13.80 $ 15.58 $ 17.62
------ ------- -------- -------- --------
Income from Investment
Operations
Net Investment Income... 0.02 0.01 0.04 0.02 0.04
Net Gains or (Losses) on
Investments (both
realized and
unrealized)............ (0.44) 4.65 1.78 3.92 8.37
------ ------- -------- -------- --------
Total from
Investment
Operations......... (0.42) 4.66 1.82 3.94 8.41
------ ------- -------- -------- --------
Less Distributions
Distributions from Net
Investment Income...... (0.02) (0.01) (0.04) (0.02) (0.04)
Distributions from Net
Realized Capital Gains. 0.00 (0.41) 0.00 (1.88) (0.88)
------ ------- -------- -------- --------
Total Distributions. (0.02) (0.42) (0.04) (1.90) (0.92)
------ ------- -------- -------- --------
Net Asset Value, End of
Period................. $ 9.56 $ 13.80 $ 15.58 $ 17.62 $ 25.11
====== ======= ======== ======== ========
Total Return (%)........ (4.2)(b) 48.8 13.2 25.6 47.8
Ratio of Operating
Expenses to Average Net
Assets (%)(d).......... 0.85 (c) 0.85 0.90 0.87 0.83
Ratio of Net Investment
Income to Average Net
Assets (%)............. 1.07 (c) 0.14 0.24 0.12 0.19
Portfolio Turnover Rate
(%).................... 32 (c) 107 78 137 119
Net Assets, End of
Period (000)........... $1,917 $46,386 $120,456 $205,318 $410,726
The Ratio of Operating
Expenses to Average Net
Assets without giving
effect to the voluntary
expense limitation
would have been (%).... 2.74 (c) 2.45 0.90 -- --
</TABLE>
- --------
(a) Commencement of operations.
(b) Not computed on an annualized basis.
(c) Computed on an annualized basis.
(d) During the periods presented, NEIM voluntarily agreed to reduce its fees or
to bear the operating expenses (does not include brokerage costs, interest,
taxes, or extraordinary expenses) of the Series in excess of an annual
expense limit of 0.85% (through December 31, 1995) of the Series' average
daily net assets, subject to the obligation of the Series to repay NEIM
such expenses in future years, if any, when the Series' operating expenses
fall below this stated expense limit; such deferred expenses may be charged
to the Series in a subsequent year to the extent the charge does not cause
the total operating expenses in such subsequent year to exceed the 0.85%
expense limit; provided, however, that the Series is not obligated to repay
any expense paid by NEIM more than two years after the end of the fiscal
year in which such expense was incurred. Beginning January 1, 1996, the
annual operating expense limit was increased to 0.90% of the Series'
average daily net assets.
B-48
<PAGE>
DAVIS VENTURE VALUE SERIES
<TABLE>
<CAPTION>
OCTOBER 31, 1994(A) YEAR ENDED DECEMBER 31,
TO -------------------------------------
DECEMBER 31, 1994 1995 1996 1997 1998
------------------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period.... $10.00 $ 9.62 $ 13.10 $ 16.09 $ 20.80
------ ------- -------- -------- --------
Income from Investment
Operations
Net Investment Income... 0.03 0.10 0.13 0.18 0.16
Net Gains or (Losses) on
Investments (both
realized and
unrealized)............ (0.38) 3.68 3.26 5.20 2.84
------ ------- -------- -------- --------
Total from
Investment
Operations......... (0.35) 3.78 3.39 5.38 3.00
------ ------- -------- -------- --------
Less Distributions
Distributions from Net
Investment Income...... (0.03) (0.10) (0.13) (0.14) (0.16)
Distributions from Net
Realized Capital Gains. 0.00 (0.20) (0.27) (0.53) (0.49)
------ ------- -------- -------- --------
Total Distributions. (0.03) (0.30) (0.40) (0.67) (0.65)
------ ------- -------- -------- --------
Net Asset Value, End of
Period................. $ 9.62 $ 13.10 $ 16.09 $ 20.80 $ 23.15
====== ======= ======== ======== ========
Total Return (%)........ (3.5)(b) 39.3 25.8 33.5 14.4
Ratio of Operating
Expenses to Average Net
Assets (%)(d).......... 0.90 (c) 0.90 0.90 0.90 0.83
Ratio of Net Investment
Income to Average Net
Assets (%)............. 2.54 (c) 1.39 1.25 0.94 0.82
Portfolio Turnover Rate
(%).................... 1 (c) 20 18 17 25
Net Assets, End of
Period (000)........... $3,371 $35,045 $108,189 $280,448 $440,351
The Ratio of Operating
Expenses to Average Net
Assets without giving
effect to the voluntary
expense limitation
would have been (%).... 3.97 (c) 1.51 0.96 0.90 --
</TABLE>
- --------
(a) Commencement of operations.
(b) Not computed on an annualized basis.
(c) Computed on an annualized basis.
(d) During the periods presented, NEIM voluntarily agreed to reduce its fees or
to bear the operating expenses (does not include brokerage costs, interest,
taxes, or other extraordinary expenses) of the Series in excess of an
annual expense limit of 0.90% of the Series' average daily net assets,
subject to the obligation of the Series to repay NEIM such expenses in
future years, if any, when the Series' total operating expenses fall below
this stated expense limit; such deferred expenses may be charged to the
Series in a subsequent year to the extent the charge does not cause the
total operating expenses in such subsequent year to exceed the 0.90%
expense limit; provided, however, that the Series is not obligated to repay
any expense paid by NEIM more than two years after the end of the fiscal
year in which such expense was incurred.
B-49
<PAGE>
GOLDMAN SACHS MIDCAP VALUE SERIES(A)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------
1994 1995 1996 1997 1998
------- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Period......................... $113.67 $112.77 $142.44 $ 157.88 $ 170.59
------- ------- ------- -------- --------
Income from Investment
Operations
Net Investment Income........... 0.59 0.42 0.11 0.00 1.09
Net Gains or (Losses) on
Investments (both realized and
unrealized).................... (0.89) 33.80 24.88 27.12 (11.41)
------- ------- ------- -------- --------
Total from Investment
Operations................. (0.30) 34.22 24.99 27.12 (10.32)
------- ------- ------- -------- --------
Less Distributions
Distributions from Net
Investment Income.............. (0.60) (0.40) (0.13) 0.00 (1.09)
Distributions from Net Realized
Capital Gains.................. 0.00 (4.15) (9.42) (14.41) (36.08)
Distributions in excess of Net
Realized Capital Gains......... 0.00 0.00 0.00 0.00 (0.25)
------- ------- ------- -------- --------
Total Distributions......... (0.60) (4.55) (9.55) (14.41) (37.42)
------- ------- ------- -------- --------
Net Asset Value, End of Period.. $112.77 $142.44 $157.88 $ 170.59 $ 122.85
======= ======= ======= ======== ========
Total Return (%)................ (0.3) 30.4 17.6 17.4 (5.5)
Ratio of Operating Expenses to
Average Net Assets (%)(b)...... 0.84 0.85 0.85 0.85 0.88
Ratio of Net Investment Income
to Average Net Assets (%)...... 0.67 0.37 0.08 (0.16) 0.66
Portfolio Turnover Rate (%)..... 67 58 65 49 171
Net Assets, End of Period (000). $25,622 $48,832 $82,667 $114,617 $112,997
The Ratio of Operating Expenses
to Average Net Assets without
giving effect to the voluntary
expense limitation would have
been (%)....................... 0.84 1.06 0.92 0.86 0.90
</TABLE>
- --------
(a) On May 1, 1998, GSAM succeeded Loomis, Sayles & Company, L.P. as subadviser
to the Series.
(b) Prior to May 1, 1998, NEIM voluntarily agreed to bear the operating
expenses (other than the advisory fees; "operating expenses" does not
include brokerage costs, interest, taxes or extraordinary expenses) of the
Series in excess on an annual basis of 0.15% of the Series' average daily
net assets. Commencing May 1, 1998, NEIM voluntarily agreed to reduce its
fees or to bear operating expenses of the Series in excess of an annual
expense limit of 0.90% of the Series' average daily net assets, subject to
the obligation of the Series to repay NEIM such expenses in future years,
if any, when the Series' total operating expenses fall below this stated
expense limit; such deferred expenses may be charged to the Series in a
subsequent year to the extent that the charge does not cause the total
operating expenses in such subsequent year to exceed the 0.90% expense
limit; provided, however, that the Series is not obligated to repay any
expense paid by NEIM more than two years after the end of the fiscal year
in which such expense was incurred.
B-50
<PAGE>
LOOMIS SAYLES SMALL CAP SERIES
<TABLE>
<CAPTION>
MAY 2, 1994(A) YEAR ENDED DECEMBER 31,
TO ------------------------------------
DECEMBER 31, 1994 1995 1996 1997 1998
----------------- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period.... $100.00 $ 96.61 $118.80 $ 144.29 $ 158.92
------- ------- ------- -------- --------
Income from Investment
Operations
Net Investment Income... 0.14 0.85 1.05 1.22 1.24
Net Gains or (Losses) on
Investments (both
realized and
unrealized)............ (3.38) 26.93 35.03 34.11 (4.01)
------- ------- ------- -------- --------
Total from
Investment
Operations......... (3.24) 27.78 36.08 35.33 (2.77)
------- ------- ------- -------- --------
Less Distributions
Distributions from Net
Investment Income...... (0.15) (0.78) (1.03) (1.21) (1.24)
Distributions from Net
Realized Capital Gains. 0.00 (4.81) (9.56) (19.49) (1.32)
Distributions in excess
of Net Realized Capital
Gains.................. 0.00 0.00 0.00 0.00 (0.07)
------- ------- ------- -------- --------
Total Distributions. (0.15) (5.59) (10.59) (20.70) (2.63)
------- ------- ------- -------- --------
Net Asset Value, End of
Period................. $ 96.61 $118.80 $144.29 $ 158.92 $ 153.52
======= ======= ======= ======== ========
Total Return (%)........ (3.2)(b) 28.9 30.7 24.9 (1.7)
Ratio of Operating
Expenses to Average Net
Assets (%)(d).......... 1.00 (c) 1.00 1.00 1.00 1.00
Ratio of Net Investment
Income to Average Net
Assets (%)............. 0.32 (c) 1.26 1.15 0.97 0.88
Portfolio Turnover Rate
(%).................... 80 (c) 98 62 87 111
Net Assets, End of
Period (000)........... $ 3,105 $27,741 $89,194 $200,105 $238,589
The Ratio of Operating
Expenses to Average Net
Assets without giving
effect to the voluntary
expense limitation
would have been (%).... 2.31 (c) 1.91 1.29 1.14 1.10
</TABLE>
- --------
(a) Commencement of operations.
(b) Not computed on an annualized basis.
(c) Computed on an annualized basis.
(d) During the periods presented, NEIM voluntarily agreed to reduce its fees or
to bear operating expenses of the Series in order to limit the Series'
total operating expenses (does not include brokerage costs, interest,
taxes, or extraordinary expenses) to an annual rate of 1.00% of the Series'
average daily net assets.
B-51
<PAGE>
WESTPEAK GROWTH AND INCOME SERIES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------
1994 1995 1996 1997 1998
------- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Period......................... $112.32 $109.03 $141.31 $ 151.77 $ 179.88
------- ------- ------- -------- --------
Income from Investment
Operations
Net Investment Income........... 1.90 1.77 1.78 1.37 1.30
Net Gains or (Losses) on
Investments (both realized and
unrealized).................... (3.25) 37.91 23.69 48.76 42.44
------- ------- ------- -------- --------
Total from Investment
Operations................. (1.35) 39.68 25.47 50.13 43.74
------- ------- ------- -------- --------
Less Distributions
Distributions from Net
Investment Income.............. (1.92) (1.71) (1.82) (1.35) (1.31)
Distributions from Net Realized
Capital Gains.................. 0.00 (5.69) (13.19) (20.57) (14.07)
Distributions from Paid-In
Capital........................ (0.02) 0.00 0.00 0.00 0.00
------- ------- ------- -------- --------
Total Distributions......... (1.94) (7.40) (15.01) (21.92) (15.38)
------- ------- ------- -------- --------
Net Asset Value, End of Period.. $109.03 $141.31 $151.77 $ 179.98 $ 208.34
======= ======= ======= ======== ========
Total Return (%)................ (1.2) 36.5 18.1 33.5 24.4
Ratio of Operating Expenses to
Average Net Assets (%)(a)...... 0.85 0.85 0.85 0.82 0.78
Ratio of Net Investment Income
to Average Net Assets (%)...... 2.30 1.63 1.40 0.91 0.80
Portfolio Turnover Rate (%)..... 133 92 104 93 100
Net Assets, End of Period (000). $22,934 $48,129 $82,330 $152,738 $281,557
The Ratio of Operating Expenses
to Average Net Assets without
giving effect to the voluntary
expense limitation would have
been (%)....................... 0.86 1.06 0.91 0.82 0.78
</TABLE>
- --------
(a) During the periods presented, NEIM voluntarily agreed to bear the operating
expenses of the Series (other than the advisory fees; "operating expenses"
does not include brokerage costs, interest, taxes or extraordinary
expenses) in excess of 0.15% of the Series' average daily net assets.
B-52
<PAGE>
MORGAN STANLEY INTERNATIONAL EQUITY MAGNUM SERIES(A)
<TABLE>
<CAPTION>
OCTOBER 31, 1994(B) YEAR ENDED DECEMBER 31,
TO ----------------------------------
DECEMBER 31, 1994 1995 1996 1997 1998
------------------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period.... $10.00 $ 10.23 $ 10.73 $ 11.29 $ 10.86
------ ------- ------- ------- -------
Income from Investment
Operations
Net Investment Income... 0.03 0.09 0.06 0.08 0.14
Net Gains or (Losses) on
Investments (both
realized and
unrealized)............ 0.23 0.53 0.68 (0.23) 0.66
------ ------- ------- ------- -------
Total from
Investment
Operations......... 0.26 0.62 0.74 (0.15) 0.80
------ ------- ------- ------- -------
Less Distributions
Distributions from Net
Investment Income...... (0.02) (0.09) (0.02) (0.09) (0.12)
Distributions in Excess
of Net Investment
Income................. 0.00 (0.03) 0.00 0.00 (0.03)
Distributions from Net
Realized Capital Gains. 0.00 0.00 (0.16) (0.08) (0.11)
Distributions in Excess
of Net Realized Capital
Gains.................. 0.00 0.00 0.00 (0.11) 0.00
Distributions From Paid-
In Capital............. (0.01) 0.00 0.00 0.00 0.00
------ ------- ------- ------- -------
Total Distributions. (0.03) (0.12) (0.18) (0.28) (0.26)
------ ------- ------- ------- -------
Net Asset Value, End of
the Period............. $10.23 $ 10.73 $ 11.29 $ 10.86 $ 11.40
====== ======= ======= ======= =======
Total Return (%)........ 2.6 (c) 6.0 6.9 (1.3) 7.3
Ratio of Operating
Expenses to Average Net
Assets (%)(e).......... 1.30 (d) 1.30 1.30 1.30 1.30
Ratio of Net Investment
Income to Average Net
Assets (%)............. 2.56 (d) 1.29 0.67 0.96 1.07
Portfolio Turnover Rate
(%).................... 4 (d) 89 64 115 40
Net Assets, End of
Period (000)........... $2,989 $16,268 $39,392 $53,035 $68,169
The Ratio of Operating
Expenses to Average Net
Assets without giving
effect to the voluntary
expense limitation
would have been (%).... 5.38 (d) 3.12 1.66 1.59 1.40
</TABLE>
- --------
(a) On May 1, 1997, MSAM succeeded Draycott Partners, Ltd. as investment
subadviser of the Series.
(b) Commencement of operations.
(c) Not computed on an annualized basis.
(d) Computed on an annualized basis.
(e) During the periods presented, NEIM voluntarily agreed to reduce its fees or
to bear the operating expenses (does not include brokerage costs, interest,
taxes or extraordinary expenses) of the Series in excess of an annual
expense limit of 1.30% of the Series' average daily net assets, subject to
the obligation of the Series to repay NEIM such expenses in future years,
if any, when the Series' total operating expenses fall below this stated
expense limit; such deferred expenses may be charged to the Series in a
subsequent year to the extent the charge does not cause the Series' total
operating expenses in such subsequent year to exceed the 1.30% expense
limit; provided, however, that the Series is not obligated to repay any
expense paid by NEIM more than two years after the end of the fiscal year
in which such expense was incurred.
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<PAGE>
NEW ENGLAND ZENITH FUND
501 BOYLSTON STREET, BOSTON, MASSACHUSETTS 02116
(800) 356-5015
STATEMENT OF ADDITIONAL INFORMATION (SAI)
The Fund's SAI contains more detailed information about the Fund. The SAI is
incorporated by reference into this prospectus, which means that it is a part
of this prospectus for legal purposes.
SHAREHOLDER REPORTS
The Fund's annual and semi-annual reports to shareholders contain additional
information about each Series. The Fund's annual report discusses the market
conditions and investment strategies that significantly affected each Series'
performance during its last fiscal year. The financial statements in the
Fund's most recent annual report to shareholders are incorporated by reference
into this prospectus.
TO OBTAIN COPIES OF THESE MATERIALS:
You may obtain free copies of the SAI or shareholder reports, request other
information about a Series, or make shareholder inquiries by calling toll free
(800) 356-5015 or by writing to New England Securities Corporation, 399
Boylston Street, Boston, Massachusetts 02116.
You may review and copy information about the Fund, including the SAI and
shareholder reports, at the Securities and Exchange Commission's Public
Reference Room in Washington, D.C. You may call (800)-SEC-0330 for information
about the operation of the Public Reference Room. You may also access reports
and other information about the Fund on the Internet at http://www.sec.gov.
You may get copies of this information, upon payment of a duplication fee, by
writing the Public Reference Station of the Securities and Exchange
Commission, Washington, D.C. 20549-6009.
New England Zenith Fund's Investment Company Act file number is 811-3728.
B-54
