Via Edgar
<PAGE>
November 7, 1995
Via EDGAR
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, DC 20549
Re: New England Funds Trust II
(File Nos.: 2-11101 and 811-242)
Dear Sir or Madam:
Pursuant to Rule 497(e) of the Securities Act of 1933, as
amended, transmitted for filing on behalf of New England Funds Trust
II (the OTrustO), is a supplement dated October 26, 1995 to the
prospectuses dated May 1, 1995 for the TrustOs New England
Intermediate Term Tax Free Fund of California and New England
Intermediate Term Tax Free Fund of New York. The supplement also
contains information on the TrustOs New England Massachusetts Tax Free
Income Fund as well as New Engand Cash Management Trust and New
England Tax Exempt Money Market Trust.
Acknowledgment of this filing will be confirmed through the
Compuserve System. If you have any questions regarding this filing,
please do not hesitate to call me at (617) 578-1669, or in my absence,
John Loder at Ropers & Gray at (617) 951-7405.
Very truly yours,
[SIGNATURE]
Sheila M. Barry
CC: R.P. Connolly
<PAGE>
NEW ENGLAND FUNDS TRUST II
NEW ENGLAND MASSACHUSETTS TAX FREE INCOME FUND
NEW ENGLAND INTERMEDIATE TERM TAX FREE FUND OF CALIFORNIA
NEW ENGLAND INTERMEDIATE TERM TAX FREE FUND OF NEW YORK
NEW ENGLAND CASH MANAGEMENT TRUST
MONEY MARKET SERIES
U.S. GOVERNMENT SERIES
NEW ENGLAND TAX EXEMPT MONEY MARKET TRUST
Supplement dated October 26, 1995 to
New England State Tax Free Funds Prospectuses dated May 1, 1995 and
New England Money Market Funds Prospectus dated September 1, 1995
THE FOLLOWING PARAGRAPHS ARE ADDED TO THE SECTION OF THE PROSPECTUSES
CAPTIONED "FUND MANAGEMENT" FOR NEW ENGLAND MASSACHUSETTS TAX FREE
INCOME FUND, NEW ENGLAND INTERMEDIATE TERM TAX FREE FUND OF
CALIFORNIA, NEW ENGLAND INTERMEDIATE TERM TAX FREE FUND OF NEW YORK,
NEW ENGLAND CASH MANAGEMENT TRUST - MONEY MARKET SERIES, NEW ENGLAND
CASH MANAGEMENT TRUST - U.S. GOVERNMENT SERIES AND NEW ENGLAND TAX
EXEMPT MONEY MARKET TRUST (THE "FUNDS"):
Back Bay Advisors, L.P., the Funds' investment adviser, is a wholly-
owned subsidiary of New England Investment Companies, L.P. ("NEIC").
New England Mutual Life Insurance Company ("The New England") owns
NEIC's sole general partner and a majority of the limited
partnership interest in NEIC. The New England and Metropolitan Life
Insurance Company ("MetLife") have entered into an agreement to
merge, with MetLife to be the survivor of the merger. The merger is
conditioned upon, among other things, approval by the policyholders
of The New England and MetLife and receipt of certain regulatory
approvals. The merger is not expected to occur until after December
31, 1995.
The merger of The New England into MetLife is being treated, for
purposes of the Investment Company Act of 1940 (the "Act"), as an
"assignment" of the existing investment advisory agreements relating
to the Funds. Under the Act, such an "assignment" will result in
the automatic termination of the investment advisory agreements,
effective at the time of the merger. Prior to the merger,
shareholders of the Funds will be asked to approve new investment
advisory agreements and subadvisory agreements, intended to take
effect at the time of the merger. A proxy statement describing the
new agreements will be sent to shareholders of the Funds prior to
their being asked to vote on the new agreements.
THE FOLLOWING PARAGRAPHS ARE ADDED TO THE SECTION OF PROSPECTUSES
CAPTIONED "BUYING FUND SHARES" FOR EACH OF THE FUNDS:
Investment checks should be made payable to New England Funds.
New England Funds will accept second-party checks (up to $10,000)
for investments into existing accounts only. (A second-party check
is a check made payable to a New England Funds shareholder which the
shareholder has endorsed to New England Funds for deposit into an
account registered to the shareholder.)
New England Funds will NOT accept third-party checks, except certain
third-party checks issued by other mutual fund companies, broker
dealers or banks representing the transfer of retirement assets. (A
third-party check is a check made payable to a party which is not a
New England Funds shareholder, but which has been ultimately
endorsed to New England Funds for deposit into an account.)
SP34-1095
<PAGE>
NEW ENGLAND FUNDS
[LOGO]
NEW ENGLAND INTERMEDIATE TERM TAX FREE FUND OF CALIFORNIA
NEW ENGLAND INTERMEDIATE TERM TAX FREE FUND OF NEW YORK
Prospectus and Application
May 1, 1995
New England Intermediate Term Tax Free Fund of California (the
OCalifornia FundO) and New England Intermediate Term Tax Free Fund of
New York (the ONew York FundO) (collectively the OFundsO) are non-
diversified mutual funds. The Funds are series of shares of New
England Funds Trust II (the OTrustO), a registered open-end management
investment company. Five other series of the Trust are described in
separate prospectuses. The Trust and New England Funds Trust I are
referred to in this prospectus as the OTrusts.O
Each Fund seeks as high a level of current income exempt from federal
income tax and its stateOs personal income tax (and New York City
personal income tax, in the case of the New York Fund) as is
consistent with preservation of capital. There can be no assurance
that a Fund will achieve its investment objective.
Each Fund offers two classes of shares to the general public. The
offering price is based on the next determined net asset value per
share. Class A share purchases generally involve a sales charge at the
time of purchase. No initial sales charge applies to Class B share
purchases. A contingent deferred sales charge, however, is imposed
upon certain redemptions of Class B shares, which also bear higher
annual 12b-1 fees than Class A shares. Class B shares automatically
convert to Class A shares eight years after the Class B shares were
purchased. See OBuying Fund Shares - Sales Charges.O
This prospectus sets forth information you should know before
investing in the Funds. Please read it carefully and keep it for
future reference. A statement of additional information in two parts
(the OStatementO) about the Funds dated May 1, 1995 has been filed
with the Securities and Exchange Commission (the OSECO) and is
available free of charge. Write to New England Funds, L.P. (the
ODistributorO), SAI Fulfillment Desk, 399 Boylston Street, Boston, MA
02116 or call toll free at 1-800-225-5478. The Statement contains more
detailed information about the Funds and is incorporated into this
prospectus by reference.
SHARES OF THE FUNDS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED
OR ENDORSED BY, ANY FINANCIAL INSTITUTION, 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 OR ANY STATE SECURITIES COMMISSION
NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
[SIDEBAR]
For general information on the Funds or any of their services and for
assistance in opening an account, contact your investment dealer or
call the Distributor toll free at: 1-800-225-5478.
<PAGE>
TABLE OF CONTENTS
Page
FUND EXPENSES AND FINANCIAL INFORMATION
1 Schedule of Fees Sales charges, yearly operating
expenses.
2 Financial Highlights Historical information on the
FundsO
performance.
INVESTMENT STRATEGY
3 How the Funds Pursue Their Objectives
7 INVESTMENT RISKS
10 FUND MANAGEMENT It is important to
understand the risks inherent in a Fund
before you invest.
BUYING FUND SHARES
11 Minimum Investment Everything you need
to know to open and add to a New England
Funds account.
11 6 Ways to Buy Fund Shares
- Through your investment dealer
- By mail
- By wire transfer
- By Investment Builder
- By electronic purchase through ACH
- By exchange from another New England Fund
12 Sales Charges
14 Reduced Sales Charges
(Class A Shares Only)
OWNING FUND SHARES New England Funds
offers three convenient ways to exchange
Fund shares.
15 Exchanging Among New England Funds
15 Fund Dividend Payments
SELLING FUND SHARES
17 5 Ways to Sell Fund Shares How
to withdraw money or close your
account.
- Through your investment dealer
- By telephone
- By mail
- By check
- By Systematic Withdrawal Plan
18 Repurchase Option An opportunity to
reinvest your
(Class A Shares Only) redemption
proceeds within 120 days for no sales
charge.
FUND DETAILS
19 How Fund Share Price is
Determined Additional
information you may find
important.
19 Income Tax Considerations
20 The FundsO Expenses
21 Performance Criteria
22 Additional Facts About the Funds
<PAGE>
FUND EXPENSES AND FINANCIAL INFORMATION
SCHEDULE OF FEES
SHAREHOLDER TRANSACTION EXPENSES -- PAID DIRECTLY BY SHAREHOLDERS
<TABLE><CAPTION>
<S> <C> <C> <C> <C>
CALIFORNIA FUND NEW YORK FUND
CLASS A CLASS B CLASS A CLASS B
SHARES SHARES SHARES SHARES
-------- -------- -------- --------
Maximum Initial Sales Charge
Imposed on a Purchase (as a
percentage of offering
price)(1)(2) 2.50% None 2.50% None
Maximum Contingent Deferred
Sales Charge (as a percentage
of original purchase price or
redemption proceeds, as
applicable)(2) (3) 4.00% (3) 4.00%
Deferred Sales Charge None None None None
Redemption Fees None None None None
Exchange Fee None None None None
<FN>
(1) A reduced sales charge on Class A shares applies in some cases.
(2) Does not apply to reinvested distributions.
(3) A 1.00% contingent deferred sales charge applies with respect to
any portion of certain purchases of Class A shares greater than
$1,000,000 redeemed within approximately 1 year after purchase.
See OSales Charges.O
</TABLE>
ANNUAL FUND OPERATING EXPENSES -- PAID DIRECTLY BY THE FUND, AND
INDIRECTLY BY ITS SHAREHOLDERS
(as a percentage of average net assets)
<TABLE>
<S> <C> <C> <C> <C>
Management Fees
after voluntary
expenses limitations) 0.00%** 0.00%** 0.00%*** 0.00%***
12b-1 Fees 0.25% 1.00%* 0.25% 1.00%*
Administrative
Services Fees
(after voluntary
expense limitations) 0.00%** 0.00%** 0.00%*** 0.00%***
Other Expenses
(after voluntary
expense limitations) 0.45%** 0.45%** 0.45%*** 0.45%***
Total Operating Expenses 0.70%** 1.45%** 0.70%*** 1.45%***
<FN>
* Because of the higher 12b-1 fees, long-term shareholders may pay
more than the economic equivalent of the maximum front-end sales
charge permitted by rules of the National Association of
Securities Dealers, Inc.
** Without the voluntary limitations, estimated Management Fees,
Administrative Services Fees and Other Expenses would be 0.40%,
0.13% and 0.55%, respectively, for both classes of shares of the
California Fund and Total Expenses would be 1.33% for Class A
shares of the Fund and 2.08% for Class B shares.
*** Without the voluntary limitations, estimated Management Fees,
Administrative Services Fees and Other Expenses would be 0.40%,
0.12% and 1.02%, respectively, for both classes of shares of the
New York Fund and Total Expenses would be 1.79% for Class A
shares of the Fund and 2.54% for Class B shares.
</TABLE>
EXAMPLE
You would pay the following expenses on a $1,000 investment, assuming
(1) a 5% annual return and (2) redemption at the end of each time
period. The 5% return and expenses in the Example should not be
considered indicative of actual or expected Fund performance or
expenses, both of which will vary.
<TABLE><CAPTION>
<S> <C> <C> <C> <C> <C> <C>
CALIFORNIA FUND NEW YORK FUND
CLASS A CLASS B CLASS A CLASS B
(1) (2) (1) (2)
1 year $32 $55 $15 $32 $55 $15
3 years $47 $76 $46 $47 $76 $46
5 years $63 $89 $79 $63 $89 $79
10 years* $110 $153 $153 $110 $153 $153
<FN>
(1) Assumes redemption at end of period.
(2) Assumes no redemption.
* Class B shares automatically convert to Class A shares after 8
years; therefore, Class B amounts are calculated using Class A
expenses in years 9 and 10.
</TABLE>
The purpose of this fee schedule is to assist you in understanding the
various costs and expenses that you will bear directly or indirectly
if you invest in the Funds.
For additional information about the FundsO fees and other expenses,
please see OFund ManagementO and OThe FundsO Expenses.O
A wire fee (currently $5.00) will be deducted from your proceeds if
you elect to transfer redemption proceeds by wire.
Please keep in mind that the Example shown above is hypothetical. The
information above should not be considered a representation of past or
future return or expenses; actual return or expenses may be more or
less than those shown.
<PAGE>
FINANCIAL HIGHLIGHTS
(For a share of each Fund outstanding throughout the indicated
periods)
The Financial Highlights presented below have been included in the
financial statements of the Funds examined by Coopers & Lybrand LLP,
independent accountants. The Financial Highlights should be read in
conjunction with the financial statements and the notes thereto
incorporated by reference in the Statement.
<TABLE><CAPTION>
<S> <C> <C> <C> <C>
NEW ENGLAND INTERMEDIATE
TERM TAX FREE FUND OF CALIFORNIA
CLASS A SHARES CLASS B SHARES
----------------------- ----------------------
APRIL 23,(a) YEAR SEPT. 13,(a) YEAR
THROUGH ENDED THROUGH ENDED
DEC. 31, DEC. 31, DEC. 31, DEC. 31,
1993 1994 1993 1994
- ----------------------------------------------------------------------
- --
Net Asset Value,
Beginning of Period $7.50 $7.84 $7.92 $7.84
- ----------------------------------------------------------------------
- --
Income From Investment
Operations
Net Investment Income 0.26 0.38 0.10 0.32
Net Gains or Losses
on Investments
(both realized and
unrealized) 0.38 (0.76) (0.04) (0.77)
- ----------------------------------------------------------------------
- --
Total Income From
Investment Operations 0.64 (0.38) 0.06 (0.45)
- ----------------------------------------------------------------------
- --
Less Distributions
Distributions (from net
investment income) (0.26) (0.38) (0.10) (0.32)
Distributions (in excess
of net investment income) (0.04) 0.00 (0.04) 0.00
- ----------------------------------------------------------------------
- --
Total Distributions (0.30) (0.38) (0.14) (0.32)
- ----------------------------------------------------------------------
- --
Net Asset Value,
End of Period $7.84 $7.08 $7.84 $7.07
- ----------------------------------------------------------------------
- --
- ----------------------------------------------------------------------
- --
Total Return (%) (d) 8.6 (4.9) 0.80 (5.8)
Ratios/Supplemental Data
Net Assets,
End of Period (000) $28,938 $30,293 $1,849 $5,713
Ratio of Operating
Expenses to
Average Net Assets (%) (b) 0.70(c) 0.70 1.45(c) 1.45
Ratio of Net Investment
Income to
Average Net Assets (%) 4.88(c) 5.07 3.68(c) 4.32
Portfolio Turnover Rate (%) 121(c) 212 121(c) 212
[TABLE CONTINUED]
<S> <C> <C> <C> <C>
NEW ENGLAND INTERMEDIATE
TERM TAX FREE FUND OF NEW YORK
CLASS A SHARES CLASS B SHARES
----------------------- ----------------------
APRIL 23, (a) YEAR SEPT. 13, (a) YEAR
THROUGH ENDED THROUGH ENDED
DEC. 31, DEC. 31, DEC. 31, DEC. 31,
1993 1994 1993 1994
- ----------------------------------------------------------------------
- --
Net Asset Value,
Beginning of Period $7.50 $7.76 $7.85 $7.76
- ----------------------------------------------------------------------
- --
Income From Investment
Operations
Net Investment Income 0.26 0.37 0.10 0.32
Net Gains or Losses
on Investments
(both realized and unrealized)0.29 (0.68) (0.05) (0.69)
- ----------------------------------------------------------------------
- --
Total Income From
Investment Operations 0.55 (0.31) 0.05 (0.37)
- ----------------------------------------------------------------------
- --
Less Distributions
Distributions (from net
investment income) (0.25) (0.38) (0.10) (0.33)
Distributions (in excess
of net investment income) (0.04) 0.00 (0.04) 0.00
- ----------------------------------------------------------------------
- --
Total Distributions (0.29) (0.38) (0.14) (0.33)
- ----------------------------------------------------------------------
- --
Net Asset Value, End of Period$7.76 $7.07 $7.76 $7.06
- ----------------------------------------------------------------------
- --
- ----------------------------------------------------------------------
- --
Total Return (%) (d) 7.4 (4.1) 0.5 (4.9)
Ratios/Supplemental Data
Net Assets, End of
Period (000) $21,122 $15,875 $555 $1,152
Ratio of Operating
Expenses to
Average Net Assets (%) (b) 0.70(c) 0.70 1.45(c) 1.45
Ratio of Net
Investment Income to
Average Net Assets (%) 4.88(c) 5.13 3.68(c) 4.38
Portfolio Turnover Rate (%) 121(c) 219 121(c) 219
<FN>
(a) The Fund commenced operations on April 23, 1993. Class B shares
were first offered beginning September 13, 1993.
(b) Commencing April 23, 1993, expenses were voluntarily limited to
0.70% of Class A average net assets and, effective September 13,
1993, 1.45% of Class B average net assets. In the case of New
England Intermediate Tax Free Fund of California, the ratio of
operating expenses to average net assets for Class A shares
without giving effect to this expense limitations would have been
1.49% (annualized) for the period April 23, 1993 through December
31, 1993, and 1.33% for year ended December 31, 1994; the ratio
of operating expenses for Class B shares would have been 2.24%
(annualized) for the period September 13, 1993 through December
31, 1993 and 2.08% for the year ended December 31, 1994. In the
case of the New England Intermediate Tax Free Fund of New York,
the ratio of operating expenses to average net assets for Class A
shares without giving effect to the expense limitations would
have been 2.11% (annualized) for the period April 23, 1993
through December 31, 1993 and 1.79% for the year ended December
31, 1994. The ratio of operating expenses for Class B shares
would have been 2.86% (annualized) for the period September 13,
1993 through December 31, 1993 and 2.54% for the year ended
December 31, 1994.
(c) Computed on an annualized basis.
(d) A sales charge of 2.50% (maximum) in the case of the Class A
shares and a contingent deferred sales charge in the case of the
Class B shares are not reflected in total return calculations.
Periods of less than one year are not annualized.
</TABLE>
<PAGE>
INVESTMENT STRATEGY
HOW THE FUNDS PURSUE THEIR OBJECTIVES
The Funds invest primarily in the tax exempt securities of their named
state (OState Tax Exempt SecuritiesO), which are described below.
The law of each FundOs named state provides that, to the extent
distributions by a Fund are derived from interest on State Tax Exempt
Securities, they shall be exempt from that stateOs personal income
taxes and, in the case of the New York Fund, from New York City income
tax (other than the possible incidence of any alternative minimum
taxes). It is a fundamental policy of each Fund that at least 80% of
its income distributions will be exempt from federal income tax, from
personal income taxes of its named state and, in the case of the New
York Fund, from New York City income tax, except during times of
adverse market conditions when a Fund is investing for temporary
defensive purposes (in which case more than 20% of a FundOs income
distributions could be subject to federal income tax and/or personal
income taxes of its named state and, in the case of the New York Fund,
New York City income tax). Each Fund currently expects that at least
90% of its income each year will be exempt from federal income taxes,
the personal income tax of its named state and, in the case of the New
York Fund, from New York City income tax. The Funds may invest in
Oprivate activity bonds,O which pay interest that, although exempt
from ordinary income taxes, may be subject to federal or state
alternative minimum taxes. It is a fundamental policy of each Fund
that distributions of interest income on such bonds, together with
distributions of interest income from investments other than State Tax
Exempt Securities (including any income subject to federal alternative
minimum tax), will not normally exceed 20% of the total amount of the
FundOs income distributions. The Funds currently do not expect such
distributions to exceed 10% of the total amount of each FundsO income
distributions. The Funds may invest up to 5% of their respective
assets in so-called Oinverse-floating obligationsO or Oresidual
interest bonds.O
Securities purchased by the Funds will be largely of investment grade
quality. At the time the Funds purchase an investment, at least 85% of
each FundOs assets will consist of securities rated AAA, AA, A or BBB
by Standard & PoorOs Corporation (OS&PO); rated Aaa, Aa, A or Baa by
MoodyOs Investors Service, Inc. (OMoodyOsO) or securities that are not
rated by S&P or MoodyOs but that are determined by each FundOs adviser
to be of comparable quality to securities in those rating categories.
The other 15% of each FundOs assets may be invested in securities
rated below investment grade (below BBB or Baa) or unrated securities
that the adviser determines are of comparable quality to bonds rated
below BBB or Baa. Bonds rated BBB or Baa are considered investment
grade but may have speculative characteristics. Unfavorable changes in
economic conditions or other circumstances are more likely to lead to
a weakened capacity of issuers of these bonds to make principal and
interest payments than is the case with higher grade bonds. Bonds of
below investment grade quality involve high risk and are sometimes
referred to as Ojunk bonds.O See OInvestment Risks - Lower Quality
Fixed Income SecuritiesO for more information about these bonds. Each
Fund may invest in bonds rated in the lowest rating categories, D by
S&P or C by MoodyOs. These classes of bonds can be regarded as having
extremely poor prospects of ever attaining any real investment
standing.
Each Fund will ordinarily seek to maintain an average dollar-weighted
maturity of three to ten years.
Although the FundsO investment objectives refer to preservation of
capital, the net asset value of the FundsO shares will fluctuate based
on changes in prevailing market rates and other factors.
ODurationO is a commonly used measure of the price responsiveness of a
fixed-income security or a portfolio of fixed-income securities to an
interest rate change (i.e., the change in price one can expect from a
given change in yield). Many investors and investment analysts
consider duration to be a more useful measure of price sensitivity
than Omaturity.O The prices (i.e., values) of securities having
shorter durations generally fluctuate less than those of securities
with longer durations. The Funds will seek to maintain an average
portfolio duration of six years or less. The FundsO portfolios may
include fixed-income securities with durations of more than six years,
so long as the average duration of the portfolio is six years or less.
A portfolio with an average duration of six years or less should
<PAGE>
provide investors with a reduced risk of loss due to rising interest
rates. For example, a 1% increase in interest rates would be expected
to result in a price decrease of approximately 6% for a portfolio with
an average duration of six years and a price decrease of 8% for a
portfolio with an average duration of eight years. Conversely, a 1%
decrease in interest rates would be expected to result in similar
increases in value. These expectations represent Back Bay Advisors,
L.P.Os (OBack Bay AdvisorsO) estimate of portfolio volatility based
upon historic data collected under a wide variety of market
conditions, but there is no assurance that actual volatility will be
consistent with such expectations. By maintaining an average portfolio
duration of six years or less, the Funds seek to achieve a lower level
of fluctuations of the FundsO per share net asset value than funds
with longer durations although this result cannot be assured.
For temporary purposes (such as pending new investments), for
liquidity purposes (such as to meet repurchase or redemption
obligations, or to pay expenses), or for temporary defensive purposes,
a Fund may invest in taxable obligations such as obligations of the
U.S. Government, its agencies or instrumentalities, other debt
securities rated within the four highest grades by either MoodyOs or
S&P, commercial paper rated in the two highest grades by either of
such rating services, certificates of deposit and bankers acceptances.
A Fund may also hold its assets in other cash equivalents or in cash.
The Funds may also purchase and sell interest rate futures contracts
and tax exempt bond index futures contracts and may write and purchase
related options. The Funds expect that transactions involving futures
and options on futures will help to reduce the volatility of the
FundsO net asset values, although these results cannot be assured.
Although the yield of a tax exempt fund generally will be lower than
that of a taxable income fund, the net after-tax return to investors
may be greater. The following table illustrates what tax-free
investing can mean for you.
The following table does not take into account the effect of income
taxes on social security benefits which may arise as a result of
receiving tax exempt income, or any alternative minimum tax. Also, a
portion of the FundsO distributions may consist of ordinary income or
short-term or long-term capital gain and will be taxable to you as
such.
The following table shows, for different assumed levels of taxable
income and marginal tax rates, the equivalent taxable yield that would
be required to achieve certain levels of tax-exempt yield. Yields
shown do not represent actual yields achieved by the Funds and are not
intended as a prediction of future yields.
<TABLE>
<C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------
- ----------------------
TAX-FREE INVESTING
CALIFORNIA FUND
- --------------------------------------------------------------------------------
- ----------------------
1995
COMBINED
FEDERAL AND
TAXABLE INCOME* CALIFORNIA IF TAX EXEMPT YIELD IS
- -------------------------------------- -----------------------------------------------
SINGLE JOINT MARGINAL 4.00% 4.50% 5.00% 5.50% 6.00%
RETURN RETURN **TAX RATE** THEN THE EQUIVALENT TAXABLE YIELD WOULD BE
- --------------------------------------------------------------------------------
- ----------------------
$11,193 D $17,662 $22,384 D $35,324 18.40% 4.90% 5.51% 6.13% 6.74% 7.35%
17,663 D 23,350 35,325 D 39,000 20.10% 5.01% 5.63% 6.26% 6.88% 7.51%
23,351 D 24,519 39,001 D 49,038 32.32% 5.91% 6.65% 7.39% 8.13% 8.87%
24,520 D 30,987 49,039 D 61,974 33.76% 6.04% 6.79% 7.55% 8.30% 9.06%
30,988 D 56,550 61,974 D 94,250 34.70% 6.13% 6.89% 7.66% 8.42% 9.19%
56,551 D 107,464 94,251 D 143,600 37.42% 6.39% 7.19% 7.99% 8.79% 9.59%
107,465 D 117,950 37.90% 6.44% 7.25% 8.05% 8.86% 9.66%
143,601 D 214,928 41.95% 6.89% 7.75% 8.61% 9.47% 10.34%
117,951 D 214,929 214,929 D 256,500 42.40% 6.94% 7.81% 8.68% 9.55% 10.42%
214,930 D 256,500 43.04% 7.02% 7.90% 8.78% 9.66% 10.53%
256,501 D 429,858 45.64% 7.36% 8.28% 9.20% 10.12% 11.04%
over 256,500 over 429,858 46.24% 7.44% 8.37% 9.30% 10.23% 11.16%
- --------------------------------------------------------------------------------
- ----------------------
NEW YORK FUND
- --------------------------------------------------------------------------------
- ----------------------
1995
COMBINED
FEDERAL AND
TAXABLE INCOME* NEW YORK IF TAX EXEMPT YIELD IS
- ------------------------------------- -------------------------------------------------
SINGLE JOINT MARGINAL 4.00% 4.50% 5.00% 5.50% 6.00%
RETURN RETURN **TAX RATE** THEN THE EQUIVALENT TAXABLE YIELD WOULD BE
- --------------------------------------------------------------------------------
- ----------------------
$9,501 D $12,500 $19,001 D $25,000 20.57% 5.04% 5.67% 6.29% 6.92% 7.55%
12,501 D 23,350 25,001 D 39,000 21.45% 5.09% 5.73% 6.37% 7.00% 7.64%
23,351 D 56,550 39,001 D 94,250 33.47% 6.01% 6.76% 7.52% 8.27% 9.02%
56,551 D 117,950 94,251 D 143,600 36.24% 6.27% 7.06% 7.84% 8.63% 9.41%
117,951 D 256,500 143,601 D 256,500 40.86% 6.76% 7.61% 8.45% 9.30% 10.15%
over 256,500 over 256,500 44.19% 7.17% 8.06% 8.96% 9.85% 10.75%
1995
COMBINED
FEDERAL AND
NEW YORK
STATE
TAXABLE INCOME* AND CITY IF TAX EXEMPT YIELD IS****
- ----------------------------------------- ---------------
- ---------------------------------------
SINGLE JOINT MARGINAL 4.00% 4.50% 5.00% 5.50% 6.00%
RETURN RETURN **TAX RATE*** THEN THE EQUIVALENT TAXABLE YIELD WOULD BE
- --------------------------------------------------------------------------------
- ----------------------
$9,501D $12,500 $19,001 D $25,000 23.82% 5.25% 5.91% 6.56% 7.22% 7.88%
12,501 D 15,000 25,001 D 27,000 24.71% 5.31% 5.98% 6.64% 7.31% 7.97%
15,001 D 23,350 27,001 D 39,000 25.19% 5.35% 6.01% 6.68% 7.35% 8.02%
23,351 D 25,000 39,001 D 45,000 36.63% 6.31% 7.10% 7.89% 8.68% 9.47%
25,001 D 56,550 45,001 D 94,250 36.64% 6.31% 7.10% 7.89% 8.68% 9.47%
56,551 D 60,000 94,251 D 108,000 39.28% 6.59% 7.41% 8.23% 9.06% 9.88%
60,001 D 117,950 108,001 D 143,600 39.32% 6.59% 7.42% 8.24% 9.06% 9.89%
117,951 D 256,500 143,601 D 256,500 43.71% 7.11% 7.99% 8.88% 9.77% 10.66%
over 256,500 over 256,500 46.88% 7.53% 8.47% 9.41% 10.35% 11.29%
<FN>
**** This amount represents taxable income as defined in the Internal
Revenue Code. It is assumed that taxable income as defined in
the Internal Revenue Code is the same as under the New York
State, New York City or California Personal Income Tax law;
however, New York State, New York City or California taxable
income may differ due to differences in exemptions, itemized
deductions and other items.
**** For federal tax purposes, these combined rates reflect the
applicable marginal rates for 1995, including indexing for
inflation, and are subject to change as a result of amendments to
existing tax laws. These rates include the effect of deducting
state taxes on your Federal return.
**** For federal tax purposes, these combined rates reflect the
applicable marginal rates for 1995, including indexing for
inflation, and are subject to change as a result of amendments to
existing tax laws. These rates include the effect of deducting
state and city taxes on your Federal return. For New York
purposes, these combined rates reflect the expected New York
State and City tax and surcharge rates for 1995.
**** These represent New York State, City and Federal tax equivalent
yields.
</TABLE>
<PAGE>
STATE TAX EXEMPT SECURITIES
State Tax Exempt Securities are debt obligations issued by a FundOs
named state and its respective political subdivisions (for example,
counties, cities, towns, villages, districts and authorities), the
interest from which is, in the opinion of bond counsel, exempt from
both federal income tax and personal income taxes of the relevant
state and, in the case of the New York Fund, New York City personal
income taxes (other than the possible incidence of any alternative
minimum taxes). State Tax Exempt Securities are issued to obtain funds
for various public purposes, such as the construction of public
facilities, the payment of general operating expenses, the refunding
of outstanding debts, or the lending of funds to public or private
institutions for the construction of housing, educational or medical
facilities. They may also include certain types of industrial
development bonds or private activity bonds issued by public
authorities to finance privately owned or operated facilities. State
Tax Exempt Securities also include debt obligations issued by other
governmental entities (for example, U.S. possessions such as Puerto
Rico) if such debt obligations generate interest income that is exempt
from federal income taxes, the relevant stateOs personal income taxes
and, in the case of the New York Fund, New York City income taxes.
The two principal classifications of State Tax Exempt Securities are
general obligation and limited obligation (limited purpose or revenue)
bonds. General obligation bonds involve the credit of an issuer
possessing taxing power and are payable from the issuerOs general
unrestricted revenues. Their payment may depend on an appropriation by
the issuerOs legislative body. The characteristics and methods of
enforcement of general obligation bonds vary according to the law
applicable to the particular issuer. Limited obligation bonds are
payable only from the revenues derived from a particular facility or
class of facilities, or a specific revenue source, and generally are
not payable from the unrestricted revenues of the issuer. Industrial
development and private activity bonds are in most cases limited
obligation bonds, the creditworthiness of which is directly related to
that of the user of the facilities.
Although the Funds will maintain an average portfolio maturity in the
intermediate range, the Funds may be primarily invested in short-term
State Tax Exempt Securities when yields on such securities are greater
than yields available on long-term State Tax Exempt Securities, to
stabilize net asset value or for temporary defensive purposes.
Also included within the general category of State Tax Exempt
Securities are participations in lease obligations or installment
purchase contract obligations (Olease obligationsO) of municipal
authorities or entities. Although lease obligations do not constitute
general obligations of the municipality for which the municipalityOs
taxing power is pledged, a lease obligation is ordinarily backed by
the municipalityOs covenant to budget for, appropriate and make the
payments due under the lease obligation. However, certain lease
obligations contain Onon-appropriationO clauses which provide that the
municipality has no obligation to make lease or installment purchase
payments in future years unless money is appropriated for such purpose
on a yearly basis. In addition to the Onon-appropriationO risk, these
securities represent a relatively new type of financing and may not be
as marketable as more conventional securities. Although Onon-
appropriationO lease obligations are secured by the leased property,
disposition of the property in the event of foreclosure might prove
difficult. In addition, the tax treatment of such obligations in the
event of non-appropriation is unclear. The FundsO investments, if any,
in these securities will be subject to procedures adopted by the
trustees of the Trust from time to time.
Participation certificates are obligations issued by state and local
governments or authorities to finance the acquisition of equipment and
facilities. They may represent participations in a lease, an
installment purchase contract or a conditional sales contract. Some
municipal leases and participation certificates may not be readily
marketable.
State Tax Exempt Securities may have fixed or variable interest rates.
Each Fund may purchase floating and variable rate demand notes, which
are securities normally having a stated maturity in excess of one
year, but which permit the holder to tender the notes for purchase at
the principal amount thereof. The interest rate on a floating rate
demand note is based on a known lending rate, such as a bankOs prime
rate, and is adjusted periodically based on changes in such lending
rate. The interest rate on a variable rate demand note is adjusted at
specified intervals. There generally is no secondary market for these
notes, although they may be tendered for redemption at face value. In
some cases, the Funds must give more than seven daysO notice before
tender. Variable rate demand notes with such a notice feature are
Oilliquid securitiesO for purposes of the policy limiting the FundsO
investments in illiquid securities to 15% of net assets.
<PAGE>
INVESTMENT RISKS
It is important to understand the following risks inherent in a Fund
before you invest.
* GENERAL
The value of a FundOs investments will change as the general level of
interest rates fluctuates. During periods of falling interest rates,
the values of fixed-income securities generally rise. Conversely,
during periods of rising interest rates, the values of such securities
generally decline. The value of a FundOs shares will fluctuate with
the value of its investments.
Certain State Tax Exempt Securities which may be held by a Fund may
permit the issuer at its option to Ocall,O or redeem, its securities.
If an issuer were to redeem State Tax Exempt Securities held by a Fund
during a time of declining interest rates, that Fund may not be able
to reinvest the proceeds in tax exempt securities providing as high a
level of investment return as the securities redeemed.
During a period of declining interest rates, many of each FundOs
portfolio investments will likely bear coupon rates which are higher
than current market rates, regardless of whether such securities were
originally purchased at a premium. Such securities would generally
carry market values greater than the principal amounts payable on
maturity, which would be reflected in the net asset value of each
FundOs shares. The value of such OpremiumO securities tends to
approach the principal amount as they approach maturity (or call price
in the case of securities approaching a call date). As a result, an
investor who holds shares of a Fund during such periods would
initially receive higher monthly distributions (derived from the
higher coupon rates payable on such FundOs investments) than might be
available from alternative investments bearing current market interest
rates, but may face an increased risk of capital loss as these higher
coupon securities approach maturity (or the call date). In evaluating
the potential performance of an investment in each Fund, investors may
find it useful to compare each FundOs current dividend rate with that
FundOs Oyield,O which is computed on a yield-to-maturity basis in
accordance with SEC regulations and which reflects amortization of
market premiums. See OPerformance Criteria.O
* STATE TAX EXEMPT SECURITIES
A FundOs ability to achieve its investment objective depends on the
ability of its named state and its political subdivisions to meet
their continuing obligations to pay principal and interest.
Since a Fund invests primarily in State Tax Exempt Securities, the
value of a FundOs shares may be especially affected by factors
pertaining to the economy of a FundOs named state and other factors
specifically affecting the ability of that state (and its political
subdivisions) to meet their obligations. As a result, the value of a
FundOs shares may fluctuate more widely than the value of shares of a
portfolio investing in securities relating to a number of different
states. The ability of a state and its political subdivisions to meet
their obligations will depend primarily on the availability of tax and
other revenues to those governments and on their fiscal conditions
generally. The amount of tax and other revenues available to
governmental issuers of State Tax Exempt Securities may be affected
from time to time by economic, political and demographic conditions
within the relevant state. In addition, constitutional or statutory
restrictions may limit a governmentOs power to raise revenues or
increase taxes. The availability of federal, state and local aid to an
issuer of State Tax Exempt Securities may also affect that issuerOs
ability to meet its obligations. Payments of principal and interest on
limited obligation securities will depend on the economic condition of
the facility or specific revenue source from whose revenues the
payments will be made, which in turn could be affected by economic,
political and demographic conditions in a FundOs named state or a
particular locality. Any reduction in the actual or perceived ability
of an issuer of State Tax Exempt Securities to meet its obligations
(including a reduction in the rating of its outstanding securities)
would likely affect adversely the market value and marketability of
its obligations and could affect adversely the values of State Tax
Exempt Securities of other issuers as well.
<PAGE>
The amount of publicly-available information about the financial
condition of an issuer of State Tax Exempt Securities may not be as
extensive as that which is made available by corporations whose
securities are publicly traded. As a result, monitoring the
creditworthiness of issuers of State Tax Exempt Bonds may be more
difficult than with corporate bonds.
INVESTING IN NEW YORK. New York suffered significant adverse effects
from the disruption of financial markets in the late 1980s and the
most recent recession. These effects included the loss of substantial
numbers of jobs, declining real estate values and reduced tax
receipts. Future weakness in the economy generally, or in those
sectors that are especially important to the New York economy (such as
financial services), could adversely affect the credit ratings and
creditworthiness of State Tax Exempt Securities of New York issuers,
which in turn could adversely affect the value of an investment in the
New York Fund.
INVESTING IN CALIFORNIA. Although California has the largest and one
of the most diversified economies of any state, it has suffered
significant adverse effects from the most recent recession and from
the continuing weakness of certain key industries, such as the defense
and aerospace industries. Among these effects are significant job
losses, declining real estate values and reduced tax receipts.
Continued or future weakness in the economy generally or in those
sectors that are especially important to the California economy could
adversely affect the credit ratings and creditworthiness of State Tax
Exempt Securities of California issuers, which in turn could adversely
affect the value of an investment in the California Fund.
Back Bay Advisors believes that, in general, the secondary market for
State Tax Exempt Securities is less liquid than that for many other
fixed-income securities. Accordingly, the ability of a Fund to buy and
sell securities may be limited.
* OPTIONS AND FUTURES
The Funds may purchase and sell financial futures contracts and
options for hedging purposes. Futures contracts on a Municipal Bond
Index are traded on the Chicago Board of Trade. This index is intended
to represent a numerical measure of market performance for long-term
tax exempt bonds. An Oindex futureO is a contract to buy or sell units
of a particular securities index at an agreed price on a specified
future date. Depending on the change in value of the index between the
time when a Fund enters into and terminates an index future, such Fund
will realize a gain or loss. The Funds may purchase and sell futures
contracts on this Index (or any other tax-exempt bond index approved
for trading by the Commodity Futures Trading Commission) to hedge
against general changes in market values of State Tax Exempt
Securities which the Funds own or expect to purchase. The Funds may
also purchase and sell put and call options on index futures, or on an
index directly, in addition to or as an alternative to purchasing and
selling financial futures contracts.
The Funds may also, for hedging purposes, purchase and sell futures
contracts and options with respect to U.S. Treasury securities,
including U.S. Treasury bills, notes and bonds. Treasury security
futures and related options would be used in a way similar to the
FundsO use of index futures and related options. The Funds will
purchase or sell Treasury security futures or related options only
when, in the opinion of Back Bay Advisors, price movements in Treasury
security futures and related options are likely to correlate closely
with price movements in the State Tax Exempt Securities which are the
subject of the hedge.
The use of futures and options may result in taxable income or capital
gains and involves certain special risks. Futures and options
transactions involve costs and may result in losses. The successful
use of futures and options will usually depend on Back Bay AdvisorsO
ability to forecast interest rate movements correctly. The FundsO
ability to hedge their portfolio positions through Treasury security
futures and options also depends on the degree of correlation between
the municipal bond index or U.S. Treasury security underlying the
futures or options purchased and sold by the Funds and the State Tax
Exempt Securities that are the subject of the hedge. The successful
use of futures and
<PAGE>
options also depends on the availability of a liquid secondary market
to enable the Funds to close their positions on a timely basis. There
can be no assurance that such a market will exist at a particular
time. Certain provisions of the Internal Revenue Code and certain
regulatory requirements may limit a FundOs ability to engage in
futures and options transactions.
The Funds will not purchase or sell futures contracts or related
options if, as a result, the sum of initial margin deposits on a
FundOs existing futures contracts and options plus premiums paid for
outstanding options on futures contracts would exceed 5% of the FundOs
net assets. (For options that are Oin-the-moneyO at the time of
purchase, the amount by which the option is Oin-the-moneyO is excluded
from this calculation.)
A more detailed explanation of futures and options transactions and
the risks associated with them is included in Part II of the
Statement.
* LOWER QUALITY FIXED-INCOME SECURITIES
Lower quality fixed-income securities generally provide higher yields
than higher quality securities, but are subject to greater credit and
market risk. Lower quality 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 Fund investing in lower quality fixed-income securities
may be more dependent on the investment adviserOs own credit analysis
than is the case for higher quality bonds. The market for lower
quality fixed-income securities may be more severely affected than
some other financial markets by economic recession or substantial
interest rate increases, by changing public perceptions of this market
or by legislation that limits the ability of certain categories of
financial institutions to invest in these securities. In addition, the
secondary market may be less liquid for lower quality 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.
* MISCELLANEOUS
Each Fund reserves the right to enter into repurchase agreements for
amounts up to 15% of its assets. In repurchase agreements, the Funds
buy 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 the Funds to earn a return on available cash at minimal market
risk, although the Funds may be subject to various delays and risks of
loss if the seller is unable to meet its obligation to repurchase.
These transactions must be fully collateralized at all times, but may
involve some credit risk to the Fund. A Fund may also purchase
securities for future delivery (i.e., forward commitments), which may
increase its overall investment exposure. Part II of the Statement
contains more detailed information about these transactions and about
limitations designed to reduce the risks associated with them.
Each Fund is Onon-diversifiedO and as such is not required to meet any
diversification requirements under the Investment Company Act of 1940
(the O1940 ActO), although each Fund must meet certain diversification
standards to qualify as a regulated investment company under the
Internal Revenue Code of 1986 (the OCodeO). Since the Funds may invest
a relatively high percentage of their assets in the obligations of a
limited number of issuers, each Fund may be more susceptible than a
more widely-diversified fund to any single economic, political or
regulatory occurrence.
In periods of rapidly fluctuating interest rates, there may be
frequent changes in investments. From time to time, consistent with
its investment objective, each Fund may also trade securities for the
purpose of seeking short-term profits. A change in the securities held
by the Funds is known as Oportfolio turnover.O Portfolio turnover
generally involves some expense to the Funds, including brokerage
commissions or dealer mark-ups and other transaction costs on the sale
of securities and reinvestment in other securities. To the extent that
such sales result in net realized capital gains, shareholders
ordinarily are taxed on such gains at applicable income tax rates.
Back Bay Advisors expects that the FundsO turnover may exceed 100%
annually.
<PAGE>
FUND MANAGEMENT
The FundsO adviser, Back Bay Advisors, 399 Boylston Street, Boston,
Massachusetts 02116, provides discretionary investment management
services to mutual funds and other institutional investors. Formed in
1986, Back Bay Advisors now manages 15 mutual fund portfolios and over
$6 billion of securities. Back Bay Advisors and the Distributor are
both indirect subsidiaries of New England Mutual Life Insurance
Company (OThe New EnglandO). Both Back Bay Advisors and the
Distributor are independently-operated subsidiaries of New England
Investment Companies, L.P. (ONEICO). NEIC is listed on the New York
Stock Exchange, and manages over $60 billion in assets for individuals
and institutions. James S. Welch, Vice President of Back Bay Advisors
and New England Funds Trust II, has served as the portfolio manager of
the Funds since their inception in April 1993. Prior to joining Back
Bay Advisors in 1993, Mr. Welch was a Vice President at Putnam
Management Company.
Subject to overall supervision by the TrustOs trustees, Back Bay
Advisors furnishes a continuous investment program for each Fund and
recommends what securities should be purchased or sold.
Back Bay Advisors is paid at the annual rate of 0.40% of the first
$200,000,000 of each FundOs average daily net asset value, 0.375% of
the next $300,000,000 of such value and 0.35% of such value in excess
of $500,000,000.
Back Bay Advisors and the Distributor have agreed, however, to reduce
their fees, and, if necessary, to bear certain expenses associated
with operating the Funds in order to limit each FundOs expenses to an
annual rate of 0.70% of the average net assets of the FundOs Class A
shares and 1.45% of the average net assets of the FundOs Class B
shares. Back Bay Advisors and the Distributor may terminate these
voluntary agreements at any time. In that event the Funds would
supplement their prospectus.
The general partners of Back Bay Advisors and the Distributor are
wholly-owned subsidiaries of NEIC, whose sole general partner, New
England Investment Companies, Inc., is a wholly-owned subsidiary of
The New England.
Under Administrative Services Agreements between each of the Funds and
the Distributor, the Distributor provides the Funds with office space,
facilities and equipment, services of executive and other personnel
and certain administrative services. Under these agreements, the Funds
pay the Distributor a fee at the annual rate of 0.125% of each FundOs
average daily net assets.
In placing portfolio transactions for the Funds, Back Bay Advisors
seeks the most favorable price and execution available. Subject to
this policy, Back Bay Advisors may consider sales of shares of the
Funds and other Funds in the New England Funds as a factor in the
selection of broker dealers.
<PAGE>
BUYING FUND SHARES
MINIMUM INVESTMENT
$2,500 is the minimum for an initial investment in either Fund and $50
is the minimum for each subsequent investment. There are special
initial investment minimums for the following plans:
$50 for automatic investing through the Investment Builder program.
$1,000 for accounts registered under the Uniform Gifts to Minors Act
or the Uniform Transfers to Minors Act.
6 WAYS TO BUY FUND SHARES
You may purchase Class A and Class B shares of the Funds in the
following ways:
[GRAPHIC] THROUGH YOUR INVESTMENT DEALER:
Many investment dealers have a sales agreement with the Distributor
and would be pleased to accept your order.
[GRAPHIC] BY MAIL:
FOR AN INITIAL INVESTMENT, simply complete an application and return
it, with a check payable to New England Funds, to P.O. Box 8551,
Boston, MA 02266-8551. Proceeds of redemptions of Fund shares
purchased by check may not be available for up to ten days after the
purchase date.
FOR SUBSEQUENT INVESTMENTS, please mail your check to New England
Funds, P.O. Box 8551, Boston, MA 02266-8551 along with a letter of
instruction or an additional deposit slip from your statements. To
make investing even easier, you can also order personalized investment
slips by calling 1-800-225-5478.
[GRAPHIC] BY WIRE TRANSFER OF FEDERAL FUNDS:
FOR AN INITIAL INVESTMENT, call us at 1-800-225-5478 between 8:00 a.m.
and 6:00 p.m. (Eastern time) to obtain an account number and wire
transfer instructions.
FOR SUBSEQUENT INVESTMENTS, direct your bank to transfer funds to
State Street Bank and Trust Company, ABA #011000028, DDA #99011538,
Credit Fund (Fund name and Class of shares), Shareholder Name,
Shareholder Account Number. Funds may be transferred between 9:00 a.m.
and 4:00 p.m. (Eastern time). Your bank may charge a fee for this
service.
[GRAPHIC] INVESTMENT BUILDER:
Investment Builder is New England FundsO automatic investment plan.
You may authorize automatic monthly transfers of $50 or more from your
bank checking or savings account to purchase shares of one or more New
England Funds.
FOR AN INITIAL INVESTMENT, please indicate that you would like to
begin an automatic investment plan through Investment Builder.
Indicate the amount of the monthly investment on the enclosed
application and enclose a void check or deposit slip from your bank
account.
TO ADD INVESTMENT BUILDER TO AN EXISTING ACCOUNT, please call us at 1-
800-225-5478 for a Service Options form.
[GRAPHIC] BY ELECTRONIC PURCHASE THROUGH ACH:
You may purchase additional shares electronically through the
Automated Clearing House (OACHO) system as long as your bank or credit
union is a member of the ACH system and you have a completed, approved
ACH application on file with the Fund.
To purchase through ACH, call us at 1-800-225-5478 between 8 a.m. and
6 p.m. (Eastern time) for instructions or call Tele#Facts at 1-800-346-
5984 twenty-four hours a day. If you purchase your shares through ACH,
you will receive the net asset value next determined after your order
is received. Proceeds of redemptions of Fund shares purchased through
ACH may not be available for up to ten days after the purchase date.
[GRAPHIC] BY EXCHANGE FROM ANOTHER NEW ENGLAND FUND
You may also purchase shares of one series of a Fund by exchanging
shares from another New England Fund. Please see OExchanging Among New
England FundsO for complete details.
[SIDEBAR]
USING TELE#FACTS
1-800-346-5984
Tele#Facts is New England FundsO automated service system that gives
you 24-hour access to your account. Through your touch-tone telephone,
you can receive your current account balance, your last five
transactions, Fund prices and recent performance information. You can
also purchase, sell or exchange Class A shares of any New England
Fund. For a free brochure about Tele#Facts including a convenient
wallet card, call us at
1-800-225-5478.
<PAGE>
GENERAL
All purchase orders are subject to acceptance by the Funds and will be
effected at the net asset value next determined after the order is
received in proper form by State Street Bank and Trust Company (OState
Street BankO) (except orders received by your investment dealer before
the close of trading on the New York Stock Exchange [the OExchangeO]
and transmitted to the Distributor by 5:00 p.m. [Eastern time] on the
same day, which will be effected at the net asset value determined on
that day). Although the Funds do not anticipate doing so, they reserve
the right to suspend or change the terms of sales of shares.
Class B shares and certain shareholder features may not be available
to persons whose shares are held in street name accounts.
You will not receive any certificates for your Class A shares unless
you request them in writing from the Distributor. The FundsO Oopen
accountO system for recording your investment eliminates the problems
and expense of handling and safekeeping certificates. Certificates
will not be issued for Class B shares.
If you wish transactions in your account to be effected by another
person under a power of attorney from you, special rules apply. Please
contact your investment dealer or the Distributor for details.
[SIDEBAR]
To make investing even easier, you can also order personalized
investment slips by calling 1-800-225-5478.
SALES CHARGES
The Funds offer two classes of shares:
CLASS A SHARES
Class A shares are offered at net asset value plus a sales charge
which varies depending on the size of your purchase. They are also
subject to a 0.25% annual service fee. The current sales charges are:
<TABLE><CAPTION>
<S> <C> <C> <C>
SALES CHARGE AS A % OF DEALERS
---------------------- CONCESSION
NET AS % OF
OFFERING AMOUNT OFFERING
VALUE OF TOTAL INVESTMENT PRICE INVESTED PRICE**
- ----------------------------------------------------------------------
- --
Up to $100,000 2.50% 2.56% 2.15%
- ----------------------------------------------------------------------
- --
$100,000 - $249,999 2.00% 2.04% 1.70%
- ----------------------------------------------------------------------
- --
$250,000 - $499,999 1.50% 1.52% 1.25%
- ----------------------------------------------------------------------
- --
$500,000 - $999,999 1.25% 1.27% 1.00%
- ----------------------------------------------------------------------
- --
$1,000,000 or more None None *
- ----------------------------------------------------------------------
- --
<FN>
* The Distributor may, at its discretion, pay investment dealers
who initiate and are responsible for such purchases a commission
of up to the following amounts: 1% on the first $2 million
invested; 0.80% on the next $1 million; 0.20% on the next $2
million; and 0.08% on the excess over $5 million. These
commissions are not payable if the purchase represents the
reinvestment of a redemption made during the previous 12 calendar
months.
** A 1.5% sales charge applies to investments of less than $500,000
of distributions from unit investment trusts. The dealer
concession is 1.5% on these sales.
</TABLE>
CONTINGENT DEFERRED SALES CHARGE (CLASS A SHARES ONLY). For purchases
of $1,000,000 or more of Class A shares of either Fund, a CDSC, at the
rate of 1% of the lesser of the purchase price or the net asset value
at the time of redemption, applies to redemptions within one year
after the shares were purchased. If an exchange is made to Class A
shares of any of the New England Cash Management Trust Money Market
Series or U.S. Government Series or the New England Tax Exempt Money
Market Trust (the OMoney Market FundsO), then the one-year holding
period for purposes of determining the expiration of the CDSC will
stop and will resume only when an exchange is made back into Class A
shares of a series of the Trusts. For purposes of the CDSC, it is
assumed that the shares held the longest are the first to be redeemed.
No CDSC applies to a redemption of shares followed by a reinvestment
effected within 30 days after the date of the redemption.
CLASS B SHARES
Class B shares are offered at net asset value, without an initial
sales charge, subject to a 0.75% annual distribution fee for 8 years
(at which time they automatically convert to Class A shares) and to a
CDSC if they are redeemed within 5 years of purchase. The holding
period for purposes of timing the conversion to Class A shares and
determining the CDSC will continue to run after an exchange to Class B
shares of either Fund. If the exchange is made to Class B shares of a
Money Market Fund, then the holding period will stop and resume only
when an exchange is made back into Class B shares of a series of the
Trusts. If the Money Market Fund shares are redeemed rather than
exchanged back into the Trusts, then a CDSC applies on the
redemptions, at the same rate as if the Class B shares of the Fund had
been redeemed
<PAGE>
at the time they were exchanged for Money Market Fund Shares.
The CDSC will be assessed on an amount equal to the lesser of the cost
of the shares being redeemed or their net asset value at the time of
redemption. Accordingly, no CDSC will be imposed on increases in net
asset value above the initial purchase price. In addition, no charge
will be assessed on shares of the same fund purchased with reinvested
dividends or capital gains distributions.
The amount of the contingent deferred sales charge, if any, will vary
depending on the number of years from the time of payment for the
purchase of Class B shares until the time of redemption of such
shares. The CDSC equals the following percentages of the dollar
amounts subject to the charge.
<TABLE><CAPTION>
<S> <C>
CONTINGENT DEFERRED
SALES CHARGE AS A
PERCENTAGE OF DOLLAR
YEAR SINCE PURCHASE AMOUNT SUBJECT TO CHARGE
- ----------------------- --------------------------
1st 4%
2nd 3%
3rd 3%
4th 2%
5th 1%
thereafter 0%
</TABLE>
Year one ends one year after the day on which the purchase was
accepted and so on.
The CDSC is deducted from the proceeds of the redemption, not the
amount remaining in the account, unless otherwise requested, and is
paid to the Distributor. The CDSC may be eliminated for certain
persons and organizations. See OSales Charges - GeneralO below. At the
time of sale, the Distributor pays investment dealers a commission of
2.75% and advances the first yearOs service fee (up to 0.25%) on
purchases of Class B shares.
DECIDING WHICH CLASS TO PURCHASE
The decision as to whether Class A or Class B shares are more
appropriate for an investor depends on the amount and intended length
of the investment. Investors making large investments, qualifying for
a reduced initial sales charge, might consider Class A shares because
Class A shares have lower 12b-1 fees and pay correspondingly higher
dividends per share. For these reasons, the Distributor will treat any
order of $1 million or more for Class B shares as a Class A order.
Investors making small investments might consider Class B shares
because 100% of the purchase price is invested immediately. Consult
your investment dealer for advice applicable to your particular
circumstances.
[SIDEBAR]
CHOOSING BETWEEN CLASS A AND B SHARES
Whether you purchase Class A or Class B shares depends on your
investing goals. If you qualify for a reduced sales charge, or invest
for the long term, you might consider purchasing Class A. Class A
shares have lower annual fees and as a result, pay higher dividends
per share. If you make a smaller investment, you might consider Class
B shares since 100% of you purchasing dollars are invested immediately
and the amount of your deferred sales charge diminishes over time.
Consult your financial representative for deciding which class is
appropriate for you.
GENERAL
NO CDSC ON ANY CLASS OF SHARES APPLIES to redemptions following the
death or disability (as defined in Section 72(m)(7) of the Internal
Revenue Code) of a shareholder if the redemption is made within one
year after the shareholderOs death or disability. In addition, no CDSC
applies to certain withdrawals pursuant to a Systematic Withdrawal
Plan. See OSystematic Withdrawal PlanO below.
Each Fund receives the net asset value next determined after the order
is received on sales of each class of shares. The sales charge is
allocated between the investment dealer and the Distributor. The
Distributor receives the CDSC. For purposes of the CDSC, an exchange
from one series of the Trusts to another series of the Trusts is not
considered a redemption or a purchase. For federal tax purposes,
however, such an exchange is considered a redemption and a purchase
and, therefore, would be considered a taxable event on which you may
recognize a gain or a loss.
The Distributor may, at its discretion, reallow the entire sales
charge imposed on the sale of Class A shares to investment dealers
from time to time. The staff of the SEC is of the view that dealers
receiving all or substantially all of the sales charge may be deemed
underwriters of the FundsO shares.
The Distributor may, at its expense, provide additional promotional
incentives or payments to dealers who sell shares of the Funds. In
some instances these incentives are provided to certain dealers who
achieve sales goals or who have sold or may sell significant amounts
of shares. New England Funds, L.P., from time to time, may provide
financial assistance programs to dealers in connection with
conferences, sales or training programs, seminars, advertising and
sales campaigns and/or shareholder services arrangements. Certain
dealers who have sold or may sell significant amounts of shares also
may receive compensation in the form of pay-
<PAGE>
ment for travel expenses, including lodging, incurred in connection
with trips taken by invited registered representatives to locations,
within or outside of the U. S., for educational seminars or meetings
of a business nature.
The Distributor may provide non-cash incentives for achievement of
specified sales levels by representatives of participating broker-
dealers and financial institutions. Such incentives include, but are
not limited to, merchandise from gift catalogues or other sources,
gift certificates or vouchers through membership in the New England
Funds Flagship Club. The participation of representatives in such
incentive programs is at the discretion of the broker-dealer or
financial institution with which the representative is associated.
REDUCED SALES CHARGES (CLASS A SHARES ONLY)
* LETTER OF INTENT -- if aggregate purchases of all series and
classes of the Trusts over a 13-month period will reach a
breakpoint (a dollar amount at which a lower sales charge
applies), smaller individual amounts can be invested at the sales
charge applicable to that breakpoint.
* COMBINING ACCOUNTS -- Purchases by all qualifying accounts of all
series and classes of the Trusts (which do not include the Money
Market Funds unless the shares were purchased through an exchange
from a series of the Trusts) may be combined with purchases of
qualifying accounts of a spouse, parents, children, siblings,
grandparents or grandchildren, individual fiduciary accounts,
sole proprietorships and/ or single trust estates. The values of
all accounts are combined to determine the sales charge.
* UNIT HOLDERS OF UNIT INVESTMENT TRUSTS -- unit investment trust
distributions of less than $500,000 may be invested in shares of
any Fund at a sales charge of 1.50% of the public offering price
(or 1.52% of the net amount invested).
* CLIENTS OF AN ADVISER OR SUBADVISER (AFFILIATED WITH NEIC) -- no
sales charge or CDSC applies to investments of $100,000 or more
in the Funds by clients of an adviser or subadviser (affiliated
with NEIC) to any series of the Trusts; any director, officer or
partner of a client of an adviser or subadviser (affiliated with
NEIC) to any series of the Trusts; and the parents, spouses and
children of the foregoing. Any investor eligible for these
arrangements should so indicate in writing at the time of the
purchase.
* Shares of the Funds may be purchased at net asset value with no
sales charge or contingent deferred sales charge by advisory
accounts through investment advisers registered under the
Investment Advisers Act of 1940 affiliated with broker-dealers.
* There is no sales charge, CDSC or initial investment minimum
related to investments by certain current and retired employees
of the TrustOs investment advisers, subadvisers (affiliated with
NEIC), the Distributor, The New England or any other company
affiliated with The New England; current and former directors and
trustees of the Trusts or their predecessor companies; agents and
general agents of The New England and its insurance company
subsidiaries; current and retired employees of such agents and
general agents; registered representatives of broker dealers who
have selling arrangements with the Distributor; the spouse,
parents, children, siblings, grandparents or grandchildren of the
persons listed above and any trust for any of the foregoing
persons.
* Shareholders of Reich & Tang Government Securities Trust may
exchange their shares of that fund for Class A shares of any
series of the Trusts at net asset value and without the
imposition of a sales charge.
The reduction or elimination of the sales charge in connection with
sales described above reflects the absence or reduction of sales
expenses associated with such sales.
<PAGE>
OWNING FUND SHARES
EXCHANGING AMONG NEW ENGLAND FUNDS
CLASS A SHARES. Except as indicated in the next two sentences, you may
exchange Class A shares of either Fund (and Class A shares of the
Money Market Funds acquired through exchanges from any of the series
of the Trusts) for the Class A shares of any other series of the
Trusts (except New England Growth Fund, which is subject to special
eligibility restrictions) without paying a sales charge. Class A
shares of the California Fund and the New York Fund (and shares of the
Money Market Funds acquired through exchanges of such shares) may be
exchanged for shares of the Funds at net asset value only if you have
held them for at least six months; otherwise, sales charges apply to
the exchange. If you exchange your Class A shares of New England
Adjustable Rate U.S. Government Fund (the OAdjustable Rate FundO) for
shares of another fund that has a higher sales charge, you will pay
the difference between any sales charge you have already paid on your
Adjustable Rate Fund shares and the higher sales charge of the fund
into which you are exchanging. Participants in the automatic exchange
program will not be charged the difference. Shares of the Adjustable
Rate Fund that are subject to a differential sales charge as described
above may not participate in this program. In addition, you may redeem
the Class A shares of any Money Market Fund that were not acquired
through exchanges from either Fund and have the proceeds directly
applied to the purchase of Fund shares at the applicable sales charge.
CLASS B SHARES.You may exchange Class B shares of any Fund or series
of the Trusts (and Class B shares of the Money Market Funds or Class A
shares of the Money Market Funds which have not been subject to a
previous sales charge) for the Class B shares of any other series of
the Trusts (except New England Growth Fund). Such exchanges will be
made at the next determined net asset value of the shares. Class B
shares will automatically convert on a tax-free basis to Class A
shares eight years after they are purchased (excluding the time the
shares are held in a Money Market Fund). See OSales Charges - Class B
SharesO above.
TO MAKE AN EXCHANGE, please call 1-800-225-5478 between 8 a.m. and 6
p.m. (Eastern time), call Tele#Facts or write New England Funds. The
exchange must be for a minimum of $500 (or the total net asset value
of the account, whichever is less) except that under the Automatic
Exchange Plan the minimum is $50. All exchanges are subject to the
minimum investment and eligibility requirements of the fund into which
you are exchanging. In connection with any exchange, you must receive
a current prospectus of the fund into which you are exchanging. The
exchange privilege may be exercised only in those states where shares
of such other fund may be legally sold.
You have the automatic privilege to exchange your Fund shares by
telephone. New England Funds, L.P. will employ reasonable procedures
to confirm that your telephone instructions are genuine, and, if it
does not, it may be liable for any losses due to unauthorized or
fraudulent instructions. New England Funds, L.P. will require a form
of personal identification prior to acting upon your telephone
instructions, and will provide you with written confirmations of such
transactions and will record your instructions.
Except as otherwise permitted by SEC rule, shareholders will receive
at least 60 daysO advance notice of any material change to the
exchange privilege.
[SIDEBAR]
AUTOMATIC EXCHANGE PLAN
The Funds have an automatic exchange plan under which shares of a
class of a Fund are automatically exchanged each month for shares of
the same class of other series in the Trusts, other than New England
Growth Fund, which is available only to certain eligible investors.
The minimum monthly exchange amount under the plan is $50. There is no
fee for exchanges made pursuant to this program, but there may be a
sales charge as described on this page.
FUND DIVIDEND PAYMENTS
The Funds declare dividends daily and pay them monthly. Each Fund pays
as dividends substantially all net investment income (tax exempt and
taxable income other than long-term capital gains) each year and
distributes annually all net realized long-term capital gains (after
applying any available capital loss carryovers). The trustees of the
Trust may adopt a different schedule as long as payments are made at
least annually.
You have the option to reinvest all distributions in additional shares
of the same class of a Fund or in shares of the same class of other
series of the Trusts, to receive distributions from dividends and
interest in cash while reinvesting distributions from capital gains in
additional shares of the same class of the Fund or the same
<PAGE>
class of shares of other series of the Trusts, or to receive all
distributions in cash. Income distributions and capital gains
distributions will be reinvested in shares of the same class of the
Funds at net asset value (without a sales charge or CDSC) unless you
select another option. You may change your distribution option by
notifying the servicing agent in writing or by calling 1-800-225-5478.
If you elect to receive your dividends in cash and the dividend checks
sent to you are returned OundeliverableO to a Fund or remain uncashed
for six months, your cash election will automatically be changed and
your future dividends will be reinvested.
DIVIDEND DIVERSIFICATION PROGRAM
You may also establish a dividend diversification program which allows
you to have all dividends and any other distributions automatically
invested in shares of another New England Fund, subject to the
investor eligibility requirements of that other fund and to state
securities law requirements. For Class A shareholders, investments
will be made at the appropriate offering price, which may include a
sales charge. For class B shareholders, shares acquired through this
program will be subject to a CDSC if they are redeemed from the
account. The shareholder name on the fund account distributing
dividends and the fund account receiving dividends must be the same
and, if a new account in the purchased fund is being established,
minimum investment requirements must be met. Before establishing a
dividend diversification program into any other New England Fund, you
must obtain a copy of that fundOs prospectus.
<PAGE>
SELLING FUND SHARES
5 WAYS TO SELL FUND SHARES
[GRAPHIC] THROUGH YOUR INVESTMENT DEALER:
Call your authorized investment dealer for information.
[GRAPHIC] BY TELEPHONE:
You or your investment dealer may redeem (sell) shares by telephone
using any of the three methods described below:
Wired to Your Bank Account -- If you have previously selected the
telephone redemption privilege on your account, Class A and Class B
shares may be redeemed by calling 1-800-225-5478 between 8 a.m. and 6
p.m. (Eastern time). Class A shares only may also be redeemed by
calling Tele#Facts at 1-800-346-5984 twenty-four hours a day.
Redemption requests accepted after the Exchange has closed (4:00 p.m.
[Eastern time]) will be processed at the next determined net asset
value. The proceeds (LESS ANY APPLICABLE CDSC) generally will be wired
on the next business day to the bank account previously chosen by you
on your application. A wire fee (currently $5.00) will be deducted
from the proceeds.
Your bank must be a member of the Federal Reserve System or have a
correspondent bank that is a member. If your account is with a savings
bank, it must have only one correspondent bank that is a member of the
System.
Mailed to Your Address of Record -- Shares may be redeemed by calling
1-800-225-5478 and requesting that a check for the PROCEEDS (LESS ANY
APPLICABLE CDSC) be mailed to the address on your account, provided
that the address has not changed over the previous month and that the
proceeds are for $100,000 or less. Generally, the check will be mailed
to you on the business day after your redemption request is received.
Through ACH -- Shares may be redeemed electronically through the ACH
system, provided that you have an approved ACH application on file
with the Fund. To redeem through ACH, call 1-800-225-5478 prior to
3:00 p.m. (Eastern time) on a day when the Fund is open for business
or call Tele#Facts at 1-800-346-5984 twenty-four hours a day. If your
telephone call is made to Tele#Facts before 4:00 p.m., the redemption
will be processed the day the telephone call is made, unless it is a
day when the Exchange closes before 4:00 p.m. and your call is made
after the Exchange closes. The proceeds (LESS ANY APPLICABLE CDSC)
generally will arrive at your bank within three business days; their
availability will depend on your bankOs particular rule. If you have
recently purchased your shares through the ACH system, the Funds may
withhold redemption proceeds until the funds have cleared, which may
take up to ten days.
[GRAPHIC] BY MAIL:
You may redeem your shares at their net asset value (LESS ANY
APPLICABLE CDSC) next determined after receipt of your request in good
order by sending a written request (including any necessary special
documentation) to New England Funds, P.O. Box 8551, Boston, MA 02266-
8551.
The request must include the name of the Fund, your account number,
the exact name(s) in which your shares are registered, the number of
shares or the dollar amount to be redeemed and whether you wish the
proceeds mailed to your address of record, wired to your bank account
or transmitted through ACH. All owners of the shares must sign the
request in the exact names in which the shares are registered (this
appears on your confirmation statement) and indicate any special
capacity in which you are signing (such as trustee, custodian or under
power of attorney or on behalf of a partnership, corporation or other
entity).
If you are redeeming shares worth less than $100,000 and the proceeds
check is made payable to the registered owner(s) and mailed to the
record address, no signature guarantee is required. Otherwise, you
generally must have your signature guaranteed by an eligible guarantor
institution in accordance with procedures established by New England
Funds, L.P. Signature guarantees by notaries public are not
acceptable.
Additional written information may be required for certain benefit
plans and IRAs. Contact the Distributor or your investment dealer for
details.
If you hold certificates for your Class A shares, you must enclose
them with your redemption request or
your request will not be honored. The Funds recommend that
certificates be sent by registered mail.
[GRAPHIC] BY CHECK:
Checkwriting is available on Class A shares of the Funds. To elect
checkwriting for your account, select the checkwriting option on your
application and complete the attached signature card. To add
checkwriting to an existing account, please call 1-800-225-5478 for
our Service Option Form. The Fund will send you checks drawn on State
Street Bank. You will continue to earn dividends on shares redeemed by
check until the check clears. There is currently a $5.00 fee to
establish this service. Each check must be written for $500 or more.
The checkwriting privilege does not apply to shares for which you have
requested share certificates to be issued. Checkwriting is not
available for investor accounts containing Class A shares subject to a
CDSC or Class B shares.
If you use withdrawal checks, you will be subject to State Street
BankOs rules governing checking accounts. The Funds and the
Distributor are in no way responsible for any checkwriting account
established with State Street Bank.
You may not close your account by withdrawal check because the exact
balance of your account will not be known until after the check is
received by State Street Bank.
[GRAPHIC] BY SYSTEMATIC WITHDRAWAL PLAN:
You may establish a Systematic Withdrawal Plan that allows you to
redeem shares and receive payments on a regular schedule. In the case
of shares subject to a CDSC, the amount or percentage you specify may
not exceed, on an annualized basis, 10% of the value of your Fund
account. Redemption of shares pursuant to the Plan will not be subject
to a CDSC. For information, contact the Distributor or your investment
dealer. Since withdrawal payments may have tax consequences, you
should consult your tax adviser before establishing such a plan.
GENERAL. Redemption requests will be effected at the net asset value
next determined after your redemption request is received in proper
form by State Street Bank or your investment dealer (except that
orders received by your investment dealer before the close of regular
trading on the Exchange and transmitted to the Distributor by 5:00
p.m. (Eastern time) on the same day will receive that dayOs net asset
value). Redemption proceeds will normally be mailed to you within
seven days after State Street Bank or the Distributor receives your
request in good order.
During periods of substantial economic or market change, telephone
redemptions may be difficult to implement. If you are unable to
contact the Distributor by telephone, shares may be redeemed by
delivering the redemption request in person to the Distributor or by
mail as described above. Requests are processed at the net asset value
next determined after the request is received.
Special rules apply to redemptions under powers of attorney. Please
call your investment dealer or the Distributor for more information.
Telephone redemptions are not available for Fund shares held in
certificate form. If certificates have been issued for your
investment, you must send them to New England Funds along with your
request before a redemption request can be honored. See the
instructions for redemption by mail above.
The Funds may suspend the right of redemption and may postpone payment
for more than seven days when the Exchange is closed for other than
weekends or holidays, or if permitted by the rules of the SEC when
trading on the Exchange is restricted or during an emergency which
makes it impracticable for the Funds to dispose of their securities or
to determine fairly the value of their net assets, or during any other
period permitted by the SEC for the protection of investors.
REPURCHASE OPTION
(CLASS A SHARES ONLY)
You may apply your Class A share redemption proceeds without a sales
charge to the repurchase of shares of any series of the Trusts. To
qualify, you must reinvest the entire proceeds within 120 days after
your redemption and notify New England Funds or your investment dealer
at the time of reinvestment that you are taking advantage of this
privilege. You may reinvest the proceeds either by returning the
redemption check or by sending your check for the entire amount.
Please note: For federal income tax purposes, a redemption is a sale
that involves tax consequences even if the proceeds are later
reinvested. Please consult your tax adviser.
<PAGE>
FUND DETAILS
HOW FUND SHARE PRICE IS DETERMINED
Back Bay Advisors, under the direction of the TrustOs board of
trustees, determines the value of the total net assets of the Funds as
of the close of regular trading (ordinarily 4:00 p.m. Eastern time) on
the Exchange each day the Exchange is open. Securities for which
market quotations are readily available are generally valued at market
value on the basis of market quotations. In all other cases, the value
of a FundOs assets is determined in good faith by Back Bay Advisors,
or by a pricing service selected by it, subject to the general
supervision of the trustees.
The net asset value per share of each classOs shares is determined by
dividing the value of the assets of the Fund attributable to such
class, less all liabilities (including accrued expenses) attributable
to such class, by the number of shares of the class outstanding. The
public offering price of a FundOs Class A shares is determined by
adding the applicable sales charge to the net asset value. See OSales
ChargesO above. The public offering price of Class B shares is the net
asset value per share.
The exact price you pay for a share will be determined by the next set
of calculations made after your order is accepted by New England
Funds, L.P. In other words, if, on a Tuesday morning, your properly
completed application is received, your wire received or your dealer
places your trade for you, the price you pay will be determined by the
calculations made as of the close of regular trading of the Exchange
on Tuesday. If you buy shares through your investment dealer, the
dealer must receive your order by the close of regular trading on the
Exchange and transmit it to the Distributor by 5:00 p.m. (Eastern
time) to receive that dayOs public offering price.
INCOME TAX CONSIDERATIONS
The Funds intend to meet all requirements of the Internal Revenue Code
of 1986, as amended, to ensure that they qualify to pay Oexempt-
interest dividends,O which in general means that a Fund can pass on to
shareholders the federal tax exempt status of interest received by it
from obligations paying tax-exempt interest. Such dividends derived
from interest on State Tax Exempt Securities are also exempt from
State personal income taxes of the relevant state and, in the case of
the New York Fund, New York City personal income taxes.
For federal income tax, state personal income tax and, in the case of
the New York Fund, New York City personal income tax purposes, your
proportionate share of taxable dividends derived from a FundOs other
net interest (and other ordinary) income and short-term capital gains,
if any, will be taxable as ordinary income, whether received in cash
or additional shares. Distributions derived from a FundOs long-term
capital gains are generally taxable as long-term capital gains
regardless of how long you have held your Fund shares. However,
certain capital gains distributions may qualify for exemption from
state personal income taxes of the relevant state. Distributions by
the Funds are not eligible for the dividends-received deduction for
corporations.
In general, any gain or loss realized upon a disposition of shares
will be treated as a long-term capital gain or loss if the shares have
been held for more than twelve months, and otherwise as a short-term
gain or loss assuming the shares are held as capital assets. Losses
incurred on the disposition of shares of the Funds held for six months
or less will be disallowed as deductions for federal income tax
purposes to the extent of exempt-interest dividends received with
respect to such shares and thereafter treated as long-term capital
losses to the extent of capital gain distributions received with
respect to such shares.
CALCULATING THE PRICE OF SHARES
Total Market Value of Portfolio Securities
plus
Other Assest
minus
Any Liabilities
divided by
Total Number of Outstanding Shares in a Class
equals
Net Asset Value (NAV)
THE PUBLIC OFFERING PRICE FOR CLASS A SHARES IS THE NAV PLUS THE
APPLICABLE SALES CHARGE. THE PUBLIC OFFERING PRICE FOR CLASS B IS THE
NAV.
<PAGE>
If you receive social security benefits, you may be taxed on a portion
of those benefits as a result of receiving tax-exempt income. Also,
income from certain private activity bonds issued after August 7, 1986
is an item of tax preference for purposes of the federal alternative
minimum tax at the maximum rate of 28% for individuals and 20% for
corporations. If the Funds invest in such private activity bonds,
shareholders may become subject to, or have increased liability under,
the alternative minimum tax.
Exempt interest dividends are included in Oadjusted current earningsO
for purposes of computing the alternative minimum tax applicable to
corporations. Seventy-five percent of the excess of adjusted current
earnings over the amount of income otherwise subject to the
alternative minimum tax is added to the corporationOs alternative
minimum taxable income, potentially giving rise to alternative minimum
tax liability.
All tax exempt bonds issued after August 16, 1986 (September 1, 1986
in the case of certain bonds) are now subject to certain rules
formerly applicable only to industrial development bonds. If the
issuer of bonds issued after such date fails to observe these rules,
the interest on the bonds could become taxable retroactive to the date
the bonds were issued.
To avoid an excise tax, each Fund intends to distribute prior to
calendar year end virtually all its ordinary income earned during that
calendar year, and virtually all of the capital gain net income it
realized in the 12-month period ending December 31 but has not
previously distributed.
Distributions declared in December to shareholders of record on a date
in that month and paid in January will be considered for federal
income tax purposes to have been received by shareholders on December
31.
If at least 95% of the FundsO dividends are Oexempt-interest
dividends,O federal back-up withholding rules do not apply. However,
if the percentage should ever drop below 95%, the Funds will be
required to withhold 31% of all income dividends and capital gains
distributions they pay to you if you do not provide a correct,
certified taxpayer identification number, if the Funds are notified
that you have underreported income in the past, or if you fail to
certify to the Funds that you are not subject to such withholding. In
addition, the Funds will be required to withhold 31% of the gross
proceeds of a FundOs shares you redeem if you have not provided a
correct, certified taxpayer identification number. If you are a tax-
exempt shareholder, however, these back-up withholding rules will not
apply so long as you furnish the Funds with an appropriate
certification.
Annually, if you earn more than $10 in taxable income from a Fund, you
will receive a Form 1099 from the Funds to assist you in reporting the
prior calendar yearOs distributions on your federal income tax return.
You should consult your tax adviser about any state or local taxes
that may apply to such distributions. Be sure to keep the Form 1099 as
a permanent record. A fee may be charged for any duplicate information
requested.
The foregoing is a summary of certain federal, state and, in the case
of the New York Fund, New York City income tax consequences of an
investment in the Funds. Shareholders should consult a competent tax
adviser as to the effect of an investment in the Fund on their
particular federal, state and local tax situations.
THE FUNDSO EXPENSES
In addition to the management fee paid to Back Bay Advisors and the
fees paid to the Distributor, each Fund pays all expenses not borne by
Back Bay Advisors or the Distributor, including, but not limited to,
the charges and expenses of the FundOs custodian and transfer agent,
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 the federal or state securities
laws, all expenses of shareholdersO and trusteesO meetings and of
preparing, printing and mailing reports to shareholders and the
compensation of trustees who are not directors, officers or employees
of Back Bay Advisors or its affiliates, other than affiliated
registered investment companies.
Under Plans adopted pursuant to Rule 12b-1 under the 1940 Act, each
Fund pays the Distributor a monthly service fee at the annual rate of
0.25% of
<PAGE.
the FundOs average daily net assets attributable to the Class A and
Class B shares. The Distributor may pay up to the entire amount of
this fee to securities dealers who are dealers of record with respect
to the FundOs shares, for providing personal services to investors in
shares of the Fund and/or maintenance of shareholder accounts. In the
case of the Class A shares, the Distributor may also use all or any
portion of the fee to pay its expenses in connection with the
provision of personal services to investors and/or the maintenance of
shareholder accounts. In the case of the Class B shares, the
Distributor retains the balance of the service fee as compensation for
providing personal services to investors and/or the maintenance of
shareholder accounts. In the case of the Class B shares, the
Distributor currently pays investment dealers at the time of sale the
first yearOs service fee in the amount of up to 0.25% of the amount
invested.
Both FundsO Class B shares pay the Distributor a monthly distribution
fee at an annual rate not to exceed 0.75% of the average net assets of
the respective FundOs Class B shares. The Distributor may pay up to
the entire amount of the distribution fee to securities dealers who
are dealers of record with respect to the FundOs shares, as
distribution fees in connection with the sale of the FundOs shares.
The Distributor retains the balance of the distribution fee as
compensation for the DistributorOs services as distributor of the
Class B shares.
PERFORMANCE CRITERIA
Each class may include tax-equivalent yield, current yield and total
return information in advertisements or other written sales material.
Each class will show its average annual total return for the one-,
five- and ten-year periods (or the life of the class, if shorter)
through the end of the most recent calendar quarter. Total return is
measured by comparing the value of an investment in a class at the
beginning of the relevant period to the value of the investment at the
end of the period (assuming deduction of the current maximum sales
charge on Class A shares, automatic reinvestment of all dividends and
capital gains distributions, imposition of the CDSC relevant to the
period of time quoted in the case of Class B shares). Each class may
also show total return over other periods, or on an aggregate basis
for the period presented, or without deduction of a sales charge. If a
sales charge or CDSC is not deducted in calculating total return, a
classOs total return will be higher.
Current yield is computed in accordance with the SECOs standardized
formula by dividing the adjusted net investment income per share
earned during a recent 30 day period by the maximum offering price of
a share of the relevant class on the last day of the period (reduced
by any earned income expected to be declared shortly as a dividend).
For this purpose, net investment income is calculated in accordance
with SEC regulations and may differ from the classOs net investment
income as determined for financial reporting purposes. SEC regulations
require that net investment income be calculated on a Oyield-to-
maturityO basis, which has the effect of amortizing any premiums or
discounts in the current market value of fixed-income securities. Each
classOs current dividend rate is based on the classOs net investment
income as determined for financial statement purposes, which reflects
amortization only as to the amount of any premium paid by the Fund for
securities.
Tax-equivalent yield is the taxable yield an investor would have to
earn to receive the equivalent of the classOs yield after payment of
federal income tax and state personal income taxes. Tax-equivalent
yield is calculated by adjusting a classOs standardized yield for a
recent 30 day period, using effective combined federal and state tax
rates for individuals.
A class may also present one or more distribution rates in its sales
literature. These rates will be determined by annualizing a classOs
distributions from net investment income and net short-term capital
gains over a recent 12-month, 3-month or 30-day period and dividing
that amount by the maximum offering price or the net asset value on
the last day of such period. If the net asset value rather than the
maximum offering price is used to calculate the distribution rate, the
rate will be higher.
Total return will generally be higher for Class A shares than for
Class B shares of the same Fund, because of the higher levels of
expenses borne by the Class B shares. An investor should balance this
expected lower total return against the benefit gained by 100%
immediate investment of the purchase price of Class B shares.
<PAGE>
All performance information is based on past performance and does not
predict future performance. See Part II of the Statement for more
details.
ADDITIONAL FACTS ABOUT THE FUNDS
* The Trust was organized in 1931 as a Massachusetts business trust
and is authorized to issue an unlimited number of full and
fractional shares in multiple series. The California Fund and the
New York Fund commenced operations in April 1993.
* When you invest in a Fund, you acquire freely transferable shares
of beneficial interest that entitle you to receive dividends and
to cast a vote for each share you own at shareholder meetings.
Shares of a Fund vote separately from shares of other series of
the Trust, except as otherwise required by law. Shares of all
classes of a Fund vote together, except as to matters relating to
Rule 12b-1 plans, on which only shares of the class to which the
particular plan relates are entitled to vote.
* The Trust does not hold regular shareholder meetings and will do
so only when required by law. Shareholders may remove trustees
from office by votes cast at a shareholder meeting or by written
consent.
* The TrustOs trustees have the authority without shareholder
approval to issue other classes of shares of the Funds that
represent interests in the FundsO portfolios but that have
different sales load and fee arrangements.
* The transfer and dividend paying agent for the Funds is New
England Funds, L.P., 399 Boylston Street, Boston, MA 02116. New
England Funds, L.P. has subcontracted certain of its obligations
as such to State Street Bank, 225 Franklin Street, Boston, MA
02110.
* Except for matters that are explicitly identified as
OfundamentalO in this prospectus or Part I of the Statement, the
investment policies of the Funds may be changed without
shareholder approval and, in most cases, without prior notice.
The investment objectives of the Funds are not fundamental.
* If there is a change in a FundOs objective, shareholders of the
Fund should consider whether the Fund remains an appropriate
investment in light of their current financial position and
needs.
* If the balance in your account is less than a minimum dollar
amount set by the trustees from time to time (currently $500),
the Funds may close your account and send the proceeds to you.
Shareholders who are affected by this policy will be notified of
the FundOs intention to close the account and will have 60 days
immediately following the notice to bring the account up to the
minimum. The minimum does not apply to automatic investment plans
or to accounts that have fallen below the minimum solely because
of fluctuations in a FundOs net asset value.
* The FundsO annual report will contain additional performance
information and will be made available upon request and without
charge.
* The Class A and Class B structure could be terminated should
certain IRS rulings be rescinded. See Part II of the Statement
for more details.
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