-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, WBUGYLxk0YBUGJHCh/4Xj39NpesbpRYK2gysCpIWAsQ/AaO9PXk9641nJ0KbRSD2 tJQEkbLHl45zmDItxkr9XA== 0000950109-95-001671.txt : 19950508 0000950109-95-001671.hdr.sgml : 19950508 ACCESSION NUMBER: 0000950109-95-001671 CONFORMED SUBMISSION TYPE: 497 PUBLIC DOCUMENT COUNT: 1 FILED AS OF DATE: 19950505 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: NEW ENGLAND ZENITH FUND CENTRAL INDEX KEY: 0000719211 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 046485680 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 497 SEC ACT: 1933 Act SEC FILE NUMBER: 002-83538 FILM NUMBER: 95534875 BUSINESS ADDRESS: STREET 1: 399 BOYLSTON ST STREET 2: 4TH FLOOR CITY: BOSTON STATE: MA ZIP: 02116 BUSINESS PHONE: 8002831155 MAIL ADDRESS: STREET 1: 399 BOYLSTON STREET STREET 2: 4TH FLOOR CITY: BOSTON STATE: MA ZIP: 02116 FORMER COMPANY: FORMER CONFORMED NAME: NEW ENGLAND ZENITH FUND INC DATE OF NAME CHANGE: 19870506 FORMER COMPANY: FORMER CONFORMED NAME: ZENITH FUND INC DATE OF NAME CHANGE: 19861204 FORMER COMPANY: FORMER CONFORMED NAME: NEL SERIES FUND INC DATE OF NAME CHANGE: 19851223 497 1 PRO/PROSUPP NEW ENGLAND ZENITH FUND SUPPLEMENT DATED MAY 1, 1995 TO PROSPECTUS DATED MAY 1, 1995 PAST PERFORMANCE OF CERTAIN SUBADVISERS INVESTMENT ADVISERS' PERFORMANCE DATA The performance information outlined below relates to all of the accounts, including mutual funds, managed by the subadvisers of the Alger Equity Growth Series, Draycott International Equity Series, Loomis Sayles Balanced Series, Venture Value Series, Salomon Brothers Strategic Bond Opportunities Series and Salomon Brothers U.S. Government Series that have investment objectives and policies substantially similar to the respective Series that they manage. THE FOLLOWING INFORMATION HAS NOT BEEN ADJUSTED TO REFLECT ANY OF THE CHARGES ASSESSED AGAINST THE INSURANCE COMPANY SEPARATE ACCOUNTS FOR WHICH THE FOLLOWING SERIES MAY SERVE AS AN INVESTMENT VEHICLE. IF THESE CHARGES WERE INCLUDED, THE RESULTS WOULD BE LOWER. Each subadviser believes that the differences between the size of the accounts that it manages and the expected size of the Series it manages, that has substantially similar investment objectives and policies as the accounts, do not affect the relevance of the information shown below to prospective purchasers of insurance contracts for which the Series may serve as an investment vehicle. The information below does not represent the performance of the actual Series listed above. THESE SERIES COMMENCED OPERATIONS ON OCTOBER 31, 1994 AND HAVE NO PERFORMANCE RECORD OF THEIR OWN FOR PERIODS PRIOR TO THAT DATE. (THESE SERIES' PERFORMANCE FOR THE PERIOD OCTOBER 31, 1994 TO DECEMBER 31, 1994 IS PRESENTED ABOVE UNDER "PERFORMANCE INFORMATION."). THE INFORMATION BELOW SHOULD NOT BE CONSIDERED A PREDICTION OF THE FUTURE PERFORMANCE OF ANY SERIES. THE PERFORMANCE MAY BE HIGHER OR LOWER THAN THE PERFORMANCE OF A FUND OR ACCOUNT WHICH HAS SUBSTANTIALLY SIMILAR INVESTMENT OBJECTIVES AND POLICIES. Alger Accounts David D. Alger, portfolio manager of the Alger Equity Growth Series, also serves as the portfolio manager of other accounts that have substantially the same investment objective and investment policies as the Alger Equity Growth Series (the "Alger Accounts"). The following table sets forth the dollar weighted annual total return of the Alger Accounts for each of the last eight calendar years. Also shown are the number and average period-end net assets of the Alger Accounts for each period and the dollar weighted average annual total returns of the Alger Accounts for the one, three and five year periods ended December 31, 1994. The total return information shown below has been adjusted to give effect to the higher of the level of the actual expenses of the Alger Accounts during the periods shown or the anticipated level of expenses that the Series will bear under the expense deferral arrangement described under "Management." PERFORMANCE INFORMATION ABOUT THE ALGER ACCOUNTS
VALUE OF ACCOUNTS AT YEARS ENDED NUMBER OF PERIOD END DECEMBER 31, TOTAL RETURN ACCOUNTS EXPENSES* (DOLLARS IN MILLIONS) ------------ ------------ --------- --------- --------------------- 1987 (0.41)% 1 3.00% $ 5.3 1988 6.40 1 3.01 5.1 1989 35.05 1 3.32 5.8 1990 2.25 2 3.04 7.6 1991 42.82 2 2.47 22.7 1992 11.66 2 1.73 53.5 1993 21.51 2 1.50 116.0 1994 0.13 3 1.33 236.9
- -------- * In cases where there is more than one account and expense levels of the accounts differ, the expense levels are averaged on a dollar weighted basis. AVERAGE ANNUAL TOTAL RETURNS THROUGH DECEMBER 31, 1994: 1 Year 0.1% 3 Year 10.7% 5 Year 14.7%
1 Draycott Accounts The team of Nicholas D.P. Carn, Timothy S. Griffen, Gregory D. Eckersley and Nigel Hankin, portfolio managers of the Draycott International Equity Series, also serve as portfolio managers of other accounts that have substantially the same investment objective and investment policies as the Draycott International Equity Series (the "Draycott Accounts"). The following table sets forth the dollar weighted total return for the period May 1, 1991 (commencement of the operations of the first Draycott Account) through December 31, 1991 and annual total return for the years ended December 31, 1992 through 1994. Also shown are the average annual total returns of the Draycott Accounts for the one year and three year periods ended December 31, 1994. The information shown below has been adjusted to give effect to the higher of the level of the actual expenses of the Draycott Accounts during the periods shown or the anticipated level of expenses that the Series will bear under the expense deferral arrangement described under "Management." PERFORMANCE INFORMATION ABOUT THE DRAYCOTT ACCOUNTS
VALUE OF ACCOUNTS AT NUMBER OF PERIOD END TOTAL RETURN ACCOUNTS EXPENSES* (DOLLARS IN MILLIONS) ------------ --------- --------- --------------------- May 1, 1991 through December 31, 1991 (8.48)% 1 1.30% $ 9.2 YEARS ENDED DECEMBER 31, ------------ 1992 (7.41) 1 1.30 13.4 1993 31.14 2 1.30 95.0 1994 8.63 2 1.49 174.4
- -------- * In cases where there is more than one account and expense levels of the accounts differ, the expense levels are averaged on a dollar weighted basis. Expenses for periods of less than one year have been annualized. Mutual fund expense calculations are based on Class A share expenses. AVERAGE ANNUAL TOTAL RETURN FOR PERIODS ENDED DECEMBER 31, 1994: 1 Year 8.6% 3 Year 9.7%
Loomis Sayles Balanced Fund Douglas D. Ramos and Meri Anne Beck, portfolio managers of the Loomis Sayles Balanced Series, also serve as portfolio managers of the New England Balanced Fund, another mutual fund that has substantially the same investment objective and investment policies as the Loomis Sayles Balanced Series. The following table sets forth the total return of the New England Balanced Fund Class A shares for the period March 1, 1990, when the Fund began to be operated as a balanced fund, through December 31, 1990. (Prior to March 1, 1990, the Fund had different portfolio managers and was operated as a growth and income fund.) The table also sets forth the annual total return of the Fund's Class A shares for the years ended December 31, 1991 through 1994, and the expense levels of the Class A shares of the Fund for those periods. Also shown are the average annual total returns for the one and three year periods and the period from March 1, 1990 through December 31, 1994. All of the expense levels of the New England Balanced Fund for the periods indicated are higher than the expense levels anticipated for the Loomis Sayles Balanced Series under the expense deferral arrangement described under "Management." The information shown below has been adjusted to give effect to the higher level of expenses of New England Balanced Fund. 2 PERFORMANCE INFORMATION ABOUT NEW ENGLAND BALANCED FUND (CLASS A SHARES)
NET ASSET VALUE YEARS ENDED AT PERIOD END DECEMBER 31, TOTAL RETURN EXPENSES** (DOLLARS IN MILLIONS) ------------ ------------ ---------- --------------------- 1990* (6.8)% 1.58% $ 52.1 1991 29.2 1.53 67.5 1992 13.9 1.48 90.5 1993 14.2 1.40 158.3 1994 (2.7) 1.40 158.3
AVERAGE ANNUAL TOTAL RETURNS THROUGH DECEMBER 31, 1994: 1 Year (2.7)% 3 Year 8.2% since March 1, 1990* 9.1%
- -------- * The Fund began pursuing its current investment policies on March 1, 1990. ** Expense for periods of less than one year have been annualized. New York Venture Accounts Shelby M.C. Davis, the portfolio manager of the Venture Value Series, also serves as the portfolio manager of other portfolios that have substantially the same investment objective and investment policies as the Venture Value Series ("New York Venture Accounts"). The following table sets forth the dollar weighted annual total return of the New York Venture Accounts for the years ended July 31, 1985 through 1994 and the period August 1, 1994 through December 31, 1994. Also shown are the average annual total returns of the New York Venture Accounts for the one, three, five and ten year periods ended December 31, 1994. The information shown below has been adjusted to give effect to the higher of the actual expenses of the New York Venture Accounts during the periods shown or the anticipated expense levels that the Venture Value Series will bear under the expense deferral arrangement described under "Management". PERFORMANCE INFORMATION ABOUT NEW YORK VENTURE ACCOUNTS
NET ASSET VALUE YEAR ENDED NUMBER OF AT YEAR END JULY 31, TOTAL RETURN ACCOUNTS EXPENSES* (DOLLARS IN MILLIONS) ---------- ------------ --------- --------- --------------------- 1985 37.83% 1 1.05% $ 122.9 1986 32.95 1 0.99 146.8 1987 25.22 1 0.93 232.1 1988 (3.30) 1 1.01 167.8 1989 33.44 1 0.97 319.1 1990 8.12 1 0.97 344.9 1991 14.29 1 0.97 421.2 1992 18.62 1 0.91 494.2 1993 20.01 2 0.90 762.0 1994 5.89 2 0.90 1,101.1 5 months Ended December 31, 1994 (2.53) 2 0.90 1,117.4
- -------- * In cases where there is more than one account and expense levels of the the accounts differ, the expense levels are averaged on a dollar weighted basis. Expenses for periods of less than one year have been annualized. Mutual fund expense calculations are based on Class A share expenses. 3 AVERAGE ANNUAL TOTAL RETURN THROUGH DECEMBER 31, 1994: 1 Year (2.0)% 3 Year 8.4% 5 Year 11.7% 10 Year 16.7%
Salomon Brothers Strategic and U.S. Government Accounts Steven Guterman, Peter Wilby and David Scott, portfolio managers of the Salomon Brothers Strategic Bond Opportunities Series, also serve as portfolio managers of the Salomon Strategic Account, another portfolio that has the same investment objective and policies as the Salomon Brothers Strategic Bond Opportunities Series. Mr. Guterman and Roger Lavan, the portfolio managers of the Salomon Brothers U.S. Government Series, also serve as portfolio managers of other accounts (the "Salomon U.S. Government Accounts") that have substantially the same investment objective and investment policy as the Salomon Brothers U.S. Government Series. The following tables set forth the total returns, for the period March 1, 1993 (commencement of operations of the Salomon Strategic Account) through December 31, 1993 and the year ended December 31, 1994 for the Salomon Strategic Account and the dollar weighted annual total returns for the years ended December 31, 1992 through 1994 for each of the Salomon U.S. Government Accounts. Also shown are the number of accounts and total period-end assets and the average annual total returns for the one year ended December 31, 1994 for the Salomon Strategic Account and the one year, three year and since inception period ended December 31, 1994 for the Salomon U.S. Government Accounts. The information shown below has been adjusted to give effect to the higher of the actual expenses of the Salomon Strategic Account and the Salomon U.S. Government Accounts, respectively, during the periods shown or the anticipated level of expenses that each of the Salomon Brothers Strategic Bond Opportunities Series and the Salomon Brothers U.S. Government Series will bear under the expense deferral arrangement described under "Management." PERFORMANCE INFORMATION ABOUT THE SALOMON STRATEGIC ACCOUNT
NET ASSET ACCOUNT AT NUMBER OF PERIOD END TOTAL RETURN ACCOUNTS EXPENSES* (DOLLARS IN MILLIONS) ------------ --------- --------- --------------------- March 1, 1993 through December 31, 1993 8.73% 1 1.00% $53.6 Year Ended December 31, 1994 (5.97) 1 0.91 84.0
- -------- * Expenses for periods of less than one year have been annualized. AVERAGE ANNUAL TOTAL RETURN THROUGH DECEMBER 31, 1994: 1 year (5.97)% Since Inception 1.21%
PERFORMANCE INFORMATION ABOUT THE SALOMON U.S. GOVERNMENT ACCOUNTS
VALUE OF ACCOUNTS AT YEAR ENDED NUMBER OF PERIOD END DECEMBER 31, TOTAL RETURN ACCOUNTS EXPENSES* (DOLLARS IN MILLIONS) ------------ ------------ --------- --------- --------------------- 1992 6.29% 2 0.70% $266.4 1993 7.63 2 0.93 398.1 1994 (1.41) 2 0.97 296.0
- -------- * In cases where there is more than one account and expenses of the accounts differ, the expenses are averaged on a dollar weighted basis. AVERAGE ANNUAL TOTAL RETURN THROUGH DECEMBER 31, 1994: 1 Year (1.4)% 3 Year 4.1%
Not to be used after October 31, 1995 4 NEW ENGLAND ZENITH FUND 501 Boylston Street Boston, Massachusetts 02116 (617) 267-6600 PROSPECTUS--MAY 1, 1995 New England Zenith Fund (the "Fund") offers fourteen investment portfolios, nine of which are contained herein: the Westpeak Value Growth Series, the Loomis Sayles Avanti Growth Series, the Loomis Sayles Small Cap Series, the Loomis Sayles Balanced Series, the Draycott International Equity Series, the Salomon Brothers U.S. Government Series, the Salomon Brothers Strategic Bond Opportunities Series, the Venture Value Series and the Alger Equity Growth Series (the "Series") with the following investment objectives: WESTPEAK VALUE GROWTH SERIES--long-term total return through investment in equity securities. LOOMIS SAYLES AVANTI GROWTH SERIES--long-term growth of capital. LOOMIS SAYLES SMALL CAP SERIES--long-term capital growth from investments in common stocks or their equivalent. LOOMIS SAYLES BALANCED SERIES--reasonable long-term investment return from a combination of long-term capital appreciation and moderate current income. DRAYCOTT INTERNATIONAL EQUITY SERIES--total return from long-term growth of capital and dividend income, primarily through investment in international equity securities. SALOMON BROTHERS U.S. GOVERNMENT SERIES--a high level of current income consistent with preservation of capital and maintenance of liquidity. SALOMON BROTHERS STRATEGIC BOND OPPORTUNITIES SERIES--a high level of total return consistent with preservation of capital. This Series may invest a significant portion of its assets in lower rated bonds commonly known as junk bonds. Investors should assess carefully the risks associated with investment in this Series. See "Investment Objectives and Policies--Salomon Brothers Strategic Bond Opportunities Series" and "Investment Risks--Lower Rated Fixed- Income Securities." VENTURE VALUE SERIES--growth of capital. ALGER EQUITY GROWTH SERIES--long-term capital appreciation. This Prospectus concisely describes the information that prospective investors ought to know before investing. Please read this Prospectus carefully and keep it for future reference. A Statement of Additional Information (the "Statement") dated May 1, 1995, is available free of charge by writing to New England Securities Corporation ("New England Securities"), 399 Boylston Street, Boston, Massachusetts 02116. The Statement, which contains more detailed information about the Fund, has been filed with the Securities and Exchange Commission (the "SEC") and is incorporated by reference in this Prospectus. SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY FINANCIAL INSTITUTION AND THE SHARES ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER AGENCY, AND INVOLVE RISK, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL. --------------------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. 1 TABLE OF CONTENTS
PAGE ---- Financial Highlights....................................................... 3 The Fund................................................................... 12 Investment Objectives and Policies......................................... 12 Investment Risks........................................................... 17 Performance Information.................................................... 25 Investment Restrictions.................................................... 27 Management................................................................. 29 Sale and Redemption of Shares.............................................. 34 Net Asset Values and Portfolio Valuation................................... 34 Dividends and Capital Gain Distributions................................... 35 Taxes...................................................................... 35 Organization and Capitalization of the Fund................................ 35 Transfer Agent............................................................. 35 Voting Rights.............................................................. 36
2 FINANCIAL HIGHLIGHTS These tables have been examined by Coopers & Lybrand LLP, the Fund's independent accountants, whose reports thereon accompany the financial statements in the Statement of Additional Information. The tables should be read in conjunction with the financial statements and notes thereto. For further performance information about the Fund, please refer to the Fund's annual report, which is available free of charge. LOOMIS SAYLES AVANTI GROWTH SERIES
APRIL 30(A) YEAR TO ENDED DEC. 31, 1993 DECEMBER 31, 1994 ------------- ----------------- Net Asset Value, Beginning of the Period... $100.00 $113.67 ------- ------- Income From Investment Operations Net Investment Income...................... 0.18 0.59 Net Gains or Losses on Investments (both realized and unrealized).................. 14.56 (0.89) ------- ------- Total From Investment Operations........... 14.74 (0.30) ------- ------- Less Distributions Distributions From Net Investment Income... (0.18) (0.60) Distributions From Net Realized Capital Gains..................................... (0.67) 0.00 Distributions From Paid-In Capital......... (0.22) 0.00 ------- ------- Total Distributions..................... (1.07) (0.60) ------- ------- Net Asset Value, End of the Period......... $113.67 $112.77 ======= ======= Total return (%)........................... 14.7 (b) (0.3) Ratio of Operating Expenses to Average Net Assets (%)................................ 0.85 (c) 0.84 Ratio of Net Investment Income to Average Net Assets (%)............................ 0.46 (c) 0.67 Portfolio Turnover Rate (%)................ 21 (c) 67 Net Assets, End of Period (000)............ $11,972 $25,622 The Ratio of Expenses to Average Net Assets without giving effect to the voluntary expense limitation described in Footnote (d) would have been (%)................... 0.89 (c)(d) 0.84
- -------- (a) Commencement of operations. (b) Not annualized. (c) Computed on an annualized basis. (d) During the periods presented, the Series' adviser voluntarily agreed to reduce its fees and, if necessary, to assume expenses of the Series in order to limit the Series' expenses to an annual rate of 0.85% of the Series' average daily net assets. 3 WESTPEAK VALUE GROWTH SERIES
APRIL 30(A) YEAR TO ENDED DEC. 31, 1993 DEC. 31, 1994 ------------- ------------- Net Asset Value, Beginning of the Period....... $100.00 $112.32 ------- ------- Income From Investment Operations Net Investment Income.......................... 0.92 1.90 Net Gains or Losses on Investments (both realized and unrealized)...................... 13.33 (3.25) ------- ------- Total From Investment Operations............... 14.25 (1.35) ------- ------- Less Distributions Distributions From Net Investment Income....... (0.92) (1.92) Distributions From Net Realized Capital Gains.. (1.00) 0.00 Distributions In Excess of Net Realized Capital Gains......................................... (0.01) 0.00 Distributions From Paid In Capital............. 0.00 (0.02) ------- ------- Total Distributions......................... (1.93) (1.94) ------- ------- Net Asset Value, End of the Period............. $112.32 $109.03 ======= ======= Total return (%)............................... 14.2 (b) (1.2) Ratio of Operating Expenses to Average Net Assets (%).................................... 0.85 (c) 0.85 Ratio of Net Investment Income to Average Net Assets (%).................................... 2.16 (c) 2.30 Portfolio Turnover Rate (%).................... 49 (c) 133 Net Assets, End of Period (000)................ $ 9,082 $22,934 The Ratio of Expenses to Average Net Assets without giving effect to the voluntary expense limitation described in Footnote (d) would have been (%)................................. 0.94 (c)(d) 0.86
- -------- (a) Commencement of operations. (b) Not annualized. (c) Computed on an annualized basis. (d) During the periods presented, the Series' adviser voluntarily agreed to reduce its fees and, if necessary, to assume expenses of the Series in order to limit the Series' expenses to an annual rate of 0.85% of the Series' average daily net assets. 4 LOOMIS SAYLES SMALL CAP SERIES
MAY 1(A) TO DECEMBER 31, 1994 ----------------- Net Asset Value, Beginning of Period......................... $100.00 ------- Income From Investment Operations Net Investment Income........................................ 0.14 Net Gains or Losses on Investments (both realized and unrealized)................................................. (3.38) ------- Total From Investment Operations............................. (3.24) ------- Less Distributions Distributions From Net Investment Income..................... (0.15) ------- Total Distributions....................................... (0.15) ------- Net Asset Value, End of the Period........................... $ 96.61 ======= Total return (%)............................................. (3.23)(b) Ratio of Operating Expenses to Average Net Assets (%)........ 1.00 (c) Ratio of Net Investment Income to Average Net Assets (%)..... 0.32 (c) Portfolio Turnover Rate (%) (a).............................. 80 (c) Net Assets, End of Period (000).............................. $ 3,105 The Ratio of Expenses to Average Net Assets without giving effect to the voluntary expense limitation described in Footnote (d) would have been (%)............................ 2.31 (c)
- -------- (a) Commencement of operations. (b) Not annualized. (c) Computed on an annualized basis. (d) During the period presented, the Series' adviser voluntarily agreed to reduce its fees and, if necessary, to assume expenses of the Series in order to limit the Series' expenses to an annual rate of 1.00% of the Series' average daily net assets. 5 LOOMIS SAYLES BALANCED SERIES
OCTOBER 31(A) TO DECEMBER 31, 1994 ----------------- Net Asset Value, Beginning of Period......................... $10.00 ------ Income From Investment Operations Net Investment Income........................................ 0.05 Net Gains or Losses on Investments (both realized and unrealized)................................................. (0.06) ------ Total From Investment Operation.............................. (0.01) ------ Less Distributions Distributions From Net Investment Income..................... (0.05) ------ Total Distributions....................................... (0.05) ------ Net Asset Value, End of the Period........................... $ 9.94 ------ Total return (%)............................................. (0.10)(c) Ratio of Operating Expenses to Average Net Assets (%)........ 0.85 (b) Ratio of Net Investment Income to Average Net Assets (%)..... 4.16 (b) Portfolio Turnover Rate (%) (a).............................. 0 (b) Net Assets, End of Period (000).............................. $2,722 The Ratio of Expenses to Average Net Assets without giving effect to the voluntary expense limitation described in Footnote (d) would have been (%)............................ 3.73 (b)
- -------- (a) Commencement of operations. (b) Computed on an annualized basis. (c) Not computed on an annualized basis. (d) Commencing November 1, 1994, TNE Advisers has agreed to pay operating expenses of the Series in excess of an annual expense limit of 0.85% of average assets subject to the obligation of the Series to repay TNE Advisers such expenses in future years, if any, when the Series' 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 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 TNE Advisers more than two years after the end of the fiscal year in which such expense was incurred. 6 DRAYCOTT INTERNATIONAL EQUITY SERIES
OCTOBER 31(A) TO DECEMBER 31, 1994 ----------------- Net Asset Value, Beginning of Period......................... $10.00 ------ Income From Investment Operations Net Investment Income........................................ 0.03 Net Gains or Losses on Investments (both realized and unrealized)................................................. 0.23 ------ Total From Investment Operation.............................. 0.26 ------ Less Distributions Distributions From Net Investment Income..................... (0.02) Distributions From Paid-In Capital........................... (0.01) ------ Total Distributions....................................... (0.03) ------ Net Asset Value, End of the Period........................... $10.23 ====== Total return (%)............................................. 2.60 (c) Ratio of Operating Expenses to Average Net Assets (%)........ 1.30 (b) Ratio of Net Investment Income to Average Net Assets (%)..... 2.56 (b) Portfolio Turnover Rate (%).................................. 4 (b) Net Assets, End of Period (000).............................. $2,989 The Ratio of Expenses to Average Net Assets without giving effect to the voluntary expense limitation described in Footnote (d) would have been (%)............................ 5.38 (b)
- -------- (a) Commencement of operations. (b) Computed on an annualized basis. (c) Not computed on an annualized basis. (d) Commencing November 1, 1994, TNE Advisers has agreed to pay operating expenses of the Series in excess of an annual expense limit of 1.30% of average assets subject to the obligation of the Series to repay TNE Advisers such expenses in future years, if any, when the Series' 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 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 TNE Advisers more than two years after the end of the fiscal year in which such expense was incurred. 7 SALOMON BROTHERS U.S. GOVERNMENT SERIES
OCTOBER 31(A) TO DECEMBER 31, 1994 ----------------- Net Asset Value, Beginning of Period......................... $10.00 ------ Income From Investment Operations Net Investment Income........................................ 0.10 Net Gains or Losses on Investments (both realized and unrealized)................................................. (0.04) ------ Total From Investment Operations............................. 0.06 ------ Less Distributions Distributions From Net Investment Income..................... (0.10) ------ Total Distributions....................................... (0.10) ------ Net Asset Value, End of the Period........................... $ 9.96 ====== Total return (%)............................................. 0.60 (b) Ratio of Operating Expenses to Average Net Assets (%)........ 0.70 (c) Ratio of Net Investment Income to Average Net Assets (%)..... 5.70 (c) Portfolio Turnover Rate (%).................................. 1,409 (c) Net Assets, End of Period (000).............................. $2,012 The Ratio of Expenses to Average Net Assets without giving effect to the voluntary expense limitation described in Footnote (d) would have been (%)............................ 2.54 (c)
- -------- (a) Commencement of operations. (b) Not computed on an annualized basis. (c) Computed on an annualized basis. (d) Commencing November 1, 1994, TNE Advisers has agreed to pay operating expenses of the Series in excess of an annual expense limit of 0.70% of average assets subject to the obligation of the Series to repay TNE Advisers such expenses in future years, if any, when the Series' 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 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 TNE Advisers more than two years after the end of the fiscal year in which such expense was incurred. 8 SALOMON BROTHERS STRATEGIC BOND OPPORTUNITIES SERIES
OCTOBER 31(A) TO DECEMBER 31, 1994 ----------------- Net Asset Value, Beginning of Period......................... $10.00 ------ Income From Investment Operations Net Investment Income........................................ 0.12 Net Gains or Losses on Investments (both realized and unrealized)................................................. (0.26) ------ Total From Investment Operations............................. (0.14) ------ Less Distributions Distributions From Net Investment Income..................... (0.12) ------ Total Distributions....................................... (0.12) ------ Net Asset Value, End of the Period........................... $ 9.74 ====== Total return (%)............................................. (1.40)(b) Ratio of Operating Expenses to Average Net Assets (%)........ 0.85 (c) Ratio of Net Investment Income to Average Net Assets (%)..... 7.05 (c) Portfolio Turnover Rate (%) (a).............................. 403 (c) Net Assets, End of Period (000).............................. $3,450 The Ratio of Expenses to Average Net Assets without giving effect to the voluntary expense limitation described in Footnote (d) would have been (%)............................ 2.01 (c)
- -------- (a) Commencement of operations. (b) Not computed on an annualized basis. (c) Computed on an annualized basis. (d) Commencing November 1, 1994, TNE Advisers has agreed to pay operating expenses of the Series in excess of an annual expense limit of 0.85% of average assets subject to the obligation of the Series to repay TNE Advisers such expenses in future years, if any, when the Series' 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 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 TNE Advisers more than two years after the end of the fiscal year in which such expense was incurred. 9 VENTURE VALUE SERIES
OCTOBER 31(A) TO DECEMBER 31, 1994 ----------------- Net Asset Value, Beginning of Period......................... $10.00 ------ Income From Investment Operations Net Investment Income........................................ 0.03 Net Gains or Losses on Investments (both realized and unrealized)................................................. (0.38) ------ Total From Investment Operations............................. (0.35) ------ Less Distributions Distributions From Net Investment Income..................... (0.03) ------ Total Distributions....................................... (0.03) ------ Net Asset Value, End of the Period........................... $ 9.62 ====== Total return (%)............................................. (3.50)(b) Ratio of Operating Expenses to Average Net Assets (%)........ 0.90 (c) Ratio of Net Investment Income to Average Net Assets (%)..... 2.54 (c) Portfolio Turnover Rate (%) (a).............................. 1 (c) Net Assets, End of Period (000).............................. $3,371 The Ratio of Expenses to Average Net Assets without giving effect to the voluntary expense limitation described in Footnote (d) would have been (%)............................ 3.97 (c)
- -------- (a) Commencement of operations. (b) Not computed on an annualized basis. (c) Computed on an annualized basis. (d) Commencing November 1, 1994, TNE Advisers has agreed to pay operating expenses of the Series in excess of an annual expense limit of 0.90% of average assets subject to the obligation of the Series to repay TNE Advisers such expenses in future years, if any, when the Series' 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 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 TNE Advisers more than two years after the end of the fiscal year in which such expense was incurred. 10 ALGER EQUITY GROWTH SERIES
OCTOBER 31(A) TO DECEMBER 31, 1994 ----------------- Net Asset Value, Beginning of Period......................... $10.00 ------ Income From Investment Operations Net Investment Income........................................ 0.02 Net Gains or Losses on Investments (both realized and unrealized).............................. (0.44) ------ Total From Investment Operations............................. (0.42) ------ Less Distributions Distributions From Net Investment Income................................... (0.02) ------ Total Distributions....................................... (0.02) ------ Net Asset Value, End of the Period........................... $ 9.56 ====== Total return (%)............................................. (4.20)(b) Ratio of Operating Expenses to Average Net Assets (%)........ 0.85 (c) Ratio of Net Investment Income to Average Net Assets (%)..... 1.07 (c) Portfolio Turnover Rate (%) (a).............................. 32 (c) Net Assets, End of Period (000).............................. $1,917 The Ratio of Expenses to Average Net Assets without giving effect to the voluntary expense limitation described in Footnote (d) would have been (%)............... 2.74 (c)
- -------- (a) Commencement of operations. (b) Not computed on an annualized basis. (c) Computed on an annualized basis. (d) Commencing November 1, 1994, TNE Advisers has agreed to pay operating expenses of the Series in excess of an annual expense limit of 0.85% of average assets subject to the obligation of the Series to repay TNE Advisers such expenses in future years, if any, when the Series' 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 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 TNE Advisers more than two years after the end of the fiscal year in which such expense was incurred. 11 THE FUND The Fund is a diversified, open-end management investment company organized in 1987 as a Massachusetts business trust under the laws of Massachusetts. The Fund is a series type company with fourteen investment portfolios, nine of which are contained herein: the Westpeak Value Growth Series, the Loomis Sayles Avanti Growth Series, the Loomis Sayles Small Cap Series, the Loomis Sayles Balanced Series, the Draycott International Equity Series, the Salomon Brothers U.S. Government Series, the Salomon Brothers Strategic Bond Opportunities Series, the Venture Value Series and the Alger Equity Growth Series. Shares in the Fund are not offered directly to the general public and, currently, are available only to separate accounts established by New England Variable Life Insurance Company ("NEVLICO"), New England Mutual Life Insurance Company ("The New England") or subsidiaries of The New England as an investment vehicle for variable life insurance or variable annuity products, although not all Series may be available to all separate accounts. In the future, however, such shares may be offered to separate accounts of insurance companies unaffiliated with NEVLICO or The New England. INVESTMENT OBJECTIVES AND POLICIES WESTPEAK VALUE GROWTH SERIES The Westpeak Value Growth Series seeks long-term total return (capital appreciation and dividend income) through investment in equity securities. Emphasis will be given to both undervalued securities ("value" style) and securities of companies with growth potential ("growth" style). The Westpeak Value Growth Series will ordinarily invest substantially all its assets in equity securities. The assets of the Westpeak Value Growth Series that are not invested in equity securities will be held in cash or invested in repurchase agreements, short-term U.S. Government securities or commercial paper or other corporate money market securities rated A-2 or higher by Moody's or P-2 or higher by Standard & Poor's (or unrated but considered to be of comparable quality by the Series' subadviser, Westpeak Investment Advisors, L.P. ["Westpeak"]). The Westpeak Value Growth Series may engage in transactions in futures contracts solely for the purpose of maintaining full exposure of the portfolio to the movements of broad equity markets at times when the Series holds a cash position pending investment in stocks or in anticipation of redemptions. See "Futures and Other Hedging Transactions" under "Investment Risks" below and "Futures" in the Statement of Additional Information. LOOMIS SAYLES AVANTI GROWTH SERIES The Loomis Sayles Avanti Growth Series seeks long-term growth of capital. The Series ordinarily invests substantially all of its assets in equity securities. Investments are selected based on their growth potential; current income is not a consideration. The Series normally will invest primarily in equity securities of companies with medium and large capitalization (capitalization of $1 billion to $5 billion and over $5 billion, respectively), but will also invest a portion of its assets in equity securities of companies with relatively small market capitalization (under $1 billion). The Series may invest a limited portion of its assets in securities of foreign issuers. Loomis, Sayles & Company, L.P. ("Loomis Sayles"), the Series' subadviser, selects investments based upon fundamental research and analysis of individual companies and industries. The subadviser selects investments for the Series based on qualitative and quantitative criteria including, among others, industry dominance and competitive position, consistent earnings growth, a history of high profitability, the subadviser's expectation of continued high profitability and overall financial strength, although not every investment will have all of these characteristics. The Series may invest in convertible securities, including corporate bonds, notes or preferred stocks that can be converted into common stocks or other equity securities. 12 LOOMIS SAYLES SMALL CAP SERIES The Loomis Sayles Small Cap Series' investment objective is long-term capital growth from investments in common stocks or their equivalent. The Series, for which Loomis Sayles acts as subadviser, seeks to achieve its objective by giving emphasis to both undervalued securities and securities of companies with significant growth potential. The Series will normally invest at least 65% of its total assets in companies with market capitalization of less than $500 million and may invest up to 35% of its assets in larger companies. Current income is not a consideration in selecting the Series' investments. The Series may invest a limited portion of its assets in securities of foreign issuers. See "Investment Risks--Foreign Securities" below. LOOMIS SAYLES BALANCED SERIES The Loomis Sayles Balanced Series' investment objective is reasonable long- term investment return from a combination of long-term capital appreciation and moderate current income. The Series, for which Loomis Sayles acts as subadviser, is "flexibly managed" in that sometimes it invests more heavily in equity securities and at other times it invests more heavily in fixed-income securities, depending on its subadviser's view of the economic and investment outlook. Most of the Series' investments are normally in dividend-paying common stocks of recognized investment quality that are expected to achieve growth in earnings and dividends over the long term. Fixed-income securities include notes, bonds, non-convertible preferred stock and money market instruments. The Series may invest in adjustable rate mortgage securities, asset-backed securities, STRIPS and inverse floaters, subject to a limit of 5% of the Series' assets for each of these instruments. The Series invests at least 25% of its assets in fixed-income senior securities and, under normal market conditions, more than 50% of its assets in equity securities. The Series also may invest in foreign securities. DRAYCOTT INTERNATIONAL EQUITY SERIES The Draycott International Equity Series seeks total return from long-term growth of capital and dividend income, primarily through investment in international equity securities. The Draycott International Equity Series seeks to achieve its objective by investing primarily in common stocks, although the Series may invest in any type of equity securities. Normally the Series will invest at least 65% of its total assets in equity securities of issuers headquartered outside the United States, and substantially all of its assets (other than cash and short-term investments) in such equity securities or equity securities of issuers (including closed-end investment companies) that derive a substantial part of their revenues or profits from countries outside the United States. Under normal conditions, the Series' portfolio will contain equity securities of issuers from at least three countries outside the United States. The Series' subadviser, Draycott Partners, Ltd. ("Draycott"), will make investment decisions on behalf of the Series by, first, selecting countries where it anticipates sustainable growth that will exceed current market expectations. Within the selected countries, the subadviser will identify economic sectors that appear to present the most potential for risk-adjusted growth and, finally, within the chosen economic sectors, the subadviser will select securities that are expected to offer the best value. SALOMON BROTHERS U.S. GOVERNMENT SERIES The Salomon Brothers U.S. Government Series' investment objective is to provide a high level of current income consistent with preservation of capital and maintenance of liquidity. The Series seeks to achieve its objective by investing primarily in debt obligations (including mortgage backed securities) issued or guaranteed by the U.S. Government or its agencies, authorities or instrumentalities or derivative securities (such as collateralized mortgage obligations) backed by such securities. 13 At least 80% of the total assets of the Salomon Brothers U.S. Government Series will be invested in: (1) mortgage backed securities guaranteed by the Government National Mortgage Association ("GNMA") that are supported by the full faith and credit of the U.S. Government. Such securities entitle the holder to receive all interest and principal payments due, whether or not payments are actually made on the underlying mortgages; (2) U.S. Treasury obligations; (3) debt obligations issued or guaranteed by agencies or instrumentalities of the U.S. Government which are backed by their own credit but are not necessarily backed by the full faith and credit of the U.S. Government; (4) mortgage related securities guaranteed by agencies or instrumentalities of the U.S. Government which are supported by their own credit but not the full faith and credit of the U.S. Government, such as the Federal Home Loan Mortgage Corporation and the Federal National Mortgage Association; and (5) collateralized mortgage obligations issued by private issuers for which the underlying mortgage backed securities serving as collateral are backed (i) by the credit of the U.S. Government agency or instrumentality which issues or guarantees the mortgage backed securities, or (ii) by the full faith and credit of the U.S. Government. Under normal market conditions, at least 65% of the Series' total assets will be invested in securities issued or guaranteed by the U.S. Government or an agency, authority or instrumentality thereof. For purposes of this policy, securities that are not issued or guaranteed by the U.S. Government or an agency, authority or instrumentality will not count toward the 65%, even if they are backed by mortgages (or other collateral) that are so guaranteed. Any guarantee of the securities in which the Series invests runs only to principal and interest payments on the securities and not to the market value of such securities or the principal and interest payments on the underlying mortgages. In addition, the guarantee runs to the portfolio securities held by the Series and not to the purchase of shares of the Series. The Series may purchase or write options on securities, options on securities indices and options on futures contracts and buy or sell futures on financial instruments and securities indices. Up to 20% of the total assets of the Series may be invested in marketable debt securities of domestic issuers and of foreign issuers (payable in U.S. dollars) rated at the time of purchase Baa or higher by Moody's or BBB or higher by S&P, or, if unrated, deemed to be of equivalent quality in Salomon Brothers Management Inc's judgment, convertible securities (including those issued in the Euromarket), securities carrying warrants to purchase equity securities and privately placed debt securities. The Series may lend securities it owns so long as such loans do not represent more than 20% of the Series' total assets. SALOMON BROTHERS STRATEGIC BOND OPPORTUNITIES SERIES The Salomon Brothers Strategic Bond Opportunities Series' investment objective is to seek a high level of total return consistent with preservation of capital. Based upon Salomon Brothers Asset Management Inc's assessment of the relative risks and opportunities available in various market segments, assets will be allocated among U.S. Government obligations, mortgage backed securities, domestic and foreign corporate debt and sovereign debt securities rated investment grade (BBB or higher by S&P or Baa or higher by Moody's) (or unrated but deemed to be of equivalent quality in the subadviser's judgment) and domestic and foreign corporate debt and sovereign debt securities rated below investment grade. The Series may invest in fixed and floating rate loans ("Loans") arranged through private negotiations between a foreign sovereign entity and one or more financial institutions, in the form of participations in such Loans ("Participations") and assignments of all or a portion of Loans from third parties ("Assignments"). See "Loan Participations and Assignments", below. Depending on market conditions, the Series may invest without limit in below investment grade securities, which involve significantly greater risks, including price volatility and risk of default in the payment of interest and principal, than higher-quality securities. Although the Series' subadviser does not anticipate investing in excess of 75% of the Series' assets in domestic and developing country debt securities that are rated below investment grade, the Series may invest a 14 greater percentage in such securities when, in the opinion of the subadviser the yield available from such securities outweighs their additional risks. Certain of the debt securities in which the Series may invest may be rated as low as "C" by Moody's or "D" by S&P or may be considered comparable to securities having such ratings. Securities of below investment grade quality are considered high yield, high risk securities and are commonly know as "junk bonds." See "Investment Risks--Lower Rated Fixed-Income Securities" below. In addition, the Series may invest in securities issued or guaranteed as to principal or interest by the U.S. Government or its agencies or instrumentalities, including mortgage backed securities, preferred stocks, convertible securities (including those issued in the Euromarket), securities carrying warrants to purchase equity securities, privately placed debt securities, stripped mortgage securities, zero coupon securities and inverse floaters. The Series may, and the subadviser anticipates that under certain market conditions that it will, invest up to 100% of its assets in foreign securities, including Brady Bonds. Brady Bonds are debt obligations created through the exchange of commercial bank loans to new obligations under a plan introduced by former U.S. Treasury Secretary Nicholas Brady. See "High Yield/High Risk Foreign Sovereign Debt Securities", below. There is no limit on the value of the portfolio's assets that may be invested in any one country or in assets denominated in any one country's currency. The Series may also invest in debt obligations issued or guaranteed by a foreign sovereign government or one of its agencies or political subdivisions and debt obligations issued or guaranteed by supranational organizations. Supranational entities include international organizations designated or supported by governmental entities to promote economic reconstruction or development and international banking institutions and related government agencies. Examples include the International Bank for Reconstruction and Development (the "World Bank"), the European Coal and Steel Community, the Asian Development Bank and the Inter-American Development Bank. Such supranational issued instruments may be denominated in multi-national currency units. The Series currently intends to invest substantially all of its assets in fixed-income securities. In order to maintain liquidity, the Series may invest up to 20% of its assets in high-quality short-term money market instruments. The Series' subadviser will have discretion to select the range of maturities of the various fixed-income securities in which the Series will invest. The weighted average life of the Series may vary substantially from time to time depending on economic and market conditions. The Series may purchase and sell (or write) exchange-listed and over-the- counter put and call options on securities, financial futures contracts and fixed income indices and other financial instruments, enter into financial futures contracts, enter into interest rate transactions, and enter into currency transactions. Interest rate transactions may take the form of swaps, structured notes, caps, floors and collars, and currency transactions may take the form of currency forward contracts, currency futures contracts, currency swaps and options on currencies or currency futures contracts. See "Futures and Other Hedging Transactions" under "Investment Risks" below and "Futures" in the Statement of Additional Information. The Series may lend securities it owns so long as such loans do not represent more than 20% of the Series' total assets. VENTURE VALUE SERIES The Venture Value Series' investment objective is growth of capital and is subadvised by Selected/Venture Advisers, L.P. The Series will primarily invest in domestic common stocks (and securities convertible into common stock) that the Series' subadviser believes have capital growth potential due to factors such as undervalued assets or earnings potential, product development and demand, favorable operating ratios, resources for expansion, management abilities, reasonableness of market price, and favorable overall business prospects. The Series will generally invest predominantly in equity securities of companies with market capitalizations of at least $250 million. It may also invest in issues with smaller capitalizations. 15 The Series may invest in foreign securities, and may hedge currency fluctuation risks related thereto. The Series may invest in U.S. registered investment companies that primarily invest in foreign securities, provided that no such investment may cause more than 10% of the Series' total assets to be invested in such companies. The Series may invest in restricted securities which may include Rule 144A securities. The Series may write covered call options on its portfolio securities, but currently intends to invest in such options only to the extent that less than 5% of its net assets would be subject to the options. The Series may lend securities it owns so long as such loans do not exceed 5% of the Series' net assets. ALGER EQUITY GROWTH SERIES The Alger Equity Growth Series' investment objective is to seek long-term capital appreciation. The Series' assets will be invested primarily in a diversified, actively managed portfolio of equity securities, primarily of companies having a total market capitalization of $1 billion or greater. These companies may still be in the developmental stage, may be older companies that appear to be entering a new stage of growth progress, or may be companies providing products or services with a high unit volume growth rate. The Series' subadviser, Fred Alger Asset Management, Inc., seeks to achieve its objective by investing in equity securities, such as common or preferred stocks or securities convertible into or exchangeable for equity securities, including warrants and rights. Except during temporary defensive periods, the Series invests at least 85% of its net assets in equity securities and at least 65% of its total assets in equity securities of companies that, at the time of purchase of the securities, have total market capitalization of $1 billion or greater; the Series may invest up to 35% of its total assets in equity securities of companies that, at the time of purchase, have total market capitalization of less than $1 billion. The Series anticipates that it will invest primarily in companies whose securities are traded on domestic stock exchanges or in the over-the-counter market. The Series may invest in bank and thrift obligations, obligations issued or guaranteed by the U.S. Government or by its agencies or instrumentalities, foreign bank obligations and obligations of foreign branches of domestic banks, and variable rate master demand notes. The Series may also hold up to 15% of its net assets in money market instruments and repurchase agreements, purchase restricted securities (including Rule 144A securities) and enter into "short sales against the box." The Series may lend securities it owns so long as such loans do not exceed 33 1/3% of the Series' total assets. ADDITIONAL INFORMATION Equity securities are securities that represent an ownership interest (or the right to acquire such an interest) in a company, and include common and preferred stocks and securities exercisable for or convertible into common or preferred stocks (such as warrants, convertible debt securities and convertible preferred stock). The Westpeak Value Growth Series, Loomis Sayles Avanti Growth Series, Loomis Sayles Small Cap Series, Draycott International Equity Series, Venture Value Series and Alger Equity Growth Series seek to attain their objectives by normally investing their assets primarily in equity securities. When the particular Series' adviser or subadviser deems it appropriate, however, any of these Series may, for temporary defensive purposes, hold all or a substantial portion of its assets in cash or fixed-income investments, including U.S. Government obligations, investment grade (and comparable unrated) corporate bonds or notes, money market instruments, bankers acceptances and repurchase agreements. In addition, the Draycott International Equity Series may invest temporarily in foreign government, agency or corporate debt obligations. No estimate can be made as to when or for how long the Series will employ these defensive strategies. 16 INVESTMENT RISKS . EQUITY SECURITIES (WESTPEAK VALUE GROWTH, LOOMIS SAYLES AVANTI GROWTH, LOOMIS SAYLES SMALL CAP, LOOMIS SAYLES BALANCED, DRAYCOTT INTERNATIONAL EQUITY, VENTURE VALUE AND ALGER EQUITY GROWTH SERIES) Equity securities are more volatile and more risky than some other forms of investment. Therefore, the value of your investment in a Series may sometimes decrease instead of increase. Investments in companies with relatively small capitalization may involve greater risk than is usually associated with more established companies. These companies often have sales and earnings growth rates which exceed those of companies with larger capitalization. Such growth rates may in turn be reflected in more rapid share price appreciation. However, companies with smaller capitalization often have limited product lines, markets or financial resources and they may be dependent upon a relatively small management group. The securities may have limited marketability and may be subject to more abrupt or erratic movements in price than securities of companies with larger capitalization or the market averages in general. The net asset value of a Series that invests in companies with smaller capitalization, therefore, may fluctuate more widely than market averages. . CONVERTIBLE SECURITIES (LOOMIS SAYLES AVANTI GROWTH, LOOMIS SAYLES BALANCED, DRAYCOTT INTERNATIONAL EQUITY, SALOMON BROTHERS STRATEGIC BOND OPPORTUNITIES, VENTURE VALUE AND ALGER EQUITY GROWTH SERIES) Convertible securities include debt securities or preferred stock that are convertible into stock as well as other securities, such as warrants, that provide an opportunity for equity participation. Because convertible securities can be converted into equity securities, their values will normally vary in some proportion with those of the underlying equity securities. Convertible debt and preferred stock usually provide a higher yield than the underlying equity securities, however, so that the price decline of a convertible security may sometimes be less substantial than that of the underlying equity securities. The value of convertible securities that pay dividends or interest, like the value of all fixed- income securities, generally fluctuates inversely with changes in interest rates. Warrants have no voting rights, pay no dividends and have no rights with respect to the assets of the corporation issuing them. They do not represent ownership of the securities for which they are exercisable, but only the right to buy such securities at a particular price. The Loomis Sayles Avanti Growth Series will not purchase any convertible debt security or convertible preferred stock that has not been rated at the time of acquisition investment grade by one major rating agency or that is not rated but is determined to be of comparable quality by the Series' adviser. . FIXED-INCOME SECURITIES (ALL SERIES) Because interest rates vary, it is impossible to predict the income of a Series for any particular period. The net asset value will vary as a result of changes in the value of the bonds and other securities in the Series' portfolio. Fixed-income securities are subject to market and credit risk. Market risk relates to changes in a security's value as a result of changes in interest rates generally. Generally, rising interest rates correlate with falling share values. Credit risk relates to the ability of the issuer to make payments of principal and interest. U.S. Government Securities generally do not involve the credit risks associated with other types of fixed-income securities, although, as a result, the yields available from U.S. Government Securities are generally lower than the yields available from corporate fixed-income securities. . LOWER RATED FIXED-INCOME SECURITIES (LOOMIS SAYLES BALANCED AND SALOMON BROTHERS STRATEGIC BOND OPPORTUNITIES SERIES) Lower rated fixed-income securities (also known as "junk bonds") and corporate fixed-income securities generally provide higher yields than U.S. Government and many foreign government securities, but are subject to greater credit and market risk than higher quality fixed-income securities. Lower rated fixed-income securities are considered predominantly speculative with respect to the ability of the issuer to meet principal and interest payments. Achievement of the investment objective of a Series investing in lower rated fixed-income securities may be more dependent on the Series' subadviser's own credit analysis than is the case for higher quality bonds. The market for lower rated fixed-income securities may be more severely affected than some other financial markets by economic recession or substantial interest rate increases, by changing public perceptions of this market or by legislation that limits the ability 17 of certain categories of financial institutions to invest in these securities. In addition, the secondary market may be less liquid for lower rated fixed-income securities. This lack of liquidity at certain times may affect the valuation of these securities and may make the valuation and sale of these securities more difficult. . MORTGAGE-RELATED SECURITIES (LOOMIS SAYLES BALANCED, SALOMON BROTHERS U.S. GOVERNMENT AND SALOMON BROTHERS STRATEGIC BOND OPPORTUNITIES SERIES) Mortgage-related securities, such as GNMA or FNMA certificates, differ from traditional debt securities. Among the major differences are that interest and principal payments are made more frequently, usually monthly, and that principal may be prepaid at any time because the underlying mortgage loans generally may be prepaid at any time. As a result, if a Series purchases these assets at a premium, a faster-than-expected prepayment rate will reduce yield to maturity, and a slower-than-expected prepayment rate will have the opposite effect of increasing yield to maturity. If a Series purchases mortgage-related securities at a discount, faster-than-expected prepayments will increase, and slower-than-expected prepayments will reduce, yield to maturity. Prepayments, and resulting amounts available for reinvestment by the Series, are likely to be greater during a period of declining interest rates and, as a result, are likely to be reinvested at lower interest rates. Accelerated prepayments on securities purchased at a premium may result in a loss of principal if the premium has not been fully amortized at the time of prepayment. Although these securities will decrease in value as a result of increases in interest rates generally, they are likely to appreciate less than other fixed-income securities when interest rates decline because of the risk of prepayments. . COLLATERALIZED MORTGAGE OBLIGATIONS (LOOMIS SAYLES BALANCED, SALOMON BROTHERS U.S. GOVERNMENT SERIES AND SALOMON BROTHERS STRATEGIC BOND OPPORTUNITIES SERIES) A collateralized mortgage obligation ("CMO") is a security backed by a portfolio of mortgages or mortgage securities held under an indenture. The underlying mortgages or mortgage securities are issued or guaranteed by the U.S. Government or an agency or instrumentality thereof, but the obligations purchased by a Series will in many cases not be so issued or guaranteed. The issuer's obligation to make interest and principal payments is secured by the underlying portfolio of mortgages or mortgage securities. CMOs are issued with a number of classes or series which have different maturities and which may represent interests in some or all of the interest or principal on the underlying collateral or a combination thereof. In the event of sufficient early prepayments on such mortgages, the class or series of CMO first to mature generally will be retired prior to its maturity. The early retirement of a particular class or series of CMO held by a Series would have the same effect as the prepayment of mortgages underlying a mortgage pass-through security. . "STRIPPED" MORTGAGE SECURITIES (SALOMON BROTHERS U.S. GOVERNMENT AND SALOMON BROTHERS STRATEGIC BOND OPPORTUNITIES SERIES) "Stripped" mortgage securities are issued by agencies or instrumentalities of the U.S. Government or private issuers. Stripped mortgage securities are usually structured with two classes that receive different proportions of the interest and principal distribution on a pool of mortgage assets. In some cases, one class will receive all of the interest (the interest-only or "IO" class), while the other class will receive all of the principal (the principal-only or "PO" class). Stripped mortgage securities have greater market volatility than other types of mortgage securities. If the underlying mortgage assets experience greater than anticipated payments of principal, the Series may fail to recoup fully its investments in IOs. The staff of the SEC has indicated that it views stripped mortgage securities as illiquid. Until further clarification of the matter is provided by the staff, the Series will treat its investment in stripped mortgage securities as illiquid. As a result, these investments, together with any other illiquid investments, will not exceed 15% of the Series' net assets. . ADJUSTABLE RATE MORTGAGE SECURITIES (LOOMIS SAYLES BALANCED, SALOMON BROTHERS U. S. GOVERNMENT AND SALOMON BROTHERS STRATEGIC BOND OPPORTUNITIES SERIES) An adjustable rate mortgage security ("ARM"), like a traditional mortgage security, is an interest in a pool of mortgage loans that provides investors with payments consisting of both principal and interest as mortgage loans in the underlying mortgage pool are paid off by the borrowers. ARMs have interest rates that are reset at periodic intervals, usually by reference to some interest rate index or market interest rate. Although the rate adjustment feature may act as a buffer to reduce sharp changes in the value of adjustable rate securities, these securities are still subject to changes in value based on changes in market interest rates or changes in the issuer's creditworthiness. Because the 18 interest rates are reset only periodically, changes in the interest rate on ARMs may lag changes in prevailing market interest rates. Also, some ARMs (or the underlying mortgages) are subject to caps or floors that limit the maximum change in interest rate during a specified period or over the life of the security. As a result, changes in the interest rate on an ARM may not fully reflect changes in prevailing market interest rates during certain periods. Because of the resetting of interest rates, ARMs are less likely than non-adjustable rate securities of comparable quality and maturity to increase significantly in value when market interest rates fall. . ASSET BACKED SECURITIES (LOOMIS SAYLES BALANCED, SALOMON BROTHERS U. S. GOVERNMENT AND SALOMON BROTHERS STRATEGIC BOND OPPORTUNITIES SERIES) The securitization techniques used to develop mortgage securities are also being applied to a broad range of other assets. Through the use of trusts and special purpose corporations, automobile and credit card receivables are being securitized in pass-through structures similar to mortgage pass- through structures or in a pay-through structure similar to the CMO structure. Generally the issuers of asset backed bonds, notes or pass- through certificates are special purpose entities and do not have any significant assets other than the receivables securing such obligations. In general, the collateral supporting asset backed securities is of shorter maturity than mortgage loans. Instruments backed by pools of receivables are similar to mortgage-backed securities in that they are subject to unscheduled prepayments of principal prior to maturity. When the obligations are prepaid, the Series will ordinarily reinvest the prepaid amounts in securities the yields of which reflect interest rates prevailing at the time. Therefore, a Series' ability to maintain a portfolio which includes high-yielding asset backed securities will be adversely affected to the extent that prepayments of principal must be reinvested in securities which have lower yields than the prepaid obligations. Moreover, prepayments of securities purchased at a premium could result in a realized loss. A Series will only invest in asset backed securities rated, at the time of purchase, AA or better by S&P or Aa or better by Moody's or which, in the opinion of the investment subadviser, are of comparable quality. . INVERSE FLOATERS (LOOMIS SAYLES BALANCED, SALOMON BROTHERS U.S. GOVERNMENT AND SALOMON BROTHERS STRATEGIC BOND OPPORTUNITIES SERIES) The Series listed above may invest in inverse floaters, which are derivative mortgage securities. Inverse floaters are structured as a class of security that receives distributions on a pool of mortgage assets and whose yields move in the opposite direction of short-term interest rates, sometimes, at an accelerated rate. Inverse floaters may be issued by agencies or instrumentalities of the U.S. Government, or by private issuers, including savings and loan associations, mortgage banks, commercial banks, investment banks and special purpose subsidiaries of the foregoing. Inverse floaters have greater volatility than other types of mortgage securities in which the Series invest (with the exception of stripped mortgage securities). Although inverse floaters are purchased and sold by institutional investors through several investment banking firms acting as brokers or dealers, the market for such securities has not yet been fully developed. Accordingly, inverse floaters are generally illiquid. . REPURCHASE AGREEMENTS (ALL SERIES) In repurchase agreements, a Series buys securities from a seller, usually a bank or brokerage firm, with the understanding that the seller will repurchase the securities at a higher price at a later date. Such transactions afford an opportunity for a Series to earn a return on available cash at minimal market risk, although the Series may be subject to various delays and risks of loss if the seller is unable to meet its obligation to repurchase. . REVERSE REPURCHASE AGREEMENTS AND DOLLAR ROLL AGREEMENTS (SALOMON BROTHERS U.S. GOVERNMENT AND SALOMON BROTHERS STRATEGIC BOND OPPORTUNITIES SERIES) The Series may enter into reverse repurchase agreements and dollar roll agreements with banks and brokers to enhance return. Reverse repurchase agreements involve sales by the Series of portfolio assets concurrently with an agreement by the Series to repurchase the same assets at a later date at a fixed price. During the reverse repurchase agreement period, the Series continues to receive principal and interest payments on these securities and also has the opportunity to earn a return on the collateral furnished by the counterparties to secure its obligation to redeliver the securities. Dollar rolls are transactions in which the Series sells securities for delivery in the current month and simultaneously contracts to repurchase substantially similar (same type and coupon) securities on a specified future date. During the roll period, the Series forgoes principal and interest paid on both the securities sold and those to be purchased. The 19 Series is compensated by the difference between the current sales price and the forward price for the future purchase (often referred to as the "drop") as well as by the interest earned on the cash proceeds of the initial sale. The Series will establish segregated accounts with the Fund's custodian in which they will maintain cash, U.S. Government Securities or other liquid high grade debt obligations equal in value to their obligations with respect to reverse repurchase agreements and dollar rolls. Reverse repurchase agreements and dollar rolls involve the risk that the market value of the securities retained by the Series may decline below the price of the securities the Series has sold but is obligated to repurchase under the agreement. In the event the buyer of securities under a reverse repurchase agreement or dollar roll files for bankruptcy or becomes insolvent, the Series' use of the proceeds of the agreement may be restricted pending a determination by the other party or its trustee or receiver, whether to enforce the Series' obligation to repurchase the securities. Reverse repurchase agreements and dollar rolls are not considered borrowings by the Series for purpose of the Series' fundamental investment restriction with respect to borrowings. . OPTIONS (DRAYCOTT INTERNATIONAL EQUITY, SALOMON BROTHERS U.S. GOVERNMENT, SALOMON BROTHERS STRATEGIC BOND OPPORTUNITIES AND VENTURE VALUE SERIES) A Series may seek to increase its current return by writing covered call options and covered put options, with respect to securities it holds or intends to buy, through the facilities of options exchanges and directly with market makers in the over-the-counter market. A Series receives a premium from writing a call or put option, which increases the Series' current return if the option expires unexercised or is closed out at a net profit. At times when a Series has written call options on a substantial portion of its portfolio, the Series' ability to profit and its risk of loss from changes in market prices of portfolio securities will be limited. Appreciation in securities covering the options would likely be partially or wholly offset by losses on the options. The termination of options positions under such conditions would generally result in the realization of short-term capital losses, which would reduce the Series' current return. Accordingly, a Series may seek to realize capital gains to offset realized losses by selling securities. As described in the Statement, over-the-counter options involve certain special risks (including liquidity and credit risks) not necessarily present with exchange-listed options. A Series will treat as illiquid any over-the-counter options and assets maintained as "cover" for over-the- counter options that the Series has written. The options markets of foreign countries are small compared to those of the United States and consequently are characterized in most cases by less liquidity than are the U.S. markets. In addition, foreign markets may be subject to less detailed reporting requirements and regulatory controls than U.S. markets. See "Foreign Securities" below. . FUTURES AND OTHER HEDGING TRANSACTIONS (WESTPEAK VALUE GROWTH, LOOMIS SAYLES BALANCED, DRAYCOTT INTERNATIONAL EQUITY, SALOMON BROTHERS U.S. GOVERNMENT, SALOMON BROTHERS STRATEGIC BOND OPPORTUNITIES AND VENTURE VALUE SERIES) Futures contracts are exchange-traded obligations to buy or sell a particular security on a specified future date (or to pay or receive amounts based on the value of a securities index or currency on that date). The use of futures transactions entails certain special risks. In particular, the variable degree of correlation between price movements of futures contracts and price movements in the related securities or currency position of a Series could create the possibility that losses on the futures contracts are greater than gains in the value of the Series' position. In addition, futures markets could be illiquid in some circumstances. As a result, in certain markets, a Series might not be able to close out a transaction without incurring substantial losses. Although a Series' use of futures transactions for hedging should tend to minimize the risk of loss due to a decline in the value of the hedged position, at the same time it will tend to limit any potential gain to a Series that might result from an increase in value of the position. The daily variation margin requirements for futures contracts create a greater ongoing potential financial risk than would purchases of options, in which case the exposure is limited to the cost of the initial premium. Each of these Series may, at the discretion of its subadviser, engage in foreign currency exchange transactions, in connection with the purchase and sale of portfolio securities, to protect the value of specific portfolio positions or in anticipation of changes in relative values of currencies in which current or future Series' portfolio holdings are denominated or quoted. 20 For hedging purposes, each of these Series may also buy put or call options on securities that it holds or intends to buy. In addition to engaging in options transactions on established exchanges, a Series may purchase over- the-counter options from brokerage firms and other financial institutions. Each of these Series may invest in options and futures contracts on various securities indices to hedge against changes in the value of securities it holds or expects to acquire. These Series may also invest in options on index futures. No Series will invest more than 5% of its net assets in futures or premiums for options on futures that are traded on a U.S. commodities exchange. Certain asset segregation requirements apply when a Series becomes obligated under a hedging instrument. There is no assurance that a Series' hedging strategies will be effective. These strategies involve costs and the risk of loss to the Series. See Part II of the Statement for more information. . SWAPS (SALOMON BROTHERS STRATEGIC BOND OPPORTUNITIES SERIES) The Series may enter into interest rate, currency and index swaps. The Series will enter into these transactions primarily to seek to preserve a return or spread on a particular investment or portion of its portfolio, to protect against currency fluctuations, as a duration management technique or to protect against any increase in the price of securities a Series anticipates purchasing at a later date. Interest rate swaps involve the exchange by a Series with another party of their respective commitments to pay or receive interest (for example, an exchange of floating rate payments for fixed rate payments with respect to a notional amount of principal). A currency swap is an agreement to exchange cash flows on a notional amount based on changes in the relative values of the specified currencies. The Series will maintain cash and appropriate liquid assets in a segregated custodial account to cover its current obligations under swap agreements. Because swap agreements are not exchange-traded, but are private contracts into which the Series and a swap counterparty enter as principals, the Series may experience a loss or delay in recovering assets if the counterparty were to default on its obligations. . STRUCTURED NOTES (SALOMON BROTHERS STRATEGIC BOND OPPORTUNITIES SERIES) The Salomon Brothers Strategic Bond Opportunities Series is permitted to invest in a broad category of instruments known as "structured notes." These instruments are debt obligations issued by industrial corporations, financial institutions or governmental or international agencies. Traditional debt obligations typically obligate the issuer to repay the principal plus a specified rate of interest. Structured notes, by contrast, obligate the issuer to pay amounts of principal or interest that are determined by reference to changes in some external factor or factors. For example, the issuer's obligations could be determined by reference to changes in the value of a commodity (such as gold or oil), a foreign currency, an index of securities (such as the S&P 500 Index) or an interest rate (such as the U.S. Treasury bill rate). In some cases, the issuer's obligations are determined by reference to changes over time in the difference (or "spread") between two or more external factors (such as the U.S. prime lending rate and the London Inter-Bank Offering Rate). In some cases, the issuer's obligations may fluctuate inversely with changes in an external factor or factors (for example, if the U.S. prime lending rate goes up, the issuer's interest payment obligations are reduced). In some cases, the issuer's obligations may be determined by some multiple of the change in an external factor or factors (for example, three times the change in the U.S. Treasury bill rate). In some cases, the issuer's obligations remain fixed (as with a traditional debt instrument) so long as an external factor or factors do not change by more than the specified amount (for example, if the U.S. Treasury bill rate does not exceed some specified maximum); but if the external factor or factors change by more than the specified amount, the issuer's obligations may be sharply reduced. Structured notes can serve many different purposes in the management of the Series. For example, they can be used to increase the Series' exposure to changes in the value of assets that the Series would not ordinarily purchase directly (such as gold or oil). They can also be used to hedge the risks associated with other investments the Series holds. For example, if a structured note has an interest rate that fluctuates inversely with general changes in market interest rates, the value of the structured note would generally move in the opposite direction to the value of traditional debt obligations, thus moderating the effect of interest rate changes in the value of the Series' portfolio as a whole. Structured notes involve special risks. As with any debt obligation, structured notes involve the risk that the issuer will become insolvent or otherwise default on its payment obligations. The risk is in addition to the risk that the 21 issuer's obligations (and thus the value of the Series' investment) will be reduced because of adverse changes in the external factor or factors to which the obligations are linked. The value of structured notes will in many cases be more volatile (that is, will change more rapidly or severely) than the value of traditional debt instruments. Volatility will be especially high if the issuer's obligations are determined by reference to some multiple of the change in the external factor or factors. Many structured notes have limited or no liquidity, so that the Series would be unable to dispose of the investment prior to maturity. (The Series is not permitted to invest more than 15% of its net assets in illiquid investments.) As with all investments, successful use of structured notes depends in significant part on the accuracy of the subadviser's analysis of the issuer's creditworthiness and financial prospects, and of the subadviser's forecast as to changes in relevant economic and financial market conditions and factors. In instances where the issuer of a structured note is a foreign entity, the usual risks associated with investments in foreign securities (described above) apply. . FOREIGN SECURITIES (LOOMIS SAYLES AVANTI GROWTH, LOOMIS SAYLES SMALL CAP, LOOMIS SAYLES BALANCED, DRAYCOTT INTERNATIONAL EQUITY, SALOMON BROTHERS U.S. GOVERNMENT, SALOMON BROTHERS STRATEGIC BOND OPPORTUNITIES, VENTURE VALUE AND ALGER EQUITY GROWTH SERIES) Each of these Series may invest in securities of issuers organized or headquartered outside the United States or primarily traded outside the United States ("foreign securities"). In the case of the Loomis Sayles Small Cap, Loomis Sayles Avanti Growth and Salomon Brothers U.S. Government Series, the Series will not purchase a foreign security if, as a result, the Series' holdings of foreign securities would exceed 20% of the Series' total assets. Although investing in foreign securities may increase a Series' diversification and reduce portfolio volatility, foreign securities may present risks not associated with investments in comparable securities of U.S. issuers. There may be less information publicly available about a foreign corporate or government issuer than about a U.S. issuer, and foreign corporate issuers are not generally subject to accounting, auditing and financial reporting standards and practices comparable to those in the United States. The securities of some foreign issuers are less liquid and at times more volatile than securities of comparable U.S. issuers. Foreign brokerage commissions and securities custody costs are often higher than in the United States. With respect to certain foreign countries, there is a possibility of governmental expropriation of assets, confiscatory taxation, political or financial instability and diplomatic developments that could affect the value of investments in those countries. A Series' receipt of interest on foreign government securities may depend on the availability of tax or other revenues to satisfy the issuer's obligations. A Series' investments in foreign securities may include investments in countries whose economies or securities markets are not yet highly developed. Special considerations associated with these investments (in addition to the considerations regarding foreign investments generally) may include, among others, greater political uncertainties, an economy's dependence on revenues from particular commodities or on international aid or development assistance, currency transfer restrictions, highly limited numbers of potential buyers for such securities and delays and disruptions in securities settlement procedures. Since most foreign securities are denominated in foreign currencies or trade primarily in securities markets in which settlements are made in foreign currencies, the value of these investments and the net investment income available for distribution to shareholders of a Series investing in these securities may be affected favorably or unfavorably by changes in currency exchange rates or exchange control regulations. Changes in the value relative to the U.S. dollar of a foreign currency in which a Series' holdings are denominated will result in a change in the U.S. dollar value of the Series' assets and the Series' income available for distribution. In addition, although part of a Series' income may be received or realized in foreign currencies, the Series will be required to compute and distribute its income in U.S. dollars. Therefore, if the value of a currency relative to the U.S. dollar declines after a Series' income has been earned in that currency, translated into U.S. dollars and declared as a dividend, but before payment of the dividend, the Series could be required to liquidate portfolio securities to pay the dividend. Similarly, if the value of a currency relative to the U.S. dollar declines between the time a Series accrues expenses in U.S. dollars and the time such expenses are paid, the amount of such currency required to be converted into U.S. dollars will be greater than the equivalent amount in such currency of such expenses at the time they were incurred. 22 . HIGH YIELD/HIGH RISK FOREIGN SOVEREIGN DEBT SECURITIES (SALOMON BROTHERS STRATEGIC BOND OPPORTUNITIES SERIES) Investing in fixed and floating rate high yield foreign sovereign debt securities will expose the Series to special risks in addition to those described under "Foreign Securities" above. These bonds are typically issued by developing or emerging countries, whose ability to pay principal and interest may be adversely affected by many factors, including: high rates of inflation, high interest rates, currency exchange rates or difficulties, political uncertainty or instability, the country's cash flow position, the availability of sufficient foreign exchange on the date a payment is due, the relative size of its debt service burden to the economy as a whole, the policy of the International Monetary Fund, the World Bank and other international agencies, the obligor's balance of payments, including export performance, its access to international credit and investments, fluctuations in the international prices of commodities which it imports or exports and the extent of its foreign reserves and access to foreign exchange. Currency devaluations may also adversely affect the ability of a sovereign obligor to obtain sufficient foreign exchange to service its external debt. If a foreign sovereign obligor cannot generate sufficient earnings from foreign trade to service its external debt, it may need to depend on continuing loans and aid from foreign governments, commercial banks and multilateral organizations, and inflows of foreign investment. The commitment on the part of these entities to make such disbursements may be conditioned on the government's implementation of economic reforms or other requirements. Failure to meet such conditions may result in the cancellation of such third parties' commitments to lend funds, which may further impair the obligor's ability or willingness to timely service its debts. Sovereign obligors in developing and emerging countries have in the past experienced substantial difficulties in servicing their external debt obligations, which has led to defaults on certain obligations and the restructuring of certain indebtedness including among other things, reducing and rescheduling interest and principal payments by negotiating new or amended credit agreements or converting outstanding principal and unpaid interest to Brady Bonds and obtaining new credit to finance interest payments. There can be no assurance that the Brady Bonds and other foreign sovereign debt securities in which the Series may invest will not be subject to similar restructuring arrangements or to requests for new credit which may adversely affect the Series' holdings. . LOAN PARTICIPATIONS AND ASSIGNMENTS (SALOMON BROTHERS STRATEGIC BOND OPPORTUNITIES SERIES) The Series may invest in fixed and floating rate loans ("Loans") arranged through private negotiations between a foreign sovereign entity and one or more financial institutions ("Lenders"). The Series may invest in such Loans in the form of participations in Loans ("Participations") and assignments of all or a portion of Loans from third parties ("Assignments"). Participations typically will result in the Series having a contractual relationship only with the Lender, not with the borrower. The Series will have the right to receive payments of principal, interest and any fees to which it is entitled only from the Lender selling the Participation and only upon receipt by the Lender of the payments from the borrower. In connection with purchasing Participations, the Series generally will have no right to enforce compliance by the borrower with the terms of the loan agreement relating to the Loan, nor any rights of set-off against the borrower, and the Series may not benefit directly from any collateral supporting the Loan in which it has purchased the Participation. As a result, the Series will be subject to credit risk relating to both the borrower and the Lender that is selling the Participation. In the event of the insolvency of the Lender selling a Participation, the Series may be treated as a general creditor of the Lender and may not benefit from any set-off between the Lender and the borrower. When the Series purchases Assignments from Lenders, the Series will acquire direct rights against the borrower on the Loan, except that under certain circumstances such rights may be more limited than those held by the assigning Lender. The Series may have difficulty disposing of Assignments and Participations. Because the market for such instruments is not highly liquid, the Series anticipates that such instruments could be sold only to a limited number of institutional investors. The lack of a highly liquid secondary market may have an adverse impact on the value of such instruments and will have an adverse impact on the Series' ability to dispose of particular Assignments or Participations in response to a specific economic event, such as deterioration in the creditworthiness of the borrower. The Series currently intends to treat all investments in Participations and Assignments as illiquid. . WHEN-ISSUED SECURITIES (DRAYCOTT INTERNATIONAL EQUITY, SALOMON BROTHERS U.S. GOVERNMENT, SALOMON BROTHERS STRATEGIC BOND OPPORTUNITIES, VENTURE VALUE AND ALGER EQUITY GROWTH SERIES) If the value of a "when-issued" security being purchased falls between the time a Series commits to buy it and the payment date, the Series may sustain a loss. The risk of this loss is in addition to the Series' risk of loss on the 23 securities actually in its portfolio at the time. In addition, when the Series buys a security on a when-issued basis, it is subject to the risk that market rates of interest will increase before the time the security is delivered, with the result that the yield on the security delivered to the Series may be lower than the yield available on other, comparable securities at the time of delivery. The Series will maintain cash or liquid high grade assets in a segregated account in an amount sufficient to satisfy its outstanding obligations to buy securities on a "when-issued" basis. . INVESTMENT COMPANY SECURITIES (WESTPEAK VALUE GROWTH, LOOMIS SAYLES AVANTI GROWTH, DRAYCOTT INTERNATIONAL EQUITY, VENTURE VALUE AND ALGER EQUITY GROWTH SERIES) Each of these Series may invest up to 10% of its assets in securities of investment companies. As a shareholder of an investment company, each Series may indirectly bear investment management fees and other expenses of that investment company, which are in addition to the management fees the Series pays its adviser and other expenses the Series incurs directly. The Venture Value Series may only invest in securities of investment companies investing primarily in foreign securities. . LENDING OF PORTFOLIO SECURITIES (SALOMON BROTHERS U.S. GOVERNMENT, SALOMON BROTHERS STRATEGIC BOND OPPORTUNITIES, VENTURE VALUE AND ALGER EQUITY GROWTH SERIES) To the extent that any of the above Series lend that Series' portfolio securities, such lending must be fully collateralized by cash, letters of credit or U.S. Government Securities at all times, but involves some credit risk to the Series if the other party should default on its obligations and the Series is delayed in or prevented from recovering the collateral. . "SHORT SALES AGAINST THE BOX" (ALGER EQUITY GROWTH SERIES) The Alger Equity Growth Series may sell securities "short against the box." While a short sale is the sale of a security the Series does not own, it is "against the box" if at all times when the short position is open the Series owns an equal amount of the securities sold short (or securities convertible into, or exchangeable without further consideration for, securities of the same issue as the securities sold short). . ILLIQUID SECURITIES (ALL SERIES) Each Series may invest up to 15% of its assets in "illiquid securities," that is, securities which are not readily resaleable, including securities whose disposition is restricted by federal securities laws. The Series may purchase "Rule 144A securities." These are privately offered securities that can be resold only to certain qualified institutional buyers. Rule 144A securities are treated as illiquid, unless the Series' subadviser has determined, under guidelines established by the Fund's trustees, that the particular issue of Rule 144A securities is liquid. . ZERO COUPON SECURITIES (LOOMIS SAYLES BALANCED, SALOMON BROTHERS U.S. GOVERNMENT AND SALOMON BROTHERS STRATEGIC BOND OPPORTUNITIES SERIES) Zero coupon securities involve special risk considerations. Zero coupon securities are debt securities that pay no cash income but are sold at substantial discounts from their value at maturity. When a zero coupon security is held to maturity, its entire return, which consists of the amortization of discount, comes from the difference between its purchase price and its maturity value. The difference is known at the time of purchase, so that investors holding zero coupon securities until maturity know at the time of their investment what the return on their investment will be. Certain zero coupon securities also are sold at substantial discounts from their maturity value and provide for the commencement of regular interest payments at a deferred date. Zero coupon securities tend to be subject to greater price fluctuations in response to changes in interest rates than are ordinary interest-paying debt securities with similar maturities. The value of zero coupon securities appreciates more during periods of declining interest rates and depreciates more during periods of rising interest rates. Zero coupon securities may be issued by a wide variety of corporate and governmental issuers. Although zero coupon securities are generally not traded on a national securities exchange, many such securities are widely traded by brokers and dealers and, if so, will not be considered illiquid. Current federal income tax law requires the holder of a zero coupon security (as well as the holders of other securities, such as Brady Bonds, which may be acquired at a discount) to accrue income with respect to these securities prior to the receipt of cash payments. To maintain its qualification as a regulated investment company and avoid liability for federal income and excise taxes, the Series may be required to distribute income accrued with respect to these 24 securities and may have to dispose of portfolio securities under disadvantageous circumstances in order to generate cash to satisfy these distribution requirements. Note: Except for the investment objective of the Westpeak Value Growth, Loomis Sayles Avanti Growth and Loomis Sayles Small Cap Series or except as otherwise explicitly stated in this Prospectus or the Statement, each Series' investment policies may be changed at any time without shareholder approval. PORTFOLIO TURNOVER Portfolio turnover is not a limiting factor with respect to investment decisions for any Series. For example, although the Alger Equity Growth Series' objective is long-term capital appreciation, it frequently sells securities to reflect changes in market, industry or individual company conditions or outlook, even though it may only have held those securities for a short period. High portfolio turnover involves correspondingly greater brokerage commissions and other transaction costs, which will be borne directly by the relevant Series. For additional information about such costs see "Taxes" and "Management" below, and "Portfolio Transactions and Brokerage" in the Statement. For information about the past portfolio turnover rates of all the Series, see "Financial Highlights." Although it is not possible to predict the portfolio turnover rates with certainty, the subadvisers of the following Series (all of which unless otherwise noted commenced operations on October 31, 1994) expect that such Series' portfolio turnover rate will usually not exceed the following annual rates: Loomis Sayles Small Cap Series (which commenced operations on May 1, 1994), 300%; Loomis Sayles Balanced Series, 75%; Draycott International Equity Series, 60%; Salomon Brothers U.S. Government Series, 300%; Salomon Brothers Strategic Bond Opportunities Series, 300%; Venture Value Series, 50%; Alger Equity Growth Series, 100%. Turnover in excess of 100% involves higher levels of brokerage commissions and possibly increased realization of taxable gains, as compared to many mutual funds. RESOLVING MATERIAL CONFLICTS Currently, shares in the Fund are available only to separate accounts established by NEVLICO, The New England or subsidiaries of The New England as an investment vehicle for variable life insurance or variable annuity products. In the future, however, such shares may be offered to separate accounts of insurance companies unaffiliated with NEVLICO or The New England. A potential for certain conflicts of interest exists between the interests of variable life insurance contract owners and variable annuity contract owners. Pursuant to conditions imposed in connection with related regulatory relief granted by the SEC, the Fund's board of trustees (the "Board of Trustees") has an obligation to monitor events to identify conflicts that may arise from the sale of shares to both variable life insurance and variable annuity separate accounts or to separate accounts of insurance companies not affiliated with The New England. Such events might include changes in state insurance law or federal income tax law, changes in investment management of any portfolio of the Fund, or differences between voting instructions given by variable life insurance and variable annuity contract owners. Insurance companies investing in the Fund will be responsible for proposing and executing any necessary remedial action and the Board of Trustees has an obligation to determine whether such proposed action adequately remedies any such conflicts. PERFORMANCE INFORMATION Information about the performance of the Series is set forth below and, from time to time, the Fund may use this information in advertisements. Performance information about a Series is based on that Series' past performance and is not intended to indicate future performance. The Fund serves as the underlying investment vehicle for variable life insurance or variable annuity products and its shares cannot be purchased directly. Therefore, such performance information does not reflect any of the charges assessed against the insurance company separate accounts or the variable life insurance or variable annuity products for which the Fund serves as an investment vehicle. Where relevant, performance information about those variable life insurance or variable annuity products is contained in the prospectus applicable to those products. 25 Each Series may include its total return in advertisements or other written material. Total return is measured by comparing the value of a hypothetical $1,000 investment in the Series at the beginning of the relevant period to the value of the investment at the end of the period (assuming immediate reinvestment of any dividends or capital gains distributions). Total return reflects the bearing of certain expenses by The New England and its affiliates pursuant to various arrangements that are described below under "Management." If these arrangements had not been in effect, each Series' total return would have been lower. TOTAL RETURN
AVERAGE ANNUAL AVERAGE ANNUAL TOTAL RETURN TOTAL RETURN FOR THE TEN FOR THE FIVE PERIOD YEARS ENDING YEARS ENDING RETURN 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 12/31/94 12/31/94 ------ ----- ----- ---- ----- ----- ----- ----- ---- ----- ----- -------------- -------------- Westpeak Value Growth Series(1) -- -- -- -- -- -- -- -- 14.2%(1) -1.2% -- -- Loomis Sayles Avanti Growth Series(2) -- -- -- -- -- -- -- -- 14.7%(2) -0.3% -- -- Loomis Sayles Small Cap Series(3) -- -- -- -- -- -- -- -- -- -3.2%(3) -- -- Loomis Sayles Balanced Series -- -- -- -- -- -- -- -- -- -0.1%(4) -- -- Draycott International Equity Series -- -- -- -- -- -- -- -- -- 2.6%(4) -- -- Salomon Brothers U.S. Government Series -- -- -- -- -- -- -- -- -- 0.6%(4) -- -- Salomon Brothers Strategic Bond Opportunities Series -- -- -- -- -- -- -- -- -- -1.4%(4) -- -- Venture Value Series -- -- -- -- -- -- -- -- -- -3.5%(4) -- -- Alger Equity Growth Series -- -- -- -- -- -- -- -- -- -4.2%(4) -- -- S&P 500(5) 31.6% 18.6% 5.2% 16.5% 31.6% -3.1% 30.3% 7.6% 10.1% 1.3% 14.4% 8.7% Lehman Intermediate Government/Corporate Bond Index(6) 18.1% 13.1% 3.7% 6.8% 12.8% 9.2% 14.6% 7.2% 8.8% -2.0% 9.1% 7.4% Consumer Price Index(7) 3.8% 1.1% 4.4% 4.4% 4.7% 6.1% 3.1% 2.9% 2.8% 2.8% 3.6% 3.5% Dow Jones Industrial Average(8) 33.6% 27.1% 5.5% 16.1% 32.2% -1.0% 24.2% 7.4% 16.9% 5.1% 16.2% 10.3% AVERAGE ANNUAL TOTAL RETURN SINCE COMMENCE- PERIOD MENT OF OFFERING RETURN THROUGH 12/31/94 ------ ---------------- Westpeak Value Growth Series(1) 7.5%(1) Loomis Sayles Avanti Growth Series(2) 8.4%(2) Loomis Sayles Small Cap Series(3) -3.2%(3) Loomis Sayles Balanced Series -0.1%(4) Draycott International Equity Series 2.6%(4) Salomon Brothers U.S. Government Series 0.6%(4) Salomon Brothers Strategic Bond Opportunities Series -1.4%(4) Venture Value Series -3.5%(4) Alger Equity Growth Series -4.2%(4) S&P 500(5) 13.4% Lehman Intermediate Government/Corporate Bond Index(6) 9.7% Consumer Price Index(7) 3.6% Dow Jones Industrial Average(8) 14.9%
- ------- (1) For the period beginning April 30, 1993, when the Westpeak Value Growth Series became publicly available. (2) For the period beginning April 30, 1993, when the Loomis Sayles Avanti Growth Series became publicly available. (3) For the period beginning May 2, 1994, when the Loomis Sayles Small Cap Series commenced operations, but did not become publicly available. Average annual total return for the period May 2, 1994 through December 31, 1994 is presented on an unannualized basis. (4) Represents unannualized total return for the period beginning October 31, 1994 when the Loomis Sayles Balanced, Draycott International Equity, Salomon Brothers U.S. Government, Salomon Brothers Strategic Bond Opportunities, Venture Value and Alger Equity Growth Series commenced operations. (5) The S&P 500 Stock Index is an unmanaged weighted index of the stock performance of 500 industrial, transportation, utility and financial companies. Investment results shown assume the reinvestment of dividends. (6) The Lehman Intermediate Government/Corporate Bond Index is a subset of the Lehman Government/Corporate Bond Index covering all issues with maturities between 1 and 10 years which is composed of taxable, publicly-issued, non- convertible debt obligations issued or guaranteed by the U.S. Government or its agencies and another Lehman index that is composed of taxable, fixed rate publicly-issued, investment grade non-convertible corporate debt obligations. (7) The Consumer Price Index, published by the U.S. Bureau of Labor Statistics, is a statistical measure of changes, over time, in the prices of goods and services. (8) The Dow Jones Industrial Average is a market value-weighted and unmanaged index of 30 large industrial stocks traded on the New York Stock Exchange. 26 From time to time, articles about a Series regarding performance, rankings and other Series characteristics may appear in national publications including, but not limited to, The Wall Street Journal, Forbes, Fortune, CDA Investment Technologies and Money Magazine. In particular, some or all of these publications may publish their own rankings or performance reviews of mutual funds, including the Fund. References to or reprints or portions of reprints of such articles, which may include rankings that list the names of other funds and their performance, may be used as Fund or variable contract sales literature or advertising material. YIELD Loomis Sayles Balanced, Salomon Brothers U.S. Government and Salomon Brothers Strategic Bond Opportunities Series Each of these Series may advertise its yield in addition to its total return. The yield will be computed in accordance with the SEC's standardized formula by dividing the net investment income per share earned during a recent 30-day period by the net asset value of a Series share (reduced by any earned income expected to be declared shortly as a dividend) on the last trading day of the period. Yield calculations will reflect any waiver of fees and/or bearing of expenses by The New England and its affiliates. INVESTMENT RESTRICTIONS The following is a description of restrictions on the investments to be made by the twelve Series. Except as specifically listed below, and except for restrictions marked with an asterisk, these restrictions may not be changed without the approval of a majority of the outstanding voting securities of the relevant Series. INVESTMENT RESTRICTIONS APPLICABLE TO THE WESTPEAK VALUE GROWTH, LOOMIS SAYLES AVANTI GROWTH, LOOMIS SAYLES SMALL CAP, LOOMIS SAYLES BALANCED, DRAYCOTT INTERNATIONAL EQUITY, SALOMON BROTHERS U.S. GOVERNMENT, SALOMON BROTHERS STRATEGIC BOND OPPORTUNITIES, VENTURE VALUE AND ALGER EQUITY GROWTH SERIES Each of the Series listed above will not: *(1) With respect to 75% of the Series' total assets, purchase any security (other than U.S. Government obligations) if, as a result, more than 5% of the Series' total assets (taken at current value) would then be invested in securities of a single issuer and, with respect to the Series' total assets, purchase any security (other than U.S. Government obligations) if, as a result, more than 10% of such assets would then be invested in securities of a single issuer; (2) Purchase any security (other than U.S. Government Securities) if, as a result, more than 25% of the Series' total assets (taken at current value) would be invested in any one industry (in the utilities category, gas, electric, water and telephone companies will be considered as being in separate industries, and each foreign country's government (together with subdivisions thereof) will be considered to be a separate industry); *(3) Purchase securities on margin (but it may obtain such short-term credits as may be necessary for the clearance of purchases and sales of securities), or make short sales except where, by virtue of ownership of other securities, it has the right to obtain, without payment of further consideration, securities equivalent in kind and amount to those sold, and the Series will not deposit or pledge more than 10% of its total assets (taken at current value) as collateral for such sales. (For this purpose, the deposit or payment by the Series of initial or variation margin in connection with futures contracts or related options transactions is not considered the purchase of a security on margin); *(4) Acquire more than 10% of any class of securities of an issuer (taking all preferred stock issues of an issuer as a single class and all debt issues of an issuer as a single class) or acquire more than 10% of the outstanding voting securities of an issuer; (5) Borrow money in excess of 10% of its total assets (taken at cost) or 5% of its total assets (taken at current value), whichever is lower, and then only as a temporary measure for extraordinary or emergency purposes; 27 *(6) Pledge more than 15% of its total assets (taken at cost). (For the purpose of this restriction, collateral arrangements with respect to options, futures contracts and options on futures contracts and with respect to initial and variation margin are not deemed to be a pledge of assets); *(7) Invest more than 5% of its total assets (taken at current value) in securities of businesses (including predecessors) less than three years old; *(8) Purchase or retain securities of any issuer if officers and trustees of the Fund or officers and directors of any investment adviser of the Fund who individually own more than l/2 of 1% of the shares or securities of that issuer, together own more than 5%; (9) Make loans, except by entering into repurchase agreements (including reverse repurchase agreements) or by purchase of bonds, debentures, commercial paper, corporate notes and similar evidences of indebtedness, which are a part of an issue to the public or to financial institutions, or through the lending of the Series' portfolio securities to the extent set forth under "Loans of Portfolio Securities" above; (10) Buy or sell oil, gas or other mineral leases, rights or royalty contracts, real estate or commodities or commodity contracts, except that the Series may buy and sell futures contracts and related options. (This restriction does not prevent the Series from purchasing securities of companies investing in the foregoing); (11) Act as underwriter, except to the extent that, in connection with the disposition of portfolio securities, it may be deemed to be an underwriter under certain federal securities laws; *(12) Make investments for the purpose of exercising control or management; *(13) Participate on a joint or joint and several basis in any trading account in securities. (The "bunching" of orders for the purchase or sale of portfolio securities for a Series with that Series' adviser or subadviser or accounts under their management to reduce brokerage commissions, to average prices among them or to facilitate such transactions is not considered a trading account in securities for purposes of this restriction.); *(14) Write, purchase or sell options or warrants or, in the case of the Loomis Sayles Small Cap Series, combinations of both, except that the Series may (a) acquire warrants or rights to subscribe to securities of companies issuing such warrants or rights, or of parents or subsidiaries of such companies, (b) write, purchase and sell put and call options on securities or securities indices, and (c) enter into currency forward contracts; *(15) Purchase any illiquid security if, as a result, more than 15% of its net assets (taken at current value) would be invested in such securities; *(16) Invest in the securities of other investment companies, except by purchases in the open market involving only customary brokers' commissions. Under the 1940 Act, the Series may not (a) invest more than 10% of its total assets (taken at current value) in such securities, (b) own securities of any one investment company having a value in excess of 5% of the total assets of the Series (taken at current value), or (c) own more than 3% of the outstanding voting stock of any one investment company; or (17) Issue senior securities. (For the purpose of this restriction none of the following is deemed to be a senior security: any pledge or other encumbrance of assets permitted by restriction (6) above; any borrowing "permitted by restriction (5) above; any collateral arrangements with respect to options, futures contracts and options on futures contracts and with respect to initial and variation margin; the purchase or sale of options, forward contracts, futures contracts or options on futures contracts; and the issuance of shares of beneficial interest permitted from time to time by the provisions of the Trust's Declaration of Trust and by the 1940 Act, the rules thereunder, or any exemption therefrom.) For purposes of restriction (5), reverse repurchase agreements are not considered borrowings. VARIABLE CONTRACT RELATED INVESTMENT RESTRICTIONS Separate accounts supporting variable life insurance and variable annuity contracts are subject to certain diversification requirements imposed by regulations adopted under the Internal Revenue Code. Because the Fund is intended as an investment vehicle for variable life insurance and variable annuity separate accounts, Section 817(h) of the Internal Revenue Code requires that the Fund's investments, and accordingly the investments of each Series, be "adequately diversified" in 28 accordance with Treasury Regulations. Failure to do so means the variable life insurance and variable annuity contracts would cease to qualify as life insurance and annuities for federal tax purposes. Regulations specifying the diversification requirements have been issued by the Department of Treasury. The Fund intends to comply with these requirements. MANAGEMENT The Fund's Board of Trustees supervises the affairs of the Fund as conducted by the Series' advisers. Pursuant to separate advisory agreements, and subject in each case to the supervision of the Fund's Board of Trustees, TNE Advisers, Inc. is the investment adviser of each of the Series. SERIES ADVISED BY TNE ADVISERS, INC. The subadviser of each Series for which TNE advisers, Inc. serves as adviser is:
SERIES SUBADVISER ------ ---------- Westpeak Value Growth Series Westpeak Loomis Sayles Avanti Growth Series Loomis Sayles Loomis Sayles Small Cap Series Loomis Sayles Loomis Sayles Balanced Series Loomis Sayles Draycott International Equity Series Draycott Salomon Brothers Strategic Bond Opportunities Series Salomon Brothers Asset Management Inc Salomon Brothers U.S. Government Series Salomon Brothers Asset Management Inc Venture Value Series Selected/Venture Advisers, L.P. Alger Equity Growth Series Fred Alger Management, Inc.
TNE ADVISERS, INC., 501 Boylston Street, Boston, MA 02116, was organized in 1994. It is a wholly-owned subsidiary of The New England. TNE Advisers, Inc. oversees, evaluates and monitors the subadvisers' provision of investment advisory services to the Series and provides general business management and administration to the Series. TNE Advisers, Inc. has contracted with New England Funds, L.P. to provide certain administrative services to support the Series. Subject to the supervision of TNE Advisers, Inc., each subadviser manages its Series in accordance with the Series' investment objective and policies, makes investment decisions for that Series, places orders to purchase and sell securities for that Series and employs professional advisers and securities analysts who provide research services to that Series. The Series advised by TNE Advisers, Inc. pay no direct fees to any of the subadvisers described below. Westpeak, Loomis Sayles and Draycott are each independently-operated subsidiaries of New England Investment Companies, L.P. ("NEIC"). The general partners of each of Westpeak and Loomis Sayles are special purpose corporations which are indirect wholly-owned subsidiaries of NEIC. NEIC's sole general partner, New England Investment Companies, Inc., is a wholly-owned subsidiary of The New England. WESTPEAK, 1050 Walnut Street, Boulder, CO 80302, subadviser to the Westpeak Value Growth and Westpeak Stock Index Series, was organized in 1991. Gerald H. Scriver, President and Chief Executive Officer of Westpeak and Senior Vice President of the Fund, and Philip J. Cooper, CFA, Senior Vice President of portfolio management of Westpeak and Vice President of the Fund, have served as the portfolio managers of the Westpeak Value Growth Series since its inception in 1993. Both Mr. Scriver and Mr. Cooper have been with Westpeak since its inception in 1991. Prior to joining Westpeak in 1991, Mr. Scriver was Director of Quantitative Strategies of INVESCO and Mr. Cooper was Portfolio Manager of United Asset Management Services. LOOMIS SAYLES, One Financial Center, Boston, MA 02111, subadviser to the Loomis Sayles Avanti Growth, Loomis Sayles Small Cap and Loomis Sayles Balanced Series, was founded in 1926 and is one of the country's oldest and largest investment firms. Richard W. Hurckes, Vice President of Loomis Sayles and Vice President of the Fund, and Scott Pape, 29 Vice President of Loomis Sayles and Vice President of the Fund, have served as the portfolio managers of the Loomis Sayles Avanti Growth Series since its inception in 1993. Mr. Hurckes has been employed by Loomis Sayles for more than five years. Prior to the time he joined Loomis Sayles in 1991, Mr. Pape was Equity Portfolio Manager of the Illinois State Board of Investment. Barbara C. Friedman and Jeffrey C. Petherick, who are Vice Presidents of Loomis Sayles and the Fund, have served as portfolio managers of the Loomis Sayles Small Cap Series since its inception in May, 1994. Ms. Friedman was a partner and portfolio manager at Harvard Management Company prior to joining Loomis Sayles in 1990. Mr. Petherick was an analyst at Masco Corporation prior to joining Loomis Sayles in 1990. Douglas D. Ramos and Meri Anne Beck, who are Vice Presidents of the Fund and Loomis Sayles, serve as portfolio managers for the Loomis Sayles Balanced Series. Both Mr. Ramos and Ms. Beck have been employed by Loomis Sayles for more than five years. DRAYCOTT PARTNERS, LTD. ("Draycott"), 8 City Road, London EC2Y 1HE, England subadvises the Draycott International Equity Series. Draycott was organized in 1991 to provide investment advice and management services to institutional investors' accounts and to mutual funds distributed both to institutional and retail customers. Draycott regulated by the Investment Management Regulatory Organisation Limited ("IMRO") in the conduct of Investment Business. IMRO is the United Kingdom regulator of investment advisers. In addition to the Series, Draycott currently manages two other mutual funds and three separate investment accounts of The New England that invest substantially all of their assets in international equity securities. Nicholas D.P. Carn, Chief Investment Officer, President and Chief Executive Officer of Draycott, Timothy S. Griffen, Senior Portfolio Manager and Pacific Rim Specialist of Draycott, Gregory D. Eckersley, Portfolio Manager and United Kingdom Specialist of Draycott, and Nigel Hankin, Portfolio Manager and European Specialist of Draycott, serves as the portfolio managers of the Draycott International Equity Series. Prior to Draycott's organization in 1991, Mr. Carn was Managing Director, International Equities Group, Mr. Griffen was a Vice President and Portfolio Manager and Mr. Hankin was European Fund Manager, all at CIGNA International Investment Advisors, Ltd. and Mr. Eckersley was an Investment Manager at Century Asset Management, London. Short-term U.S. cash management services for the Draycott International Equity Series are provided by Back Bay Advisors as subadviser to Draycott. For these services, Draycott has agreed to compensate Back Bay Advisors at the annual rate of 0.08% of the value of the Series' average daily net assets. SALOMON BROTHERS ASSET MANAGEMENT INC ("SBAM"), 7 World Trade Center, New York, New York 10048, the subadviser to the Salomon Brothers U.S. Government Series and the Salomon Brothers Strategic Bond Opportunities Series, is an indirect, wholly-owned subsidiary of Salomon Inc ("SI") and was incorporated in 1987. In connection with SBAM's service as subadviser to the Strategic Bond Opportunities Series, SBAM's London based affiliate, Salomon Brothers Asset Management Limited ("SBAM Limited"), Victoria Plaza, 111 Buckingham Palace Road, London SW1W, OSB, England, serves as subadviser to SBAM relating to currency transactions and investments in non-dollar denominated debt securities for the benefit of the Salomon Brothers Strategic Bond Opportunities Series. For these services, SBAM has agreed to compensate SBAM Limited at the rate of one-third of the compensation payable to SBAM by TNE Advisers, Inc. SBAM Limited is an indirect, wholly-owned subsidiary of S.I. SBAM Limited is a member of IMRO and is registered as an investment adviser in the United States pursuant to the Investment Advisers Act of 1940. Steven Guterman is primarily responsible for the day-to-day management of the Salomon Brothers U.S. Government Series and the mortgage-backed securities and U.S. Government securities portions of the Salomon Brothers Strategic Bond Opportunities Series. Mr. Guterman co-manages the Salomon Brothers U.S. Government Series with Roger Lavan. Peter J. Wilby is primarily responsible for the day-to-day management of the High Yield and Emerging Market Debt Securities portions of the Salomon Brothers Strategic Bond Opportunities Series. Beth Semmel assists Mr. Wilby in the day-to-day management of the Strategic Bond Opportunities Series. David Scott is primarily responsible for the portion of the Salomon Brothers Strategic Bond Opportunities Series relating to currency transactions and investments in non-dollar denominated debt securities. 30 Mr. Guterman joined SBAM in 1990 and Salomon Brothers Inc in 1983. He initially worked in the mortgage research group where he became a Research Director and later traded derivative mortgage-backed securities for Salomon Brothers Inc. Mr. Lavan joined SBAM in 1990. Prior to joining SBAM, Mr. Lavan spent four years analyzing portfolios for Salomon Brothers Inc.'s Fixed Income Sales Group and Product Support Divisions. Mr. Wilby, who joined SBAM in 1989, was previously employed by Prudential Capital Management Group ("Prudential") where he served as director of Prudential's credit research unit and as a corporate and sovereign credit analyst with Prudential. Mr. Wilby later managed high yield bonds and leveraged equities in the mutual funds and institutional portfolios at Prudential. Ms. Semmel joined SBAM in May of 1993. Prior to joining SBAM, Ms. Semmel spent four years as a high yield bond analyst at Morgan Stanley Asset Management. Mr. Scott has been with SBAM since April, 1994. Previously, he was a portfolio manager for J.P. Morgan Investment Management in London from 1990-94 where he was responsible for global and non- dollar portfolios. Before joining J.P. Morgan, Mr. Scott was employed by Mercury Asset Management where he had responsibility for captive insurance portfolios and products. SELECTED/VENTURE ADVISERS, L.P. ("Selected/Venture"), 124 East Marcy Street, Santa Fe, New Mexico 87501, subadvises the Venture Value Series. Venture Advisers, Inc. is the sole general partner of Selected/Venture, which, in turn, is controlled by Shelby M. C. Davis (as of May 1, 1994). Selected/Venture provides advisory services to other investment companies and institutions. Since 1968, Mr. Davis has been a director of Venture Advisers, Inc. He is also a director and officer of all investment companies managed by Selected/Venture. FRED ALGER MANAGEMENT, INC. ("Alger Management"), 75 Maiden Lane, New York, New York 10038, subadvises the Alger Equity Growth Series. Alger Management is a wholly-owned subsidiary of Fred Alger & Company, Incorporated which in turn is a wholly-owned subsidiary of Alger Associates, Inc., a financial services holding company. Fred M. Alger III and his brother, David D. Alger, are majority shareholders of Alger Associates, Inc. and may be deemed to control that company and its subsidiaries. David D. Alger, President of Alger Management, is primarily responsible for the day-to-day management of the Alger Equity Growth Series. He has been employed by Alger Management as Executive Vice President and Director of Research since 1971, as President since 1995 and he serves as portfolio manager for other mutual funds and investment accounts managed by Alger Management. FEES AND EXPENSES. TNE Advisers, Inc. is paid a management fee from the Series it manages as follows:
MANAGEMENT FEE PAID BY SERIES TO TNE ADVISERS, INC. SERIES (% OF AVERAGE NET ASSETS) ------ -------------------------------- Westpeak Value Growth Series .70% the first $200 million .65% the next $300 million .60% amounts in excess of $500 million Loomis Sayles Avanti Growth Series .70% the first $200 million .65% the next $300 million .60% amounts in excess of $500 million Loomis Sayles Small Cap Series 1.00% all assets Loomis Sayles Balanced .70% all assets Draycott International Equity .90% all assets Salomon Brothers U.S. Government .55% all assets Salomon Brothers Strategic Bond Opportunities .65% all assets Venture Value .75% all assets Alger Equity Growth .70% all assets
TNE Advisers, Inc. pays each subadviser at the following rates for providing advisory services to the Series: for the Westpeak Value Growth Series, TNE Advisers, Inc. pays Westpeak at the annual rate of 0.50% of the first $25 million of average net assets, 0.40% of the next $75 million of such assets, 0.35% of the next $100 million of such assets and 0.30% of such assets in excess of $200 million; for the Loomis Sayles Avanti Growth Series, TNE Advisers, Inc. pays Loomis 31 Sayles at the annual rate of 0.50% of the first $25 million of average net assets, 0.40% of the next $75 million of such assets, 0.35% of the next $100 million of such assets and 0.30% of such assets in excess of $200 million; for the Loomis Sayles Small Cap Series, TNE Advisers, Inc. pays Loomis Sayles at the annual rate of 0.55% of the first $25 million of average net assets, 0.50% of the next $75 million of such assets, 0.45% of the next $100 million of such assets and 0.40% of such assets in excess of $200 million; for the Loomis Sayles Balanced Series, TNE Advisers, Inc. pays Loomis Sayles at the annual rate of 0.50% of the first $25 million of average net assets, 0.40% of the next $75 million of such assets and 0.30% of such assets in excess of $100 million; for the Draycott International Equity Series, TNE Advisers, Inc. pays Draycott at the annual rate of 0.75% of the first $10 million of average net assets, 0.60% of the next $40 million of such assets and 0.45% of such assets in excess of $50 million; for the Salomon Brothers U.S. Government Series, TNE Advisers, Inc. pays SBAM at the annual rate of 0.225% of the first $200 million of average net assets, 0.15% of the next $300 million of such assets and 0.10% of such assets in excess of $500 million; for the Salomon Brothers Strategic Bond Opportunities Series, TNE Advisers, Inc. pays SBAM at the annual rate of 0.35% of the first $50 million of average net assets, 0.30% of the next $150 million of such assets, 0.25% of the next $300 million of such assets and 0.20% of such assets in excess of $500 million; for the Venture Value Series, TNE Advisers, Inc. pays Selected/Venture at the annual rate of 0.45% of the first $100 million of average net assets, 0.40% on the next $400 million of average net assets and 0.35% of such assets in excess of $500 million; for the Alger Equity Growth Series, TNE Advisers, Inc. pays Alger Management at the annual rate of 0.45% of the first $10 million of average net assets, 0.40% of the next $90 million of such assets, 0.35% of the next $150 million of such assets, 0.30% of the next $250 million of such assets and 0.25% of such assets in excess of $500 million. VOLUNTARY EXPENSE AGREEMENT Pursuant to a voluntary expense agreement relating to the Loomis Sayles Avanti Growth and Westpeak Value Growth Series, TNE Advisers, Inc. bears the expenses (other than the advisory fees and any brokerage costs, interest, taxes or extraordinary expenses) of the Series in excess of 0.15% of the respective Series' average daily net assets. In the case of the Loomis Sayles Small Cap Series, TNE Advisers Inc. bears all such expenses (other than any brokerage costs, interest, taxes or extraordinary expenses) of the Series in excess of 1.00% of the Series' average daily net assets. Similar voluntary expense agreements with The New England were in effect with respect to the Loomis Sayles Small Cap, Loomis Sayles Avanti Growth and Westpeak Value Growth Series from December 1, 1994 through April 30, 1995. As a result of the current voluntary expense agreements (and assuming the Series incur the same level of advisory fees as in 1994 and no taxes, interest or extraordinary expenses), the Series' expense ratios during the continuation of the voluntary expense agreement are expected to be:
TOTAL EXPENSE RATIO UNDER CURRENT VOLUNTARY SERIES EXPENSE AGREEMENT ------ ----------------------- Westpeak Value Growth Series 0.85% Loomis Sayles Small Cap Series 1.00% Loomis Sayles Avanti Growth Series 0.85%
TNE Advisers Inc. may terminate these expense agreements at any time. If these expense agreements were terminated, the expense ratios would be higher. Prior to November 1, 1994, The New England had agreed to pay the charges and expenses of preparing, printing and distributing prospectuses and reports to shareholders, custodial and transfer agent charges and expenses, auditing, accounting and legal fees and certain other expenses in connection with the affairs of the Fund and the expenses of shareholders' and trustees' meetings. EXPENSE DEFERRAL ARRANGEMENT Pursuant to an expense deferral arrangement in effect beginning November 1, 1994, relating to the Loomis Sayles Balanced Series, the Draycott International Equity Series, the Salomon Brothers U.S. Government Series, the Salomon Brothers Strategic Bond Opportunities Series, the Venture Value Series and the Alger Equity Growth Series, which TNE Advisers, Inc. may terminate at any time, TNE Advisers, Inc. has agreed to pay the expenses of the Series' operations (exclusive of any brokerage costs, interest, taxes, or extraordinary expenses) in excess of stated expense limits, which limits 32 vary from Series to Series, subject to the obligation of the Series to repay TNE Advisers, Inc. such expenses in future years, if any, when a Series' expenses fall below the stated expense limit that pertains to that Series; such deferred expenses may be charged to a Series in a subsequent year to the extent that the charge does not cause the total expenses in such subsequent year to exceed the Series' stated expense limit; provided, however, that no Series is obligated to repay any expense paid by TNE Advisers, Inc. more than two years after the end of the fiscal year in which such expense was incurred. For the Loomis Sayles Balanced Series, TNE Advisers, Inc. has agreed to defer such expenses in excess of 0.85% of net assets until a subsequent year, if any, when total expenses are less than 0.85% of net assets; for the Draycott International Equity Series, TNE Advisers, Inc. has agreed to defer such expenses in excess of 1.30% of net assets until a subsequent year, if any, when total expenses are less than 1.30% of net assets; for the Salomon Brothers U.S. Government Series, TNE Advisers, Inc. has agreed to defer such expenses in excess of 0.70% of net assets until a subsequent year, if any, when total expenses are less than 0.70% of net assets; for the Salomon Brothers Strategic Bond Opportunities Series, TNE Advisers, Inc. has agreed to defer such expenses in excess of 0.85% of net assets until a subsequent year, if any, when total expenses are less than 0.85% of net assets; for the Venture Value Series, TNE Advisers, Inc. has agreed to defer such expenses in excess of 0.90% of net assets until a subsequent year, if any, when total expenses are less than 0.90% of net assets; for the Alger Equity Growth Series, TNE Advisers, Inc. has agreed to defer such expenses in excess of 0.85% of net assets until a subsequent year, if any, when total expenses are less than 0.85% of net assets. These expense limits can be prospectively discontinued by TNE Advisers, Inc. but any expenses that were deferred while a Series' expense limit was in place can never be charged to that Series unless that Series' expenses fall below the limit. ADDITIONAL INFORMATION ABOUT EXPENSES The Series pay all expenses not borne by TNE Advisers, Inc., the subadvisers or the Distributor, including, but not limited to, the charges and expenses of the respective Series' custodian, independent auditors and legal counsel, all brokerage commissions and transfer taxes in connection with portfolio transactions, all taxes and filing fees, the fees and expenses for registration or qualification of its shares under federal or state securities laws, all expenses of shareholders' and trustees' meetings and preparing, printing and mailing prospectuses and reports to shareholders and the compensation of trustees of the Fund who are not directors, officers or employees of The New England or its affiliates, other than affiliated registered investment companies. The Fund incurred total expenses during the one-year period ended December 31, 1994 as follows: 0.84% of the Loomis Sayles Avanti Growth Series' average net assets and 0.85% of the Westpeak Value Growth Series average net assets. The Fund incurred total expenses for the period May 1, 1994 to December 31, 1994 for the Loomis Sayles Small Cap Series of 1.00% of the Series' average net assets. The Fund incurred total expenses for the period October 31, 1994 to December 31, 1994 as follows: on an annualized basis, these expenses equaled 0.85% of the Loomis Sayles Balanced Series' average net assets, 1.30% of the Draycott International Equity Series' average net assets, 0.70% of the Salomon Brothers U.S. Government Series' average net assets, 0.85% of the Salomon Brothers Strategic Bond Opportunities Series' average net assets, 0.90% of the Venture Value Series' average net assets and 0.85% of the Alger Equity Growth Series' average net assets during such period. If the voluntary expense agreement and expense deferral arrangement described above had not been in effect, the Series' expenses for the periods referenced above (annualized in the case of the Loomis Sayles Balanced, Draycott International Equity, Salomon Brothers U.S. Government, Salomon Brothers Strategic Bond Opportunities, Venture Value and Alger Equity Growth Series) would have been: 0.84% of the Loomis Sayles Avanti Growth Series' average net assets, 0.86% of the Westpeak Value Growth Series' average net assets, 2.31% of the Loomis Sayles Small Cap Series' average net assets, 3.73% of the Loomis Sayles Balanced Series' average net assets, 5.38% of the Draycott International Equity Series' average net assets, 2.54% of the Salomon Brothers U.S. Government Series' average net assets, 2.01% of the Salomon Brothers Strategic Bond Opportunities Series' average net assets, 3.97% of the Venture Value Series' average net assets and 2.74% of the Alger Equity Growth Series' average net assets. These expense figures do not include portfolio brokerage commissions, which are not deducted from the Series' assets in the same manner as other charges and expenses; rather, brokerage commissions are part of the purchase price paid for portfolio securities and reduce the proceeds received on the sale of portfolio securities. For the one-year period ended December 31, 1994, the Loomis Sayles Avanti Growth Series paid a total of $67,095 in brokerage commissions, the Westpeak Value Growth Series paid a total of $54,751 in brokerage commissions; for the period May 1, 1994 to December 31, 1994, the Loomis Sayles Small Cap Series paid $7,395 in brokerage commissions and, for the period October 31, 1994 to December 31, 1994, the Loomis 33 Sayles Balanced Series paid $2,515 in brokerage commissions, the Draycott International Equity Series paid $4,714 in brokerage commissions, the Venture Value Series paid $6,084 in brokerage commissions and the Alger Equity Growth Series paid $2,452 in brokerage commissions. These brokerage commissions equaled 0.38% of the Capital Growth Series' average net assets, 0.03% of the Westpeak Stock Index Series' average net assets 0.02% of the Back Bay Advisors Managed Series' average net assets, 0.34% of the Loomis Sayles Avanti Growth Series' average net assets, 0.32% of the Westpeak Value Growth Series' average net assets, 0.35% of the Loomis Sayles Small Cap Series' average net assets, 0.14% of the Loomis Sayles Balanced Series' average net assets, 0.26% of the Draycott International Equity Series' average net assets, 0.31% of the Venture Value Series' average net assets and 0.13% of the Alger Equity Growth Series' average net assets. Portfolio transactions of the Salomon Brothers U.S. Government Series and Salomon Brothers Strategic Bond Opportunities Series and portfolio transactions of the Loomis Sayles Balanced Series in bonds, notes and money market instruments are generally on a net basis without a stated commission. MISCELLANEOUS ARRANGEMENTS The Series' adviser has contracted with New England Funds, L.P. to provide executive and other personnel for the administration of Fund affairs. Subject to procedures adopted by the Fund's trustees, Fund brokerage transactions may be executed by brokers that are affiliated with any adviser or subadviser. Fund shares are offered through New England Securities, 399 Boylston Street, Boston, Massachusetts 02116, the principal underwriter for the Fund. New England Securities is a wholly-owned subsidiary of The New England. SALE AND REDEMPTION OF SHARES Shares of each Series are purchased or redeemed depending, among other things, on the amount of premium payments invested and the surrender and transfer requests effected on any given day pursuant to the variable life insurance and variable annuity contracts supported by the Fund. Such transactions can be made only on those days during which the New York Stock Exchange is open for trading. Purchases and redemptions of Fund shares are effected at the net asset value per share determined as of the close of regular trading on the New York Stock Exchange on the day such purchase order or redemption request is received. The Fund may suspend the right of redemption for any Series and may postpone payment for any period when the New York Stock Exchange is closed for other than weekends or holidays, or, if permitted by the rules of the SEC, during periods when trading on the New York Stock Exchange is restricted or during an emergency which makes it impracticable for a Series to dispose of securities or fairly to determine the value of its net assets, or during any other period permitted by the SEC for the protection of investors. NET ASSET VALUES AND PORTFOLIO VALUATION Westpeak, Loomis Sayles, Draycott, SBAM, Selected/Venture and Alger Management, under the direction of the Board of Trustees, determine the value of each Series' securities under the direction of the Fund's Board of Trustees. The net asset value of each Series' shares is determined as of the close of regular trading on the New York Stock Exchange each day it is open. Each Series' total net assets are divided by the number of outstanding shares of that Series to determine the net asset value per share for that Series. 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 are valued at market value where current market quotations are readily available and otherwise are taken at fair value as determined in good faith by the Board of Trustees, although the actual calculations may be made by persons acting pursuant to the direction of the Board. 34 DIVIDENDS AND CAPITAL GAIN DISTRIBUTIONS ALL SERIES It is the policy of each Series to pay annually as dividends substantially all net investment income and to distribute annually all net realized capital gains, if any, after offsetting any capital loss carryovers. See "Taxes." Dividends from net investment income may be paid more or less often if the Board of Trustees deems it appropriate. Federal income tax law requires each Series to distribute prior to calendar year end virtually all of its ordinary income for such year and virtually all of the capital gain net income realized by the Series in the one-year period ending October 31 (or December 31, if the Series so elects) of such year and not previously distributed. Dividends and distributions of each Series are automatically reinvested in shares of the respective Series. TAXES Each Series is treated as a separate taxable entity for federal income tax purposes and intends to qualify as a regulated investment company under the Internal Revenue Code of 1986, as amended. So long as a Series distributes all of its net investment income and net capital gains to its shareholders, the Series itself does not pay any federal income tax. Dividends from net investment income of each of the Series and distributions of each Series' net short-term gains, if any, are ordinary income to its shareholders. Distributions of any Series' net realized long-term capital gains, if any, are long-term capital gains to its shareholders. Whether or not taxes must be paid by the shareholders of a Series on distributions received from that Series will depend on the tax status of NEVLICO's or The New England's separate accounts and the tax status of any other shareholders. For the purposes of the foregoing, each Series' shareholders are the separate accounts investing directly in the Fund and are not the owners of the variable life insurance or variable annuity contracts for which the Fund serves as an investment vehicle. For a description of the tax consequences for such contract owners, see the relevant prospectus applicable to such contracts. ORGANIZATION AND CAPITALIZATION OF THE FUND The Fund was originally organized in 1983 as a Massachusetts corporation and was reorganized into a Massachusetts business trust on February 27, 1987. The Fund is registered as a diversified, open-end management company under the 1940 Act and is authorized to issue an unlimited number of shares of each Series. Shareholders may address inquiries about the Fund to New England Securities, 399 Boylston Street, Boston, Massachusetts 02116. As of the date of this prospectus, all of the outstanding voting securities of the Fund are owned by separate accounts of The New England and/or NEVLICO, or, in the case of certain series, by those separate accounts and the general account of The New England. Therefore, The New England and NEVLICO are presumed to be in control (as that term is defined in the 1940 Act) of the Fund. However, the staff of the SEC is presently of the view that The New England and NEVLICO are each required to vote their Fund shares that are held in a separate account in the same proportion as the voting instructions received from the variable life insurance or variable annuity contracts issued by the separate account, and that The New England is required to vote any shares held in its general account in the same proportion as all other Fund shares are voted. The New England and NEVLICO currently intend to vote their shares in a manner consistent with this view. The Fund does not generally hold annual meetings of shareholders and will hold shareholders meetings only when required by law. Shareholders may remove trustees from office by votes cast at a shareholder meeting or by written consent. TRANSFER AGENT The transfer agent and the dividend paying agent for the Fund is The New England, 501 Boylston Street, Boston, Massachusetts 02116. 35 VOTING RIGHTS NEVLICO and The New England will vote shares attributable to the variable life insurance and variable annuity contracts investing in the Fund in accordance with instructions received from the owners of those contracts in the manner set forth in the prospectus applicable to such contracts. Fund shareholders are entitled to one vote for each full share held (with fractional votes for fractional shares held). 36 APPENDIX A RATINGS OF SECURITIES Description of Moody's Investors Service, Inc. corporate bond ratings: Aaa, Aa, A--Bonds which are rated AAA or Aa are judged to be of high quality by all standards and are generally known as high grade bonds. Bonds rated Aa are rated lower than Aaa securities because margins of protection may not be as large as in the latter or fluctuation of protective elements may be of greater amplitude or there may be other elements present which make the long- term risks appear somewhat larger than in Aaa securities. Bonds which are rated A possess many favorable investment attributes and are to be considered as upper medium grade obligations. Factors giving security to principal and interest are considered adequate, but elements may be present which suggest a susceptibility to impairment sometime in the future. Baa--Bonds which are rated Baa are considered medium grade obligations, i.e., they are neither higher protected nor poorly secured. Interest payments and principal security appear adequate for the present, but certain protective elements may be lacking or may be characteristically unreliable over any great length of time. Such bonds lack outstanding investment characteristics and in fact have speculative characteristics as well. Ba--Bonds which are rated Ba are judged to have speculative elements; their future cannot be considered as well assured. Often the protection of interest and principal payments may be very moderate and thereby not well safeguarded during both good and bad times over the future. Uncertainty of position characterizes bonds in this class. B--Bonds which are rated B generally lack characteristics of the desirable investment. Assurance of interest and principal payments or of maintenance of other terms of the contract over any long period of time may be small. Caa--Bonds which are rated Caa are of poor standing. Such issues may be in default or there may be present elements of danger with respect to principal or interest. Ca--Bonds which are rated Ca represent obligations which are speculative in high degree. Such issues are often in default or have other marked shortcomings. C--Bonds which are rated C are the lowest rated class of bonds and can be regarded as having extremely poor prospects of ever attaining any real investment standing. Description of Standard & Poor's Corporation corporate bond ratings: AAA, AA, A--Bonds rated AAA have the highest rating assigned by Standard & Poor's to a debt obligation. Capacity to pay interest and repay principal is extremely strong. Bonds rated AA have a very strong capacity to pay interest and repay principal and differ from the highest rated issues only in small degree. Bonds rated A have a strong capacity to pay interest and repay principal although they are somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than bonds in high rated categories. BBB--Bonds rated BBB are regarded as having an adequate capacity to pay interest and repay principal. Whereas they normally exhibit adequate protection parameters, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity to repay principal and pay interest for bonds in this category than for bonds in higher rated categories. BB-B-CCC-CC--Bonds rated BB, B, CCC and CC are regarded, on balance, as predominantly speculative with respect to the issuer's capacity to pay interest and repay principal in accordance with the terms of the obligation. BB indicates the lowest degree of speculation and CC the highest degree of speculation. While such bonds will likely have some quality and protective characteristics, these are outweighed by large uncertainties or major risk exposures to adverse conditions. CI--The rating CI is reserved for income bonds on which no income is being paid. D--Bonds rated D are in default, and payment of interest and/or repayment of principal is in arrears. 37 500 Boylston Street Boston, Massachusetts 02116-3735 - -------------------------------------------------------------------------------- EQUAL OPPORTUNITY EMPLOYER M/F New England Mutual Life Insurance Company GSP-915-95 -----END PRIVACY-ENHANCED MESSAGE-----