Registration Nos. 2-11101
811-242
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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF [ X ]
1933
Pre-Effective Amendment No. ____ [ ]
Post-Effective Amendment No. 102 [ X ]
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY [ X ]
ACT OF 1940
Amendment No. 36
(Check appropriate box or boxes)
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NEW ENGLAND FUNDS TRUST II
(Exact Name of Registrant as Specified in Charter)
399 Boylston Street, Boston, Massachusetts 02116
(Address of Principal Executive Offices, including Zip Code)
(617) 578-1388
(Registrant's Telephone Number, including Area Code)
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Robert P. Connolly, Esq.
New England Funds, L.P.
399 Boylston Street
Boston, Massachusetts 02116
Copy to:
Edward A. Benjamin, Esq.
Ropes & Gray
One International Place
Boston, Massachusetts 02110
(Name and address of agent for service)
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It is proposed that this filing will become effective (check
appropriate box)
[ ] immediately upon filing pursuant to paragraph (b) of Rule
485
[ ] on (date) pursuant to paragraph (b) of Rule 485
[ X] 60 days after filing pursuant to paragraph (a)(1) of Rule
485
[ ] on (date) pursuant to paragraph (a)(1) of Rule 485
[ ] 75 days after filing pursuant to paragraph (a)(2) of Rule
485
[ ] on (date) pursuant to paragraph (a)(2) of Rule 485.
If appropriate, check the following box:
[ ] this post-effective amendment designates a new
effective date for a previously filed post-effective
amendment.
Registrant has registered an indefinite number of securities
under the Securities Act of 1933 in accordance with Rule 24f-2
under the Investment Company Act of 1940, as amended. Registrant
will file on or about February 27, 1996, the Rule 24f-2 Notice
for the Registrant's fiscal year ended December 31, 1995.
<PAGE>
NEW ENGLAND FUNDS TRUST II
(Prospectus and Statement of Additional Information)
CROSS REFERENCE SHEET
Items required by Form N-1A
Item No. of
Form N-1A Caption in Prospectus
------------ ------------------------------
1 . . . . . . . . . Cover page
2 . . . . . . . . . Schedule of Fees
3 . . . . . . . . . Financial Highlights
4 . . . . . . . . . Cover page; Additional Facts
About the Funds; Investment
Objectives; How the Funds
Pursue Their Objectives; Fund
Investments; Investment Risks
5 . . . . . . . . . New England Funds; Fund
Management; Back cover page;
Additional Facts About the
Funds
5A . . . . . . . . . None
6 . . . . . . . . . Cover page; Additional Facts
About the Funds; Buying Fund
Shares; Owning Fund Shares;
Dividends; Income Tax
Considerations; Back cover
page
7 . . . . . . . . . Cover page; Schedule of Fees;
Buying Fund Shares; Owning
Fund Shares; Selling Fund
Shares; How Fund Share Price
is Determined; Determination
of Net Asset Value; The Funds'
Expenses; Back cover page
8 . . . . . . . . . Selling Fund Shares;
Exchanging Among New England
Funds
9 . . . . . . . . . None
<PAGE>
Item No. of Caption in Statement of
Form N-1A Additional Information
------------- ------------------------------
10 . . . . . . . . . Cover page
11 . . . . . . . . . Table of Contents
12 . . . . . . . . . Description of the Trusts and
Ownership of Shares
13 . . . . . . . . . Miscellaneous Investment
Practices; Investment
Restrictions
14 . . . . . . . . . Management of the Trusts
15 . . . . . . . . . Fund Charges and Expenses;
Management of the Trusts
16 . . . . . . . . . Fund Charges and Expenses;
Management of the Trusts
17 . . . . . . . . . Fund Charges and Expenses;
Portfolio Transactions and
Brokerage
18 . . . . . . . . . Description of the Trusts and
Ownership of Shares
19 . . . . . . . . . How to Buy Shares; Net Asset
Value and Public Offering
Price; Reduced Sales Charges;
Shareholder Services;
Redemptions
20 . . . . . . . . . Income Dividends, Capital Gain
Distributions and Tax Status
21 . . . . . . . . . Fund Charges and Expenses;
Management of the Trusts
22 . . . . . . . . . Performance Criteria (in
Prospectus); Investment
Performance of the Funds;
Standard Performance Measures
23 . . . . . . . . . Financial Statements
<PAGE>
NEW ENGLAND FUNDS
Where The Best Minds Meet(TM)
NEW ENGLAND CAPITAL GROWTH FUND
NEW ENGLAND BALANCED FUND
NEW ENGLAND GROWTH FUND
NEW ENGLAND GROWTH OPPORTUNITIES FUND
NEW ENGLAND INTERNATIONAL EQUITY FUND
NEW ENGLAND STAR ADVISERS FUND
NEW ENGLAND VALUE FUND
Prospectus and Application -- April 15, 1996
New England Capital Growth Fund, New England Balanced Fund, New
England Growth Fund, New England International Equity Fund, New
England Star Advisers Fund and New England Value Fund, series of
New England Funds Trust I, and New England Growth Opportunities
Fund, a series of New England Funds Trust II, are separate
mutual funds (the "Funds" and each a "Fund"). New England Funds
Trust I and New England Funds Trust II are referred to in this
prospectus as the "Trusts."
Each Fund offers three classes of shares to the general public
(Classes A, B and C), except as described in the next paragraph.
The offering price is based on the net asset value per share
next determined after an order is received. 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 (a "CDSC"),
however, is imposed upon certain redemptions of Class B shares.
Class B shares automatically convert to Class A shares eight
years after purchase. No initial sales charge or CDSC applies
to purchases or redemptions of Class C shares, which do not have
a conversion feature. Class B shares and Class C shares bear
higher annual 12b-1 fees than Class A shares. See "Buying Fund
Shares_Sales Charges." Through a separate prospectus, New
England Capital Growth Fund, New England Balanced Fund, New
England International Equity Fund, New England Star Advisers
Fund, New England Value Fund and New England Growth
Opportunities Fund also offer an additional class of shares,
Class Y shares, to certain institutional investors. To obtain
more information about Class Y shares, please call New England
Funds, L.P. (the "Distributor") toll-free at 1-800-225-5478.
New England Growth Fund currently offers only Class A shares,
but may at a later date offer Class B and Class C shares to the
general public and Class Y shares to certain institutional
investors. If and when New England Growth Fund offers such
additional classes of shares for sale, the Fund will supplement
its prospectus.
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 "Statement") about the Funds dated April 15, 1996
has been filed with the Securities and Exchange Commission (the
"SEC") and is available free of charge. Write to New England
Funds, L.P., 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.
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>
T a b l e O f C o n t e n t s
Page
NEW ENGLAND FUNDS
Investment Objectives The investment goal for each
Fund.
New England Investment Companies
and the Funds' Advisers and
Subadvisers
FUND EXPENSES AND FINANCIAL
INFORMATION
Schedule of Fees Sales charges, yearly operating
expenses.
Financial Highlights Historical information on the
Funds' performance.
INVESTMENT STRATEGY
How the Funds Pursue Their
Objectives
Fund Investments
INVESTMENT RISKS It is important to understand
the risks inherent in a Fund
before you invest.
FUND MANAGEMENT
BUYING FUND SHARES
Minimum Investment Everything you need to know to
open and add to
6 Ways to Buy Fund Shares a New England Funds account.
[] Through your investment
dealer
[] By mail
[] By wire transfer
[] By Investment Builder
[] By electronic purchase
through ACH
[] By exchange from another
New England Fund
Sales Charges
Reduced Sales Charges (Class A
Shares Only)
OWNING FUND SHARES
Exchanging Among New England New England Funds offers three
Funds convenient ways to
Fund Dividend Payments exchange Fund shares.
SELLING FUND SHARES
4 Ways to Sell Fund Shares How to withdraw money or close
your account.
[] Through your investment
dealer
[] By telephone
[] By mail
[] By Systematic Withdrawal
Plan
Repurchase Option (Class A An opportunity to reinvest your
Shares Only) redemption proceeds within 120
days for no sales charge.
FUND DETAILS Additional information you may
find important.
How Fund Share Price Is
Determined
Income Tax Considerations
The Funds' Expenses
Performance Criteria
Additional Facts About the Funds
Glossary of Terms
<PAGE>
N e w E n g l a n d F u n d s
Investment Objectives
NEW ENGLAND CAPITAL GROWTH FUND (the "Capital Growth Fund")
The Fund seeks long-term growth of capital
Subadviser: Loomis, Sayles & Company, L.P., Chicago, IL
NEW ENGLAND BALANCED FUND
(the "Balanced Fund")
The Fund seeks a reasonable long-term investment return from a
combination of long-term capital appreciation and moderate
current income.
Subadviser: Loomis, Sayles & Company, L.P., Pasadena, CA
NEW ENGLAND GROWTH FUND
(the "Growth Fund")
The Fund seeks long-term growth of capital through investment in
equity securities of companies whose earnings are expected to
grow at a faster rate than the United States economy. Shares of
the Growth Fund are currently offered for sale only to certain
eligible investors. See "Growth Fund Eligibility" on page __.
Adviser: Capital Growth Management Limited Partnership
NEW ENGLAND INTERNATIONAL EQUITY FUND
(the "International Equity Fund")
The Fund seeks total return from long-term growth of capital and
dividend income, primarily through investment in international
equity securities.
Subadviser: Draycott Partners, Ltd.
NEW ENGLAND STAR ADVISERS FUND
(the "Star Advisers Fund")
The Fund seeks long-term growth of capital
Subadvisers: Berger Associates, Inc., Founders Asset
Management, Inc., Janus Capital Corporation and
Loomis, Sayles & Company, L.P., Detroit, MI
NEW ENGLAND VALUE FUND
(the "Value Fund")
The Fund seeks a reasonable long-term investment return from a
combination of market appreciation and dividend income from
equity securities.
Subadviser: Loomis, Sayles & Company, L.P., Pasadena, CA
NEW ENGLAND GROWTH OPPORTUNITIES FUND
(the "Growth Opportunities Fund")
The Fund seeks opportunities for long-term growth of capital and
income.
Subadviser: Westpeak Investment Advisors, L.P.
New England Investment Companies and the Funds' Advisers and
Subadvisers
The subadvisers of each of the Funds, except the International
Equity and Star Advisers Funds, are independently operated
subsidiaries of New England Investment Companies, L.P. ("NEIC"),
the [fifth]-largest publicly traded investment management firm in
the United States. New England Funds Management, L.P. ("NEFM"),
the adviser to each of the Funds except the Growth Fund, is also
a independently operated subsidiary of NEIC. NEIC is listed on
the New York Stock Exchange and through its subsidiaries [or an
affiliate] manages over $__ billion in assets for individuals and
institutions. Each subadviser operates independently and is
staffed by experienced investment professionals. All the
subadvisers apply specialized knowledge and careful analysis to
the pursuit of each Fund's objectives.
New England Funds Management, L.P. is the adviser to each of the
Funds except the Growth Fund, as well as most of the other New
England Funds.
Loomis, Sayles & Company, L.P. ("Loomis Sayles"), with over $44
billion of assets under management, manages portfolios for mutual
funds and other institutional investors and individuals. Loomis
Sayles serves as the subadviser to the Capital Growth, Balanced
and Value Funds, and as one of the subadvisers to the Star
Advisers Fund.
Draycott Partners, Ltd. ("Draycott"), a London-based firm,
manages the International Equity Fund as well as other
international equity portfolios.
Capital Growth Management Limited Partnership ("CGM"), manager of
the Growth Fund, has $___ billion of assets under management.
CGM specializes in managing aggressive growth-oriented equity
portfolios for mutual funds and other institutions.
Berger Associates, Inc. ("Berger") is one of the subadvisers to
the Star Advisers Fund, in addition to managing portfolios for
other mutual funds, pension and profit sharing plans and other
institutional and private investors.
Founders Asset Management, Inc. ("Founders"), one of the
subadvisers to the Star Advisers Fund, has acted as an investment
adviser since 1938.
Janus Capital Corporation ("Janus Capital") is one of the
subadvisers to the Star Advisers Fund and has managed mutual
funds since 1970. Janus Capital also advises individual,
corporate, charitable and retirement accounts.
Westpeak Investment Advisors, L.P. ("Westpeak") acts as
subadviser to the Growth Opportunities Fund and also provides
investment management services to other mutual funds and
institutional clients, including accounts of New England Mutual
Life Insurance Company ("The New England").
F u n d E x p e n s e s A n d
F i n a n c i a l I n f o r m a t i o n
Schedule of Fees
Expenses are one of several factors to consider when you invest
in the Funds. The following tables summarize your maximum
transaction costs from investing in the Funds and estimated
annual expenses for each class of the Funds' shares. The Example
on the following page shows the cumulative expenses attributable
to a hypothetical $1,000 investment in each class of shares of
the Funds for the periods specified.
Shareholder transaction expenses
All Funds
(except New England
Growth Fund)
------------------
Class A Class B Class C
------- ------- -------
Maximum Initial Sales Charge Imposed on a
Purchase (as a percentage of offering
price)(1)(2) 5.75% None None
Maximum Contingent Deferred Sales Charge
(as a percentage of original purchase price
or redemption proceeds, as applicable)(2)
(3) 4.00% None
New England
Growth Fund
------------------
Class A Class B Class C
------- ------- -------
Maximum Initial Sales Charge Imposed on a
Purchase (as a percentage of offering
price)(1)(2) 6.50% None None
Maximum Contingent Deferred Sales Charge
(as a percentage of original purchase price
or redemption proceeds, as applicable)(2)
(3) 4.00% None
(1) A reduced sales charge on Class A shares applies in some
cases. See "Buying Fund Shares -- Reduced Sales Charges
(Class A Shares Only)."
(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 1 year after
purchase, but not to any other purchases or redemptions of
Class A shares. See "Buying Fund Shares -- Sales Charges."
Annual Fund operating expenses
(as a percentage of average net assets)
New England New England
Capital Growth Fund Balanced Fund
------------------- -----------------
Class Class Class Class Class Class
A B C A B C
----- ----- ------ ----- ----- -----
Management Fees ___% ___% ___% ___% ___% ___%
12b-1 Fees 0.25% 1.00%* 1.00%* 0.25% 1.00%* 1.00%*
Other Expenses ___% ___% ___% ___% ___% ___%
Total Fund ___% ___% ___% ___% ___% ___%
Operating Expenses
New England New England
Growth Fund International Equity
------------------- Fund***
-------------------
Class Class Class Class Class Class
A B C A B C
----- ----- ------ ----- ----- -----
Management Fees ___% ___% ___% ___%** ___%** ___%**
12b-1 Fees 0.25% 1.00%* 1.00%* 0.25% 1.00%* 1.00%*
Other Expenses ___% ___% ___% ___% ___% ___%
Total Fund ___% ___% ___% ___%** ___%** ___%**
Operating Expenses
New England New England
Star Advisers Fund Value Fund
----------------- -----------------
Class Class Class Class Class Class
A B C A B C
----- ----- ----- ----- ----- -----
Management Fees ___% ___% ___% ___% ___% ___%
12b-1 Fees 0.25% 1.00%* 1.00%* 0.25% 1.00%* 1.00%*
Other Expenses ___% ___% ___% ___% ___% ___%
Total Fund ___% ___% ___% ___% ___% ___%
Operating Expenses
New England Growth
Opportunities
Fund***
-----------------
Class Class Class
A B C
----- ----- -----
Management Fees ___% ___% ___%
12b-1 Fees 0.25% 1.00%* 1.00%*
Other Expenses ___% ___% ___%
Total Fund ___% ___% ___%
Operating Expenses
* 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.
** After voluntary fee waiver and expense reduction by the
Fund's adviser and/or the Distributor. Without the
voluntary limitations, Management Fees would be ___% for all
classes and Total Fund Operating Expenses would be ___% for
Class A shares, ___% for Class B shares and ___% for Class C
shares. These voluntary limitations can be terminated by
the Fund's adviser or the Distributor at any time.
*** The expense information contained in this table and its
footnotes for the International Equity and Growth
Opportunities Funds has been restated to reflect fees and
expenses currently in effect for those Funds.
Example
You would pay the following expenses on a $1,000 investment
assuming (1) a 5% annual return and (2) unless otherwise noted,
redemption at period end. The 5% return and expenses in the
Example should not be considered indicative of actual or expected
Fund performance or expenses, both of which may be more or less
than those shown.
New England New England
Capital Growth Fund Balanced Fund
-------------------- --------------------
Class A Class B Class C Class A Class B Class C
------- -------- ------- ------- -------- -------
(1) (2) (1) (2)
1 year $ $ $ $ $ $ $ $
3 years $ $ $ $ $ $ $ $
5 years $ $ $ $ $ $ $ $
10 years* $ $ $ $ $ $ $ $
New England New England
Growth Fund International Equity Fund
-------------------- --------------------
Class A Class B Class Class A Class B Class C
------- -------- C ------- -------- -------
------
-
(1) (2) (1) (2)
1 year $ $ $ $ $ $ $ $
3 years $ $ $ $ $ $ $ $
5 years $ $ $ $ $ $ $ $
10 years* $ $ $ $ $ $ $ $
New England New England
Star Advisers Fund Value Fund
-------------------- --------------------
Class A Class B Class C Class A Class B Class C
------- -------- ------- ------- -------- -------
(1) (2) (1) (2)
1 year $ $ $ $ $ $ $ $
3 years $ $ $ $ $ $ $ $
5 years $ $ $ $ $ $ $ $
10 years* $ $ $ $ $ $ $ $
New England Growth
Opportunities Fund
--------------------
Class A Class B Class C
------- -------- -------
(1) (2)
1 year $ $ $ $
3 years $ $ $ $
5 years $ $ $ $
10 years* $ $ $ $
(1) Assumes redemption at end of period.
(2) Assumes no redemption at end of period.
* 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.
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 Funds' fees and other expenses,
please see "Fund Management," "The Funds' Expenses" and
"Additional Facts About the Funds."
A wire fee (currently $5.00) will be deducted from your proceeds
if you elect to transfer redemption proceeds by wire.
<PAGE>
Financial Highlights
To Be Filed
By Amendment
<PAGE>
I n v e s t m e n t S t r a t e g y
How the Funds Pursue Their Objectives
Investments in each Fund will be pooled with money from other
investors in that Fund to invest in a managed portfolio
consisting of securities appropriate to each Fund's investment
objective and policies. There can be no assurance that any Fund
will achieve its objective. Each Fund is a "diversified" mutual
fund, except for the Star Advisers Fund.
Fund Investments
[] Capital Growth Fund
The Capital Growth Fund seeks to attain its objective by
investing substantially all of its assets in equity securities.
Investments are selected based on their growth potential; current
income is not a consideration. The Fund normally will invest
primarily in equity securities of companies with medium or large
market capitalization (capitalization of $1 billion to $5 billion
and over $5 billion, respectively), but will also invest a
portion of its assets in equity securities of companies with
relatively small market capitalization (under $1 billion).
The Fund's subadviser selects investments based upon fundamental
research and analysis of individual companies and industries.
The subadviser selects investments for the Fund based on
qualitative and quantitative criteria including, among others,
industry dominance and competitive position, consistent earnings
growth, a history of high profitability, the subadviser's
expectation of continued high profitability and overall financial
strength, although not every investment will have all of these
characteristics. The Fund may invest in foreign securities.
[] Growth Fund
Most of the Growth Fund's investments are normally in common
stocks, although the Fund may invest in any type of equity
securities. The Fund does not consider current income as a
factor in selecting its investments. The Fund may invest in
foreign securities.
[] Value Fund
Substantially all of the Value Fund's investments are normally in
equity securities. In selecting investments for the Fund, the
emphasis is ordinarily placed on undervalued securities.
Although long-term market appreciation is ordinarily the basis
for security selection, current income may be a significant
consideration when yields appear to be favorable compared to
overall opportunities for capital appreciation. The Fund may
invest in foreign securities.
[] Balanced Fund
The Balanced Fund is "flexibly managed" in that sometimes it
invests more heavily in equity securities and at other times it
invests more heavily in fixed-income securities, depending on the
Fund's subadviser's view of the economic and investment outlook.
Most of the Fund's equity investments are normally in dividend-
paying common stocks of recognized investment quality that are
expected to achieve growth in earnings and dividends over the
long term. In selecting equity investments for the Fund, an
emphasis is ordinarily placed on undervalued securities. Fixed-
income securities include notes, bonds, non-convertible preferred
stock and money market instruments. The Fund invests at least
25% of its assets in fixed-income senior securities and, under
normal market conditions, more than 50% of its assets in equity
securities. The Fund may invest in foreign securities.
[] International Equity Fund
The International Equity Fund seeks to achieve its objective by
investing primarily in common stocks, although the Fund may
invest in any type of equity securities. Normally the Fund will
invest at least 65% of its total assets in equity securities of
issuers headquartered outside the United States, and
substantially all of its assets (other than cash and short-term
investments) in such equity securities or equity securities of
issuers (including closed-end investment companies) that derive a
substantial part of their revenues or profits from countries
outside the United States. Under normal conditions the Fund's
portfolio will contain equity securities of issuers from at least
three countries outside the United States. The Fund may also
engage in certain options and futures transactions.
The Fund's subadviser will make investment decisions on behalf of
the Fund by, first, selecting countries where it anticipates
sustainable growth that will exceed current market expectations.
Within the selected countries, the subadviser will identify
economic sectors that appear to present the most potential for
risk-adjusted growth and, finally, within the chosen economic
sectors, the subadviser will select securities that are expected
to offer the best value.
[] Growth Opportunities Fund
It is normally the policy of the Growth Opportunities Fund to
invest in a diversified portfolio of common stocks considered by
the Fund's subadviser to have possibilities for long-term
appreciation of capital and income. Emphasis will be given to
both undervalued securities ("value" style) and securities of
companies with growth potential ("growth" style). The Fund will
ordinarily invest substantially all of its assets in equity
securities. The Fund may invest in foreign securities that are
traded in U.S. markets.
[] Star Advisers Fund
The Star Advisers Fund seeks to attain its objective by investing
primarily in equity securities. The Fund may also invest in
other securities, as described below. Under normal market
conditions, however, at least 65% of the Fund's assets will be
invested in equity securities. Capital invested in the Fund will
be allocated on an equal basis among four different subadvisers.
Each subadviser will manage its segment of the Fund's assets in
accordance with that subadviser's own investment style and
strategy. The Fund, in the discretion of each subadviser, may
invest without limit in securities of companies with smaller
capitalization. The Fund may in the discretion of each of its
subadvisers invest without limit in securities of foreign issuers
(including issuers in emerging markets) as well as in securities
of U.S. issuers.
NEFM, the adviser of the Star Advisers Fund, believes that a
multi-adviser approach to equity investing - one that combines
the varied styles of a number of subadvisers in selecting
securities for the Fund's portfolio - offers a different
investment opportunity than equity funds run by a single adviser
using a single style.
Any given management style tends to produce better returns than
other styles under certain market and economic conditions, and to
perform less well under other conditions. Therefore, most single-
adviser funds have not consistently maintained superior
performance rankings relative to their peers over long periods.
NEFM believes that consistency of results, minimizing under-
performance even at the cost of out-performance at times, is
likely to produce higher performance over time.
NEFM believes that assigning portfolio management responsibility
for the Star Advisers Fund to four subadvisers, whose varying
styles have resulted in records of success, may increase the
likelihood that the Fund may produce superior long-term results
for its shareholders, with less variability of return and less
risk of persistent under-performance than a single-adviser fund.
Of course, past results should not be considered a prediction of
future performance, and there is no assurance that the Fund will
in fact achieve superior results over any time period. The
investment styles described below will be those applied by each
of the subadvisers to the segment of the Fund's portfolio for
which that subadviser is responsible.
Berger places primary emphasis on established companies which it
believes have favorable growth prospects, regardless of the
company's size. Berger emphasizes stocks with potential for
rapid earnings expansion. Berger seeks companies with the
capability to perform well under varying economic conditions,
including the ability to compete in the global marketplace.
Berger also seeks companies with the ability to market increasing
amounts of products or services, in order to increase shareholder
equity at an above-average rate. Berger also places considerable
emphasis on the quality of the corporate leadership of companies
under consideration. Common stocks will generally constitute all
or most of the segment of the Fund managed by Berger, but this
segment of the portfolio may from time to time take substantial
positions in securities convertible into common stocks, and may
also purchase preferred stocks, government securities, zero-
coupon securities and other senior securities when Berger
believes it is appropriate to do so. This segment of the
portfolio may also invest in Rule 144A securities (see
"Investment Risks -- Miscellaneous" below) and may purchase put
and call options on stock indices and futures contracts and
options thereon for the purpose of hedging.
Founders' segment of the portfolio will invest primarily in
common stocks of well-established, high-quality growth companies
with mid or high market capitalization. Founders manages its
segment of the Fund's portfolio by investing primarily in
established companies with above-average prospects for growth in
earnings per share. This segment will invest primarily in mid-
cap and large capitalization stocks. Founders believes that mid-
cap companies (companies with between $1.5 billion and $3.5
billion of market capitalization) can produce returns close to
those of smaller-cap companies, but with less risk because of
their stronger infrastructures and performance records and more
solid market positions, and that large-capitalization stocks add
stability to the portfolio. These companies tend to have strong
performance records, with solid continuous operating records of
three years or more. Founders' approach to investment management
gives greater emphasis to the fundamental financial, marketing
and operating characteristics of individual companies, and is
less concerned with the short-term impact of changes in
macroeconomics and market conditions, than some other investment
firms. This segment of the portfolio may invest in bonds,
debentures and other corporate obligations when Founders believes
that these investments offer opportunity for growth of capital.
This segment of the portfolio may also invest in Rule 144A
securities and may enter into futures contracts or options
thereon for hedging purposes.
Janus Capital pursues the Fund's investment objective by
investing substantially all of Janus Capital's segment of the
portfolio in common stocks when its portfolio manager believes
that the relevant market environment favors profitable investing
in such securities. Janus Capital manages its segment of the
portfolio to seek long-term capital growth primarily from
investing in common stocks of companies of any size, including
large, well-established companies and smaller, emerging growth
companies. Janus Capital's analysis and selection process focus
on stocks with earnings growth potential that may not be
recognized by the market. This segment of the portfolio may also
invest in preferred stocks, warrants, government securities,
corporate bonds and debentures or other debt securities or
repurchase agreements when its portfolio manager perceives an
opportunity for capital growth from such securities or to receive
a return on idle cash. Janus Capital's segment may also invest
in Rule 144A securities and may enter into options, futures and
forward contracts.
Loomis Sayles manages its segment of the portfolio by investing
primarily in stocks of small cap companies with good earnings
growth potential, that Loomis Sayles believes are undervalued by
the market. Typically, such companies range in size from $100
million to $500 million in market capitalization, have better
than average growth rates at below average price/earnings ratios
and have strong balance sheets and cash flow. Loomis Sayles
seeks to build a core small cap portfolio of solid growth company
stocks, with a smaller emphasis on special situations and
turnarounds (companies that have experienced significant business
problems but which Loomis Sayles believes have favorable
prospects for recovery), as well as unrecognized stocks.
Under unusual market conditions as determined by any of the four
subadvisers, all or any portion of the segment of the portfolio
managed by that subadviser may be invested, for temporary,
defensive purposes, in short-term debt instruments or in cash.
In addition, under normal conditions, a portion of each segment's
assets may be invested in short-term assets for liquidity
purposes or pending investment in other securities. Short-term
investments may include U.S. Government securities, certificates
of deposit, commercial paper and other obligations of corporate
issuers rated in the top two rating categories by a major rating
agency or, if unrated, determined to be of comparable quality by
the subadviser, and repurchase agreements that are fully
collateralized by cash, U.S. Government securities or high-
quality money market instruments.
[] Additional Information
Equity securities are securities that represent an ownership
interest (or the right to acquire such an interest) in a company,
and include common and preferred stocks and securities
exercisable for or convertible into common or preferred stocks
(such as warrants, convertible debt securities and convertible
preferred stock). The Capital Growth, Growth, International
Equity, Value and Growth Opportunities Funds seek to attain their
objectives by normally investing substantially all of their
assets in equity securities. When the particular Fund's adviser
or subadviser deems it appropriate, however, the Capital Growth,
Growth, Value and Growth Opportunities Funds may, for temporary
defensive purposes, hold a substantial portion of their assets in
cash or fixed-income investments, including U.S. Government
obligations, investment grade (and comparable unrated) corporate
bonds or notes, money market instruments and repurchase
agreements. Corporate obligations in the lowest investment grade
category (rated BBB by Standard & Poor's Ratings Group ["S&P"] or
Baa by Moody's Investors Service, Inc. ["Moody's"]) have some
speculative characteristics and may be more adversely affected by
changing economic conditions than are higher grade obligations.
The International Equity Fund may, for temporary purposes, hold
all or any portion of its assets in cash, repurchase agreements,
short-term debt obligations of U.S. or foreign corporate issuers
or U.S. or foreign government obligations of any maturity rated
AAA, AA, A or BBB by S&P, Aaa, Aa, A or Baa by Moody's or unrated
but determined by the Fund's subadviser to be of comparable
quality to securities in those rating categories. No estimate
can be made as to when or for how long a Fund will employ
defensive strategies. Under some market conditions, the Balanced
Fund may, for temporary purposes, invest less than 50% of its
assets in equity securities and the balance in cash and fixed-
income investments.
I n v e s t m e n t R i s k s
It is important to understand the following risks inherent in a
Fund before you invest.
[] Equity Securities
While offering greater potential for long-term growth, equity
securities are more volatile and more risky than some other forms
of investment. Therefore, the value of your investment in a Fund
may sometimes decrease instead of increase. Each Fund may invest
in equity securities of companies with relatively small market
capitalization. Securities of such companies may be more
volatile than the securities of larger, more established
companies and the broad equity market indices. See "Small
Companies" below. Each Fund's investments may include securities
traded "over-the-counter" as well as those traded on a securities
exchange. Some over-the-counter securities may be more difficult
to sell under some market conditions.
Each Fund may invest in convertible securities, including
corporate bonds, notes or preferred stocks that can be converted
into common stocks or other equity securities. Convertible
securities also include other securities, such as warrants, that
provide an opportunity for equity participation. Because
convertible securities can be converted into equity securities,
their values will normally increase or decrease as the values of
the underlying equity securities increase or decrease. The
movements in the prices of convertible securities, however, may
be smaller than the movements in the value of the underlying
equity securities. The value of convertible securities that pay
dividends or interest, like the value of other fixed-income
securities, generally fluctuates inversely with changes in
interest rates. Warrants have no voting rights, pay no dividends
and have no rights with respect to the assets of the corporation
issuing them. They do not represent ownership of the securities
for which they are exercisable, but only the right to buy such
securities at a particular price. Less than 35% of each Fund's
respective net assets will be invested in convertible securities
rated below investment grade and unrated convertible securities
of comparable quality.
[] Small Companies
Investments in companies with relatively small capitalization may
involve greater risk than is usually associated with more
established companies. These companies often have sales and
earnings growth rates which exceed those of companies with larger
capitalization. Such growth rates may in turn be reflected in
more rapid share price appreciation. However, companies with
smaller capitalization often have limited product lines, markets
or financial resources and they may be dependent upon a
relatively small management group. The securities may have
limited marketability and may be subject to more abrupt or
erratic movements in price than securities of companies with
larger capitalization or the market averages in general. The net
asset value of funds that invest in companies with smaller
capitalization therefore may fluctuate more widely than market
averages.
[] Foreign Securities
Investments in foreign securities present risks not typically
associated with investments in comparable securities of U.S.
issuers.
There may be less information publicly available about a foreign
corporate or government issuer than about a U.S. issuer, and
foreign corporate issuers are not generally subject to
accounting, auditing and financial reporting standards and
practices comparable to those in the United States. The
securities of some foreign issuers are less liquid and at times
more volatile than securities of comparable U.S. issuers.
Foreign brokerage commissions and securities custody costs are
often higher than those in the United States, and judgments
against foreign entities may be more difficult to obtain and
enforce. With respect to certain foreign countries, there is a
possibility of governmental expropriation of assets, confiscatory
taxation, political or financial instability and diplomatic
developments that could affect the value of investments in those
countries. The receipt of interest on foreign government
securities may depend on the availability of tax or other
revenues to satisfy the issuer's obligations.
The International Equity and Star Advisers Funds' investments in
foreign securities may include investments in emerging or
developing countries, whose economies or securities markets are
not yet highly developed. Special considerations associated with
these investments (in addition to the considerations regarding
foreign investments generally) may include, among others, greater
political uncertainties, an economy's dependence on revenues from
particular commodities or on international aid or development
assistance, currency transfer restrictions, highly limited
numbers of potential buyers for such securities and delays and
disruptions in securities settlement procedures.
The Funds may invest in foreign equity securities either by
purchasing such securities directly or by purchasing "depository
receipts." Depository receipts are instruments issued by a bank
that represent an interest in equity securities held by
arrangement with the bank. Depository receipts can be either
"sponsored" or "unsponsored." Sponsored depository receipts are
issued by banks in cooperation with the issuer of the underlying
equity securities. Unsponsored depository receipts are arranged
without involvement by the issuer of the underlying equity
securities. Less information about the issuer of the underlying
equity securities may be available in the case of unsponsored
depository receipts.
[] Foreign Currency (Capital Growth, Balanced, International
Equity, Star Advisers and Value Funds)
Most foreign securities in the Capital Growth, Balanced,
International Equity, Star Advisers and Value Funds' portfolios
will be denominated in foreign currencies or traded in securities
markets in which settlements are made in foreign currencies.
Similarly, any income on such securities is generally paid to the
Fund in foreign currencies. The value of these foreign
currencies relative to the U.S. dollar varies continually,
causing changes in the dollar value of the Fund's portfolio
investments (even if the local market price of the investments is
unchanged) and changes in the dollar value of the Fund's income
available for distribution to its shareholders. The effect of
changes in the dollar value of a foreign currency on the dollar
value of the Fund's assets and on the net investment income
available for distribution may be favorable or unfavorable.
The Capital Growth, Balanced, International Equity, Star Advisers
and Value Funds may incur costs in connection with conversions
between various currencies. In addition, those Funds may be
required to liquidate portfolio assets, or may incur increased
currency conversion costs, to compensate for a decline in the
dollar value of a foreign currency occurring between the time
when the Fund declares and pays a dividend, or between the time
when the Fund accrues and pays an operating expense in U.S.
dollars.
[] Fixed-Income Securities
Fixed-income securities include a broad array of short, medium
and long term obligations issued by the U.S. or foreign
governments, government or international agencies and
instrumentalities, and corporate issuers of various types. Some
fixed income securities represent uncollateralized obligations of
their issuers; in other cases, the securities may be backed by
specific assets (such as mortgages or other receivables) that
have been set aside as collateral for the issuer's obligation.
Fixed-income securities generally involve an obligation of the
issuer to pay interest or dividends on either a current basis or
at the maturity of the security, as well as the obligation to
repay the principal amount of the security at maturity.
Fixed-income securities involve both credit risk and market risk.
Credit risk is the risk that the security's issuer will fail to
fulfill its obligation to pay interest, dividends or principal on
the security. Market risk is the risk that the value of the
security will fall because of changes in market rates of
interest. (Generally, the value of fixed-income securities falls
when market rates of interest are rising.) Some fixed-income
securities also involve prepayment or call risk. This is the
risk that the issuer will repay a Fund the principal on the
security before it is due, thus depriving the Fund of a favorable
stream of future interest or dividend payments.
Because interest rates vary, it is impossible to predict the
income of a fund that invests in fixed-income securities for any
particular period. Fluctuations in the value of a Fund's
investments in fixed-income securities will cause a Fund's net
asset value to increase or decrease.
All non-convertible fixed-income securities purchased by the
Funds other than the Balanced and Star Advisers Funds, will, at
the time of purchase, either be rated investment grade by at
least one major rating agency or be unrated but determined to be
of investment grade quality by the Fund's adviser or subadviser.
[] Lower Quality Fixed-Income Securities (Balanced and Star
Advisers Funds)
Fixed-income securities rated BB or lower by S&P or Ba or lower
by Moody's (and comparable unrated securities) are of below
"investment grade" quality. Lower quality fixed-income
securities generally provide higher yields, but are subject to
greater credit and market risk, than higher quality fixed-income
securities. 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 mutual fund investing in lower
quality fixed-income securities may be more dependent on the
fund's adviser's or subadviser's own credit analysis than for a
fund investing in 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 market may be less liquid
for lower rated fixed-income securities. This lack of liquidity
at certain times may affect the valuation of these securities and
may make the valuation and sale of these securities more
difficult. During the fiscal year ended December 31, 1995, the
Balanced and Star Advisers Funds had on average ___% and ___% of
their assets, respectively, invested in fixed-income securities
rated below investment grade. Securities of below investment
grade quality are considered high yield, high risk securities and
are commonly known as "junk bonds." For more information,
including a detailed description of the ratings assigned by S&P
and Moody's, please refer to the Statement's "Appendix A -
Description of Bond Ratings."
[] Zero Coupon, Pay-In-Kind and Step Coupon Securities and
"Strips" (Star Advisers Fund)
The Star Advisers Fund may invest in zero coupon, pay-in-kind and
step coupon securities and in "strips." Zero coupon bonds do not
make regular interest payments; rather, they are sold at a
discount from face value. Principal and accrued discount
(representing interest accrued but not paid) are paid at
maturity. "Strips" are debt securities that are stripped of
their interest coupon after the securities are issued, but
otherwise are comparable to zero coupon bonds. Step coupon bonds
trade at a discount from their face value and pay coupon
interest. The coupon rate is low for an initial period and then
increases to a higher coupon rate thereafter. Pay-in-kind bonds
normally give the issuer an option to pay cash at a coupon
payment date or give the holder of the security a similar bond
with the same coupon rate and a face value equal to the amount of
the coupon payment that would have been made. The market values
of "strips" and zero coupon, pay-in-kind and step coupon
securities generally fluctuate in response to changes in interest
rates to a greater degree than do conventional interest-paying
securities of comparable term and quality. Under many market
conditions, investments in such securities may be illiquid,
making it difficult for the Fund to dispose of them or determine
their current value.
[] Repurchase Agreements
Under a repurchase agreement, a Fund buys securities from a
seller, usually a bank or brokerage firm, with the understanding
that the seller will repurchase the securities at a higher price
at a later date. If the seller fails to repurchase the
securities, the Fund has rights to sell the securities to third
parties. Repurchase agreements can be regarded as loans by the
Fund to the seller, collateralized by the securities that are the
subject of the agreement. Repurchase agreements afford an
opportunity for the Fund to earn a return on available cash at
relatively low market risk, although the Fund may be subject to
various delays and risks of loss if the seller fails to meet its
obligation to repurchase. The staff of the SEC is currently of
the view that repurchase agreements maturing in more than 7 days
are illiquid securities.
[] Investments in Other Investment Companies (International
Equity Fund)
The International Equity Fund may invest up to 10% of its total
assets in securities of other investment companies. Because of
restrictions on direct investment by U.S. entities in certain
countries, investing indirectly in such countries (by purchasing
shares of another fund that is permitted to invest in such
countries) may be the most practical or efficient way for the
Fund to invest in such countries. In other cases, where the
Fund's subadviser desires to make only a relatively small
investment in a particular country, investing through another
fund that holds a diversified portfolio in that country may be
more effective than investing directly in issuers in that
country. As an investor in another investment company, the Fund
will indirectly bear its share of the expenses of that investment
company. These expenses are in addition to the Fund's own costs
of operations. In some cases, investing in an investment company
may involve the payment of a premium over the value of the assets
held in that investment company's portfolio.
[] Short-Term Trading
Although each Fund seeks long-term growth or return, each Fund
may, consistent with its investment objective, engage in
portfolio trading in anticipation of, or in response to, changing
economic or market conditions and trends. These policies may
result in higher turnover rates in the Fund's portfolio, which
may produce higher transaction costs and a higher level of
taxable capital gains. Portfolio turnover considerations will
not limit any adviser's or subadviser's investment discretion in
managing a Fund's assets.
Recent portfolio turnover rates of each Fund are set forth above
under "Financial Highlights."
[] Options, Futures, Swap Contracts and Currency Transactions
(International Equity, Star Advisers and Growth Opportunities
Funds)
The International Equity and Star Advisers Fund may buy, sell or
write options on securities, securities indexes, currencies or
futures contracts. These Funds may buy and sell futures
contracts on securities, securities indexes or currencies. These
Funds may also enter into swap contracts. These Funds may engage
in these transactions either for the purpose of enhancing
investment return, or to hedge against changes in the value of
other assets that the Fund owns or intends to acquire. These
Funds may also conduct foreign currency exchange transactions on
a spot (i.e., cash) basis at the spot rate prevailing in the
foreign currency exchange market. These Funds may enter into
interest rate, currency and securities index swaps. These Funds
will enter into these transactions primarily to seek to preserve
a return or spread on a particular investment or portion of its
portfolio, to protect against currency fluctuations, as a
duration management technique or to protect against an increase
in the price of securities the Fund anticipates purchasing at a
later date.
The Growth Opportunities Fund may buy and sell futures contracts
on a variety of stock indexes. The Fund would buy such a futures
contract only when the Fund is experiencing significant cash
inflows, and then only for the purpose of maintaining the Fund's
exposure to the equity markets during the time before the Fund
has fully invested incoming cash in equity securities directly.
Similarly, the Fund would sell stock index futures only during
periods of cash outflows from the Fund, for the purpose of
reducing equity market exposure before holdings of stock are
liquidated. The Fund will not use futures contracts for
speculative purposes or to hedge against changes in the value of
the Fund's securities portfolios.
Options, futures and swap contracts fall into the broad category
of financial instruments known as "derivatives" and involve
special risks. Use of options, futures or swaps for other than
hedging purposes may be considered a speculative activity,
involving greater risks than are involved in hedging.
Options can generally be classified as either "call" or "put"
options. There are two parties to a typical options transaction:
the "writer" and the "buyer." A call option gives the buyer the
right to buy a security or other asset (such as an amount of
currency or a futures contract) from, and a put option the right
to sell a security or other asset to, the option writer at a
specified price, on or before a specified date. The buyer of an
option pays a premium when purchasing the option, which reduces
the return on the underlying security or other asset if the
option is exercised, and results in a loss if the option expires
unexercised. The writer of an option receives a premium from
writing an option, which may increase its return if the option
expires or is closed out at a profit. If a Fund as the writer of
an option is unable to close out an unexpired option, it must
continue to hold the underlying security or other asset until the
option expires, to "cover" its obligations under the option.
A futures contract creates an obligation by the seller to deliver
and the buyer to take delivery of the type of instrument or cash
at the time and in the amount specified in the contract.
Although many futures contracts call for the delivery (or
receipt) of the specified instrument, futures are usually closed
out before the settlement date through the purchase (or sale) of
a comparable contract. If the price of the sale of the futures
contract by a Fund exceeds (or is less than) the price of the
offsetting purchase, the Fund will realize a gain (or loss).
Interest rate swaps involve the exchange by a Fund with another
party of their respective commitments to pay or receive interest
(for example, an exchange of floating rate payments for fixed
rate payments with respect to a notional amount of principal). A
currency swap is an agreement to exchange cash flows on a
notional amount based on changes in the relative values of the
specified currencies. An index swap is an agreement to make or
receive payments based on the different returns that would be
achieved if a notional amount were invested in a specified basket
of securities (such as the Standard & Poor's Composite Index of
500 Stocks [the "S&P 500"]) or in some other investment (such as
U.S. Treasury securities).
The value of options purchased by a Fund, futures contracts held
by a Fund and a Fund's positions in swap contracts may fluctuate
up or down based on a variety of market and economic factors. In
some cases, the fluctuations may offset (or be offset by) changes
in the value of securities held in the Fund's portfolio. All
transactions in options, futures or swaps involve the possible
risk of loss to the Fund of all or a significant part of the
value of its investment. In some cases, the risk of loss may
exceed the amount of the Fund's investment. The Fund will be
required, however, to set aside with its custodian bank certain
assets in amounts sufficient at all times to satisfy its
obligations under options, futures and swap contracts.
The successful use of options, futures and swaps will usually
depend on the subadvisers' ability to forecast stock market,
currency or other financial market movements correctly. A Fund's
ability to hedge against adverse changes in the value of
securities held in its portfolio through options, futures and
swap transactions also depends on the degree of correlation
between the changes in the value of futures, options or swap
positions and changes in the values of the portfolio securities.
The successful use of futures and exchange-traded options also
depends on the availability of a liquid secondary market to
enable the Fund to close its positions on a timely basis. There
can be no assurance that such a market will exist at any
particular time. In the case of swap contracts and of options
that are not traded on an exchange ("over-the-counter" options),
the Fund is at risk that the other party to the transaction will
default on its obligations, or will not permit the Fund to
terminate the transaction before its scheduled maturity. As a
result of these characteristics, the Fund will treat most swap
contracts and over-the-counter options (and the assets it
segregates to cover its obligations thereunder) as illiquid.
Certain provisions of the Internal Revenue Code (the "Code") and
certain regulatory requirements may limit a Fund's ability to
engage in futures, options and swap transactions.
[] Currency Hedging Transactions (International Equity and Star
Advisers Funds)
The International Equity and Star Advisers Funds may, at the
discretion of their subadvisers, engage in foreign currency
exchange transactions, in connection with the purchase and sale
of portfolio securities, to protect the value of specific
portfolio positions or in anticipation of changes in relative
values of currencies in which current or future Fund portfolio
holdings are denominated or quoted. Currency hedging
transactions may include forward contracts (contracts with
another party to buy or sell a currency at a specified price on a
specified date), futures contracts (which are similar to forward
contracts but are traded on an exchange) and swap contracts. For
more information on foreign currency hedging transactions, see
Part II of the Statement.
[] Miscellaneous
No Fund will invest more than 15% of its net assets in "illiquid
securities," that is, securities which are not readily resalable,
which may include securities whose disposition is restricted by
federal securities laws.
The Balanced, International Equity and Star Advisers Funds may
purchase Rule 144A securities. These are privately offered
securities that can be resold only to certain qualified
institutional buyers. The Star Advisers Fund may also purchase
commercial paper issued under Section 4(2) of the Securities Act
of 1933. Rule 144A securities and Section 4(2) commercial paper
are treated as illiquid, unless a subadviser has determined,
under guidelines established by New England Funds Trust I's
trustees, that the particular issue of Rule 144A securities or
commercial paper is liquid. Investment in restricted or other
illiquid securities involves the risk that a Fund may be unable
to sell such a security at the desired time. Also, a Fund may
incur expenses, losses or delays in the process of registering
restricted securities prior to resale.
The International Equity and Star Advisers Funds may purchase
securities on a "when-issued" or "delayed-delivery" basis. This
means that a Fund enters into a commitment to buy the security
before the security has been issued, or, in the case of a
security that has already been issued, to accept delivery of the
security on a date beyond the usual settlement period. If the
value of a security purchased on a "when-issued" or "delayed
delivery" basis falls or market rates of interest increase
between the time a Fund commits to buy the security and the
delivery date, the Fund may sustain a loss in value of or yield
on the security. For more information on "when-issued" and
"delayed delivery" securities, see Part II of the Statement.
To the extent the Star Advisers Fund may invest in derivative
securities for other than bona fide hedging purposes, such
investments may be speculative in nature and may involve
additional risks.
The Star Advisers Fund is a "non-diversified" fund and as such is
not required to meet any diversification requirements under the
Investment Company Act of 1940 (the "1940 Act"), although the
Fund must meet certain diversification standards to qualify as a
"regulated investment company" under the Code. Since the Fund
may invest a relatively high percentage of its assets in the
obligations of a limited number of issuers, the Fund may be more
susceptible than a more widely-diversified fund to any single
economic, political or regulatory occurrence.
[] Special Considerations Regarding the Multi-Adviser Approach
(Star Advisers Fund)
NEFM, the adviser of the Star Advisers Fund, oversees the
portfolio management services provided to the Fund by each of the
four subadvisers. NEFM does not, however, determine what
investments will be purchased or sold for any segment of the
portfolio. Because each subadviser will be managing its segment
of the portfolio independently from the other subadvisers, the
same security may be held in two different segments of the
portfolio, or may be acquired for one segment of the portfolio at
a time when the subadviser of another segment deems it
appropriate to dispose of the security from that other segment.
Similarly, under some market conditions, one or more of the
subadvisers may believe that temporary, defensive investments in
short-term instruments or cash are appropriate when another
subadviser or subadvisers believe continued exposure to the
equity markets is appropriate for their segments of the
portfolio. Because each subadviser directs the trading for its
own segment of the portfolio, and does not aggregate its
transactions with those of the other subadvisers, the Fund may
incur higher brokerage costs than would be the case if a single
adviser or subadviser were managing the entire portfolio. Also,
because each segment of the portfolio will perform differently
from the other segments depending upon the investments it holds
and changing market conditions, one segment may be larger or
smaller at various times than other segments. The Fund does not
intend to reallocate assets among the segments to reduce these
differences in size. Net cash inflows or outflows resulting from
sales and redemptions of the Fund's shares will be allocated on
an equal basis, without regard to the relative size of the
segments, among the four segments of the portfolio.
NEFM may, at its discretion, terminate its agreement with a
segment's subadviser. In such case, NEFM will either enter into
an agreement with another subadviser to manage the segment or
will allocate the segment's assets equally among the other
segments of the Fund.
F u n d M a n a g e m e n t
NEFM, 399 Boylston Street, Boston, Massachusetts, 02116, serves
as the adviser to each Fund except the Growth Fund (for which CGM
serves as adviser). NEFM oversees, evaluates and monitors the
subadvisory services provided to each Fund (except the Growth
Fund) and furnishes general business management and
administration to each such Fund.
The subadviser of the Capital Growth Fund, the Balanced Fund and
the Value Fund is Loomis Sayles. Founded in 1926, Loomis Sayles,
One Financial Center, Boston, Massachusetts 02111, is one of the
country's oldest and largest investment counsel firms. Richard
W. Hurckes and Scott S. Pape, Vice Presidents of Loomis Sayles,
have served as the portfolio managers of the Capital Growth Fund
since its inception in 1992. Carol C. McMurtrie, Vice President
and Managing Partner of Loomis Sayles, and Tricia H. Mills and
Douglas D. Ramos, Vice Presidents of Loomis Sayles, have served
as portfolio managers of the Value Fund since March 1993.
Douglas D. Ramos and Meri Anne Beck have served as portfolio
managers of the Balanced Fund since 1990; Ms. Beck is also a Vice
President of Loomis Sayles. All of the foregoing persons have
been employed by Loomis Sayles for five years except Mr. Pape
who, prior to the time he joined Loomis Sayles, was Equity
Portfolio Manger of the Illinois State Board of Investment.
The adviser of the Growth Fund is CGM, One International Place,
Boston, Massachusetts 02110. CGM, organized in 1989, serves as
investment adviser to seven mutual funds and to other
institutional investors. The general partner of CGM is a
corporation owned in equal shares by Robert L. Kemp and G.
Kenneth Heebner, who are officers of New England Funds Trust I.
Mr. Heebner, Senior Portfolio Manager of CGM, has served as
portfolio manager of the Growth Fund since 1976. NEIC owns a
majority limited partnership interest in CGM. In 1995, the
Growth Fund paid ____% of its net assets in advisory fees to CGM.
The subadviser of the Growth Opportunities Fund is Westpeak, 1011
Walnut Street, Boulder, Colorado 80302. The portfolio manager of
the Growth Opportunities Fund is Gerald H. Scriver, President and
Chief Executive Officer of Westpeak. Mr. Scriver has been with
Westpeak since its inception in 1991. Mr. Scriver was Director
of Quantitative Strategies of INVESCO from 1989 through 1991.
The subadviser of the International Equity Fund is Draycott, 8
City Road, London EC2Y 1HE, England. Draycott was organized in
1991 to provide investment advice and management services to
institutional investors' accounts and to mutual funds distributed
to both institutional and retail customers. Draycott is a member
of the Investment Management Regulatory Organization Limited
(IMRO), the U.K. regulator of investment advisers. Nicholas D.
P. Carn, Chief Investment Officer, President and Chief Executive
Officer of Draycott, Timothy S. Griffen, Senior Portfolio Manager
and Pacific Rim Specialist of Draycott, Gregory D. Eckersley,
Portfolio Manager and United Kingdom Specialist of Draycott, and
Nigel Hankin, Portfolio Manager and European Specialist of
Draycott, have served as the portfolio managers of the
International Equity Fund since the Fund's inception in 1992.
Prior to Draycott's organization in 1991, Mr. Carn was Managing
Director, International Equities Group, Mr. Griffen was a Vice
President and Portfolio Manager, Mr. Eckersley was Investment
Manager and Mr. Hankin was European Fund Manager, all at CIGNA
International Investment Advisors, Ltd.
Each Fund other than the Growth Fund pays NEFM a management fee
at the annual rate set forth in the following table:
Management fee paid by Fund to NEFM
(as a percentage of average daily net
Fund assets of the Fund)
- ------------------------ ------------------------------------------
Balanced Fund 0.75% of the first $200 million
0.70% of the next $300 million
0.65% of amounts in excess of $500 million
Capital Growth Fund 0.75% of the first $200 million
0.70% of the next $300 million
0.65% of amounts in excess of $500 million
Growth Opportunities 0.70% of the first $200 million
Fund 0.65% of the next $300 million
0.60% of amounts in excess of $500 million
International Equity 0.90% of the first $200 million
Fund 0.85% of the next $300 million
0.80% of amounts in excess of $500 million
Star Advisers Fund 1.05% of all assets
Value Fund 0.75% of the first $200 million
0.70% of the next $300 million
0.65% of amounts in excess of $500 million
The advisory fee rates payable by the Balanced, Capital Growth,
International Equity, Star Advisers and Value Funds are higher
than those paid by most other mutual funds but are comparable to
fee rates paid by some mutual funds with similar investment
objectives and policies to these Funds. In the case of the Star
Advisers Fund, this difference in the fee rate is partially due
to the multi-adviser format.
Subject to the supervision of NEFM, each subadviser manages the
portfolio(s) of the Fund(s) to which it serves as subadviser (in
the case of the Star Advisers Fund, its segment of such Fund's
portfolio) in accordance with the Fund's investment objective and
policies, makes investment decisions for that Fund or segment,
places orders to purchase and sell securities for that Fund or
segment, and employs professional advisers and securities
analysts who provide research services to that Fund or segment.
The Funds pays no direct fees to any of their subadvisers.
Below is a brief description of the subadvisers of the Star
Advisers Fund.
Berger, 210 University Boulevard, Suite 900, Denver, Colorado
80206. Rodney L. Linafelter, Vice President of Berger, has day-
to-day responsibility for the management of the segment of the
Fund managed by Berger. Kansas City Southern Industries, Inc.
("KCSI"), a publicly traded holding company, owns approximately
80% of the outstanding shares of Berger.
Founders, 2930 East Third Avenue, Denver, Colorado 80206. To
facilitate day-to-day investment management, Founders employs a
unique team-and-lead-manager system. The management team for a
portfolio or fund is comprised of Founders' Chief Investment
Officer Bjorn K. Borgen, a lead portfolio manager, assistant
portfolio managers, portfolio traders and research analysts.
Team members share responsibility for providing ideas,
information, knowledge and expertise in the management of
Founders' segment of the Fund. Each team member has one or more
areas of expertise that is applied to the management of Founders'
segment of the Fund. Daily decisions on portfolio selection rest
with the lead portfolio manager, who, through participation in
the team process, utilizes the input of other team members in
making purchase and sale determinations. Edward F. Keely is lead
portfolio manager for the segment of the Fund that is managed by
Founders. Mr. Borgen has served as Founders' Chief Investment
Officer since 1969 and owns all of Founders' outstanding shares.
Janus Capital, 100 Fillmore Street, Denver, Colorado 80206.
Warren B. Lammert has day-to-day management responsibility for
those assets of the Fund allocated to Janus Capital, where he
serves as a portfolio manager and Vice President of Investments.
KCSI owns approximately 83% of the outstanding voting stock of
Janus Capital. Thomas H. Bailey, President and Chairman of the
Board of Janus Capital, owns approximately 12% of Janus Capital's
voting stock and, by agreement with KCSI, selects a majority of
Janus Capital's board of directors.
Loomis Sayles. Jeffrey C. Petherick and Mary Champagne, Vice
Presidents of Loomis Sayles, have day-to-day management
responsibility for the segment of the Fund that is allocated to
Loomis Sayles. Mr. Petherick, who joined Loomis Sayles in 1990,
has co-managed the Loomis Sayles segment of the Fund since the
Fund's inception. Ms. Champagne has co-managed the Loomis Sayles
segment of the Fund since July 1995. Prior to joining Loomis
Sayles in 1993, Ms. Champagne served as a portfolio manager at
NBD Bank for 10 years.
NEFM pays each subadviser of the Star Advisers Fund a subadvisory
fee at the annual rate of 0.55% of the first $50 million of the
average daily net assets of the segment of the Fund that the
subadviser manages and 0.50% of such assets in excess of $50
million. The Distributor in its discretion may, but is not
obligated to, pay an incentive bonus to the subadviser whose
segment of the Fund's portfolio has the highest relative total
return for the prior year versus that segment's investment peer
group as tracked by a major independent mutual fund reporting
service.
NEFM pays the subadvisers of the following Funds a subadvisory
fee at the annual rate set forth in the following table:
Subadvisory fee payable by NEFM to
subadviser
(as a percentage of average daily
Fund Subadviser net assets of the Fund)
- ------------------- ---------- --------------------------------
Balanced Fund Loomis 0.535% of the first $200 million
Sayles 0.350% of the next $300 million
0.300% of amounts in excess of
$500 million
Capital Growth Fund Loomis 0.60% of the first $25 million
Sayles 0.55% of the next $75 million
0.50% of the next $100 million
0.35% of the next $300 million
0.30% of amounts in excess of
$500 million
Growth Westpeak 0.50% of the first $25 million
Opportunities Fund 0.40% of the next $75 million
0.35% of the next $100 million
0.30% of amounts in excess of
$200 million
International Draycott 0.54% of the first $200 million
Equity Fund 0.49% of the next $300 million
0.44% of amounts in excess of
$500 million
Value Fund Loomis 0.535% of the first $200 million
Sayles 0.350% of the next $300 million
0.300% of amounts in excess of
$500 million
Prior to January 2, 1996 (December 29, 1995, in the case of the
International Equity Fund), the current subadvisers to the
Balanced, Capital Growth, International Equity and Value Funds
served as those Funds' respective advisers, and NEIC served as
adviser to the Star Advisers Fund. Prior to May 1, 1995, the
Growth Opportunities Fund was advised by a different adviser and
paid a lower rate of advisory fees.
The general partners of each of NEFM, the Distributor, Loomis
Sayles and Westpeak are special purpose corporations. These
corporations are indirect wholly-owned subsidiaries of NEIC,
whose sole general partner, New England Investment Companies,
Inc. ("NEIC Inc."), is a wholly-owned subsidiary of The New
England. 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 policy holders of The
New England and MetLife and receipt of certain regulatory
approvals. After such merger, NEIC Inc. will be a wholly-owned
subsidiary of MetLife.
Draycott is a wholly-owned subsidiary of Cursitor Holdings Ltd.
U.K. ("Cursitor"). Cursitor, headquartered at 66 Buckingham
Gate, London, SW1E 6AU, England, is an international investment
management group that had approximately $__ billion in assets
under management at December 31, 1995. Alliance Capital
Management, L.P. ("Alliance Capital") is expected to acquire the
business of Cursitor later in 1996. As a result of this
transaction, Draycott will become a wholly-owned subsidiary of a
new entity, Cursitor Alliance LLC, in which Alliance Capital will
directly and indirectly own a 93% interest. Alliance Capital
Management Corporation ("ACMC") is the sole general partner of,
and the owner of a 1% general partnership interest in, Alliance
Capital. ACMC is an indirect wholly-owned subsidiary of The
Equitable Life Assurance Society of the United States, which is a
wholly-owned subsidiary of The Equitable Companies Incorporated,
a holding company controlled by AXA, a French insurance holding
company.
Subject to applicable regulatory restrictions and such policies
as the Trusts' trustees may adopt, the Funds' advisers or
subadvisers may consider sales of shares of the Funds and other
mutual funds they manage as a factor in the selection of broker-
dealers to effect portfolio transactions for the Funds. Subject
to procedures adopted by the trustees of the Trusts, Fund
brokerage transactions may be executed by brokers that are
affiliated with NEIC, NEFM, CGM or any subadviser. See
"Portfolio Transactions and Brokerage" in Part II of the
Statement.
NEFM and CGM provide executive and other personnel for the
management of the Trusts. Each Trust's Board of Trustees
supervises the affairs of the Trust as conducted by the Funds'
advisers and subadvisers.
NEFM and the Distributor have voluntarily agreed to reduce their
fees and to bear certain operating expenses charged to the
International Equity Fund to the extent that the total of such
fees and expenses would exceed 1.75% annually of the average
daily net assets of the Fund's Class A shares and 2.50% annually
of the average daily net assets of the Fund's Class B and Class C
shares. NEFM and the Distributor may terminate these voluntary
limitations at any time. In such event, the Fund would
supplement its prospectus.
B u y i n g F u n d S h a r e s
Minimum Investment
$2,500 is the minimum for an initial investment in any Fund and
$50 is the minimum for each subsequent investment. There are
special initial investment minimums for the following plans:
[] $25 (for initial and subsequent investments) for payroll
deduction investment programs for 401(k), SARSEP, 403(b)(7)
retirement plans and certain other retirement plans.
[] $50 for automatic investing through the Investment Builder
program.
[] $250 for retirement plans with tax benefits such as
corporate pension and profit sharing plans, IRAs and Keogh
plans.
[] $1,000 for accounts registered under the Uniform Gifts to
Minors Act or the Uniform Transfers to Minors Act.
[] $1,000 (per Fund) for Portfolio 1,2,3 investment programs.
Subsequent investment minimums are $50 per Fund. See Part
II of the Statement.
6 Ways to Buy Fund Shares
You may purchase Class A, Class B and Class C shares of the Funds
in the following ways:
[] Through your investment dealer:
Many investment dealers have a sales agreement with the
Distributor and would be pleased to accept your order.
[] By mail:
For an initial investment, simply complete an application and
return it, with a check payable to New England Funds, 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 between
8:00 a.m. and 7:00 p.m. (Eastern time).
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.)
[] By wire transfer of Federal Funds:
For an initial investment, call us at 1-800-225-5478 between 8:00
a.m. and 7:00 p.m. (Eastern time), on a day when the Funds are
open for business, 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.
Using Tele#Facts 1-800-346-5984
Tele#Facts is New England Funds' automated service system that
gives you 24-hour access to your account. Through your touch-
tone telephone, you can receive your 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.
[] By Investment Builder:
Investment Builder is New England Funds' 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 on
the enclosed application. Indicate the amount of the monthly
investment and enclose a check marked "Void" or a 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.
[] By electronic purchase through ACH:
You may purchase additional shares electronically through the
Automated Clearing House ("ACH") 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 1-800-225-5478 between 8:00 a.m.
and 7:00 p.m. (Eastern time). You may purchase shares through
ACH by calling Tele#Facts at 1-800-346-5984 twenty-four hours a
day. Under normal circumstances, the New York Stock Exchange
(the "Exchange") closes at 4:00 p.m. (Eastern time). Purchase
orders accepted through ACH or Tele#Facts after 4:00 p.m.
(Eastern time), or after the Exchange closes if it closes earlier
than 4:00 p.m., will be processed at the net asset value
determined at the close of regular trading on the next day that
the Exchange is open. Proceeds of redemptions of Fund shares
purchased through ACH may not be available for up to ten days
after the purchase date.
[] By exchange from another New England Fund:
You may also purchase shares of a Fund by exchanging shares from
another New England Fund. Please see "Owning Fund Shares --
Exchanging Among New England Funds" for complete details.
To make investing even easier, you can also order personalized
investment slips by calling 1-800-225-5478 between 8:00 a.m. and
7:00 p.m. (Eastern time).
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 ("State Street Bank") (except orders received by your
investment dealer before the close of trading on the Exchange 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
Funds' "open account" system for recording your investment
eliminates the problems and expense of handling and safekeeping
certificates. Certificates will not be issued for Class B shares
or Class C 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.
Growth Fund Eligibility: Shares of the Growth Fund are currently
available for purchase by the following categories of investors
only:
(1)Shareholders of any fund in the New England Funds (and
participants in retirement or salary savings plans that
invest in such funds, as such participants) who have accounts
established on or before August 3, 1992;
(2)Current and retired employees of The New England, its
subsidiaries, general agencies or any company affiliated with
The New England;
(3)Current and former directors and trustees of the Trusts, The
New England or its affiliates;
(4)Registered representatives of broker-dealers that have
selling arrangements with the Distributor relating to the New
England Funds;
(5)The spouses, parents, children, siblings, grandparents or
grandchildren of any of the above persons; and
(6)401(k) retirement plans.
The Growth Fund currently offers only one class of shares, Class
A shares, but may offer additional classes of shares in the
future. In such event, the Fund would supplement its prospectus.
Sales Charges
Except as otherwise indicated in this prospectus, each Fund
offers three classes of shares to the general public:
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. Class A shares are
offered subject to the following initial sales charges:
Capital Growth Fund
Value Fund
Balanced Fund
International Equity Fund
Star Advisers Fund
Growth Opportunities Fund
Sales charge as a % of Dealer's
---------------------- Concession
Net as % of
Value of Total Offering Amount Offering
Investment Price Invested Price
- --------------------- -------- ----------- -----------
Less than $50,000 5.75% 6.10% 5.00%
$50,000 - $99,999 4.50% 4.71% 4.00%
$100,000 - $249,999 3.50% 3.63% 3.00%
$250,000 - $499,999 2.50% 2.56% 2.15%
$500,000 - $999,999 2.00% 2.04% 1.70%
$1,000,000 or more None None *
Growth Fund
Sales charge as a % of Dealer's
---------------------- Concession
Net as % of
Value of Total Offering Amount Offering
Investment Price Invested Price
- --------------------- --------- ---------- -----------
Less than $25,000 6.50% 6.95% 5.75%
$25,000 - $49,999 5.50% 5.82% 4.75%
$50,000 - $99,999 4.50% 4.71% 4.00%
$100,000 - $249,999 3.50% 3.63% 3.00%
$250,000 - $499,999 2.50% 2.56% 2.15%
$500,000 - $999,999 2.00% 2.04% 1.70%
$1,000,000 or more None None *
* 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; .80% on the next $1 million; .20% on the next
$2 million; and .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.
Contingent Deferred Sales Charge (Class A shares only). For
purchases of $1,000,000 or more of Class A shares of the Funds, 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 of shares within one year after purchase. If an
exchange is made to Class A shares of any of New England Cash
Management Trust Money Market Series or U.S. Government Series or
New England Tax Exempt Money Market Trust (the "Money Market
Funds"), 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. If the Money Market Fund shares are
redeemed rather than exchanged back into the Trusts, then a CDSC
applies to the redemption. 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 0.25% annual service fee, a 0.75%
annual distribution fee for 8 years (at which time they
automatically convert to Class A shares) and 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 any series of the Trusts. If the exchange is
made to Class B shares of a Money Market Fund, then the holding
period stops and will 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 to the redemption, at the same
rate as if the Class B shares of the Fund had been redeemed at
the time they were exchanged for Money Market Fund shares. For
the purpose of the CDSC it is assumed that the shares held the
longest are the first to be redeemed.
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 CDSC will be assessed on shares of the same fund
purchased with reinvested dividends or capital gains
distributions. The amount of the CDSC, 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:
Contingent
Deferred
Sales Charge as a
Percentage of
Dollar
Year Since Amount Subject to
Purchase Charge
----------- -----------------
1st ............. 4%
2nd ............. 3%
3rd ............. 3%
4th ............. 2%
5th ............. 1%
thereafter ............. 0%
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, unless
otherwise requested, and is paid to the Distributor. The CDSC
may be eliminated for certain persons and organizations. See
"Sales Charges -- General" below. At the time of sale, the
Distributor pays investment dealers a commission of 3.75% and
advances the first year's service fee (up to 0.25%) on purchases
of Class B shares.
Class C Shares
Class C shares are offered at net asset value, without an initial
sales charge or CDSC; are subject to a 0.25% annual service fee
and a 0.75% annual distribution fee; and do not convert into
another class.
Class Y Shares
Each Fund (except the Growth Fund) also offers a fourth class of
shares (which are not available to
the general public) to certain qualified investors. See
"Additional Facts About the Funds" below.
A, B or C Shares -- Which Should You Choose?
Your choice of share class depends on the size of your investment
and how long you intend to hold your shares. In general, there
are only minor differences in performance results for the
different classes if held for the long term. Consult your
financial representative for help in deciding which class is
appropriate for you.
Deciding Which Class to Purchase
The decision as to whether Class A, Class B or Class C 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. Any order of $1
million or more for Class C shares will be treated as an order
for Class A shares, unless you indicate on the relevant section
of your application that you have been informed of the relative
advantages and disadvantages of Class A and C shares. Investors
making smaller investments might consider Class B or Class C
shares because 100% of the purchase is invested immediately.
Investors making smaller investments who anticipate redeeming
their shares within five years may find Class C shares more
favorable than Class B shares, because Class B shares are subject
to a CDSC on redemptions made within five years after purchase.
Class B shares are more favorable than Class C shares for
investors who anticipate holding their investment for more than
eight years, since Class B shares convert to Class A shares (and
thus bear lower ongoing fees) after eight years. Consult your
investment dealer for advice applicable to your particular
circumstances.
General
No CDSC on any class of shares applies in connection with (1)
redemptions by retirement plans qualified under Code Sections
401(a) or 403(b)(7) when such redemptions are necessary to make
distributions to plan participants; (2) distributions from an IRA
due to death, disability or a tax-free return of an excess
contribution; (3) distributions by other employee benefit plans
to pay benefits; and (4) distributions by a Section 401(a) plan
due to death. For 403(b)(7) and IRA accounts established before
January 3, 1995, the CDSC is waived for redemptions made after
attainment of age 59 1/2. The CDSC is waived for redemptions
made to make required minimum distributions after attainment of
age 70 1/2 for 403(b)(7) and IRA accounts established on or after
January 3, 1995. There is also no CDSC on 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 shareholder's death or disability. In
addition, there is no CDSC on certain withdrawals pursuant to a
Systematic Withdrawal Plan. See "Selling Fund Shares -- 4 Ways
to Sell Fund Shares -- By Systematic Withdrawal Plan" below.
The Funds receive the net asset value next determined after an
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 a fund's shares.
For new amounts invested, the Distributor may, at its expense,
pay investment dealers who sell shares of the Funds at net asset
value to an eligible governmental authority .025% of the average
daily net assets of an account at the end of each calendar
quarter for up to one year. These commissions are not payable if
the purchase represents the reinvestment of redemption proceeds
from any of the Funds or any series of the Trusts or if the
account is registered in street name.
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. The Distributor 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 payment 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. 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 $1 million may be invested in
Class A shares of any Fund at a reduced sales charge of 1.50% of
the public offering price (or 1.52% of the net amount invested).
[] Eligible governmental authorities -- no sales charge or CDSC
applies to investments by any state, county or city or any
instrumentality, department, authority or agency thereof that has
determined that a Fund is a legally permissible investment and
that is prohibited by applicable investment laws from paying a
sales charge or commission in connection with the purchase of
shares of any registered investment company.
[] Clients of an adviser or subadviser -- no sales charge or
CDSC applies to investments of $25,000 or more in the Funds by
(1) clients of an adviser or subadviser to any series of the
Trusts; any director, officer or partner of a client of an
adviser or subadviser to any series of the Trusts; and the
parents, spouses and children of the foregoing; (2) any
individual who is a participant in a Keogh or IRA Plan under a
prototype Plan document of an adviser or subadviser to any series
of the Trusts if at least one participant in the plan qualifies
under category (1) above; and (3) an individual who invests
through an IRA and is a participant in an employee benefit plan
that is a client of an adviser or subadviser to any series of the
Trusts. 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 by
investment advisers, financial planners or other intermediaries
who place trades for their own accounts or the accounts of their
clients and who charge a management, consulting or other fee for
their services; clients of such investment advisers, financial
planners or other intermediaries who place trades for their own
accounts if the accounts are linked to the master account of such
investment adviser, financial planner or other intermediary on
the books and records of the broker or agent; and retirement and
deferred compensation plans and trusts used to fund those plans,
including, but not limited to, those defined in Section 401(a),
403(b) or 457 of the Code and "rabbi trusts." Investors may be
charged a fee if they effect transactions through a broker or
agent.
[] Current shareholders of the Growth Opportunities Fund who
were participants in a certain Trust Securities Program,
administered through State Street Bank, may purchase additional
shares of the Growth Opportunities Fund at net asset value.
[] Shares of the Funds also may be purchased at net asset value
through certain broker-dealers and/or financial services
organizations without any transaction fee. Such organizations
may receive compensation, in an amount of up to 0.35% annually of
the average value of the Fund shares held by their customers.
This compensation may be paid by NEFM and/or a Fund's subadviser
out of their own assets, or may be paid indirectly by the Fund in
the form of servicing, distribution or transfer agent fees.
[] There is no sales charge, CDSC or initial investment minimum
related to investments by certain current and retired employees
of the Trusts' investment advisers or subadvisers, the
Distributor 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 that have selling arrangements
with the Distributor; the spouse, parents, children, siblings,
grandparents or grandchildren of the persons listed above; any
trust, pension, profit sharing or other benefit plan for any of
the foregoing persons; and any separate account of The New
England or of any insurance company affiliated with The New
England.
[] Shareholders of Reich and 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 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.
O w n i n g F u n d S h a r e s
Exchanging Among New England Funds
Class A Shares
Except as indicated in the next two sentences, you may exchange
Class A shares of any series of the Trusts (and Class A shares of
the Money Market Funds acquired through exchanges from any of
series of the Trusts) for Class A shares of any other series of
the Trusts (except the Growth Fund, which is subject to special
eligibility restrictions) without paying a sales charge; such
exchanges will be made at the next-determined net asset value of
the shares. Class A shares of New England Intermediate Term Tax
Free Fund of California and New England Intermediate Term Tax
Free Fund of New York (and shares of the Money Market Funds
acquired through exchanges of such shares) may be exchanged for
Class A shares of another series of the Trusts 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
"Adjustable Rate Fund") for shares of another series of the
Trusts 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
series into which you are exchanging. In addition, you may redeem
Class A shares of any Money Market Fund that were not acquired
through exchanges from any series of the Trusts and have the
proceeds directly applied to the purchase of shares of a series
of the Trusts 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 Class B shares of any other series of
the Trusts which offers Class B shares. 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 "Sales Charges
- -- Class B Shares" above.
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 of the Trusts (other than the
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.
Class C Shares
You may exchange Class C shares of the Funds (except the Growth
Fund) or any other series of the Trusts for Class C shares of any
other series of the Trusts which offers Class C shares or for
Class A shares of the Money Market Funds.
To make an exchange, please call 1-800-225-5478 between 8:00 a.m.
and 7:00 p.m. (Eastern time) on a day when the Funds are open for
business, call Tele#Facts at 1-800-346-5984 twenty-four hours a
day or write to New England Funds. Exchange requests after 4:00
p.m. (Eastern time), or after the Exchange closes if it closes
earlier than 4:00 p.m., will be processed at the net asset value
determined at the close of regular trading on the next day that
the Exchange is open. The exchange must be for a minimum of $500
(or the total net asset value of your 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 series into which you are
exchanging. In connection with any exchange, you must receive a
current prospectus of the series into which you are exchanging.
The exchange privilege may be exercised only in those states
where shares of such other series 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, 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 days' advance notice of any material change
to the exchange privilege.
Fund Dividend Payments
The Capital Growth Fund, the Growth Fund, the International
Equity Fund, the Value Fund and the Star Advisers Fund pay
dividends annually and the Balanced Fund and the Growth
Opportunities Fund pay dividends quarterly. Each Fund pays as
dividends substantially all net investment 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 Trusts
may adopt a different schedule as long as payments are made at
least annually. If you intend to purchase shares of a Fund
shortly before it declares a dividend, you should be aware that a
portion of the purchase price may be returned to you as a taxable
dividend.
You have the option to reinvest all distributions in additional
shares of the same class of the 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 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 respective Fund at net asset
value (without a sales charge or CDSC) unless you select another
option. You may change your distribution option by notifying New
England Funds 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 "undeliverable" to the 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 that
allows you to have all dividends and any other distributions
automatically invested in shares of the same class of another New
England Fund, subject to the investor eligibility requirements of
that other fund and to state securities law requirements. Shares
will be purchased at the selected fund's net asset value (without
a sales charge or CDSC) on the dividend record date. A dividend
diversification account must be in the same registration
(shareholder name) as the distributing fund account and, if a new
account in the purchased fund is being established, the purchased
fund's 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 fund's
prospectus.
S e l l i n g F u n d S h a r e s
4 Ways to Sell Fund Shares
You may sell Class A, Class B and Class C shares of the Funds in
the following ways:
[] Through your investment dealer:
Call your authorized investment dealer for information.
[] 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, shares may be
redeemed by calling 1-800-225-5478 between 8:00 a.m. and 7:00
p.m. (Eastern time) on a day when the Funds are open for business
or by calling Tele#Facts at 1-800-346-5984 twenty-four hours a
day. 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 between 8:00 a.m. and 7:00 p.m. (Eastern
time) 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
between 8:00 a.m. and 7:00 p.m. (Eastern time) or call Tele#Facts
at 1-800-346-5984 twenty-four hours a day. The proceeds (less
any applicable CDSC) generally will arrive at your bank within
three business days; their availability will depend on your
bank's particular rule.
Redemption requests accepted after 4:00 p.m. (Eastern time), or
after the Exchange closes if it closes before 4:00 p.m., will be
processed at the net asset value determined at the close of
regular trading on the next day that the Exchange is open.
[] 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 they 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 redemptions by
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.
[] 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 day's net asset value). Redemption proceeds (less
any applicable CDSC) will normally be mailed to you within seven
days after State Street Bank or the Distributor receives your
request in good order. However, in those cases where you have
recently purchased your shares by check or an electronic funds
transfer through the ACH system and you make a redemption request
within 10 days after such purchase or transfer, the Fund may
withhold redemption proceeds until the Fund knows that the check
or funds have cleared.
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 with respect to redemptions under powers of
attorney. Please call your investment dealer or the Distributor
for more information.
Telephone redemptions are not available for tax qualified
retirement plans or 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 Class A shares of any series
of the Trusts. To qualify, you must reinvest some or all of the
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 some or all of the redemption
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.
F u n d D e t a i l s
How Fund Share Price Is Determined
The net asset value of each Fund's shares is determined as of the
close of regular trading (normally 4:00 p.m. [Eastern time]) on
the Exchange on each day that the Exchange is open for trading.
Each Fund's holdings of equity securities are valued at the most
recent sales prices on an applicable exchange or NASDAQ, or, in
the case of unlisted securities (or listed securities which were
not traded during the day), at the last quoted bid prices. Price
information on listed securities is generally taken from the
closing price on the exchange where the security is primarily
traded. Securities traded primarily on an exchange outside the
United States which closes before the close of the Exchange
generally will be valued for purposes of calculating the Fund's
net asset value at the last sale or bid price on that non-U.S.
exchange, except that when an occurrence after the closing of
that exchange is likely to have materially changed such a
security's value, such security will be valued at fair value as
of the close of regular trading on the Exchange. An option that
is written by the Fund generally will be valued at the last sale
price or, in the absence of the last sale price, the last offer
price. The value of a futures contract will be equal to the
unrealized gain or loss on the contract that is determined by
marking the contract to the current settlement price. A
settlement price may not be used if the market makes a limit move
with respect to a particular futures contract or if the
securities underlying the futures contract experience significant
price fluctuations after the determination of the settlement
price. When a settlement price is not used, futures contracts
will be valued at their fair value as determined by or under the
direction of each Trust's Board of Trustees. Short-term notes
are valued at cost, or, where applicable, amortized cost, which
method is intended to approximate market value. All other
securities and assets of each Fund's portfolio (or, in the case
of the Star Advisers Fund, each segment of the Fund's portfolio)
are valued at their fair market value as determined in good faith
by the adviser or subadviser of that Fund or segment (or a
pricing service selected by the adviser or subadviser) under the
supervision of each Trust's Board of Trustees. The value of any
assets for which the market price is expressed in terms of a
foreign currency will be translated into U.S. dollars at the
prevailing market rate on the date of the net asset value
computation, or, if no such rate is quoted at such time, at such
other appropriate rate as may be determined by or under the
direction of each Trust's Board of Trustees.
The net asset value per share of each class is determined by
dividing the value of each class's securities (determined as
explained above) plus any cash and other assets (including
dividends and interest receivable but not collected) less all
liabilities (including accrued expenses), by the number of shares
of such class outstanding. The public offering price of each
Fund's Class A shares is determined by adding the applicable
sales charge to the net asset value. See "Buying Fund Shares --
Sales Charges" above. The public offering price of each Fund's
Class B and Class C shares is the net asset value per share.
The price you pay for a share will be determined using 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 is
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 on 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 day's public offering price.
CALCULATING THE PRICE OF SHARES
Total Market Value of
Portfolio Securities
+
Other Assets
- -
Any Liabilities
=
Net Asset Value (NAV)
- ----------------------------------------------------------------
Total Number of Outstanding Shares in a Class
The public offering price for Class A shares is the NAV plus the
applicable sales charge. The public offering price for Class B
and Class C shares is the NAV.
Income Tax Considerations
Each Fund intends to meet all requirements of the Code necessary
to qualify as a ``regulated investment company'' and thus does
not expect to pay any federal income tax on investment income and
capital gains distributed to shareholders in cash or in
additional shares. Unless you are a tax-exempt entity, your
distributions derived from a Fund's short-term capital gains and
ordinary income are taxable to you as ordinary income. (A
portion of these distributions may qualify for the dividends-
received deduction for corporations.) Distributions derived from
a Fund's long-term capital gains (``capital gains
distributions''), if designated as such by a Fund, are taxable to
you as long-term capital gains, regardless of how long you have
owned shares in the Fund. Both income distribution and capital
gains distributions are taxable whether you elected to receive
them in cash or additional shares.
To avoid an excise tax, each Fund intends to distribute prior to
calendar year end virtually all the Fund's ordinary income and
net capital gains earned during that calendar year. If declared
in December to shareholders of record in that month, and paid the
following January, these distributions will be considered for
federal income tax purposes to have been received by shareholders
on December 31.
Each Fund is required to withhold 31% of all income dividends and
capital gains distributions it pays to you if you do not provide
a correct, certified taxpayer identification number, if a Fund is
notified that you have underreported income in the past or if you
fail to certify to a Fund that you are not subject to such
withholding. In addition, each Fund will be required to withhold
31% of the gross proceeds of Fund shares you redeem if you have
not provided a correct, certified taxpayer identification number.
If you are a tax-exempt shareholder, however, these backup
withholding rules will not apply so long as you furnish the Fund
with an appropriate certification.
Annually, if you earn more than $10 in taxable income from a
Fund, you will receive a Form 1099 to assist you in reporting the
prior calendar year's 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 International Equity Fund may be liable to foreign
governments for taxes relating primarily to investment income or
capital gains on foreign securities in the Fund's portfolio. The
Fund may in some circumstances be eligible to, and in its
discretion may, make an election under the Code which would allow
Fund shareholders who are U.S. citizens or U.S. corporations to
claim a foreign tax credit or deduction (but not both) on their
U.S. income tax return. If the Fund makes the election, the
amount of each shareholder's distribution reported on the
information returns filed by the Fund with the Internal Revenue
Service must be increased by the amount of the shareholder's
portion of the Fund's foreign tax paid.
The foregoing is a summary of certain federal income tax
consequences of an investment in a Fund for shareholders who are
U.S. citizens or corporations. Shareholders should consult a
competent tax adviser as to the effect of an investment in a Fund
on their particular federal, state and local tax situations.
Shareholders of the International Equity Fund should also consult
their tax advisers about consequences of their investment under
foreign laws.
The Funds' Expenses
In addition to the management fee paid to its adviser, each Fund
pays all expenses not borne by its adviser, subadviser(s) or the
Distributor, including, but not limited to, the charges and
expenses of each Fund's custodian and transfer agent, independent
auditors and legal counsel for the Fund and the Trusts'
independent trustees, 12b-1 fees, all brokerage commissions and
transfer taxes in connection with portfolio transactions, all
taxes and filing fees, the fees and expenses for registration or
qualification of its shares under federal and state securities
laws, all expenses of shareholders' and trustees' meetings,
preparing, printing and mailing prospectuses and reports to
shareholders and the compensation of trustees who are not
directors, officers or employees of The New England or its
affiliates, other than affiliated registered investment
companies. In the case of Funds that offer Class Y shares,
certain expenses are allocated differently between the Fund's
Class A, Class B and Class C shares, on the one hand, and its
Class Y shares, on the other hand. (See "Additional Facts about
the Funds" below.)
Under Service Plans adopted pursuant to Rule 12b-1 under the 1940
Act, each Fund pays the Distributor a monthly service fee at an
annual rate not to exceed 0.25% of the Fund's average daily net
assets attributable to the Class A, Class B and Class C shares
(except the Growth Fund which pays such fee rate with respect to
all its net assets). The Distributor may pay up to the entire
amount of this fee to securities dealers who are dealers of
record with respect to the Fund's shares, for providing personal
services to investors in shares of the Fund and/or the
maintenance of shareholder accounts. In the case of the Class B
shares, the Distributor pays investment dealers at the time of
sale the first year's service fee, in the amount of up to 0.25%
of the amount invested. In the case of each Fund except the
Growth Opportunities Fund, the Class A service fee is payable
only to reimburse the Distributor for amounts it pays or expends
in connection with the provision of personal services to
investors and/or the maintenance of shareholder accounts. In the
case of the Class A shares of the Growth, Value and Balanced
Funds, reimbursable expenses may include such expenses incurred
by those Funds' former distributor (an affiliate of the
Distributor) in prior years. To the extent that the
Distributor's reimbursable expenses in any year exceed the
maximum amount payable under the relevant Service Plan for that
year, such expenses may be carried forward for reimbursement in
future years in which the Plan remains in effect. The amounts of
unreimbursed Class A expenses carried over into 1996 from
previous plan years were $_______ for the Capital Growth Fund,
$_________ for the Balanced Fund, $_________ for the Growth Fund,
$_______ for the International Equity Fund and $_________ for the
Value Fund. The Class B and C service fees for all funds (except
the Growth Fund, which has only Class A shares), and the Class A
service fee for the Growth Opportunities Fund, are payable
regardless of the amount of the Distributor's related expenses.
Each Fund's Class B and Class C shares also pay the Distributor a
monthly distribution fee at an annual rate not to exceed 0.75% of
the average net assets of the respective Fund's Class B and Class
C 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 Fund's shares, as distribution fees in connection
with the sale of the Fund's shares. The Distributor retains the
balance of the fee as compensation for its services as
distributor of the Class B and Class C shares.
Performance Criteria
Each Fund may include total return information for each class of
shares in advertisements or other written sales material. Each
Fund may show each class's 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, or,
in the case of the Growth Opportunities Fund's Class A shares,
for the periods from July 27, 1988 and May 1, 1995, when there
were changes in that Fund's investment adviser, to the end of the
most recent calendar quarter. Total return is measured by
comparing the value of a hypothetical $1,000 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
and, in the case of Class B shares, imposition of the CDSC
relevant to the period quoted). Total return may be quoted with
or without giving effect to any voluntary expense limitations in
effect for the class in question during the relevant period. The
class may also show total return over other periods, on an
aggregate basis for the period presented, or without deduction of
a sales charge. If a sales charge is not deducted in calculating
total return, the class's total return will be higher.
The Balanced Fund may also include the yield of its Class A,
Class B and Class C shares, accompanied by the total return, in
advertising and other written material. Yield will be computed
in accordance with the SEC's standardized formula by dividing the
adjusted net investment income per share earned during a recent
thirty-day period by the maximum offering price of a share of the
relevant class (reduced by any earned income expected to be
declared shortly as a dividend) on the last day of the period.
Yield calculations will reflect any voluntary expense limitations
in effect for the Fund during the relevant period.
The Balanced Fund may also present one or more distribution rates
for each class in its sales literature. These rates will be
determined by annualizing the class's distributions from net
investment income and net short-term capital gain over a recent
twelve-month, three-month or thirty-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 and Class C shares of the same Fund, because of the
higher levels of expenses borne by the Class B and Class C
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 or Class C shares. As a result of
lower operating expenses, Class Y shares of each Fund that offers
such shares can be expected to achieve a higher investment return
than the Fund's Class A, Class B or Class C shares.
All performance information is based on past results and is not
an indication of likely future performance.
Additional Facts About the Funds
[] New England Funds Trust I was organized in 1985 as a
Massachusetts business trust and is authorized to issue an
unlimited number of full and fractional shares in multiple
series. The Growth, Value and Balanced Funds were organized
prior to 1985 and conducted investment operations as separate
corporations until their reorganization as series of New England
Funds Trust I in January 1987. The International Equity Fund and
the Capital Growth Fund were organized in 1992 and the Star
Advisers Fund was organized in 1994.
[] New England Funds Trust II 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 Growth Opportunities Fund is the original series of
shares of the Trust and has been in operation since 1931.
[] When you invest in a Fund, you acquire freely transferable
shares of beneficial interest that entitle you to receive annual
or quarterly dividends as determined by the respective Trust's
trustees and to cast a vote for each share you own at shareholder
meetings. Shares of each Fund vote separately from shares of
other series of the same Trust, except as otherwise required by
law. Shares of all classes of a Fund vote together, except as to
matters relating to a class's Rule 12b-1 plan, on which only
shares of that class are entitled to vote.
[] Except for matters that are explicitly identified as
``fundamental'' in this prospectus or Part I of the Statement,
the investment policies of each Fund may be changed without
shareholder approval or, in most cases, prior notice. The
investment objectives of the Growth, Value and Balanced Funds are
fundamental. The investment objectives of the Capital Growth,
International Equity and Star Advisers Funds are not fundamental.
The investment objective of the Growth Opportunities Fund is not
fundamental but, as a matter of policy, the trustees would not
change the objective without shareholder approval. If there is a
change in the Capital Growth, International Equity, Star Advisers
or Growth Opportunities Funds' objectives, shareholders should
consider whether these Funds remain appropriate investments in
light of their current financial position and needs.
[] Class Y shares may be purchased by endowments and
foundations. The minimum initial investment is $1 million for
these entities and the minimum for each subsequent investment is
$100,000. Class Y shares may also be purchased by plan sponsors
of 401(a), 401(k), 457 or 403(b) plans ("Retirement Plans") that
have total investment assets in these plans of at least $10
million. Plan sponsors' investment assets in multiple Retirement
Plans can be aggregated for purposes of meeting this minimum.
Class Y shares may also be purchased by any separate account of
The New England or of any other insurance company affiliated with
The New England ("Separate Accounts") and, in the case of the
International Equity Fund, by bank common trust funds, bank
collective trust funds and dedicated corporate trustee funds,
such as nuclear decommissioning trusts and hospital depreciation
funds ("Special Accounts"). There is no minimum initial or
subsequent investment amount for Retirement Plans, Separate
Accounts or Special Accounts. Investments in Class Y shares may
also be made by certain individual retirement accounts if the
amounts invested represent rollover distributions from
investments by any of the foregoing Retirement Plans of amounts
invested in Class Y shares.
[] Class Y shares are identical to Class A, Class B and Class C
shares, except that Class Y shares have no sales charge or CDSC,
bear no Rule 12b-1 fees and have separate voting rights in
certain circumstances. Class Y bears its own transfer agency and
prospectus printing costs and does not bear any portion of those
costs relating to other classes of shares.
[] The Trusts do not generally hold regular shareholder
meetings and will do so only when required by law. Shareholders
of a Trust may remove the trustees of that Trust from office by
votes cast at a shareholder meeting or by written consent.
[] 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.
[] If the balance in your account with a Fund is less than a
minimum amount set by the trustees of the Trusts from time to
time (currently $500 for all accounts, except for those indicated
below and for individual retirement accounts, which have a $25
minimum), that Fund may close your account and send the proceeds
to you. Shareholders who are affected by this policy will be
notified of the Fund's 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 Keogh,
pension and profit sharing plans, automatic investment plans or
accounts that have fallen below the minimum solely because of
fluctuations in a Fund's net asset value per share.
[] The Trusts, together with the Money Market Funds, constitute
the New England Funds. Each Trust offers only its own Funds'
shares for sale, but it is possible that a Trust might become
liable for any misstatements in this prospectus that relate to
the other Trust. The trustees of each Trust have considered this
possible liability and approved the use of this combined
prospectus for Funds of both Trusts.
[] Each Fund's annual report contains additional performance
information and is made available upon request and without
charge.
[] The Class A, Class B, Class C and Class Y structure could be
terminated should certain IRS rulings be rescinded.
[] Summit Cash Reserves Fund (the "Cash Fund"), a series of
Financial Institutions Series Trust, is related to the Funds for
purposes of investment and investor services. Shares of all
classes of the Funds may be exchanged for shares of the Cash Fund
at net asset value. If shares of the Funds that are exchanged
for shares of the Cash Fund are subject to a CDSC, the holding
period for purposes of determining the expiration of the CDSC
will stop and resume only when an exchange is made back into
shares of a series of the Trusts. If Fund shares subject to a
CDSC are exchanged for Cash Fund shares and the Cash Fund shares
are later redeemed rather than being exchanged back into shares
of a series of the Trusts, then a CDSC will apply at the same
rate as if the Fund shares were redeemed at the time of the
exchange.
<PAGE>
G l o s s a r y O f T e r m s
Capital gain distributions _ Payments to shareholders of profits
earned from selling securities in the fund's portfolio. Capital
gain distributions are usually paid once a year.
Contingent Deferred Sales Charge (CDSC) _ A fee that may be
charged when a shareholder sells fund shares.
Distribution fee _ An annual asset-based sales charge that is
used to pay for sales-related expenses.
Income Distributions _ Payments to shareholders resulting from
interest or dividend income earned by a fund's portfolio.
Mutual fund _ The pooled assets of a group of investors,
professionally managed in pursuit of a specific objective.
Net asset value (NAV) _ The market value of one share of a mutual
fund on any given day without sales charge or CDSC. Determined
by dividing the fund's total net assets by the number of fund
shares outstanding.
New England Funds, L.P. _ The distributor and transfer agent of
the New England Funds.
New England Funds Management, L.P. _ The investment adviser to
most of the New England Funds.
Open end investment management company _ A mutual fund that
allows investors to redeem fund shares directly from the fund
company on any business day.
Public offering price _ The price of one share of a mutual fund,
including its initial sales charge, if there is one.
Record date _ The date on which mutual fund investors must own a
fund's shares to be eligible to receive specific income or
capital gain distributions.
Service fee _ Payments by a fund to the fund's distributor or a
financial representative for personal services to investors
and/or for maintenance of shareholder accounts.
Total Return _ The change in value of an investment in a fund
investment over a specific time period, assuming all earnings are
reinvested in additional shares of the fund. Expressed as a
percentage.
Yield _ The rate at which a fund earns income, expressed as a
percentage. Yield calculations are standardized among mutual
funds, based on a formula developed by the Securities and
Exchange Commission.
12b-1 fees _ Fees paid by a mutual fund under a plan adopted
under 1940 Act Rule 12b-1. Can include both distribution fees
and service fees.
<PAGE>
NEW ENGLAND FUNDS
Where The Best Minds Meet(TM)
Class Y shares of:
NEW ENGLAND CAPITAL GROWTH FUND
NEW ENGLAND BALANCED FUND
NEW ENGLAND GROWTH OPPORTUNITIES FUND
NEW ENGLAND INTERNATIONAL EQUITY FUND
NEW ENGLAND STAR ADVISERS FUND
NEW ENGLAND VALUE FUND
Prospectus and Application -- April 15, 1996
New England Capital Growth Fund, New England Balanced Fund, New
England International Equity Fund, New England Star Advisers
Fund and New England Value Fund, series of New England Funds
Trust I, and New England Growth Opportunities Fund, a series of
New England Funds Trust II, are separate mutual funds (the
"Funds" and each a "Fund"). New England Funds Trust I and New
England Funds Trust II are referred to in this prospectus as the
"Trusts."
The Funds offer four classes of shares: Class Y (for qualified
institutional investors) and Classes A, B and C (for other
investors). This prospectus sets forth information investors
should know before investing in Class Y shares. Please read it
carefully and keep it for future reference. A Statement of
Additional Information in two parts (the "Statement") about the
Funds dated April 15, 1996 has been filed with the Securities
and Exchange Commission (the "SEC") and is available free of
charge. Write to New England Funds, L.P. (the "Distributor"),
SAI Fulfillment Desk, 399 Boylston Street, Boston, Massachusetts
02116 or call toll free at 1-800-225-7670. The Statement
contains more detailed information about the Funds and is
incorporated into this prospectus by reference. Class A, Class
B and Class C shares of the Funds are described in a separate
prospectus. To obtain more information about Class A, Class B
and Class C shares, please call the Distributor toll-free at 1-
800-225-5478.
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.
<PAGE>
T a b l e O f C o n t e n t s
Page
FUND EXPENSES AND FINANCIAL
INFORMATION
Schedule of Fees
Financial Highlights
INVESTMENT STRATEGY
Investment Objectives
How the Funds Pursue Their
Objectives
Fund Investments
INVESTMENT RISKS
FUND MANAGEMENT
BUYING FUND SHARES
Minimum Investment
Ways to Buy Fund Shares
[] By wire transfer
[] By mail
OWNING FUND SHARES
Exchanging Among New England
Funds
Fund Dividend Payments
SELLING FUND SHARES
Ways to Sell Fund Shares
[] By telephone
[] By mail
FUND DETAILS
Determination of Net Asset Value
Income Tax Considerations
Performance Criteria
Additional Facts About the Funds
<PAGE>
F u n d E x p e n s e s A n d F i n a n c i a l I n f o r
m a t i o n
Schedule of Fees
Expenses are one of several factors to consider when you invest
in the Funds. The following tables summarize your maximum
transaction costs from investing in Class Y shares of the Funds
and estimated annual expenses for the Funds' Class Y shares. The
Example on the following page shows the cumulative expenses
attributable to a hypothetical $1,000 investment in Class Y
shares of the Funds for the periods specified.
Shareholder transaction expenses
All Funds
---------
Class Y
--------
Maximum Initial Sales Charge Imposed on a None
Purchase
Maximum Contingent Deferred Sales Charge None
Annual Fund operating expenses
(as a percentage of average net assets)
New England New England New England
Capital Balanced International
Growth Fund Fund Equity Fund*
------------ ------------ ------------
Class Y Class Y Class Y
------- ------- -------
Management Fees ___% ___% ___%**
12b-1 Fees None None None
Other Expenses ___% ___% ___%
Total Fund ___% ___% ___%**
Operating Expenses
New England New England
Star New England Growth
Advisers Value Opportunities
Fund Fund Fund*
------------ ------------ ------------
Class Y Class Y Class Y
------- ------- -------
Management Fees ___% ___% ___%
12b-1 Fees None None None
Other Expenses ___% ___% ___%
Total Fund ___% ___% ___%
Operating Expenses
* The information contained in this table and its footnotes for
New England International Equity Fund and New England Growth
Opportunities Fund has been restated to reflect fees and
expenses currently in effect for those Funds.
**After voluntary fee waiver and expense reduction by the Fund's
adviser and/or the Distributor. Without the voluntary
limitations, Management Fees would be ___% and Total Fund
Operating Expenses would be ___%. These voluntary limitations
can be terminated by the Fund's adviser or the Distributor at
any time.
Example
A $1,000 investment in Class Y shares of the Funds would incur
the following dollar amount of transaction costs and operating
expenses, assuming a 5% annual return and redemption at period
end. The 5% return and expenses in the Example should not be
considered indicative of actual or expected Fund performance or
expenses, both of which may be more or less than those shown.
New England New England
Capital Growth Fund Balanced Fund
------------------- --------------------
Class Y Class Y
------- -------
1 year $ $
3 years $ $
5 years $ $
10 years $ $
New England New England
International Equity Star Advisers Fund
Fund --------------------
--------------------
Class Y Class Y
------- -------
1 year $ $
3 years $ $
5 years $ $
10 years $ $
New England New England Growth
Value Fund Opportunities Fund
-------------------- --------------------
Class Y Class Y
------- -------
1 year $ $
3 years $ $
5 years $ $
10 years $ $
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 Funds' fees and other expenses,
please see "Fund Management" and "Additional Facts About the
Funds."
A wire fee (currently $5.00) will be deducted from your proceeds
if you elect to transfer redemption proceeds by wire.
<PAGE>
Financial Highlights
To Be Filed
By Amendment
<PAGE>
I n v e s t m e n t S t r a t e g y
Investment Objectives
NEW ENGLAND CAPITAL GROWTH FUND (the "Capital Growth Fund")
The Fund seeks long-term growth of capital
Subadviser: Loomis, Sayles & Company, L.P. ("Loomis Sayles"),
Chicago, IL
NEW ENGLAND BALANCED FUND
(the "Balanced Fund")
The Fund seeks a reasonable long-term investment return from a
combination of long-term capital appreciation and moderate
current income.
Subadviser: Loomis Sayles, Pasadena, CA
NEW ENGLAND INTERNATIONAL EQUITY FUND
(the "International Equity Fund")
The Fund seeks total return from long-term growth of capital and
dividend income, primarily through investment in international
equity securities.
Subadviser: Draycott Partners, Ltd. ("Draycott")
NEW ENGLAND STAR ADVISERS FUND
(the "Star Advisers Fund")
The Fund seeks long-term growth of capital
Subadvisers: Berger Associates, Inc. ("Berger"), Founders Asset
Management, Inc. ("Founders"), Janus Capital
Corporation ("Janus Capital") and Loomis Sayles,
Detroit, MI
NEW ENGLAND VALUE FUND
(the "Value Fund")
The Fund seeks a reasonable long-term investment return from a
combination of market appreciation and dividend income from
equity securities.
Subadviser: Loomis Sayles
NEW ENGLAND GROWTH OPPORTUNITIES FUND
(the "Growth Opportunities Fund")
The Fund seeks opportunities for long-term growth of capital and
income.
Subadviser: Westpeak Investment Advisors, L.P. ("Westpeak")
How the Funds Pursue Their Objectives
Investments in each Fund will be pooled with money from other
investors in that Fund to invest in a managed portfolio
consisting of securities appropriate to each Fund's investment
objective and policies. There can be no assurance that any Fund
will achieve its objective. Each Fund is a "diversified" mutual
fund, except for the Star Advisers Fund.
Fund Investments
[] Capital Growth Fund
The Capital Growth Fund seeks to attain its objective by
investing substantially all of its assets in equity securities.
Investments are selected based on their growth potential; current
income is not a consideration. The Fund normally will invest
primarily in equity securities of companies with medium or large
market capitalization (capitalization of $1 billion to $5 billion
and over $5 billion, respectively), but will also invest a
portion of its assets in equity securities of companies with
relatively small market capitalization (under $1 billion).
The Fund's subadviser selects investments based upon fundamental
research and analysis of individual companies and industries.
The subadviser selects investments for the Fund based on
qualitative and quantitative criteria including, among others,
industry dominance and competitive position, consistent earnings
growth, a history of high profitability, the subadviser's
expectation of continued high profitability and overall financial
strength, although not every investment will have all of these
characteristics. The Fund may invest in foreign securities.
[] Value Fund
Substantially all of the Value Fund's investments are normally in
equity securities. In selecting investments for the Fund, the
emphasis is ordinarily placed on undervalued securities.
Although long-term market appreciation is ordinarily the basis
for security selection, current income may be a significant
consideration when yields appear to be favorable compared to
overall opportunities for capital appreciation. The Fund may
invest in foreign securities.
[] Balanced Fund
The Balanced Fund is "flexibly managed" in that sometimes it
invests more heavily in equity securities and at other times it
invests more heavily in fixed-income securities, depending on the
Fund's subadviser's view of the economic and investment outlook.
Most of the Fund's equity investments are normally in dividend-
paying common stocks of recognized investment quality that are
expected to achieve growth in earnings and dividends over the
long term. In selecting equity investments for the Fund, an
emphasis is ordinarily placed on undervalued securities. Fixed-
income securities include notes, bonds, non-convertible preferred
stock and money market instruments. The Fund invests at least
25% of its assets in fixed-income senior securities and, under
normal market conditions, more than 50% of its assets in equity
securities. The Fund may invest in foreign securities.
[] International Equity Fund
The International Equity Fund seeks to achieve its objective by
investing primarily in common stocks, although the Fund may
invest in any type of equity securities. Normally the Fund will
invest at least 65% of its total assets in equity securities of
issuers headquartered outside the United States, and
substantially all of its assets (other than cash and short-term
investments) in such equity securities or equity securities of
issuers (including closed-end investment companies) that derive a
substantial part of their revenues or profits from countries
outside the United States. Under normal conditions the Fund's
portfolio will contain equity securities of issuers from at least
three countries outside the United States. The Fund may also
engage in certain options and futures transactions.
The Fund's subadviser will make investment decisions on behalf of
the Fund by, first, selecting countries where it anticipates
sustainable growth that will exceed current market expectations.
Within the selected countries, the subadviser will identify
economic sectors that appear to present the most potential for
risk-adjusted growth and, finally, within the chosen economic
sectors, the subadviser will select securities that are expected
to offer the best value.
[] Growth Opportunities Fund
It is normally the policy of the Growth Opportunities Fund to
invest in a diversified portfolio of common stocks considered by
the Fund's subadviser to have possibilities for long-term
appreciation of capital and income. Emphasis will be given to
both undervalued securities ("value" style) and securities of
companies with growth potential ("growth" style). The Fund will
ordinarily invest substantially all of its assets in equity
securities. The Fund may invest in foreign securities that are
traded in U.S. markets.
[] Star Advisers Fund
The Star Advisers Fund seeks to attain its objective by investing
primarily in equity securities. The Fund may also invest in
other securities, as described below. Under normal market
conditions, however, at least 65% of the Fund's assets will be
invested in equity securities. Capital invested in the Fund will
be allocated on an equal basis among four different subadvisers.
Each subadviser will manage its segment of the Fund's assets in
accordance with that subadviser's own investment style and
strategy. The Fund, in the discretion of each subadviser, may
invest without limit in securities of companies with smaller
capitalization. The Fund may in the discretion of each of its
subadvisers invest without limit in securities of foreign issuers
(including issuers in emerging markets) as well as in securities
of U.S. issuers.
NEFM, the adviser of the Star Advisers Fund, believes that a
multi-adviser approach to equity investing - one that combines
the varied styles of a number of subadvisers in selecting
securities for the Fund's portfolio - offers a different
investment opportunity than equity funds run by a single adviser
using a single style.
Any given management style tends to produce better returns than
other styles under certain market and economic conditions, and to
perform less well under other conditions. Therefore, most single-
adviser funds have not consistently maintained superior
performance rankings relative to their peers over long periods.
NEFM believes that consistency of results, minimizing under-
performance even at the cost of out-performance at times, is
likely to produce higher performance over time.
NEFM believes that assigning portfolio management responsibility
for the Star Advisers Fund to four subadvisers, whose varying
styles have resulted in records of success, may increase the
likelihood that the Fund may produce superior long-term results
for its shareholders, with less variability of return and less
risk of persistent under-performance than a single-adviser fund.
Of course, past results should not be considered a prediction of
future performance, and there is no assurance that the Fund will
in fact achieve superior results over any time period. The
investment styles described below will be those applied by each
of the subadvisers to the segment of the Fund's portfolio for
which that subadviser is responsible.
Berger places primary emphasis on established companies which it
believes have favorable growth prospects, regardless of the
company's size. Berger emphasizes stocks with potential for
rapid earnings expansion. Berger seeks companies with the
capability to perform well under varying economic conditions,
including the ability to compete in the global marketplace.
Berger also seeks companies with the ability to market increasing
amounts of products or services, in order to increase shareholder
equity at an above-average rate. Berger also places considerable
emphasis on the quality of the corporate leadership of companies
under consideration. Common stocks will generally constitute all
or most of the segment of the Fund managed by Berger, but this
segment of the portfolio may from time to time take substantial
positions in securities convertible into common stocks, and may
also purchase preferred stocks, government securities, zero-
coupon securities and other senior securities when Berger
believes it is appropriate to do so. This segment of the
portfolio may also invest in Rule 144A securities (see
"Investment Risks -- Miscellaneous" below) and may purchase put
and call options on stock indices and futures contracts and
options thereon for the purpose of hedging.
Founders' segment of the portfolio will invest primarily in
common stocks of well-established, high-quality growth companies
with mid or high market capitalization. Founders manages its
segment of the Fund's portfolio by investing primarily in
established companies with above-average prospects for growth in
earnings per share. This segment will invest primarily in mid-
cap and large capitalization stocks. Founders believes that mid-
cap companies (companies with between $1.5 billion and $3.5
billion of market capitalization) can produce returns close to
those of smaller-cap companies, but with less risk because of
their stronger infrastructures and performance records and more
solid market positions, and that large-capitalization stocks add
stability to the portfolio. These companies tend to have strong
performance records, with solid continuous operating records of
three years or more. Founders' approach to investment management
gives greater emphasis to the fundamental financial, marketing
and operating characteristics of individual companies, and is
less concerned with the short-term impact of changes in
macroeconomics and market conditions, than some other investment
firms. This segment of the portfolio may invest in bonds,
debentures and other corporate obligations when Founders believes
that these investments offer opportunity for growth of capital.
This segment of the portfolio may also invest in Rule 144A
securities and may enter into futures contracts or options
thereon for hedging purposes.
Janus Capital pursues the Fund's investment objective by
investing substantially all of its segment of the Fund's
portfolio in common stocks when its portfolio manager believes
that the relevant market environment favors profitable investing
in such securities. Janus Capital manages its segment of the
portfolio to seek long-term capital growth primarily from
investing in common stocks of companies of any size, including
large, well-established companies and smaller, emerging growth
companies. Janus Capital's analysis and selection process focus
on stocks with earnings growth potential that may not be
recognized by the market. This segment of the portfolio may also
invest in preferred stocks, warrants, government securities,
corporate bonds and debentures or other debt securities or
repurchase agreements when its portfolio manager perceives an
opportunity for capital growth from such securities or to receive
a return on idle cash. Janus Capital's segment may also invest
in Rule 144A securities and may enter into options, futures and
forward contracts.
Loomis Sayles manages its segment of the portfolio by investing
primarily in stocks of small cap companies with good earnings
growth potential, that Loomis Sayles believes are undervalued by
the market. Typically, such companies range in size from $100
million to $500 million in market capitalization, have better
than average growth rates at below average price/earnings ratios
and have strong balance sheets and cash flow. Loomis Sayles
seeks to build a core small cap portfolio of solid growth company
stocks, with a smaller emphasis on special situations and
turnarounds (companies that have experienced significant business
problems but which Loomis Sayles believes have favorable
prospects for recovery), as well as unrecognized stocks.
Under unusual market conditions as determined by any of the four
subadvisers, all or any portion of the segment of the portfolio
managed by that subadviser may be invested, for temporary,
defensive purposes, in short-term debt instruments or in cash.
In addition, under normal conditions, a portion of each segment's
assets may be invested in short-term assets for liquidity
purposes or pending investment in other securities. Short-term
investments may include U.S. Government securities, certificates
of deposit, commercial paper and other obligations of corporate
issuers rated in the top two rating categories by a major rating
agency or, if unrated, determined to be of comparable quality by
the subadviser, and repurchase agreements that are fully
collateralized by cash, U.S. Government securities or high-
quality money market instruments.
[] Additional Information
Equity securities are securities that represent an ownership
interest (or the right to acquire such an interest) in a company,
and include common and preferred stocks and securities
exercisable for or convertible into common or preferred stocks
(such as warrants, convertible debt securities and convertible
preferred stock). The Capital Growth, International Equity,
Value and Growth Opportunities Funds seek to attain their
objectives by normally investing substantially all of their
assets in equity securities. When the particular Fund's adviser
or subadviser deems it appropriate, however, the Capital Growth,
Value and Growth Opportunities Funds may, for temporary defensive
purposes, hold a substantial portion of their assets in cash or
fixed-income investments, including U.S. Government obligations,
investment grade (and comparable unrated) corporate bonds or
notes, money market instruments and repurchase agreements.
Corporate obligations in the lowest investment grade category
(rated BBB by Standard & Poor's Ratings Group ["S&P"] or Baa by
Moody's Investors Service, Inc. ["Moody's"]) have some
speculative characteristics and may be more adversely affected by
changing economic conditions than are higher grade obligations.
The International Equity Fund may, for temporary purposes, hold
all or any portion of its assets in cash, repurchase agreements,
short-term debt obligations of U.S. or foreign corporate issuers
or U.S. or foreign government obligations of any maturity rated
AAA, AA, A or BBB by S&P, Aaa, Aa, A or Baa by Moody's or unrated
but determined by the Fund's subadviser to be of comparable
quality to securities in those rating categories. No estimate
can be made as to when or for how long a Fund will employ
defensive strategies. Under some market conditions, the Balanced
Fund may, for temporary purposes, invest less than 50% of its
assets in equity securities and the balance in cash and fixed-
income investments.
I n v e s t m e n t R i s k s
It is important to understand the following risks inherent in a
Fund before you invest.
[] Equity Securities
While offering greater potential for long-term growth, equity
securities are more volatile and more risky than some other forms
of investment. Therefore, the value of your investment in a Fund
may sometimes decrease instead of increase. Each Fund may invest
in equity securities of companies with relatively small market
capitalization. Securities of such companies may be more
volatile than the securities of larger, more established
companies and the broad equity market indices. See "Small
Companies" below. Each Fund's investments may include securities
traded "over-the-counter" as well as those traded on a securities
exchange. Some over-the-counter securities may be more difficult
to sell under some market conditions.
Each Fund may invest in convertible securities, including
corporate bonds, notes or preferred stocks that can be converted
into common stocks or other equity securities. Convertible
securities also include other securities, such as warrants, that
provide an opportunity for equity participation. Because
convertible securities can be converted into equity securities,
their values will normally increase or decrease as the values of
the underlying equity securities increase or decrease. The
movements in the prices of convertible securities, however, may
be smaller than the movements in the value of the underlying
equity securities. The value of convertible securities that pay
dividends or interest, like the value of other fixed-income
securities, generally fluctuates inversely with changes in
interest rates. Warrants have no voting rights, pay no dividends
and have no rights with respect to the assets of the corporation
issuing them. They do not represent ownership of the securities
for which they are exercisable, but only the right to buy such
securities at a particular price. Less than 35% of each Fund's
respective net assets will be invested in convertible securities
rated below investment grade and unrated convertible securities
of comparable quality.
[] Small Companies
Investments in companies with relatively small capitalization may
involve greater risk than is usually associated with more
established companies. These companies often have sales and
earnings growth rates which exceed those of companies with larger
capitalization. Such growth rates may in turn be reflected in
more rapid share price appreciation. However, companies with
smaller capitalization often have limited product lines, markets
or financial resources and they may be dependent upon a
relatively small management group. The securities may have
limited marketability and may be subject to more abrupt or
erratic movements in price than securities of companies with
larger capitalization or the market averages in general. The net
asset value of funds that invest in companies with smaller
capitalization therefore may fluctuate more widely than market
averages.
[] Foreign Securities
Investments in foreign securities present risks not typically
associated with investments in comparable securities of U.S.
issuers.
There may be less information publicly available about a foreign
corporate or government issuer than about a U.S. issuer, and
foreign corporate issuers are not generally subject to
accounting, auditing and financial reporting standards and
practices comparable to those in the United States. The
securities of some foreign issuers are less liquid and at times
more volatile than securities of comparable U.S. issuers.
Foreign brokerage commissions and securities custody costs are
often higher than those in the United States, and judgments
against foreign entities may be more difficult to obtain and
enforce. With respect to certain foreign countries, there is a
possibility of governmental expropriation of assets, confiscatory
taxation, political or financial instability and diplomatic
developments that could affect the value of investments in those
countries. The receipt of interest on foreign government
securities may depend on the availability of tax or other
revenues to satisfy the issuer's obligations.
The International Equity and Star Advisers Funds' investments in
foreign securities may include investments in emerging or
developing countries, whose economies or securities markets are
not yet highly developed. Special considerations associated with
these investments (in addition to the considerations regarding
foreign investments generally) may include, among others, greater
political uncertainties, an economy's dependence on revenues from
particular commodities or on international aid or development
assistance, currency transfer restrictions, highly limited
numbers of potential buyers for such securities and delays and
disruptions in securities settlement procedures.
The Funds may invest in foreign equity securities either by
purchasing such securities directly or by purchasing "depository
receipts." Depository receipts are instruments issued by a bank
that represent an interest in equity securities held by
arrangement with the bank. Depository receipts can be either
"sponsored" or "unsponsored." Sponsored depository receipts are
issued by banks in cooperation with the issuer of the underlying
equity securities. Unsponsored depository receipts are arranged
without involvement by the issuer of the underlying equity
securities. Less information about the issuer of the underlying
equity securities may be available in the case of unsponsored
depository receipts.
[] Foreign Currency (Capital Growth, Balanced, International
Equity, Star Advisers and Value Funds)
Most foreign securities in the Capital Growth, Balanced,
International Equity, Star Advisers and Value Funds' portfolios
will be denominated in foreign currencies or traded in securities
markets in which settlements are made in foreign currencies.
Similarly, any income on such securities is generally paid to the
Fund in foreign currencies. The value of these foreign
currencies relative to the U.S. dollar varies continually,
causing changes in the dollar value of the Fund's portfolio
investments (even if the local market price of the investments is
unchanged) and changes in the dollar value of the Fund's income
available for distribution to its shareholders. The effect of
changes in the dollar value of a foreign currency on the dollar
value of the Fund's assets and on the net investment income
available for distribution may be favorable or unfavorable.
The Capital Growth, Balanced, International Equity, Star Advisers
and Value Funds may incur costs in connection with conversions
between various currencies. In addition, those Funds may be
required to liquidate portfolio assets, or may incur increased
currency conversion costs, to compensate for a decline in the
dollar value of a foreign currency occurring between the time
when the Fund declares and pays a dividend, or between the time
when the Fund accrues and pays an operating expense in U.S.
dollars.
[] Fixed-Income Securities
Fixed-income securities include a broad array of short, medium
and long term obligations issued by the U.S. or foreign
governments, government or international agencies and
instrumentalities, and corporate issuers of various types. Some
fixed income securities represent uncollateralized obligations of
their issuers; in other cases, the securities may be backed by
specific assets (such as mortgages or other receivables) that
have been set aside as collateral for the issuer's obligation.
Fixed-income securities generally involve an obligation of the
issuer to pay interest or dividends on either a current basis or
at the maturity of the security, as well as the obligation to
repay the principal amount of the security at maturity.
Fixed-income securities involve both credit risk and market risk.
Credit risk is the risk that the security's issuer will fail to
fulfill its obligation to pay interest, dividends or principal on
the security. Market risk is the risk that the value of the
security will fall because of changes in market rates of
interest. (Generally, the value of fixed-income securities falls
when market rates of interest are rising.) Some fixed-income
securities also involve prepayment or call risk. This is the
risk that the issuer will repay a Fund the principal on the
security before it is due, thus depriving the Fund of a favorable
stream of future interest or dividend payments.
Because interest rates vary, it is impossible to predict the
income of a fund that invests in fixed-income securities for any
particular period. Fluctuations in the value of a Fund's
investments in fixed-income securities will cause a Fund's net
asset value to increase or decrease.
All non-convertible fixed-income securities purchased by the
Funds other than the Balanced and Star Advisers Funds will, at
the time of purchase, either be rated investment grade by at
least one major rating agency or be unrated but determined to be
of investment grade quality by the Fund's subadviser.
[] Lower Quality Fixed-Income Securities (Balanced and Star
Advisers Funds)
Fixed-income securities rated BB or lower by S&P or Ba or lower
by Moody's (and comparable unrated securities) are of below
"investment grade" quality. Lower quality fixed-income
securities generally provide higher yields, but are subject to
greater credit and market risk, than higher quality fixed-income
securities. 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 mutual fund investing in lower
quality fixed-income securities may be more dependent on the
fund's adviser's or subadviser's own credit analysis than for a
fund investing in 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 market may be less liquid
for lower rated fixed-income securities. This lack of liquidity
at certain times may affect the valuation of these securities and
may make the valuation and sale of these securities more
difficult. During the fiscal year ended December 31, 1995, the
Balanced and Star Advisers Funds had on average ___% and ___% of
their assets, respectively, invested in fixed-income securities
rated below investment grade. Securities of below investment
grade quality are considered high yield, high risk securities and
are commonly known as "junk bonds." For more information,
including a detailed description of the ratings assigned by S&P
and Moody's, please refer to the Statement's "Appendix A -
Description of Bond Ratings."
[] Zero Coupon, Pay-In-Kind and Step Coupon Securities and
"Strips" (Star Advisers Fund)
The Star Advisers Fund may invest in zero coupon, pay-in-kind and
step coupon securities and in "strips." Zero coupon bonds do not
make regular interest payments; rather, they are sold at a
discount from face value. Principal and accrued discount
(representing interest accrued but not paid) are paid at
maturity. "Strips" are debt securities that are stripped of
their interest coupon after the securities are issued, but
otherwise are comparable to zero coupon bonds. Step coupon bonds
trade at a discount from their face value and pay coupon
interest. The coupon rate is low for an initial period and then
increases to a higher coupon rate thereafter. Pay-in-kind bonds
normally give the issuer an option to pay cash at a coupon
payment date or give the holder of the security a similar bond
with the same coupon rate and a face value equal to the amount of
the coupon payment that would have been made. The market values
of "strips" and zero coupon, pay-in-kind and step coupon
securities generally fluctuate in response to changes in interest
rates to a greater degree than do conventional interest-paying
securities of comparable term and quality. Under many market
conditions, investments in such securities may be illiquid,
making it difficult for the Fund to dispose of them or determine
their current value.
[] Repurchase Agreements
Under a repurchase agreement, a Fund buys securities from a
seller, usually a bank or brokerage firm, with the understanding
that the seller will repurchase the securities at a higher price
at a later date. If the seller fails to repurchase the
securities, the Fund has rights to sell the securities to third
parties. Repurchase agreements can be regarded as loans by the
Fund to the seller, collateralized by the securities that are the
subject of the agreement. Repurchase agreements afford an
opportunity for the Fund to earn a return on available cash at
relatively low market risk, although the Fund may be subject to
various delays and risks of loss if the seller fails to meet its
obligation to repurchase. The staff of the SEC is currently of
the view that repurchase agreements maturing in more than seven
days are illiquid securities.
[] Investments in Other Investment Companies (International
Equity Fund)
The International Equity Fund may invest up to 10% of its total
assets in securities of other investment companies. Because of
restrictions on direct investment by U.S. entities in certain
countries, investing indirectly in such countries (by purchasing
shares of another fund that is permitted to invest in such
countries) may be the most practical or efficient way for the
Fund to invest in such countries. In other cases, where the
Fund's subadviser desires to make only a relatively small
investment in a particular country, investing through another
fund that holds a diversified portfolio in that country may be
more effective than investing directly in issuers in that
country. As an investor in another investment company, the Fund
will indirectly bear its share of the expenses of that investment
company. These expenses are in addition to the Fund's own costs
of operations. In some cases, investing in an investment company
may involve the payment of a premium over the value of the assets
held in that investment company's portfolio.
[] Short-Term Trading
Although each Fund seeks long-term growth or return, each Fund
may, consistent with its investment objective, engage in
portfolio trading in anticipation of, or in response to, changing
economic or market conditions and trends. These policies may
result in higher turnover rates in the Fund's portfolio, which
may produce higher transaction costs and a higher level of
taxable capital gains. Portfolio turnover considerations will
not limit any adviser's or subadviser's investment discretion in
managing a Fund's assets.
Recent portfolio turnover rates of each Fund are set forth above
under "Financial Highlights."
[] Options, Futures, Swap Contracts and Currency Transactions
(International Equity, Star Advisers and Growth Opportunities
Funds)
The International Equity and Star Advisers Fund may buy, sell or
write options on securities, securities indexes, currencies or
futures contracts. These Funds may buy and sell futures
contracts on securities, securities indexes or currencies. These
Funds may also enter into swap contracts. These Funds may engage
in these transactions either for the purpose of enhancing
investment return, or to hedge against changes in the value of
other assets that the Fund owns or intends to acquire. These
Funds may also conduct foreign currency exchange transactions on
a spot (i.e., cash) basis at the spot rate prevailing in the
foreign currency exchange market. These Funds may enter into
interest rate, currency and securities index swaps. These Funds
will enter into these transactions primarily to seek to preserve
a return or spread on a particular investment or portion of its
portfolio, to protect against currency fluctuations, as a
duration management technique or to protect against an increase
in the price of securities the Fund anticipates purchasing at a
later date.
The Growth Opportunities Fund may buy and sell futures contracts
on a variety of stock indexes. The Fund would buy such a futures
contract only when the Fund is experiencing significant cash
inflows, and then only for the purpose of maintaining the Fund's
exposure to the equity markets during the time before the Fund
has fully invested incoming cash in equity securities directly.
Similarly, the Fund would sell stock index futures only during
periods of cash outflows from the Fund, for the purpose of
reducing equity market exposure before holdings of stock are
liquidated. The Fund will not use futures contracts for
speculative purposes or to hedge against changes in the value of
the Fund's securities portfolios.
Options, futures and swap contracts fall into the broad category
of financial instruments known as "derivatives" and involve
special risks. Use of options, futures or swaps for other than
hedging purposes may be considered a speculative activity,
involving greater risks than are involved in hedging.
Options can generally be classified as either "call" or "put"
options. There are two parties to a typical options transaction:
the "writer" and the "buyer." A call option gives the buyer the
right to buy a security or other asset (such as an amount of
currency or a futures contract) from, and a put option the right
to sell a security or other asset to, the option writer at a
specified price, on or before a specified date. The buyer of an
option pays a premium when purchasing the option, which reduces
the return on the underlying security or other asset if the
option is exercised, and results in a loss if the option expires
unexercised. The writer of an option receives a premium from
writing an option, which may increase its return if the option
expires or is closed out at a profit. If a Fund as the writer of
an option is unable to close out an unexpired option, it must
continue to hold the underlying security or other asset until the
option expires, to "cover" its obligations under the option.
A futures contract creates an obligation by the seller to deliver
and the buyer to take delivery of the type of instrument or cash
at the time and in the amount specified in the contract.
Although many futures contracts call for the delivery (or
receipt) of the specified instrument, futures are usually closed
out before the settlement date through the purchase (or sale) of
a comparable contract. If the price of the sale of the futures
contract by a Fund exceeds (or is less than) the price of the
offsetting purchase, the Fund will realize a gain (or loss).
Interest rate swaps involve the exchange by a Fund with another
party of their respective commitments to pay or receive interest
(for example, an exchange of floating rate payments for fixed
rate payments with respect to a notional amount of principal). A
currency swap is an agreement to exchange cash flows on a
notional amount based on changes in the relative values of the
specified currencies. An index swap is an agreement to make or
receive payments based on the different returns that would be
achieved if a notional amount were invested in a specified basket
of securities (such as the Standard & Poor's Composite Index of
500 Stocks [the "S&P 500"]) or in some other investment (such as
U.S. Treasury securities).
The value of options purchased by a Fund, futures contracts held
by a Fund and a Fund's positions in swap contracts may fluctuate
up or down based on a variety of market and economic factors. In
some cases, the fluctuations may offset (or be offset by) changes
in the value of securities held in the Fund's portfolio. All
transactions in options, futures or swaps involve the possible
risk of loss to the Fund of all or a significant part of the
value of its investment. In some cases, the risk of loss may
exceed the amount of the Fund's investment. The Fund will be
required, however, to set aside with its custodian bank certain
assets in amounts sufficient at all times to satisfy its
obligations under options, futures and swap contracts.
The successful use of options, futures and swaps will usually
depend on the subadvisers' ability to forecast stock market,
currency or other financial market movements correctly. A Fund's
ability to hedge against adverse changes in the value of
securities held in its portfolio through options, futures and
swap transactions also depends on the degree of correlation
between the changes in the value of futures, options or swap
positions and changes in the values of the portfolio securities.
The successful use of futures and exchange-traded options also
depends on the availability of a liquid secondary market to
enable the Fund to close its positions on a timely basis. There
can be no assurance that such a market will exist at any
particular time. In the case of swap contracts and of options
that are not traded on an exchange ("over-the-counter" options),
the Fund is at risk that the other party to the transaction will
default on its obligations, or will not permit the Fund to
terminate the transaction before its scheduled maturity. As a
result of these characteristics, the Fund will treat most swap
contracts and over-the-counter options (and the assets it
segregates to cover its obligations thereunder) as illiquid.
Certain provisions of the Internal Revenue Code (the "Code") and
certain regulatory requirements may limit a Fund's ability to
engage in futures, options and swap transactions.
[] Currency Hedging Transactions (International Equity and Star
Advisers Funds)
The International Equity and Star Advisers Funds may, at the
discretion of their subadvisers, engage in foreign currency
exchange transactions, in connection with the purchase and sale
of portfolio securities, to protect the value of specific
portfolio positions or in anticipation of changes in relative
values of currencies in which current or future Fund portfolio
holdings are denominated or quoted. Currency hedging
transactions may include forward contracts (contracts with
another party to buy or sell a currency at a specified price on a
specified date), futures contracts (which are similar to forward
contracts but are traded on an exchange) and swap contracts. For
more information on foreign currency hedging transactions, see
Part II of the Statement.
[] Miscellaneous
No Fund will invest more than 15% of its net assets in "illiquid
securities," that is, securities which are not readily resalable,
which may include securities whose disposition is restricted by
federal securities laws.
The Balanced, International Equity and Star Advisers Funds may
purchase Rule 144A securities. These are privately offered
securities that can be resold only to certain qualified
institutional buyers. The Star Advisers Fund may also purchase
commercial paper issued under Section 4(2) of the Securities Act
of 1933. Rule 144A securities and Section 4(2) commercial paper
are treated as illiquid, unless a subadviser has determined,
under guidelines established by New England Funds Trust I's
trustees, that the particular issue of Rule 144A securities or
commercial paper is liquid. Investment in restricted or other
illiquid securities involves the risk that a Fund may be unable
to sell such a security at the desired time. Also, a Fund may
incur expenses, losses or delays in the process of registering
restricted securities prior to resale.
The International Equity and Star Advisers Funds may purchase
securities on a "when-issued" or "delayed-delivery" basis. This
means that a Fund enters into a commitment to buy the security
before the security has been issued, or, in the case of a
security that has already been issued, to accept delivery of the
security on a date beyond the usual settlement period. If the
value of a security purchased on a "when-issued" or "delayed
delivery" basis falls or market rates of interest increase
between the time a Fund commits to buy the security and the
delivery date, the Fund may sustain a loss in value of or yield
on the security. For more information on "when-issued" and
"delayed delivery" securities, see Part II of the Statement.
To the extent the Star Advisers Fund may invest in derivative
securities for other than bona fide hedging purposes, such
investments may be speculative in nature and may involve
additional risks.
The Star Advisers Fund is a "non-diversified" fund and as such is
not required to meet any diversification requirements under the
Investment Company Act of 1940 (the "1940 Act"), although the
Fund must meet certain diversification standards to qualify as a
"regulated investment company" under the Code. Since the Fund
may invest a relatively high percentage of its assets in the
obligations of a limited number of issuers, the Fund may be more
susceptible than a more widely-diversified fund to any single
economic, political or regulatory occurrence.
[] Special Considerations Regarding the Multi-Adviser Approach
(Star Advisers Fund)
NEFM, the adviser of the Star Advisers Fund, oversees the
portfolio management services provided to the Fund by each of the
four subadvisers. NEFM does not, however, determine what
investments will be purchased or sold for any segment of the
portfolio. Because each subadviser will be managing its segment
of the portfolio independently from the other subadvisers, the
same security may be held in two different segments of the
portfolio, or may be acquired for one segment of the portfolio at
a time when the subadviser of another segment deems it
appropriate to dispose of the security from that other segment.
Similarly, under some market conditions, one or more of the
subadvisers may believe that temporary, defensive investments in
short-term instruments or cash are appropriate when another
subadviser or subadvisers believe continued exposure to the
equity markets is appropriate for their segments of the
portfolio. Because each subadviser directs the trading for its
own segment of the portfolio, and does not aggregate its
transactions with those of the other subadvisers, the Fund may
incur higher brokerage costs than would be the case if a single
adviser or subadviser were managing the entire portfolio. Also,
because each segment of the portfolio will perform differently
from the other segments depending upon the investments it holds
and changing market conditions, one segment may be larger or
smaller at various times than other segments. The Fund does not
intend to reallocate assets among the segments to reduce these
differences in size. Net cash inflows or outflows resulting from
sales and redemptions of the Fund's shares will be allocated on
an equal basis, without regard to the relative size of the
segments, among the four segments of the portfolio.
NEFM may, at its discretion, terminate its agreement with a
segment's subadviser. In such case, NEFM will either enter into
an agreement with another subadviser to manage the segment or
will allocate the segment's assets equally among the other
segments of the Fund.
F u n d M a n a g e m e n t
New England Funds Management, L.P. ("NEFM"), 399 Boylston Street,
Boston, Massachusetts, 02116, serves as the adviser to each Fund.
NEFM oversees, evaluates and monitors the subadvisory services
provided to each Fund and furnishes general business management
and administration to each Fund.
The subadviser of the Capital Growth Fund, the Balanced Fund and
the Value Fund is Loomis Sayles. Founded in 1926, Loomis Sayles,
One Financial Center, Boston, Massachusetts 02111, is one of the
country's oldest and largest investment counsel firms. Richard
W. Hurckes and Scott S. Pape, Vice Presidents of Loomis Sayles,
have served as the portfolio managers of the Capital Growth Fund
since its inception in 1992. Carol C. McMurtrie, Vice President
and Managing Partner of Loomis Sayles, and Tricia H. Mills and
Douglas D. Ramos, Vice Presidents of Loomis Sayles, have served
as portfolio managers of the Value Fund since March 1993.
Douglas D. Ramos and Meri Anne Beck have served as portfolio
managers of the Balanced Fund since 1990; Ms. Beck is also a Vice
President of Loomis Sayles. All of the foregoing persons have
been employed by Loomis Sayles for five years except Mr. Pape
who, prior to the time he joined Loomis Sayles, was Equity
Portfolio Manger of the Illinois State Board of Investment.
The subadviser of the Growth Opportunities Fund is Westpeak, 1011
Walnut Street, Boulder, Colorado 80302. The portfolio manager of
the Growth Opportunities Fund is Gerald H. Scriver, President and
Chief Executive Officer of Westpeak. Mr. Scriver has been with
Westpeak since its inception in 1991. Mr. Scriver was Director
of Quantitative Strategies of INVESCO from 1989 through 1991.
The subadviser of the International Equity Fund is Draycott, 8
City Road, London EC2Y 1HE, England. Draycott was organized in
1991 to provide investment advice and management services to
institutional investors' accounts and to mutual funds distributed
to both institutional and retail customers. Draycott is a member
of the Investment Management Regulatory Organization Limited
(IMRO), the U.K. regulator of investment advisers. Nicholas D.
P. Carn, Chief Investment Officer, President and Chief Executive
Officer of Draycott, Timothy S. Griffen, Senior Portfolio Manager
and Pacific Rim Specialist of Draycott, Gregory D. Eckersley,
Portfolio Manager and United Kingdom Specialist of Draycott, and
Nigel Hankin, Portfolio Manager and European Specialist of
Draycott, have served as the portfolio managers of the
International Equity Fund since the Fund's inception in 1992.
Prior to Draycott's organization in 1991, Mr. Carn was Managing
Director, International Equities Group, Mr. Griffen was a Vice
President and Portfolio Manager, Mr. Eckersley was Investment
Manager and Mr. Hankin was European Fund Manager, all at CIGNA
International Investment Advisors, Ltd.
Each Fund pays NEFM a management fee at the annual rate set forth
in the following table:
Management fee paid by Fund to NEFM
(as a percentage of average daily net assets
Fund of the Fund)
- ------------------------ --------------------------------------------
Balanced Fund 0.75% of the first $200 million
0.70% of the next $300 million
0.65% of amounts in excess of $500 million
Capital Growth Fund 0.75% of the first $200 million
0.70% of the next $300 million
0.65% of amounts in excess of $500 million
Growth Opportunities 0.70% of the first $200 million
Fund 0.65% of the next $300 million
0.60% of amounts in excess of $500 million
International Equity 0.90% of the first $200 million
Fund 0.85% of the next $300 million
0.80% of amounts in excess of $500 million
Star Advisers Fund 1.05% of all assets
Value Fund 0.75% of the first $200 million
0.70% of the next $300 million
0.65% of amounts in excess of $500 million
The advisory fee rates payable by the Balanced, Capital Growth,
International Equity, Star Advisers and Value Funds are higher
than those paid by most other mutual funds but are comparable to
fee rates paid by some mutual funds with similar investment
objectives and policies to these Funds. In the case of the Star
Advisers Fund, this difference in the fee rate is partially due
to the multi-adviser format.
Subject to the supervision of NEFM, each subadviser manages the
portfolio(s) of the Fund(s) to which it serves as subadviser (in
the case of the Star Advisers Fund, its segment of such Fund's
portfolio) in accordance with the Fund's investment objective and
policies, makes investment decisions for that Fund or segment,
places orders to purchase and sell securities for that Fund or
segment, and employs professional advisers and securities
analysts who provide research services to that Fund or segment.
The Funds pays no direct fees to any of their subadvisers.
Below is a brief description of the subadvisers of the Star
Advisers Fund.
Berger, 210 University Boulevard, Suite 900, Denver, Colorado
80206. Rodney L. Linafelter, Vice President of Berger, has day-
to-day responsibility for the management of the segment of the
Fund managed by Berger. Kansas City Southern Industries, Inc.
("KCSI"), a publicly traded holding company, owns approximately
80% of the outstanding shares of Berger.
Founders, 2930 East Third Avenue, Denver, Colorado 80206. To
facilitate day-to-day investment management, Founders employs a
unique team-and-lead-manager system. The management team for a
portfolio or fund is comprised of Founders' Chief Investment
Officer Bjorn K. Borgen, a lead portfolio manager, assistant
portfolio managers, portfolio traders and research analysts.
Team members share responsibility for providing ideas,
information, knowledge and expertise in the management of
Founders' segment of the Fund. Each team member has one or more
areas of expertise that is applied to the management of Founders'
segment of the Fund. Daily decisions on portfolio selection rest
with the lead portfolio manager, who, through participation in
the team process, utilizes the input of other team members in
making purchase and sale determinations. Edward F. Keely is lead
portfolio manager for the segment of the Fund that is managed by
Founders. Mr. Borgen has served as Founders' Chief Investment
Officer since 1969 and owns all of Founders' outstanding shares.
Janus Capital, 100 Fillmore Street, Denver, Colorado 80206.
Warren B. Lammert has day-to-day management responsibility for
those assets of the Fund allocated to Janus Capital, where he
serves as a portfolio manager and Vice President of Investments.
KCSI owns approximately 83% of the outstanding voting stock of
Janus Capital. Thomas H. Bailey, President and Chairman of the
Board of Janus Capital, owns approximately 12% of Janus Capital's
voting stock and, by agreement with KCSI, selects a majority of
Janus Capital's board of directors.
Loomis Sayles. Jeffrey C. Petherick, Vice President of Loomis
Sayles and New England Funds Trust I, and Mary Champagne, Vice
President of Loomis Sayles, have day-to-day management
responsibility for the segment of the Fund that is allocated to
Loomis Sayles. Mr. Petherick has co-managed the Loomis Sayles
segment of the Fund since the Fund's inception. Ms. Champagne
has co-managed the Loomis Sayles segment of the Fund since July
1995. Prior to joining Loomis Sayles in 1993, Ms. Champagne
served as a portfolio manager at NBD Bank for 10 years.
NEFM pays each subadviser of the Star Advisers Fund a subadvisory
fee at the annual rate of 0.55% of the first $50 million of the
average daily net assets of the segment of the Fund that the
subadviser manages and 0.50% of such assets in excess of $50
million. The Distributor in its discretion may, but is not
obligated to, pay an incentive bonus to the subadviser whose
segment of the Fund's portfolio has the highest relative total
return for the prior year versus that segment's investment peer
group as tracked by a major independent mutual fund reporting
service.
NEFM pays the subadvisers of the following Funds a subadvisory
fee at the annual rate set forth in the following table:
Subadvisory fee payable by NEFM to
subadviser
(as a percentage of average daily
Fund Subadviser net assets of the Fund)
- ------------------- ---------- --------------------------------
Balanced Fund Loomis 0.535% of the first $200 million
Sayles 0.350% of the next $300 million
0.300% of amounts in excess of
$500 million
Capital Growth Fund Loomis 0.60% of the first $25 million
Sayles 0.55% of the next $75 million
0.50% of the next $100 million
0.35% of the next $300 million
0.30% of amounts in excess of
$500 million
Growth Westpeak 0.50% of the first $25 million
Opportunities Fund 0.40% of the next $75 million
0.35% of the next $100 million
0.30% of amounts in excess of
$200 million
International Draycott 0.54% of the first $200 million
Equity Fund 0.49% of the next $300 million
0.44% of amounts in excess of
$500 million
Value Fund Loomis 0.535% of the first $200 million
Sayles 0.350% of the next $300 million
0.300% of amounts in excess of
$500 million
Prior to January 2, 1996 (December 29, 1995, in the case of the
International Equity Fund), the current subadvisers to the
Balanced, Capital Growth, International Equity and Value Funds
served as those Funds' respective advisers, and New England
Investment Companies, L.P. ("NEIC") served as adviser to the Star
Advisers Fund. Prior to May 1, 1995, the Growth Opportunities
Fund was advised by a different adviser and paid a lower rate of
advisory fees.
The general partners of each of NEFM, the Distributor, Loomis
Sayles and Westpeak are special purpose corporations. These
corporations are indirect wholly-owned subsidiaries of NEIC,
whose sole general partner, New England Investment Companies,
Inc. ("NEIC Inc."), is a wholly-owned subsidiary of New England
Mutual Life Insurance Company ("The New England"). 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 policy holders of The New England
and MetLife and receipt of certain regulatory approvals. After
such merger, NEIC Inc. will be a wholly-owned subsidiary of
MetLife.
Draycott is a wholly-owned subsidiary of Cursitor Holdings Ltd.
U.K. ("Cursitor"). Cursitor, headquartered at 66 Buckingham
Gate, London, SW1E 6AU, England, is an international investment
management group that had approximately $__ billion in assets
under management at December 31, 1995. Alliance Capital
Management, L.P. ("Alliance Capital") is expected to acquire the
business of Cursitor later in 1996. As a result of this
transaction, Draycott will become a wholly-owned subsidiary of a
new entity, Cursitor Alliance LLC, in which Alliance Capital will
directly and indirectly own a 93% interest. Alliance Capital
Management Corporation ("ACMC") is the sole general partner of,
and the owner of a 1% general partnership interest in, Alliance
Capital. ACMC is an indirect wholly-owned subsidiary of The
Equitable Life Assurance Society of the United States, which is a
wholly-owned subsidiary of The Equitable Companies Incorporated,
a holding company controlled by AXA, a French insurance holding
company.
Subject to applicable regulatory restrictions and such policies
as the Trusts' trustees may adopt, the Funds' advisers or
subadvisers may consider sales of shares of the Funds and other
mutual funds they manage as a factor in the selection of broker-
dealers to effect portfolio transactions for the Funds. Subject
to procedures adopted by the trustees of the Trusts, Fund
brokerage transactions may be executed by brokers that are
affiliated with NEIC, NEFM or any subadviser. See "Portfolio
Transactions and Brokerage" in Part II of the Statement.
NEFM provides executive and other personnel for the management of
the Trusts. Each Trust's Board of Trustees supervises the
affairs of the Trust as conducted by NEFM and the Funds'
subadvisers.
NEFM and the Distributor have voluntarily agreed to reduce their
fees and to bear certain operating expenses charged to the
International Equity Fund to the extent that the total of such
fees and expenses would exceed 1.75% annually of the average
daily net assets of the Fund's Class A shares and 2.50% annually
of the average daily net assets of the Fund's Class B and Class C
shares. NEFM and the Distributor may terminate these voluntary
limitations at any time. In such event, the Fund would
supplement its prospectus.
In addition to the management fee paid to its adviser, each Fund
pays all expenses not borne by its adviser, subadviser(s) or the
Distributor, including, but not limited to, the charges and
expenses of each Fund's custodian and transfer agent, independent
auditors and legal counsel for the Fund and the Trusts'
independent trustees, all brokerage commissions and transfer
taxes in connection with portfolio transactions, all taxes and
filing fees, the fees and expenses for registration or
qualification of its shares under federal and state securities
laws, all expenses of shareholders' and trustees' meetings,
preparing, printing and mailing prospectuses and reports to
shareholders and the compensation of trustees who are not
directors, officers or employees of The New England or its
affiliates, other than affiliated registered investment
companies. Certain expenses are allocated differently between
each Fund's Class A, Class B and Class C shares, on the one hand,
and its Class Y shares, on the other hand. (See "Additional
Facts about the Funds" below.)
B u y i n g F u n d S h a r e s
Minimum Investment
Class Y shares of the Funds may be purchased by endowments and
foundations. The minimum initial investment is $1 million for
these entities and $100,000 for each subsequent investment.
Class Y shares may also be purchased by plan sponsors of 401(a),
401(k), 457 or 403(b) plans ("Retirement Plans") that have total
investment assets in these plans of at least $10 million. Plan
sponsors' investment assets in multiple Retirement Plans can be
aggregated for purposes of meeting this minimum. Class Y shares
may also be purchased by any separate account of The New England,
any other insurance company affiliated with The New England
("Separate Accounts") and, in the case of the International
Equity Fund, by bank common trusts, bank collective trust funds
and dedicated corporate or trusted funds, such as nuclear
decommissioning trusts and hospital depreciation funds ("Special
Accounts"). There is no minimum initial or subsequent investment
amount for Retirement Plans, Separate Accounts or Special
Accounts. Investments in the Funds may also be made by certain
individual retirement accounts if the amounts invested represent
rollover distributions from investments by any of the foregoing
plans of amounts invested in the Funds. The Distributor serves
as the principal underwriter of the Fund's shares. Shares may be
purchased on any day when the New York Stock Exchange (the
"Exchange") is open for business (a "business day"). Investors
should contact New England Funds before attempting to place an
order for Fund shares. The Funds and the Distributor reserve the
right at any time to reject a purchase order.
Ways To Buy Fund Shares
A shareholder may purchase Class Y shares for cash on any
business day by the two methods described below:
BY WIRE TRANSFER: Prior to an initial investment, obtain an
account number and wire transfer instructions by calling 1-800-
225-5478. All funds should be transmitted to State Street Bank
and Trust Company, ABA #011000028, DDA #99011538, Credit [Fund
Name] Class Y shares, Shareholder Name, and Shareholder Account
Number.
BY MAIL: For an initial investment, complete the attached
application and return it with a check payable to New England
Funds and mailed to New England Funds, L.P. 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.
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.)
Class Y shares of each Fund other than the Star Advisers Fund may
also be purchased by exchanging securities on deposit with a
custodian acceptable to the subadviser of the Fund or by a
combination of such securities and cash. Purchase of shares of
the Funds in exchange for securities is subject in each case to
the determination by the Fund's subadviser that the securities to
be exchanged are acceptable for purchase by the Fund. Securities
accepted by the Fund's subadviser in exchange for Fund shares
will be valued in the same manner as the Fund's assets (generally
the last quoted sales price), as described below under
"Determination of Net Asset Value," as of the time of the Fund's
next determination of net asset value after such acceptance. All
dividends and subscription or other rights which are reflected in
the market price of accepted securities at the time of valuation
become the property of the Fund and must be delivered to the Fund
upon receipt by the investor from the issuer. A gain or loss for
federal income tax purposes would be realized upon the exchange
by an investor that is subject to federal income taxation,
depending upon the investor's basis in the securities tendered.
A shareholder who wishes to purchase shares by exchanging
securities should obtain instructions by calling 1-800-225-5478.
A subadviser will not approve the acceptance of securities in
exchange for shares of a Fund it manages unless (1) the
subadviser, in its sole discretion, believes the securities are
appropriate investments for the Fund; (2) the investor represents
and agrees that all securities offered to the Fund are not
subject to any restrictions upon their sale by the Fund under the
Securities Act of 1933, or otherwise; (3) the securities are
eligible to be acquired under the Fund's investment policies and
restrictions; and (4) the securities have a value which is
readily ascertainable (not established by evaluation procedures
alone) as evidenced by a listing on the New York Stock Exchange,
the American Stock Exchange, NASDAQ or the principal securities
exchange of countries in which the Fund may invest. No investor
owning 5% or more of the Fund's shares may purchase additional
Fund shares by exchange of securities (other than shares of other
New England Funds).
General
The purchase price of shares of each Fund is the net asset value
next determined after a purchase order is received in good order
by New England Funds. For purposes of calculating the purchase
price of Fund shares, a purchase order is considered received by
the Fund on the day that it is "in good order" unless it is
rejected by the Fund. For a purchase order to be in "good order"
on a particular day, in the case of a purchase of Fund shares in
exchange for securities, the investor's securities must be placed
on deposit at a depository acceptable to the Fund's subadviser by
4:00 p.m. (Eastern time) and, in the case of a cash investment,
Federal funds must be wired to the Fund between 9:00 a.m. and
4:00 p.m. (Eastern time) or a check for the purchase price of the
shares, accompanied by a completed application, must have been
received by New England Funds before 4:00 p.m. (Eastern time) on
that day. Orders received after 4:00 p.m. (Eastern time) will
receive the next day's price.
Purchases will be made in full and fractional Class Y shares
calculated to three decimal places. The shareholder will receive
a statement of Fund shares owned following each transaction.
Investors will not receive certificates representing Class Y
shares. The Funds and the Distributor reserve the right at any
time to reject a purchase order.
O w n i n g F u n d S h a r e s
Exchanging Among New England Funds
A shareholder may exchange Class Y shares of the Funds or any
other series of the Trusts for Class Y shares of any other series
of the Trusts which offers Class Y shares or for Class A shares
of New England Cash Management Trust Money Market Series or U.S.
Government Series or New England Tax Exempt Money Market Trust
(the "Money Market Funds").
To make an exchange, please call 1-800-225-5478 between 8:00 a.m.
and 7:00 p.m. (Eastern time) on a day when the Funds are open for
business or write to New England Funds. Exchange requests after
4:00 p.m. (Eastern time), or after the Exchange closes if it
closes earlier than 4:00 p.m., will be processed at the net asset
value determined at the close of regular trading on the next day
that the Exchange is open. All exchanges are subject to the
minimum investment and eligibility requirements of the series
into which you are exchanging. In connection with any exchange,
you must receive a current prospectus of the series into which
you are exchanging. The exchange privilege may be exercised only
in those states where shares of such other series may be legally
sold.
Shareholders have the automatic privilege to exchange Fund shares
by telephone. New England Funds, L.P. will employ reasonable
procedures to confirm that 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 telephone instructions, will provide shareholders with
written confirmations of such transactions and will record
telephone instructions.
Except as otherwise permitted by SEC rule, shareholders will
receive at least 60 days' advance notice of any material change
to the exchange privilege.
Fund Dividend Payments
The Capital Growth Fund, the International Equity Fund, the Value
Fund and the Star Advisers Fund pay dividends annually and the
Balanced Fund and the Growth Opportunities Fund pay dividends
quarterly. Each Fund pays as dividends substantially all net
investment 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 Trusts may adopt a different schedule as long as
payments are made at least annually. A shareholder intending to
purchase shares of a Fund shortly before it declares a dividend
should be aware that a portion of the purchase price may be
returned to the shareholder as a taxable dividend.
Shareholders have the option to reinvest all distributions in
additional shares of the Fund or in Class Y shares of other
series of the Trusts, to receive distributions from dividends and
interest in cash while reinvesting distributions from capital
gains in additional Class Y shares of the Fund or of other series
of the Trusts, or to receive all distributions in cash. Income
distributions and capital gains distributions will be reinvested
in Class Y shares of the respective Fund at net asset value
unless you select another option. You may change your
distribution option by notifying New England Funds 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 "undeliverable" to the 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 that
allows you to have all dividends and any other distributions
automatically invested in Class Y shares of another New England
Fund, subject to the investor eligibility requirements of that
other fund and to state securities law requirements. Shares will
be purchased at the selected fund's net asset value on the
dividend record date. A dividend diversification account must be
in the same registration (shareholder name) as the distributing
fund account and, if a new account in the purchased fund is being
established, the purchased fund's 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 fund's prospectus.
S e l l i n g F u n d S h a r e s
Ways to Sell Fund Shares
A shareholder may redeem shares of the Funds in the following
ways:
[] By telephone:
Shares may be redeemed by telephone on any business day for cash
by the two methods described below:
Wired to Your Bank Account -- If you have previously selected the
telephone redemption privilege on your account, shares may be
redeemed by calling 1-800-225-5478 between 8:00 a.m. and 7:00
p.m. (Eastern time) on a day when the Funds are open for
business. The proceeds 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 between 8:00 a.m. and 7:00 p.m. (Eastern
time) and requesting that a check for the proceeds 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.
Redemption requests accepted after 4:00 p.m. (Eastern time), or
after the Exchange closes if it closes before 4:00 p.m., will be
processed at the net asset value determined at the close of
regular trading on the next day that the Exchange is open.
[] By mail:
Shares may be redeemed at their net asset value next determined
after receipt of a 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 or
wired to your bank account. 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 they 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 redemptions by
certain benefit plans and IRAs. Contact the Distributor or your
investment dealer for details.
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 and Trust Company ("State
Street Bank"). Redemption proceeds will normally be mailed to
you within seven days after State Street Bank or the Distributor
receives your request in good order. However, in those cases
where you have recently purchased your shares by check and you
make a redemption request within 10 days after such purchase, the
Fund may withhold redemption proceeds until the Fund knows that
the check has cleared.
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 with respect to redemptions under powers of
attorney. Please call the Distributor for more information.
Telephone redemptions are not available for tax qualified
retirement plans. 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.
If a Fund's subadviser(s) determine(s), in its or their sole
discretion, that it would be detrimental to the best interests of
the remaining shareholders of the Fund to make payment wholly or
partly in cash, the Fund may pay the redemption price in whole or
in part by a distribution in kind of readily marketable
securities held by the Fund in lieu of cash. Securities used to
redeem Fund shares in kind will be valued in accordance with the
Funds' procedures for valuation described under "Determination of
Net Asset Value." Securities distributed by a Fund in kind will
be selected by the Fund's subadviser(s) in light of the Fund's
objective and will not generally represent a pro rata
distribution of each security held in the Fund's portfolio.
Investors may incur brokerage charges on the sale of any such
securities so received in payment of redemptions. The Funds'
right to pay redemptions in kind is limited by an election made
by the Funds under Rule 18f-1 under the 1940 Act. See
"Redemptions" in Part II of the Statement.
F u n d D e t a i l s
Determination of Net Asset Value
The net asset value of each Fund's shares is determined as of the
close of regular trading (normally 4:00 p.m. [Eastern time]) on
the Exchange on each day that the Exchange is open for trading.
Each Fund's holdings of equity securities are valued at the most
recent sales prices on an applicable exchange or NASDAQ, or, in
the case of unlisted securities (or listed securities which were
not traded during the day), at the last quoted bid prices. Price
information on listed securities is generally taken from the
closing price on the exchange where the security is primarily
traded. Securities traded primarily on an exchange outside the
United States which closes before the close of the Exchange
generally will be valued for purposes of calculating the Fund's
net asset value at the last sale or bid price on that non-U.S.
exchange, except that when an occurrence after the closing of
that exchange is likely to have materially changed such a
security's value, such security will be valued at fair value as
of the close of regular trading on the Exchange. An option that
is written by the Fund generally will be valued at the last sale
price or, in the absence of the last sale price, the last offer
price. The value of a futures contract will be equal to the
unrealized gain or loss on the contract that is determined by
marking the contract to the current settlement price. A
settlement price may not be used if the market makes a limit move
with respect to a particular futures contract or if the
securities underlying the futures contract experience significant
price fluctuations after the determination of the settlement
price. When a settlement price is not used, futures contracts
will be valued at their fair value as determined by or under the
direction of each Trust's Board of Trustees. Short-term notes
are valued at cost, or, where applicable, amortized cost, which
method is intended to approximate market value. All other
securities and assets of each Fund's portfolio (or, in the case
of the Star Advisers Fund, each segment of the Fund's portfolio)
are valued at their fair market value as determined in good faith
by the adviser or subadviser of that Fund or segment (or a
pricing service selected by the adviser or subadviser) under the
supervision of each Trust's Board of Trustees. The value of any
assets for which the market price is expressed in terms of a
foreign currency will be translated into U.S. dollars at the
prevailing market rate on the date of the net asset value
computation, or, if no such rate is quoted at such time, at such
other appropriate rate as may be determined by or under the
direction of each Trust's Board of Trustees.
The net asset value per share of each class is determined by
dividing the value of each class's securities (determined as
explained above) plus any cash and other assets (including
dividends and interest receivable but not collected) less all
liabilities (including accrued expenses), by the number of shares
of such class outstanding. The public offering price of each
Fund's Class Y shares is the net asset value per share.
Income Tax Considerations
Each Fund intends to meet all requirements of the Code necessary
to qualify as a ``regulated investment company'' and thus does
not expect to pay any federal income tax on investment income and
capital gains distributed to shareholders in cash or in
additional shares. Unless you are a tax-exempt entity, your
distributions derived from a Fund's short-term capital gains and
ordinary income are taxable to you as ordinary income. (A
portion of these distributions may qualify for the dividends-
received deduction for corporations.) Distributions derived from
a Fund's long-term capital gains ("capital gains distributions"),
if designated as such by a Fund, are taxable to you as long-term
capital gains, regardless of how long you have owned shares in
the Fund. Both income distribution and capital gains
distributions are taxable whether you elected to receive them in
cash or additional shares.
To avoid an excise tax, each Fund intends to distribute prior to
calendar year end virtually all the Fund's ordinary income and
net capital gains earned during that calendar year. If declared
in December to shareholders of record in that month, and paid the
following January, these distributions will be considered for
federal income tax purposes to have been received by shareholders
on December 31.
Each Fund is required to withhold 31% of all income dividends and
capital gains distributions it pays to you if you do not provide
a correct, certified taxpayer identification number, if a Fund is
notified that you have underreported income in the past or if you
fail to certify to a Fund that you are not subject to such
withholding. In addition, each Fund will be required to withhold
31% of the gross proceeds of Fund shares you redeem if you have
not provided a correct, certified taxpayer identification number.
If you are a tax-exempt shareholder, however, these backup
withholding rules will not apply so long as you furnish the Fund
with an appropriate certification.
Annually, if you earn more than $10 in taxable income from a
Fund, you will receive a Form 1099 to assist you in reporting the
prior calendar year's 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 International Equity Fund may be liable to foreign
governments for taxes relating primarily to investment income or
capital gains on foreign securities in the Fund's portfolio. The
Fund may in some circumstances be eligible to, and in its
discretion may, make an election under the Code which would allow
Fund shareholders who are U.S. citizens or U.S. corporations to
claim a foreign tax credit or deduction (but not both) on their
U.S. income tax return. If the Fund makes the election, the
amount of each shareholder's distribution reported on the
information returns filed by the Fund with the Internal Revenue
Service must be increased by the amount of the shareholder's
portion of the Fund's foreign tax paid.
The foregoing is a summary of certain federal income tax
consequences of an investment in a Fund for shareholders who are
U.S. citizens or corporations. Shareholders should consult a
competent tax adviser as to the effect of an investment in a Fund
on their particular federal, state and local tax situations.
Shareholders of the International Equity Fund should also consult
their tax advisers about consequences of their investment under
foreign laws.
Performance Criteria
Each Fund may include total return information for each class of
shares in advertisements or other written sales material. Each
Fund may show each class's 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, or,
in the case of the Growth Opportunities Fund's Class A shares,
for the periods from July 27, 1988 and May 1, 1995, when there
were changes in that Fund's investment adviser, to the end of the
most recent calendar quarter. Total return is measured by
comparing the value of a hypothetical $1,000 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
and, in the case of Class B shares, imposition of the CDSC
relevant to the period quoted). Total return may be quoted with
or without giving effect to any voluntary expense limitations in
effect for the class in question during the relevant period. The
class may also show total return over other periods, on an
aggregate basis for the period presented, or without deduction of
a sales charge. If a sales charge is not deducted in calculating
total return, the class's total return will be higher.
The Balanced Fund may also include the yield of each class of its
shares, accompanied by the total return, in advertising and other
written material. Yield will be computed in accordance with the
SEC's standardized formula by dividing the adjusted net
investment income per share earned during a recent thirty-day
period by the maximum offering price of a share of the relevant
class (reduced by any earned income expected to be declared
shortly as a dividend) on the last day of the period. Yield
calculations will reflect any voluntary expense limitations in
effect for the Fund during the relevant period.
The Balanced Fund may also present one or more distribution rates
for each class in its sales literature. These rates will be
determined by annualizing the class's distributions from net
investment income and net short-term capital gain over a recent
twelve-month, three-month or thirty-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.
All performance information is based on past results and is not
an indication of likely future performance. As a result of lower
operating expenses, Class Y shares of each Fund can be expected
to achieve a higher investment return than the Fund's Class A,
Class B or Class C shares.
Additional Facts About the Funds
[] New England Funds Trust I was organized in 1985 as a
Massachusetts business trust and is authorized to issue an
unlimited number of full and fractional shares in multiple
series. The Value and Balanced Funds were organized prior to
1985 and conducted investment operations as separate corporations
until their reorganization as series of New England Funds Trust I
in January 1987. The International Equity Fund and the Capital
Growth Fund were organized in 1992 and the Star Advisers Fund was
organized in 1994.
[] New England Funds Trust II 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 Growth Opportunities Fund is the original series of
shares of the Trust and has been in operation since 1931.
[] An investor in a Fund acquires freely transferable shares of
beneficial interest that entitle the investor to receive annual
or quarterly dividends as determined by the respective Trust's
trustees and to cast a vote for each share owned at shareholder
meetings. Shares of each Fund vote separately from shares of
other series of the same Trust, except as otherwise required by
law. Shares of all classes of a Fund vote together, except as to
matters relating to a class's Rule 12b-1 plan, on which only
shares of that class are entitled to vote. No Rule
12b-1 plan applies to the Class Y shares of any Fund.
[] Class A, Class B and Class C shares are identical to Class Y
shares, except that Class A and Class B shares are subject to a
sales load or contingent deferred sales charge, Class A, Class B
and Class C shares bear a service fee at the annual rate of 0.25%
of average net assets (and in the case of Class B and Class C
shares a 0.75% distribution fee, and have separate voting rights
in certain circumstances. Class Y bears its own transfer agency
and prospectus printing costs. The minimum investment in Class
A, Class B and Class C shares is $2,500 (but lower minimums apply
to purchases under certain special programs).
[] Except for matters that are explicitly identified as
``fundamental'' in this prospectus or Part I of the Statement,
the investment policies of each Fund may be changed without
shareholder approval or, in most cases, prior notice. The
investment objectives of the Value and Balanced Funds are
fundamental. The investment objectives of the Capital Growth,
International Equity and Star Advisers Funds are not fundamental.
The investment objective of the Growth Opportunities Fund is not
fundamental but, as a matter of policy, the trustees would not
change the objective without shareholder approval. If there is a
change in the Capital Growth, International Equity, Star Advisers
or Growth Opportunities Funds' objectives, shareholders should
consider whether these Funds remain appropriate investments in
light of their current financial position and needs.
[] The Trusts do not generally hold regular shareholder
meetings and will do so only when required by law. Shareholders
of a Trust may remove the trustees of that Trust from office by
votes cast at a shareholder meeting or by written consent.
[] 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.
[] The Trusts (together with the Money Market Funds) constitute
the New England Funds. Each Trust offers only its own Funds'
shares for sale, but it is possible that a Trust might become
liable for any misstatements in this prospectus that relate to
the other Trust. The trustees of each Trust have considered this
possible liability and approved the use of this combined
prospectus for Funds of both Trusts.
[] Each Fund's annual report contains additional performance
information and is made available upon request and without
charge.
[] The Class A, Class B, Class C and Class Y structure could be
terminated should certain IRS rulings be rescinded.
[] The Distributor has entered into a selling agreement with
investment dealers, including a broker-dealer that is an
affiliate of the Distributor, for the sale of the Funds' Class Y
Shares. The Distributor may at its expense pay an amount not to
exceed 0.50% of the amount invested to dealers who have selling
agreements with the Distributor. Registered representatives of
the affiliated broker-dealer are also employees of New England
Investment Associates, Inc. ("NEIA"), an indirect, wholly owned
subsidiary of NEIC. NEIA may receive compensation with respect
to certain sales of each Fund's Class Y shares from the Fund's
subadviser.
<PAGE>
NEW ENGLAND FUNDS
Where The Best Minds Meet(TM)
NEW ENGLAND GOVERNMENT SECURITIES FUND
NEW ENGLAND LIMITED TERM U.S. GOVERNMENT FUND
NEW ENGLAND ADJUSTABLE RATE U.S. GOVERNMENT FUND
NEW ENGLAND STRATEGIC INCOME FUND
NEW ENGLAND BOND INCOME FUND
NEW ENGLAND HIGH INCOME FUND
NEW ENGLAND MUNICIPAL INCOME FUND (formerly named New England Tax
Exempt Income Fund)
Prospectus and Application _ April 15, 1996
New England Government Securities Fund, New England Strategic
Income Fund, New England Bond Income Fund and New England
Municipal Income Fund, series of New England Funds Trust I, and
New England Limited Term U.S. Government Fund, New England
Adjustable Rate U.S. Government Fund and New England High Income
Fund, series of New England Funds Trust II, are separate mutual
funds (the "Funds" and each a "Fund"). New England Funds Trust I
and New England Funds Trust II are referred to in this prospectus
as the "Trusts."
Each Fund offers two classes of shares to the general public
(Classes A and B) except New England Limited Term U.S.
Government, New England Strategic Income Fund and New England
Bond Income Fund, which offer three classes of shares (Classes A,
B and C) to the general public. The offering price is based on
the net asset value per share next determined after an order is
received. 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
(a "CDSC"), however, is imposed upon certain redemptions of Class
B shares. Class B shares automatically convert to Class A shares
eight years after purchase. No initial sales charge or CDSC
applies to purchases or redemptions of Class C shares which do
not have a conversion feature. Class B and Class C shares bear
higher 12b-1 fees than Class A shares. See "Buying Fund Shares _
Sales Charges." Through a separate prospectus, New England
Government Securities Fund, New England Limited Term U.S.
Government Fund, New England Adjustable Rate U.S. Government
Fund, New England Strategic Income Fund and New England Bond
Income Fund also offer an additional class of shares, Class Y
shares, to certain institutional investors. To obtain more
information about Class Y shares, please call New England Funds,
L.P. (the "Distributor") toll-free at 1-800-225-5478.
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 "Statement") about the Funds dated April 15, 1996 has
been filed with the Securities and Exchange Commission (the
"SEC") and is available free of charge. Write to New England
Funds, L.P., 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.
New England High Income Fund invests primarily in and New England
Strategic Income Fund may invest up to all of its assets in lower
rated bonds commonly known as "junk bonds." This type of
investment is subject to greater risk than higher rated bonds
with respect to principal and interest payments, including the
risk of default. Investors should assess carefully the risks
associated with investment in these funds. See "Investment Risks
- -- Lower Rated Fixed-Income Securities."
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.
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: 1-800-225-5478.
<PAGE>
T a b l e O f C o n t e n t s
Page
NEW ENGLAND FUNDS
Investment Objectives The investment goal for each
Fund.
New England Investment Companies The Funds' adviser and
and the Funds' Adviser and subadvisers are affiliates of
Subadvisers NEIC.
FUND EXPENSES AND FINANCIAL
INFORMATION
Schedule of Fees Sales charges, yearly operating
expenses.
Financial Highlights Historical information on the
Funds' performance.
INVESTMENT STRATEGY
How the Funds Pursue Their
Objectives
Fund Investments
INVESTMENT RISKS It is important to understand
the risks inherent in a Fund
before you invest.
FUND MANAGEMENT
BUYING FUND SHARES
Minimum Investment Everything you need to know to
open and add to
6 Ways to Buy Fund Shares a New England Funds account.
[] Through your investment
dealer
[] By mail
[] By wire transfer
[] By Investment Builder
[] By electronic purchase
through ACH
[] By exchange from another New
England Fund
Sales Charges
Reduced Sales Charges (Class A
Shares Only)
OWNING FUND SHARES
Exchanging Among New England New England Funds offers three
Funds convenient ways to
Fund Dividend Payments exchange Fund shares.
SELLING FUND SHARES
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
Repurchase Option (Class A Shares An opportunity to reinvest your
Only) redemption proceeds within 120
days for no sales charge.
FUND DETAILS Additional information you may
find important.
How Fund Share Price is
Determined
Income Tax Considerations
The Funds' Expenses
Performance Criteria
Additional Facts About the Funds
Appendix A Ratings of Securities.
Appendix B Portfolio Composition of the
High Income Fund.
Glossary of Terms
<PAGE>
N e w E n g l a n d F u n d s
Investment Objectives
NEW ENGLAND GOVERNMENT SECURITIES FUND
(the "Government Securities Fund")
The Fund seeks a high level of current income consistent with
safety of principal by investing in U.S. Government securities.
Subadviser: Back Bay Advisors, L.P.
NEW ENGLAND LIMITED TERM U.S. GOVERNMENT FUND
(the "Limited Term U.S. Government Fund")
The Fund seeks a high current return consistent with preservation
of capital.
Subadviser: Back Bay Advisors, L.P.
NEW ENGLAND ADJUSTABLE RATE U.S. GOVERNMENT FUND
(the "Adjustable Rate Fund")
The Fund seeks a high level of current income consistent with low
volatility of principal. The Fund intends to pursue its
objective by investing only in securities issued or guaranteed by
the U.S. Government, its agencies or instrumentalities.
Subadviser: Back Bay Advisors, L.P.
NEW ENGLAND STRATEGIC INCOME FUND
(the "Strategic Income Fund")
The Fund seeks high current income with a secondary objective of
capital growth.
Subadviser: Loomis, Sayles & Company, L.P.
NEW ENGLAND BOND INCOME FUND
(the "Bond Income Fund")
The Fund seeks a high level of current income consistent with
what the Fund considers reasonable risk. The Bond Income Fund
invests primarily in corporate and U.S. Government bonds.
Subadviser: Back Bay Advisors, L.P.
NEW ENGLAND HIGH INCOME FUND
(the "High Income Fund")
The Fund seeks high current income plus the opportunity for
capital appreciation to produce a high total return.
Subadviser: Back Bay Advisors, L.P.
NEW ENGLAND MUNICIPAL INCOME FUND (formerly named New England Tax
Exempt Income Fund)
(the "Municipal Income Fund")
The Fund seeks as high a level of current income exempt from
federal income taxes as is consistent with reasonable risk and
protection of shareholders' capital. The Municipal Income Fund
invests primarily in debt securities of municipal issuers, the
interest of which is exempt from regular federal income tax but
may be subject to the federal alternative minimum tax ("municipal
securities"), and may engage in transactions in financial futures
contracts and options on futures.
Subadviser: Back Bay Advisors, L.P.
New England Investment Companies and the Funds' Adviser and
Subadvisers
The investment adviser and subadvisers of each of the Funds are
independently-operated subsidiaries of New England Investment
Companies, L.P. ("NEIC"), the [fifth]-largest publicly traded
investment management firm in the United States. NEIC is listed
on the New York Stock Exchange and through its subsidiaries or an
affiliate manages over $__ billion in assets for individuals and
institutions. Each adviser and subadviser operates independently
and is staffed by experienced investment professionals. All the
advisers and subadvisers apply specialized knowledge and careful
analysis to the pursuit of each Fund's objectives.
New England Funds Management, L.P. ("NEFM") is investment adviser
of each of the Funds, as well as most of the other New England
Funds.
Back Bay Advisors, L.P. ("Back Bay Advisors"), subadviser of all
the Funds except the Strategic Income Fund, manages over $_
billion in assets, primarily mutual fund and institutional fixed-
income portfolios.
Loomis, Sayles & Company, L.P. ("Loomis Sayles"), subadviser to
the Strategic Income Fund, has over $__ billion of assets under
management. Loomis Sayles manages portfolios for mutual funds
and other institutional investors and individuals.
F u n d E x p e n s e s A n d
F i n a n c i a l I n f o r m a t i o n
Schedule of Fees
Expenses are one of several factors to consider when you invest
in the Funds. The following tables summarize your maximum
transaction costs from investing in the Funds and estimated
annual expenses for each class of the Funds' shares. The Example
on the following page shows the cumulative expenses attributable
to a hypothetical $1,000 investment in each class of shares of
the Funds for the periods specified.
Shareholder transaction expenses
New England Government Securities Fund
New England Bond Income Fund
New England High Income Fund
New England Municipal Income Fund
New England Strategic Income Fund
--------------------------------------
Class A Class B Class C
------------ ---------- -----------
Maximum Initial Sales Charge Imposed
on a Purchase (as a percentage of
offering price)(1)(2)
4.50% None None
Maximum Contingent Deferred Sales
Charge (as a percentage of
original purchase price or
redemption proceeds, as
applicable)(2) (3) 4.00% None
New England New England
Limited Term Adjustable Rate
U.S. Government U.S.
Fund Government Fund
------------------- ---------------
Class Class Clas Class Class
A B s C A B
----- ----- ---- ------- ------
-
Maximum Initial Sales Charge Imposed
on a Purchase (as a percentage of
offering price)(1)(2)
3.00% None None 1.00% None
Maximum Contingent Deferred Sales
Charge(as a percentage of
original purchase price or
redemption proceeds, as
applicable)(2) (3) 4.00% None (3) 4.00%
(1) A reduced sales charge on Class A shares applies in some
cases. See "Buying Fund Shares -- Reduced Sales Charges
(Class A Shares Only)."
(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 1 year after
purchase, but not to any other purchases or redemptions of
Class A shares. See "Buying Fund Shares -- Sales Charges."
Annual Fund operating expenses
(as a percentage of average net assets)
New England New England
Government Limited Term
Securities U.S. Government
Fund Fund*****
----------- -----------------
Class Class Class Class Class
A B A B C
----- ----- ----- ----- -----
Management Fees ___% ___% ___% ___% ___%
12b-1 Fees 0.25% 1.00%* 0.35% 1.00%* 1.00%*
Other Expenses ___% ___% ___% ___% ___%
Total Fund ___% ___% ___% ___% ___%
Operating Expenses
New England New
Adjustable Rate England
U.S. Government Strategic Income
Fund***** Fund
------------------ -------------------
Class A Class B Class A Class B Class C
----- ----- ----- ----- -----
Management Fees ___%** ___%** ___%*** ___%*** ___%***
12b-1 Fees 0.25% 1.00%* 0.25% 1.00%* 1.00%*
Other Expenses ___% ___% ___% ___% ___%
Total Fund ___%** ___%** ___%*** ___%*** ___%***
Operating Expenses
New England New England
Bond Income Fund High Income Fund
------------------- -------------------
Class Class Class Class Class
A B C A B
----- ----- ------ ----- -----
Management Fees ___% ___% ___% ___%**** ___%****
12b-1 Fees 0.25% 1.00% 1.00%* 0.35% 1.00%*
*
Other Expenses ___% ___% ___% ___% ___%
Total Fund ___% ___% ___% ___%**** ___%****
Operating Expenses
New England
Municipal Income
Fund
----------------
Class A Class B
------- --------
Management Fees ___% ___%
12b-1 Fees 0.25% 1.00%*
Other Expenses ___% ___%
Total Fund ___% ___%
Operating Expenses
* 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.
** After voluntary fee waiver and expense reduction by the
Fund's adviser and/or the Distributor. Without the
voluntary limitations, Management Fees would be ____% for
both classes and Total Fund Operating Expenses would be
____% for Class A shares and ____% for Class B shares.
These voluntary limitations can be terminated by the Fund's
adviser or the Distributor at any time.
*** After voluntary fee waiver and expense reduction by the
Fund's adviser and subadviser. Without the voluntary
limitations, Management Fees would be ____% for all classes
and Total Fund Operating Expenses would be ____% for Class A
shares, ____% for Class B shares and ____% for Class C
shares. These voluntary limitations can be terminated by
the Fund's adviser or subadviser at any time.
**** After voluntary fee waiver by the Fund's adviser. Without
the voluntary limitation, Management Fees would be ____% for
all classes and Total Fund Operating Expenses would be ____%
for Class A shares and ____% for Class B shares. This
voluntary limitation can be terminated by the Fund's adviser
at any time.
*****The expense information contained in this table and its
footnotes for the Limited Term U.S. Government Fund and the
Adjustable Rate Fund has been restated to reflect fees and
expenses currently in effect for those Funds.
Example
You would pay the following expenses on a $1,000 investment
assuming (1) a 5% annual return and (2) unless otherwise noted,
redemption at period end. The 5% return and expenses in the
Example should not be considered indicative of actual or expected
Fund performance or expenses, both of which may be more or less
than those shown.
New England New England New England
Government Limited Term U.S. Adjustable Rate
Securities Fund Government Fund U.S. Government
---------------- ------------------------- Fund
----------------
Class Class Class Class Class Class Class
A B A B C A B
------ ------- ------ --------- ------ ----- --------
(1) (2) (1) (2) (1) (2)
1 year $ $ $ $ $ $ $ $ $ $
3 years $ $ $ $ $ $ $ $ $ $
5 years $ $ $ $ $ $ $ $ $ $
10 years* $ $ $ $ $ $ $ $ $ $
New England New England
Strategic Income Fund Bond Income Fund
----------------------- ---------------------
Class Class Class Class Class Class
A B C A B C
----- -------- ------ ---- ------- -----
(1) (2) (1) (2)
1 year $ $ $ $ $ $ $ $
3 years $ $ $ $ $ $ $ $
5 years $ $ $ $ $ $ $ $
10 years* $ $ $ $ $ $ $ $
New England New England Municipal
High Income Fund Income Fund
------------- ----------------
Class A Class B Class A Class B
------- ------- -------- ---------
(1) (2) (1) (2)
1 year $ $ $ $ $ $
3 years $ $ $ $ $ $
5 years $ $ $ $ $ $
10 years* $ $ $ $ $ $
(1) Assumes redemption at end of period.
(2) Assumes no redemption at end of period.
* 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.
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 Funds' management fees, 12b-1
fees and other expenses, please see "Fund Management," "The
Funds' Expenses" and "Additional Facts About the Funds."
A wire fee (currently $5.00) will be deducted from your proceeds
if you elect to transfer redemption proceeds by wire.
<PAGE>
Financial Highlights
To Be Filed
By Amendment
<PAGE>
I n v e s t m e n t S t r a t e g y
How the Funds Pursue Their Objectives
Investments in each Fund will be pooled with money from other
investors in that Fund to invest in a managed portfolio
consisting of securities appropriate to the Fund's investment
objective and policies. There can be no assurance that any Fund
will achieve its objective. Each Fund is a "diversified" mutual
fund.
Fund Investments
[] Government Securities Fund
The Government Securities Fund expects that under normal market
conditions it will invest 100% of its net assets in securities
issued or guaranteed by the U.S. Government or its agencies,
authorities or instrumentalities that are backed by the full
faith and credit of the U.S. Government. These securities
include, for example, U.S. Treasury bills, bonds and notes,
mortgage participation certificates guaranteed by the Government
National Mortgage Association ("GNMA") and Federal Housing
Administration debentures.
The Fund may invest in securities of any maturity and in zero
coupon securities. In addition to investing directly in U.S.
Government securities, the Fund may purchase "stripped"
securities.
For hedging purposes, the Government Securities Fund may also
purchase and sell interest rate futures contracts on U.S.
Government securities and may write and purchase options on such
futures and options on U.S. Government securities. Transactions
involving futures and options on futures may help to reduce the
volatility of the Fund's net asset value, but this result cannot
be assured. Options and futures are not backed by the U.S.
Government.
It is a fundamental policy of the Fund that under normal market
conditions it will invest at least 65% of its total assets in
"U.S. Government Securities," which term as used in this
prospectus includes all securities issued or guaranteed by the
U.S. Government or its agencies, authorities or
instrumentalities.
[] Limited Term U.S. Government Fund
The Fund seeks to achieve its objective by investing in U.S.
Government Securities. Under normal market conditions, 65% or
more of the Fund's total assets will be invested in U.S.
Government Securities (including zero coupon bonds) and
collateralized mortgage obligations ("CMOs"). The Fund limits
its investments in CMOs to those issued by instrumentalities of
the U.S. Government. The Fund may also invest in asset-backed
securities rated Aaa by Moody's Investors Service, Inc.
("Moody's") or AAA by Standard & Poor's Ratings Group ("S&P") or
unrated but determined by the Fund's subadviser to be of
comparable quality to securities in those rating categories. For
hedging purposes, the Fund may purchase and sell financial
futures contracts and options.
The Fund's subadviser, Back Bay Advisors, provides a continuous
investment program designed to maximize current return while
minimizing fluctuations in the value of the Fund's portfolio,
thus stabilizing the net asset value of the Fund's shares.
Because the market value of fixed-income securities fluctuates in
response to changes in interest rates, there is a risk of a
decline in the value of the Fund's portfolio (and a corresponding
decrease in the value of the Fund's shares) if interest rates
increase. To reduce this risk, the Fund will ordinarily seek to
maintain an average dollar-weighted maturity of three to seven
years. The Fund may hold individual securities with maturities
of more than seven years as long as its average maturity remains
within this limit.
"Duration" 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 interest rates). Many
investors and investment analysts consider duration to be a more
useful measure of price sensitivity than "maturity." A debt
instrument's duration is derived by discounting principal and
interest payments to their present value using the instrument's
current yield to maturity and calculating the dollar-weighted
average time until these payments will be received. The Fund
will seek to maintain an average portfolio duration of four years
or less. The Fund's portfolio may include fixed-income
securities with durations of more than four years, so long as the
Fund seeks to maintain an average portfolio duration of four
years or less.
The values of securities having shorter durations generally
fluctuate less than securities with longer durations. A
portfolio with an average duration of four years or less should
provide investors with a reduced risk of loss due to rising
interest rates. For example, based on yields of 5.2% for a five-
year U.S. Treasury security and 6.05% for a 30-year U.S. Treasury
security, a 1% increase in interest rates would be expected to
result in approximately a 4.3% reduction in the value of the five-
year security (duration 4.3) as compared to approximately a 13%
reduction in the value of the 30-year security (duration 13).
Conversely, a 1% decrease in interest rates would be expected to
result in similar increases in value. These expectations
represent Back Bay Advisors' 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.
The Fund may lend portfolio securities amounting to not more than
25% of its assets to securities dealers and may enter into
repurchase agreements on up to 25% of its assets. These
transactions must be fully collateralized at all times, but
involve some credit risk to the Fund if the other party should
default on its obligations and the Fund is delayed in or
prevented from recovering the collateral.
[] Adjustable Rate Fund
The Fund seeks to achieve its objective by investing, under
normal market conditions, at least 65% of its total assets in
adjustable rate mortgage securities ("ARMs") or other securities
collateralized by or representing interests in mortgages
(collectively, "mortgage securities"), which have interest rates
that are reset at periodic intervals and which are issued or
guaranteed by the U.S. Government or its agencies or
instrumentalities. The Fund also may invest in CMOs issued by
instrumentalities of the U.S. Government, but will not invest in
privately issued CMOs. Other securities purchased by the Fund
will be limited to securities issued or guaranteed by the U.S.
Government, its agencies or instrumentalities but will not
include any stripped securities (such as interest only or
principal only obligations) or zero coupon obligations. As more
fully described in Part I of the Statement, the Fund also intends
to limit its investments to those that would be permissible
investments for federal credit unions and national banks. When
maintaining a temporary defensive position, the Fund may invest
its assets, without limit, in U.S. Government Securities of any
type.
[] Strategic Income Fund
The Fund seeks to achieve its investment objectives by investing
at least 65% of its total assets in debt instruments. The Fund
may invest in debt instruments issued by corporations based in
the United States or abroad and debt instruments that are
convertible into equity securities. The Fund may also invest in
U.S. Government Securities and in securities issued or guaranteed
by foreign governments (including their political subdivisions,
agencies, authorities and/or instrumentalities) ("Foreign
Government Securities") and securities issued by supranational
agencies. The Fund may invest in debt instruments in any rating
category including debt instruments rated in the lowest rating
categories (C by Moody's and D by S&P) and in instruments that
are unrated. For more information about the risks of investing
in low rated, high risk securities and securities of foreign
issuers, see "Investment Risks _ Lower Rated Fixed-Income
Securities" and "Foreign Securities."
Under normal market conditions, the Fund will invest in debt
instruments of both domestic and foreign issuers and in corporate
as well as government issues. At any time, however, the Fund may
invest up to 100% of its assets in debt instruments of U.S.
issuers, in debt instruments of foreign issuers, in corporate
debt instruments or in government securities. The Fund may
invest up to a total of 35% of its total assets in preferred
stocks, dividend-paying common stocks and shares of closed-end
investment companies (which shares will not exceed 10% of the
Fund's total assets).
The proportion of Fund assets invested in corporate bonds,
government bonds and preferred or common stock will vary over
time based on changing market conditions. When Loomis Sayles
believes that a particular market presents more opportunity than
other markets, it may increase the proportion of the Fund's
assets invested in that market.
The Fund may invest in Rule 144A securities. For hedging
purposes, the Fund may also purchase and sell options and futures
and engage in foreign currency transactions. The Fund may also
invest in mortgage-backed securities, zero coupon bonds, stripped
securities and pay-in-kind securities. For more information
about all these types of investments, see "Investment Risks"
below.
[] Bond Income Fund
The Bond Income Fund invests primarily in corporate and U.S.
Government bonds. At least 80% of its total assets will be
invested in bonds carrying investment grade ratings from one of
the recognized rating services. The Fund may also purchase non-
rated or lower-rated bonds. Bonds rated BBB by S&P or Baa by
Moody's (the lowest ratings that are considered investment grade)
have some speculative characteristics, and 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. If an investment rated BBB or Baa is downgraded by
a major rating agency, the Fund's subadviser will consider
whether the investment remains appropriate for the Fund. The
Fund may invest in securities of any maturity and in zero coupon
securities. The Fund may also invest in CMOs. The Fund will
normally maintain an average dollar-weighted portfolio maturity
of less than ten years. The Fund may invest in convertible
securities.
The Fund may invest in foreign securities but will do so only
when the Fund's subadviser believes the associated risks are
minimal as compared to similar securities of domestic issuers.
The Fund may engage in a variety of options and futures
transactions with respect to U.S. or Foreign Government
Securities and corporate fixed-income securities. See
"Investment Risks -- Options, Futures, Swaps and Currency
Transactions" for information about these kinds of transactions.
[] High Income Fund
The High Income Fund invests primarily in long-term corporate
fixed-income securities, the majority of which are rated BBB or
lower by S&P or Baa or lower by Moody's or are unrated. See
"Investment Risks _ Lower Rated Fixed-Income Securities" below.
A diversified portfolio of these securities normally provides a
current yield or yield to maturity that is significantly higher
than yields of higher rated fixed-income securities. In addition
to high current income, the Fund seeks capital appreciation
through (1) market price appreciation in periods of declining
interest rates and (2) improvement in the credit standing of
issuers.
The Fund's subadviser, Back Bay Advisors, provides the Fund with
a management program that seeks to reduce risks to the Fund by
diversification and analysis of the underlying creditworthiness
of issuers and the underlying value of securities. Back Bay
Advisors performs its own credit analyses and does not rely
primarily on the ratings assigned by rating services. Back Bay
Advisors' analyses, in ascertaining both creditworthiness and
potential for capital appreciation, focus on technical factors as
well as fundamental factors such as the relationship of current
market price to anticipated cash flow and its coverage of
interest or dividend requirements, debt as a percentage of
assets, earnings prospects, the experience and perceived strength
of the issuer's management, price responsiveness of the issuer's
securities to changes in interest rates and business conditions,
debt maturity schedules and borrowing requirements and the
issuer's liquidation value.
The Fund will not invest in defaulted issues as a standard
practice, but may from time to time invest in certain defaulted
issues that, in the view of Back Bay Advisors, present an
attractive opportunity for capital appreciation. Because
defaulted issues are ordinarily not income producing, investment
in such issues would likely reduce the Fund's current yield.
The Fund expects that under normal market conditions at least 80%
of the value of its total assets will be invested in long-term
fixed-income securities of U.S. corporations, including preferred
stock and convertible securities. To achieve its basic
investment objective, the Fund from time to time also may invest
up to 20% of the value of its total assets in common stocks and
up to 10% of the value of its total assets in fixed-income
securities issued by foreign governments or by companies
organized in foreign countries. However, investments in both of
these types of securities on a combined basis generally will not
exceed 20% of the value of the Fund's assets. See "Investment
Risks _ Foreign Securities" below.
If Back Bay Advisors expects a rising trend in interest rates, it
may shift the Fund's portfolio into shorter-term debt securities
and domestic money market instruments whose prices might not be
affected as much by an increase in interest rates. During those
periods, or other periods when market conditions temporarily
warrant a more defensive strategy, or in order to meet
redemptions or pending investments, the Fund may invest an
unlimited portion of its assets in U.S. Government Securities;
certificates of deposit, bankers' acceptances and other
obligations of U.S. banks with deposits of at least $2 billion at
the close of the last calendar year; commercial paper that is
rated in the two highest categories of Moody's or S&P; short-term
fixed-income securities that are rated within the three highest
categories of Moody's or S&P; and repurchase agreements with
financial institutions deemed creditworthy by Back Bay Advisors.
Investment in such instruments may result in a lower current
yield and would tend to limit appreciation possibilities.
The Fund may lend portfolio securities amounting to not more than
10% of its assets to securities dealers. These transactions must
be fully collateralized at all times, but involve some credit
risk to the Fund if the other party should default on its
obligations and the Fund is delayed in or prevented from
recovering the collateral.
The Fund may engage in a variety of options and futures
transactions with respect to U.S. or Foreign Government
Securities and corporate fixed-income securities. See
"Investment Risks -- Options, Futures, Swaps and Currency
Transactions" for information about these kinds of transactions.
[] Municipal Income Fund
The Fund will normally invest at least 80% of its total assets in
debt securities of Municipal Issuers, the interest from which is
exempt from regular federal income tax but may be subject to the
federal alternative minimum tax. For this purpose, "Municipal
Issuers" means states and other political subdivisions of the
United States, local governments, and agencies, authorities and
other instrumentalities of the foregoing. Securities purchased
by the Fund will be largely of investment grade quality.
Immediately after the purchase of any investment, at least 85% of
the Fund's assets will consist of securities rated AAA, AA, A or
BBB by S&P, Aaa, Aa, A or Baa by Moody's or unrated but
determined by the Fund's subadviser to be of comparable quality
to securities in those rating categories. The other 15% of the
Fund's assets may be invested in securities rated below
investment grade (below BBB or Baa) or unrated but determined by
the subadviser to be of comparable quality. Bonds rated BBB or
Baa are considered investment grade but may have some 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. If an
investment rated BBB or Baa is downgraded by a major rating
agency, the subadviser will consider whether the investment
remains appropriate for the Fund. The Fund may invest in bonds
rated in the lowest rating categories, D by S&P or C by Moody's.
These classes of bonds can be regarded as having extremely poor
prospects of ever attaining any real investment standing. The
Fund may invest in securities of any maturity.
The Fund may also purchase and sell interest rate futures
contracts and tax exempt bond index futures contracts and may
write and purchase related options. Transactions involving
futures and options on futures may help to reduce the volatility
of the Fund's net asset value and the writing of options on
futures may yield additional income for the Fund, but these
results cannot be assured. Income from options and futures
transactions is not tax-exempt.
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 table below illustrates what tax
free investing can mean. It shows what you must earn from a
taxable investment to equal a tax-free yield ranging from 4% to
6%, under current federal tax rates. You can see that as your
tax rate goes up, so do the benefits of tax-free income. For
example, a married couple with a taxable income of $40,000 filing
a joint return would have to earn a taxable yield of 8.33% to
equal a tax-free yield of 6.0%. This example and the following
table do not take into account the effect of state or local
income taxes, if any, or federal income taxes on social security
benefits which may arise as a result of receiving tax exempt
income, or the federal alternative minimum tax that may be
payable to the extent that Fund dividends are derived from
interest on "private activity" bonds (see below). Also, a
portion of the Fund's distributions may consist of ordinary
income or short-term or long-term capital gains and will be
taxable to you as such.
TAX FREE INVESTING
Taxable and Tax-Exempt Yields
Taxable Income Federal If Tax Exempt Yield is
Single Joint Marginal 4.0% 4.5% 5.0% 5.5% 6.0%
Return Return Tax Rate then the equivalent taxable
($) ($) yield would be:
0 - 0 - 15.00% 4.71% 5.29% 5.88% 6.47% 7.06%
- - 28.00% 5.56% 6.25% 6.94% 7.64% 8.33%
- - 31.00% 5.80% 6.52% 7.25% 7.97% 8.70%
- - 36.00% 6.25% 7.03% 7.81% 8.59% 9.38%
39.60% 6.62% 7.45% 8.28% 9.11% 9.93%
Under the Internal Revenue Code (the "Code"), the interest on so-
called "private activity" bonds is an item of tax preference,
which, depending on the shareholder's particular tax situation,
might subject the shareholder to an alternative minimum tax with
a maximum rate of 28%. The Fund may to invest all or any portion
of its assets in "private activity" bonds.
The interest on tax exempt bonds issued after certain dates in
1986 is retroactively taxable from the date of issuance if the
issuer does not comply with certain requirements concerning the
use of bond proceeds and the application of earnings on bond
proceeds.
[] U.S. and Foreign Government Securities
Different types of U.S. and Foreign Government Securities have
different kinds of government support. U.S. Government
Securities include securities backed by the full faith and credit
of the U.S. Government, as well as many other securities that are
not full faith and credit obligations. For example, obligations
of the Federal Home Loan Banks are supported by the right of the
issuer to borrow from the U.S. Treasury, and obligations of the
Federal Home Loan Mortgage Corporation (the "FHLMC") and the
Federal National Mortgage Association (the "FNMA") are supported
only by the credit of those corporations. Similarly, obligations
of foreign governmental entities include obligations issued or
guaranteed by governments with taxing power or by their agencies.
Some Foreign Government Securities are supported by the full
faith and credit of a foreign national government or political
subdivision (such as a province of Canada) and some are not. For
example, Foreign Government Securities include securities issued
by corporations which have been charged with a public purpose and
a majority of whose outstanding equity securities are owned by a
foreign government or government agency. Such securities may be
supported only by the credit of the issuing corporation and not
by that of the government or agency.
In addition to investing directly in U.S. and Foreign Government
Securities, the Government Securities and Strategic Income Funds
may purchase "stripped" securities evidencing undivided ownership
interests in interest payments or principal payments, or both, on
U.S. and Foreign Government Securities. These investments may be
more volatile than other types of U.S. or Foreign Government
Securities.
[] Foreign Currency Exchange Transactions
The Funds that may invest in securities denominated in foreign
currencies or traded in foreign markets may engage in related
foreign currency exchange transactions to protect the value of
specific portfolio positions or in anticipation of changes in
relative values of currencies in which current or future
portfolio holdings are denominated or quoted.
The Bond Income and Strategic Income Funds may engage in
transactions in currency forward contracts. A currency forward
contract is a contract with a major international bank that
obligates the bank and the other party to the contract to
exchange specified amounts of different currencies at a specified
future date. For example, the bank may agree to deliver a
specified number of French francs, in exchange for a specified
number of U.S. dollars on a certain date.
From time to time, a portion of the Bond Income or Strategic
Income Fund's assets may be invested in securities that are
denominated in foreign currencies or that are traded in markets
where purchase or sale transactions settle in a foreign currency.
Currency forward contracts may be used both (1) to facilitate
settlement of a Fund's transactions in these securities and (2)
to hedge against possible adverse changes in the relative values
of the currencies in which the Fund's portfolio holdings (or
intended future holdings) are denominated.
Currency forward contracts involve transaction costs and the risk
that the banks with which a Fund enters into such contracts will
fail financially. Each Fund's subadviser will, however, monitor
the creditworthiness of these banks on an ongoing basis.
Successful use of currency forward contracts for hedging purposes
also depends on the accuracy of the subadviser's forecasts as to
future changes in the relative values of currencies. The
accuracy of such forecasts cannot be assured. The Fund will set
aside with its custodian certain assets to provide for
satisfaction of its obligations under currency forward contracts.
Although both Funds are permitted to use currency forward
contracts, they are not obligated to do so. Thus, the Funds will
not necessarily be fully (or even partially) hedged against the
risk of adverse currency price movements at any given time.
Foreign currency transactions involve costs and may result in
losses. See Part II of the Statement for more information.
[] Additional Information
Each Fund may purchase securities for its portfolio on a "when-
issued" basis. This means that the Fund will enter into the
commitment to buy the security before the security has been
issued. The Fund's payment obligation and the interest rate on
the security are determined when the Fund enters into the
commitment. The security is typically delivered to the Fund 15
to 120 days later. No interest accrues on the security between
the time the Fund enters into the commitment and the time the
security is delivered.
The Funds, consistent with their investment objectives, attempt
to maximize yields by engaging in portfolio trading and by buying
and selling portfolio investments in anticipation of or in
response to changing economic market conditions and trends. The
Government Securities and Strategic Income Funds also invest to
take advantage of what are believed to be temporary disparities
in the yields of the different segments of the market for U.S.
Government Securities. These policies may result in higher
turnover rates in the Funds' portfolios which may produce higher
transaction costs and a higher level of taxable capital gains.
Portfolio turnover considerations will not limit any Fund's
subadviser's investment discretion in managing the Fund's assets.
Recent portfolio turnover rates for the Funds are set forth above
under "Financial Highlights."
Each Fund may enter into repurchase agreements, under which a
Fund buys securities from a seller, usually a bank or brokerage
firm, with the understanding that the seller will repurchase the
securities at a higher price at a later date. If the seller
fails to repurchase the securities, the Fund has rights to sell
the securities to third parties. Repurchase agreements be
regarded as loans by the Fund to the seller, collateralized by
the securities that are the subject of the agreement. Repurchase
agreements afford an opportunity for the Fund to earn a return on
available cash at relatively low credit risk, although the Fund
may be subject to various delays and risks of loss if the seller
fails to meet its obligation to repurchase. The staff of the SEC
is currently of the view that repurchase agreements maturing in
more than seven days are illiquid securities.
I n v e s t m e n t R i s k s
It is important to understand the following risks inherent in a
Fund before you invest.
[] Fixed-Income Securities (All Funds)
The Funds invest principally in fixed-income securities. Because
interest rates vary, it is impossible to predict the income of a
Fund for any particular period. The net asset value of your
shares will vary as a result of changes in the value of the bonds
and other securities in a Fund's portfolio.
Fixed-income securities include a broad array of short, medium
and long term obligations issued by the U.S. or foreign
governments, government or international agencies and
instrumentalities, and corporate issuers of various types. Some
fixed-income securities represent uncollateralized obligations of
their issuers; in other cases, the securities may be backed by
specific assets (such as mortgages or other receivables) that
have been set aside as collateral for the issuer's obligation.
Fixed-income securities generally involve an obligation of the
issuer to pay interest or dividends on either a current basis or
at the maturity of the securities, as well as the obligation to
repay the principal amount of the security at maturity.
Fixed-income securities are subject to market and credit risk.
Credit risk relates to the ability of the issuer to make payments
of principal and interest. In the case of municipal bonds, the
issuer may make these payments from money raised through a
variety of sources, including (1) the issuer's general taxing
power, (2) a specific type of tax such as a property tax, or (3)
a particular facility or project such as a highway. The ability
of an issuer of municipal bonds to make these payments could be
affected by litigation, legislation or other political events, or
the bankruptcy of the issuer. U.S. Government Securities do not
involve the credit risks associated with other types of fixed-
income securities; as a result, the yields available from U.S.
Government Securities are generally lower than the yields
available from corporate fixed-income securities. Market risk is
the risk that the value of the security will fall because of
changes in market rates of interest. (Generally, the value of
fixed-income securities falls when market rates of interest are
rising.) Some fixed-income securities also involve prepayment or
call risk. This is the risk that the issuer will repay a Fund
the principal on the security before if is due, thus depriving
the Fund of a favorable stream of future interest or dividend
payments.
Because interest rates vary, it is impossible to predict the
income of a fund that invests in fixed-income securities for any
particular period. Fluctuations in the value of a Fund's
investments in fixed-income securities will cause the Fund's net
asset value to increase or decrease.
[] Lower Rated Fixed-Income Securities (Strategic Income Fund,
Bond Income Fund, High Income Fund and Municipal Income Fund)
Fixed-income securities rated BB or lower by S&P or Ba or lower
by Moody's (and comparable unrated securities) are of below
"investment grade" quality. Lower quality fixed-income
securities generally provide higher yields, but are subject to
greater credit and market risk, than higher quality fixed-income
securities, including U.S. Government and many Foreign Government
Securities. 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 mutual fund investing in lower
quality fixed-income securities may be more dependent on the
fund's adviser's or subadviser's own credit analysis than for a
fund investing in 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 rated fixed-income securities. This lack
of liquidity at certain times may affect the valuation of these
securities and may make the valuation and sale of these
securities more difficult. Securities of below investment grade
quality are considered high yield, high risk securities and are
commonly known as "junk bonds." For more information, including
a detailed description of the ratings assigned by S&P and
Moody's, please refer to the Statement's "Appendix A --
Description of Bond Ratings."
During the fiscal year ended December 31, 1995, __% of the
average month-end net assets of the Bond Income Fund was invested
in fixed-income securities rated in the rating category just
below investment grade (BB/Ba). The composition of the High
Income Fund for the fiscal year ended December 31, 1995 is
summarized in Appendix B to this prospectus.
[] Foreign Securities (Strategic Income Fund, Bond Income Fund
and High Income Fund)
Foreign Government Securities and foreign corporate securities
present risks not associated with investments in U.S. Government
or corporate securities.
Since most foreign securities are denominated in foreign
currencies or traded primarily in securities markets in which
settlements are made in foreign currencies, the value of these
investments and the net investment income available for
distribution to shareholders of a Fund may be affected favorably
or unfavorably by changes in currency exchange rates or exchange
control regulations. Because the Strategic Income Fund, the Bond
Income Fund and the High Income Fund may purchase securities
denominated in foreign currencies, a change in the value of any
such currency against the U.S. dollar will result in a change in
the U.S. dollar value of the Fund's assets and the Fund's income
available for distribution.
In addition, although a Fund's income may be received or realized
in foreign currencies, a Fund will be required to compute and
distribute its income in U.S. dollars. Therefore, if the value
of a currency relative to the U.S. dollar declines after a Fund's
income has been earned in that currency, translated into U.S.
dollars and declared as a dividend, but before payment of such
dividend, the Fund could be required to liquidate portfolio
securities to pay such dividend. Similarly, if the value of a
currency relative to the U.S. dollar declines between the time a
Fund incurs expenses in U.S. dollars and the time such expenses
are paid, the amount of such currency required to be converted
into U.S. dollars in order to pay such expenses in U.S. dollars
will be greater than the equivalent amount in such currency of
such expenses at the time they were incurred.
There may be less information publicly available about a foreign
corporate or government issuer than about a U.S. issuer, and
foreign corporate issuers are not generally subject to
accounting, auditing and financial reporting standards and
practices comparable to those in the United States. The
securities of some foreign issuers are less liquid and at times
more volatile than securities of comparable U.S. issuers.
Foreign brokerage commissions and other fees in some
circumstances may be higher than in the United States. With
respect to certain foreign countries, there is a possibility of
expropriation of assets, confiscatory taxation, political or
financial instability and diplomatic developments that could
affect the value of investments in those countries. The receipt
of interest on foreign government securities may depend on the
availability of tax or other revenues to satisfy the issuer's
obligations. A Fund may have limited legal recourse should a
foreign government be unwilling or unable to repay the principal
or interest owed.
The Strategic Income Fund will invest all or any portion of its
assets in the securities of emerging markets. Investments in
emerging markets include investments in countries whose economies
or securities markets are not yet highly developed. Special
considerations associated with these investments (in addition to
the considerations regarding foreign investments as discussed
above) may include, among others, greater political
uncertainties, an economy's dependence on revenues from
particular commodities or on international aid or development
assistance, currency transfer restrictions, highly limited
numbers of potential buyers for such securities and delays and
disruptions in securities settlement procedures.
In addition, the Funds may invest in securities issued by
supranational agencies. Supranational agencies are those
agencies whose member nations determine to make capital
contributions to support the agencies' activities, and include
such entities as the International Bank of Reconstruction and
Development (the World Bank), the Asian Development Bank, the
European Coal and Steel Community and the Inter-American
Development Bank.
In determining whether to invest in securities of foreign
issuers, the adviser of each Fund will consider the likely
effects of foreign taxes on the net yield available to the Fund
and its shareholders. Compliance with foreign tax law may reduce
the Fund's net income available for distribution to shareholders.
[] Mortgage-Related Securities (All Funds except Municipal
Income Fund)
Mortgage-related securities, such as GNMA or FNMA certificates,
differ from traditional debt securities. Among the major
differences are that interest and principal payments are made
more frequently, usually monthly, and that principal may be
prepaid at any time because the underlying mortgage loans
generally may be prepaid at any time. As a result, if a Fund
purchases these assets at a premium, a faster-than-expected
prepayment rate will reduce yield to maturity, and a slower-than-
expected prepayment rate will have the opposite effect of
increasing yield to maturity. If a Fund purchases mortgage-
related securities at a discount, faster-than-expected
prepayments will increase, and slower-than-expected prepayments
will reduce, yield to maturity. Prepayments, and resulting
amounts available for reinvestment by the Fund, are likely to be
greater during a period of declining interest rates and, as a
result, are likely to be reinvested at lower interest rates.
Accelerated prepayments on securities purchased at a premium may
result in a loss of principal if the premium has not been fully
amortized at the time of prepayment. Although these securities
will decrease in value as a result of increases in interest rates
generally, they are likely to appreciate less than other fixed-
income securities when interest rates decline because of the risk
of prepayments.
An ARM, like a traditional mortgage security, is an interest in a
pool of mortgage loans that provides investors with payments
consisting of both principal and interest as mortgage loans in
the underlying mortgage pool are paid off by the borrowers. ARMs
have interest rates that are reset at periodic intervals, usually
by reference to some interest rate index or market interest rate.
Although the rate adjustment feature may act as a buffer to
reduce sharp changes in the value of adjustable rate securities,
these securities are still subject to changes in value based on
changes in market interest rates or changes in the issuer's
creditworthiness. Because the interest rates are reset only
periodically, changes in the interest rate on ARMs may lag
changes in prevailing market interest rates. Also, some ARMs (or
the underlying mortgages) are subject to caps or floors that
limit the maximum change in interest rate during a specified
period or over the life of the security. As a result, changes in
the interest rate on an ARM may not fully reflect changes in
prevailing market interest rates during certain periods. Because
of the resetting of interest rates, ARMs are less likely than non-
adjustable rate securities of comparable quality and maturity to
increase significantly in value when market interest rates fall.
[] Asset-Backed Securities (Limited Term U.S. Government Fund)
The securitization techniques used to develop mortgage securities
are also being applied to a broad range of other assets. Through
the use of trusts and special purpose corporations, assets such
as automobile and credit card receivables are being securitized
in pass-through structures similar to mortgage pass-through
structures or in a pay-through structure similar to a CMO
structure. Generally the issuers of asset-backed bonds, notes or
pass-through certificates are special purpose entities and do not
have any significant assets other than the receivables securing
such obligations. In general, the collateral supporting asset-
backed securities is of shorter maturity than mortgage loans.
Instruments backed by pools of receivables are similar to
mortgage-backed securities in that they are subject to
unscheduled prepayments of principal prior to maturity. When the
obligations are pre-paid, the Fund will ordinarily reinvest the
pre-paid amounts in securities the yields of which reflect
interest rates prevailing at the time. Therefore, the Fund's
ability to maintain a portfolio which includes high-yielding
asset-backed securities will be adversely affected to the extent
that prepayments of principal must be reinvested in securities
which have lower yields than the prepaid obligations. Moreover,
prepayments of securities purchased at a premium could result in
a realized loss.
[] Collateralized Mortgage Obligations (All Funds except
Municipal Income Fund)
A CMO is a security backed by a portfolio of mortgages or
mortgage securities held under an indenture. The underlying
mortgages or mortgage securities are issued or guaranteed by the
U.S. Government or an agency or instrumentality thereof. The
issuer's obligation to make interest and principal payments is
secured by the underlying portfolio of mortgages or mortgage
securities. CMOs are issued with a number of classes or series
which have different maturities and which may represent interests
in some or all of the interest or principal on the underlying
collateral or a combination thereof. CMOs of different classes
are generally retired in sequence as the underlying mortgage
loans in the mortgage pool are repaid. In the event of
sufficient early prepayments on such mortgages, the class or
series of CMO first to mature generally will be retired prior to
its maturity. Thus, the early retirement of a particular class
or series of CMO held by the Fund would have the same effect as
the prepayment of mortgages underlying a mortgage pass-through
security. CMOs may be considered derivative securities.
[] "Stripped" Securities (Government Securities and Strategic
Income Funds)
Stripped securities are usually structured with two or more
classes that receive different proportions of the interest and
principal distribution on a pool of U.S. or Foreign Government
Securities or mortgage assets. In some cases, one class will
receive all of the interest (the interest-only or "IO" class),
while the other class will receive all of the principal (the
principal-only or "PO" class). Stripped securities commonly have
greater market volatility than other types of fixed-income
securities. In the case of stripped mortgage securities, if the
underlying mortgage assets experience greater than anticipated
payments of principal, a Fund may fail to recoup fully its
investments in IOs. The staff of the SEC has indicated that it
views stripped mortgage securities as illiquid unless the
securities are issued by the U.S. Government or its agencies and
are backed by fixed-rate mortgages. The Funds intend to abide by
the staff's position. Stripped securities may be considered
derivative securities.
[] Zero Coupon Securities (All Funds except Adjustable Rate
Fund)
Pay-In-Kind Securities (High Income and Strategic Income
Funds)
Zero coupon securities are issued at a significant discount from
face value and pay interest only at maturity, rather than at
intervals during the life of the security. Pay-in-kind
securities pay dividends or interest in the form of additional
securities of the issuer, rather than in cash. The prices of pay-
in-kind or zero coupon securities may react more strongly to
changes in interest rates than the prices of many other
securities. The Funds are required to accrue and distribute
income from pay-in-kind and zero coupon securities on a current
basis, even though the Funds will not receive the income
currently in cash. Thus a Fund may have to sell other
investments to obtain cash needed to make income distributions.
[] When-Issued Securities (All Funds)
If the value of a "when-issued" security being purchased falls
between the time a Fund commits to buy it and the payment date,
the Fund may sustain a loss. The risk of this loss is in
addition to the Fund's risk of loss on the securities actually in
its portfolio at the time. In addition, when a Fund buys a
security on a when-issued basis, it is subject to the risk that
market rates of interest will increase before the time the
security is delivered, with the result that the yield on the
security delivered to the Fund may be lower than the yield
available on other, comparable securities at the time of
delivery. Each Fund will maintain liquid high grade assets in a
segregated account in an amount sufficient to satisfy its
outstanding obligations to buy securities on a "when-issued"
basis.
[] Options, Futures, Swap Contracts and Currency Transactions
(Government Securities, Limited Term U.S. Government, Strategic
Income, Bond Income, High Income and Municipal Income Funds)
Except as otherwise noted, the following discussion applies to
the Government Securities Fund, the Limited Term U.S. Government
Fund, the Strategic Income Fund, the Bond Income Fund, the High
Income Fund and the Municipal Income Fund. The Funds may engage
in a variety of transactions involving the use of options and
futures with respect to U.S. or Foreign Government Securities,
corporate fixed-income securities (in the case of the Strategic
Income Fund) or municipal bonds or indices thereof (in the case
of the Municipal Income Fund) for purposes of hedging against
changes in interest rates.
A Fund may buy, sell or write options on securities, securities
indexes, currencies or futures contracts. A Fund may buy and
sell futures contracts on securities, securities indexes or
currencies. A Fund may also enter into swap contracts. A Fund
may engage in these transactions either for the purpose of
enhancing investment return, or to hedge against changes in the
value of other assets that a Fund owns or intends to acquire. A
Fund may also conduct foreign currency exchange transactions on a
spot (i.e., cash) basis at the spot rate prevailing in the
foreign currency exchange market. Options, futures and swap
contracts fall into the broad category of financial instruments
known as "derivatives" and involve special risks. Use of
options, futures or swaps for other than hedging purposes may be
considered a speculative activity, involving greater risks than
are involved in hedging.
Options can generally be classified as either "call" or "put"
options. There are two parties to a typical options transaction:
the "writer" and the "buyer." A call option gives the buyer the
right to buy a security or other asset (such as an amount of
currency or a futures contract) from, and a put option the right
to sell a security or other asset to, the option writer at a
specified price, on or before a specified date. The buyer of an
option pays a premium when purchasing the option, which reduces
the return on the underlying security or other asset if the
option is exercised, and results in a loss if the option expires
unexercised. The writer of an option receives a premium from
writing an option, which may increase its return if the option
expires or is closed out at a profit. If a Fund as the writer of
an option is unable to close out an unexpired option, it must
continue to hold the underlying security or other asset until the
option expires, to "cover" its obligations under the option.
A futures contract creates an obligation by the seller to deliver
and the buyer to take delivery of the type of instrument or cash
at the time and in the amount specified in the contract.
Although many futures contracts call for the delivery (or
acceptance) of the specified instrument, futures are usually
closed out before the settlement date through the purchase (or
sale) of a comparable contract. If the price of the sale of the
futures contract by the Fund exceeds (or is less than) the price
of the offsetting purchase, the Fund will realize a gain (or
loss). A Fund may not purchase or sell futures contracts or
purchase related options if immediately thereafter the sum of the
amount of deposits for initial margin or premiums on the existing
futures and related options positions would exceed 5% of the
market value of the Fund's net assets. Transactions in futures
and related options involve the risk of (1) imperfect correlation
between the price movement of the contracts and the underlying
securities, (2) significant price movement in one but not the
other market because of different hours, (3) the possible absence
of a liquid secondary market at any point in time, and (4) if the
subadviser's prediction on interest rates or other economic
factors is inaccurate, the Fund may be worse off than if it had
not hedged. Futures transactions involve potentially unlimited
risk of loss.
The Funds may enter into interest rate, currency and securities
index swaps. The Funds will enter into these transactions
primarily to seek to preserve a return or spread on a particular
investment or portion of its portfolio, to protect against
currency fluctuations, as a duration management technique or to
protect against an increase in the price of securities a Fund
anticipates purchasing at a later date. Interest rate swaps
involve the exchange by the Fund with another party of their
respective commitments to pay or receive interest (for example,
an exchange of floating rate payments for fixed rate payments
with respect to a notional amount of principal). A currency swap
is an agreement to exchange cash flows on a notional amount based
on changes in the relative values of the specified currencies.
An index swap is an agreement to make or receive payments based
on the different returns that would be achieved if a notional
amount were invested in a specified basket of securities (such as
the Standard & Poor's Composite Index of 500 Stocks [the "S&P
500"]) or in some other investment (such as U.S. Treasury
securities).
The value of options purchased by a Fund, futures contracts held
by a Fund and a Fund's positions in swap contracts may fluctuate
up or down based on a variety of market and economic factors. In
some cases, the fluctuations may offset (or be offset by) changes
in the value of securities held in the Fund's portfolio. All
transactions in options, futures or swaps involve the possible
risk of loss to the Fund of all or a significant part of the
value of its investment. In some cases, the risk of loss may
exceed the amount of the Fund's investment. The Fund will be
required, however, to set aside with its custodian bank certain
assets in amounts sufficient at all times to satisfy its
obligations under options, futures and swap contracts.
The successful use of options, futures and swaps will usually
depend on a Fund's subadviser's ability to forecast bond market,
currency or other financial market movements correctly. The
Fund's ability to hedge against adverse changes in the value of
securities held in its portfolio through options, futures and
swap transactions also depends on the degree of correlation
between the changes in the value of futures, options or swap
positions and changes in the values of the portfolio securities.
The successful use of futures and exchange traded options also
depends on the availability of a liquid secondary market to
enable the Fund to close its positions on a timely basis. There
can be no assurance that such a market will exist at any
particular time. Trading hours for options may differ from the
trading hours for the underlying securities. Thus, significant
price movements may occur in the securities markets that are not
reflected in the options market. This may limit the
effectiveness of options as hedging devices. In the case of swap
contracts and of options that are not traded on an exchange and
not protected by the Options Clearing Corporation ("over-the-
counter" options), the Fund is at risk that the other party to
the transaction will default on its obligations, or will not
permit the Fund to terminate the transaction before its scheduled
maturity. As a result of these characteristics, the Funds will
treat most swap contracts and over-the-counter options (and the
assets they segregate to cover their obligations thereunder) as
illiquid. Certain provisions of the Internal Revenue Code (the
"Code") and certain regulatory requirements may limit the Funds'
ability to engage in futures, options and swap transactions.
The options and futures markets of foreign countries are small
compared to those of the United States and consequently are
characterized in most cases by less liquidity than are the U.S.
markets. In addition, foreign markets may be subject to less
detailed reporting requirements and regulatory controls than U.S.
markets. Furthermore, investments by the Strategic Income Fund
in options and futures in foreign markets are subject to many of
the same risks as are the Fund's other foreign investments. See
"Foreign Securities" above. For further information, see
"Options and Futures" in Part II of the Statement.
[] Rule 144A Securities (Strategic Income Fund)
Rule 144A securities are privately offered securities that can be
resold only to certain qualified institutional buyers. Rule 144A
securities are treated as illiquid, unless the subadviser has
determined, under guidelines established by the trustees of New
England Funds Trust I, that the particular issue of Rule 144A
securities is liquid. Investment in illiquid securities involves
the risk that the Fund may be unable to sell such a security at
the desired time.
[] Securities Lending (Limited Term U.S. Government Fund)
The Limited Term U.S. Government Fund may lend its portfolio
securities to broker-dealers or other parties under contracts
calling for the deposit by the borrower with the Fund's custodian
of cash collateral equal to at least the market value of the
securities loaned, marked to market on a daily basis. The Fund
will continue to benefit from interest or dividends on the
securities loaned and will also receive interest through
investment of the cash collateral in short-term liquid
investments. No loans will be made if, as a result, the
aggregate amount of such loans outstanding at any time would
exceed 25% of the Fund's total assets (taken at current value).
Any voting rights, or rights to consent, relating to securities
loaned pass to the borrower. However, if a material event
affecting the investment occurs, such loans will be called so
that the securities may be voted by the Fund. The Fund pays
various fees in connection with such loans, including shipping
fees and reasonable custodial or placement fees.
Securities loans must be fully collateralized at all times, but
involve some credit risk to the Fund if the borrower defaults on
its obligation and the Fund is delayed or prevented from
recovering the collateral.
F u n d M a n a g e m e n t
NEFM, 399 Boylston Street, Boston, Massachusetts 02116, is the
investment adviser of each of the Funds. NEFM oversees,
evaluates and monitors the subadvisory services provided to the
Funds and furnishes general business management and
administration to the Funds.
Loomis Sayles is the subadviser of the Strategic Income Fund.
Founded in 1926, Loomis Sayles, One Financial Center, Boston,
Massachusetts 02111, is one of the country's oldest and largest
investment counsel firms. Daniel Fuss, Managing Partner and
Executive Vice President of Loomis Sayles, has served as the
Strategic Income Fund's portfolio manager since the Fund's
inception in May 1995. Mr. Fuss joined Loomis Sayles in 1976.
The subadviser of the other Funds is Back Bay Advisors, 399
Boylston Street, Boston, Massachusetts 02116. Back Bay Advisors
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 a total of
over $__ billion of securities. Eric N. Gutterson, Vice
President of Back Bay Advisors, has served as the portfolio
manager of the Government Securities Fund and Limited Term U.S.
Government Fund since April 1994. J. Scott Nicholson, Senior
Vice President of Back Bay Advisors, has served as the Adjustable
Rate Fund's portfolio manager since the Fund's inception in
October 1991. Catherine L. Bunting, Senior Vice President of
Back Bay Advisors, has served as the Bond Income Fund's portfolio
manager since 1989. Charles G. Glueck, Jr., Senior Vice
President of Back Bay Advisors, has served as the High Income
Fund's portfolio manager since 1988. Nathan R. Wentworth, Vice
President of Back Bay Advisors, has served as the Municipal
Income Fund's portfolio manager since 1983. Each of the
foregoing persons has been employed by Back Bay Advisors for at
least five years.
Subject to the supervision of NEFM, each subadviser manages the
portfolio of each Fund to which it acts as subadviser in
accordance with the Fund's investment objective and policies,
makes investment decisions for the Fund, places orders to
purchase and sell securities for the Fund and employs
professional advisers and securities analysts who provide
research services relating to the Fund. The Funds pay no direct
fees to any of the subadvisers.
Each of the Funds pays NEFM a management fee at the annual rate
set forth in the following table:
Management fee paid by Fund to NEFM
(as a percentage of average daily net
Fund assets of the Fund)
- ---------------------------- -----------------------------------------
Adjustable Rate Fund 0.55% of the first $200 million
0.51% of the next $300 million
0.47% of amounts in excess of $500
million
Bond Income Fund 0.500% of the first $100 million
0.375% of amounts in excess of $100
million
Government Securities Fund 0.650% of the first $200 million
0.625% of the next $300 million
0.600% of amounts in excess of $500
million
High Income Fund 0.75% of all assets
Limited Term U.S. Government 0.650% of the first $200 million
Fund 0.625% of the next $300 million
0.600% of amounts in excess of $500
million
Strategic Income Fund 0.65% of the first $200 million
0.60% of amounts in excess of $200
million
Municipal Income Fund 0.500% of the first $100 million
0.375% of amounts in excess of $100
million
The rate of the management fee payable by the High Income Fund is
higher than that paid by most mutual funds, but is comparable to
fee rates paid by some mutual funds with similar investment
objectives and policies to that Fund.
NEFM pays each Fund's subadviser a subadvisory fee at the annual
rate set forth in the following table:
Subadvisory fee payable to NEFM to
subadviser
(as a percentage of average daily
Fund Subadviser net assets of the Fund)
- ----------------------- ----------- --------------------------------
Adjustable Rate Fund Back Bay 0.275% of the first $200 million
Advisors 0.255% of the next $300 million
0.235% of amounts in excess of
$500 million
Bond Income Fund Back Bay 0.2500% of the first $100 million
Advisors 0.1875% of amounts in excess of
$100 million
Government Securities Back Bay 0.3250% of the first $200 million
Fund Advisors 0.3125% of the next $300 million
0.3000% of amounts in excess of
$500 million
High Income Fund Back Bay 0.375% of all assets
Advisors
Limited Term U.S. Back Bay 0.3250% of the first $200 million
Government Fund Advisors 0.3125% of the next $300 million
0.3000% of amounts in excess of
$500 million
Strategic Income Fund Loomis 0.35% of the first $200 million
Sayles 0.30% of amounts in excess of
$200 million
Municipal Income Fund Back Bay 0.2500% of the first $100 million
Advisors 0.1875% of amounts in excess of
$100 million
Prior to January 2, 1996, Back Bay Advisors served as adviser to
each Fund other than the Strategic Income Fund.
Under an expense deferral arrangement, which NEFM and Loomis
Sayles may terminate at any time, NEFM and Loomis Sayles have
agreed to waive advisory and subadvisory fees for the Strategic
Income Fund until further notice, subject to the obligation of
the Fund to pay NEFM such waived fees in later periods to the
extent that the Fund's expenses fall below the annual rate of
1.40% for Class A shares, 2.15% for Class B shares and 2.15% for
Class C shares; provided, however, that, the Fund is not
obligated to pay any such waived fees more than two years after
the end of the fiscal year in which such fee was waived.
NEFM has voluntarily agreed, until further notice to the High
Income Fund, to reduce its management fee and, if necessary, to
bear certain expenses associated with operating the Fund in order
to limit the Fund's expenses to an annual rate of 1.60% of the
average daily net assets of the Fund's Class A shares and 2.25%
of the Fund's Class B shares.
NEFM and the Distributor have voluntarily agreed, until further
notice to the Adjustable Rate Fund, to reduce their fees and, if
necessary, to bear certain expenses associated with operating the
Fund, in order to limit the Fund's expenses to the annual rate of
0.70% of the Fund's average daily net assets for Class A shares
and 1.45% for Class B shares.
If any of the voluntary fee reductions described above are
terminated, the prospectus of the affected Fund will be
supplemented.
The general partners of Back Bay Advisors, Loomis Sayles, NEFM
and the Distributor are special purpose corporations that are
indirect, wholly-owned subsidiaries of NEIC. NEIC's sole general
partner, New England Investment Companies, Inc. ("NEIC Inc."), is
a wholly-owned subsidiary of New England Mutual Life Insurance
Company ("The New England"). 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. After such merger, NEIC Inc. will
be a wholly-owned subsidiary of MetLife.
In placing portfolio transactions for the Funds, Back Bay
Advisors and, in the case of the Strategic Income Fund, Loomis
Sayles, seek the most favorable price and execution available.
Subject to applicable regulatory restrictions and such policies
as each Trust's trustees may adopt, Back Bay Advisors and Loomis
Sayles may consider sales of shares of the Funds as a factor in
the selection of broker-dealers to effect portfolio transactions
for the Fund for which it acts as subadviser. See "Portfolio
Transactions and Brokerage" in Part II of the Statement.
In addition to overseeing the management of the Funds' portfolios
as conducted by the subadvisers, NEFM provides executive and
other personnel for the management of the Trusts. Each Trust's
Board of Trustees supervises the affairs of that Trust as
conducted by NEFM and the subadvisers.
Pursuant to rules of the SEC, the Funds may pay brokerage
commissions to New England Securities Corporation, an affiliate
of NEFM, on purchases and sales of securities for the portfolios
of the Funds.
B u y i n g F u n d S h a r e s
Minimum Investment
$2,500 is the minimum for an initial investment in any Fund and
$50 is the minimum for each subsequent investment. There are
special initial investment minimums for the following plans:
[] $25 (for initial and subsequent investments) for payroll
deduction investment programs for 401(k), SARSEP, 403(b)
retirement plans and certain other retirement plans.
[] $50 for automatic investing through the Investment Builder
program.
[] $250 for retirement plans with tax benefits such as corporate
pension and profit sharing plans, IRAs and Keogh plans.
[] $1,000 for accounts registered under the Uniform Gifts to
Minors Act or the Uniform Transfers to Minors Act.
[] $1,000 (per Fund) for Portfolio 1,2,3, investment programs.
Subsequent investment minimums are $50 per Fund. See Part II
of the Statement.
6 Ways to Buy Fund Shares
You may purchase Class A, Class B and (in the case of the Limited
Term U.S. Government, Strategic Income and Bond Income Funds)
Class C shares of the Funds in the following ways:
[] Through your investment dealer:
Many investment dealers have a sales agreement with the
Distributor and would be pleased to accept your order.
[] 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 between
8:00 a.m. and 7:00 p.m. (Eastern time).
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.)
[] By wire transfer of Federal Funds:
For an initial investment, call us at 1-800-225- 5478 between
8:00 a.m. and 7:00 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.
Using Tele#Facts 1-800-346-5984
Tele#Facts is New England Funds' 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.
[] By Investment Builder:
Investment Builder is New England Funds' 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 check marked "Void" or a 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.
[] By electronic purchase through ACH:
You may purchase additional shares electronically through the
Automated Clearing House ("ACH") 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 1-800-225-5478 between 8:00 a.m.
and 7:00 p.m. (Eastern time) for instructions or call Tele#Facts
at 1-800-346-5984 twenty-four hours a day. Under normal
circumstances, the New York Stock Exchange (the "Exchange")
closes at 4:00 p.m. (Eastern time). Purchase orders accepted
through ACH or Tele#Facts after 4:00 p.m. (Eastern time), or
after the Exchange closes if it closes earlier than 4:00 p.m.,
will be processed at the net asset value determined at the close
of regular trading on the next day that the Exchange is open.
Proceeds of redemptions of Fund shares purchased through ACH may
not be available for up to ten days after the purchase date.
[] By exchange from another New England Fund:
You may also purchase shares of a Fund by exchanging shares from
another New England Fund. Please see "Owning Fund Shares --
Exchanging Among New England Funds" for complete details.
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 ("State Street Bank") (except orders received by your
investment dealer before the close of trading on the Exchange 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
Funds' "open account" system for recording your investment
eliminates the problems and expense of handling and safekeeping
certificates. Certificates will not be issued for Class B or
Class C 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.
Sales Charges
Each Fund offers two (or, in the case of the Limited Term U.S.
Government Fund, Strategic Income Fund and Bond Income Fund,
three) classes of shares to the general public:
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. Class A shares are
offered subject to the following sales charges:
Government Securities Fund
Strategic Income Fund
Bond Income Fund
Municipal Income Fund
High Income Fund
Sales charge as a % of Dealer's
------------------------ Concession
Net as % of
Value of Total Offering Amount Offering
Investment Price Invested Price
- -------------------- ----------- ----------- -----------
Less than $100,000 4.50% 4.71% 4.00%
$100,000 - $249,999 3.50% 3.63% 3.00%
$250,000 - $499,999 2.50% 2.56% 2.15%
$500,000 - $999,999 2.00% 2.04% 1.70%
$1,000,000 or more None None *
Limited Term U.S. Government Fund
Sales charge as a % of Dealer's
------------------------ Concession
Net as % of
Value of Total Offering Amount Offering
Investment Price Invested Price
- -------------------- ----------- ----------- -----------
Less than $100,000 3.00% 3.09% 2.70%
$100,000 - $249,999 2.50% 2.56% 2.15%
$250,000 - $499,999 2.00% 2.04% 1.70%
$500,000 - $999,999 1.25% 1.27% 1.00%
$1,000,000 or more None None *
Adjustable Rate Fund
Sales charge as a % of Dealer's
------------------------ Concession
Net as % of
Value of Total Offering Amount Offering
Investment Price Invested Price
- -------------------- ----------- ----------- -----------
Up to - $999,999 1.00% 1.01% 0.85%
$1,000,000 or more None None *
* The Distributor may, at its discretion, pay investment dealers
who initiate and are responsible for such purchases of the
Funds (except the Adjustable Rate Fund) a commission of up to
the following amounts: 1% on the first $2 million invested;
.80% on the next $1 million; .20% on the next $2 million; and
.08% on the excess over $5 million. The Distributor may, at
its discretion, pay investment dealers who initiate and are
responsible for such purchases of the Adjustable Rate Fund a
commission of up to the following amounts: 0.50% on the first
$3 million invested; 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
from any New England Fund during the previous 12 calendar
months.
To make investing even easier, you can also order personalized
investment slips by calling 1-800-225-5478 between 8:00 a.m. and
7:00 p.m. (Eastern time).
Contingent Deferred Sales Charge (Class A shares only). For
purchases of $1,000,000 or more of Class A shares in the Funds, 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
of Class A shares purchased within one year before the
redemption. If an exchange is made to Class A shares of any of
New England Cash Management Trust Money Market Series or U.S.
Government Series or New England Tax Exempt Money Market Trust
(the "Money Market Funds"), 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. If the Money Market Fund
shares are redeemed rather than exchanged back into the Trusts,
then a CDSC applies to the redemption. For purposes of the CDSC,
it is assumed that the Class A shares held the longest are the
first to be redeemed. No CDSC applies to a redemption of Class A
shares followed by a reinvestment effected within 30 days after
the date of redemption.
Class B Shares
Class B shares are offered at net asset value, without an initial
sales charge, subject to a 0.25% annual service fee, a 0.75%
annual distribution fee for eight years (at which time they
automatically convert to Class A shares) and a CDSC if they are
redeemed within five 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 any series of the Trusts. If the exchange is
made to Class B shares of a Money Market Fund, then the holding
period stops and will 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 to the redemption, at the same
rate as if the Class B shares of the Fund had been redeemed at
the time they were exchanged for Money Market Fund shares. For
the purposes of the CDSC, it is assumed that the shares held the
longest are the first to be redeemed.
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 CDSC, 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:
Contingent
Deferred
Sales Charge as a
Percentage of
Dollar
Year Since Amount Subject to
Purchase Charge
---------- -----------------
1st ........... 4%
2nd ........... 3%
3rd ........... 3%
4th ........... 2%
5th ........... 1%
thereafter ........... 0%
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 "Sales Charges - General"
below. At the time of sale, the Distributor pays investment
dealers a commission of 3.75% on purchases of Class B shares of
the Government Securities, Strategic Income, Bond Income, High
Income and Municipal Income Funds and 2.75% on purchases of the
Class B shares of the Limited Term U.S. Government and Adjustable
Rate Funds and advances the first year's service fee (up to
0.25%) on purchases of the Funds' Class B shares.
Class C Shares
Class C shares are offered at net asset value, without an initial
sales charge or CDSC; are subject to a 0.25% annual service fee
and a 0.75% annual distribution fee; and do not convert into
another class.
Class Y Shares
The Government Securities Fund, the Limited Term U.S. Government
Fund, the Adjustable Rate Fund, the Strategic Income Fund and the
Bond Income Fund offer an additional class of shares (which are
not available to the general public) to qualified investors. See
"Additional Facts About the Funds" below.
Deciding Which Class to Purchase
The decision as to whether Class A, Class B or (in the case of
the Limited Term U.S. Government, Strategic Income and Bond
Income Funds) Class C 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. Any order of $1 million or more for Class C
shares will be treated as an order for Class A shares, unless you
indicate on the relevant section of your application that you
have been informed of the relative advantages and disadvantages
of Class A and Class C shares. Investors making smaller
investments might consider Class B or Class C shares because 100%
of the purchase is invested immediately. Investors making
smaller investments who anticipate redeeming their shares within
five years may find Class C shares more favorable than Class B
shares, because Class B shares are subject to a CDSC on
redemptions made within five years after purchase. Class B
shares are more favorable than Class C shares for investors who
anticipate holding their investment for more than eight years
since Class B shares convert to Class A shares (and thus bear
lower ongoing fees) after eight years. Consult your investment
dealer for advice applicable to your particular circumstances.
General
No CDSC on any class of shares applies in connection with (1)
redemptions by retirement plans qualified under Code Sections
401(a) or 403(b)(7) when such redemptions are necessary to make
distributions to plan participants; (2) distributions from an IRA
due to death, disability or a tax-free return of an excess
contribution; (3) distributions by other employee benefit plans
to pay benefits; and (4) distributions by a Section 401(a) plan
due to death. For 403(b)(7) and IRA accounts established before
January 3, 1995, the CDSC is waived for redemptions made after
attainment of age 59 1/2. The CDSC is waived for redemptions
made to make required minimum distributions after attainment of
age 70 1/2 for 403(b)(7) and IRA accounts established on or after
January 3, 1995. There is also no CDSC on 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 shareholder's death or disability. In
addition, there is no CDSC on certain withdrawals pursuant to a
Systematic Withdrawal Plan. See "Selling Fund Shares -- 5 Ways
to Sell Fund Shares -- By Systematic Withdrawal Plan" below.
The Fund receives the net asset value next determined after an
order is received on sales of each class of shares. The sales
charge is allocated between your 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 a fund's shares.
The Distributor may, at its expense, pay investment dealers who
sell new amounts of shares of the Funds at net asset value to
eligible governmental authorities .025% of the average daily net
assets of an account at the end of each calendar quarter for up
to one year. The same compensation schedule applies to sales of
$250,000 or more of shares of the Adjustable Rate Fund and $5
million or more of shares of the Limited Term U.S. Government
Fund to trust companies, bank trust departments, corporations and
credit unions as described below under "Reduced Sales Charges."
These commissions are not payable if the purchase represents the
reinvestment of redemption proceeds from any series of the Trusts
or if the account is not registered in the name of the beneficial
owner. The CDSC is not applicable to these sales.
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. The Distributor 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 payment 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. 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 $1 million may be invested in
shares of the Fund at a reduced sales charge of 1.50% of the
public offering price (or 1.52% of the net amount invested).
[] Shares of the Adjustable Rate Fund and Limited Term U.S.
Government Fund may be purchased at net asset value, without
payment of sales charge or CDSC, by trust companies and bank
trust departments for funds over which they exercise
discretionary investment authority and which they hold in a
fiduciary, agency, custodial or similar capacity, by corporations
that purchase shares for their own account and by credit unions
provided that the amount invested is $250,000 or more in the case
of the Adjustable Rate Fund and $5 million or more in the case of
the Limited Term U.S. Government Fund.
[] Eligible governmental authorities _ no sales charge or CDSC
applies to investments by any state, county or city or any
instrumentality, department, authority or agency thereof, that
has determined that a Fund is a legally permissible investment
and that is prohibited by applicable investment laws from paying
a sales charge or commission in connection with the purchase of
shares of any registered investment company.
[] Clients of an adviser or subadviser _ no sales charge or
CDSC applies to investments of $25,000 or more in the Funds by
(1) clients of an adviser or subadviser to any series of the
Trusts; any director, officer or partner of a client of an
adviser or subadviser to any series of the Trusts; and the
parents, spouses and children of the foregoing; (2) any
individual who is a participant in a Keogh or IRA Plan under a
prototype Plan document of an adviser or to any series of the
Trusts if at least one participant in the plan qualifies under
category (1) above; and (3) an individual who invests through an
IRA and is a participant in an employee benefit plan that is a
client of an adviser or subadviser to any series of the Trusts.
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 by
investment advisers, financial planners or other intermediaries
who place trades for their own accounts or the accounts of their
clients and who charge a management, consulting or other fee for
their services; clients of such investment advisers, financial
planners or other intermediaries who place trades for their own
accounts if the accounts are linked to the master account of such
investment adviser, financial planner or other intermediary on
the books and records of the broker or agent; and retirement and
deferred compensation plans and trusts used to fund those plans,
including, but not limited to, those defined in Section 401(a),
403(b) or 457 of the Code and "rabbi trusts." Investors may be
charged a fee if they effect transactions through a broker or
agent.
[] Shares of the Funds also may be purchased at net asset value
through certain broker-dealers and/or financial services
organizations without any transaction fee. Such organizations
may receive compensation, in an amount of up to 0.35% annually of
the average value of the Fund shares held by their customers.
This compensation may be paid by NEFM and/or a Fund's subadviser
out of their own assets, or may be paid indirectly by the Fund in
the form of servicing, distribution or transfer agent fees.
[] There is no sales charge, CDSC or initial investments
minimum on investments by certain current and retired employees
of the Trusts' investment advisers and subadvisers, the
Distributor, The New England or any other company affiliated with
The New England; current and former directors and trustees of the
Trusts, The New England 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 any
of the persons listed above; any trust, pension, profit sharing
or other benefit plan for any of the foregoing persons and any
separate account of The New England or of any insurance company
affiliated with The New England.
[] Shareholders of Reich and 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>
O w n i n g F u n d S h a r e s
Exchanging Among New England Funds
Class A Shares
Except as indicated in the next two sentences, you may exchange
Class A shares of any series of the Trusts (and Class A shares of
the Money Market Funds acquired through exchanges from any series
of the Trusts) for 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;
such exchanges will be made at the next-determined net asset
value of the shares. Class A shares of New England Intermediate
Term Tax Free Fund of California and New England Intermediate
Term Tax Free Fund of New York (and shares of the Money Market
Funds acquired through exchanges of such shares) may be exchanged
for Class A shares of another series of the Trusts 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 the Adjustable Rate Fund for shares of
another series of the Trusts 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 series into which you are exchanging. In addition,
you may redeem Class A shares of any Money Market Fund that were
not acquired through exchanges from any series of the Trusts and
have the proceeds directly applied to the purchase of shares of a
series of the Trusts 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 Class B shares of any other series of
the Trusts (except New England Growth Fund, which does not offer
Class B shares). 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 "Sales Charges _ Class B
Shares" above.
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. Shares of the Adjustable Rate Fund that are subject to a
differential sales charge as described on this page may not
participate in this program.
Class C Shares
You may exchange Class C shares of the Fund or any other series
of the Trusts for Class C shares of any other series of the
Trusts which offers Class C shares or for Class A shares of the
Money Market Funds.
To make an exchange, please call 1-800-225-5478 between 8:00 a.m.
and 7:00 p.m. (Eastern time), write to New England Funds or call
Tele#Facts at 1-800-346-5984 twenty-four hours a day. Exchange
requests after 4:00 p.m. (Eastern time), or after the Exchange
closes if it closes earlier than 4:00 p.m., will be processed at
the net asset value determined at the close of regular trading on
the next day that the Exchange is open. The exchange must be for
a minimum of $500 (or the total net asset value of your 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 series
into which you are exchanging. In connection with any exchange,
you must receive a current prospectus of the series into which
you are exchanging. The exchange privilege may be exercised only
in those states where shares of such other series 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, 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 days' advance notice of any material change
to the exchange privilege.
Fund Dividend Payments
Each Fund declares dividends daily and pays 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). Each Fund pays short-term capital gains annually.
The trustees of the Trusts may adopt a different schedule as long
as payments are made at least annually. If you intend to
purchase shares of a Fund shortly before it declares a dividend
you should be aware that a portion of the purchase price may be
returned to you as a taxable dividend.
You have the option to reinvest all distributions in additional
shares of the same class of the Fund or in shares of the same
class of other series of the Trusts, to receive distributions
from ordinary income in cash while reinvesting distributions from
capital gains in additional shares of the same class of the Fund
or the same class 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 Fund at net asset value (without a sales charge or CDSC)
unless you select another option. You may change your
distribution option by notifying New England Funds 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 "undeliverable" to the 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 that
allows you to have all dividends and any other distributions
automatically invested in shares of the same class of another New
England Fund, subject to the investor eligibility requirements of
that other fund and to state securities law requirements. Shares
will be purchased at the selected fund's net asset value (without
a sales charge or CDSC) on the dividend record date. A dividend
diversification account must be in the same registration
(shareholder name) as the distributing fund account and, if a new
account in the purchased fund is being established, the purchased
fund's 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 fund's
prospectus.
<PAGE>
S e l l i n g F u n d S h a r e s
5 Ways to Sell Fund Shares
You may sell Class A, Class B and Class C shares of the Funds in
the following ways:
[] Through your investment dealer:
Call your authorized investment dealer for information.
[] 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, Class B
and Class C shares may be redeemed by calling 1-800-225- 5478
between 8:00 a.m. and 7:00 p.m. (Eastern time) on a day when the
Funds are open for business or by calling Tele#Facts at 1-800-346-
5984 twenty-four hours a day. 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 between 8:00 a.m. and 7:00 p.m. (Eastern
time) 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
between 8:00 a.m. and 7:00 p.m. (Eastern time) or call Tele#Facts
at 1-800-346-5984 twenty-four hours a day. The proceeds (less
any applicable CDSC) generally will arrive at your bank within
three business days; their availability will depend on your
bank's particular rule.
Redemption requests accepted after 4:00 p.m. (Eastern time), or
after the Exchange closes if it closes before 4:00 p.m., will be
processed at the net asset value determined at the close of
regular trading on the next day that the Exchange is open.
[] 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 they 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 redemptions by
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.
[] By check:
Checkwriting is available on Class A shares of the Limited Term
U.S. Government and Adjustable Rate Funds only. 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 Options 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. 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 or Class B shares subject to
a CDSC.
If you use withdrawal checks, you will be subject to State Street
Bank's rules governing checking accounts. The Limited Term U.S.
Government Fund, the Adjustable Rate Fund 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.
[] 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 the 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 day's net asset value). Redemption proceeds (less
any applicable CDSC) will normally be mailed to you within seven
days after State Street Bank or the Distributor receives your
request in good order. However, in those cases where you have
recently purchased your shares by check or an electronic funds
transfer through the ACH system and you make a redemption request
within 10 days after such purchase or transfer, the Fund may
withhold redemption proceeds until the Fund knows that the check
or funds have cleared.
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 the Distributor or your investment dealer for more
information.
Telephone redemptions are not available for tax qualified
retirement plans or for Fund shares 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 that 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 redemption proceeds (without a sales charge)
to the repurchase of Class A shares of any series of the Trusts.
To qualify, you must reinvest some or all of the 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 some or all of the redemption 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>
F u n d D e t a i l s
How Fund Share Price is Determined
Back Bay Advisors or, in the case of the Strategic Income Fund,
Loomis Sayles, under the supervision of each Trust's Board of
Trustees, determines the value of the total net assets of each
Fund as of the close of regular trading (ordinarily 4:00 p.m.
Eastern time) each day the Exchange is open. The Boards of
Trustees have authorized Back Bay Advisors or, in the case of the
Strategic Income Fund, Loomis Sayles, to delegate certain price
determination functions to pricing services or facilities
selected by Back Bay Advisors or Loomis Sayles, as the case may
be. Securities for which market quotations are readily available
are generally valued at market value on the basis of market
quotations. Options, interest rate futures and options thereon
which are traded on exchanges are valued at their last sale price
as of the close of the Exchange. All money market instruments
with a maturity of more than 60 days are valued at current market
value. The value of debt securities with remaining maturities of
60 days or less shall be their amortized cost value, unless
conditions indicate otherwise. In all other cases, the value of
a Fund's assets is determined in good faith by Back Bay Advisors
or, in the case of the Strategic Income Fund, Loomis Sayles, or a
pricing service selected by Back Bay Advisors or Loomis Sayles,
under the supervision of the Boards of Trustees.
The net asset value per share of each class is determined by
dividing the value of each class's securities (the current U.S.
dollar value, in the case of securities principally traded
outside the United States) plus any cash and other assets
(including dividends and interest receivable but not collected)
less all liabilities (including accrued expenses), by the number
of shares of such class outstanding. The public offering price
of each Fund's Class A shares is determined by adding the
applicable sales charge to the net asset value. See "Buying Fund
Shares _ Sales Charges" above. The public offering price of
Class B and (in the case of the Limited Term U.S. Government,
Strategic Income and Bond Income Funds) Class C 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 is
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 on 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 day's public offering price.
Income Tax Considerations
Each Fund intends to meet all requirements of the Code necessary
to ensure that it qualifies as a regulated investment company and
thus does not expect to pay any federal income tax on investment
income and capital gains distributed to shareholders in cash or
additional shares. Unless you are a tax exempt entity, your
distributions derived from a Fund's short-term capital gains and,
except for the Municipal Income Fund, ordinary income are taxable
to you as ordinary income. Distributions derived from a Fund's
long-term capital gains ("capital gains distributions"), if
designated as such by a Fund, are taxable to you as long-term
capital gains, regardless of how long you have owned shares in
the Fund. Both dividends and capital gains distributions are
taxable whether distributed to you in cash or additional shares.
A Fund's transactions in foreign currency-denominated debt
securities and its hedging activities will likely produce a
difference between its book income and its taxable income. This
difference may cause a part or all of a Fund's income
distributions to constitute returns of capital for tax purposes
or require the Fund to make distributions exceeding book income
to avoid federal income tax liability.
Dividends derived from interest on U.S. Government securities may
be exempt from state and local taxes. The Trusts intend to
advise shareholders of the proportion of each Fund's dividends
that are derived from such interest. Before investing in any of
the Funds, you should check the consequences of your local and
state tax laws, which may be different from the federal tax
consequences, and the consequences for any retirement plan
offering tax benefits.
To avoid an excise tax, each Fund intends to distribute prior to
calendar year end virtually all the Fund's ordinary income earned
during that calendar year, and virtually all of the capital gain
net income the Fund realized in the 12-month period ending
December 31 but has not previously distributed. If declared in
December to shareholders of record in that month, and paid the
following January, these distributions will be considered for
federal income tax purposes to have been received by shareholders
on December 31.
Each Fund (possibly excepting the Municipal Income Fund, as
described below) is required to withhold 31% of all income
dividends and capital gains distributions it pays to you if you
do not provide a correct, certified taxpayer identification
number, if the Fund is notified that you have underreported
income in the past or if you fail to certify to the Fund that you
are not subject to such withholding. In addition, each Fund will
be required to withhold 31% of the gross proceeds of Fund shares
you redeem if you have not provided a correct, certified taxpayer
identification number. If you are a tax-exempt institution,
however, these back-up withholding rules will not apply so long
as you furnish the Fund with an appropriate certification.
Annually, if you earn more than $10 in taxable income from a
Fund, you will receive a Form 1099 to assist you in reporting the
prior calendar year's 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 income tax
consequences of an investment in a Fund. You should consult a
competent tax adviser as to the effect of an investment in a Fund
on your particular federal, state and local tax situations.
[] Adjustable Rate Fund
While many states grant tax-free status to dividends paid to
shareholders of mutual funds from interest income earned by a
Fund from direct obligations of the U.S. Government, none of the
distributions of the Adjustable Rate Fund during the current
fiscal year are expected to qualify for such tax-free treatment.
Investments in mortgage-backed securities (including GNMA, FNMA
and FHLMC securities) and repurchase agreements collateralized by
U.S. Government securities do not qualify as direct federal
obligations in most states.
[] Municipal Income Fund
Dividends paid to you as a shareholder of the Municipal Income
Fund that are derived from interest on tax exempt bonds are
"exempt-interest dividends" and may be excluded from gross income
on your federal tax return. However, 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, if
the Municipal Income Fund invests in "private activity" bonds, a
portion of the Fund's dividends may constitute a tax preference
item subject to the alternative minimum tax. See "Fund
Investments" for further information.
Other dividends and short-term capital gains, if any, paid by the
Municipal Income Fund are taxable to you as ordinary income,
whether received in cash or additional shares. Distributions of
long-term capital gains are taxable to you as long-term capital
gains, whether distributed in cash or additional shares,
regardless of how long you have held your shares.
If at least 95% of the Fund's dividends are "exempt-interest
dividends," federal back-up withholding rules do not apply.
However, if the percentage should ever drop below 95%, the Fund
will be required to withhold 31% of all income dividends that are
not "exempt-interest dividends" and 31% of all capital gain
distributions it pays to you if you do not provide a correct,
certified taxpayer identification number, if the Fund is notified
that you have underreported income in the past, or if you fail to
certify to the Fund that you are not subject to such withholding.
In addition, the Fund will be required to withhold 31% of the
gross proceeds of Fund shares you redeem if you have not provided
a correct, certified taxpayer identification number. The federal
exemption for "exempt-interest dividends" does not necessarily
result in exemption from state and local taxes. Distributions of
"exempt-interest dividends" may be exempt from local and state
taxation to the extent they are derived from the state or
locality in which you reside. Before investing in the Fund, you
should check the consequences of your local and state tax laws.
The Fund will report annually on a state-by-state basis the
source of income the Fund receives on tax exempt bonds that was
paid out as dividends during the preceding year.
The Funds' Expenses
In addition to the management fee paid to NEFM, each Fund pays
all expenses not borne by the Fund's investment adviser or
subadviser or the Distributor, including, but not limited to, the
charges and expenses of the Fund's custodian and transfer agent,
independent auditors and legal counsel for the Fund and the
Trusts' independent trustees, 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 shareholders' and trustees' meetings,
preparing, printing and mailing prospectuses and reports to
shareholders and the compensation of trustees who are not
directors, officers or employees of Back Bay Advisors, NEFM,
Loomis Sayles or their affiliates, other than affiliated
registered investment companies. In the case of Funds that offer
Class Y shares, certain expenses are allocated differently
between the Fund's Class A, Class B and (in the case of the
Limited Term U.S. Government, Strategic Income and Bond Income
Funds) Class C shares, on one hand, and its Class Y shares, on
the other hand. (See "Additional Facts About the Funds" below.)
Under Plans adopted pursuant to Rule 12b-1 under the Investment
Company Act of 1940 (the "1940 Act"), each Fund pays the
Distributor a monthly service fee at an annual rate not to exceed
0.25% of the Fund's average daily net assets attributable to the
Class A, Class B and (in the case of the Limited Term U.S.
Government, Strategic Income and Bond Income Funds) Class C
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 Fund's shares, for providing personal services to
investors in shares of the Fund and/or maintenance of shareholder
accounts. In the case of the Class B shares, the Distributor
pays investment dealers at the time of sale the first year's
service fee in the amount of up to 0.25% of the amount invested.
In addition to the 0.25% service fee, the High Income Fund and
the Limited Term U.S. Government Fund pay the Distributor a
monthly distribution fee at an annual rate not to exceed 0.10% of
the Fund's average daily net assets of the respective Funds'
Class A shares. Also, each Fund's Class B shares and (in the
case of the Limited Term U.S. Government, Strategic Income and
Bond Income Funds) Class C shares pay the Distributor a monthly
distribution fee at an annual rate not to exceed 0.75% of the
average net assets of the Fund's Class B shares and Class C
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 Fund's shares, as distribution fees in
connection with the sale of the Fund's shares. Except in the
case of the Class A shares of the Limited Term U.S. Government
Fund, the Distributor retains the balance of the fee as
compensation for its services as distributor of the relevant
class of shares. In the case of the Class A shares of the
Limited Term U.S. Government Fund, the Distributor may also use
all or any portion of the distribution fee to pay its expenses in
connection with the distribution of shares, including, without
limitation, expenses of printing and distributing prospectuses to
persons other than shareholders of the Funds, expenses of
preparing, printing and distributing advertising and sales
literature and reports to shareholders used in connection with
the sales of shares, expenses of personnel and communication
equipment used in connection with prospective shareholder
inquiries, and overhead expenses relating to any of the
foregoing.
In the case of each Fund except the High Income Fund, the Class A
service fee is payable only to reimburse the Distributor for
amounts it pays or expends in connection with the provision of
personal services to investors and/or the maintenance of
shareholder accounts and may be used to reimburse such expenses
incurred by the Funds' former distributor (an affiliate of the
Distributor) in prior years. To the extent that the
Distributor's reimbursable expenses in any year exceed the
maximum amount payable under the relevant Plan for that year,
such expenses may be carried forward for reimbursement in future
years in which the Plan remains in effect. Similarly, the
distribution fee of the Limited Term U.S. Government Fund is
payable only to reimburse the Distributor for expenses in
connection with the distribution of the Fund's shares, but
unreimbursed expenses can be carried forward into future years.
The amounts of unreimbursed expenses carried over into 1996 from
previous plan years with respect to the Class A shares are as
follows: $_________ for the Government Securities Fund;
$_________ for the Limited Term U.S. Government Fund; $_________
for the Adjustable Rate Fund; $_________ for the Bond Income
Fund; and $_________ for the Municipal Income Fund. The Class B
service fees for all Funds, the Class C service fees for the
Limited Term U.S. Government Fund, the Strategic Income Fund and
the Bond Income Fund, and the Class A service fee of the High
Income Fund, are payable regardless of the amount of the
Distributor's related expenses.
Performance Criteria
Each Fund may include total return information in advertisements
or other written sales material. Each Fund may show the average
annual total return for each class of shares for the one-, five-
and ten-year periods through the end of the most recent calendar
quarter (or, if shorter, the period since the commencement of the
class's operations) or, in the case of the High Income Fund's
Class A shares, for the period since July 27, 1988, when Back Bay
Advisors became the High Income Fund's investment adviser. Total
return is measured by comparing the value of a hypothetical
$1,000 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 and, in the case of the Class B shares,
imposition of the CDSC for the period of time quoted). Total
return may be quoted with or without giving effect to any
voluntary expense limitations in effect for the class in question
during the relevant period. The classes may also show total
return over other periods, on an aggregate basis for the period
presented, or without deduction of a sales charge. If a sales
charge is not deducted in calculating total return, the class's
total return is higher. Each Fund may also include the yield,
accompanied by the total return, for each class of shares, in
advertising and other written material. Yield will be computed
in accordance with the SEC's 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 (reduced by any earned income expected to be
declared shortly as a dividend) on the last day of the period.
Yield calculations will reflect any voluntary expense limitations
in effect for the Fund during the relevant period.
In addition, the Municipal Income Fund may include the taxable-
equivalent yield for each class of shares in advertising and
other written material. Taxable-equivalent yield is calculated
by adjusting the class's tax exempt yield by a factor designed to
show the approximate yield that a taxable investment would have
to earn to produce an after-tax yield equal, for a shareholder in
a specified tax bracket, to the class's tax exempt yield.
Each Fund may also present one or more distribution rates for
each class in its sales literature. These rates will be
determined by annualizing the class's 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 and Class C shares of the same Fund, because of the
higher levels of expenses borne by the Class B and Class C
shares. However, this difference may be offset in whole or in
part by the benefit gained by 100% immediate investment of the
purchase price of Class B shares or Class C shares. As a result
of lower operating expenses, Class Y shares of the Government
Securities, Limited Term U.S. Government, Adjustable Rate,
Strategic Income and Bond Income Funds can be expected to achieve
a higher investment return than the Funds' Class A, Class B or
Class C shares.
All performance information is based on past results and is not
an indication of likely future performance.
Additional Facts About the Funds
[] New England Funds Trust I was organized in 1985 as a
Massachusetts business trust and is authorized to issue an
unlimited number of full and fractional shares in multiple
series. The Government Securities Fund represents the original
series of shares of New England Funds Trust I. The Bond Income
and Municipal Income Funds were organized prior to 1985 and
conducted investment operations as separate corporations until
their reorganization as series of New England Funds Trust I in
January 1987. The Strategic Income Fund commenced investment
operations in 1995.
[] New England Funds Trust II 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 Limited Term U.S. Government Fund commenced
investment operations in 1989. The High Income Fund was
organized in 1984 and conducted investment operations as a
separate corporation until its reorganization as a series of New
England Funds Trust II in 1989. The Adjustable Rate Fund
commenced operations in 1991.
[] When you invest in a Fund, you acquire freely transferable
shares of beneficial interest that entitle you to receive
dividends as determined by the respective Trust's trustees and to
cast a vote for each share you own at shareholder meetings.
Shares of each Fund vote separately from shares of other series
of the same Trust, except as otherwise required by law. Shares
of all classes of a Fund vote together, except as to matters
relating to a class's Rule 12b-1 plan, for which only shares of
that class are entitled to vote.
[] Except for matters that are explicitly identified as
"fundamental" in this prospectus or Parts I and II of the
Statement, the investment policies of each Fund may be changed
without shareholder approval or prior notice. The investment
objectives of the Government Securities, Bond Income and
Municipal Income Funds are fundamental. The investment
objectives of the Adjustable Rate Fund and Strategic Income Fund
are not fundamental. The investment objectives of the Limited
Term U.S. Government and High Income Funds are not fundamental
but, as a matter of policy, the trustees would not change those
objectives without shareholder approval. If there is a change in
the investment objective of the Adjustable Rate or Strategic
Income Fund, you should consider whether the Fund remains an
appropriate investment in light of your then current financial
position and needs.
[] The Trusts do not generally hold regular shareholder
meetings and will do so only when required by law. Shareholders
of a Trust may remove the trustees of that Trust from office by
votes cast at a shareholder meeting or by written consent.
[] 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.
[] Class Y shares for the Government Securities, Limited Term
U.S. Government, Strategic Income, Bond Income and Adjustable
Rate Funds: Class Y shares of these Funds may be purchased by
endowments and foundations. The minimum initial investment is $1
million for these entities and the minimum for each subsequent
investment is $100,000. Class Y shares may also be purchased by
plan sponsors of 401(a), 401(k), 457 or 403(b) plans ("Retirement
Plans") that have total investment assets in these plans of at
least $10 million. Plan sponsors' investment assets in multiple
Retirement Plans can be aggregated for purposes of meeting this
minimum. Class Y shares may also be purchased by any separate
account of The New England or of any other insurance company
affiliated with The New England ("Separate Accounts"). There is
no minimum initial or subsequent investment amount for Retirement
Plans or Separate Accounts. Investments in Class Y shares may
also be made by certain individual retirement accounts if the
amounts invested represent rollover distributions from
investments by any of the foregoing Retirement Plans of amounts
invested in Class Y shares.
[] Class Y shares are identical to Class A, Class B and Class C
shares, except that Class Y shares have no sales charge or CDSC,
bear no Rule 12b-1 fees and have separate voting rights in
certain circumstances. Class Y bears its own transfer agency and
prospectus printing costs.
[] If the balance in your account with a Fund is less than a
minimum dollar amount set by the trustees of the Trusts from time
to time (currently $500 for all accounts, except for those
indicated below and for individual retirement accounts , which
have a $25 minimum), that Fund may close your account and send
the proceeds to you. Shareholders who are affected by this
policy will be notified of the Fund's 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 Keogh, pension and profit sharing plans, automatic investment
plans or accounts that have fallen below the minimum solely
because of fluctuations in net asset value per share.
[] The Trusts, together with the Money Market Funds, constitute
the New England Funds. Each Trust offers only its own Funds'
shares for sale, but it is possible that a Trust might become
liable for any misstatements in this prospectus that relate to
the other Trust. The trustees of each Trust have considered this
possible liability and approved the use of this combined
prospectus for Funds of both Trusts.
[] The Class A, Class B, Class C and Class Y structure could be
terminated should certain IRS rulings be rescinded.
[] Each Fund's annual report contains additional performance
information and is made available upon request and without
charge.
[] Summit Cash Reserves Fund (the "Cash Fund"), a series of
Financial Institutions Series Trust, is related to the Funds for
purposes of investment and investor services. Shares of all
classes of the Funds may be exchanged for shares of the Cash Fund
at net asset value. If shares of the Funds that are exchanged
for shares of the Cash Fund are subject to a CDSC, the holding
period for purposes of determining the expiration of the CDSC
will stop and resume only when an exchange is made back into
shares of a series of the Trusts. If Fund shares subject to a
CDSC are exchanged for Cash Fund shares and the Cash Fund shares
are later redeemed rather than being exchanged back into shares
of a series of the Trusts, then a CDSC will apply at the same
rate as if the Fund shares were redeemed at the time of the
exchange.
<PAGE>
A p p e n d i x A : R a t i n g s O f S e c u r i t i e s
Description of Moody's Investors Service, Inc. bond ratings:
Aaa, Aa, A _ Bonds which are rated Aaa or Aa are judged to be of
high quality by all standards and are generally known as high
grade bonds. Bonds rated Aa are rated lower than Aaa securities
because margins of protection may not be as large as in the
latter or fluctuation of protective elements may be of greater
amplitude or there may be other elements present which make the
long-term risks appear somewhat larger than in Aaa securities.
Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper medium grade
obligations. Factors giving security to principal and interest
are considered adequate, but elements may be present which
suggest a susceptibility to impairment sometime in the future.
Baa _ Bonds which are rated Baa are considered medium grade
obligations, i.e., they are neither highly protected nor poorly
secured. Interest payments and principal security appear
adequate for the present, but certain protective elements may be
lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as
well.
Ba _ Bonds which are rated Ba are judged to have speculative
elements; their future cannot be considered as well secured.
Often the protection of interest and principal payments may be
very moderate and thereby not well safeguarded during both good
and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B _ Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal
payments or of maintenance of other terms of the contract over
any long period of time may be small.
Caa _ Bonds which are rated Caa are of poor standing. Such
issues may be in default or there may be present elements of
danger with respect to principal or interest.
Ca _ Bonds which are rated Ca represent obligations which are
speculative in high degree. Such issues are often in default or
have other marked shortcomings.
C _ Bonds which are rated C are the lowest rated class of bonds
and can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
Description of Standard & Poor's Ratings Group bond ratings:
AAA, AA, A _ Bonds rated AAA have the highest rating assigned by
S&P to a debt obligation. Capacity to pay interest and repay
principal is extremely strong. Bonds rated AA have a very strong
capacity to pay interest and repay principal and differ from the
highest rated issues only in small degree. Bonds rated A have a
strong capacity to pay interest and repay principal although they
are somewhat more susceptible to the adverse effects of changes
in circumstances and economic conditions than bonds in high rated
categories.
BBB _ Bonds rated BBB are regarded as having an adequate capacity
to pay interest and repay principal. Whereas they normally
exhibit adequate protection parameters, adverse economic
conditions or changing circumstances are more likely to lead to a
weakened capacity to repay principal and pay interest for bonds
in this category than for bonds in higher rated categories.
BB-B-CCC-CC-C _ Bonds rated BB, B, CCC, CC and C are regarded, on
balance, as predominantly speculative with respect to the
issuer's capacity to pay interest and repay principal in
accordance with the terms of the obligation.
BB indicates the lowest degree of speculation and C the highest
degree of speculation. While such bonds will likely have some
quality and protective characteristics, these are outweighed by
large uncertainties or major risk exposures to adverse
conditions.
CI _ The rating CI is reserved for income bonds on which no
income is being paid.
D _ Bonds rated D are in default, and payment of interest and/or
repayment of principal is in arrears.
<PAGE>
A p p e n d i x B
AVERAGE MONTHLY PORTFOLIO COMPOSITION TABLE OF THE
HIGH INCOME FUND AS OF DECEMBER 31, 1995
Percentage
of Net
Security Assets
-------- -----------
Preferred Stock ................................ __%
Short-term Obligations and Other Assets ........ __%
Debt _ Unrated ................................ __%
Debt _ Standard and Poor's Rating ............. __%
AAA ....................................... __%
BBB........................................ __%
BB......................................... __%
B.......................................... __%
CAA........................................ __%
CA......................................... __%
The chart above indicates the composition of the High Income Fund
for the fiscal year ended December 31, 1995, with the debt
securities rated by Standard and Poor's separated into the
indicated categories. The percentages were calculated on a
dollar weighted average basis by determining monthly the
percentage of the High Income Fund's net assets invested in each
category as of the end of each month during the year. Back Bay
Advisors does not rely primarily on ratings designed by any
rating agency in making investment decisions. The chart does not
necessarily indicate what the composition of the Fund's portfolio
will be in subsequent fiscal years.
<PAGE>
G l o s s a r y O f T e r m s
Capital gain distributions _ Payments to shareholders of profits
earned from selling securities in the Fund's portfolio. Capital
gain distributions are usually paid once a year.
Contingent deferred sales charge (CDSC) _ A fee that may be
charged when a shareholder sells Fund shares.
Distribution fee _ An annual asset-based sales charge that is
used to pay for sales-related expenses.
Income distributions _ Payments to shareholders resulting from
interest or dividend income earned by a Fund's portfolio.
Mutual fund _ The pooled assets of a group of investors,
professionally managed in pursuit of a specific objective.
Net asset value (NAV) _ The market value of one share of a mutual
fund on any given day without sales charge or CDSC. Determined
by dividing the fund's total net assets by the number of fund
shares outstanding.
New England Funds, L.P. _ The distributor and transfer agent of
the New England Funds.
New England Funds Management, L.P. -- The adviser to most of the
New England Funds.
Open end investment management company _ A mutual fund that
allows investors to redeem fund shares directly from the fund
company on any business day.
Public offering price _ The price of one share of a mutual fund,
including its initial sales charge, if there is one.
Record date _ The date on which mutual fund investors must own a
fund's shares to be eligible to receive specific income or
capital gain distributions.
Service fee _ Payments by a fund to the fund's distributor or a
financial representative for personal services to investors
and/or for maintenance of shareholder accounts.
Total Return _ The change in value of an investment in a Fund
investment over a specific time period, assuming all earnings are
reinvested in additional shares of the fund. Expressed as a
percentage.
Yield _ The rate at which a fund earns income, expressed as a
percentage. Yield calculations are standardized among mutual
funds, based on a formula developed by the Securities and
Exchange Commission.
12b-1 fees _ Fees paid by a mutual fund under a plan adopted
under 1940 Act Rule 12b-1. Can include both distribution fees
and service fees (see above).
<PAGE>
NEW ENGLAND FUNDS
Where The Best Minds Meet(TM)
Class Y shares of:
NEW ENGLAND GOVERNMENT SECURITIES FUND
NEW ENGLAND LIMITED TERM U.S. GOVERNMENT FUND
NEW ENGLAND ADJUSTABLE RATE U.S. GOVERNMENT FUND
NEW ENGLAND STRATEGIC INCOME FUND
NEW ENGLAND BOND INCOME FUND
Prospectus and Application _ April 15, 1996
New England Government Securities Fund, New England Strategic
Income Fund and New England Bond Income Fund, series of New
England Funds Trust I, and New England Limited Term U.S.
Government Fund and New England Adjustable Rate U.S. Government
Fund, series of New England Funds Trust II, are separate mutual
funds (the "Funds" and each a "Fund"). New England Funds Trust I
and New England Funds Trust II are referred to in this prospectus
as the "Trusts."
The Funds offer Class Y shares (for qualified investors). New
England Limited Term U.S. Government Fund, New England Strategic
Income Fund and New England Bond Income Fund offer Class A, Class
B and Class C shares (for other investors). New England
Government Securities Fund and New England Adjustable Rate U.S.
Government Fund offer Class A and Class B shares (for other
investors). This prospectus sets forth information investors
should know before investing in Class Y shares. Please read it
carefully and keep it for future reference. A Statement of
Additional Information in two parts (the "Statement") about the
Funds dated April 15, 1996 has been filed with the Securities and
Exchange Commission (the "SEC") and is available free of charge.
Write to New England Funds, L.P. (the "Distributor"), SAI
Fulfillment Desk, 399 Boylston Street, Boston, Massachusetts
02116 or call toll-free at 1-800-_________. The Statement
contains more detailed information about the Funds and is
incorporated into this prospectus by reference. Class A, Class B
and Class C shares are described in a separate prospectus. To
obtain more information about Class A, Class B and Class C
shares, please call the Distributor toll-free at 1-800-225-5478.
New England Strategic Income Fund may invest up to all of its
assets in lower rated bonds commonly known as junk bonds. This
type of investment is subject to greater risk than higher rated
bonds with respect to principal and interest payments, including
the risk of default. Investors should assess carefully the risks
associated with investment in this fund. See "Investment Risks--
Lower Rated Fixed-Income Securities."
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.
<PAGE>
T a b l e O f C o n t e n t s
Page
FUND EXPENSES AND FINANCIAL
INFORMATION
Schedule of Fees
Financial Highlights
INVESTMENT STRATEGY
Investment Objectives
How the Funds Pursue Their
Objectives
Fund Investments
INVESTMENT RISKS
FUND MANAGEMENT
BUYING FUND SHARES
Minimum Investment
Ways to Buy Fund Shares
[] By wire transfer
[] By mail
OWNING FUND SHARES
Exchanging Among New England
Funds
Fund Dividend Payments
SELLING FUND SHARES
Ways to Sell Fund Shares
[] By telephone
[] By mail
FUND DETAILS
Determination of Net Asset Value
Income Tax Considerations
Performance Criteria
Additional Facts About the Funds
Appendix A
<PAGE>
F u n d E x p e n s e s A n d
F i n a n c i a l I n f o r m a t i o n
Schedule of Fees
Expenses are one of several factors to consider when you invest
in the Funds. The following tables summarize your maximum
transaction costs from investing in Class Y shares of the Funds
and estimated annual expenses for the Funds' Class Y shares. The
Example on the following page shows the cumulative expenses
attributable to a hypothetical $1,000 investment in Class Y
shares of the Funds for the periods specified.
Shareholder transaction expenses
All Funds
---------------------------
Class Y
-----------
Maximum Initial Sales Charge Imposed None
on a Purchase
Maximum Contingent Deferred Sales None
Charge
Annual Fund operating expenses
(as a percentage of average net assets)
New England New England
New England Limited Term Adjustable
Government U.S. Rate U.S.
Securities Government Government
Fund Fund* Fund*
----------- ------------- -------------
Class Y Class Y Class Y
------- ------- -------
Management Fees ___% ___% ___%**
12b-1 Fees None None None
Other Expenses ___% ___% ___%
Total Fund Operating ___% ___% ___%**
Expenses
New England New England
Strategic Bond Income
Income Fund Fund
----------- -------------
Class Y Class Y
------- -------
Management Fees ___%*** ___%
12b-1 Fees None None
Other Expenses ___% ___%
Total Fund Operating ___%*** ___%
Expenses
* The expense information contained in this table and its
footnotes for New England Adjustable Rate U.S. Government Fund
and New England Limited Term U.S. Government Fund has been
restated to reflect fees and expenses currently in effect for
those Funds.
** After voluntary fee waiver and expense reduction by the Fund's
adviser and/or the Distributor. Without the voluntary
limitations, Management Fees would be ____% and Total Fund
Operating Expenses would be ____%. These voluntary
limitations can be terminated by the Fund's adviser or the
Distributor at any time.
*** After voluntary fee waiver and expense reduction by the
Fund's adviser and subadviser. Without the voluntary
limitations, Management Fees would be ____% and Total Fund
Operating Expenses would be ____%. These voluntary
limitations can be terminated by the Fund's adviser or
subadviser at any time.
Example
You would pay the following expenses on a $1,000 investment
assuming (1) a 5% annual return and (2) unless otherwise noted,
redemption at period end. The 5% return and expenses in the
Example should not be considered indicative of actual or expected
Fund performance or expenses, both of which may be more or less
than those shown.
New England New England
New England Limited Term Adjustable
Government U.S. Rate U.S.
Securities Government Government
Fund Fund Fund
----------- -------------- --------------
Class Y Class Y Class Y
------ ------ -----
1 year $ $ $
3 years $ $ $
5 years $ $ $
10 years $ $ $
New England New England
Strategic Bond Income
Income Fund Fund
-------------- ---------------
Class Y Class Y
------ ------
1 year $ $
3 years $ $
5 years $ $
10 years $ $
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 Funds' management fees, and
other expenses, please see "Fund Management" and "Additional
Facts About the Funds."
A wire fee (currently $5.00) will be deducted from your proceeds
if you elect to transfer redemption proceeds by wire.
<PAGE>
Financial Highlights
To Be Filed
By Amendment
<PAGE>
I n v e s t m e n t S t r a t e g y
Investment Objectives
NEW ENGLAND GOVERNMENT SECURITIES FUND
(the "Government Securities Fund")
The Fund seeks a high level of current income consistent with
safety of principal by investing in U.S. Government securities.
Subadviser: Back Bay Advisors, L.P. ("Back Bay Advisors")
NEW ENGLAND LIMITED TERM U.S. GOVERNMENT FUND
(the "Limited Term U.S. Government Fund")
The Fund seeks a high current return consistent with preservation
of capital.
Subadviser: Back Bay Advisors
NEW ENGLAND ADJUSTABLE RATE U.S. GOVERNMENT FUND
(the "Adjustable Rate Fund")
The Fund seeks a high level of current income consistent with low
volatility of principal. The Fund intends to pursue its
objective by investing only in securities issued or guaranteed by
the U.S. Government, its agencies or instrumentalities.
Subadviser: Back Bay Advisors
NEW ENGLAND STRATEGIC INCOME FUND
(the "Strategic Income Fund")
The Fund seeks high current income with a secondary objective of
capital growth.
Subadviser: Loomis, Sayles & Company, L.P. ("Loomis Sayles")
NEW ENGLAND BOND INCOME FUND
(the "Bond Income Fund")
The Fund seeks a high level of current income consistent with
what the Fund considers reasonable risk. The Bond Income Fund
invests primarily in corporate and U.S. Government bonds.
Subadviser: Back Bay Advisors
How the Funds Pursue Their Objectives
Investments in each Fund will be pooled with money from other
investors in that Fund to invest in a managed portfolio
consisting of securities appropriate to the Fund's investment
objective and policies. There can be no assurance that any Fund
will achieve its objective. Each Fund is a "diversified" mutual
fund.
Fund Investments
[] Government Securities Fund
The Government Securities Fund expects that under normal market
conditions it will invest 100% of its net assets in securities
issued or guaranteed by the U.S. Government or its agencies,
authorities or instrumentalities that are backed by the full
faith and credit of the U.S. Government. These securities
include, for example, U.S. Treasury bills, bonds and notes,
mortgage participation certificates guaranteed by the Government
National Mortgage Association ("GNMA") and Federal Housing
Administration debentures.
The Fund may invest in securities of any maturity and in zero
coupon securities. In addition to investing directly in U.S.
Government securities, the Fund may purchase "stripped"
securities.
For hedging purposes, the Government Securities Fund may also
purchase and sell interest rate futures contracts on U.S.
Government securities and may write and purchase options on such
futures and options on U.S. Government securities. Transactions
involving futures and options on futures may help to reduce the
volatility of the Fund's net asset value, but this result cannot
be assured. Options and futures are not backed by the U.S.
Government.
It is a fundamental policy of the Fund that under normal market
conditions it will invest at least 65% of its total assets in
"U.S. Government Securities," which term as used in this
prospectus includes all securities issued or guaranteed by the
U.S. Government or its agencies, authorities or
instrumentalities.
[] Limited Term U.S. Government Fund
The Fund seeks to achieve its objective by investing in U.S.
Government Securities. Under normal market conditions, 65% or
more of the Fund's total assets will be invested in U.S.
Government Securities (including zero coupon bonds) and
collateralized mortgage obligations ("CMOs"). The Fund limits
its investments in CMOs to those issued by instrumentalities of
the U.S. Government. The Fund may also invest in asset-backed
securities rated Aaa by Moody's Investors Service, Inc.
("Moody's") or AAA by Standard & Poor's Ratings Group ("S&P") or
unrated but determined by the Fund's subadviser to be of
comparable quality to securities in those rating categories. For
hedging purposes, the Fund may purchase and sell financial
futures contracts and options.
The Fund's subadviser, Back Bay Advisors, provides a continuous
investment program designed to maximize current return while
minimizing fluctuations in the value of the Fund's portfolio,
thus stabilizing the net asset value of the Fund's shares.
Because the market value of fixed-income securities fluctuates in
response to changes in interest rates, there is a risk of a
decline in the value of the Fund's portfolio (and a corresponding
decrease in the value of the Fund's shares) if interest rates
increase. To reduce this risk, the Fund will ordinarily seek to
maintain an average dollar-weighted maturity of three to seven
years. The Fund may hold individual securities with maturities
of more than seven years as long as its average maturity remains
within this limit.
"Duration" 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 interest rates). Many
investors and investment analysts consider duration to be a more
useful measure of price sensitivity than "maturity." A debt
instrument's duration is derived by discounting principal and
interest payments to their present value using the instrument's
current yield to maturity and calculating the dollar-weighted
average time until these payments will be received. The Fund
will seek to maintain an average portfolio duration of four years
or less. The Fund's portfolio may include fixed-income
securities with durations of more than four years, so long as the
Fund seeks to maintain an average portfolio duration of four
years or less.
The values of securities having shorter durations generally
fluctuate less than securities with longer durations. A
portfolio with an average duration of four years or less should
provide investors with a reduced risk of loss due to rising
interest rates. For example, based on yields of 5.2% for a five-
year U.S. Treasury security and 6.05% for a 30-year U.S. Treasury
security, a 1% increase in interest rates would be expected to
result in approximately a 4.3% reduction in the value of the five-
year security (duration 4.3) as compared to approximately a 13%
reduction in the value of the 30-year security (duration 13).
Conversely, a 1% decrease in interest rates would be expected to
result in similar increases in value. These expectations
represent Back Bay Advisors' 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.
The Fund may lend portfolio securities amounting to not more than
25% of its assets to securities dealers and may enter into
repurchase agreements on up to 25% of its assets. These
transactions must be fully collateralized at all times, but
involve some credit risk to the Fund if the other party should
default on its obligations and the Fund is delayed in or
prevented from recovering the collateral.
[] Adjustable Rate Fund
The Fund seeks to achieve its objective by investing, under
normal market conditions, at least 65% of its total assets in
adjustable rate mortgage securities ("ARMs") or other securities
collateralized by or representing interests in mortgages
(collectively, "mortgage securities"), which have interest rates
that are reset at periodic intervals and which are issued or
guaranteed by the U.S. Government or its agencies or
instrumentalities. The Fund also may invest in CMOs issued by
instrumentalities of the U.S. Government, but will not invest in
privately issued CMOs. Other securities purchased by the Fund
will be limited to securities issued or guaranteed by the U.S.
Government, its agencies or instrumentalities but will not
include any stripped securities (such as interest only or
principal only obligations) or zero coupon obligations. As more
fully described in Part I of the Statement, the Fund also intends
to limit its investments to those that would be permissible
investments for federal credit unions and national banks. When
maintaining a temporary defensive position, the Fund may invest
its assets, without limit, in U.S. Government Securities of any
type.
[] Strategic Income Fund
The Fund seeks to achieve its investment objectives by investing
at least 65% of its total assets in debt instruments. The Fund
may invest in debt instruments issued by corporations based in
the United States or abroad and debt instruments that are
convertible into equity securities. The Fund may also invest in
U.S. Government Securities and in securities issued or guaranteed
by foreign governments (including their political subdivisions,
agencies, authorities and/or instrumentalities) ("Foreign
Government Securities") and securities issued by supranational
agencies. The Fund may invest in debt instruments in any rating
category including debt instruments rated in the lowest rating
categories (C by Moody's and D by S&P) and in instruments that
are unrated. For more information about the risks of investing
in low rated, high risk securities and securities of foreign
issuers, see "Investment Risks _ Lower Rated Fixed-Income
Securities" and "Foreign Securities."
Under normal market conditions, the Fund will invest in debt
instruments of both domestic and foreign issuers and in corporate
as well as government issues. At any time, however, the Fund may
invest up to 100% of its assets in debt instruments of U.S.
issuers, in debt instruments of foreign issuers, in corporate
debt instruments or in government securities. The Fund may
invest up to a total of 35% of its total assets in preferred
stocks, dividend-paying common stocks and shares of closed-end
investment companies (which shares will not exceed 10% of the
Fund's total assets).
The proportion of Fund assets invested in corporate bonds,
government bonds and preferred or common stock will vary over
time based on changing market conditions. When Loomis Sayles
believes that a particular market presents more opportunity than
other markets, it may increase the proportion of the Fund's
assets invested in that market.
The Fund may invest in Rule 144A securities. For hedging
purposes, the Fund may also purchase and sell options and futures
and engage in foreign currency transactions. The Fund may also
invest in mortgage-backed securities, zero coupon bonds, stripped
securities and pay-in-kind securities. For more information
about all these types of investments, see "Investment Risks"
below.
[] Bond Income Fund
The Bond Income Fund invests primarily in corporate and U.S.
Government bonds. At least 80% of its total assets will be
invested in bonds carrying investment grade ratings from one of
the recognized rating services. The Fund may also purchase non-
rated or lower-rated bonds. Bonds rated BBB by S&P or Baa by
Moody's (the lowest ratings that are considered investment grade)
have some speculative characteristics, and 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. If an investment rated BBB or Baa is downgraded by
a major rating agency, the Fund's subadviser will consider
whether the investment remains appropriate for the Fund. The
Fund may invest in securities of any maturity and in zero coupon
securities. The Fund may also invest in CMOs. The Fund will
normally maintain an average dollar-weighted portfolio maturity
of less than ten years. The Fund may invest in convertible
securities.
The Fund may invest in foreign securities but will do so only
when the Fund's subadviser believes the associated risks are
minimal as compared to similar securities of domestic issuers.
The Fund may engage in a variety of options and futures
transactions with respect to U.S. or Foreign Government
Securities and corporate fixed-income securities. See
"Investment Risks -- Options, Futures, Swaps and Currency
Transactions" for information about these kinds of transactions.
[] U.S. and Foreign Government Securities
Different types of U.S. and Foreign Government Securities have
different kinds of government support. U.S. Government
Securities include securities backed by the full faith and credit
of the U.S. Government, as well as many other securities that are
not full faith and credit obligations. For example, obligations
of the Federal Home Loan Banks are supported by the right of the
issuer to borrow from the U.S. Treasury, and obligations of the
Federal Home Loan Mortgage Corporation (the "FHLMC") and the
Federal National Mortgage Association (the "FNMA") are supported
only by the credit of those corporations. Similarly, obligations
of foreign governmental entities include obligations issued or
guaranteed by governments with taxing power or by their agencies.
Some Foreign Government Securities are supported by the full
faith and credit of a foreign national government or political
subdivision (such as a province of Canada) and some are not. For
example, Foreign Government Securities include securities issued
by corporations which have been charged with a public purpose and
a majority of whose outstanding equity securities are owned by a
foreign government or government agency. Such securities may be
supported only by the credit of the issuing corporation and not
by that of the government or agency.
In addition to investing directly in U.S. and Foreign Government
Securities, the Government Securities and Strategic Income Funds
may purchase "stripped" securities evidencing undivided ownership
interests in interest payments or principal payments, or both, on
U.S. and Foreign Government Securities. These investments may be
more volatile than other types of U.S. or Foreign Government
Securities.
[] Foreign Currency Exchange Transactions
The Funds that may invest in securities denominated in foreign
currencies or traded in foreign markets may engage in related
foreign currency exchange transactions to protect the value of
specific portfolio positions or in anticipation of changes in
relative values of currencies in which current or future
portfolio holdings are denominated or quoted.
The Bond Income and Strategic Income Funds may engage in
transactions in currency forward contracts. A currency forward
contract is a contract with a major international bank that
obligates the bank and the other party to the contract to
exchange specified amounts of different currencies at a specified
future date. For example, the bank may agree to deliver a
specified number of French francs, in exchange for a specified
number of U.S. dollars on a certain date.
From time to time, a portion of the Bond Income or Strategic
Income Fund's assets may be invested in securities that are
denominated in foreign currencies or that are traded in markets
where purchase or sale transactions settle in a foreign currency.
Currency forward contracts may be used both (1) to facilitate
settlement of a Fund's transactions in these securities and (2)
to hedge against possible adverse changes in the relative values
of the currencies in which the Fund's portfolio holdings (or
intended future holdings) are denominated.
Currency forward contracts involve transaction costs and the risk
that the banks with which a Fund enters into such contracts will
fail financially. Each Fund's subadviser will, however, monitor
the creditworthiness of these banks on an ongoing basis.
Successful use of currency forward contracts for hedging purposes
also depends on the accuracy of the subadviser's forecasts as to
future changes in the relative values of currencies. The
accuracy of such forecasts cannot be assured. The Fund will set
aside with its custodian certain assets to provide for
satisfaction of its obligations under currency forward contracts.
Although both Funds are permitted to use currency forward
contracts, they are not obligated to do so. Thus, the Funds will
not necessarily be fully (or even partially) hedged against the
risk of adverse currency price movements at any given time.
Foreign currency transactions involve costs and may result in
losses. See Part II of the Statement for more information.
[] Additional Information
Each Fund may purchase securities for its portfolio on a "when-
issued" basis. This means that the Fund will enter into the
commitment to buy the security before the security has been
issued. The Fund's payment obligation and the interest rate on
the security are determined when the Fund enters into the
commitment. The security is typically delivered to the Fund 15
to 120 days later. No interest accrues on the security between
the time the Fund enters into the commitment and the time the
security is delivered.
The Funds, consistent with their investment objectives, attempt
to maximize yields by engaging in portfolio trading and by buying
and selling portfolio investments in anticipation of or in
response to changing economic market conditions and trends. The
Government Securities and Strategic Income Funds also invest to
take advantage of what are believed to be temporary disparities
in the yields of the different segments of the market for U.S.
Government Securities. These policies may result in higher
turnover rates in the Funds' portfolios which may produce higher
transaction costs and a higher level of taxable capital gains.
Portfolio turnover considerations will not limit any Fund's
subadviser's investment discretion in managing the Fund's assets.
Recent portfolio turnover rates for the Funds are set forth above
under "Financial Highlights."
Each Fund may enter into repurchase agreements, under which a
Fund buys securities from a seller, usually a bank or brokerage
firm, with the understanding that the seller will repurchase the
securities at a higher price at a later date. If the seller
fails to repurchase the securities, the Fund has rights to sell
the securities to third parties. Repurchase agreements can be
regarded as loans by the Fund to the seller, collateralized by
the securities that are the subject of the agreement. Repurchase
agreements afford an opportunity for the Fund to earn a return on
available cash at relatively low credit risk, although the Fund
may be subject to various delays and risks of loss if the seller
fails to meet its obligation to repurchase. The staff of the SEC
is currently of the view that repurchase agreements maturing in
more than seven days are illiquid securities.
I n v e s t m e n t R i s k s
It is important to understand the following risks inherent in a
Fund before you invest.
[] Fixed-Income Securities (All Funds)
The Funds invest principally in fixed-income securities. Because
interest rates vary, it is impossible to predict the income of a
Fund for any particular period. The net asset value of your
shares will vary as a result of changes in the value of the bonds
and other securities in a Fund's portfolio.
Fixed-income securities include a broad array of short, medium
and long term obligations issued by the U.S. or foreign
governments, government or international agencies and
instrumentalities, and corporate issuers of various types. Some
fixed-income securities represent uncollateralized obligations of
their issuers; in other cases, the securities may be backed by
specific assets (such as mortgages or other receivables) that
have been set aside as collateral for the issuer's obligation.
Fixed-income securities generally involve an obligation of the
issuer to pay interest or dividends on either a current basis or
at the maturity of the securities, as well as the obligation to
repay the principal amount of the security at maturity.
Fixed-income securities are subject to market and credit risk.
Credit risk relates to the ability of the issuer to make payments
of principal and interest. In the case of municipal bonds, the
issuer may make these payments from money raised through a
variety of sources, including (1) the issuer's general taxing
power, (2) a specific type of tax such as a property tax, or (3)
a particular facility or project such as a highway. The ability
of an issuer of municipal bonds to make these payments could be
affected by litigation, legislation or other political events, or
the bankruptcy of the issuer. U.S. Government Securities do not
involve the credit risks associated with other types of fixed-
income securities; as a result, the yields available from U.S.
Government Securities are generally lower than the yields
available from corporate fixed-income securities. Market risk is
the risk that the value of the security will fall because of
changes in market rates of interest. (Generally, the value of
fixed-income securities falls when market rates of interest are
rising.) Some fixed-income securities also involve prepayment or
call risk. This is the risk that the issuer will repay a Fund
the principal on the security before it is due, thus depriving
the Fund of a favorable stream of future interest or dividend
payments.
Because interest rates vary, it is impossible to predict the
income of a fund that invests in fixed-income securities for any
particular period. Fluctuations in the value of a Fund's
investments in fixed-income securities will cause the Fund's net
asset value to increase or decrease.
[] Lower Rated Fixed-Income Securities (Strategic Income Fund
and Bond Income Fund)
Fixed-income securities rated BB or lower by S&P or Ba or lower
by Moody's (and comparable unrated securities) are of below
"investment grade" quality. Lower quality fixed-income
securities generally provide higher yields, but are subject to
greater credit and market risk, than higher quality fixed-income
securities, including U.S. Government and many Foreign Government
Securities. 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 mutual fund investing in lower
quality fixed-income securities may be more dependent on the
fund's adviser's or subadviser's own credit analysis than for a
fund investing in 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 rated fixed-income securities. This lack
of liquidity at certain times may affect the valuation of these
securities and may make the valuation and sale of these
securities more difficult. Securities of below investment grade
quality are considered high yield, high risk securities and are
commonly known as "junk bonds." For more information, including
a detailed description of the ratings assigned by S&P and
Moody's, please refer to the Statement's "Appendix A --
Description of Bond Ratings."
During the fiscal year ended December 31, 1995, __% of the
average month-end net assets of the Bond Income Fund was invested
in fixed-income securities rated in the rating category just
below investment grade (BB/Ba).
[] Foreign Securities (Strategic Income Fund and Bond Income
Fund)
Foreign Government Securities and foreign corporate securities
present risks not associated with investments in U.S. Government
or corporate securities.
Since most foreign securities are denominated in foreign
currencies or traded primarily in securities markets in which
settlements are made in foreign currencies, the value of these
investments and the net investment income available for
distribution to shareholders of a Fund may be affected favorably
or unfavorably by changes in currency exchange rates or exchange
control regulations. Because the Strategic Income Fund and the
Bond Income Fund may purchase securities denominated in foreign
currencies, a change in the value of any such currency against
the U.S. dollar will result in a change in the U.S. dollar value
of the Fund's assets and the Fund's income available for
distribution.
In addition, although a Fund's income may be received or realized
in foreign currencies, a Fund will be required to compute and
distribute its income in U.S. dollars. Therefore, if the value
of a currency relative to the U.S. dollar declines after a Fund's
income has been earned in that currency, translated into U.S.
dollars and declared as a dividend, but before payment of such
dividend, the Fund could be required to liquidate portfolio
securities to pay such dividend. Similarly, if the value of a
currency relative to the U.S. dollar declines between the time a
Fund incurs expenses in U.S. dollars and the time such expenses
are paid, the amount of such currency required to be converted
into U.S. dollars in order to pay such expenses in U.S. dollars
will be greater than the equivalent amount in such currency of
such expenses at the time they were incurred.
There may be less information publicly available about a foreign
corporate or government issuer than about a U.S. issuer, and
foreign corporate issuers are not generally subject to
accounting, auditing and financial reporting standards and
practices comparable to those in the United States. The
securities of some foreign issuers are less liquid and at times
more volatile than securities of comparable U.S. issuers.
Foreign brokerage commissions and other fees in some
circumstances may be higher than in the United States. With
respect to certain foreign countries, there is a possibility of
expropriation of assets, confiscatory taxation, political or
financial instability and diplomatic developments that could
affect the value of investments in those countries. The receipt
of interest on foreign government securities may depend on the
availability of tax or other revenues to satisfy the issuer's
obligations. A Fund may have limited legal recourse should a
foreign government be unwilling or unable to repay the principal
or interest owed.
The Strategic Income Fund will invest all or any portion of its
assets in the securities of emerging markets. Investments in
emerging markets include investments in countries whose economies
or securities markets are not yet highly developed. Special
considerations associated with these investments (in addition to
the considerations regarding foreign investments as discussed
above) may include, among others, greater political
uncertainties, an economy's dependence on revenues from
particular commodities or on international aid or development
assistance, currency transfer restrictions, highly limited
numbers of potential buyers for such securities and delays and
disruptions in securities settlement procedures.
In addition, the Funds may invest in securities issued by
supranational agencies. Supranational agencies are those
agencies whose member nations determine to make capital
contributions to support the agencies' activities, and include
such entities as the International Bank of Reconstruction and
Development (the World Bank), the Asian Development Bank, the
European Coal and Steel Community and the Inter-American
Development Bank.
In determining whether to invest in securities of foreign
issuers, the adviser of each Fund will consider the likely
effects of foreign taxes on the net yield available to the Fund
and its shareholders. Compliance with foreign tax law may reduce
the Fund's net income available for distribution to shareholders.
[] Mortgage-Related Securities (All Funds)
Mortgage-related securities, such as GNMA or FNMA certificates,
differ from traditional debt securities. Among the major
differences are that interest and principal payments are made
more frequently, usually monthly, and that principal may be
prepaid at any time because the underlying mortgage loans
generally may be prepaid at any time. As a result, if a Fund
purchases these assets at a premium, a faster-than-expected
prepayment rate will reduce yield to maturity, and a slower-than-
expected prepayment rate will have the opposite effect of
increasing yield to maturity. If a Fund purchases mortgage-
related securities at a discount, faster-than-expected
prepayments will increase, and slower-than-expected prepayments
will reduce, yield to maturity. Prepayments, and resulting
amounts available for reinvestment by the Fund, are likely to be
greater during a period of declining interest rates and, as a
result, are likely to be reinvested at lower interest rates.
Accelerated prepayments on securities purchased at a premium may
result in a loss of principal if the premium has not been fully
amortized at the time of prepayment. Although these securities
will decrease in value as a result of increases in interest rates
generally, they are likely to appreciate less than other fixed-
income securities when interest rates decline because of the risk
of prepayments.
An ARM, like a traditional mortgage security, is an interest in a
pool of mortgage loans that provides investors with payments
consisting of both principal and interest as mortgage loans in
the underlying mortgage pool are paid off by the borrowers. ARMs
have interest rates that are reset at periodic intervals, usually
by reference to some interest rate index or market interest rate.
Although the rate adjustment feature may act as a buffer to
reduce sharp changes in the value of adjustable rate securities,
these securities are still subject to changes in value based on
changes in market interest rates or changes in the issuer's
creditworthiness. Because the interest rates are reset only
periodically, changes in the interest rate on ARMs may lag
changes in prevailing market interest rates. Also, some ARMs (or
the underlying mortgages) are subject to caps or floors that
limit the maximum change in interest rate during a specified
period or over the life of the security. As a result, changes in
the interest rate on an ARM may not fully reflect changes in
prevailing market interest rates during certain periods. Because
of the resetting of interest rates, ARMs are less likely than non-
adjustable rate securities of comparable quality and maturity to
increase significantly in value when market interest rates fall.
[] Asset-Backed Securities (Limited Term U.S. Government Fund)
The securitization techniques used to develop mortgage securities
are also being applied to a broad range of other assets. Through
the use of trusts and special purpose corporations, assets such
as automobile and credit card receivables are being securitized
in pass-through structures similar to mortgage pass-through
structures or in a pay-through structure similar to a CMO
structure. Generally the issuers of asset-backed bonds, notes or
pass-through certificates are special purpose entities and do not
have any significant assets other than the receivables securing
such obligations. In general, the collateral supporting asset-
backed securities is of shorter maturity than mortgage loans.
Instruments backed by pools of receivables are similar to
mortgage-backed securities in that they are subject to
unscheduled prepayments of principal prior to maturity. When the
obligations are prepaid, the Fund will ordinarily reinvest the
prepaid amounts in securities the yields of which reflect
interest rates prevailing at the time. Therefore, the Fund's
ability to maintain a portfolio which includes high-yielding
asset-backed securities will be adversely affected to the extent
that prepayments of principal must be reinvested in securities
which have lower yields than the prepaid obligations. Moreover,
prepayments of securities purchased at a premium could result in
a realized loss.
[] Collateralized Mortgage Obligations (All Funds)
A CMO is a security backed by a portfolio of mortgages or
mortgage securities held under an indenture. The underlying
mortgages or mortgage securities are issued or guaranteed by the
U.S. Government or an agency or instrumentality thereof. The
issuer's obligation to make interest and principal payments is
secured by the underlying portfolio of mortgages or mortgage
securities. CMOs are issued with a number of classes or series
which have different maturities and which may represent interests
in some or all of the interest or principal on the underlying
collateral or a combination thereof. CMOs of different classes
are generally retired in sequence as the underlying mortgage
loans in the mortgage pool are repaid. In the event of
sufficient early prepayments on such mortgages, the class or
series of CMO first to mature generally will be retired prior to
its maturity. Thus, the early retirement of a particular class
or series of CMO held by the Fund would have the same effect as
the prepayment of mortgages underlying a mortgage pass-through
security. CMOs may be considered derivative securities.
[] "Stripped" Securities (Government Securities and Strategic
Income Funds)
Stripped securities are usually structured with two or more
classes that receive different proportions of the interest and
principal distribution on a pool of U.S. or Foreign Government
Securities or mortgage assets. In some cases, one class will
receive all of the interest (the interest-only or "IO" class),
while the other class will receive all of the principal (the
principal-only or "PO" class). Stripped securities commonly have
greater market volatility than other types of fixed-income
securities. In the case of stripped mortgage securities, if the
underlying mortgage assets experience greater than anticipated
payments of principal, a Fund may fail to recoup fully its
investments in IOs. The staff of the SEC has indicated that it
views stripped mortgage securities as illiquid unless the
securities are issued by the U.S. Government or its agencies and
are backed by fixed-rate mortgages. The Funds intend to abide by
the staff's position. Stripped securities may be considered
derivative securities.
[] Zero Coupon Securities (All Funds except Adjustable Rate
Fund)
Pay-In-Kind Securities (Strategic Income Fund)
Zero coupon securities are issued at a significant discount from
face value and pay interest only at maturity, rather than at
intervals during the life of the security. Pay-in-kind
securities pay dividends or interest in the form of additional
securities of the issuer, rather than in cash. The prices of pay-
in-kind or zero coupon securities may react more strongly to
changes in interest rates than the prices of many other
securities. The Funds are required to accrue and distribute
income from pay-in-kind and zero coupon securities on a current
basis, even though the Funds will not receive the income
currently in cash. Thus a Fund may have to sell other
investments to obtain cash needed to make income distributions.
[] When-Issued Securities (All Funds)
If the value of a "when-issued" security being purchased falls
between the time a Fund commits to buy it and the payment date,
the Fund may sustain a loss. The risk of this loss is in
addition to the Fund's risk of loss on the securities actually in
its portfolio at the time. In addition, when a Fund buys a
security on a when-issued basis, it is subject to the risk that
market rates of interest will increase before the time the
security is delivered, with the result that the yield on the
security delivered to the Fund may be lower than the yield
available on other, comparable securities at the time of
delivery. Each Fund will maintain liquid high grade assets in a
segregated account in an amount sufficient to satisfy its
outstanding obligations to buy securities on a "when-issued"
basis.
[] Options, Futures, Swap Contracts and Currency Transactions
(All Funds except Adjustable Rate Fund)
Except as otherwise noted, the following discussion applies to
all Funds except the Adjustable Rate Fund. The Funds may engage
in a variety of transactions involving the use of options and
futures with respect to U.S. or Foreign Government Securities or
corporate fixed-income securities (in the case of the Strategic
Income Fund) for purposes of hedging against changes in interest
rates.
A Fund may buy, sell or write options on securities, securities
indexes, currencies or futures contracts. A Fund may buy and
sell futures contracts on securities, securities indexes or
currencies. A Fund may also enter into swap contracts. A Fund
may engage in these transactions either for the purpose of
enhancing investment return, or to hedge against changes in the
value of other assets that a Fund owns or intends to acquire. A
Fund may also conduct foreign currency exchange transactions on a
spot (i.e., cash) basis at the spot rate prevailing in the
foreign currency exchange market. Options, futures and swap
contracts fall into the broad category of financial instruments
known as "derivatives" and involve special risks. Use of
options, futures or swaps for other than hedging purposes may be
considered a speculative activity, involving greater risks than
are involved in hedging.
Options can generally be classified as either "call" or "put"
options. There are two parties to a typical options transaction:
the "writer" and the "buyer." A call option gives the buyer the
right to buy a security or other asset (such as an amount of
currency or a futures contract) from, and a put option the right
to sell a security or other asset to, the option writer at a
specified price, on or before a specified date. The buyer of an
option pays a premium when purchasing the option, which reduces
the return on the underlying security or other asset if the
option is exercised, and results in a loss if the option expires
unexercised. The writer of an option receives a premium from
writing an option, which may increase its return if the option
expires or is closed out at a profit. If a Fund as the writer of
an option is unable to close out an unexpired option, it must
continue to hold the underlying security or other asset until the
option expires, to "cover" its obligations under the option.
A futures contract creates an obligation by the seller to deliver
and the buyer to take delivery of the type of instrument or cash
at the time and in the amount specified in the contract.
Although many futures contracts call for the delivery (or
acceptance) of the specified instrument, futures are usually
closed out before the settlement date through the purchase (or
sale) of a comparable contract. If the price of the sale of the
futures contract by the Fund exceeds (or is less than) the price
of the offsetting purchase, the Fund will realize a gain (or
loss). A Fund may not purchase or sell futures contracts or
purchase related options if immediately thereafter the sum of the
amount of deposits for initial margin or premiums on the existing
futures and related options positions would exceed 5% of the
market value of the Fund's net assets. Transactions in futures
and related options involve the risk of (1) imperfect correlation
between the price movement of the contracts and the underlying
securities, (2) significant price movement in one but not the
other market because of different hours, (3) the possible absence
of a liquid secondary market at any point in time, and (4) if the
subadviser's prediction on interest rates or other economic
factors is inaccurate, the Fund may be worse off than if it had
not hedged. Futures transactions involve potentially unlimited
risk of loss.
The Funds may enter into interest rate, currency and securities
index swaps. The Funds will enter into these transactions
primarily to seek to preserve a return or spread on a particular
investment or portion of its portfolio, to protect against
currency fluctuations, as a duration management technique or to
protect against an increase in the price of securities a Fund
anticipates purchasing at a later date. Interest rate swaps
involve the exchange by the Fund with another party of their
respective commitments to pay or receive interest (for example,
an exchange of floating rate payments for fixed rate payments
with respect to a notional amount of principal). A currency swap
is an agreement to exchange cash flows on a notional amount based
on changes in the relative values of the specified currencies.
An index swap is an agreement to make or receive payments based
on the different returns that would be achieved if a notional
amount were invested in a specified basket of securities (such as
the Standard & Poor's Composite Index of 500 Stocks [the "S&P
500"]) or in some other investment (such as U.S. Treasury
securities).
The value of options purchased by a Fund, futures contracts held
by a Fund and a Fund's positions in swap contracts may fluctuate
up or down based on a variety of market and economic factors. In
some cases, the fluctuations may offset (or be offset by) changes
in the value of securities held in the Fund's portfolio. All
transactions in options, futures or swaps involve the possible
risk of loss to the Fund of all or a significant part of the
value of its investment. In some cases, the risk of loss may
exceed the amount of the Fund's investment. The Fund will be
required, however, to set aside with its custodian bank certain
assets in amounts sufficient at all times to satisfy its
obligations under options, futures and swap contracts.
The successful use of options, futures and swaps will usually
depend on a Fund's subadviser's ability to forecast bond market,
currency or other financial market movements correctly. The
Fund's ability to hedge against adverse changes in the value of
securities held in its portfolio through options, futures and
swap transactions also depends on the degree of correlation
between the changes in the value of futures, options or swap
positions and changes in the values of the portfolio securities.
The successful use of futures and exchange traded options also
depends on the availability of a liquid secondary market to
enable the Fund to close its positions on a timely basis. There
can be no assurance that such a market will exist at any
particular time. Trading hours for options may differ from the
trading hours for the underlying securities. Thus, significant
price movements may occur in the securities markets that are not
reflected in the options market. This may limit the
effectiveness of options as hedging devices. In the case of swap
contracts and of options that are not traded on an exchange and
not protected by the Options Clearing Corporation ("over-the-
counter" options), the Fund is at risk that the other party to
the transaction will default on its obligations, or will not
permit the Fund to terminate the transaction before its scheduled
maturity. As a result of these characteristics, the Funds will
treat most swap contracts and over-the-counter options (and the
assets they segregate to cover their obligations thereunder) as
illiquid. Certain provisions of the Internal Revenue Code (the
"Code") and certain regulatory requirements may limit the Funds'
ability to engage in futures, options and swap transactions.
The options and futures markets of foreign countries are small
compared to those of the United States and consequently are
characterized in most cases by less liquidity than are the U.S.
markets. In addition, foreign markets may be subject to less
detailed reporting requirements and regulatory controls than U.S.
markets. Furthermore, investments by the Strategic Income Fund
in options and futures in foreign markets are subject to many of
the same risks as are the Fund's other foreign investments. See
"Foreign Securities" above. For further information, see
"Options and Futures" in Part II of the Statement.
[] Rule 144A Securities (Strategic Income Fund)
Rule 144A securities are privately offered securities that can be
resold only to certain qualified institutional buyers. Rule 144A
securities are treated as illiquid, unless the subadviser has
determined, under guidelines established by the trustees of New
England Funds Trust I, that the particular issue of Rule 144A
securities is liquid. Investment in illiquid securities involves
the risk that the Fund may be unable to sell such a security at
the desired time.
[] Securities Lending (Limited Term U.S. Government Fund)
The Limited Term U.S. Government Fund may lend its portfolio
securities to broker-dealers or other parties under contracts
calling for the deposit by the borrower with the Fund's custodian
of cash collateral equal to at least the market value of the
securities loaned, marked to market on a daily basis. The Fund
will continue to benefit from interest or dividends on the
securities loaned and will also receive interest through
investment of the cash collateral in short-term liquid
investments. No loans will be made if, as a result, the
aggregate amount of such loans outstanding at any time would
exceed 25% of the Fund's total assets (taken at current value).
Any voting rights, or rights to consent, relating to securities
loaned pass to the borrower. However, if a material event
affecting the investment occurs, such loans will be called so
that the securities may be voted by the Fund. The Fund pays
various fees in connection with such loans, including shipping
fees and reasonable custodial or placement fees.
Securities loans must be fully collateralized at all times, but
involve some credit risk to the Fund if the borrower defaults on
its obligation and the Fund is delayed or prevented from
recovering the collateral.
F u n d M a n a g e m e n t
New England Funds Management, L.P. ("NEFM"), 399 Boylston Street,
Boston, Massachusetts 02116, is the investment adviser of each of
the Funds. NEFM oversees, evaluates and monitors the subadvisory
services provided to the Funds and furnishes general business
management and administration to the Funds.
Loomis Sayles is the subadviser of the Strategic Income Fund.
Founded in 1926, Loomis Sayles, One Financial Center, Boston,
Massachusetts 02111, is one of the country's oldest and largest
investment counsel firms. Daniel Fuss, Managing Partner and
Executive Vice President of Loomis Sayles, has served as the
Strategic Income Fund's portfolio manager since the Fund's
inception in May 1995. Mr. Fuss joined Loomis Sayles in 1976.
The subadviser of the other Funds is Back Bay Advisors, 399
Boylston Street, Boston, Massachusetts 02116. Back Bay Advisors
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 a total of
over $__ billion of securities. Eric N. Gutterson, Vice
President of Back Bay Advisors, has served as the portfolio
manager of the Government Securities Fund and Limited Term U.S.
Government Fund since April 1994. J. Scott Nicholson, Senior
Vice President of Back Bay Advisors, has served as the Adjustable
Rate Fund's portfolio manager since the Fund's inception in
October 1991. Catherine L. Bunting, Senior Vice President of
Back Bay Advisors, has served as the Bond Income Fund's portfolio
manager since 1989. Each of the foregoing persons has been
employed by Back Bay Advisors for at least five years.
Subject to the supervision of NEFM, each subadviser manages the
portfolio of each Fund to which it acts as subadviser in
accordance with the Fund's investment objective and policies,
makes investment decisions for the Fund, places orders to
purchase and sell securities for the Fund and employs
professional advisers and securities analysts who provide
research services relating to the Fund. The Funds pay no direct
fees to any of the subadvisers.
Each of the Funds pays NEFM a management fee at the annual rate
set forth in the following table:
Management fee paid by Fund to NEFM
(as a percentage of average daily net
Fund assets of the Fund)
- ---------------------------- -------------------------------
Adjustable Rate Fund 0.55% of the first $200 million
0.51% of the next $300 million
0.47% of amounts in excess of $500
million
Bond Income Fund 0.500% of the first $100 million
0.375% of amounts in excess of $100
million
Government Securities Fund 0.650% of the first $200 million
0.625% of the next $300 million
0.600% of amounts in excess of $500
million
Limited Term U.S. Government 0.650% of the first $200 million
Fund 0.625% of the next $300 million
0.600% of amounts in excess of $500
million
Strategic Income Fund 0.65% of the first $200 million
0.60% of amounts in excess of $200
million
NEFM pays each Fund's subadviser a subadvisory fee at the annual
rate set forth in the following table:
Subadvisory fee payable to NEFM to
subadviser
(as a percentage of average daily
Fund Subadviser net assets of the Fund)
- ----------------------- ----------- --------------------------------
Adjustable Rate Fund Back Bay 0.275% of the first $200 million
Advisors 0.255% of the next $300 million
0.235% of amounts in excess of
$500 million
Bond Income Fund Back Bay 0.2500% of the first $100 million
Advisors 0.1875% of amounts in excess of
$100 million
Government Securities Back Bay 0.3250% of the first $200 million
Fund Advisors 0.3125% of the next $300 million
0.3000% of amounts in excess of
$500 million
Limited Term U.S. Back Bay 0.3250% of the first $200 million
Government Fund Advisors 0.3125% of the next $300 million
0.3000% of amounts in excess of
$500 million
Strategic Income Fund Loomis 0.35% of the first $200 million
Sayles 0.30% of amounts in excess of
$200 million
Prior to January 2, 1996, Back Bay Advisors served as adviser to
each Fund other than the Strategic Income Fund.
Under an expense deferral arrangement, which NEFM and Loomis
Sayles may terminate at any time, NEFM and Loomis Sayles have
agreed to waive their advisory and subadvisory fees for the
Strategic Income Fund until further notice, subject to the
obligation of the Fund to repay such waived fees to NEFM in later
periods to the extent that the Fund's expenses in such future
periods fall below the annual rate of 1.15% for the Fund's Class
Y shares; provided, however, that the Fund is not obligated to
pay any such waived fees more than two years after the end of the
fiscal year in which such fee was waived.
NEFM and the Distributor have voluntarily agreed, until further
notice to the Adjustable Rate Fund, to reduce their fees and, if
necessary, to bear certain expenses associated with operating the
Fund, in order to limit the Fund's expenses to the annual rate of
0.45% of the Fund's average daily net assets attributable to its
Class Y shares.
If any of the voluntary fee reductions described above are
terminated, the prospectus of the affected Fund will be
supplemented.
The general partners of Back Bay Advisors, Loomis Sayles, NEFM
and the Distributor are special purpose corporations that are
indirect, wholly-owned subsidiaries of New England Investment
Companies, L.P. ("NEIC"). NEIC's sole general partner, New
England Investment Companies, Inc. ("NEIC Inc."), is a wholly-
owned subsidiary of New England Mutual Life Insurance Company
("The New England"). 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. After such merger, NEIC Inc. will
be a wholly-owned subsidiary of MetLife.
In placing portfolio transactions for the Funds, Back Bay
Advisors and, in the case of the Strategic Income Fund, Loomis
Sayles, seek the most favorable price and execution available.
Subject to applicable regulatory restrictions and such policies
as each Trust's trustees may adopt, Back Bay Advisors and Loomis
Sayles may consider sales of shares of the Funds as a factor in
the selection of broker-dealers to effect portfolio transactions
for the Fund for which it acts as subadviser. See "Portfolio
Transactions and Brokerage" in Part II of the Statement.
In addition to overseeing the management of the Funds' portfolios
as conducted by the subadvisers, NEFM provides executive and
other personnel for the management of the Trusts. Each Trust's
Board of Trustees supervises the affairs of that Trust as
conducted by NEFM and the subadvisers.
Pursuant to rules of the SEC, the Funds may pay brokerage
commissions to New England Securities Corporation, a broker-
dealer affiliate of NEFM, on purchases and sales of securities
for the portfolios of the Funds.
In addition to the management fee paid to NEFM, each Fund pays
all expenses not borne by the Fund's investment adviser or
subadviser or the Distributor, including, but not limited to, the
charges and expenses of the Fund's custodian and transfer agent,
independent auditors and legal counsel for the Fund and the
Trusts' independent trustees, 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 and state
securities laws, all expenses of shareholders' and trustees'
meetings, preparing, printing and mailing prospectuses and
reports to shareholders and the compensation of trustees who are
not directors, officers or employees of Back Bay Advisors, NEFM,
Loomis Sayles or their affiliates, other than affiliated
registered investment companies. Certain expenses are allocated
differently between each Fund's Class A, Class B and (in the case
of the Limited Term U.S. Government, Strategic Income and Bond
Income Funds) Class C shares, on one hand, and its Class Y
shares, on the other hand. (See "Additional Facts About the
Funds" below.)
B u y i n g F u n d S h a r e s
Minimum Investment
Class Y shares of the Funds may be purchased by endowments and
foundations. The minimum initial investment is $1 million for
these entities and $100,000 is the minimum for each subsequent
investment. Class Y shares may also be purchased by plan
sponsors of 401(a), 401(k), 457 or 403(b) plans ("Retirement
Plans") that have total investment assets in these plans of at
least $10 million. Plan sponsors' investment assets in multiple
Retirement Plans can be aggregated for purposes of meeting this
minimum. Class Y shares may also be purchased by any separate
account of The New England or of any other insurance company
affiliated with The New England ("Separate Accounts"). There is
no minimum initial or subsequent investment amount for Retirement
Plans or Separate Accounts. Investments in the Funds may also be
made by certain individual retirement accounts if the amounts
invested represent rollover distributions from investments by any
of the foregoing plans of amounts invested in the Funds.
Ways To Buy Fund Shares
A shareholder may purchase Class Y shares for cash on any
business day by the two methods described below:
BY WIRE TRANSFER: Prior to an initial investment, obtain an
account number and wire transfer instructions by calling 1-800-
225-5478 between 8:00 a.m. and 7:00 p.m. (Eastern time). All
funds should be transmitted to State Street Bank and Trust
Company, ABA #011000028, DDA #99011538 Credit [Fund Name] Class Y
shares, Shareholder Name, and Shareholder Account Number.
BY MAIL: For an initial investment, complete the attached
application and return it with a check payable to New England
Funds, L.P. and mailed to New England Funds, L.P., 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.
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.)
Class Y shares may also be purchased by exchanging securities on
deposit with a custodian acceptable to a Fund's subadviser or by
a combination of such securities and cash. Purchase of shares of
the Funds in exchange for securities is subject in each case to
the determination by a Fund's subadviser that the securities to
be exchanged are acceptable for purchase by the Fund. Securities
accepted by a Fund's subadviser in exchange for Fund shares will
be valued in the same manner as the Fund's assets (generally the
last quoted sales price), as described below under "Determination
of Net Asset Value," as of the time of the Fund's next
determination of net asset value after such acceptance. All
dividends and subscription or other rights which are reflected in
the market price of accepted securities at the time of valuation
become the property of the Fund and must be delivered to the Fund
upon receipt by the investor from the issuer. A gain or loss for
federal income tax purposes would be realized upon the exchange
by an investor that is subject to federal income taxation,
depending upon the investor's basis in the securities tendered.
A shareholder who wishes to purchase shares by exchanging
securities should obtain instructions by calling 1-800-225-5478.
A Fund's subadviser will not approve the acceptance of securities
in exchange for shares of a Fund it advises unless (1) the Fund's
subadviser, in its sole discretion, believes the securities are
appropriate investments for the Fund; (2) the investor represents
and agrees that all securities offered to the Fund are not
subject to any restrictions upon their sale by the Fund under the
Securities Act of 1933, or otherwise; (3) the securities are
eligible to be acquired under the Fund's investment policies and
restrictions; and (4) the securities have a value which is
readily ascertainable (not established by evaluation procedures
alone) as evidenced by a listing on the New York Stock Exchange,
the American Stock Exchange, NASDAQ or the principal securities
exchange of countries in which the Fund may invest. No investor
owning 5% or more of the Fund's shares may purchase additional
Fund shares by exchange of securities (other than shares of other
funds in the New England Funds).
General
The purchase price of shares of each Fund is the net asset value
next determined after a purchase order is received in good order
by New England Funds, L.P. For purposes of calculating the
purchase price of Fund shares, a purchase order is considered
received by the Fund on the day that it is "in good order" unless
it is rejected by the Fund. For a purchase order to be in "good
order" on a particular day, the investor's securities must be
placed on deposit at a depository acceptable to a Fund's
subadviser by 4:00 p.m. (Eastern time), and, in the case of a
cash investment, Federal funds must be wired to the Fund between
9:00 a.m. and 4:00 p.m. (Eastern time) or a check for the
purchase price of the shares, accompanied by a completed
application, must have been received by New England Funds, L.P.
before 4:00 p.m. (Eastern time) on that day. Orders received
after 4:00 p.m. (Eastern time) will receive the next day's price.
Purchases will be made in full and fractional Class Y shares
calculated to three decimal places. The shareholder will receive
a statement of Fund shares owned following each transaction.
Investors will not receive certificates representing Class Y
shares. The Funds and the Distributor reserve the right at any
time to reject a purchase order.
O w n i n g F u n d S h a r e s
Exchanging Among New England Funds
You may exchange Class Y shares of the Fund or any other series
of the Trusts for Class Y shares of any other series of the
Trusts which offers Class Y shares or for Class A shares of the
New England Cash Management Trust Money Market Series or U.S.
Government Series or New England Tax Exempt Money Market Trust
(the "Money Market Funds").
To make an exchange, please call 1-800-225-5478 between 8:00 a.m.
and 7:00 p.m. (Eastern time) or, write to New England Funds.
Exchange requests after 4:00 p.m. (Eastern time), or after the
Exchange closes if it closes earlier than 4:00 p.m., will be
processed at the net asset value determined at the close of
regular trading on the next day that the Exchange is open. All
exchanges are subject to the minimum investment and eligibility
requirements of the series into which you are exchanging. In
connection with any exchange, you must receive a current
prospectus of the series into which you are exchanging. The
exchange privilege may be exercised only in those states where
shares of such other series may be legally sold.
Shareholders have the automatic privilege to exchange Fund shares
by telephone. New England Funds, L.P. will employ reasonable
procedures to confirm that 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 telephone instructions, will provide shareholders with
written confirmations of such transactions and will record
telephone instructions.
Except as otherwise permitted by SEC rule, shareholders will
receive at least 60 days' advance notice of any material change
to the exchange privilege.
Fund Dividend Payments
Each Fund declares dividends daily and pays 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). Each Fund pays short-term capital gains annually.
The trustees of the Trusts may adopt a different schedule as long
as payments are made at least annually. If you intend to
purchase shares of a Fund shortly before it declares a dividend
you should be aware that a portion of the purchase price may be
returned to you as a taxable dividend.
Shareholders have the option to reinvest all distributions in
additional Class Y shares of the Fund or in Class Y shares of
other series of the Trusts, to receive distributions from
ordinary income in cash while reinvesting distributions from
capital gains in additional Class Y shares of the Fund or of
other series of the Trusts or to receive all distributions in
cash. Income distributions and capital gains distributions will
be reinvested in Class Y shares of the Fund at net asset value
unless you select another option. You may change your
distribution option by notifying New England Funds 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 "undeliverable" to the 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 that
allows you to have all dividends and any other distributions
automatically invested in shares of the same class of another New
England Fund, subject to the investor eligibility requirements of
that other fund and to state securities law requirements. Shares
will be purchased at the selected fund's net asset value on the
dividend record date. A dividend diversification account must be
in the same registration (shareholder name) as the distributing
fund account and, if a new account in the purchased fund is being
established, the purchased fund's 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 fund's prospectus.
S e l l i n g F u n d S h a r e s
Ways to Sell Fund Shares
Class Y shares of the Funds may be redeemed in the following
ways:
[] By telephone:
A shareholder may redeem shares by telephone in cash by the two
methods described below:
Wired to Your Bank Account _ If you have previously selected the
telephone redemption privilege on your account, shares may be
redeemed by calling 1-800-225- 5478 between 8:00 a.m. and 7:00
p.m. (Eastern time) on a day when the Funds are open for
business. The proceeds 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 between 8:00 a.m. and 7:00 p.m. (Eastern
time) and requesting that a check for the proceeds 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.
Redemption requests accepted after 4:00 p.m. (Eastern time), or
after the Exchange closes if it closes before 4:00 p.m., will be
processed at the net asset value determined at the close of
regular trading on the next day that the Exchange is open.
[] By mail:
You may redeem your shares at their net asset value 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 they 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 redemptions by
certain benefit plans and IRAs. Contact the Distributor for
details.
General
Redemption requests will be effected at the net asset value next
determined after the redemption request is received in proper
form by State Street Bank and Trust Company ("State Street
Bank"). Redemption proceeds will normally be mailed to you
within seven days after State Street Bank or the Distributor
receives your request in good order. However, in those cases
where you have recently purchased your shares by check or an
electronic funds transfer through the ACH system and you make a
redemption request within 10 days after such purchase or
transfer, the Fund may withhold redemption proceeds until the
Fund knows that the check or funds have cleared.
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 the Distributor or your investment dealer for more
information.
Telephone redemptions are not available for tax qualified
retirement plans or for Fund shares 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 that 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.
If Back Bay Advisors, or Loomis Sayles in the case of the
Strategic Income Fund, determines, in its sole discretion, that
it would be detrimental to the best interests of the remaining
shareholders of the Fund to make payment wholly or partly in
cash, the Fund may pay the redemption price in whole or in part
by a distribution in kind of readily marketable securities held
by the Fund in lieu of cash. Securities used to redeem Fund
shares in kind will be valued in accordance with the Funds'
procedures for valuation described under "Determination of Net
Asset Value." Securities distributed by a Fund in kind will be
selected by Back Bay Advisors, or Loomis Sayles in the case of
the Strategic Income Fund, in light of the Fund's objective and
will not generally represent a pro rata distribution of each
security held in the Fund's portfolio. Investors may incur
brokerage charges on the sale of any such securities so received
in payment of redemptions. The Funds' right to pay redemptions
in kind is limited by an election made by the Funds under Rule
18f-1 under the Investment Company Act of 1940. See
"Redemptions" in Part II of the Statement.
F u n d D e t a i l s
Determination of Net Asset Value
Back Bay Advisors or, in the case of the Strategic Income Fund,
Loomis Sayles, under the supervision of each Trust's Board of
Trustees, determines the value of the total net assets of each
Fund as of the close of regular trading (ordinarily 4:00 p.m.
Eastern time) each day the Exchange is open. The Boards of
Trustees have authorized Back Bay Advisors or, in the case of the
Strategic Income Fund, Loomis Sayles, to delegate certain price
determination functions to pricing services or facilities
selected by Back Bay Advisors or Loomis Sayles, as the case may
be. Securities for which market quotations are readily available
are generally valued at market value on the basis of market
quotations. Options, interest rate futures and options thereon
which are traded on exchanges are valued at their last sale price
as of the close of the Exchange. All money market instruments
with a maturity of more than 60 days are valued at current market
value. The value of debt securities with remaining maturities of
60 days or less shall be their amortized cost value, unless
conditions indicate otherwise. In all other cases, the value of
a Fund's assets is determined in good faith by Back Bay Advisors
or, in the case of the Strategic Income Fund, Loomis Sayles, or a
pricing service selected by Back Bay Advisors or Loomis Sayles,
under the supervision of the Boards of Trustees.
The net asset value per share of each class is determined by
dividing the value of each class's securities (the current U.S.
dollar value, in the case of securities principally traded
outside the United States) plus any cash and other assets
(including dividends and interest receivable but not collected)
less all liabilities (including accrued expenses), by the number
of shares of such class outstanding. The public offering price
of Class Y shares is the net asset value per share.
Income Tax Considerations
Each Fund intends to meet all requirements of the Code necessary
to ensure that it qualifies as a regulated investment company and
thus does not expect to pay any federal income tax on investment
income and capital gains distributed to shareholders in cash or
additional shares. Unless you are a tax exempt entity, your
distributions derived from a Fund's short-term capital gains and
ordinary income are taxable to you as ordinary income.
Distributions derived from a Fund's long-term capital gains
("capital gains distributions"), if designated as such by a Fund,
are taxable to you as long-term capital gains, regardless of how
long you have owned shares in the Fund. Both dividends and
capital gains distributions are taxable whether distributed to
you in cash or additional shares.
A Fund's transactions in foreign currency-denominated debt
securities and its hedging activities will likely produce a
difference between its book income and its taxable income. This
difference may cause a part or all of a Fund's income
distributions to constitute returns of capital for tax purposes
or require the Fund to make distributions exceeding book income
to avoid federal income tax liability.
Dividends derived from interest on U.S. Government securities may
be exempt from state and local taxes. The Trusts intend to
advise shareholders of the proportion of each Fund's dividends
that are derived from such interest. Before investing in any of
the Funds, you should check the consequences of your local and
state tax laws, which may be different from the federal tax
consequences, and the consequences for any retirement plan
offering tax benefits.
To avoid an excise tax, each Fund intends to distribute prior to
calendar year end virtually all the Fund's ordinary income earned
during that calendar year, and virtually all of the capital gain
net income the Fund realized in the 12-month period ending
December 31 but has not previously distributed. If declared in
December to shareholders of record in that month, and paid the
following January, these distributions will be considered for
federal income tax purposes to have been received by shareholders
on December 31.
Each Fund is required to withhold 31% of all income dividends and
capital gains distributions it pays to you if you do not provide
a correct, certified taxpayer identification number, if the Fund
is notified that you have underreported income in the past or if
you fail to certify to the Fund that you are not subject to such
withholding. In addition, each Fund will be required to withhold
31% of the gross proceeds of Fund shares you redeem if you have
not provided a correct, certified taxpayer identification number.
If you are a tax-exempt institution, however, these back-up
withholding rules will not apply so long as you furnish the Fund
with an appropriate certification.
Annually, if you earn more than $10 in taxable income from a
Fund, you will receive a Form 1099 to assist you in reporting the
prior calendar year's 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 income tax
consequences of an investment in a Fund. You should consult a
competent tax adviser as to the effect of an investment in a Fund
on your particular federal, state and local tax situations.
[] Adjustable Rate Fund
While many states grant tax-free status to dividends paid to
shareholders of mutual funds from interest income earned by a
Fund from direct obligations of the U.S. Government, none of the
distributions of the Adjustable Rate Fund during the current
fiscal year are expected to qualify for such tax-free treatment.
Investments in mortgage-backed securities (including GNMA, FNMA
and FHLMC securities) and repurchase agreements collateralized by
U.S. Government securities do not qualify as direct federal
obligations in most states.
Performance Criteria
Each Fund may include total return information in advertisements
or other written sales material. Each Fund may show the average
annual total return for each class of shares for the one-, five-
and ten-year periods through the end of the most recent calendar
quarter (or, if shorter, the period since the commencement of the
class's operations). Total return is measured by comparing the
value of a hypothetical $1,000 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 and, in the case of
the Class B shares, imposition of the CDSC for the period of time
quoted). Total return may be quoted with or without giving
effect to any voluntary expense limitations in effect for the
class in question during the relevant period. The classes may
also show total return over other periods, on an aggregate basis
for the period presented, or without deduction of a sales charge.
If a sales charge is not deducted in calculating total return,
the class's total return is higher. Each Fund may also include
the yield, accompanied by the total return, for each class of
shares, in advertising and other written material. Yield will be
computed in accordance with the SEC's 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 (reduced by any earned income
expected to be declared shortly as a dividend) on the last day of
the period. Yield calculations will reflect any voluntary
expense limitations in effect for the Fund during the relevant
period.
Each Fund may also present one or more distribution rates for
each class in its sales literature. These rates will be
determined by annualizing the class's 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.
As a result of lower operating expenses, Class Y shares of the
Funds can be expected to achieve a higher investment return than
the Funds' Class A, Class B or Class C shares.
All performance information is based on past results and is not
an indication of likely future performance.
Additional Facts About the Funds
[] New England Funds Trust I was organized in 1985 as a
Massachusetts business trust and is authorized to issue an
unlimited number of full and fractional shares in multiple
series. The Government Securities Fund represents the original
series of shares of New England Funds Trust I. The Bond Income
Fund was organized prior to 1985 and conducted investment
operations as a separate corporation until its reorganization as
a series of New England Funds Trust I in January 1987. The
Strategic Income Fund commenced investment operations in 1995.
[] New England Funds Trust II 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 Limited Term U.S. Government Fund commenced
investment operations in 1989. The Adjustable Rate Fund
commenced operations in 1991.
[] When you invest in a Fund, you acquire freely transferable
shares of beneficial interest that entitle you to receive
dividends as determined by the respective Trust's trustees and to
cast a vote for each share you own at shareholder meetings.
Shares of each Fund vote separately from shares of other series
of the same Trust, except as otherwise required by law. Shares
of all classes of a Fund vote together, except as to matters
relating to a class's Rule 12b-1 plan, for which only shares of
that class are entitled to vote. No Rule 12b-1 plan applies to
the Class Y shares of any Fund.
[] Class A, Class B and Class C shares are identical to Class Y
shares, except that Class A and Class B shares are subject to a
sales load or contingent deferred sales charge, Class A, Class B
and Class C shares bear a service fee at the annual rate of 0.25%
of average net assets (and in the case of Class B and Class C
shares a 0.75% distribution fee; also, Class A shares of the
Limited Term U.S. Government Fund bear an additional 0.10%
distribution fee) and have separate voting rights in certain
circumstances. Class Y bears its own transfer agency and
prospectus printing costs. The minimum investment in Class A,
Class B and Class C shares is $2,500 (but lower minimums apply to
purchases under certain special programs).
[] Except for matters that are explicitly identified as
"fundamental" in this prospectus or Parts I and II of the
Statement, the investment policies of each Fund may be changed
without shareholder approval or prior notice. The investment
objectives of the Government Securities and Bond Income Funds are
fundamental. The investment objectives of the Adjustable Rate
Fund and Strategic Income Fund are not fundamental. The
investment objectives of the Limited Term U.S. Government Fund is
not fundamental but, as a matter of policy, the trustees would
not change that objective without shareholder approval. If there
is a change in the investment objective of the Adjustable Rate or
Strategic Income Fund, you should consider whether the Fund
remains an appropriate investment in light of your then current
financial position and needs.
[] The Trusts do not generally hold regular shareholder
meetings and will do so only when required by law. Shareholders
of a Trust may remove the trustees of that Trust from office by
votes cast at a shareholder meeting or by written consent.
[] 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.
[] The Trusts, together with the Money Market Funds, constitute
the New England Funds. Each Trust offers only its own Funds'
shares for sale, but it is possible that a Trust might become
liable for any misstatements in this prospectus that relate to
the other Trust. The trustees of each Trust have considered this
possible liability and approved the use of this combined
prospectus for Funds of both Trusts.
[] The Class A, Class B, Class C and Class Y structure could be
terminated should certain IRS rulings be rescinded.
[] Each Fund's annual report contains additional performance
information and is made available upon request and without
charge.
[] The Distributor has entered into a selling agreement with
investment dealers, including a broker-dealer that is an
affiliate of the Distributor, for the sale of the Funds' Class Y
Shares. The Distributor may at its expense pay an amount not to
exceed 0.50% of the amount invested to dealers who have selling
agreements with the Distributor. Registered representatives of
the affiliated broker-dealer are also employees of New England
Investment Associates, Inc. ("NEIA"), an indirect, wholly-owned
subsidiary of NEIC. NEIA may receive compensation with respect
to certain sales of each Fund's Class Y shares from the Fund's
subadviser.
<PAGE>
A p p e n d i x A : R a t i n g s O f S e c u r i t i e s
Description of Moody's Investors Service, Inc. bond ratings:
Aaa, Aa, A _ Bonds which are rated Aaa or Aa are judged to be of
high quality by all standards and are generally known as high
grade bonds. Bonds rated Aa are rated lower than Aaa securities
because margins of protection may not be as large as in the
latter or fluctuation of protective elements may be of greater
amplitude or there may be other elements present which make the
long-term risks appear somewhat larger than in Aaa securities.
Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper medium grade
obligations. Factors giving security to principal and interest
are considered adequate, but elements may be present which
suggest a susceptibility to impairment sometime in the future.
Baa _ Bonds which are rated Baa are considered medium grade
obligations, i.e., they are neither highly protected nor poorly
secured. Interest payments and principal security appear
adequate for the present, but certain protective elements may be
lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as
well.
Ba _ Bonds which are rated Ba are judged to have speculative
elements; their future cannot be considered as well secured.
Often the protection of interest and principal payments may be
very moderate and thereby not well safeguarded during both good
and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B _ Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal
payments or of maintenance of other terms of the contract over
any long period of time may be small.
Caa _ Bonds which are rated Caa are of poor standing. Such
issues may be in default or there may be present elements of
danger with respect to principal or interest.
Ca _ Bonds which are rated Ca represent obligations which are
speculative in high degree. Such issues are often in default or
have other marked shortcomings.
C _ Bonds which are rated C are the lowest rated class of bonds
and can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
Description of Standard & Poor's Ratings Group bond ratings:
AAA, AA, A _ Bonds rated AAA have the highest rating assigned by
S&P to a debt obligation. Capacity to pay interest and repay
principal is extremely strong. Bonds rated AA have a very strong
capacity to pay interest and repay principal and differ from the
highest rated issues only in small degree. Bonds rated A have a
strong capacity to pay interest and repay principal although they
are somewhat more susceptible to the adverse effects of changes
in circumstances and economic conditions than bonds in high rated
categories.
BBB _ Bonds rated BBB are regarded as having an adequate capacity
to pay interest and repay principal. Whereas they normally
exhibit adequate protection parameters, adverse economic
conditions or changing circumstances are more likely to lead to a
weakened capacity to repay principal and pay interest for bonds
in this category than for bonds in higher rated categories.
BB-B-CCC-CC-C _ Bonds rated BB, B, CCC, CC and C are regarded, on
balance, as predominantly speculative with respect to the
issuer's capacity to pay interest and repay principal in
accordance with the terms of the obligation.
BB indicates the lowest degree of speculation and C the highest
degree of speculation. While such bonds will likely have some
quality and protective characteristics, these are outweighed by
large uncertainties or major risk exposures to adverse
conditions.
CI _ The rating CI is reserved for income bonds on which no
income is being paid.
D _ Bonds rated D are in default, and payment of interest and/or
repayment of principal is in arrears.
<PAGE>
<PAGE>
NEW ENGLAND FUNDS
Where The Best Minds Meet(TM)
NEW ENGLAND MASSACHUSETTS TAX FREE INCOME FUND
Prospectus and Application _ April 15, 1996
New England Massachusetts Tax Free Income Fund (the "Fund") is a
non-diversified mutual fund and a series of New England Funds
Trust II (the "Trust"), a registered open-end management
investment company. Seven 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 "Trusts."
The Fund seeks as high a level of current income exempt from
federal income tax and Massachusetts personal income taxes as
Back Bay Advisors, L.P. ("Back Bay Advisors"), the Fund's
subadviser, believes is consistent with preservation of capital.
There can be no assurance that the Fund will achieve this
objective.
The 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 (a
"CDSC"), 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 purchase. See "Buying Fund Shares _ Sales
Charges."
This prospectus sets forth information you should know before
investing in the Fund. Please read it carefully and keep it for
future reference. A statement of additional information in two
parts (the "Statement") about the Fund dated April 15, 1996 has
been filed with the Securities and Exchange Commission (the
"SEC") and is available free of charge. Write to New England
Funds, L.P. (the "Distributor"), 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
Fund and is incorporated into this prospectus by reference.
SHARES OF THE FUND 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.
For general information on the Fund or any of its services and
for assistance in opening an account, contact your investment
dealer or call the Distributor toll free at 1-800-225-5478.
<PAGE>
T a b l e O f C o n t e n t s
Pag
e
FUND EXPENSES AND FINANCIAL
INFORMATION
Schedule of Fees Sales charges, yearly operating
expenses.
Financial Highlights Historical information on the
Fund's performance.
INVESTMENT STRATEGY
How the Fund Pursues Its
Investment Objective
INVESTMENT RISKS It is important to understand
the risks inherent in the Fund
before you invest.
FUND MANAGEMENT
BUYING FUND SHARES
Minimum Investment Everything you need to know to
open and add to
6 Ways to Buy Fund Shares a New England Funds account.
[] Through your investment
dealer
[] By mail
[] By wire transfer
[] By Investment Builder
[] By electronic purchase
through ACH
[] By exchange from another New
England Fund
Sales Charges
Reduced Sales Charges (Class A
Shares Only)
OWNING FUND SHARES
Exchanging Among New England New England Funds offers three
Funds convenient ways to
Fund Dividend Payments exchange Fund shares.
SELLING FUND SHARES
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
Repurchase Option (Class A Shares An opportunity to reinvest your
Only) redemption proceeds within 120
days for no sales charge.
FUND DETAILS Additional information you may
find important.
How Fund Share Price is
Determined
Income Tax Considerations
The Fund's Expenses
Performance Criteria
Additional Facts About the Fund
Glossary of Terms
<PAGE>
F u n d E x p e n s e s A n d
F i n a n c i a l I n f o r m a t i o n
Schedule of Fees
Expenses are one of several factors to consider when you invest
in the Fund. The following tables summarize your maximum
transaction costs from investing in the Fund and estimated annual
expenses for each class of the Fund's shares. The Example shows
the cumulative expenses attributable to a hypothetical $1,000
investment in each class of shares of the Fund for the periods
specified.
Shareholder transaction expenses
Class A Class B
----- -----
Maximum Initial Sales Charge Imposed on a
Purchase (as a percentage of offering
price)(1)(2) 4.25% None
Maximum Contingent Deferred Sales Charge
(as a percentage of original purchase
price or redemption proceeds, as
applicable)(2) (3) 4.00%
(1) A reduced sales charge on Class A shares applies in some
cases. See "Buying Fund Shares -- Reduced Sales Charges
(Class A Shares Only)."
(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 one year
after purchase, but not to any other purchases or
redemptions of Class A shares. See "Buying Fund Shares --
Sales Charges."
Annual Fund operating expenses*
(as a percentage of average net assets)
Class A Class B
------- --------
Management Fees ___%*** ____%***
12b-1 Fees 0.35% 1.00%*
Other Expenses ___% ___%
Total Fund Operating Expenses ___%*** ___%***
* The expense information contained in this table and its
footnotes has been restated to reflect fees and expenses
currently in effect for the Fund.
** 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.
*** After voluntary fee waiver and expense limitations. Without
such voluntary limitations, the Fund's Management Fees would
be ____% for Class A and Class B shares and Total Expenses
would be ____% for Class A shares and ___% for Class B
shares.
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
may be more or less than those shown.
Class A Class B
---- -------
(1) (2)
1 year $ $ $
3 years $ $ $
5 years $ $ $
10 years* $ $ $
(1) Assumes redemption at end of period.
(2) Assumes no redemption at end of period.
* 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.
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 Fund. For additional
information about the Fund's management fees, 12b-1 fees and
other expenses, please see "Fund Management" and "The Fund's
Expenses."
A wire fee (currently $5.00) will be deducted from your proceeds
if you elect to transfer redemption proceeds by wire.
<PAGE>
FINANCIAL HIGHLIGHTS
TO BE FILED
BY AMENDMENT
<PAGE>
I n v e s t m e n t S t r a t e g y
How the Fund Pursues Its Investment Objective
The Fund invests primarily in Massachusetts Tax Exempt Bonds
(which are described below). Massachusetts law provides that to
the extent distributions by the Fund are derived from interest on
Massachusetts Tax Exempt Bonds, they shall be exempt from
Massachusetts personal income taxes. It is a fundamental policy
of the Fund that the Fund will normally invest at least 80% of
the value of its net assets in debt obligations the interest from
which is, in the opinion of bond counsel at the time of issuance,
exempt from regular federal income tax and Massachusetts personal
income taxes and is not subject to the federal alternative
minimum tax (the "AMT") for individuals. It is the Fund's
intention, however, that, under normal market conditions, (1) at
least 90% of the Fund's net assets will be invested in debt
obligations the interest from which will be exempt from federal
income tax (other than the AMT) and Massachusetts personal income
taxes and (2) no more than 20% of the Fund's net assets will be
invested in debt obligations the interest from which is subject
to the AMT. Under normal conditions, at least 65% of the Fund's
assets will be invested in Massachusetts Tax Exempt Bonds. During
the Fund's fiscal year ended December 31, 1995, on average ____%
of the Fund's net assets were invested in debt obligations the
interest from which is exempt from Federal income tax (other than
the AMT) and Massachusetts personal income taxes, and ___% of the
Fund's net assets were invested in debt obligations the interest
from which is subject to the AMT. During that period, ___% of the
Fund's distributions were derived from "private activity bonds,"
the income from which is an item of tax preference for purposes
of the federal alternative minimum tax for individuals. The Fund
may invest up to 5% of its assets in so-called "inverse floating
obligations" or "residual interest bonds."
Securities purchased by the Fund will be largely of investment
grade quality. Immediately after the Fund purchases an
investment, at least 85% of the Fund's assets will consist of
securities rated AAA, AA, A or BBB by Standard & Poor's Ratings
Group ("S&P"); Aaa, Aa, A or Baa by Moody's or securities that
are not rated by S&P or Moody's but that are determined by the
Fund's subadviser to be of comparable quality to securities in
those rating categories.
The other 15% of the Fund's assets may be invested in securities
rated below investment grade (below BBB or Baa) or unrated but
securities determined by Back Bay Advisors to be of comparable
quality to bonds rated below BBB or Baa.
Bonds rated BBB or Baa are considered investment grade but may
have speculative characteristics. See "Investment Risks _ Lower
Quality Fixed-Income Securities" for more information about these
bonds. The Fund may invest in bonds rated in the lowest rating
categories, D by S&P or C by Moody's. These classes of bonds can
be regarded as having extremely poor prospects of ever attaining
any real investment standing.
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, the 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 Moody's or S&P, commercial paper rated
in the two highest grades by either of such rating services,
certificates of deposit, bankers acceptances and repurchase
agreements. The Fund may also hold its assets in other cash
equivalents or in cash.
The Fund 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 "index future" 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 the value of the index between the time when the Fund
enters into and terminates an index future, the Fund will realize
a gain or loss. The Fund 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 Massachusetts Tax
Exempt Bonds which the Fund owns or expects to purchase. The
Fund 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 Fund 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 Fund's use of index futures and related
options. The Fund 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 Massachusetts Tax Exempt Bonds which are the
subject of the hedge.
Except for policies of the Fund that are explicitly described in
this prospectus or in Part I of the Statement as fundamental, the
investment policies of the Fund, including the investment
objective, may be changed without shareholder approval or prior
notice. As a matter of policy, however, the trustees would not
change the Fund's investment objective without shareholder
approval.
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 table below 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 Fund's 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 Fund and are not intended as a prediction of
future yields.
1996
Combined
MA and
Taxable Income* Federal If Tax Exempt Yield is
Single Joint Tax 4.00% 5.00% 6.00% 7.00% 8.00%
Return Return Bracket* then the equivalent taxable yield
($) ($) would be:
25.20% 5.35% 6.68% 8.02% 9.36% 10.70%
36.64% 6.31% 7.89% 9.47% 11.05% 12.63%
39.28% 6.59% 8.23% 9.88% 11.53% 13.18%
43.68% 7.10% 8.88% 10.65% 12.43% 14.20%
46.85% 7.53% 9.41% 11.29% 13.17% 15.05%
* 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
Massachusetts Personal Income Tax law; however, Massachusetts
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 1996, 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.
Massachusetts Tax Exempt Bonds
Massachusetts Tax Exempt Bonds are debt obligations issued by The
Commonwealth of Massachusetts and its 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 Massachusetts
personal income taxes (other than the possible incidence of any
alternative minimum taxes). These bonds 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. Massachusetts Tax
Exempt Bonds 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 and Massachusetts
personal income taxes.
The two principal classifications of Massachusetts Tax Exempt
Bonds 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 issuer's general unrestricted revenues. Their payment may
depend on an appropriation by the issuer's 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 unlimited 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 the user of the facilities.
Certain Massachusetts Tax Exempt Bonds which may be held by the
Fund may permit the issuer at its option to "call," or redeem,
its securities. If an issuer were to redeem Massachusetts Tax
Exempt Bonds held by the Fund during a time of declining interest
rates, the 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.
Although the Fund's investment objective refers to preservation
of capital, the net asset value of Fund shares will fluctuate
based on changes in the prevailing market interest rates and
other factors.
During a period of declining interest rates, many of the Fund's
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 the Fund's shares. The value of such
"premium" 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 the Fund during such periods would initially receive
higher monthly distributions (derived from the higher coupon
rates payable on the Fund's 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 the
Fund, investors may find it useful to compare the Fund's current
dividend rate with the Fund's "yield," which is computed on a
yield-to-maturity basis in accordance with SEC regulations and
which reflects amortization of market premiums. See "Fund Details
- -- Performance Criteria."
I n v e s t m e n t R i s k s
It is important to understand the following risks inherent in the
Fund before you invest. The Fund's ability to achieve its
investment objective depends on the ability of the issuers of
Massachusetts Tax Exempt Bonds to meet their continuing
obligations to pay principal and interest.
Since the Fund invests primarily in Massachusetts Tax Exempt
Bonds, the value of the Fund's shares may be especially affected
by factors pertaining to the economy of Massachusetts and other
factors specifically affecting the ability of issuers of
Massachusetts Tax Exempt Bonds to meet their obligations. As a
result, the value of the Fund's 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
Massachusetts 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 Massachusetts Tax Exempt
Bonds may be affected from time to time by economic, political
and demographic conditions within Massachusetts. In addition,
constitutional or statutory restrictions may limit a government's
power to raise revenues or increase taxes. The availability of
federal, state and local aid to an issuer of Massachusetts Tax
Exempt Bonds may also affect that issuer's ability to meet its
obligations. Payments of principal and interest on limited
obligation bonds 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 Massachusetts
or a particular locality. Any reduction in the actual or
perceived ability of an issuer of Massachusetts Tax Exempt Bonds
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 other Massachusetts Tax Exempt
Bonds as well.
Like other northeastern states, Massachusetts suffered
significant adverse effects from the recession of the early
1990s, including the loss of substantial numbers of jobs,
declining real estate values and reduced tax receipts. Weakness
in the local or national economy could adversely affect the
credit ratings and creditworthiness of Massachusetts Tax Exempt
Bonds, which in turn could adversely affect the value of an
investment in the Fund.
At certain times the secondary market for Massachusetts Tax
Exempt Bonds may be less liquid than that for other fixed-income
securities. Accordingly, the ability of the Fund to buy and sell
securities at those times may be limited. The amount of publicly
available information about the financial condition of an issuer
of Massachusetts Tax Exempt Bonds 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 Massachusetts Tax Exempt Bonds may be more difficult
than monitoring the creditworthiness of issuers of corporate
bonds.
The value of the Fund's 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. Changes in the
credit ratings of obligations as well as in the ability of an
issuer to make payments of interest and principal will also
affect the value of these investments. The value of the Fund's
shares will fluctuate with the value of its investments.
[] 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 fund's investment adviser's or subadviser's own credit
analysis than is the case for a fund investing in 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.
Securities of below investment grade quality are considered high
yield, high risk securities and are commonly known as "junk
bonds." For more information, including a detailed description
of the ratings assigned by S&P and Moody's, please refer to the
Statement's "Appendix A -- Description of Bond Ratings."
[] Futures and Options
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
whether Back Bay Advisors forecasts interest rate movements
correctly, which cannot be assured. The Fund's ability to hedge
its 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 Fund and the
Massachusetts Tax Exempt Bonds that are the subject of the hedge.
The successful use of futures and options also depends on the
availability of a liquid secondary market to enable the Fund to
close its 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 the Fund's ability to engage in futures
and options transactions.
The Fund will not purchase or sell futures contracts or related
options if, as a result, the sum of initial margin deposits on
the Fund's existing futures contracts and options plus premiums
paid for outstanding options on futures contracts would exceed 5%
of the Fund's net assets. (For options that are "in-the-money"
at the time of purchase, the amount by which the option is "in-
the-money" 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.
[] Miscellaneous
In periods of rapidly fluctuating interest rates, there may be
frequent changes in investments. From time to time, consistent
with its investment objective, the Fund may also trade securities
for the purpose of seeking short-term profits. A change in the
securities held by the Fund is known as "portfolio turnover."
Portfolio turnover generally involves some expense to the Fund,
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. See "Income Tax
Considerations" below. Under certain market conditions, the
Fund's portfolio turnover rate may be higher than that of similar
mutual funds. Recent portfolio turnover rates for the Fund are
set forth above under "Financial Highlights."
The Fund reserves the right to enter into repurchase agreements
for amounts up to 15% of its assets. In repurchase agreements,
the Fund buys securities from a seller, usually a bank or
brokerage firm, with the understanding that the seller will
repurchase the securities at a higher price at a later date. Such
transactions afford an opportunity for the Fund to earn a return
on available cash at minimal market risk, although the Fund 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. The 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.
The Fund is a "non-diversified" fund and as such is not required
to meet any diversification requirements under the Investment
Company Act of 1940 (the "1940 Act"), although the Fund must meet
certain diversification standards to qualify as a regulated
investment company under the Internal Revenue Code of 1986 (the
"Code"). Since the Fund may invest a relatively high percentage
of its assets in the obligations of a limited number of issuers,
the Fund may be more susceptible than a more widely-diversified
fund to any single economic, political or regulatory occurrence.
F u n d M a n a g e m e n t
New England Funds Management, L.P. ("NEFM"), 399 Boylston Street,
Boston, Massachusetts 02116, serves as the Fund's adviser. NEFM
oversees, evaluates and monitors Back Bay Advisors' provision of
subadvisory services to the Fund and provides general business
management and administration to the Fund.
The Fund's subadviser is Back Bay Advisors, 399 Boylston Street,
Boston, Massachusetts 02116. Subject to overall supervision by
NEFM and the Trust's trustees, Back Bay Advisors furnishes a
continuous investment program for the Fund and recommends what
securities should be purchased or sold. Back Bay Advisors
provides discretionary investment management services to mutual
funds and other institutional investors. Formed in 1986, Back Bay
Advisors now manages __ mutual fund portfolios and over $__
billion of securities. James S. Welch, Vice President of Back Bay
Advisors and the Trust, has served as the Fund's portfolio
manager since May 1995. Prior to joining Back Bay Advisors in
1993, Mr. Welch was a Vice President at Putnam Management
Company.
The general partners of NEFM, Back Bay Advisors and the
Distributor are special purpose corporations that are wholly-
owned subsidiaries of New England Investment Companies, L.P.
("NEIC"). NEIC is listed on the New York Stock Exchange, and
manages over $__ billion in assets for individuals and
institutions. NEIC's sole general partner, New England Investment
Companies, Inc. ("NEIC Inc."), is a wholly-owned subsidiary of
New England Mutual Life Insurance Company ("The New England").
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. After such merger, NEIC Inc. will be a wholly-owned
subsidiary of MetLife.
The Fund pays NEFM a management fee at the annual rate of 0.60%
of the first $100 million of the Fund's average daily net assets
and 0.50% of such assets in excess of $100 million. NEFM has
voluntarily agreed, however, until further notice to the Fund, to
reduce its management fee and, if necessary, to bear certain
expenses associated with operating the Fund in order to limit the
Fund's expenses to an annual rate of 0.85% of the average daily
net assets of the Fund's Class A shares and 1.50% of the average
daily net assets of the Fund's Class B shares. NEFM may terminate
this voluntary agreement at any time. In that event the Fund
would supplement its prospectus.
NEFM pays Back Bay Advisors for providing subadvisory services to
the Fund a subadvisory fee at the annual rate of 0.30% of the
first $100 million of the Fund's average daily net assets and
0.25% of such assets in excess of $100 million. The Fund pays no
direct fees to Back Bay Advisors. Prior to January 2, 1996, Back
Bay Advisors served as adviser to the Fund.
Subject to applicable regulatory restrictions and such policies
as the Trust's trustees may adopt, Back Bay Advisors may consider
sales of shares of the Fund and shares of the other mutual funds
it advises as a factor in the selection of broker-dealers to
effect portfolio transactions for the Fund. See "Portfolio
Transactions and Brokerage" in Part II of the Statement.
The Trust's Board of Trustees supervises the affairs of the Fund
as conducted by NEFM and Back Bay Advisors.
B u y i n g F u n d S h a r e s
Minimum Investment
$2,500 is the minimum for an initial investment in the 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 Fund in the
following ways:
[] Through your investment dealer:
Many investment dealers have a sales agreement with the
Distributor and would be pleased to accept your order.
[] 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 between
8:00 a.m. and 7:00 p.m. (Eastern time).
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.)
[] By wire transfer of Federal Funds:
For an initial investment, call 1-800-225-5478 between 8:00 a.m.
and 7:00 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 New England Massachusetts Tax Free Income Fund,
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.
[] By Investment Builder:
Investment Builder is New England Funds' 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 check marked "Void" or a 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.
[] By electronic purchase through ACH:
You may purchase additional shares electronically through the
Automated Clearing House ("ACH") 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 8:00
a.m. and 7:00 p.m. (Eastern time) on a day when the Fund is open
for business. You may also purchase shares through ACH by calling
Tele#Facts at 1-800-346-5984 twenty-four hours a day. Under
normal circumstances, the New York Stock Exchange (the
"Exchange") closes at 4:00 p.m. (Eastern time). Purchase orders
accepted through ACH or Tele#Facts after 4:00 p.m. (Eastern
time), or after the Exchange closes if it closes earlier than
4:00 p.m., will be processed at the net asset value determined at
the close of regular trading on the next day that the Exchange is
open. Proceeds of redemptions of Fund shares purchased through
ACH may not be available for up to ten days after the purchase
date.
[] By exchange from another New England Fund:
You may also purchase shares of a Fund by exchanging shares from
another New England Fund. Please see "Owning Fund Shares --
Exchanging Among New England Funds" for complete details.
Using Tele#Facts 1-800-346-5984
Tele#Facts is New England Funds' 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.
General
All purchase orders are subject to acceptance by the Fund 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 ("State Street Bank") (except orders received by your
investment dealer before the close of trading on the Exchange 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 Fund does not anticipate
doing so, it reserves 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
Fund's "open account" 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.
To make investing even easier, you can also order personalized
investment slips by calling 1-800-225-5478 between 8:00 a.m. and
7:00 p.m. (Eastern time).
Sales Charges
The Fund offers 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. Class A shares are
offered subject to the following sales charges:
Sales charge as a % of Dealer's
------------------------ Concession
Net as % of
Offering Amount Offering
Value of Total Price Invested Price**
Investment ----------- ----------- -----------
- --------------------
Up to $50,000 4.25% 4.44% 3.75%
$50,000 - $99,999 4.00% 4.17% 3.50%
$100,000 - $249,999 3.50% 3.63% 3.00%
$250,000 - $499,999 2.50% 2.56% 2.15%
$500,000 - $999,999 2.00% 2.04% 1.70%
$1,000,000 or more None None *
* 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; .80% on the next $1 million; .20% on the
next $2 million; and .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.
Contingent Deferred Sales Charge (Class A shares only). For
purchases of $1,000,000 or more of Class A shares 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 of Class
A shares purchased within one year before the redemption. If an
exchange is made to Class A shares of any of New England Cash
Management Trust Money Market Series or U.S. Government Series or
New England Tax Exempt Money Market Trust (the "Money Market
Funds"), 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 Class A shares held the longest are the first to be
redeemed. If the Money Market Fund shares are redeemed rather
than exchanged back into the Trusts, then a CDSC applies to the
redemption. No CDSC applies to a redemption of Class A shares
followed by a reinvestment effected within 30 days after the date
of redemption.
Class B Shares
Class B shares are offered at net asset value, without an initial
sales charge, subject to a 0.25% annual service fee, a 0.75%
annual distribution fee for eight years (at which time they
automatically convert to Class A shares) and to a CDSC if they
are redeemed within five 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 the Fund. If the exchange is made to Class B
shares of a Money Market Fund, then the holding period stops and
will 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 to the redemption, at the same rate as if the Class
B shares of the Fund had been redeemed at the time they were
exchanged for Money Market Fund shares. For purposes of the
CDSC, it is assumed that the shares held the longest are the
first to be redeemed.
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 CDSC will be assessed on shares of the same fund
purchased with reinvested dividends or capital gains
distributions. The amount of the CDSC, 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.
Contingent
Deferred
Sales Charge as a
Percentage of
Dollar
Year Since Amount Subject to
Purchase Charge
---------- -----------------
1st ........... 4%
2nd ........... 3%
3rd ........... 3%
4th ........... 2%
5th ........... 1%
thereafte ........... 0%
r
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, and is paid to the Distributor.
The CDSC may be eliminated for certain persons and organizations.
See "Sales Charges _ General" below. At the time of sale, the
Distributor pays investment dealers a commission of 3.75% and
advances the first year's 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.
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
shares. Class A shares have lower annual fees and as a result,
pay higher dividends per share. If you are making a smaller
investment, you might consider Class B shares since 100% of your
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
Code) of a shareholder if the redemption is made within one year
after the shareholder's death or disability. In addition, no CDSC
applies to certain withdrawals pursuant to a Systematic
Withdrawal Plan. See "Selling Fund Shares -- 5 Ways to Sell Fund
Shares -- By Systematic Withdrawal Plan" below.
The Fund receives the net asset value next determined after your
order is received on sales of both classes of shares. The Class A
sales charge is allocated between the investment dealer and the
Distributor. The Distributor receives the CDSC. For purposes of
the CDSC, an exchange from the Fund to another series 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 Fund's shares.
The Distributor may, at its expense, provide additional
promotional incentives or payments to dealers who sell shares of
the Fund. 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. The Distributor 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 payment 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. 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 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
the 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 up to $1 million may be invested in shares
of the Fund at a reduced sales charge of 1.50% of the public
offering price (or 1.52% of the net amount invested).
[] Clients of an adviser or subadviser _ no sales charge or
CDSC applies to investments of $100,000 or more in the Fund by
clients of an adviser or subadviser to any series of the Trusts;
any director, officer or partner of a client of an adviser or
subadviser 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 by
investment advisers, financial planners or other intermediaries
who place trades for their own accounts or the accounts of their
clients and who charge a management, consulting or other fee for
their services; clients of such investment advisers, financial
planners or other intermediaries who place trades for their own
accounts if the accounts are linked to the master account of such
investment adviser, financial planner or other intermediary on
the books and records of the broker or agent; and retirement and
deferred compensation plans and trusts used to fund those plans,
including, but not limited to, those defined in Section 401(a),
403(b) or 457 of the Code and "rabbi trusts." Investors may be
charged a fee if they effect transactions through a broker or
agent.
[] Shares of the Fund also may be purchased at net asset value
through certain broker-dealers and/or financial services
organizations without any transaction fee. Such organizations
may receive compensation, in an amount of up to 0.35% annually of
the average value of the Fund shares held by their customers.
This compensation may be paid by NEFM and/or Back Bay Advisors
out of their own assets, or may be paid indirectly by the Fund in
the form of servicing, distribution or transfer agent fees.
[] There is no sales charge, CDSC or initial investment minimum
related to investments by certain current and retired employees
of the Trusts' investment advisers or subadvisers, the
Distributor 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 and any separate account
of The New England or of any insurance company affiliated with
The New England.
[] 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.
O w n i n g F u n d S h a r e s
Exchanging Among New England Funds
Class A Shares
Except as indicated in the next two sentences, you may exchange
Class A shares of the Fund (and Class A shares of the Money
Market Funds acquired through exchanges from any series of the
Trusts) for 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; such
exchanges will be made at the next-determined asset value of the
shares. Class A shares of New England Intermediate Term Tax Free
Fund of California and New England Intermediate Term Tax Free
Fund of New York (and shares of the Money Market Funds acquired
through exchanges of such shares) may be exchanged for Class A
shares of another series of the Trusts 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 for
shares of another series of the Trusts that has a higher sales
charge, you will pay the difference between any sales charge you
have already paid on your New England Adjustable Rate U.S.
Government Fund shares and the higher sales charge of the fund
into which you are exchanging. In addition, you may redeem the
Class A shares of any Money Market Fund that were not acquired
through exchanges from the Fund and have the proceeds directly
applied to the purchase of shares of a series of the Trusts at
the applicable sales charge.
Class B Shares
You may exchange Class B shares of the Fund or any 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 Class B shares of any other series of
the Trusts which offers Class B shares. 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 "Sales Charges _
Class B Shares" above.
To make an exchange, please call 1-800-225-5478 between 8:00 a.m.
and 7:00 p.m. (Eastern time) on a day where the Fund is open for
business, write to New England Funds or call Tele#Facts at 1-800-
346-5984 twenty-four hours a day. Exchange requests accepted
after 4:00 p.m. (Eastern time), or after the Exchange closes if
it closes earlier than 4:00 p.m., will be processed at the net
asset value determined at the close of regular trading on the
next day that the Exchange is open. The exchange must be for a
minimum of $500 (or the total net asset value of your 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 series
into which you are exchanging. In connection with any exchange,
you must receive a current prospectus of the series into which
you are exchanging. The exchange privilege may be exercised only
in those states where shares of such other series 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, 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 days' advance notice of any material change
to the exchange privilege.
Automatic Exchange Plan
The Fund has an automatic exchange plan under which shares of a
class of the Fund are automatically exchanged each month for
shares of the same class of other series of 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 Fund declares dividends daily and pays them monthly. The 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. If you
intend to purchase shares of the Fund shortly before it declares
a dividend you should be aware that a portion of the purchase
price may be returned to you as a taxable dividend.
You have the option to reinvest all distributions in additional
shares of the same class of the Fund or in shares of the same
class of other series of the Trusts, to receive distributions
from ordinary income in cash while reinvesting distributions from
capital gains in additional shares of the same class of the Fund
or the same class 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 Fund at net asset value (without a sales charge or CDSC)
unless you select another option. You may change your
distribution option by notifying New England Funds 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
"undeliverable" to the 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 that
allows you to have all dividends and any other distributions
automatically invested in shares of the same class of another New
England Fund, subject to the investor eligibility requirements of
that other fund and to state securities law requirements. Shares
will be purchased at the selected fund's net asset value (without
a sales charge or CDSC) on the dividend record date. A dividend
diversification account must be in the same registration
(shareholder name) as the distributing fund account and, if a new
account in the purchased fund is being established, the purchased
fund's 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 fund's
prospectus.
S e l l i n g F u n d S h a r e s
5 Ways to Sell Fund Shares
You may sell Class A and Class B shares of the Fund in the
following ways:
[] Through your investment dealer:
Call your authorized investment dealer for information.
[] 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 8:00 a.m. and 7:00 p.m. (Eastern time) on a day when
the Fund is open for business, or by calling Tele#Facts at 1-
800-346-5984 twenty-four hours a day. 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 between 8:00 a.m. and 7:00 p.m.
(Eastern time) 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 between 8:00 a.m. and 7:00 p.m. (Eastern time)
or call Tele#Facts at 1-800-346-5984 twenty-four hours a day.
The proceeds (less any applicable CDSC) generally will arrive
at your bank within three business days; their availability
will depend on your bank's particular rule.
Redemption requests accepted after 4:00 p.m. (Eastern time), or
after the Exchange closes if it closes before 4:00 p.m., will be
processed at the net asset value determined at the close of
regular trading on the next day that the Exchange is open.
[] 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 and
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 they 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 redemptions by
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 Fund recommends that certificates be sent by
registered mail.
[] By check:
Checkwriting is available on Class A shares of the Fund only. 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.
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 or Class B shares
subject to a CDSC. If you use withdrawal checks, you will be
subject to State Street Bank's rules governing checking accounts.
The Fund 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.
[] 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 day's net asset value). Redemption proceeds (less
any applicable CDSC) will normally be mailed to you within seven
days after State Street Bank or the Distributor receives your
request in good order. However, in those cases where you have
recently purchased your shares by check or an electronic funds
transfer through the ACH system and you make a redemption request
within 10 days after such purchase or transfer, the Fund may
withhold redemption proceeds until the Fund knows that the check
or funds have cleared.
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 in
certificate form. If certificates have been issued for your
investment, you must send them along with your request to New
England Funds, L.P. before a redemption request can be honored.
See the instructions for redemption by mail above.
The Fund 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 Fund to dispose of
its securities or to determine fairly the value of its 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
sales charge to the repurchase of Class A 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.
F u n d D e t a i l s
How Fund Share Price Is Determined
Back Bay Advisors, under the direction of the Trust's Board of
Trustees, determines the value of the total net assets of the
Fund 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 the Fund's 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 class is determined by
dividing the value of the assets attributable to that 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 the Fund's Class A shares is determined
by adding the applicable sales charge to the net asset value. See
"Sales Charges" 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 the
New England Funds, L.P. In other words, if, on a Tuesday morning,
your properly completed application is received, your wire is
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 day's public offering price.
CALCULATING THE PRICE OF SHARES
Total Market Value of
Portfolio Securities
+ Other Assets
- - Any Liabilities
= Net Asset Value (NAV)
- -----------------------------------------------------------------
Total Number of Outstanding Shares in a Class
The public offering price for Class A shares is the NAV plus the
applicable sales charge. The public offering price for Class B
shares is the NAV.
Income Tax Considerations
The Fund intends to meet all requirements of the Code necessary
to ensure that it is qualified to pay "exempt-interest
dividends," which in general means that the 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 Massachusetts Tax Exempt Bonds are also
exempt from Massachusetts personal income taxes.
For federal income tax and Massachusetts personal income tax
purposes, your proportionate share of taxable dividends derived
from the Fund's 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 the Fund's 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 exemptions from Massachusetts
personal income taxes, to the extent designated as such by the
Fund. Distributions by the Fund 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 Fund
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.
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 Fund invests in
such private activity bonds, shareholders may become subject to,
or have increased liability under, the alternative minimum tax.
However, it is a fundamental policy of the Fund that
distributions from interest income on such bonds, together with
distributions from interest income on investments other than
Massachusetts Tax Exempt Bonds, will normally not exceed 10% of
the total amount of the Fund's income distributions.
Exempt interest dividends are included in "adjusted current
earnings" 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
corporation's 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, the Fund intends to distribute prior to
calendar year end virtually all the Fund's ordinary income earned
during that calendar year, and virtually all of the capital gain
net income the Fund realized in the twelve-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 Fund's dividends are "exempt-interest
dividends," federal back-up withholding rules do not apply.
However, if the percentage should ever drop below 95%, the Fund
will be required to withhold 31% of all income dividends and
capital gains distributions it pays to you if you do not provide
a correct, certified taxpayer identification number, if the Fund
is notified that you have underreported income in the past, or if
you fail to certify to the Fund that you are not subject to such
withholding. If you are a tax-exempt shareholder, however, these
back-up withholding rules will not apply so long as you furnish
the Fund 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 Fund to assist you in
reporting the prior calendar year's 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 and Massachusetts
income tax consequences of an investment in the Fund.
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 Fund's Expenses
In addition to the management fee paid to NEFM, the Fund pays all
expenses not borne by NEFM, Back Bay Advisors or the Distributor,
including, but not limited to, the charges and expenses of the
Fund's custodian and transfer agent, independent auditors and
legal counsel for the Fund and the Trust's independent trustees,
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
shareholders' and trustees' meetings, preparing, printing and
mailing reports to shareholders and the compensation of trustees
who are not directors, officers or employees of NEFM, Back Bay
Advisors or their affiliates, other than affiliated registered
investment companies.
Under Plans adopted pursuant to Rule 12b-1 under the 1940 Act,
each class of shares of the Fund pays the Distributor a monthly
service fee at an annual rate not to exceed 0.25% of each class's
average daily net assets. The Distributor may pay up to the
entire amount of the service fee to securities dealers who are
dealers of record with respect to Fund shares, for providing
personal services to investors in shares of the Fund and/or the
maintenance of shareholder accounts. The Distributor retains the
balance of the fees as compensation for providing personal
service to investors in the Fund 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 year's service fee in the amount of up to 0.25% of the
amount invested. The Distributor may also use all or any portion
of the fee to pay its expenses in connection with the provision
or personal services to investors and/or the maintenance of
shareholder accounts. The Fund's Class A shares also pay the
Distributor a distribution fee not to exceed an annual rate of
0.10% of the average daily net assets of the Class A shares, and
the Fund's Class B shares pay the Distributor a distribution fee
at an annual rate not to exceed 0.75% of the average net assets
of the 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 Fund's shares, as
distribution fees in connection with the sale of Fund shares. The
Distributor retains the balance of the fee as compensation for
its services as distributor of the relevant class of shares.
Performance Criteria
Each class of the Fund may include tax-equivalent yield, yield
and total return information in advertisements or other written
sales material. Each class of shares of the Fund may 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, or in the case of the Class A
shares, for the period since July 27, 1988, when Back Bay
Advisors became the Fund's investment adviser. Total return is
measured by comparing the value of an investment in the 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,
and imposition of the CDSC relevant to the period of time quoted
in the case of the 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 or CDSC.
If a sales charge or CDSC is not deducted in calculating total
return, the class's total return 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.
Yield is computed in accordance with the SEC's 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). Tax-equivalent yield is the taxable yield
an investor would have to earn to receive the equivalent of the
class's yield after payment of federal income tax and
Massachusetts personal income taxes. Tax-equivalent yield is
calculated by adjusting the class's standardized yield for a
recent thirty day period, using effective combined federal and
Massachusetts tax rates for individuals.
Each class may also present one or more distribution rates in its
sales literature. These rates will be determined by annualizing
the class's 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.
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 Fund
[] 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 Fund was organized in
1983 as a Massachusetts business trust and conducted investment
operations as a separate organization until its reorganization as
a series of the Trust in January 1989.
[] When you invest in the 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 the Fund vote separately from
shares of other series of the Trust, except as otherwise required
by law. Shares of all classes of the Fund vote together, except
as to matters relating to a class's 12b-1 plan, for which only
shares of that class 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 transfer and dividend paying agent for the Fund is New
England Funds, L.P., 399 Boylston Street, Boston, Massachusetts
02116. New England Funds, L.P. has subcontracted certain of its
obligations as such to State Street Bank, 225 Franklin Street,
Boston, MA 02110.
[] If the balance in your account is less than a minimum dollar
amount set by the trustees from time to time (currently $500),
the Fund may close your account and send the proceeds to you.
Shareholders who are affected by this policy will be notified of
the Fund's 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 accounts that have fallen below the minimum solely because of
fluctuations in the Fund's net asset value per share.
[] The Fund's annual report contains 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.
[] Summit Cash Reserves Fund (the "Cash Fund"), a series of
Financial Institutions Series Trust, is related to the Fund for
purposes of investment and investor services. Shares of all
classes of the Fund may be exchanged for shares of the Cash Fund
at net asset value. If shares of the Fund that are exchanged for
shares of the Cash Fund are subject to a CDSC, the holding period
for purposes of determining the expiration of the CDSC will stop
and resume only when an exchange is made back into shares of a
series of the Trusts. If Fund shares subject to a CDSC are
exchanged for Cash Fund shares and the Cash Fund shares are later
redeemed rather than being exchanged back into shares of a series
of the Trusts, then a CDSC will apply at the same rate as if the
Fund shares were redeemed at the time of the exchange.
G l o s s a r y O f T e r m s
Capital gain distributions _ Payments to shareholders of profits
earned from selling securities in the Fund's portfolio. Capital
gain distributions are usually paid once a year.
Contingent deferred sales charge (CDSC) _ A fee that may be
charged when a shareholder sells Fund shares.
Distribution fee _ An annual asset-based sales charge that is
used to pay for sales-related expenses.
Income distributions _ Payments to shareholders resulting from
interest or dividend income earned by a Fund's portfolio.
Mutual fund _ The pooled assets of a group of investors,
professionally managed in pursuit of a specific objective.
Net asset value (NAV) _ The market value of one share of a mutual
fund on any given day without sales charge or CDSC. Determined
by dividing the fund's total net assets by the number of fund
shares outstanding.
New England Funds, L.P. _ The distributor and transfer agent of
the New England Funds.
New England Funds Management, L.P. _ The investment adviser to
most of the New England Funds.
Open end investment management company _ A mutual fund that
allows investors to redeem fund shares directly from the fund
company on any business day.
Public offering price _ The price of one share of a mutual fund,
including its initial sales charge, if there is one.
Record date _ The date on which mutual fund investors must own a
fund's shares to be eligible to receive specific income or
capital gain distributions.
Service fee _ Payments by a fund to the fund's distributor or a
financial representative for personal services to investors
and/or for maintenance of shareholder accounts.
Taxable equivalent yield --The yield an investor would have to
earn prior to paying income taxes, in order to retain a net-after-
tax amount equivalent to the yield on a tax-free fund.
Total Return _ The change in value of an investment in a Fund
investment over a specific time period, assuming all earnings are
reinvested in additional shares of the fund. Expressed as a
percentage.
Yield _ The rate at which a fund earns income, expressed as a
percentage. Yield calculations are standardized among mutual
funds, based on a formula developed by the Securities and
Exchange Commission.
12b-1 fees _ Fees paid by a mutual fund under a plan adopted
under 1940 Act Rule 12b-1. Can include both distribution fees
and service fees (see above).
<PAGE>
NEW ENGLAND FUNDS
Where The Best Minds Meet(TM)
NEW ENGLAND INTERMEDIATE TERM TAX FREE FUND OF CALIFORNIA
NEW ENGLAND INTERMEDIATE TERM TAX FREE FUND OF NEW YORK
Prospectus and Application - April 15, 1996
New England Intermediate Term Tax Free Fund of California (the
"California Fund") and New England Intermediate Term Tax Free
Fund of New York (the "New York Fund") (collectively the "Funds")
are non-diversified mutual funds. The Funds are series of shares
of New England Funds Trust II (the "Trust"), a registered open-
end management investment company. Six 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
"Trusts."
Each Fund seeks as high a level of current income exempt from
federal income tax and its state's 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 (a "CDSC"), 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 purchase. See "Buying Fund Shares _
Sales Charges."
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 "Statement") about the Funds dated April 15, 1996 has
been filed with the Securities and Exchange Commission (the
"SEC") and is available free of charge. Write to New England
Funds, L.P. (the "Distributor"), 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.
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>
T a b l e O f C o n t e n t s
Page
FUND EXPENSES AND FINANCIAL
INFORMATION
Schedule of Fees Sales charges, yearly operating
expenses.
Financial Highlights Historical information on the
Funds' performance.
INVESTMENT STRATEGY
How the Funds Pursue Their
Objectives
INVESTMENT RISKS It is important to understand
the risks inherent in a Fund
before you invest.
FUND MANAGEMENT
BUYING FUND SHARES
Minimum Investment Everything you need to know to
open and add to
6 Ways to Buy Fund Shares a New England Funds account.
[] Through your investment
dealer
[] By mail
[] By wire transfer
[] By Investment Builder
[] By electronic purchase
through ACH
[] By exchange from another
New England Fund
Sales Charges
Reduced Sales Charges (Class A
Shares Only)
OWNING FUND SHARES
Exchanging Among New England New England Funds offers three
Funds convenient ways to
Fund Dividend Payments exchange Fund shares.
SELLING FUND SHARES
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
Repurchase Option (Class A An opportunity to reinvest your
Shares Only) redemption proceeds within 120
days for no sales charge.
FUND DETAILS Additional information you may
find important.
How Fund Share Price Is
Determined
Income Tax Considerations
The Funds' Expenses
Performance Criteria
Additional Facts About the Funds
<PAGE>
F u n d E x p e n s e s A n d
F i n a n c i a l I n f o r m a t i o n
Schedule of Fees
Shareholder transaction expenses
California New York
Fund Fund
------------ ------------
Class Class Class Class
A B A B
----- ----- ----- -----
Maximum Initial Sales Charge Imposed
on a Purchase (as a percentage of
offering price)(1)(2)
2.50% None 2.50% 6.50%
Maximum Contingent Deferred Sales
Charge (as a percentage of
original purchase price or
redemption proceeds, as
applicable)(2) (3) 4.00% (3) 4.00%
(1) A reduced sales charge on Class A shares applies in some
cases. See "Buying Fund Shares -- Reduced Sales Charges
(Class A Shares Only)."
(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 one year
after purchase, but not to any other purchases or
redemptions of Class A shares. See "Buying Fund Shares --
Sales Charges."
Annual Fund operating expenses*
(as a percentage of average net assets)
California Fund New York Fund
------------ ------------
Class A Class B Class A Class B
----- ----- ----- -----
Management Fees 0.00%*** 0.00%*** 0.00%*** 0.00%***
12b-1 Fees 0.25% 1.00%* 0.25% 1.00%*
Other Expenses ___%*** ___%*** ___%**** ___%****
Total Fund Operating ___%*** ___%*** ___%**** ___%****
Expenses
* The expense information contained in this table and its
footnotes has been restated to reflect the fees and expenses
currently in effect for the Funds.
** 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.
*** After voluntary fee waiver and expense reduction by the
Fund's adviser and/or the Distributor. Without the
voluntary limitations, Management Fees and Other Expenses
would be ____% and ____%, respectively, for both classes and
Total Fund Operating Expenses would be ____% for Class A
shares and ____% for Class B shares. These voluntary
limitations can be terminated by the Fund's adviser or the
Distributor at any time.
**** After voluntary fee waiver and expense reduction by the
Fund's adviser and/or the Distributor. Without the
voluntary limitations, estimated Management Fees and Other
Expenses would be ____% and ____%, respectively, for both
classes and Total Fund Operating Expenses would be ____% for
Class A shares and ____% for Class B shares. These
voluntary limitations can be terminated by the Fund's
adviser or the Distributor at any time.
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
may be more or less than those shown.
California Fund New York Fund
------------- --------------
Class A Class B Class A Class B
---- ------- ----- -------
(1) (2) (1) (2)
1 year $ $ $ $ $ $
3 years $ $ $ $ $ $
5 years $ $ $ $ $ $
10 years* $ $ $ $ $ $
(1) Assumes redemption at end of period.
(2) Assumes no redemption at end of period.
* 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.
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 Funds' fees and other expenses,
please see "Fund Management" and "The Funds' Expenses."
A wire fee (currently $5.00) will be deducted from your proceeds
if you elect to transfer redemption proceeds by wire.
<PAGE>
Financial Highlights
To Be Filed
By Amendment
<PAGE>
I n v e s t m e n t S t r a t e g y
How the Funds Pursue Their Objectives
The Funds invest primarily in the tax exempt securities of their
named state ("State Tax Exempt Securities"), which are described
below.
The law of each Fund's 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 state's
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 Fund's 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 "private activity bonds," 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 Fund's income
distributions. The Funds currently do not expect such
distributions to exceed 10% of the total amount of each Funds'
income distributions. The Funds may invest up to 5% of their
respective assets in so-called "inverse-floating obligations" or
"residual interest bonds."
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 Fund's assets will consist of securities rated
AAA, AA, A or BBB by Standard & Poor's Ratings Group ("S&P");
rated Aaa, Aa, A or Baa by Moody's Investors Service, Inc.
("Moody's") or securities that are not rated by S&P or Moody's
but that are determined by Back Bay Advisors, L.P. ("Back Bay
Advisors"), the Funds' subadviser, to be of comparable quality to
securities in those rating categories. The other 15% of each
Fund's assets may be invested in securities rated below
investment grade (below BBB or Baa) or unrated securities that
the subadviser 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. See
"Investment Risks _ Lower Quality Fixed Income Securities" 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
Moody's. 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 Funds' investment objectives refer to preservation
of capital, the net asset value of the Funds' shares will
fluctuate based on changes in prevailing market rates and other
factors.
"Duration" 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 "maturity." 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 Funds' 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 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' 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 Funds' 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 Moody's 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 Funds' 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 Funds' 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.
TAX FREE INVESTING
California Fund
1996
Combined
Federal
Taxable Income and
- -------------------------- 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
($) ($) would be:
18.40% 4.90% 5.51% 6.13% 6.74% 7.35%
20.10% 5.01% 5.63% 6.26% 6.88% 7.51%
32.32% 5.91% 6.65% 7.39% 8.13% 8.87%
33.76% 6.04% 6.79% 7.55% 8.30% 9.06%
34.70% 6.13% 6.89% 7.66% 8.42% 9.19%
37.42% 6.39% 7.19% 7.99% 8.79% 9.59%
37.90% 6.44% 7.25% 8.05% 8.86% 9.66%
41.95% 6.89% 7.75% 8.61% 9.47% 10.34%
42.40% 6.94% 7.81% 8.68% 9.55% 10.42%
43.04% 7.02% 7.90% 8.78% 9.66% 10.53%
45.64% 7.36% 8.28% 9.20% 10.12% 11.04%
46.24% 7.44% 8.37% 9.30% 10.23% 11.16%
New York Fund
1996
Combined
Federal
Taxable Income and
- ---------------------------- New York If Tax Exempt Yield is
Single Joint Marginal 4.00% 4.50% 5.00% 5.50% 6.00%
Return Return Tax then the equivalent taxable yield
($) ($) Rate** would be:
20.57% 5.04% 5.67% 6.29% 6.92% 7.55%
21.45% 5.09% 5.73% 6.37% 7.00% 7.64%
33.47% 6.01% 6.76% 7.52% 8.27% 9.02%
36.24% 6.27% 7.06% 7.84% 8.63% 9.41%
40.86% 6.76% 7.61% 8.45% 9.30% 10.15%
44.19% 7.17% 8.06% 8.96% 9.85% 10.75%
1996
Combined
Federal
and
New York
Taxable Income State
- ---------------------------- and If Tax Exempt Yield is****
City
Single Joint Marginal 4.00% 4.50% 5.00% 5.50% 6.00%
Return Return Tax then the equivalent taxable yield
($) ($) Rate*** would be:
23.82% 5.25% 5.91% 6.56% 7.22% 7.88%
24.71% 5.31% 5.98% 6.64% 7.31% 7.97%
25.19% 5.35% 6.01% 6.68% 7.35% 8.02%
36.63% 6.31% 7.10% 7.89% 8.68% 9.47%
36.64% 6.31% 7.10% 7.89% 8.68% 9.47%
39.28% 6.59% 7.41% 8.23% 9.06% 9.88%
39.32% 6.59% 7.42% 8.24% 9.06% 9.89%
43.71% 7.11% 7.99% 8.88% 9.77% 10.66%
46.88% 7.53% 8.47% 9.41% 10.35% 11.29%
*
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 1996,
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 1996,
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 1996.
**** These represent New York State, City and Federal
tax equivalent yields.
State Tax Exempt Securities
State Tax Exempt Securities are debt obligations issued by a
Fund's 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 state's 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
issuer's general unrestricted revenues. Their payment may depend
on an appropriation by the issuer's 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 ("lease obligations") of municipal
authorities or entities. Although lease obligations do not
constitute general obligations of the municipality for which the
municipality's taxing power is pledged, a lease obligation is
ordinarily backed by the municipality's covenant to budget for,
appropriate and make the payments due under the lease obligation.
However, certain lease obligations contain "non-appropriation"
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 "non-appropriation" risk, these securities
represent a relatively new type of financing and may not be as
marketable as more conventional securities. Although "non-
appropriation" 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
Funds' 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 bank's 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 days' notice before
tender. Variable rate demand notes with such a notice feature
are "illiquid securities" for purposes of the policy limiting the
Funds' investments in illiquid securities to 15% of net assets.
I n v e s t m e n t R i s k s
It is important to understand the following risks inherent in a
Fund before you invest.
[] General
The value of a Fund's 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
Fund's 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 "call," 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 Fund's
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 Fund's shares. The value of such
"premium" 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 Fund's 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 Fund's current
dividend rate with that Fund's "yield," which is computed on a
yield-to-maturity basis in accordance with SEC regulations and
which reflects amortization of market premiums. See "Performance
Criteria."
[] State Tax Exempt Securities
A Fund's 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 the Funds invest primarily in State Tax Exempt Securities,
the value of a Fund's shares may be especially affected by
factors pertaining to the economy of a Fund's 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 Fund's 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 government's 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
issuer's 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 Fund's 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.
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 "index future" 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 Funds' 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 Advisors' ability to forecast interest rate movements
correctly. The Funds' 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
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 (the "Code") and certain regulatory requirements may limit a
Fund's 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
Fund's existing futures contracts and options plus premiums paid
for outstanding options on futures contracts would exceed 5% of
the Fund's net assets. (For options that are "in-the-money" at
the time of purchase, the amount by which the option is "in-the-
money" 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 fund's investment adviser's or subadviser's own credit
analysis than is the case for a fund investing in 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.
Securities below investment grade quality are considered high
yield, high risk securities and are commonly know as "junk
bonds." For more information, including a detailed description
of the ratings assigned by S&P and Moody's, please refer to the
Statement's "Appendix A -- Description of Bond Ratings."
[] Miscellaneous
Each Fund reserves the right to enter into repurchase agreements
for amounts up to 15% of its assets. In repurchase agreements,
the Fund buys securities from a seller, usually a bank or
brokerage firm, with the understanding that the seller will
repurchase the securities at a higher price at a later date.
Such transactions afford an opportunity for the Fund to earn a
return on available cash at minimal market risk, although the
Fund 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 "non-diversified" and as such is not required to
meet any diversification requirements under the Investment
Company Act of 1940 (the "1940 Act"), although each Fund must
meet certain diversification standards to qualify as a regulated
investment company under the Code. 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 "portfolio
turnover." 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 Funds' turnover may exceed 100%
annually. Recent portfolio turnover rates for the Funds are set
forth above under "Financial Highlights."
F u n d M a n a g e m e n t
New England Funds Management, L.P. ("NEFM"), 399 Boylston Street,
Boston, Massachusetts 02116, serves as the Funds' adviser. NEFM
oversees, evaluates and monitors Back Bay Advisors' provision of
subadvisory services to the Funds and provides general business
management and administration to the Funds. NEFM also serves as
adviser to most of the other funds in the New England Funds.
The Funds' subadviser is Back Bay Advisors, 399 Boylston Street,
Boston, Massachusetts 02116. Subject to overall supervision by
NEFM and the Trust's trustees, Back Bay Advisors furnishes a
continuous investment program for each Fund and recommends what
securities should be purchased or sold. Back Bay Advisors
provides discretionary investment management services to mutual
funds and other institutional investors. Formed in 1986, Back
Bay Advisors now manages __ mutual fund portfolios and over $__
billion of securities. James S. Welch, Vice President of Back
Bay Advisors, 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.
Each Fund pays NEFM a management fee at the annual rate of 0.525%
of the first $200 million of such Fund's average daily net
assets, 0.500% of the next $300 million of such assets and 0.475%
of such assets in excess of $500 million. NEFM 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 Fund's expenses to an annual rate of
0.70% of the average net assets of the Fund's Class A shares and
1.45% of the average net assets of the Fund's Class B shares.
NEFM and the Distributor may terminate these voluntary agreements
at any time. In that event the Funds would supplement their
prospectus.
NEFM pays Back Bay Advisors for providing subadvisory services to
each Fund a subadvisory fee at the annual rate of 0.2625% of the
first $200 million of each Fund's average daily net assets,
0.2500% of the next $300 million of such assets and 0.2375% of
such assets in excess of $500 million. The Funds pay no direct
fees to Back Bay Advisors. Prior to January 2, 1996, Back Bay
Advisors served as adviser to each of the Funds.
The general partners of NEFM, Back Bay Advisors and the
Distributor are wholly-owned subsidiaries of New England
Investment Companies, L.P. ("NEIC"). NEIC is listed on the New
York Stock Exchange, and manages over $__ billion in assets for
individuals and institutions. NEIC's sole general partner, New
England Investment Companies, Inc. ("NEIC Inc."), is a wholly-
owned subsidiary of New England Mutual Life Insurance Company
("The New England"). 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 policy
holders of The New England and MetLife and receipt of certain
regulatory approvals. After such merger, NEIC Inc. will be a
wholly-owned subsidiary of MetLife.
In placing portfolio transactions for the Funds, Back Bay
Advisors seeks the most favorable price and execution available.
Subject to applicable regulatory restrictions and such policies
as the Trust's trustees may adopt, 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 to effect
portfolio transactions for the Funds.
The Trust's Board of Trustees supervises the affairs of the Funds
as conducted by NEFM and Back Bay Advisors.
B u y i n g F u n d S h a r e s
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:
[] Through your investment dealer:
Many investment dealers have a sales agreement with the
Distributor and would be pleased to accept your order.
[] 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 between
8:00 a.m. and 7:00 p.m. (Eastern time).
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.)
[] By wire transfer of Federal Funds:
For an initial investment, call 1-800-225-5478 between 8:00 a.m.
and 7:00 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.
[] By Investment Builder:
Investment Builder is New England Funds' 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 check marked "Void" or a 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.
[] By electronic purchase through ACH:
You may purchase additional shares electronically through the
Automated Clearing House ("ACH") 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 8:00
a.m. and 7:00 p.m. (Eastern time) on a day when the Funds are
open for business. You may also purchase shares through ACH by
calling Tele#Facts at 1-800-346-5984 twenty-four hours a day.
Under normal circumstances, the New York Stock Exchange (the
"Exchange") closes at 4:00 p.m. (Eastern time). Purchase orders
accepted through ACH or Tele#Facts after 4:00 p.m. (Eastern
time), or after the Exchange closes if it closes earlier than
4:00 p.m., will be processed at the net asset value determined at
the close of regular trading on the next day that the Exchange is
open. Proceeds of redemptions of Fund shares purchased through
ACH may not be available for up to ten days after the purchase
date.
[] 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
"Owning Fund Shares -- Exchanging Among New England Funds" for
complete details.
Using Tele#Facts 1-800-346-5984
Tele#Facts is New England Funds' 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.
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 ("State Street Bank") (except orders received by your
investment dealer before the close of trading on the Exchange 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
Funds' "open account" 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.
To make investing even easier, you can also order personalized
investment slips by calling 1-800-225-5478 between 8:00 a.m. and
7:00 p.m. (Eastern time).
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. Class A shares are
offered subject to the following sales charges:
Sales charge as a % of Dealer's
------------------------ Concession
Net as % of
Offering Amount Offering
Value of Total Price Invested Price**
Investment ----------- ----------- -----------
- --------------------
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 *
* 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.
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 New England Cash
Management Trust Money Market Series or U.S. Government Series or
New England Tax Exempt Money Market Trust (the "Money Market
Funds"), 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. If the Money Market Fund shares are
redeemed rather than exchanged back into the Trusts, then a CDSC
applies to the redemption. 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 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 to the
redemption, at the same rate as if the Class B shares of the Fund
had been redeemed at the time they were exchanged for Money
Market Fund shares. For purposes of the CDSC, it is assumed that
the shares held the longest are the first to be redeemed.
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 CDSC, 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.
Contingent
Deferred
Sales Charge as
a
Percentage of
Dollar
Year Since Amount Subject
Purchase to Charge
---------- ----------------
1st .......... 4%
2nd .......... 3%
3rd .......... 3%
4th .......... 2%
5th .......... 1%
thereafter .......... 0%
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 "Sales Charges - General"
below. At the time of sale, the Distributor pays investment
dealers a commission of 2.75% and advances the first year's
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.
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
Code) of a shareholder if the redemption is made within one year
after the shareholder's death or disability. In addition, no
CDSC applies to certain withdrawals pursuant to a Systematic
Withdrawal Plan. See "Selling Fund Shares -- 5 Ways to Sell Fund
Shares -- By Systematic Withdrawal Plan" 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 Funds' 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. The Distributor 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 payment 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. 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 -- no sales charge or
CDSC applies to investments of $100,000 or more in the Funds by
clients of an adviser or subadviser to any series of the Trusts;
any director, officer or partner of a client of an adviser or
subadviser 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 by
investment advisers, financial planners or other intermediaries
who place trades for their own accounts or the accounts of their
clients and who charge a management, consulting or other fee for
their services; clients of such investment advisers, financial
planners or other intermediaries who place trades for their own
accounts if the accounts are linked to the master account of such
investment adviser, financial planner or other intermediary on
the books and records of the broker or agent; and retirement and
deferred compensation plans and trusts used to fund those plans,
including, but not limited to, those defined in Section 401(a),
403(b) or 457 of the Code and "rabbi trusts." Investors may be
charged a fee if they effect transactions through a broker or
agent.
[] Shares of the Funds also may be purchased at net asset value
through certain broker-dealers and/or financial services
organizations without any transaction fee. Such organizations
may receive compensation, in an amount of up to 0.35% annually of
the average value of the Fund shares held by their customers.
This compensation may be paid by NEFM and/or Back Bay Advisors
out of their own assets, or may be paid indirectly by the Fund in
the form of servicing, distribution or transfer agent fees.
[] There is no sales charge, CDSC or initial investment minimum
related to investments by certain current and retired employees
of the Trust's investment advisers, subadvisers, 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.
O w n i n g F u n d S h a r e s
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 series of the
Trusts) for 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; such
exchanges will be made at the next-determined net asset value of
the shares. 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 Class A shares of
another series of the Trusts 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 "Adjustable
Rate Fund") 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 shares of a series of the Trusts 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 which offers Class B shares. 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 "Sales
Charges _ Class B Shares" above.
To make an exchange, please call 1-800-225-5478 between 8:00 a.m.
and 7:00 p.m. (Eastern time) on a day when the Funds are open for
business, call Tele#Facts or write New England Funds. Exchange
requests accepted after 4:00 p.m. (Eastern time), or after the
Exchange closes if it closes earlier than 4:00 p.m., will be
processed at the net asset value determined at the close of
regular trading on the next day that the Exchange is open. 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 days' advance notice of any material change
to the exchange privilege.
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 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 "undeliverable" 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. Shares will be
purchased at the selected fund's net asset value (without a sales
charge or CDSC) on the dividend record date. 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 fund's prospectus.
S e l l i n g F u n d S h a r e s
5 Ways to Sell Fund Shares
You may sell Class A and Class B shares of the Funds in the
following ways:
[] Through your investment dealer:
Call your authorized investment dealer for information.
[] 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 8:00 a.m. and
7:00 p.m. (Eastern time) on a day when the Funds are open for
business, or by calling Tele#Facts at 1-800-346-5984 twenty-
four hours a day. 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 between 8:00 a.m. and 7:00 p.m.
(Eastern time) 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 between 8:00 a.m. and 7:00 p.m. (Eastern
time) or call Tele#Facts at 1-800-346-5984 twenty-four hours a
day. The proceeds (less any applicable CDSC) generally will
arrive at your bank within three business days; their
availability will depend on your bank's particular rule.
Redemption requests accepted after 4:00 p.m. (Eastern time), or
after the Exchange closes if it closes before 4:00 p.m., will be
processed at the net asset value determined at the close of
regular trading on the next day that the Exchange is open.
[] 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 they 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.
[] 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.
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
Bank's 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.
[] 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 day's 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.
However, in those cases where you have recently purchased your
shares by check or an electronic funds transfer through the ACH
system and you make a redemption request within 10 days after
such purchase or transfer, the Fund may withhold redemption
proceeds until the Fund knows that the check or funds have
cleared.
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.
F u n d D e t a i l s
How Fund Share Price is Determined
Back Bay Advisors, under the direction of the Trust's 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 Fund's 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 class's 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
Fund's Class A shares is determined by adding the applicable
sales charge to the net asset value. See "Sales Charges" 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 day's public offering price.
CALCULATING THE PRICE OF SHARES
Total Market Value of
Portfolio Securities
+ Other Assets
- - Any Liabilities
= Net Asset Value (NAV)
- -----------------------------------------------------------------
- ---
Total Number of Outstanding Shares in a Class
The public offering price for Class A shares is the NAV plus the
applicable sales charge. The public offering price for Class B
shares is the NAV.
Income Tax Considerations
The Funds intend to meet all requirements of the Code necessary
to ensure that they qualify to pay "exempt-interest dividends,"
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 Fund's 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 Fund's 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.
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 "adjusted current
earnings" 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
corporation's 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 Funds' dividends are "exempt-interest
dividends," 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 Fund's 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 year's 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 Funds' Expenses
In addition to the management fee paid to NEFM, each Fund pays
all expenses not borne by NEFM, Back Bay Advisors or the
Distributor, including, but not limited to, the charges and
expenses of the Fund's custodian and transfer agent, independent
auditors and legal counsel for the Fund and the Trust's
independent trustees, 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 and state
securities laws, all expenses of shareholders' and trustees'
meetings, preparing, printing and mailing reports to shareholders
and the compensation of trustees who are not directors, officers
or employees of NEFM, Back Bay Advisors or their 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 the Fund's 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 Fund's 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 year's service fee in the amount of
up to 0.25% of the amount invested.
Both Funds' 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 Fund's 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 Fund's shares, as distribution fees in connection with the
sale of the Fund's shares. The Distributor retains the balance
of the distribution fee as compensation for the Distributor's
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 may 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 class's total return will be higher.
Current yield is computed in accordance with the SEC's
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 class's net investment income
as determined for financial reporting purposes. SEC regulations
require that net investment income be calculated on a "yield-to-
maturity" basis, which has the effect of amortizing any premiums
or discounts in the current market value of fixed-income
securities. Each class's current dividend rate is based on the
class's 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.
Taxable-equivalent yield is the taxable yield an investor would
have to earn to receive the equivalent of the class's yield after
payment of federal income tax and state personal income taxes.
Taxable-equivalent yield is calculated by adjusting a class's
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 class's 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.
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 Trust's trustees have the authority without shareholder
approval to issue other classes of shares of the Funds that
represent interests in the Funds' 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
"fundamental" 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 Fund's 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 Fund's 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 Fund's net asset value.
[] The Funds' 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.
[] Summit Cash Reserves Fund (the "Cash Fund"), a series of
Financial Institutions Series Trust, is related to the Funds for
purposes of investment and investor services. Shares of all
classes of the Funds may be exchanged for shares of the Cash Fund
at net asset value. If shares of the Funds that are exchanged
for shares of the Cash Fund are subject to a CDSC, the holding
period for purposes of determining the expiration of the CDSC
will stop and resume only when an exchange is made back into
shares of a series of the Trusts. If Fund shares subject to a
CDSC are exchanged for Cash Fund shares and the Cash Fund shares
are later redeemed rather than being exchanged back into shares
of a series of the Trusts, then a CDSC will apply at the same
rate as if the Fund shares were redeemed at the time of the
exchange.
<PAGE>
NEW ENGLAND FUNDS
Where The Best Minds Meet(TM)
NEW ENGLAND CAPITAL GROWTH FUND
NEW ENGLAND BALANCED FUND
NEW ENGLAND GROWTH FUND
NEW ENGLAND GROWTH OPPORTUNITIES FUND
NEW ENGLAND INTERNATIONAL EQUITY FUND
NEW ENGLAND STAR ADVISERS FUND
NEW ENGLAND VALUE FUND
Statement of Additional Information -- PART I
April 15, 1996
This Statement of Additional Information (the "Statement")
contains information which may be useful to investors but which
is not included in the Prospectus of the New England Funds listed
above (the "Funds" and each a "Fund"). This Statement is not a
prospectus and is only authorized for distribution when
accompanied or preceded by the Prospectus of the Funds dated
April 15, 1996 for Class A, Class B and Class C shares or the
Prospectus of the Funds dated April 15, 1996 for Class Y shares
(the "Prospectus" or "Prospectuses"). The Statement should be
read together with the Prospectus. Investors may obtain a free
copy of any of the Prospectuses from New England Funds, L.P.,
Prospectus Fulfillment Desk, 399 Boylston Street, Boston,
Massachusetts 02116.
Part I of this Statement contains specific information about
the Funds. Part II includes information about the Funds and
other New England Funds. New England Growth Fund, New England
Capital Growth Fund, New England Value Fund, New England Balanced
Fund, New England International Equity Fund and New England Star
Advisers Fund are series of New England Funds Trust I, a
registered management investment company that offers a total of
eleven series, and New England Growth Opportunities Fund is a
series of New England Funds Trust II, a registered management
investment company that offers a total of eight series.
T a b l e o f C o n t e n t s
Page
Part I
Investment Restrictions
Fund Charges and Expenses
Investment Performance of the Funds
Part II
Miscellaneous Investment Practices
Management of the Trusts
Portfolio Transactions and Brokerage
Description of the Trusts and Ownership of
Shares
How to Buy Shares
Net Asset Value and Public Offering Price
Reduced Sales Charges
Shareholder Services
Redemptions
Standard Performance Measures
Income Dividends, Capital Gain Distributions
and Tax Status
Financial Statements
Appendix A - Description of Bond Ratings
Appendix B - Publications That May Contain
Fund Information
Appendix C - Advertising and Promotional
Literature
INVESTMENT RESTRICTIONS
The following is a description of restrictions on the
investments to be made by the Funds, some of which restrictions
(which are marked with an asterisk) may not be changed without
the approval of a majority of the outstanding voting securities
of the relevant Fund (as defined in the Investment Company Act of
1940 [the "1940 Act"]). Except in the case of restrictions
marked with a dagger (+) below, the percentages set forth below
and the percentage limitations set forth in the Prospectus will
apply at the time of the purchase of a security and shall not be
considered violated unless an excess or deficiency occurs or
exists immediately after and as a result of a purchase of such
security.
New England Growth Fund, New England Value Fund and New England
Balanced Fund
New England Growth Fund (the "Growth Fund"), New England Value
Fund (the "Value Fund") and New England Balanced Fund (the
"Balanced Fund") each will not:
*(1) Purchase any security (other than U.S. Government
securities) if, as a result, more than 5% of the Fund's total
assets (taken at current value) would then be invested in
securities of a single issuer or 25% of the Fund's total
assets (taken at current value) would be invested in any one
industry;
*(2) Purchase securities on margin (but it may obtain such
short-term credits as may be necessary for the clearance of
purchases and sales of securities), or make short sales
except where, by virtue of ownership of other securities, it
has the right to obtain, without payment of further
consideration, securities equivalent in kind and amount to
those sold, and the Fund will not deposit or pledge more than
10% of its total assets (taken at current value) as
collateral for such sales;
*(3) Acquire more than 10% of any class of securities of an
issuer (taking all preferred stock issues of an issuer as a
single class and all debt issues of an issuer as a single
class) or acquire more than 10% of the outstanding voting
securities of an issuer;
*(4) Borrow money in excess of 10% of its total assets (taken
at cost) or 5% of its total assets (taken at current value),
whichever is lower, and then only as a temporary measure for
extraordinary or emergency purposes;
*(5) Pledge more than 15% of its total assets (taken at
cost);
*(6) Invest more than 5% of its total assets (taken at
current value) in securities of businesses (including
predecessors) less than three years old;
*(7) Purchase or retain securities of any issuer if officers
and trustees of New England Funds Trust I or of the
investment adviser of the Fund who individually own more than
1/2 of 1% of the shares or securities of that issuer,
together own more than 5%;
*(8) Make loans, except by purchase of bonds, debentures,
commercial paper, corporate notes and similar evidences of
indebtedness, which are a part of an issue to the public or
to financial institutions;
*(9) Buy or sell oil, gas or other mineral leases, rights or
royalty contracts, real estate or commodities or commodity
contracts. Also, the Value Fund will not buy or sell real
estate or interests in real estate which are not readily
marketable. (This restriction does not prevent such Funds
from purchasing securities of companies investing in the
foregoing);
*(10)Act as underwriter, except to the extent that, in connection
with the disposition of portfolio securities, it may be
deemed to be an underwriter under certain federal securities
laws;
*(11)Make investments for the purpose of exercising control or
management;
*(12)Participate on a joint or joint and several basis in any
trading account in securities;
*(13)Purchase options or warrants if, as a result, more than 1%
of its total assets (taken at current value) would be
invested in such securities;
*(14)Write options or warrants; or
*(15)Invest in the securities of other investment companies,
except by purchases in the open market involving only
customary brokers' commissions. (Under the 1940 Act, the
Growth Fund, the Value Fund and the Balanced Fund each may
not (a) invest more than 10% of its total assets [taken at
current value] in such securities, (b) own securities of any
one investment company having a value in excess of 5% of the
total assets of such Fund [taken at current value], or (c)
own more than 3% of the outstanding voting stock of any one
investment company.)
In order to comply with certain state requirements applicable
to restriction (5) above, as a matter of operating policy,
subject to change without shareholder approval, the Growth Fund,
the Value Fund and the Balanced Fund will not pledge more than 2%
of their assets. In addition, as a matter of operating policy,
subject to change without shareholder approval, the Funds do not
intend to make short sales of the type permitted by restriction
(2).
As a matter of operating policy, subject to change without
shareholder approval, the Growth Fund, the Value Fund and the
Balanced Fund will not (1) purchase any security restricted as to
disposition under federal securities laws if as a result of such
purchase more than 10% of the Fund's total net assets would be
invested in such securities; +(2) invest more than 15% of the
Fund's total net assets in illiquid securities, or (3) purchase
or sell real property, including limited partnership interests.
New England Capital Growth Fund
New England Capital Growth Fund (the "Capital Growth Fund") may
not:
(1) Purchase any security (other than U.S. Government securities)
if, as a result, more than 5% of the Fund's total assets
(taken at current value) would then be invested in securities
of a single issuer;
*(2) Purchase any security (other than U.S. Government
securities) if, as a result, more than 25% of the Fund's
total assets (taken at current value) would be invested in
any one industry (in the utilities category, gas, electric,
water and telephone companies will be considered as being in
separate industries, and each foreign country's government
[together with subdivisions thereof] will be considered to be
a separate industry);
(3) Purchase securities on margin (but it may obtain such short-
term credits as may be necessary for the clearance of
purchases and sales of securities), or make short sales
except where, by virtue of ownership of other securities, it
has the right to obtain, without payment of further
consideration, securities equivalent in kind and amount to
those sold, and the Fund will not deposit or pledge more than
10% of its total assets (taken at current value) as
collateral for such sales. (For this purpose, the deposit or
payment by the Fund of initial or variation margin in
connection with futures contracts or related options
transactions is not considered the purchase of a security on
margin);
(4) Acquire more than 10% of any class of securities of an issuer
(other than U.S. Government securities and taking all
preferred stock issues of an issuer as a single class and all
debt issues of an issuer as a single class) or acquire more
than 10% of the outstanding voting securities of an issuer;
*(5)Borrow money in excess of 10% of its total assets (taken at
cost) or 5% of its total assets (taken at current value),
whichever is lower, and then only as a temporary measure for
extraordinary or emergency purposes;
(6) Pledge more than 15% of its total assets (taken at cost).
(For the purpose of this restriction, collateral arrangements
with respect to options, futures contracts and options on
futures contracts and with respect to initial and variation
margin are not deemed to be a pledge of assets);
(7) Invest more than 5% of its total assets (taken at current
value) in securities of businesses (including predecessors)
less than three years old;
(8) Purchase or retain securities of any issuer if officers and
trustees of New England Funds Trust I or of the investment
adviser or subadviser of the Fund who individually own more
than l/2 of 1% of the shares or securities of that issuer,
together own more than 5%;
*(9)Make loans, except by entering into repurchase agreements or
by purchase of bonds, debentures, commercial paper, corporate
notes and similar evidences of indebtedness, which are a part
of an issue to the public or to financial institutions, or
through the lending of the Fund's portfolio securities;
*(10)Buy or sell oil, gas or other mineral leases, rights or
royalty contracts, real estate or commodities or commodity
contracts, except that the Fund may buy and sell futures
contracts and related options. (This restriction does not
prevent the Fund from purchasing securities of companies
investing in the foregoing);
*(11)Act as underwriter, except to the extent that, in connection
with the disposition of portfolio securities, it may be
deemed to be an underwriter under certain federal securities
laws;
(12)Make investments for the purpose of exercising control or
management;
(13) Except to the extent permitted by rule or order of the
Securities and Exchange Commission (the "SEC"), participate
on a joint or joint and several basis in any trading account
in securities. (The "bunching" of orders for the purchase or
sale of portfolio securities with Loomis, Sayles & Company,
L.P. ["Loomis Sayles"] or accounts under its management to
reduce brokerage commissions, to average prices among them or
to facilitate such transactions is not considered a trading
account in securities for purposes of this restriction.);
(14)Write, purchase or sell options or warrants, except that the
Fund may (a) acquire warrants or rights to subscribe to
securities of companies issuing such warrants or rights, or
of parents or subsidiaries of such companies, (b) write,
purchase and sell put and call options on securities or
securities indexes and (c) enter into currency forward
contracts;
+(15)Purchase any illiquid security if, as a result, more than
15% of its net assets (taken at current value) would be
invested in such securities;
(16)Invest in the securities of other investment companies,
except by purchases in the open market involving only
customary brokers' commissions or no commissions. Under the
1940 Act, the Fund may not (a) invest more than 10% of its
total assets (taken at current value) in such securities, (b)
own securities of any one investment company having a value
in excess of 5% of the total assets of the Fund (taken at
current value), or (c) own more than 3% of the outstanding
voting stock of any one investment company; or
*(17)Issue senior securities. (For the purpose of this
restriction, none of the following is deemed to be a senior
security: any pledge or other encumbrance of assets
permitted by restriction (6) above; any borrowing permitted
by restriction (5) above; any collateral arrangements with
respect to options, futures contracts and options on futures
contracts and with respect to initial and variation margin;
the purchase or sale of options, forward contracts, futures
contracts or options on futures contracts; and the issuance
of shares of beneficial interest permitted from time to time
by the provisions of New England Funds Trust I's Agreement
and Declaration of Trust and by the 1940 Act, the rules
thereunder, or any exemption therefrom.)
The Capital Growth Fund has undertaken that its investments
in warrants (other than warrants acquired in units or attached to
other securities) will not exceed 5% of the value of its net
assets and that, within that 5%, not more than 2% of its net
assets will be invested in warrants not listed on the New York or
American Stock Exchanges; it will not invest in commodity futures
contracts or real estate limited partnerships; it will not invest
more than 5% of its net assets in restricted securities; it will
not invest in puts, calls, straddles, spreads or any combination
thereof; it will not invest in futures contracts and it will not
make loans of portfolio securities. The undertakings set forth
in this paragraph can be changed without shareholder approval,
but the Statement will be revised to reflect any such changes.
New England Star Advisers Fund
New England Star Advisers Fund (the "Star Advisers Fund") may
not:
*(1) Purchase any security (other than U.S. Government
securities) if , as a result, more than 25% of the Fund's
total assets (taken at current value) would be invested in
any one industry (in the utilities category, gas, electric,
water and telephone companies will be considered as being in
separate industries, and each foreign country's government
(together with subdivisions thereof) will be considered to be
a separate industry);
(2) Purchase securities on margin (but it may obtain such short-
term credits as may be necessary for the clearance of
purchases and sales of securities), or make short sales
except where, by virtue of ownership of other securities, it
has the right to obtain, without payment of further
consideration, securities equivalent in kind and amount to
those sold, and the Fund will not deposit or pledge more than
10% of its total assets (taken at current value) as
collateral for such sales. (For this purpose, the deposit or
payment by the Fund of initial or variation margin in
connection with futures contracts or related options
transactions is not considered the purchase of a security on
margin);
(3) Acquire more than 10% of any class of securities of an issuer
(other than U.S. Government securities and taking all
preferred stock issues of an issuer as a single class and all
debt issues of an issuer as a single class) or acquire more
than 10% of the outstanding voting securities of an issuer;
*(4) Borrow money in excess of 25% of its total assets, and
then only as a temporary measure for extraordinary or
emergency purposes;
(5) Pledge more than 25% of its total assets (taken at cost).
(For the purpose of this restriction, collateral arrangements
with respect to options, futures contracts and options on
futures contracts and with respect to initial and variation
margin are not deemed to be a pledge of assets);
(6) Invest more than 5% of its total assets (taken at current
value) in securities of businesses (including predecessors)
less than three years old;
(7) Purchase or retain securities of any issuer if officers and
trustees of New England Funds Trust I or of any investment
adviser or subadviser of the Fund who individually own more
than 1/2 of 1% of the shares or securities of that issuer,
together own more than 5%;
*(8)Make loans, except by entering into repurchase agreements or
by purchase of bonds, debentures, commercial paper, corporate
notes and similar evidences of indebtedness, which are a part
of an issue to the public or to financial institutions, or
through the lending of the Fund's portfolio securities;
*(9)Buy or sell oil, gas or other mineral leases, rights or
royalty contracts, real estate or commodities or commodity
contracts, except that the Fund may buy and sell futures
contracts and related options. (This restriction does not
prevent the Fund from purchasing securities of companies
investing in the foregoing);
*(10)Act as underwriter, except to the extent that, in connection
with the disposition of portfolio securities, it may be
deemed to be an underwriter under certain federal securities
laws;
(11) Make investments for the purpose of exercising control
or management;
(12) Except to the extent permitted by rule or order of the
SEC, participate on a joint or joint and several basis in any
trading account in securities. (The "bunching" of orders for
the purchase or sale of portfolio securities with any
investment adviser or subadviser of the Fund or accounts
under any such investment adviser's or subadviser's
management to reduce brokerage commissions, to average prices
among them or to facilitate such transactions is not
considered a trading account in securities for purposes of
this restriction.);
(13) Write, purchase or sell options or warrants, except that
the Fund may (a) acquire warrants or rights to subscribe to
securities of companies issuing such warrants or rights, or
of parents or subsidiaries of such companies, (b) write,
purchase and sell put and call options on securities,
securities indexes, currencies, futures contracts, swap
contracts and other similar instruments and (c) enter into
currency forward contracts;
+(14) Purchase any illiquid security if, as a result, more
than 15% of its net assets (taken at current value) would be
invested in such securities;
(15) Invest in the securities of other investment companies,
except by purchases in the open market involving only
customary brokers' commissions or no commissions. Under the
1940 Act, the Fund may not (a) invest more than 10% of its
total assets (taken at current value) in such securities, (b)
own securities of any one investment company having value in
excess of 5% of the total assets of the Fund (taken at
current value), or (c) own more than 3% of the outstanding
voting stock of any one investment company; or
*(16) Issue senior securities. (For the purpose of this
restriction none of the following is deemed to be a senior
security: any pledge or other encumbrance of assets
permitted by restrictions (2) or (5) above; any borrowing
permitted by restriction (4) above; any collateral
arrangements with respect to forward contracts, options,
futures contracts and options on futures contracts and with
respect to initial and variation margin; the purchase or sale
of options, forward contracts, futures contracts or options
on futures contracts; and the issuance of shares of
beneficial interest permitted from time to time by the
provisions of New England Funds Trust I's Agreement and
Declaration of Trust and by the 1940 Act, the rules
thereunder, or any exemption therefrom.)
As a matter of operating policy subject to change without
shareholder approval, the Star Advisers Fund intends not to
purchase securities when its outstanding borrowings exceeds 5% of
its total assets and the Fund will not (1) invest more 15% of its
total assets in securities of issuers which together with any
predecessors have a record of less than three years continuous
operation or securities of issuers which are restricted as to
disposition; (2) invest in any oil, gas and other mineral leases;
(3) purchase or sell real property including limited partnership
interests but excluding readily marketable interests in real
estate investment trusts or readily marketable securities of
companies which invest in real estate; (4) invest more than 5% of
its net assets in warrants, no more than 2% of which will be
invested in warrants that are not listed on the New York Stock
Exchange or American Stock Exchange, provided however, that for
purposes of this limitation, warrants acquired by the Fund in
units or attached to other securities may be deemed to be without
value; (5) invest in any uncovered puts, calls, straddles,
spreads or any combination thereof, if immediately thereafter the
aggregate premiums paid on such outstanding options would exceed
5% of the market value of the total assets of the Fund; or (6)
invest in commodities or commodity futures contracts, except that
the Fund may buy and sell stock index futures contracts and
related options, stock index options, currency options, currency
futures contracts and related options and interest rate futures
contracts and related options.
New England International Equity Fund
New England International Equity Fund (the "International Equity
Fund") may not:
(1) Purchase any security (other than U.S. Government securities)
if, as a result, more than 5% of the Fund's total assets
(taken at current value) would then be invested in securities
of a single issuer;
*(2) Purchase any security (other than U.S. Government
securities) if, as a result, more than 25% of the Fund's
total assets (taken at current value) would be invested in
any one industry (in the utilities category, gas, electric,
water and telephone companies will be considered as being in
separate industries, and each foreign country's government
[together with subdivisions thereof] will be considered to be
a separate industry);
(3) Purchase securities on margin (but it may obtain such short-
term credits as may be necessary for the clearance of
purchases and sales of securities), or make short sales
except where, by virtue of ownership of other securities, it
has the right to obtain, without payment of further
consideration, securities equivalent in kind and amount to
those sold, and the Fund will not deposit or pledge more than
10% of its total assets (taken at current value) as
collateral for such sales. (For this purpose, the deposit or
payment by the Fund of initial or variation margin in
connection with futures contracts or related options
transactions is not considered the purchase of a security on
margin);
(4) Acquire more than 10% of any class of securities of an issuer
(other than U.S. Government securities and taking all
preferred stock issues of an issuer as a single class and all
debt issues of an issuer as a single class) or acquire more
than 10% of the outstanding voting securities of an issuer;
*(5) Borrow money in excess of 10% of its total assets (taken
at cost) or 5% of its total assets (taken at current value),
whichever is lower, and then only as a temporary measure for
extraordinary or emergency purposes;
(6) Pledge more than 15% of its total assets (taken at cost).
(For the purpose of this restriction, collateral arrangements
with respect to options, futures contracts and options on
futures contracts and with respect to initial and variation
margin are not deemed to be a pledge of assets);
(7) Invest more than 5% of its total assets (taken at current
value) in securities of businesses (including predecessors)
less than three years old;
(8) Purchase or retain securities of any issuer if officers and
trustees of New England Funds Trust I or of the investment
adviser or subadviser of the Fund who individually own more
than 1/2 of 1% of the shares or securities of that issuer,
together own more than 5%;
*(9) Make loans, except by entering into repurchase
agreements or by purchase of bonds, debentures, commercial
paper, corporate notes and similar evidences of indebtedness,
which are a part of an issue to the public or to financial
institutions, or through the lending of the Fund's portfolio
securities;
*(10)Buy or sell oil, gas or other mineral leases, rights or
royalty contracts, real estate or commodities or commodity
contracts, except that the Fund may buy and sell futures
contracts and related options. (This restriction does not
prevent the Fund from purchasing securities of companies
investing in the foregoing);
*(11)Act as underwriter, except to the extent that, in connection
with the disposition of portfolio securities, it may be
deemed to be an underwriter under certain federal securities
laws;
(12) Make investments for the purpose of exercising control
or management;
(13) Except to the extent permitted by rule or order of the
SEC, participate on a joint or joint and several basis in any
trading account in securities. (The "bunching" of orders for
the purchase or sale of portfolio securities with Draycott
Partners, Ltd. ["Draycott"] or accounts under its management
to reduce brokerage commissions, to average prices among them
or to facilitate such transactions is not considered a
trading account in securities for purposes of this
restriction.);
(14) Write, purchase or sell options or warrants, except that
the Fund may (a) acquire warrants or rights to subscribe to
securities of companies issuing such warrants or rights, or
of parents or subsidiaries of such companies, (b) write,
purchase and sell put and call options on securities,
securities indexes, currencies, futures contracts, swap
contracts and other similar instruments and (c) enter into
currency forward contracts;
+(15)Purchase any illiquid security if, as a result, more than
15% of its total assets (taken at current value) would be
invested in such securities;
(16) Invest in the securities of other investment companies,
except by purchases in the open market involving only
customary brokers' commissions or no commissions. Under the
1940 Act, the Fund may not (a) invest more than 10% of its
total assets (taken at current value) in such securities, (b)
own securities of any one investment company having a value
in excess of 5% of the total assets of the Fund (taken at
current value), or (c) own more than 3% of the outstanding
voting stock of any one investment company; or
*(17)Issue senior securities. For the purpose of this
restriction none of the following is deemed to be a senior
security: any pledge or other encumbrance of assets
permitted by restriction (6) above; any borrowing permitted
by restriction (5) above; any collateral arrangements with
respect to options, futures contracts and options on futures
contracts and with respect to initial and variation margin;
the purchase or sale of options, forward contracts, futures
contracts or options on futures contracts; and the issuance
of shares of beneficial interest permitted from time to time
by the provisions of New England Funds Trust I's Agreement
and Declaration of Trust and by the 1940 Act, the rules
thereunder, or any exemption therefrom.
The Fund has given undertakings to certain state regulatory
authorities in connection with the qualification of Fund shares
for sale in such states that its investments in warrants (other
than warrants acquired in units or attached to other securities)
will not exceed 5% of the value of its net assets and that,
within that 5%, not more than 2% of its net assets will be
invested in warrants not listed on the New York or American Stock
Exchanges; that it will not invest in commodity futures contracts
or real estate limited partnerships; that it will not invest more
than 5% of its net assets in restricted securities; and that it
will not invest in puts, calls, straddles, spreads or any
combination thereof if by reason thereof the value of its
aggregate investment in such classes of securities will exceed 5%
of its total assets. Such undertakings can be changed without
shareholder approval, but the Statement will be revised to
reflect any such changes.
The staff of the SEC is currently of the view that
repurchase agreements maturing in more than seven days are
subject to restriction (15) above.
New England Growth Opportunities Fund
New England Growth Opportunities Fund (the "Growth Opportunities
Fund") will not:
*(1) Purchase securities of an issuer if such purchase would
cause more than 5% of the market value of the total Fund
assets to be invested in the securities of such issuer
(exclusive of United States or Canadian government
obligations), or if such purchase would cause more than 10%
of the securities of such issuer to be held by the Fund;
*(2) Purchase or retain the securities of any issuer if the
officers and trustees of New England Funds Trust II owning
beneficially 1/2 of 1% of the securities of such issuer
together own beneficially more than 5% of the securities of
such issuer;
*(3) Purchase the securities issued by any other investment
company, except that a purchase involving no commission or
profit to a sponsor or dealer (other than a customary
broker's commission) is permitted and except that a purchase
that is part of a plan of merger or consolidation is
permitted;
*(4) Purchase securities issued by companies with a record
(including that of their predecessors) of less than three
years' continuous operation;
*(5) Purchase securities for the portfolio on margin, make
short sales or make loans to persons affiliated with New
England Funds Trust II;
*(6)Act as underwriter of securities of other issuers, or invest
directly in real estate or in commodities or commodity
contracts; or
*(7) Make loans to other persons, provided, however, that
this restriction shall not prohibit the Fund from entering
into repurchase agreements with respect to not more than 25%
of the Fund's total assets taken at current value. The
purchase of a portion of an issue of bonds, notes or
debentures publicly distributed or of a type customarily
purchased by institutional investors does not constitute the
making of loans within the meaning of this restriction.
*(8) The Growth Opportunities Fund may make secured or
unsecured bank borrowings, provided that an asset coverage of
at least 300% for all such borrowings (including the amount
then being borrowed) is maintained as required by the 1940
Act.
It is a fundamental policy of the Growth Opportunities Fund
that it will not concentrate its assets in the securities of
issuers in the same industry. The Fund intends to abide by the
views of the SEC staff on what constitutes industry
concentration. Accordingly, the Fund will not make an investment
if, immediately thereafter, the Fund would hold more than 25% of
its total assets in securities of issuers in any one industry.
This limitation does not apply to securities issued or guaranteed
by the U.S. Government, its agencies or instrumentalities.
It is contrary to the Growth Opportunities Fund's present
policy, which may be changed without shareholder approval, to:
(a) Purchase interests in oil, gas or other mineral exploration
or development programs, mineral leases;
(b) Write put or call options;
(c) Invest in real estate investments, or
(d) Invest in warrants.
As a matter of operating policy subject to change without
shareholder approval, the Fund will not (1) purchase any security
restricted as to disposition under federal securities laws if as
a result of such purchase more than 10% of the Fund's total net
assets would be invested in such securities; +(2) invest more
than 15% of the Fund's total net assets in illiquid securities;
or (3) purchase or sell real property, including limited
partnership interests.
The Growth Opportunities Fund has no present intention of
borrowing money except on a temporary basis, as may be needed; to
cover redemptions of shares. Should this intention change, the
Prospectus will be amended.
FUND CHARGES AND EXPENSES
INVESTMENT ADVISORY AND ADMINISTRATIVE SERVICES FEES
Pursuant to an advisory agreement dated September 1, 1993,
Capital Growth Management Limited Partnership ("CGM") has agreed
to manage the investment and reinvestment of the assets of the
Growth Fund, subject to the supervision of the Board of Trustees
of New England Funds Trust I. Under the advisory agreement, the
Fund pays CGM an advisory fee at the annual rate of 0.75% of the
first $200 million of the Fund's average daily net assets, 0.70%
of the next $300 million of such assets and 0.65% of such assets
in excess of $500 million.
Pursuant to separate advisory agreements, each dated January
2, 1996 (December 29, 1995, in the case of the International
Equity Fund), New England Funds Management, L.P. ("NEFM") has
agreed, subject to the supervision of the Board of Trustees of
the relevant Trust, to manage the investment and reinvestment of
the assets of the Capital Growth, Value, Balanced, International
Equity, Star Advisers and Growth Opportunities Funds and to
provide a range of administrative services to such Funds. For
the services described in the advisory agreements, each such Fund
has agreed to pay NEFM a management fee at the annual rate set
forth in the following table:
Management fee payable by Fund to NEFM
(as a percentage of average daily net
Fund assets of the Fund)
- ------------------------ ----------------------------------
Balanced Fund 0.75% of the first $200 million
0.70% of the next $300 million
0.65% of amounts in excess of $500
million
Capital Growth Fund 0.75% of the first $200 million
0.70% of the next $300 million
0.65% of amounts in excess of $500
million
Growth Opportunities 0.70% of the first $200 million
Fund 0.65% of the next $300 million
0.60% of amounts in excess of $500
million
International Equity 0.90% of the first $200 million
Fund 0.85% of the next $300 million
0.80% of amounts in excess of $500
million
Star Advisers Fund 1.05% of all assets
Value Fund 0.75% of the first $200 million
0.70% of the next $300 million
0.65% of amounts in excess of $500
million
The advisory agreements for the Capital Growth, Value,
Balanced, International Equity, Star Advisers and Growth
Opportunities Funds each provide that NEFM may delegate its
responsibilities thereunder to other parties. Pursuant to
separate subadvisory agreements, each dated January 2, 1996
(December 29, 1995, in the case of the International Equity
Fund), NEFM has delegated responsibility for managing the
investment and reinvestment of each of these Funds' assets to a
subadviser. The subadviser is Loomis Sayles, in the case of the
Balanced, Value and Capital Growth Funds; Westpeak Investment
Advisors, L.P. ("Westpeak"), in the case of the Growth
Opportunities Fund; and Draycott, in the case of the
International Equity Fund. The Funds pay no direct fees to the
subadvisers. For providing such subadvisory services to the
Funds, NEFM pays each subadviser a subadvisory fee at the annual
rate set forth in the following table:
Subadvisory fee payable by NEFM to
subadviser
(as a percentage of average daily
Fund Subadviser net assets of the Fund)
- ------------------- ---------- ----------------------------------
Balanced Fund Loomis 0.535% of the first $200 million
Sayles 0.350% of the next $300 million
0.300% of amounts in excess of
$500 million
Capital Growth Fund Loomis 0.60% of the first $25 million
Sayles 0.55% of the next $75 million
0.50% of the next $100 million
0.35% of the next $300 million
0.30% of amounts in excess of
$500 million
Growth Westpeak 0.50% of the first $25 million
Opportunities Fund 0.40% of the next $75 million
0.35% of the next $100 million
0.30% of amounts in excess of
$200 million
International Draycott 0.54% of the first $200 million
Equity Fund 0.49% of the next $300 million
0.44% of amounts in excess of
$500 million
Value Fund Loomis 0.535% of the first $200 million
Sayles 0.350% of the next $300 million
0.300% of amounts in excess of
$500 million
As explained in the Prospectus, the Star Advisers Fund's
portfolio is divided into four segments. Pursuant to separate
subadvisory agreements, each dated January 2, 1996, NEFM has
delegated responsibility for managing the investment and
reinvestment of the assets of each segment of the portfolio to a
different subadviser. The four subadvisers are Berger
Associates, Inc. ("Berger"), Founders Asset Management, Inc.
("Founders"), Janus Capital Corporation ("Janus Capital") and
Loomis Sayles. For providing such subadvisory services to the
Fund, NEFM pays each subadviser a subadvisory fee at the annual
rate of 0.55% of the first $50 million of the average daily net
assets of the segment of the Fund managed by that subadviser and
0.50% of such assets in excess of $50 million.
Prior to January 2, 1996, Loomis Sayles served as adviser to
the Capital Growth, Balanced and Value Funds pursuant to separate
advisory agreements, each of which provided for an advisory fee
payable by such Fund to Loomis Sayles at the same rate as the
management fee currently payable by such Fund to NEFM.
From May 1, 1995 until January 2, 1996, NEFM served as
adviser and Westpeak served as subadviser to the Growth
Opportunities Fund pursuant to advisory and subadvisory
agreements providing for the same advisory and subadvisory fee
rates as are currently in effect for the Fund. Prior to May 1,
1995, Back Bay Advisors, L.P. ("Back Bay Advisors") served as
adviser to the Growth Opportunities Fund pursuant to an advisory
agreement providing for an advisory fee payable by the Fund to
Back Bay Advisors at the annual rate of 0.50% of the Fund's
average daily net assets.
Prior to January 2, 1996, New England Investment Companies,
L.P. ("NEIC") served as adviser to the Star Advisers Fund
pursuant to an advisory agreement providing for a management fee
payable by the Fund to NEIC at the same rate as the management
fee currently payable by such Fund to NEFM.
Prior to December 29, 1995, Draycott served as adviser to
the International Equity Fund pursuant to an advisory agreement
providing for an advisory fee payable by the Fund to Draycott at
the annual rate of 0.80% of the first $200 million of the Fund's
average daily net assets, 0.75% of the next $300 million of such
assets and 0.70% of such assets in excess of $500 million.
Prior to December 29, 1995, short-term cash management
services were provided to the International Equity Fund by Back
Bay Advisors, a subadviser to Draycott. For these services,
Draycott had agreed to compensate Back Bay Advisors at the annual
rate of 0.08% of average daily net assets of the Fund. Back Bay
Advisors voluntarily agreed to waive this fee in its entirety.
Prior to December 29, 1995, New England Funds, L.P. (the
"Distributor"), of which Draycott was then an affiliate,
furnished or paid the expenses of the International Equity Fund
for office space, facilities and equipment, services of executive
and other personnel of New England Funds Trust I and certain
administrative services, pursuant to an administrative services
agreement. Under this agreement, the Fund paid the Distributor a
fee at the annual rate of 0.10% of the average daily net assets
attributable to the Fund's Class A, Class B and Class C shares
and 0.05% of the average daily net assets attributable to the
Fund's Class Y shares. The International Equity Fund's current
management fee rate represents, with respect to the Fund's Class
A, Class B and Class C shares, the sum of the fee rates under the
prior advisory and administrative services agreements.
Until further notice to the International Equity Fund, NEFM
and the Distributor have voluntarily agreed to reduce their fees
and, if necessary, to bear certain expenses related to operating
the Fund in order to limit the Fund's expenses to an annual rate
of 1.75% of the average daily net assets of the Fund's Class A
shares, 2.50% of the average daily net assets of the Fund's Class
B shares, 2.50% of the average daily net assets of the Fund's
Class C shares and 1.00% of the average daily net assets of the
Fund's Class Y shares. NEFM and the Distributor may terminate
these voluntary limitations at any time. Prior to December 29,
1995, similar voluntary limitations were in effect with respect
to Draycott, the Distributor and the Fund.
For the last three fiscal years, the advisory fees for the Funds
(before any voluntary fee reductions) were:
Fund 1993 1994 1995
-------------------- -------- -------- --------
Growth Fund $8,074,472 $7,572,051 $
Capital Growth Fund $558,088 $834,943 $
Value Fund $1,287,064 $1,543,333 $
Balanced Fund $954,586 $1,498,050 $
International Equity $387,348 $1,541,223 $
Fund*
Growth Opportunities $511,327 $555,258 $
Star Advisers Fund** $569,280 $
* As a result of the voluntary expense limitation in effect, the
International Equity Fund paid $171,250, $1,449,606 and
$__________, respectively, in advisory fees for the fiscal
years ended December 31, 1993, 1994 and 1995.
**The Star Advisers Fund commenced operations on July 7, 1994.
As a result of the voluntary expense limitation in effect, the
Star Advisers Fund paid $543,254 and $______, respectively, in
advisory fees for the period July 7, 1994 through December 31,
1994 and for the fiscal year ended December 31, 1995.
For the period from the commencement of the Star Advisers
Fund's operations in July 1994 until December 31, 1994, NEIC and
the subadvisers of the Star Advisers Fund voluntarily agreed to
reduce their compensation. As a result of this voluntary
agreement, the compensation paid by the Fund to NEIC for this
period was at the annual rate of 1.00% of the Fund's average
daily net assets, and the compensation paid by NEIC to each
subadviser was at the annual rate of 0.50% of the average daily
net assets of the segment of the Fund's portfolio managed by that
subadviser. Without the voluntary limitations, estimated
compensation paid to NEIC would have been at the annual rate of
1.05% of the Fund's average daily net assets and the compensation
paid by NEIC to each subadviser would be been at the annual rate
of 0.55% of the average daily net assets of the segment of the
Fund's portfolio managed by that subadviser.
For more information about the Funds' advisory and
subadvisory agreements, see "Management of the Trusts" in Part II
of this Statement.
BROKERAGE COMMISSIONS
In 1993, 1994 and 1995, brokerage transactions for the
Growth Fund aggregating $3,159,418,968, $3,048,679,127 and
$______________, respectively, were allotted to brokers providing
research services, and $4,896,039, $4,187,824 and $_____________,
respectively, in commissions were paid on these transactions in
such years. During 1993, 1994 and 1995 the Fund paid total
brokerage commissions of $5,204,339, $4,305,999 and $___________,
respectively.
In 1993, 1994 and 1995, brokerage transactions for the Value
Fund aggregating $10,177,146, $9,382,814 and $_______________,
respectively, were allotted to brokers providing research
services, and $14,608, $14,664 and $__________, respectively, in
commissions were paid on these transactions in such years.
During 1993, 1994 and 1995, the Fund paid total brokerage
commissions of $290,786, $342,576.50 and $_____________,
respectively.
In 1993, 1994 and 1995, brokerage transactions for the
Balanced Fund aggregating $12,509,788, $14,761,967 and
$________________, respectively, were allotted to brokers
providing research services, and $18,540, $28,267 and
$__________, respectively, in commissions were paid on these
transactions in such years. During 1993, 1994 and 1995, the Fund
paid total brokerage commissions of $188,608, $159,243 and
$_________, respectively.
In 1993, 1994 and 1995, the Growth Opportunities Fund paid
aggregate brokerage commissions of $27,372, $9,427 and
$_________, respectively.
For the fiscal year ended December 31, 1993, brokerage
transactions for the International Equity Fund and the Capital
Growth Fund aggregating $141,224,000 and $84,641,249,
respectively, were allocated to brokers providing research
services, and $376,365 and $108,879, respectively, in commissions
were paid on these transactions. During 1993, the International
Equity Fund and the Capital Growth Fund paid total brokerage
commissions of $376,365 and $156,966, respectively. For the
fiscal year ended December 31, 1994, brokerage transactions for
the International Equity Fund and the Capital Growth Fund
aggregating $482,619,468 and $135,445,676, respectively, were
allocated to brokers providing research services, and $1,173,745
and $191,861, respectively, in commissions were paid on these
transactions. During 1994, the International Equity Fund and the
Capital Growth Fund paid total brokerage commissions of
$1,173,745 and $10,615, respectively. For the fiscal year ended
December 31, 1995, brokerage transactions for the International
Equity Fund and the Capital Growth Fund aggregating
$_______________ and $_____________, respectively, were allocated
to brokers providing research services and $______________ and
$_________, respectively, in commissions were paid on these
transactions. During 1995, the International Equity Fund and the
Capital Growth Fund paid total brokerage commissions of
approximately $____________ and $_____________, respectively.
For the period July 7, 1994 (commencement of operations) to
December 31, 1994 and the fiscal year ended December 31, 1995,
brokerage transaction for the Star Advisers Fund aggregating
$____ and $_____, respectively, were allocated to brokers
providing research services, and $____ and $____, respectively,
in commissions were paid these transactions. For the period July
7, 1994 to December 31, 1994 and the fiscal year ended December
31, 1995, the Fund paid total brokerage commissions of $___ and
$____, respectively.
For more information about the Funds' portfolio
transactions, see "Portfolio Transactions and Brokerage" in Part
II of this Statement.
SALES CHARGES AND 12B-1 FEES
As explained in Part II of this Statement, the Class A,
Class B and Class C shares of each Fund pay fees under plans
adopted pursuant to Rule 12b-1 under the 1940 Act. The following
table shows the amounts of Rule 12b-1 fees paid by each Fund
during the fiscal years ended December 31, 1993, 1994 and 1995:
Fund 1993 1994 1995
----------------- ---------- ---------- -----------
Growth Fund $2,970,951 $2,177,712 (Class A)
Value Fund $429,022 $489,686 (Class A)
$2,966 $81,490 (Class B)*
(Class C)**
Balanced Fund $318,195 $401,403 (Class A)
$6,196 $131,331 (Class B)*
(Class C)**
Growth $357,066 $376,217 (Class A)
Opportunities $2,469 $35,609 (Class B)*
Fund (Class
C)***
Star Advisers $89,910 (Class A)
Fund**** $204,766 (Class B)
$62,604 (Class C)
International $112,228 $341,787 (Class A)
Equity Fund $13,893 $242,144 (Class B)*
(Class C)**
Capital Growth $183,521 $247,956 (Class A)
Fund $10,030 $121,432 (Class B)*
(Class C)**
* Class B shares were first offered on September 13, 1993.
** Class C shares were first offered on January 2, 1995.
*** Growth Opportunities Fund Class C shares were first
offered on May 1, 1995.
**** The Star Advisers Fund commenced operations on July 7,
1994.
During the fiscal year ended December 31, 1995, expenses
relating to each Fund's 12b-1 plans were as follows:
Growth Fund
Compensation to Investment Dealers $
Compensation to Distributor's Sales Personnel $
TOTAL $
Value Fund
(Class A shares)
Compensation to Investment Dealers $
Compensation to Distributor's Sales Personnel $
TOTAL $
(Class B shares)
Compensation to Investment Dealers $
TOTAL $
(Class C shares)
Compensation to Investment Dealers $
Compensation to Distributor's Sales Personnel $
TOTAL $
Balanced Fund
(Class A shares)
Compensation to Investment Dealers $
Compensation to Distributor's Sales Personnel $
TOTAL $
(Class B shares)
Compensation to Investment Dealers $
TOTAL $
(Class C shares)
Compensation to Investment Dealers $
Compensation to Distributor's Sales Personnel $
TOTAL $
Growth Opportunities Fund
(Class A shares)
Compensation to Investment Dealers $
Compensation to Distributor's Sales Personnel $
TOTAL $
(Class B shares)
Compensation to Investment Dealers $
TOTAL $
(Class C shares)
Compensation to Investment Dealers $
Compensation to Distributor's Sales Personnel $
TOTAL $
Star Advisers Fund
(Class A shares)
Compensation to Investment Dealers $
Compensation to Distributor's Sales Personnel $
TOTAL $
(Class B shares)
Compensation to Investment Dealers $
TOTAL $
(Class C shares)
Compensation to Investment Dealers $
TOTAL $
International Equity Fund
(Class A shares)
Compensation to Investment Dealers $
Compensation to Distributor's Sales Personnel $
TOTAL $
(Class B shares)
Compensation to Investment Dealers $
TOTAL $
(Class C shares)
Compensation to Investment Dealers $
Compensation to Distributor's Sales Personnel $
TOTAL $
Capital Growth Fund
(Class A shares)
Compensation to Investment Dealers $
Compensation to Distributor's Sales Personnel $
TOTAL $
(Class B shares)
Compensation to Investment Dealers $
TOTAL $
(Class C shares)
Compensation to Investment Dealers $
Compensation to Distributor's Sales Personnel $
TOTAL $
Of the amounts listed above as compensation to investment
dealers, the following amounts were paid by the Distributor to
New England Securities Corporation ("New England Securities"), a
broker-dealer affiliate of the Distributor: $_________ relating
to the Growth Fund; $_________ relating to the Class A shares,
$_________ relating to the Class B shares and $_________ relating
to the Class C shares of the Value Fund; $_________ relating to
the Class A shares, $_________ relating to the Class B shares and
$___________ $_________ relating to the Class C shares of the
Balanced Fund; $_________ relating to the Class A shares,
$_________ relating to the Class B shares and $__________
relating to the Class C shares of the Growth Opportunities Fund;
$_________ relating to the Class A shares, $_________ relating to
the Class B shares and $_________ relating to the Class C shares
of the Star Advisers Fund; $_________ relating to the Class A
shares, $_________ relating to the Class B shares and $_________
relating to the Class C shares of the International Equity Fund;
and $_________ relating to the Class A shares, $_________
relating to the Class B shares and $_________ relating to the
Class B shares of the Capital Growth Fund. New England
Securities paid [substantially all] of the fees it received from
the Distributor in commissions to its sales personnel and to
defray overhead costs relating to sales of Fund shares and/or
servicing shareholder accounts.
OWNERSHIP OF FUND SHARES
On April 1, 1996 the following persons owned of record or
beneficially 5% or more of the Class A,
Class B, Class C or Class Y shares of the indicated Funds.
[To be filed by amendment]
INVESTMENT PERFORMANCE OF THE FUNDS
Performance Results - Percent Change*
For The Periods Ended 12/31/95
Growth Fund
Aggregate Average Annual
Total Return Total Return
------------------- ----------------
1 5 10 5 10
As a % of Year Years Years Years Years
- ------------------------ ----- ----- ----- ------- -------
Net Asset Value
Maximum Offering Price
Value Fund
Aggregate Average Annual
Total Return Total Return
------------------- ----------------
Class A shares: As a % 1 5 10 5 10
of Year Years Years Years Years
- ------------------------ ----- ----- ----- ------- -------
Net Asset Value
Maximum Offering Price
Aggregate Average Annual
Total Return Total Return
------------------- ----------------
Class B shares: As a % Since Since
of 1 Year 9/13/93** 9/13/93**
- ------------------------ ------- ---------- ----------------
Net Asset Value
Redemption at End of
Period
Aggregate Annualized
Total Return Total Return
Class C shares: As a %
of Since 1/3/95** Since 1/3/95**
- ------------------------ ------------------- ----------------
Net Asset Value
Aggregate Annualized
Total Return Total Return
------------------- ----------------
Class Y shares: As a % Since Since
of 1 Year 3/31/94** 3/31/94**
- ------------------------ -------- --------- ----------------
Net Asset Value
Balanced Fund
Aggregate Average Annual
Total Return Total Return
------------------- ----------------
Class A shares: As a % 1 5 10 5 10
of Year Years Years Years Years
- ------------------------ ----- ----- ----- -------- ------
Net Asset Value
Maximum Offering Price
Aggregate Average Annual
Total Return Total Return
------------------- ----------------
Class B shares: As a % Since Since
of 1 Year 9/13/93** 9/13/93**
- ------------------------ ------- ---------- ----------------
Net Asset Value
Redemption at End of
Period
Aggregate Annualized
Total Return Total Return
Class C shares: As a % Since Since
of 1/3/95** 1/3/95**
- ------------------------ ------------------- --------------------
Net Asset Value
Aggregate Average Annual
Total Return Total Return
------------------- ----------------
Class Y shares: As a % Since Since
of 1 Year 3/31/94** 3/31/94**
- ------------------------ ------- ---------- ----------------
Net Asset Value
Growth Opportunities Fund***
Aggregate Average Annual
Total Return Total Return
------------------- ----------------
Class A shares: As a % 1 5 10 5 10
of Year Years Years Years Years
- ------------------------ ----- ----- ----- ----- -----
Net Asset Value
Maximum Offering Price
Aggregate Average Annual
Total Return Total Return
------------------- --------------------
Class B shares: As a % Since Since
of 1 Year 9/13/93** 9/13/93**
- ------------------------ ------- ---------- -----------
Net Asset Value
Redemption at End of
Period
Aggregate Average Annual
Total Return Total Return
Class C shares: As a % Since Since
of 5/1/95** 5/1/95**
- ------------------------ ------------------- --------------------
Net Asset Value
Aggregate Annualized
Total Return Total Return
Class Y shares: As a % Since Since
of 1 Year 3/31/94** 3/31/94**
- ------------------------ -------- --------- --------------------
Net Asset Value
Star Advisers Fund
Aggregate Average Annual
Total Return Total Return
------------------- ------------------
Class A shares: As a % Since Since
of 1 Year 7/7/94** 7/7/94**
- ------------------------ ------- ---------- ------------------
Net Asset Value
Maximum Offering Price
Aggregate Average Annual
Total Return Total Return
------------------- ------------------
Class B shares: As a % Since Since
of 1 Year 7/7/94** 7/7/94**
- ------------------------ ------- ---------- ------------------
Net Asset Value
Redemption at End of
Period
Aggregate Average Annual
Total Return Total Return
------------------- ------------------
Class C shares: As a % Since Since
of 1 Year 7/7/94** 7/7/94**
- ------------------------ ------- ---------- ------------------
Net Asset Value
Redemption at End of
Period
Aggregate Annualized
Total Return Total Return
------------------- -----------------
Class Y shares: As a % Since Since
of 1 Year 3/31/94** 3/31/94**
- ------------------------ -------- --------- -----------------
Net Asset Value
International Equity Fund****
Aggregate Average Annual
Total Return Total Return
------------------- -----------------
Class A shares: As a % Since Since
of 1 Year 5/21/92** 5/21/92**
- ------------------------ ------- ---------- -----------------
Net Asset Value
Maximum Offering Price
Aggregate Average Annual
Total Return Total Return
------------------- ------------------
Class B shares: As a % Since Since
of 1 Year 9/13/93** 9/13/93**
- ------------------------ ------- ---------- ------------------
Net Asset Value
Redemption at End of
Period
Aggregate Annualized
Total Return Total Return
Class C shares: As a % Since 1/3/95** Since 1/3/95**
of ------------------- ------------------
- ------------------------
Net Asset Value
Aggregate Average Annual
Total Return Total Return
------------------- ------------------
Class Y shares: As a % Since Since
of 1 Year 9/13/93** 9/13/93**
- ------------------------ ------- ---------- -------------------
Net Asset Value
Capital Growth Fund*****
Aggregate Average Annual
Total Return Total Return
------------------- ------------------
Class A shares: As a % Since Since
of 1 Year 8/03/92** 8/03/92**
- ------------------------ ------- ---------- ------------------
Net Asset Value
Maximum Offering Price
Aggregate Average Annual
Total Return Total Return
------------------- ------------------
Class B shares: As a % Since Since
of 1 Year 9/13/93** 9/13/93**
- ------------------------ ------- ---------- ------------------
Net Asset Value
Redemption at End of
Period
Aggregate Annualized
Total Return Total Return
Class C shares: As a % Since 1/3/95** Since 1/3/95**
of ------------------- ------------------
- ------------------------
Net Asset Value
Aggregate Average Annual
Total Return Total Return
------------------- ------------------
Class Y shares: As a % Since Since
of 1 Year 3/31/94** 3/31/94**
- ------------------------ -------- --------- ------------------
Net Asset Value
* Federal regulations require this example to be calculated
using a $1,000 investment. The normal minimum initial
investment in shares of the Funds is $2,500, however.
** Commencement of Fund operations or offering of specified
class of shares.
*** Assuming deduction of the current maximum sales load, the
Growth Opportunities Fund's Class A shares' ten-year average
annual total return would have been ____%, had a voluntary
expense limitation by the Fund's former investment adviser
not been in effect, and their ten-year aggregate total
return would have been ____%. Based on net asset values,
the Fund's Class A shares' ten-year average annual total
return would have been ____%, had this limitation not been
in effect, and their ten-year aggregate total return would
have been ____%.
**** Assuming deduction of the current maximum sales load, the
International Equity Fund's Class A shares' since-inception
average annual total return would have been ____%, and their
aggregate one-year and since-inception total returns would
have been ____% and ____%, respectively, had a voluntary
expense limitation not been in effect. Based on net asset
values, the Fund's Class A shares' since-inception average
annual total return would have been ____%, and their one-
year and since-inception aggregate total returns would have
been ____% and ____%, respectively, without the voluntary
limitation. Assuming redemption at the end of the period,
the Fund's Class B shares' since-inception average annual
total return would have been ____%, had a voluntary expense
limitation not been in effect, and their aggregate total
returns for the one-year and since-inception periods would
have been ____% and ____%, respectively. Based on net asset
values, the Fund's Class B shares' average annual total
return for the since-inception period would have been ____%,
and their aggregate total returns for the one-year and since-
inception periods would have been ____% and ____%,
respectively, without the voluntary limitation. The Fund's
Class C and Class Y shares' annualized total returns for the
since-inception period would have been ____% and ____%,
respectively, and their since-inception aggregate total
returns would have been ____% and ____%, respectively,
without the voluntary limitation.
*****Assuming deduction of the current maximum sales load, the
Capital Growth Fund's Class A shares' since-inception
average annual total return would have been ____%, and their
aggregate one-year and since-inception total returns would
have been ____% and ____%, respectively, had a voluntary
expense limitation not been in effect. Based on net asset
values, their since-inception average annual total return
would have been ____%, and their one-year and since
inception aggregate total returns would have been ___% and
____%, respectively, without the voluntary limitation.
Assuming redemption at the end of the period, the Fund's
Class B shares' since-inception average annual return would
have been ____%, and their one-year and since-inception
aggregate total returns would have been ____% and ____%,
respectively, without the voluntary limitation. Based on
net asset values, the Fund's Class B shares' since-inception
average annual total return would have been ____%, and their
one-year and since-inception aggregate total returns would
have been ____% and ____%, respectively, without the
voluntary limitation. The Fund's Class C shares' average
annual total return for the since-inception period would
have been ____%, and their aggregate one-year and since-
inception total returns would have been ____% and ____%,
respectively, without the voluntary limitation. The Fund's
Class Y shares' since-inception average annual total return
would have been ____%, and their one-year and since-
inception aggregate total returns would have been ____% and
____%, respectively, without the voluntary limitation.
The foregoing data represent past performance only and are
not a prediction as to the future returns of any Fund. The
investment return and principal value of an investment in any
Fund will fluctuate so that the investor's shares, when redeemed,
may be worth more or less than this original cost.
<PAGE>
NEW ENGLAND FUNDS
Where The Best Minds Meet(TM)
NEW ENGLAND GOVERNMENT SECURITIES FUND
NEW ENGLAND LIMITED TERM U.S. GOVERNMENT FUND
NEW ENGLAND ADJUSTABLE RATE U.S. GOVERNMENT FUND
NEW ENGLAND STRATEGIC INCOME FUND
NEW ENGLAND BOND INCOME FUND
NEW ENGLAND HIGH INCOME FUND
NEW ENGLAND MUNICIPAL INCOME FUND
Statement of Additional Information -- PART I
April 15, 1996
This Statement of Additional Information (the "Statement")
contains information which may be useful to investors but which
is not included in the Prospectus of the New England Funds listed
above (the "Funds" and each a "Fund"). This Statement is not a
prospectus and is only authorized for distribution when
accompanied or preceded by the Prospectus of the Funds dated
April 15, 1996 for Class A, Class B or Class C shares, or the
Prospectus of the Funds dated April 15, 1996 for Class Y shares
(the "Prospectus" or "Prospectuses"). The Statement should be
read together with the Prospectus. Investors may obtain a free
copy of any of the Prospectuses from New England Funds, L.P.,
Prospectus Fulfillment Desk, 399 Boylston Street, Boston,
Massachusetts 02116.
Part I of this Statement contains specific information about
the Funds. Part II includes information about the Funds and
other New England Funds.
New England Government Securities Fund, New England
Strategic Income Fund, New England Bond Income Fund and New
England Municipal Income Fund (formerly named New England Tax
Exempt Income Fund) are series of New England Funds Trust I, a
registered management investment company that offers a total of
eleven series, and New England Limited Term U.S. Government Fund,
New England Adjustable Rate U.S. Government Fund and New England
High Income Fund are series of New England Funds Trust II, a
registered management investment company that offers a total of
eight series. New England Funds Trust I and New England Funds
Trust II are collectively referred to in this Statement as the
"Trusts," and are each referred to as a "Trust."
T a b l e o f C o n t e n t s
Page
Part I
Investment Restrictions
Fund Charges and Expenses
Investment Performance of the Funds
Part II
Miscellaneous Investment Practices
Management of the Trusts
Portfolio Transactions and Brokerage
Description of the Trusts and Ownership of
Shares
How to Buy Shares
Net Asset Value and Public Offering Price
Reduced Sales Charges
Shareholder Services
Redemptions
Standard Performance Measures
Income Dividends, Capital Gain Distributions
and Tax Status
Financial Statements
Appendix A - Description of Bond Ratings
Appendix B - Publications That May Contain
Fund Information
Appendix C - Advertising and Promotional
Literature
<PAGE>
INVESTMENT RESTRICTIONS
The following is a description of restrictions on the
investments to be made by the Funds, some of which restrictions
(which are marked with an asterisk) may not be changed without
the approval of a majority of the outstanding voting securities
of the relevant Fund (as defined in the Investment Company Act of
1940 [the "1940 Act"]). Except in the case of those restrictions
marked with a dagger (+) below, the percentages set forth below
and the percentage limitations set forth in the prospectus will
apply at the time of the purchase of a security and shall not be
considered violated unless an excess or deficiency occurs or
exists immediately after and as a result of a purchase of such
security.
Government Securities Fund
New England Government Securities Fund (the "Government
Securities Fund") will not:
*(1) Invest in any securities other than U.S. Government
securities, put and call options thereon, futures contracts,
options on futures contracts and repurchase agreements;
*(2) Purchase or sell commodities or commodity contracts,
except that the Fund may purchase and sell interest rate
futures contracts and related options;
*(3) Purchase any security on margin, except that the Fund
may obtain such short-term credits as may be necessary for
the clearance of purchases and sales of portfolio securities.
(For this purpose, the deposit or payment by the Fund of
initial or variation margin in connection with interest rate
futures contracts or related options transactions is not
considered the purchase of a security on margin.);
*(4) Make short sales of securities or maintain a short
position, unless at all times when a short position is open
it owns an equal amount of such securities or securities
convertible into or exchangeable, without payment of any
further consideration, for securities of the same issue as,
and equal in amount to, the securities sold short, and unless
not more than 10% of the Fund's net assets (taken at market
value) is held as collateral for such sales at any one time.
(It is the present intention of management to make such sales
only for the purpose of deferring realization of gain or loss
for federal income tax purposes; such sales would not be made
with respect to securities subject to outstanding options.);
*(5) Make loans to other persons (except as provided in
restriction (6) below); provided that for purposes of this
restriction the investment in repurchase agreements shall not
be deemed to be the making of a loan;
*(6) Lend its portfolio securities in excess of 15% of its
total assets, taken at market value;
*(7) Issue senior securities, borrow money or pledge its
assets; provided, however, that the Fund may borrow from a
bank as a temporary measure for extraordinary or emergency
purposes or to meet redemptions, in amounts not exceeding 10%
(taken at the market value) of its total assets and pledge
its assets to secure such borrowings; and, provided, further,
that the Fund will not purchase any additional portfolio
securities at any time that its borrowings exceed 5% of its
total net assets. (For the purpose of this restriction,
collateral arrangements with respect to the writing of
options, interest rate futures contracts, options on interest
rate futures contracts, and collateral arrangements with
respect to initial and variation margin are not deemed to be
a pledge of assets and neither such arrangements nor the
purchase or sale of futures or related options are deemed to
be the issuance of a senior security.);
*(8) Underwrite securities of other issuers except insofar as
the Fund may be deemed an underwriter under the Securities
Act of 1933 in selling portfolio securities;
*(9) Write, purchase or sell puts, calls or combinations
thereof, except that the Fund may write, purchase and sell
puts, calls or combinations thereof with respect to U.S.
Government Securities and with respect to interest rate
futures contracts; or
*(10)Invest in the securities of other investment companies,
except by purchases in the open market involving only
customary brokers' commissions, or in connection with a
merger, consolidation or similar transaction. Under the 1940
Act, the Fund may not (a) invest more than 10% of its total
assets (taken at current value) in such securities, (b) own
securities of any one investment company having a value in
excess of 5% of the Fund's total assets [taken at current
value], or (c) own more than 3% of the outstanding voting
stock of any one investment company.
Although the Government Securities Fund may from time to
time loan its portfolio securities and issue senior securities,
borrow money or pledge its assets to the extent permitted by
investment restrictions (5), (6) and (7) above, the Fund has no
current intention of engaging in such investment techniques.
As a matter of operating policy, subject to change without
shareholder approval, the Fund will not (1) purchase any security
restricted as to disposition under federal securities laws if as
a result of such purchase more than 10% of the Fund's total net
assets would be invested in such securities; +(2) invest more
than 15% of the Fund's total net assets in illiquid investments;
(3) invest in any oil, gas and other mineral leases; (4) purchase
or sell real property including limited partnership interests but
excluding readily marketable interests in real estate investment
trusts or readily marketable securities of companies which invest
in real estate, or (5) invest more than 5% of its net assets in
warrants, no more than 2% of which will be invested in warrants
that are not listed on the New York Stock Exchange or American
Stock Exchange, provided however, that for purposes of this
limitation, warrants acquired by the Fund in units or attached to
other securities may be deemed to be without value.
Limited Term U.S. Government Fund
New England Limited Term U.S. Government Fund (the "Limited Term
U.S. Government Fund") will not:
*(1) Purchase any security on margin, except that the Fund
may obtain such short-term credits as may be necessary for
the clearance of purchases and sales of portfolio securities.
(For this purpose, the deposit or payment by the Fund of
initial or variation margin in connection with futures
contracts or options transactions is not considered the
purchase of a security on margin.);
*(2) Make short sales of securities unless at all times when
a short position is open it owns an equal amount of such
securities or securities convertible into or exchangeable,
without payment of any further consideration, for securities
of the same issue as, and equal in amount to, the securities
sold short, and unless not more than 10% of the Fund's net
assets (taken at current value) is held as collateral for
such sales at any one time;
*(3) Issue senior securities, borrow money or pledge its
assets; provided, however, that the Fund may borrow from a
bank as a temporary measure for extraordinary or emergency
purposes or to meet redemptions, in amounts not exceeding 10%
(taken at the current value) of its total assets and pledge
its assets to secure such borrowings; and, provided, further,
that the Fund will not purchase any additional portfolio
securities at any time that its borrowings exceed 5% of its
total net assets. (For the purpose of this restriction,
collateral arrangements with respect to the writing of
options, futures contracts and options on futures contracts,
and collateral arrangements with respect to initial and
variation margin, are not deemed to be a pledge of assets and
neither such arrangements nor the purchase or sale of futures
or options are deemed to be the issuance of a senior
security.);
*(4) Invest more than 25% of its total assets (taken at
current value) in securities of businesses in the same
industry (for this purpose, telephone, electric, water and
gas utilities are considered separate industries);
*(5) Make loans, except by the purchase of bonds, debentures,
commercial paper, corporate notes and similar evidences of
indebtedness that are a part of an issue to the public or to
financial institutions, or by lending portfolio securities to
the extent set forth in Part II of this Statement of
Additional Information under "Miscellaneous Investment
Practices -- Loans of Portfolio Securities" provided that for
purposes of this restriction, investment in repurchase
agreements shall not be deemed to be the making of a loan;
*(6) Buy or sell oil, gas or other mineral leases, rights or
royalty contracts, real estate or commodities or commodity
contracts, except that the Fund may purchase and sell
financial futures contracts, currency futures contracts and
options related to such futures contracts. (This restriction
does not prevent the Fund from purchasing securities of
companies investing or dealing in the foregoing.);
*(7) Act as underwriter, except to the extent that, in
connection with the disposition of portfolio securities, it
may be deemed to be an underwriter under certain federal
securities laws;
*(8) Make investments for the purpose of exercising control
or management; or
*(9) Write, purchase or sell puts, calls or combinations
thereof, except that the Fund may write, purchase and sell
puts, calls or combinations thereof with respect to financial
instruments or indices thereof and currencies and with
respect to futures contracts on financial instruments or
indices thereof.
Although the Fund may from time to time make short sales,
issue senior securities, borrow money or pledge its assets to the
extent permitted by the above investment restrictions, the Fund
has no current intention of engaging in such investment
techniques.
As a matter of operating policy, subject to change without
shareholder approval, the Fund will not (1) purchase any security
restricted as to disposition under federal securities laws if as
a result of such purchase more than 10% of the Fund's total net
assets would be invested in such securities or +(2) invest more
than 15% of the Fund's total net assets in illiquid securities.
The Fund may invest in the securities of other investment
companies to the extent permitted by the 1940 Act. The Fund has
given undertakings to certain state regulatory authorities that
the Fund will not (i) invest in real estate limited partnership
interests or (ii) invest more than 5% of its net assets in
warrants, no more than 2% of which will be invested in warrants
that are not listed on the New York Stock Exchange or American
Stock Exchange; provided, however, that for purposes of this
limitation, warrants acquired by the Fund in units or attached to
other securities may be deemed to be without value. Such
undertakings can be changed without shareholder approval, but the
Statement will be revised to reflect any such changes.
Adjustable Rate Fund
New England Adjustable Rate U.S. Government Fund (the "Adjustable
Rate Fund") will not:
*(1) Purchase any security (other than U.S. Government
securities) if, as a result, more than 5% of the Fund's total
assets (taken at current value) would then be invested in
securities of a single issuer or 25% of the Fund's total
assets (taken at current value) would be invested in any one
industry (in the utilities category, gas, electric, water and
telephone companies will be considered as being in separate
industries);
*(2) Purchase any security on margin, except that the Fund
may obtain such short-term credits as may be necessary for
the clearance of purchases and sales of portfolio securities.
(For this purpose, the deposit or payment by the Fund of
initial or variation margin in connection with interest rate
futures contracts or related options transactions is not
considered the purchase of a security on margin.);
*(3) Make short sales of securities or maintain a short
position, unless at all times when a short position is open
it owns an equal amount of such securities or securities
convertible into or exchangeable, without payment of any
further consideration, for securities of the same issue as,
and equal in amount to, the securities sold short, and unless
not more than 10% of the Fund's net assets (taken at market
value) is held as collateral for such sales at any one time.
(It is the current intention of the Fund, which may change
without shareholder approval, to make such sales only for the
purpose of deferring realization of gain or loss for federal
income tax purposes; such sales would not be made with
respect to securities covering outstanding options.);
*(4) Acquire more than 10% of any class of securities of an
issuer (taking all preferred stock issues of an issuer as a
single class and all debt issues of an issuer as a single
class) or acquire more than 10% of the outstanding voting
securities of an issuer;
*(5) Issue senior securities, borrow money or pledge its
assets; provided, however, that the Fund may borrow from a
bank as a temporary measure for extraordinary or emergency
purposes or to meet redemptions, in amounts not exceeding 10%
(taken at the market value) of its total assets and pledge
its assets to secure such borrowings; and, provided, further,
that the Fund will not purchase any additional portfolio
securities at any time that its borrowings exceed 5% of its
total net assets. (For the purpose of this restriction,
collateral arrangements with respect to the writing of
options, interest rate future contracts, and options on
interest rate futures contracts, collateral arrangements with
respect to interest rate caps, floors or swap arrangements,
and collateral arrangements with respect to initial and
variation margin are not deemed to be a pledge of assets and
neither (i) such arrangements, (ii) the purchase or sale of
futures or related options, (iii) interest rate caps and
floors nor (iv) interest rate swap agreements, where assets
are segregated to cover the Fund's obligations thereunder,
are deemed to be the issuance of a senior security.);
*(6) Invest more than 5% of its total assets (taken at
current value) in securities of businesses (including
predecessors) less than three years old;
*(7) Purchase or retain securities of any issuer if officers
and trustees of the Trust or officers and directors of the
investment adviser of the Fund who individually own more than
1/2 of 1% of the shares or securities of that issuer,
together own more than 5%;
*(8) Make loans, except by purchase of bonds, debentures,
commercial paper, corporate notes and similar evidences of
indebtedness, that are a part of an issue to the public or to
financial institutions, or by lending portfolio securities to
the extent set forth under "Miscellaneous Investment
Practices - Loans of Portfolio Securities" in Part II of this
Statement. (This restriction 8 does not limit the Fund's
ability to engage in repurchase agreement transactions.);
*(9) Buy or sell oil, gas or other mineral leases, rights or
royalty contracts, real estate or commodities or commodity
contracts, except that the Fund may purchase and sell
financial futures contracts, currency futures contracts and
options related to such futures contracts, and may purchase
interest rate caps and floors and enter into interest rate
swap agreements. (This restriction does not prevent the Fund
from purchasing securities of companies investing or dealing
in the foregoing.);
*(10)Act as underwriter, except to the extent that, in connection
with the disposition of portfolio securities, it may be
deemed to be an underwriter under certain federal securities
laws;
*(11)Make investments for the purpose of exercising control or
management;
*(12)Participate on a joint or joint and several basis in any
trading account in securities;
*(13)Write, purchase or sell puts, calls or combinations thereof,
except that the Fund may write, purchase and sell puts, calls
or combinations thereof with respect to fixed income
securities and currencies and with respect to futures
contracts on fixed income securities or currencies;
*(14)Purchase any illiquid security, including securities that
are not readily marketable, if, as a result, more than 10% of
the Fund's total net assets (based on current value) would
then be invested in such securities. (The staff of the
Securities and Exchange Commission (the "SEC") is presently
of the view that repurchase agreements maturing in more than
seven days are subject to this restriction. Until that
position is revised, modified or rescinded, the Fund will
conduct its operations in a manner consistent with this
view); or
*(15)Invest in the securities of other investment companies,
except by purchases in the open market involving only
customary brokers' commissions, or in connection with a
merger, consolidation or similar transaction. Under the 1940
Act, the Fund may not (a) invest more than 10% of its total
assets (taken at current value) in such securities, (b) own
securities of any one investment company having a value in
excess of 5% of the Fund's total assets (taken at current
value), or (c) own more than 3% of the outstanding voting
stock of any one investment company.
Although the Fund may loan its portfolio securities and
issue senior securities, borrow money, pledge its assets, and
invest in the securities of other investment companies to the
extent permitted by investment restrictions (5), (8) and (14)
above, the Fund has no current intention of engaging in such
investment activities. Also, the Fund will not invest in any
stripped securities or other derivative investments.
In addition, as a matter of current operating policy that
may be changed without shareholder approval, the Fund (1) intends
to limit certain of its investments in accordance with the
provisions of the Federal Credit Union Act and Regulation 703
thereunder, (2) will not purchase or sell real property,
including limited partnership interests but excluding readily
marketable interests in real estate investment trusts or readily
marketable securities of companies which invest in real estate,
and (3) will not purchase any security restricted as to
disposition under federal securities laws if as a result of such
purchase more than 10% of the Fund's total net assets would be
invested in such securities.
Strategic Income Fund
New England Strategic Income Fund (the "Strategic Income Fund")
will not:
*(1) Purchase any security (other than U.S. Government
securities) if , as a result, more than 25% of the Fund's
total assets (taken at current value) would be invested in
any one industry (in the utilities category, gas, electric,
water and telephone companies will be considered as being in
separate industries, and each foreign country's government
(together with subdivisions thereof) will be considered to be
a separate industry);
(2) Purchase securities on margin (but it may obtain such short-
term credits as may be necessary for the clearance of
purchases and sales of securities), or make short sales
except where, by virtue of ownership of other securities, it
has the right to obtain, without payment of further
consideration, securities equivalent in kind and amount to
those sold, and the Fund will not deposit or pledge more than
10% of its total assets (taken at current value) as
collateral for such sales. (For this purpose, the deposit or
payment by the Fund of initial or variation margin in
connection with futures contracts or related options
transactions is not considered the purchase of a security on
margin);
(3) Acquire more than 10% of any class of securities of an issuer
(other than U.S. Government securities and taking all
preferred stock issues of an issuer as a single class and all
debt issues of an issuer as a single class) or acquire more
than 10% of the outstanding voting securities of an issuer;
*(4) Borrow money in excess of 25% of its total assets, and
then only as a temporary measure for extraordinary or
emergency purposes;
(5) Pledge more than 25% of its total assets (taken at cost).
(For the purpose of this restriction, collateral arrangements
with respect to options, futures contracts and options on
futures contracts and with respect to initial and variation
margin are not deemed to be a pledge of assets);
(6) Invest more than 5% of its total assets (taken at current
value) in securities of businesses (including predecessors)
less than three years old;
(7) Purchase or retain securities of any issuer if officers and
trustees of New England Funds Trust I or of any investment
adviser of the Fund who individually own more than 1/2 of 1%
of the shares or securities of that issuer, together own more
than 5%;
*(8) Make loans, except by entering into repurchase
agreements or by purchase of bonds, debentures, commercial
paper, corporate notes and similar evidences of indebtedness,
which are a part of an issue to the public or to financial
institutions, or through the lending of the Fund's portfolio
securities;
*(9) Buy or sell oil, gas or other mineral leases, rights or
royalty contracts, real estate or commodities or commodity
contracts, except that the Fund may buy and sell futures
contracts and related options. (This restriction does not
prevent the Fund from purchasing securities of companies
investing in the foregoing);
*(10)Act as underwriter, except to the extent that, in connection
with the disposition of portfolio securities, it may be
deemed to be an underwriter under certain federal securities
laws;
(11) Make investments for the purpose of exercising control
or management;
(12) Except to the extent permitted by rule or order of the
SEC, participate on a joint or joint and several basis in any
trading account in securities. (The "bunching" of orders for
the purchase or sale of portfolio securities with any
investment adviser or subadviser of the Fund or accounts
under any such investment adviser's or subadviser's
management to reduce brokerage commissions, to average prices
among them or to facilitate such transactions is not
considered a trading account in securities for purposes of
this restriction.);
(13) Write, purchase or sell options or warrants, except that
the Fund may (a) acquire warrants or rights to subscribe to
securities of companies issuing such warrants or rights, or
of parents or subsidiaries of such companies, (b) write,
purchase and sell put and call options on securities,
securities indexes, currencies, futures contracts, swap
contracts and other similar instruments and (c) enter into
currency forward contracts;
+(14)Purchase any illiquid security if, as a result, more than
15% of its net assets (taken at current value) would be
invested in such securities;
(15) Invest in the securities of other investment companies,
except by purchases in the open market involving only
customary brokers' commissions or no commissions. Under the
1940 Act, the Fund may not (a) invest more than 10% of its
total assets (taken at current value) in such securities, (b)
own securities of any one investment company having a value
in excess of 5% of the total assets of the Fund (taken at
current value), or (c) own more than 3% of the outstanding
voting stock of any one investment company; or
*(16)Issue senior securities. (For the purpose of this
restriction none of the following is deemed to be a senior
security: any pledge or other encumbrance of assets
permitted by restrictions (2) or (5) above; any borrowing
permitted by restriction (4) above; any collateral
arrangements with respect to forward contracts, options,
futures contracts, swap contracts or other similar contracts
and options on futures contracts, swap contracts or other
similar contracts and with respect to initial and variation
margin; the purchase or sale of options, forward contracts,
futures contracts, swap contracts or other similar contracts
or options on futures contracts, swap contracts or other
similar contracts; and the issuance of shares of beneficial
interest permitted from time to time by the provisions of New
England Funds Trust I's Agreement and Declaration of Trust
and by the 1940 Act, the rules thereunder, or any exemption
therefrom.)
As a matter of operating policy, subject to change without
shareholder approval, the Fund will not (1) at the time of
purchase, invest more than 5% of its assets the securities of any
issuer, excluding government securities; and (2) purchase puts,
calls, straddles, spreads and any combination thereof if by
reason thereof the value of its aggregate investments in such
will exceed 5% of its total assets.
Bond Income Fund
New England Bond Income Fund (the "Bond Income Fund") will not:
*(1) Purchase any security (other than U.S. Government
securities) if, as a result, more than 5% of the Fund's total
assets (taken at current value) would then be invested in
securities of a single issuer or 25% of the Fund's total
assets (taken at current value) would be invested in any one
industry (in the utilities category, gas, electric, water and
telephone companies will be considered as being in separate
industries);
*(2) Purchase securities on margin (but it may obtain such
short-term credits as may be necessary for the clearance of
purchases and sales of securities); or make short sales
except where, by virtue of ownership of other securities, it
has the right to obtain, without payment of further
consideration, securities equivalent in kind and amount to
those sold, and the Fund will not deposit or pledge more than
10% of its total assets (taken at current value) as
collateral for such sales;
*(3) Acquire more than 10% of any class of securities of an
issuer (taking all preferred stock issues of an issuer as a
single class and debt issues of an issuer as a single class)
or acquire more than 10% of the outstanding voting securities
of an issuer;
*(4) Borrow money, except as a temporary measure for
extraordinary or emergency purposes, up to an amount not in
excess of 10% of its total assets (taken at cost) or 5% of
its total assets (taken at current value), whichever is
lower;
*(5) Pledge more than 15% of its total assets (taken at
cost);
*(6) Invest more than 5% of its total assets (taken at
current value) in securities of businesses (including
predecessors) less than three years old;
*(7) Purchase or retain securities of any company if officers
and trustees of New England Funds Trust I or of any
investment adviser or subadviser of the Bond Income Fund who
individually own more than 1/2 of 1% of the shares or
securities of that company, together own more than 5%;
*(8) Make loans, except by purchase of bonds, debentures,
commercial paper, corporate notes and similar evidences of
indebtedness, which are part of an issue to the public, or by
lending portfolio securities to the extent set forth under
"Miscellaneous Investment Practices -- Loans of Portfolio
Securities" in Part II of this Statement;
*(9) Buy or sell oil, gas or other mineral leases, rights or
royalty contracts, commodities or commodity contracts or real
estate (except that the Bond Income Fund may buy and sell
marketable securities of companies, including real estate
investment trusts, which may represent indirect interests in
real estate; may buy and sell futures contracts on securities
or on securities indexes and may write, purchase or sell put
or call options on such futures contracts or indexes; and may
enter into currency forward contracts);
*(10)Act as underwriter;
*(11)Make investments for the purpose of exercising control or
management;
*(12)Participate on a joint or joint and several basis in any
trading account in securities. (The "bunching" of orders for
the purchase or sale of portfolio securities with Back Bay
Advisors, L.P. ["Back Bay Advisors"] or accounts under its
management to reduce brokerage commissions, to average prices
among them, or to facilitate such transactions is not
considered participating in a trading account in
securities.);
*(13)Write, purchase or sell options or warrants, except that the
Fund may (a) acquire warrants or rights to subscribe to
securities of companies issuing such warrants or rights or of
parents or subsidiaries of such companies, provided that such
warrants or other rights to subscribe are attached to, or
part of a unit offering involving, other securities, and (b)
write, purchase or sell put or call options on securities,
securities indexes or futures contracts; or
*(14)Invest in the securities of other investment companies,
except by purchases in the open market involving only
customary brokers' commissions, or in connection with a
merger, consolidation or similar transaction. (Under the
1940 Act, the Fund may not (a) invest more than 10% of its
total assets [taken at current value] in such securities, (b)
own securities of any one investment company having a value
in excess of 5% of the Fund's total assets [taken at current
value], or (c) own more than 3% of the outstanding voting
stock of any one investment company.)
In order to comply with certain state requirements
applicable to restriction (5) above, as a matter of operating
policy, subject to change without shareholder approval, the Bond
Income Fund will not pledge more than 2% of its assets. As a
matter of operating policy subject to change without shareholder
approval, the Fund will not (1) purchase any security restricted
as to disposition under federal securities laws if as a result of
such purchase more than 10% of the Fund's total net assets would
be invested in such securities; (2) invest more than 15% of the
Fund's total net assets in illiquid investments; or (3) purchase
or sell real property, including limited partnership interests
but excluding readily marketable interests in real estate
investment trusts or readily marketable securities of companies
which invest in real estate.
High Income Fund
New England High Income Fund (the "High Income Fund") will not:
*(1) Buy more than 10% of the voting securities or more than
10% of all of the securities of any issuer, or invest to
control or manage any company;
*(2) Purchase securities on "margin," except for short-term
credits as needed to clear securities purchases;
*(3) Invest in securities issued by other investment
companies, except in connection with a merger, consolidation,
acquisition, or reorganization, or by purchase in the open
market of securities of closed-end investment companies where
no underwriter or dealer commission or profit, other than a
customary brokerage commission, is involved and only if
immediately thereafter not more than 10% of the value of its
total assets would be invested in such securities;
*(4) Purchase securities, other than shares of the Fund, from
or sell portfolio securities to its directors or officers, or
firms they are affiliated with as principals, except as
permitted by the regulations of the SEC;
*(5) Purchase or sell commodities or commodity contracts, or
write, purchase or sell options, except that the Fund may (a)
buy or sell futures contracts on securities or on securities
indexes and (b) write, purchase or sell put or call options
on securities, on securities indexes or on futures contracts
of the type referred to in clause (a) of this restriction;
*(6) Make loans, except loans of portfolio securities and
except to the extent that the purchase of notes, repurchase
agreements, bonds, or other evidences of indebtedness or
deposits with banks or other financial institutions may be
considered loans;
*(7) Make short sales of securities or maintain a short
position;
*(8) Purchase or sell real estate, provided that the Fund may
invest in securities secured by real estate or interests
therein or in securities issued by companies which invest in
real estate or interests therein;
*(9) Purchase or sell interests in oil and gas or other
mineral exploration or development programs, provided that
the Fund may invest in securities issued by companies which
do invest in or sponsor such programs;
*(10)Underwrite the securities of other issuers; or
*(11)Invest more than 10% of the value of its total assets, in
the aggregate, in repurchase agreements maturing in more than
seven days and restricted securities.
As a matter of operating policy, subject to change without
shareholder approval, the Fund will not (1) purchase any security
restricted as to disposition under federal securities laws if as
a result of such purchase more than 10% of the Fund's total net
assets would be invested in such securities or (2) invest more
than 15% of the Fund's total net assets in illiquid investments.
The Fund has given undertakings to certain state regulatory
authorities that the Fund will not (1) invest more than 5% of its
net assets in warrants, no more than 2% of which will be invested
in warrants that are not listed on the New York Stock Exchange or
the American Stock Exchange; provided, however, that for purposes
of this limitation, warrants acquired by the Fund in units or
attached to other securities may be deemed to be without value,
(2) invest in mineral leases or (3) invest in real estate limited
partnership interests. Such undertakings can be changed without
shareholder approval, but the Statement will be revised to
reflect any such changes.
Municipal Income Fund
New England Municipal Income Fund (the "Municipal Income Fund")
will not:
*(1) Purchase any security if, as a result, more than 5% of
the Fund's total assets (taken at current value) would then
be invested in securities of a single issuer. This
limitation does not apply to U.S. Government securities.
(The Fund will treat each state and each separate political
subdivision, agency, authority or instrumentality of such
state, each multistate agency or authority, and each
guarantor, if any, as a separate issuer);
(2) Invest more than 25% of its total assets (taken at current
value) in industrial development revenue bonds that are
based, directly or indirectly, on the credit of private
entities in any one industry or in securities of private
issuers in any one industry. (For the purpose of this
restriction, "private activity bonds" under the Internal
Revenue Code of 1986, as amended [the "Code"], will be
treated as industrial revenue bonds.) (In the utilities
category, gas, electric, water and telephone companies will
be considered as being in separate industries);
*(3) Purchase any security on margin, except that the Fund
may obtain such short-term credits as may be necessary for
the clearance of purchases and sales of securities; or make
short sales. For this purpose, the deposit or payment by the
Fund of initial or variation margin in connection with
interest rate futures contracts or tax exempt bond index
futures contracts is not considered the purchase of a
security on margin;
*(4) Purchase more than 10% of the total value of the
outstanding securities of an issuer;
*(5) Borrow money, except as a temporary measure for
extraordinary or emergency purposes (but not for the purpose
of investment) up to an amount not in excess of 10% of its
total assets (taken at cost) or 5% of its total assets (taken
at current value), whichever is lower;
*(6) Pledge, mortgage or hypothecate more than 15% of its
total assets (taken at cost). In order to comply with
certain state requirements, as a matter of operating policy
subject to change without shareholder approval, the Fund will
not pledge, mortgage or hypothecate more than 5% of such
assets;
*(7) Invest more than 5% of its total assets (taken at
current value) in securities of businesses less than three
years old and industrial development revenue bonds where the
private entity on whose credit the security is based,
directly or indirectly, is less than three years old
(including predecessor businesses and entities);
*(8) Purchase or retain securities of any issuer if, to the
knowledge of the Fund, officers and trustees of New England
Funds Trust I or of any investment adviser or subadviser of
the Fund who individually own beneficially more than 1/2 of
1% of the securities of that issuer, together own
beneficially more than 5% of such securities;
*(9) Make loans, except by purchase of debt obligations in
which the Fund may invest consistent with its investment
policies. This limitation does not apply to repurchase
agreements;
*(10)Buy or sell oil, gas or other mineral leases, rights or
royalty contracts, commodities or real estate (except that
the Fund may buy tax exempt bonds or other permitted
investment secured by real estate or an interest therein);
*(11)Act as underwriter, except to the extent that, in connection
with the disposition of portfolio securities, it may be
deemed to be an underwriter under certain federal securities
laws;
*(12)Purchase voting securities or make investments for the
purpose of exercising control or management;
*(13)Participate on a joint or joint and several basis in any
trading account in securities;
*(14)Write, purchase, or sell puts, calls or combinations
thereof, except that the Fund may write, purchase and sell
puts, calls or combinations thereof with regard to futures
contracts;
*(15)Invest in the securities of other investment companies,
except in connection with a merger, consolidation or similar
transaction. (Under the 1940 Act, the Fund may not (a)
invest more than 10% of its total assets (taken at current
value) in such securities, (b) own securities of any one
investment company having a value in excess of 5% of the
Fund's total assets (taken at current value), or (c) own more
than 3% of the outstanding voting stock of any one investment
company.)
The Fund may invest more than 25% of its assets in industrial
development revenue bonds, subject to limitation (2) above. In
addition, as a matter of such operating policy subject to change
without shareholder approval, the Fund will not invest more than
25% of its assets in securities of issuers located in the same
state, and the Fund will not (1) purchase any security restricted
as to disposition under federal securities laws if as a result of
such purchase more than 10% of the Fund's total net assets would
be invested in such securities or (2) invest more than 15% of the
Fund's total net assets in illiquid investments.+
FUND CHARGES AND EXPENSES
INVESTMENT ADVISORY AND ADMINISTRATIVE SERVICES FEES
Pursuant to separate advisory agreements, each dated January
2, 1996 (May 1, 1995, in the case of the Strategic Income Fund),
New England Funds Management, L.P. ("NEFM") has agreed, subject
to the supervision of the Board of Trustees of the relevant
Trust, to manage the investment and reinvestment of the assets of
each Fund and to provide a range of administrative services to
each Fund. For the services described in the advisory
agreements, each Fund pays NEFM a management fee at the annual
rate set forth in the following table:
Management fee paid by Fund to NEFM
(as a percentage of average daily
Fund net assets of the Fund)
- ---------------------------- -------------------------------
Adjustable Rate Fund 0.55% of the first $200 million
0.51% of the next $300 million
0.47% of amounts in excess of $500
million
Bond Income Fund 0.500% of the first $100 million
0.375% of amounts in excess of $100
million
Government Securities Fund 0.650% of the first $200 million
0.625% of the next $300 million
0.600% of amounts in excess of $500
million
High Income Fund 0.75% of all assets
Limited Term U.S. Government 0.650% of the first $200 million
Fund 0.625% of the next $300 million
0.600% of amounts in excess of $500
million
Strategic Income Fund 0.65% of the first $200 million
0.60% of amounts in excess of $200
million
Municipal Income Fund 0.500% of the first $100 million
0.375% of amounts in excess of $100
million
Each advisory agreement provides that NEFM may delegate its
responsibilities thereunder to another party. Pursuant to a
subadvisory agreement dated May 1, 1995, NEFM has delegated
responsibility for managing the investment and reinvestment of
the Strategic Income Fund's assets to Loomis Sayles & Company,
L.P. ("Loomis Sayles"), as subadviser. Pursuant to separate
subadvisory agreements, each dated January 2, 1996, NEFM has
delegated responsibility for managing the investment and
reinvestment of the other Funds' assets to Back Bay Advisors, as
subadviser. The Funds pay no direct fees to Loomis Sayles or Back
Bay Advisors. For providing such subadvisory services to the
Funds, NEFM pays each subadviser a subadvisory fee at the annual
rate set forth in the following table:
Subadvisory fee payable to NEFM to
subadviser
(as a percentage of average daily
Fund Subadviser net assets of the Fund)
- ----------------------- ----------- --------------------------------
Adjustable Rate Fund Back Bay 0.275% of the first $200 million
Advisors 0.255% of the next $300 million
0.235% of amounts in excess of
$500 million
Bond Income Fund Back Bay 0.2500% of the first $100 million
Advisors 0.1875% of amounts in excess of
$100 million
Government Securities Back Bay 0.3250% of the first $200 million
Fund Advisors 0.3125% of the next $300 million
0.3000% of amounts in excess of
$500 million
High Income Fund Back Bay 0.375% of all assets
Advisors
Limited Term U.S. Back Bay 0.3250% of the first $200 million
Government Fund Advisors 0.3125% of the next $300 million
0.3000% of amounts in excess of
$500 million
Strategic Income Fund Loomis 0.35% of the first $200 million
Sayles 0.30% of amounts in excess of
$200 million
Municipal Income Fund Back Bay 0.2500% of the first $100 million
Advisors 0.1875% of amounts in excess of
$100 million
Prior to January 2, 1996, Back Bay Advisors served as
adviser to the Government Securities, Limited Term U.S.
Government, Bond Income, High Income and Municipal Income Funds,
pursuant to separate advisory agreements each of which provided
for an advisory fee payable by such Fund to Back Bay Advisors at
the same rate as the management fee currently payable by such
Fund to NEFM.
Prior to January 2, 1996, Back Bay Advisors served as
adviser to the Adjustable Rate Fund, pursuant to an advisory
agreement which provided for an advisory fee payable by the Fund
to Back Bay Advisors at the annual rate of 0.40% of the first
$200 million of the Fund's average daily net assets, 0.375% of
the next $300 million of such assets and 0.35% of such assets in
excess of $500 million.
Back Bay Advisors was paid $955,078, $1,056,207 and
$________, respectively, for investment management services it
rendered to the Adjustable Rate Fund during the fiscal years
ended December 31, 1993, 1994 and 1995, after reduction pursuant
to the expense limitation arrangement described below. Had the
voluntary expense limitation not been in effect Back Bay Advisors
would have been paid $2,011,626, $2,351,792 and $__________,
respectively, for investment management services it rendered to
the Adjustable Rate Fund during the fiscal years ended December
31, 1993, 1994 and 1995.
Prior to January 2, 1996, New England Funds, L.P. (the
"Distributor"), an affiliate of Back Bay Advisors, provided the
Adjustable Rate Fund with office space, facilities and equipment,
services of executive and other personnel and certain
administrative services, pursuant to an administrative services
agreement. Under this agreement, the Adjustable Rate Fund paid
the Distributor a fee at the annual rate of 0.15% of the first
$200 million of the Fund's average daily net assets, 0.135% of
the next $300 million of such assets and 0.12% of such assets in
excess of $500 million. The Adjustable Rate Fund's current
management fee rate represents the sum of the fee rates under the
prior advisory and administrative services agreements.
Until further notice to the Adjustable Rate Fund, NEFM and
the Distributor have voluntarily agreed to reduce their fees and,
if necessary, to bear certain expenses related to operating the
Fund in order to limit the Fund's expenses to an annual rate of
0.70%, 1.45% and 0.45% of the average daily net assets of the
Fund's Class A, Class B and Class Y shares, respectively. Prior
to January 2, 1996, similar voluntary limitations were in effect
with respect to Back Bay Advisors, the Distributor and the Fund.
For the fiscal years ended December 31, 1993, 1994 and 1995,
the Government Securities Fund paid advisory fees to Back Bay
Advisors of $1,211,057, $1,102,880 and $__________, respectively.
The Limited Term U.S. Government Fund paid Back Bay Advisors
$3,390,740, $3,163,619 and $________ in advisory fees for the
fiscal years ended December 31, 1993, 1994 and 1995,
respectively, after reduction pursuant to the voluntary expense
limitations then in effect.
For the fiscal years ended December 31, 1993, 1994 and 1995,
the Bond Income Fund paid advisory fees to Back Bay Advisors of
$751,948, $774,457 and $__________, respectively; and the
Municipal Income Fund paid advisory fees to Back Bay Advisors of
$911,990, $925,947 and $__________, respectively.
Prior to July 1, 1995, the advisory agreement for the
Municipal Income Fund included a provision under which Loomis
Sayles served as a subadviser and furnished regularly to Back Bay
Advisors, without additional cost to the Fund, statistical and
research information and advice relating to the Fund's
investments. For its services, Loomis Sayles received a fee,
paid by Back Bay Advisors not less often than quarterly, equal to
40% of the compensation paid by the Fund to Back Bay Advisors on
the first $10 million of the Fund's average daily net assets, 30%
of the compensation paid on the next $10 million of such assets
and 20% of the compensation paid on such assets in excess of $20
million. For the fiscal years ended December 31, 1993 and 1994,
and the period from January 1 to June 30, 1995, the compensation
from Back Bay Advisors to Loomis Sayles under this agreement was
$197,398, $200,190 and $_________, respectively.
In addition to the expense limitations discussed in Part II
of this Statement under "Management of the Trusts," Back Bay
Advisors' compensation under its advisory agreement with the High
Income Fund was subject to reduction to the extent that, for any
calendar month, the Fund's expenses, including the management
fee, but exclusive of brokerage, taxes, interest, distribution
fees and extraordinary items, exceed an annual rate of 1.50% of
the Fund's average daily net assets.
Until further notice to the Fund, NEFM has voluntarily
agreed to reduce its management fee and, if necessary, to bear
certain expenses related to operating the High Income Fund to an
annual rate of 1.50% of the Fund's average daily net assets.
Prior to January 2, 1996, similar voluntary limitations were in
effect with respect to Back Bay Advisors and the Fund.
Back Bay Advisors was paid $131,833, $190,955 and $________
in advisory fees by the High Income Fund during the fiscal years
ended December 31, 1993, 1994 and 1995, respectively, after
reduction pursuant to the foregoing voluntary expense
limitations. Had the voluntary expense limitation not been in
effect, Back Bay Advisors would have been paid $207,486, $273,994
and $__________, respectively, in advisory fees by the High
Income Fund during the fiscal years ended December 31, 1993, 1994
and 1995.
Under an expense deferral arrangement, which NEFM and Loomis
Sayles may terminate at any time, NEFM and Loomis Sayles have
agreed to waive advisory and subadvisory fees for the Strategic
Income Fund until further notice, subject to the obligation of
the Fund to pay NEFM such waived fees in later periods to the
extent that the Fund's expenses fall below the annual rate of
1.40% for Class A shares, 2.15% for Class B shares, 2.15% for
Class C shares and 1.15% for Class Y shares; provided, however,
that, the Fund is not obligated to pay any such waived fees more
than two years after the end of the fiscal year in which such fee
was waived.
For the period May 1, 1995 (commencement of operations) to
December 31, 1995, the Strategic Income Fund paid no management
fees to NEFM. Had the voluntary expense deferral arrangements
described above not been in effect, the Fund would have paid NEFM
$_______ in management fees for this period. Under the terms of
the expense deferral arrangement, the Fund may be obligated to
pay up to $_____ of such fees to NEFM in future periods.
BROKERAGE COMMISSIONS
In 1993, 1994 and 1995, the Funds paid [no commissions] on
brokerage transactions.
For more information about the Funds' portfolio
transactions, see "Portfolio Transactions and Brokerage" in Part
II of this Statement.
SALES CHARGES AND 12B-1 FEES
As explained in Part II of this Statement, the Class A,
Class B and, in the case of the Limited Term U.S. Government,
Bond Income and Strategic Income Funds, Class C shares of each
Fund pay a fee pursuant to a plan adopted pursuant to Rule 12b-1
under the 1940 Act. The following table shows the amounts of
Rule 12b-1 fees paid by the Class A, Class B and Class C shares
of each Fund during the fiscal year ended Decembers 31, 1993,
1994 and 1995:
Fund 1993 1994 1995
- ------------------------- --------- --------- ----------
Government Securities Fund $465,401 [$409,90] (Class A)
$1,582 $23,270 (Class B)**
Limited Term U.S. Government $1,873,424 $1,705,012 (Class A)
Fund $7,721 $98,717 (Class B)*
(Class C)***
Adjustable Rate Fund $1,322,743 $1,551,366 (Class A)
$1,444 $14,092 (Class B)*
Bond Income Fund $416,977 $416,918 (Class A)
$3,957 $30,717 (Class B)*
High Income Fund $96,279 $117,107 (Class A)
$1,574 $30,717 (Class B)*
(Class C)***
Municipal Income Fund $523,343 $512,288 (Class A)
$5,363 $66,711 (Class B)*
Strategic Income Fund**** (Class A)
(Class B)
(Class C)
* Class B shares were first offered on September 13, 1993.
** Government Securities Fund Class B shares were first offered
September 23, 1993.
*** Class C shares were first offered on January 3, 1995.
**** The Strategic Income Fund commenced operations on May 1,
1995.
During the fiscal year ended December 31, 1995, the
Distributor's expenses relating to each Fund's 12b-1 plans were
as follows:
Government Securities Fund
(Class A shares)
Compensation to Investment Dealers
Compensation to Distributor's Sales Personnel
TOTAL
(Class B shares)
Compensation to Investment Dealers
TOTAL
Limited Term U.S. Government Fund
(Class A shares)
Compensation to Investment Dealers
Compensation to Distributor's Sales Personnel
TOTAL
(Class B shares)
Compensation to Investment Dealers
TOTAL
(Class C shares)
Compensation to Investment Dealers
Compensation to Distributor's Sales Personnel
TOTAL
Adjustable Rate Fund
(Class A shares)
Compensation to Investment Dealers
Compensation to Distributor's Sales Personnel
TOTAL
(Class B shares)
Compensation to Investment Dealers
TOTAL
Strategic Income Fund
(Class A shares)
Compensation to Investment Dealers
Compensation to Distributor's Sales Personnel
TOTAL
(Class B shares)
Compensation to Investment Dealers
TOTAL
(Class C shares)
Compensation to Investment Dealers
Compensation to Distributor's Sales Personnel
TOTAL
Bond Income Fund
(Class A shares)
Compensation to Investment Dealers
Compensation to Distributor's Sales Personnel
TOTAL
(Class B shares)
Compensation to Investment Dealers
TOTAL
(Class C shares)
Compensation to Investment Dealers
Compensation to Distributor's Sales Personnel
TOTAL
High Income Fund
(Class A shares)
Compensation to Investment Dealers
Compensation to Distributor's Sales Personnel
TOTAL
(Class B shares)
Compensation to Investment Dealers
TOTAL
Municipal Income Fund
(Class A shares)
Compensation to Investment Dealers
Compensation to Distributor's Sales Personnel
TOTAL
(Class B shares)
Compensation to Investment Dealers
TOTAL
Of the amounts listed above as compensation to investment
dealers, the following amounts were paid by the Distributor to
New England Securities Corporation ("New England Securities"), a
broker-dealer affiliate of the Distributor: $______ relating to
the Class A shares and $______ relating to the Class B shares of
the Government Securities Fund; $______ relating to the Class A
shares and $______ relating to the Class B shares of the
Adjustable Rate Fund; $______ relating to the Class A shares and
$______ relating to the Class B shares and $______ relating to
the Class C shares of the Bond Income Fund; $______ relating to
the Class A shares and $______ relating to the Class B shares of
the High Income Fund; $______ relating to the Class A shares and
$______ relating to the Class B shares of the Municipal Income
Fund; $______ relating to the Class A shares, $______ relating to
Class B shares and $_______ relating to the Class C shares of the
Limited Term U.S. Government Fund; and $________ to the Class A
shares, $_________ relating to the Class B shares and
$____________ relating to the Class C shares of the Strategic
Income Fund. New England Securities paid substantially all of
the fees it received from the Distributor in commissions to its
sales personnel and to defray overhead costs relating to sales of
Fund shares and/or servicing shareholder accounts.
At April 1, 1996, to the Trusts' knowledge, the following
persons owned of record or beneficially 5% or more of the
outstanding shares of the following classes of the following
Funds:
[To be filed by amendment]
INVESTMENT PERFORMANCE OF THE FUNDS
PERFORMANCE RESULTS - PERCENT CHANGE
For the Periods Ended 12/31/95*
Government Securities Fund
Aggregate Average Annual
Total Return Total Return
------------------- ----------------
Class A shares: As a % 1 5 10 5 10
of Year Years Years Years Years
- ------------------------ ----- ----- ----- -------- ---------
Net Asset Value
Maximum Offering Price
Aggregate Average Annual
Total Return Total Return
------------------- ----------------
Class B shares: As a % Since Since
of 1 Year 9/23/93** 9/23/93**
- ------------------------ ------- ---------- ----------------
Net Asset Value
Redemption at End of
Period
Aggregate Average Annual
Total Return Total Return
------------------- ----------------
Class Y shares: As a % Since Since
of 1 Year 3/31/94** 3/31/94**
- ------------------------ -------- --------- ----------------
Net Asset Value
Limited Term U.S. Government Fund
Aggregate Average Annual
Total Return Total Return
------------------- ----------------
Class A shares: As a % 1 5 Since 5 Since
of Year Years 1/03/89** Years 1/03/89**
- ------------------------ ----- ----- ----- ----- -------
Net Asset Value
Maximum Offering Price
Aggregate Average Annual
Total Return Total Return
------------------- ----------------
Class B shares: As a % Since Since
of 1 Year 9/27/93** 9/27/93**
- ------------------------ ------- ---------- ----------------
Net Asset Value
Redemption at End of
Period
Aggregate Annualized
Total Return Total Return
Class C shares: As a % Since Since
of 1/3/95** 1/3/95**
- ------------------------ ------------------- ----------------
Net Asset Value
Aggregate Average Annual
Total Return Total Return
------------------- ----------------
Class Y shares: As a % Since Since
of 1 Year 3/31/94** 3/31/94**
- ------------------------ -------- --------- ----------------
Net Asset Value
Adjustable Rate Fund***
Aggregate Average Annual
Total Return Total Return
------------------- ---------------
Class A shares: As a % 1 Since Since
of Year 10/19/91** 10/19/91**
- ------------------------ -------- --------- ---------------
Net Asset Value
Maximum Offering Price
Aggregate Average Annual
Total Return Total Return
------------------- ----------------
Class B shares: As a % Since Since
of 1 Year 9/13/93** 9/13/93**
- ------------------------ ------- ---------- ----------------
Net Asset Value
Redemption at End of
Period
Aggregate Average Annual
Total Return Total Return
------------------- ----------------
Class Y shares: As a % Since Since
of 1 Year 3/31/94** 3/31/94**
- ------------------------ -------- --------- ----------------
Net Asset Value
Strategic Income Fund*****
Aggregate Annualized
Total Return Total Return
Class A shares: As a % Since Since
of 5/1/95** 5/1/95**
- ------------------------ ------------------- ----------------
Net Asset Value
Maximum Offering Price
Aggregate Annualized
Total Return Total Return
Class B shares: As a % Since Since
of 5/1/95** 5/1/95**
- ------------------------ ------------------- ----------------
Net Asset Value
Redemption at End of
Period
Aggregate Annualized
Total Return Total Return
Class C shares: As a % Since Since
of 5/1/95** 5/1/95**
- ------------------------ ------------------- ----------------
Net Asset Value
Aggregate Annualized
Total Return Total Return
Class Y shares: As a % Since Since
of 5/1/95** 5/1/95**
- ------------------------ ------------------- ----------------
Net Asset Value
Bond Income Fund
Aggregate Average Annual
Total Return Total Return
------------------- ----------------
Class A shares: As a % 1 5 10 5 10
of Year Years Years Years Years
- ------------------------ ----- ----- ----- ------- -------
Net Asset Value
Maximum Offering Price
Aggregate Average Annual
Total Return Total Return
------------------- ----------------
Class B shares: As a % Since Since
of 1 Year 9/13/93** 9/13/93**
- ------------------------ ------- ---------- ----------------
Net Asset Value
Redemption at End of
Period
Aggregate Annualized
Total Return Total Return
Class C shares: As a % Since Since
of 1/3/95** 1/3/95**
- ------------------------ ------------------- ----------------
Net Asset Value
Aggregate Average Annual
Total Return Total Return
------------------- ----------------
Since Since
Class Y shares: As a % 1 Year 3/31/94** 3/31/94**
of -------- --------- ----------------
- ------------------------
Net Asset Value
High Income Fund
Aggregate Average Annual
Total Return Total Return
------------------- ----------------
Class A shares: As a % 1 5 10 5 10
of Year Years Years Years Years
- ------------------------ ----- ----- ----- ------- -------
Net Asset Value
Maximum Offering Price
Aggregate Average Annual
Total Return Total Return
------------------- ----------------
Class B shares: As a % Since Since
of 1 Year 9/20/93** 9/20/93**
- ------------------------ ------- ---------- ----------------
Net Asset Value
Redemption at End of
Period
Municipal Income Fund
Aggregate Average Annual
Total Return Total Return
------------------- ----------------
Class A shares: As a % 1 5 10 5 10
of Year Years Years Years Years
- ------------------------ ----- ----- ----- ------- -------
Net Asset Value
Maximum Offering Price
Aggregate Average Annual
Total Return Total Return
------------------- ----------------
Class B shares: As a % Since Since
of 1 Year 9/13/93** 9/13/93**
- ------------------------ ------- ---------- ----------------
Net Asset Value
Redemption at End of
Period
* Federal regulations require this example to be calculated
using a $1,000 investment. The normal minimum initial
investment in shares of the Funds is $2,500, however.
** Commencement of Fund operations or offering of indicated
class of shares.
*** Assuming deduction of current maximum sales load, the
Adjustable Rate Fund's Class A shares' average one-year and
since-inception aggregate total returns would have been
____% and ____%, respectively, and their average annual
since-inception total return would have been ____% had a
voluntary expense limitation not been in effect. Based on
net asset values, the Fund's Class A shares' one-year and
since-inception aggregate total returns would have been
____% and ____%, respectively, and their since-inception
average annual total return would have been ____%, without
the voluntary limitation. Assuming redemption at the end
of the period, the Fund's Class B shares' one-year and
since-inception aggregate total returns would have been
____% and ____%, respectively, had a voluntary expense
limitation not been in effect, and their average annual
total return for the since-inception period would have been
____%. Based on net asset values, the Fund's Class B
shares' aggregate total returns for the one-year and since-
inception periods would have been ____% and ____%,
respectively, and their average annual total returns for
the since-inception period would have been ____%, without
the voluntary limitation. The Fund's Class Y shares' one-
year and since-inception aggregate total returns would have
been ____% and ____%, respectively, and their since-
inception average annual total return would have been
____%, without the voluntary limitation.
**** Assuming deduction of current maximum sales load, the High
Income Fund's Class A shares' one-year, five-year and ten-
year aggregate total returns would have been ____%, ____%
and ____%, respectively, had a voluntary expense limitation
for certain periods not been in effect, and their five-year
and ten-year average annual total returns would have been
____% and ____%, respectively. Based on net asset values,
the High Income Fund's Class A shares' one-year, five-year
and ten-year aggregate total returns would have been ____%,
____% and ____%, respectively, without the voluntary
limitation, and their five-year and ten-year average annual
total returns would have been ____% and ____%,
respectively. Assuming redemption at the end of the
period, the Fund's Class B shares' aggregate total returns
for the one-year and since-inception periods would have
been ____% and ____%, respectively, had a voluntary expense
limitation not been in effect, and their average annual
total return for the since-inception period would have been
____%. Based on net asset values, the Fund's Class B
shares' aggregate total returns for the one-year and since-
inception periods would have been ____% and ____%,
respectively, without the voluntary limitation, and their
average annual total return for the since-inception period
would have been ____%.
***** Assuming deduction of the current maximum sales load, the
Strategic Income Fund's Class A, Class B, Class C and Class
Y shares' aggregate total returns for the since-inception
period would have been ____%, ____%, ____% and ____%,
respectively, had a voluntary expense deferral arrangement
not been in effect, and their annualized total returns for
the since-inception would have been ____%, ____%, ____% and
____%, respectively.
YIELD FOR THE 30-DAY PERIOD
Ended 12/31/95
Fund Class A Class B Class C Class Y
- ------------------------------- ------- -------- ------- --------
Government Securities Fund
Limited Term U.S. Government
Fund
Adjustable Rate U.S. Government
Fund
Strategic Income Fund
Bond Income Fund
High Income Fund
Municipal Income Fund
* Yields for the Class A shares of the Funds are based on
the public offering price of a Class A share of the Funds
and yields for the Class B, Class C and Class Y shares
are based on the net asset value of a share of the Funds.
Distribution Rate. The Government Securities, Limited Term
U.S. Government, Adjustable Rate, Bond Income and High Income
Funds may include in their written sales material distribution
rates based on the Funds' distributions from net investment
income and short-term capital gains for a recent 30 day, three
month or one year period.
Distributions of less than one year are annualized by
multiplying by the factor necessary to produce twelve months of
distributions. The distribution rates are determined by dividing
the amount of the particular Fund's distributions per share over
the relevant period by either the maximum offering price or the
net asset value of a share of the Fund on the last day of the
period.
DISTRIBUTION RATES
For Periods Ending 12/31/95
As a % of 30 day 3 months 12 months
Government Securities Fund
(Class A shares)
Net Asset Value
Maximum Offering Price
(Class B shares)
Net Asset Value
Redemption at End of Period
(Class Y shares)
Net Asset Value
Limited Term U.S. Government Fund
(Class A shares)
Net Asset Value
Maximum Offering Price
(Class B shares)
Net Asset Value
Redemption of End of Period
(Class C shares)
Net Asset Value
(Class Y shares)
Net Asset Value
Adjustable Rate Fund
(Class A shares)
Net Asset Value
Maximum Offering Price
(Class B shares)
Net Asset Value
Redemption at End of Period
(Class Y shares)
Net Asset Value
Strategic Income Fund
(Class A shares)
Net Asset Value
Maximum Offering Price
(Class B shares)
Net Asset Value
Redemption at End of Period
(Class C shares)
Net Asset Value
(Class Y shares)
Net Asset Value
Bond Income Fund
(Class A shares)
Net Asset Value
Maximum Offering Price
(Class B shares)
Net Asset Value
Redemption at End of Period
(Class C shares)
Net Asset Value
(Class Y shares)
Net Asset Value
High Income Fund
(Class A shares)
Net Asset Value
Maximum Offering Price
(Class B shares)
Net Asset Value
Redemption at End of Period
Municipal Income Fund
(Class A shares)
Net Asset Value
Maximum Offering Price
(Class B shares)
Net Asset Value
Redemption at End of Period
The foregoing data represent past performance only, and are
not a representation as to the future results of any Fund. The
investment return and principal value of an investment in any
Fund will fluctuate so that the investor's shares, when redeemed,
may be worth more or less than the original cost.
<PAGE>
NEW ENGLAND FUNDS
Where The Best Minds Meet(TM)
NEW ENGLAND MASSACHUSETTS TAX FREE INCOME FUND
Statement of Additional Information -- PART I
April 15, 1996
This Statement of Additional Information (the "Statement")
contains information which may be useful to investors but which
is not included in the prospectus of New England Massachusetts
Tax Free Income Fund (the "Fund"). This Statement is not a
prospectus and is only authorized for distribution when
accompanied or preceded by the Prospectus of the Fund dated April
15, 1996 (the "Prospectus"). The Statement should be read
together with that Prospectus. Investors may obtain a free copy
of the Prospectus from New England Funds, L.P., Prospectus
Fulfillment Desk, 399 Boylston Street, Boston, Massachusetts
02116.
Part I of this Statement contains specific information about
the Fund. Part II includes information about the Fund and other
New England Funds.
The Fund is a series of New England Funds Trust II (the
"Trust"), a registered management investment company that offers
a total of eight series.
T a b l e o f C o n t e n t s
Page
Part I
Investment Restrictions
Fund Charges and Expenses
Investment Performance of the Fund
Part II
Miscellaneous Investment Practices
Management of the Trusts
Portfolio Transactions and Brokerage
Description of the Trusts and Ownership of
Shares
How to Buy Shares
Net Asset Value and Public Offering Price
Reduced Sales Charges
Shareholder Services
Redemptions
Standard Performance Measures
Income Dividends, Capital Gain
Distributions and Tax Status
Financial Statements
Appendix A - Description of Bond Ratings
Appendix B - Publications That May Contain
Fund Information
Appendix C - Advertising and Promotional
Literature
<PAGE>
INVESTMENT RESTRICTIONS
As fundamental investment restrictions, which may not be changed
without a vote of a majority of the Fund's outstanding voting
securities (as defined in the Investment Act of 1940 [the "1940
Act"]) the Fund will not:
(1) Borrow money in excess of 10% of the value (taken at the
lower of cost or current value) of its total assets (not
including the amount borrowed) at the time the borrowing is
made, and then only from banks as a temporary measure to
facilitate the meeting of redemption requests (not for
leverage) which might otherwise require the untimely
disposition of portfolio investments or for extraordinary or
emergency purposes. (Such borrowings will be repaid before
any additional investments are made);
(2) Pledge, hypothecate, mortgage or otherwise encumber its
assets in excess of 10% of the value of its total assets
(taken at the lower of cost or current value) and then only
to secure borrowings permitted by restriction (1) above;
(3) Purchase securities on margin, except such short-term credits
as may be necessary for the clearance of purchases and sales
of securities;
(4) Make short sales of securities or maintain a short position
for the account of the Fund unless at all times when a short
position is open it owns an equal amount of such securities
or owns securities which, without payment of any further
consideration, are convertible into or exchangeable for
securities of the same issue as, and equal in amount to, the
securities sold short;
(5) Underwrite securities issued by other persons except to the
extent that, in connection with the disposition of its
portfolio investments, it may be deemed to be an underwriter
under federal securities laws;
(6) Purchase or sell real estate, although it may purchase
securities which are secured by or represent interests in
real estate;
(7) Purchase or sell commodities or commodity contracts, or write
or purchase options, except that the Fund may (a) buy or sell
futures contracts on securities or on securities indexes and
(b) write, purchase or sell put or call options on
securities, on securities indexes or on futures contracts of
the type referred to in clause (a) of this restriction;
(8) Make loans, except by purchase of debt obligations in which
the Fund may invest consistent with its investment policies,
and through repurchase agreements;
(9) Invest in securities of any issuer if, to the knowledge of
the Fund, officers and trustees of the Trust or officers and
directors of Back Bay Advisors, L.P. ("Back Bay Advisors")
the Fund's subadviser, who beneficially own more than 1/2 of
1% of the securities of that issuer together own more than
5%;
(10) Invest in the securities of any issuer if, immediately
after such investment, more than 5% of the value of the total
assets of the Fund taken at current value would be invested
in the securities of such issuer; provided that this
limitation does not apply either to obligations issued or
guaranteed as to interest and principal by the U. S.
Government or its agencies or instrumentalities or to
Massachusetts Tax Exempt Bonds (as defined in the
Prospectus);
(11) Purchase securities restricted as to resale, if, as a
result, such investments would exceed 5% of the value of the
Fund's net assets;
(12) Purchase securities (other than securities of the U.S.
Government, its agencies or instrumentalities or
Massachusetts Tax Exempt Bonds, except obligations backed
only by the assets and revenues of nongovernmental users) if
as a result of such purchases more than 25% of the value of
the Fund's total assets would be invested in any one
industry. Governmental issuers of Massachusetts Tax Exempt
Bonds are not considered part of any "industry." However,
Massachusetts Tax Exempt Bonds backed only by the assets and
revenues of nongovernmental users may for this purpose be
deemed to be issued by such nongovernmental users, and this
25% limitation would apply to such obligations. Thus, no
more than 25% of the Fund's assets will be invested in
obligations deemed to be issued by nongovernmental users in
any one industry and in taxable obligations of issuers in the
same industry;
(13) Acquire more than 10% of the voting securities of any
issuer; or
(14) Issue any class of securities which is senior to the
Fund's shares of beneficial interest except to the extent
that borrowings permitted by investment restriction (1) are
deemed to involve the issuance of such securities.
It is contrary to the Fund's present policies, which may be
changed without shareholder approval, to:
(1) Invest in securities of other investment companies, except as
they may be acquired as part of a merger, consolidation or
acquisition of assets;
(2) Invest in securities of any issuer if the party responsible
for payment, together with any predecessor, has been in
operation for less than three years, and, as a result of the
investment, the aggregate of such investments would exceed 5%
of the value of the Fund's total assets; provided, however,
that this restriction shall not apply to any obligation of
the United States or its agencies or for the payment of which
is pledged the faith, credit and taxing power of any person
authorized to issue Massachusetts Tax Exempt Bonds;
(3) Buy or sell oil, gas or other mineral leases, rights or
royalty contracts; or
(4) (A) purchase any security restricted as to disposition under
federal securities laws if as a result of such purchase more
than 10% of the Fund's total net assets would be invested in
such securities or (B) invest more than 15% of the Fund's
total net assets in illiquid securities.
Except in the case of policy 4(B) above, all percentage
limitations on investments will apply at the time of the making
of an investment and shall not be considered violated unless an
excess or deficiency occurs or exists immediately after and as a
result of such investment.
FUND CHARGES AND EXPENSES
INVESTMENT ADVISORY FEES
Pursuant to an advisory agreement dated January 2, 1996, New
England Funds Management, L.P. ("NEFM") has agreed, subject to
the supervision of the Board of Trustees of the Trust, to manage
the investment and reinvestment of the assets of the Fund and to
provide a range of administrative services to the Fund. For the
services described in the advisory agreement, the Fund has agreed
to pay NEFM a management fee at the annual rate of 0.60% of the
first $100 million of the Fund's average daily net assets and
0.50% of such assets in excess of $100 million.
The advisory agreement provides that NEFM may delegate its
responsibilities thereunder to other parties. Pursuant to a
subadvisory agreement dated January 2, 1996, NEFM has delegated
responsibility for managing the investment and reinvestment of
the Fund's assets to Back Bay Advisors, as subadviser. For
providing such subadvisory services to the Fund, NEFM pays Back
Bay Advisors a subadvisory fee at the annual rate of 0.30% of the
first $100 million of the Fund's average daily net assets and
0.25% of such assets in excess of $100 million. The Fund pays no
direct fees to Back Bay Advisors.
Prior to January 2, 1996, Back Bay Advisors served as
adviser to the Fund pursuant to an advisory agreement which
provided for an advisory fee payable by the Fund to Back Bay
Advisors at the same rate as the management fee currently payable
by the Fund to NEFM. Back Bay Advisors' compensation under such
advisory agreement was subject to reduction to the extent that in
any year the Fund's expenses, including Back Bay Advisors' fee,
but exclusive of brokerage commissions, taxes, interest,
distribution expenses and extraordinary items, exceeded the
lesser of (i) 1.50% annually, of the Fund's average daily net
assets or (ii) any expense limitation on investment company
expenses imposed by any statute or regulatory authority of any
jurisdiction in which shares of the Fund were qualified for offer
and sale. See "Management of the Trusts" in Part II of this
Statement.
NEFM has voluntarily agreed for an indefinite period to
reduce its management fee and, if necessary, to bear certain
expenses associated with operating the Fund in order to limit the
Fund's expenses to an annual rate of 0.85% of the Fund's average
daily net assets. Prior to January 2, 1996, similar voluntary
limitations were in effect with respect to Back Bay Advisors and
the Fund, in addition to the contractual expense limitations
described above.
For the fiscal years ended December 31, 1993, 1994 and 1995,
the Fund paid advisory fees to Back Bay Advisors of $263,716,
$235,838 and $__________ , respectively (after reductions
pursuant to voluntary expense limitations in effect). Had
voluntary expense limitations not been in effect, the Fund's
advisory fees for the fiscal years ended December 1993, 1994 and
1995 would have been $673,228, $709,536 and $__________,
respectively.
BROKERAGE COMMISSIONS
For the fiscal years ended December 31, 1993, 1994 and 1995,
the Fund paid [no brokerage commissions] on portfolio
transactions.
For more information about Fund portfolio transactions, see
"Portfolio Transactions and Brokerage" in Part II of this
Statement.
OWNERSHIP OF FUND SHARES
At April 1, 1996, the following persons owned of record or
beneficially 5% or more of the Class A or Class B shares of the
Fund:
[To be filed by amendment]
SALES CHARGES AND 12B-1 FEES
As explained in Part II of this Statement, the Fund pays its
distributor, New England Funds, L.P. (the "Distributor") fees
under separate plans adopted pursuant to Rule 12b-1 under the
1940 Act relating to its Class A and Class B shares. For the
fiscal years ended December 31, 1993, 1994 and 1995, these fees
amounted to $401,119, $415,085 and $__________, respectively, for
the Fund's Class A shares; for the period September 13, 1993
through December 31, 1993 and the fiscal years ended December 31,
1994 and 1995, these fees amounted to $2024, $33,138 and $______,
respectively, for the Fund's Class B shares.
During the fiscal year ended December 31, 1995, the
Distributor paid $_______ as compensation to investment dealers
and $_______ as compensation to its sales personnel for the
Fund's Class A shares. During the fiscal year ended December 31,
1995, the Distributor paid $_______ as compensation to investment
dealers for the Fund's Class B shares. Of the amount paid to
investment dealers, $_______ and $_______ was paid to New England
Securities Corporation ("New England Securities"), a broker-
dealer affiliate of the Distributor, for the Fund's Class A
shares and Class B shares, respectively. New England Securities
paid substantially all of the fees it received from the
Distributor in commissions to its sales personnel and to defray
sales-related overhead costs.
INVESTMENT PERFORMANCE OF THE FUND
PERFORMANCE RESULTS - PERCENT CHANGE
For the Periods Ended 12/31/95*
Aggregate Average Annual
Total Return Total Return
------------------- ----------------
Class A shares:*** As a 1 5 10 5 10
% of Year Years Years Years Years
- ------------------------ ----- ----- ----- ------- -------
Net Asset Value
Maximum Offering Price
Aggregate Average Annual
Total Return Total Return
------------------- ----------------
Class B shares:**** As Since Since
a % of 1 Year 9/13/93** 9/13/93**
- ------------------------ ------- ---------- ----------------
Net Asset Value
Redemption at End of
Period
* Federal regulations require this example to be calculated
using a $1,000 investment. The minimum initial investment in
shares of the Fund is $2,500, however.
**Commencement of offering of Class B shares.
*** Assuming deduction of current maximum sales load, the
Fund's Class A shares' five-year and ten-year average annual
total returns would have been ____% and ____%, respectively,
had a voluntary expense limitation for certain periods not
been in effect, and their aggregate one-year, five-year and
ten-year total returns would have been ____%, ____% and ____%,
respectively. Based on net asset values, the Fund's Class A
shares' five-year and ten-year average annual total returns
would have been ____% and ____%, respectively, without the
voluntary limitation, and their aggregate one-year, five-year
and ten-year total returns would have been ____%, ____% and
____%, respectively.
**** Assuming redemption at the end of the period, the Fund's
Class B shares' average annual total return for the since-
inception period would have been ____%, had a voluntary
expense limitation not been in effect, and their aggregate
total returns for the one-year and since-inception periods
would have been ____% and ____%, respectively. Based on net
asset values, the Class B shares' average annual total return
for the since-inception period would have been ____%, without
the voluntary limitation, and their aggregate total returns
for the one-year and since-inception periods would have been
____% and ____%, respectively.
The foregoing data represent past performance only. The
investment return and principal value of an investment in any
Fund will fluctuate so that an investor's shares, when redeemed,
may be worth more or less than the original cost.
YIELD AND TAXABLE EQUIVALENT YIELDS
for the 30-day period ended 12/31/95
30-day yield:
Class A ____%
Class B ____%
Taxable equivalent
yields:
Combined Tax Taxable
Rate** Equivalent
Yield
Class A 46.85% Class A ____%
Class B 46.85% Class B ____%
[add other tax rates?]
* Yields for Class A shares of the Fund are based on the public
offering price of a share of the Fund and yields for Class B
shares are based on the net asset value of a share of the Fund.
**Based on combined Federal and Massachusetts marginal tax rates
for individuals, assuming deduction of state income taxes for
purposes of calculating Federal taxable income.
The table below compares taxable and tax free yields, based on
tax rates for 1996:
Taxable and Tax Free Yields
Taxable Income* If tax exempt yield is
1996
Combined
MA and
Federal
Tax
Single Joint Bracket** 4.0% 5.0% 6.0% 7.0% 8.0%
Return Return
then the equivalent taxable yield
would be:
25.20% 5.35% 6.68% 8.02% 9.36% 10.70%
36.64% 6.31% 7.89% 9.47% 11.05% 12.63%
39.28% 6.59% 8.23% 9.88% 11.53% 13.18%
43.68% 7.10% 8.88% 10.65% 12.43% 14.20%
46.85% 7.53% 9.41% 11.29% 13.17% 15.05%
* 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
Massachusetts Personal Income Tax law, however, Massachusetts
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 1996 including indexing for
inflation. These rates include the effect of deducting state
taxes on your Federal return.
Joint return figures assume two personal exemptions; single
return figures assume one personal exemption. The table is for
illustrative purposes only and is not indicative of future
performance of the Fund.
DISTRIBUTION RATE OF RETURN
The Fund may include in its written sales material rates of
return for each class based on that class's distributions from
net investment income and short-term capital gains for a recent
30-day, three-month or one-year period. Distributions of less
than one year are annualized by multiplying the factor necessary
to produce 12 months of distributions. The distribution rates
are determined by dividing the amount of the class's
distributions per share over the relevant period by either the
maximum offering price in the case of the Class A shares or the
price assuming redemption at the end of the period in the case of
Class B shares or the net asset value of a share of Class A and
Class B on the last day of the period.
DISTRIBUTION RATES
For Periods Ending 12/31/95
As a % of 30 day 3 months 12 months
(Class A shares)
Net Asset Value
Maximum Offering Price
(Class B shares)
Net Asset Value
<PAGE>
NEW ENGLAND FUNDS
Where The Best Minds Meet(TM)
NEW ENGLAND INTERMEDIATE TERM TAX FREE FUND OF CALIFORNIA
NEW ENGLAND INTERMEDIATE TERM TAX FREE FUND OF NEW YORK
Statement of Additional Information -- PART I
April 15, 1996
This Statement of Additional Information (the "Statement")
contains information which may be useful to investors but which
is not included in the Prospectus of New England Intermediate
Term Tax Free Fund of California (the "California Fund") and New
England Intermediate Term Tax Free Fund of New York (the "New
York Fund") (collectively, the "Funds"). This Statement is not a
prospectus and is only authorized for distribution when
accompanied or preceded by the Prospectus of the Funds dated
April 15, 1996 (the "Prospectus"). The Statement should be read
together with the Prospectus. Investors may obtain a free copy
of the Prospectus from New England Funds, L.P., Prospectus
Fulfillment Desk, 399 Boylston Street, Boston, MA 02116.
Part I of this Statement contains specific information about
the Funds. Part II includes information about the Funds and
other New England Funds.
The Funds are a series of New England Funds Trust II (the
"Trust"), a registered management investment company that offers
a total of eight series.
T a b l e o f C o n t e n t s
Page
Part I
Investment Restrictions
Fund Charges and Expenses
Investment Performance of the Funds
Part II
Miscellaneous Investment Practices
Management of the Trusts
Portfolio Transactions and Brokerage
Description of the Trusts and Ownership of
Shares
How to Buy Shares
Net Asset Value and Public Offering Price
Reduced Sales Charges
Shareholder Services
Redemptions
Standard Performance Measures
Income Dividends, Capital Gain Distributions
and Tax Status
Financial Statements
Appendix A - Description of Bond Ratings
Appendix B - Publications That May Contain
Fund Information
Appendix C - Advertising and Promotional
Literature
<PAGE>
INVESTMENT RESTRICTIONS
The following is a description of restrictions on the
investments to be made by the Funds. The restrictions marked
with an asterisk may not be changed without the approval of a
majority of the outstanding voting securities of a Fund. The
other restrictions set forth below are not fundamental policies
and may be changed by the Trust's Board of Trustees. Except in
the case of restriction (15) below, the percentages set forth
below and the percentage limitations set forth in the Prospectus
will apply at the time of the purchase of a security and shall
not be considered violated unless an excess or deficiency occurs
or exists immediately after and as a result of a purchase of such
security. The Investment Company Act of 1940 (the "1940 Act")
provides that a "vote of a majority of the outstanding voting
securities" of a Fund means the affirmative vote of the lesser of
(1) more than 50% of the outstanding shares of the Fund, or (2)
67% or more of the shares present at a meeting if more than 50%
of the outstanding shares are represented at the meeting in
person or by proxy.
The Funds may not:
(1) With respect to 50% of their total assets, purchase any
security (other than U.S. Government securities) if, as a
result, more than 5% of a Fund's total assets (taken at
current value) would then be invested in securities of a
single issuer;
*(2) Purchase securities (other than securities of the U.S.
Government, its agencies or instrumentalities or State Tax
Exempt Securities (as defined in the Prospectus, except
obligations backed only by the assets and revenues of
nongovernmental users) if as a result of such purchases more
than 25% of the value of a Fund's total assets would be
invested in any one industry. Governmental issuers of State
Tax Exempt Securities are not considered part of any
"industry." However, State Tax Exempt Securities backed only
by the assets and revenues of nongovernmental users may for
this purpose be deemed to be issued by such nongovernmental
users, and this 25% limitation would apply to such
obligations. Thus, no more than 25% of a Fund's assets will
be invested in obligations deemed to be issued by
nongovernmental users in any one industry and in taxable
obligations of issuers in the same industry;
(3) Purchase securities on margin (but it may obtain such short-
term credits as may be necessary for the clearance of
purchases and sales of securities), or make short sales
except where, by virtue of ownership of other securities, it
has the right to obtain, without payment of further
consideration, securities equivalent in kind and amount to
those sold, and the Funds will not deposit or pledge more
than 10% of its total assets (taken at current value) as
collateral for such sales. (For this purpose, the deposit or
payment by the Funds of initial or variation margin in
connection with futures contracts or related options
transactions is not considered the purchase of a security on
margin);
(4) Acquire more than 10% of any class of securities of an issuer
(taking all preferred stock issues of an issuer as a single
class and all debt issues of an issuer as a single class) or
acquire more than 10% of the outstanding voting securities of
an issuer;
*(5) Borrow money in excess of 10% of its total assets (taken
at cost) or 5% of its total assets (taken at current value),
whichever is lower, and then only as a temporary measure for
extraordinary or emergency purposes;
(6) Pledge more than 15% of its total assets (taken at cost) (for
the purpose of this restriction, collateral arrangements with
respect to options, futures contracts and options on futures
contracts and with respect to initial and variation margin
are not deemed to be a pledge of assets);
(7) Invest more than 5% of its total assets (taken at current
value) in securities of businesses (including predecessors)
less than three years old;
(8) Purchase or retain securities of any issuer if officers and
trustees of the Trust or of the investment adviser or
subadviser of the Funds who individually own more than l/2 of
1% of the shares or securities of that issuer, together own
more than 5%;
*(9) Make loans, except by entering into repurchase
agreements or by purchase of bonds, debentures, commercial
paper, corporate notes and similar evidences of indebtedness,
which are a part of an issue to the public or to financial
institutions, or through the lending of a Fund's portfolio
securities;
*(10)Buy or sell oil, gas or other mineral leases, rights or
royalty contracts, real estate or commodities or commodity
contracts, except that the Funds may buy and sell futures
contracts and related options. (This restriction does not
prevent the Funds from purchasing securities of companies
investing in the foregoing);
*(11)Act as underwriter, except to the extent that, in connection
with the disposition of portfolio securities, it may be
deemed to be an underwriter under certain federal securities
laws;
(12) Make investments for the purpose of exercising control
or management;
(13) Except to the extent permitted by rule or order of the
Securities and Exchange Commission (the "SEC") participate on
a joint or joint and several basis in any trading account in
securities (the "bunching" of orders for the purchase or sale
of portfolio securities with Back Bay Advisors, L.P. ("Back
Bay Advisors") or accounts under its management to reduce
brokerage commissions, to average prices among them or to
facilitate such transactions is not considered a trading
account in securities for purposes of this restriction.);
(14) Write, purchase or sell options or warrants, except that
the Funds may (a) acquire warrants or rights to subscribe to
securities of companies issuing such warrants or rights, or
of parents or subsidiaries of such companies, (b) write,
purchase and sell put and call options on securities,
securities indices or financial futures contracts and (c)
enter into currency forward contracts;
(15) Purchase any illiquid security if, as a result, more
than 15% of its net assets (taken at current value) would be
invested in such securities;
(16) Invest in the securities of other investment companies,
except by purchases in the open market involving only
customary brokers' commissions or no commissions (under the
1940 Act, a Fund may not (a) invest more than 10% of its
total assets (taken at current value) in such securities, (b)
own securities of any one investment company having a value
in excess of 5% of the total assets of a Fund (taken at
current value), or (c) own more than 3% of the outstanding
voting stock of any one investment company); or
*(17)Issue senior securities (for the purpose of this restriction
none of the following is deemed to be a senior security: any
pledge or other encumbrance of assets permitted by
restriction (6) above; any borrowing permitted by restriction
(5) above; any collateral arrangements with respect to
options, futures contracts and options on futures contracts
and with respect to initial and variation margin; the
purchase or sale of options, forward contracts, futures
contracts or options on futures contracts; and the issuance
of shares of beneficial interest permitted from time to time
by the provisions of the Trust's Agreement and Declaration of
Trust and by the 1940 Act, the rules thereunder, or any
exemption therefrom).
The staff of the SEC is currently of the view that
repurchase agreements maturing in more than seven days are
subject to restriction (15) above.
As a matter of operating policy, subject to change without
shareholder approval, the Funds will not (1) write, purchase or
sell options in an amount in excess of 5% of their net assets;
(2) invest more than 5% of their net assets in warrants, no more
than 2% of which will be invested in warrants that are not listed
on the New York Stock Exchange or the American Stock Exchange;
provided, however, that for purposes of this limitation, warrants
acquired by the Funds in units or attached to other securities
may be deemed to be without value; and (3) purchase or sell real
property, including limited partnership interests. Such
undertakings can be changed without shareholder approval, but the
Statement will be revised to reflect any such changes.
FUND CHARGES AND EXPENSES
INVESTMENT ADVISORY FEES
Pursuant to separate advisory agreements, each dated January
2, 1996, New England Funds Management, L.P. ("NEFM") has agreed,
subject to the supervision of the Board of Trustees of the Trust,
to manage the investment and reinvestment of the assets of the
Funds and to provide a range of administrative services to the
Funds. For the services described in the advisory agreements,
each Fund has agreed to pay NEFM a management fee at the annual
rate of 0.525% of the first $200 million of the Fund's average
daily net assets, 0.50% of the next $300 million of such assets
and 0.475% of such assets in excess of $500 million.
The advisory agreements each provide that NEFM may delegate
its responsibilities thereunder to other parties. Pursuant to
separate subadvisory agreements, each dated January 2, 1996, NEFM
has delegated responsibility for managing the investment and
reinvestment of each Fund's assets to Back Bay Advisors, as
subadviser. For providing such subadvisory services to the
Funds, NEFM pays Back Bay Advisors a subadvisory fee at the
annual rate of 0.2625% of the first $200 million of each Fund's
average daily net assets, 0.25% of the next $300 million of such
assets and 0.2375% of such assets in excess of $500 million. The
Funds pay no direct fees to Back Bay Advisors.
Prior to January 2, 1996, Back Bay Advisors served as
adviser to the Funds pursuant to separate advisory agreements,
each of which provided for an advisory fee payable by the Fund to
Back Bay Advisors at the annual rate of 0.40% of the first $200
million of the Fund's average daily net assets, 0.375% of the
next $300 million of such assets and 0.35% of such assets in
excess of $500 million. Back Bay Advisors' compensation under
such advisory agreements was subject to reduction to the extent
that in any year a Fund's expenses, including Back Bay Advisors'
fee, but exclusive of brokerage commissions, taxes, interest,
distribution expenses and extraordinary items, exceeded any
expense limitation on investment company expenses imposed by any
statute or regulatory authority of any jurisdiction in which
shares of the Fund were qualified for offer and sale.
Prior to January 2, 1996, under administrative services
agreements between each of the Funds and New England Funds, L.P.
(the "Distributor"), the Funds' distributor, the Distributor
provided the Funds with office space, facilities and equipment,
services of executive and other personnel and certain
administrative services. Under these agreements, each Fund paid
the Distributor a fee at the annual rate of 0.125% of the Fund's
average daily net assets. The Funds' current management fee rate
represents the sum of the fee rates payable under the prior
advisory and administrative services agreements.
NEFM and the Distributor have voluntarily agreed for an
indefinite period to reduce their fees and, if necessary, to bear
certain expenses associated with operating the Funds in order to
limit each Fund's expenses to an annual rate of 0.70% of the
daily average net assets attributable to the Fund's Class A
shares and 1.45% of such assets attributable to the Fund's Class
B shares. Prior to January 2, 1996, similar voluntary
limitations were in effect with respect to Back Bay Advisors, the
Distributor and each Fund, in addition to the contractual expense
limitations described above.
As a result of voluntary expense limitations in effect, the
Funds paid Back Bay Advisors no advisory fees for the period
March 1, 1993 through December 31, 1993 and the fiscal years
ended December 31, 1994 [and 1995]. Had the voluntary
limitations for the California Fund not been in effect, Back Bay
Advisors would have been paid $54,534, $157,109 and _________,
respectively, in advisory fees by the Fund for the period March
1, 1993 through December 31, 1993 and the fiscal years ended
December 31, 1994 and 1995. Had the voluntary limitations for
the New York Fund not been in effect, Back Bay Advisors would
have been paid $47,170, $82,155 and $________, respectively, in
advisory fees by the Fund for the period March 1, 1993 through
December 31, 1993 and the fiscal years ended December 31, 1994
and 1995.
OWNERSHIP OF FUND SHARES
At April 1, 1996, the following persons owned of record or
beneficially 5% or more of the outstanding Class A shares and
Class B shares of the indicated Funds:
[To be filed by amendment]
SALES CHARGES AND 12B-1 FEES
As explained in Part II of this Statement, the Funds pay the
Distributor fees under separate plans adopted pursuant to Rule
12b-1 under the 1940 Act relating to their Class A and Class B
shares. For the period April 23, 1993 through December 31, 1993
and the fiscal years ended December 31, 1994 and 1995, these fees
amounted to $33,061, $5,769 and $___________, respectively, for
the California Fund's Class A shares, and for the period
September 13, 1993 through December 31, 1993 and the fiscal years
ended December 31, 1994 and 1995, these fees amounted to $3,914,
$49,694 and $_____________, respectively, for the California
Fund's Class B shares. For the period April 23, 1993 through
December 31, 1993 and the fiscal years ended December 31, 1994
and 1995, these fees amounted to $29,334, $48,644 and
$________________, respectively, for the New York Fund's Class A
shares, and for the period September 13, 1993 through December
31, 1993 and the fiscal years ended December 31, 1994 and 1995,
these fees amounted to $1,051, $10,811 and $_________,
respectively, for the New York Fund's Class B shares.
During the fiscal year ended December 31, 1995, the
Distributor paid $______ and $______ as compensation to
investment dealers and $______ and $______ as compensation to its
sales personnel for the California and New York Funds' Class A
shares, respectively. During the fiscal year ended December 31,
1995, the Distributor paid $______ and $______ as compensation to
investment dealers for the California and New York Fund's Class B
shares, respectively. Of the amount paid to investment dealers,
$______ and $______ was paid to New England Securities
Corporation ("New England Securities"), a broker-dealer affiliate
of the Distributor, for the California Fund's A shares and B
shares, respectively. Of the amount paid to investment dealers,
$______ and $______ was paid to New England Securities for the
New York Fund's Class A shares and Class B shares, respectively.
New England Securities paid substantially all of the fees it
received from the Distributor in commissions to its sales
personnel and to defray sales-related overhead costs.
INVESTMENT PERFORMANCE OF THE FUNDS
PERFORMANCE RESULTS - PERCENT CHANGE
For the Periods Ended 12/31/95*
California Fund***
Aggregate Average Annual
Total Return Total Return
------------------- ------------------
Class A shares: As a % Since Since
of 1 Year 4/23/93** 4/23/93**
- ------------------------ ------- ---------- -------------------
Net Asset Value
Maximum Offering Price
Aggregate Average Annual
Total Return Total Return
------------------- ------------------
Class B shares: As a % Since Since
of 1 Year 9/13/93** 9/13/93**
- ------------------------ ------- ---------- -------------------
Net Asset Value
Redemption at End of
Period
New York Fund****
Aggregate Average Annual
Total Return Total Return
------------------- ------------------
Class A shares: As a % Since Since
of 1 Year 4/23/93** 4/23/93**
- ------------------------ ------- ---------- -------------------
Net Asset Value
Maximum Offering Price
Aggregate Average Annual
Total Return Total Return
------------------- ------------------
Class B shares: As a % Since Since
of 1 Year 9/13/93** 9/13/93**
- ------------------------ ------- ---------- -------------------
Net Asset Value
Redemption at End of
Period
* Federal regulations require this example to be calculated
using a $1,000 investment. The maximum initial investment
in shares of each Fund is $2,500, however.
** Commencement of Fund operations or offering of Class B
shares.
*** Assuming deduction of current maximum sales load, the
California Fund's Class A shares' since-inception average
annual total return would have been ____%, had a voluntary
expense limitation for certain periods not been in effect,
and their aggregate one-year and since-inception total
returns would have been ____% and ____%, respectively.
Based on net asset values, the Fund's Class A shares' since-
inception average annual total return would have been ____%,
and their aggregate one-year and since-inception total
returns would have been ____% and ____%, respectively,
without the voluntary limitation. Assuming redemption at
the end of the period, the California Fund's Class B shares'
average annual total return for the since-inception period
would have been ____%, had a voluntary expense limitation
not been in effect, and their aggregate total returns for
the one-year and since-inception periods would have been
____% and ____%, respectively. Based on net asset values,
the Fund's Class B shares' average annual total return for
the since-inception period would have been ____%, and their
aggregate total returns for the one-year and since-inception
periods would have been ____% and ____%, respectively,
without the voluntary limitation.
**** Assuming deduction of current maximum sales load, the New
York Fund's Class A shares' since-inception average annual
total returns would have been ____%, had a voluntary expense
limitation for certain periods not been in effect, and their
aggregate one-year and since-inception total returns would
have been ____% and ____%, respectively. Based on net asset
values, the Fund's Class A shares' since-inception average
annual total returns would have been ____%, and their
aggregate one-year and since-inception total returns would
have been ____% and ____%, respectively, without the
voluntary limitation. Assuming redemption at the end of the
period, the New York Fund's Class B shares' average annual
total returns for the since-inception period would have been
____%, had a voluntary expense limitation not been in
effect, and their aggregate total returns for the one-year
and since-inception periods would have been ____% and ____%,
respectively. Based on net asset values, the Class B
shares' average annual total return for the since-inception
period would have been ____%, and their aggregate total
returns for the one-year and since-inception periods would
have been ____% and ____%, respectively, without the
voluntary limitation.
DISTRIBUTION RATE OF RETURN
Each class of the Funds may include in their written sales
material rates of return based on that class's distributions from
net investment income and short-term capital gains for a recent
30-day, three-month or one-year period. Distributions of less
than one year are annualized by multiplying the factor necessary
to produce 12 months of distributions. The distribution rates
are determined by dividing the amount of a class's distributions
per share over the relevant period by either the maximum offering
price in the case of Class A shares or the price assuming
redemption at the end of the period in the case of Class B shares
or the net asset value of a share of a class on the last day of
the period.
DISTRIBUTION RATES
For Periods Ending 12/31/95
As a % of 30 day 3 months 12 months
California Fund
(Class A shares)
Net Asset Value
Maximum Offering Price
(Class B shares)
Net Asset Value
Redemption at End of Period
New York Fund
(Class A shares)
Net Asset Value
Maximum Offering Price
(Class B shares)
Net Asset Value
Redemption at End of Period
<PAGE>
NEW ENGLAND FUNDS
Where The Best Minds Meet(TM)
NEW ENGLAND FUNDS TRUST I
NEW ENGLAND FUNDS TRUST II
Statement of Additional Information -- PART II
April 15, 1996
The following information applies generally to the funds
listed below (the "Funds" and each a "Fund"). The Funds
constitute all of the series of New England Funds Trust I and
New England Funds Trust II (the "Trusts" and each a "Trust"),
except for New England Star Worldwide Fund, a series of New
England Funds Trust I, and Growth Fund of Israel, a series of
New England Funds Trust II, each of which are described in
separate Statements of Additional Information. In certain
cases, the discussion applies to some but not all of the Funds.
Certain data applicable to particular Funds is found in Part I
of this Statement of Additional Information (the "Statement") as
well as in the Prospectuses of the Funds dated April 15, 1996
(the "Prospectuses"). The following Funds are described in this
Statement:
Series of New England Funds Trust I
New England Capital Growth Fund (the "Capital Growth Fund")
New England Balanced Fund (the "Balanced Fund")
New England Growth Fund (the "Growth Fund")
New England International Equity (the "International Equity
Fund Fund")
New England Star Advisers Fund (the "Star Advisers Fund")
New England Value Fund (the "Value Fund")
New England Government Securities (the "Government Securities
Fund Fund")
New England Strategic Income Fund (the "Strategic Income Fund")
New England Bond Income Fund (the "Bond Income Fund")
New England Municipal Income Fund (the "Municipal Income Fund")
(formerly named New England Tax
Exempt Income Fund)
Series of New England Fund Trust II
New England Growth Opportunities (the "Growth Opportunities
Fund Fund")
New England Limited Term U.S. (the "Limited Term U.S.
Government Fund Government Fund")
New England Adjustable Rate U.S. (the "Adjustable Rate Fund")
Government Fund
New England High Income Fund (the "High Income Fund")
New England Massachusetts Tax Free (the "Massachusetts Fund")
Income Fund
New England Intermediate Term Tax (the "California Fund')
Free Fund of California
New England Intermediate Term Tax (the "New York Fund")
Free Fund of New York
MISCELLANEOUS INVESTMENT PRACTICES
The following information relates to certain investment
practices in which certain Funds may engage. The table below
indicates which Funds may engage in each of these practices.
Practices Funds
Loans of Portfolio Securities Government Securities Fund
Bond Income Fund
Limited Term U.S. Government Fund
High Income Fund
Adjustable Rate Fund
International Equity Fund
Star Advisers Fund
Strategic Income Fund
U.S. Government Securities All Funds
When-Issued Securities Star Advisers Fund
Government Securities Fund
Bond Income Fund
Municipal Income Fund
High Income Fund
Limited Term U.S. Government Fund
California Fund
Massachusetts Fund
New York Fund
Adjustable Rate Fund
Strategic Income Fund
Repurchase Agreements All Funds
Zero Coupon Securities All Funds
Convertible Securities Value Fund
Balanced Fund
Growth Opportunities Fund
High Income Fund
International Equity Fund
Capital Growth Fund
Star Advisers Fund
Strategic Income Fund
Bond Income Fund
Tax Exempt Bonds Municipal Income Fund
California Fund
Massachusetts Fund
New York Fund
State Tax Exempt Securities California Fund
Massachusetts Fund
New York Fund
Futures and Options Government Securities Fund
Municipal Income Fund
Limited Term U.S. Government Fund
International Equity Fund
Star Advisers Fund
California Fund
New York Fund
Strategic Income Fund
Bond Income Fund
High Income Fund
Massachusetts Fund
Growth Opportunities Fund
Foreign Currency Transactions International Equity Fund
Balanced Fund
Capital Growth Fund
Value Fund
Star Advisers Fund
Strategic Income Fund
Bond Income Fund
Loans of Portfolio Securities. The Fund may lend its portfolio
securities to broker-dealers under contracts calling for cash
collateral equal to at least the market value of the securities
loaned, marked to the market on a daily basis. The Fund will
continue to benefit from interest or dividends on the securities
loaned and will also receive interest through investment of the
cash collateral in short-term liquid investments, which may
include shares of money market funds subject to any investment
restriction listed in Part I of this Statement. Any voting
rights, or rights to consent, relating to securities loaned pass
to the borrower. However, if a material event affecting the
investment occurs, such loans will be called so that the
securities may be voted by the Fund. The Fund pays various fees
in connection with such loans, including shipping fees and
reasonable custodian and placement fees approved by the boards
of trustees of the Trusts or persons acting pursuant to the
direction of the boards.
These transactions must by fully collateralized at all
times, but involve some credit risk to the Fund if the other
party should default on its obligation and the Fund is delayed
in or prevented from recovering the collateral.
U.S. Government Securities. The Fund may invest in some or all
of the following U.S. Government securities:
" U.S. Treasury Bills - Direct obligations of the United
States Treasury which are issued in maturities of one year or
less. No interest is paid on Treasury bills; instead, they are
issued at a discount and repaid at full face value when they
mature. They are backed by the full faith and credit of the
United States Government.
" U.S. Treasury Notes and Bonds - Direct obligations of the
United States Treasury issued in maturities that vary between one
and 40 years, with interest normally payable every six months.
These obligations are backed by the full faith and credit of the
United States Government.
" "Ginnie Maes" - Debt securities issued by a mortgage banker
or other mortgagee which represent an interest in a pool of
mortgages insured by the Federal Housing Administration or the
Farmer's Home Administration or guaranteed by the Veterans
Administration. The Government National Mortgage Association
("GNMA") guarantees the timely payment of principal and interest
when such payments are due, whether or not these amounts are
collected by the issuer of these certificates on the underlying
mortgages. An assistant attorney general of the United States
has rendered an opinion that the guarantee by GNMA is a general
obligation of the United States backed by its full faith and
credit. Mortgages included in single family or multi-family
residential mortgage pools backing an issue of Ginnie Maes have a
maximum maturity of up to 30 years. Scheduled payments of
principal and interest are made to the registered holders of
Ginnie Maes (such as the Fund) each month. Unscheduled
prepayments may be made by homeowners, or as a result of a
default. Prepayments are passed through to the registered holder
(such as the Fund, which reinvests any prepayments) of Ginnie
Maes along with regular monthly payments of principal and
interest.
" "Fannie Maes" - The Federal National Mortgage Association
("FNMA") is a government-sponsored corporation owned entirely by
private stockholders that purchases residential mortgages from a
list of approved seller/servicers. Fannie Maes are pass-through
securities issued by FNMA that are guaranteed as to timely
payment of principal and interest by FNMA but are not backed by
the full faith and credit of the United States Government.
" "Freddie Macs" - The Federal Home Loan Mortgage Corporation
("FHLMC") is a corporate instrumentality of the United States
Government. Freddie Macs are participation certificates issued
by FHLMC that represent an interest in residential mortgages from
FHLMC's National Portfolio. FHLMC guarantees the timely payment
of interest and ultimate collection of principal, but Freddie
Macs are not backed by the full faith and credit of the United
States Government.
U.S. Government securities generally do not involve the
credit risks associated with investments in other types of fixed-
income securities, although, as a result, the yields available
from U.S. Government securities are generally lower than the
yields available from corporate fixed-income securities. Like
other fixed-income securities, however, the values of U.S.
Government securities change as interest rates fluctuate.
Fluctuations in the value of portfolio securities will not
affect interest income on existing portfolio securities but will
be reflected in the Fund's net asset value. Since the magnitude
of these fluctuations will generally be greater at times when
the Fund's average maturity is longer, under certain market
conditions the Fund may, for temporary defensive purposes,
accept lower current income from short-term investments rather
than investing in higher yielding long-term securities.
When-Issued Securities. The Fund may enter into agreements with
banks or broker-dealers for the purchase or sale of securities
at an agreed-upon price on a specified future date. Such
agreements might be entered into, for example, when the Fund
anticipates a decline in interest rates and is able to obtain a
more advantageous yield by committing currently to purchase
securities to be issued later. When the Fund purchases
securities in this manner (i.e., on a when-issued or delayed-
delivery basis), it is required to create a segregated account
with the Trust's custodian and to maintain in that account cash
or U.S. Government securities in an amount equal to or greater
than, on a daily basis, the amount of the Fund's when-issued or
delayed-delivery commitments. The Fund will make commitments to
purchase on a when-issued or delayed-delivery basis only
securities meeting the Fund's investment criteria. The Fund may
take delivery of these securities or, if it is deemed advisable
as a matter of investment strategy, the Fund may sell these
securities before the settlement date. When the time comes to
pay for when-issued or delayed-delivery securities, the Fund
will meet its obligations from the then available cash flow or
the sale of securities, or from the sale of the when-issued or
delayed-delivery securities themselves (which may have a value
greater or less than the Fund's payment obligation).
Repurchase Agreements. The Fund may enter into repurchase
agreements, by which the Fund purchases a security and obtains a
simultaneous commitment from the seller to repurchase the
security at an agreed-upon price and date. The resale price is
in excess of the purchase price and reflects an agreed-upon
market rate unrelated to the coupon rate on the purchased
security. Such transactions afford the Fund the opportunity to
earn a return on temporarily available cash at relatively low
market risk. While the underlying security may be a bill,
certificate of indebtedness, note or bond issued by an agency,
authority or instrumentality of the United States Government,
the obligation of the seller is not guaranteed by the United
States Government and there is a risk that the seller may fail
to repurchase the underlying security. In such event, the Fund
would attempt to exercise rights with respect to the underlying
security, including possible disposition in the market.
However, the Fund may be subject to various delays and risks of
loss, including (a) possible declines in the value of the
underlying security during the period while the Fund seeks to
enforce its rights thereto, (b) possible reduced levels of
income and lack of access to income during this period and (c)
inability to enforce rights and the expenses involved in the
attempted enforcement.
Zero Coupon Securities. Zero coupon securities are debt
obligations that do not entitle the holder to any periodic
payments of interest either for the entire life of the
obligation or for an initial period after the issuance of the
obligations. Such securities are issued and traded at a
discount from their face amounts. The amount of the discount
varies depending on such factors as the time remaining until
maturity of the securities, prevailing interest rates, the
liquidity of the security and the perceived credit quality of
the issuer. The market prices of zero coupon securities
generally are more volatile than the market prices of securities
that pay interest periodically and are likely to respond to
changes in interest rates to a greater degree than do non-zero
coupon securities having similar maturities and credit quality.
In order to satisfy a requirement for qualification as a
"regulated investment company" under the Internal Revenue Code
of 1986, as amended (the "Code"), the Fund must distribute each
year at least 90% of its net investment income, including the
original issue discount accrued on zero coupon securities.
Because the Fund will not on a current basis receive cash
payments from the issuer of a zero coupon security in respect of
accrued original issue discount, in some years the Fund may have
to distribute cash obtained from other sources in order to
satisfy the 90% distribution requirement under the Code. Such
cash might be obtained from selling other portfolio holdings of
the Fund. In some circumstances, such sales might be necessary
in order to satisfy cash distribution requirements even though
investment considerations might otherwise make it undesirable
for the Fund to sell such securities at such time.
Convertible Securities. The Fund may invest in convertible
securities, including corporate bonds, notes or preferred stocks
of U.S. or foreign issuers that can be converted into (that is,
exchanged for) common stocks or other equity securities.
Convertible securities also include other securities, such as
warrants, that provide an opportunity for equity participation.
Because convertible securities can be converted into equity
securities, their values will normally vary in some proportion
with those of the underlying equity securities. Convertible
securities usually provide a higher yield than the underlying
equity, however, so that the price decline of a convertible
security may sometimes be less substantial than that of the
underlying equity security.
Tax Exempt Bonds. The Fund may invest in tax exempt bonds. Tax
exempt bonds include debt obligations issued to obtain funds for
various public purposes, including the construction of a wide
range of public facilities such as bridges, highways, hospitals,
housing, mass transportation, schools, streets, and water and
sewer works. Other public purposes for which tax exempt bonds
may be issued include the refunding of outstanding obligations,
obtaining funds for general operating expenses, and obtaining
funds to lend to other public institutions and facilities. In
addition, prior to the Tax Reform Act of 1986, certain debt
obligations known as industrial development bonds could be
issued by or on behalf of public authorities to obtain funds to
provide privately operated housing facilities, sports
facilities, convention or trade show facilities, airport, mass
transit, port or parking facilities, air or water pollution
control facilities and certain local facilities for water
supply, gas, electricity, or sewage or solid waste disposal.
Such obligations are included within the term "tax exempt bonds"
if the interest paid thereon is, in the opinion of bond counsel,
exempt from federal income tax. Interest on certain industrial
development bonds used to fund the construction, equipment,
repair or improvement of privately operated industrial or
commercial facilities may also be exempt from federal income
tax. The Tax Reform Act of 1986 eliminated some types of tax
exempt industrial revenues bonds but retains others under the
general category of "private activity bonds." The interest on
so-called "private activity bonds" is exempt from ordinary
federal income taxation but is treated as a tax preference item
in computing a shareholder's alternative minimum tax liability,
as noted in the Prospectus.
The Fund may not be a desirable investment for "substantial
users" of facilities financed by industrial development bonds or
for "related persons" of substantial users.
The two principal classifications of tax exempt bonds are
general obligation bonds and limited obligation (or revenue)
bonds. General obligation bonds are obligations involving the
credit of an issuer possessing taxing power and are payable from
the issuer's general unrestricted revenues and not from any
particular fund or source. The characteristics and method of
enforcement of general obligation bonds vary according to the
law applicable to the particular issuer, and payment may be
dependent upon an appropriation by the issuer's legislative
body. Limited obligation bonds are payable only from the
revenues derived from a particular facility or class of
facilities, or in some cases from the proceeds of a special
excise or other specific revenue source such as the user of the
facility. Tax exempt industrial development bonds and private
activity bonds are in most cases revenue bonds and generally are
not payable from the unrestricted revenues of the issuer. The
credit and quality of such bonds is usually directly related to
the credit standing of the corporate user of the facilities.
Principal and interest on such bonds is the responsibility of
the corporate user (and any guarantor).
Prices and yields on tax exempt bonds are dependent on a
variety of factors, including general money market conditions,
the financial condition of the issuer, general conditions of the
tax exempt bond market, the size of a particular offering, the
maturity of the obligation and the rating of the issue. A
number of these factors, including the ratings of particular
issues, are subject to change from time to time. Information
about the financial condition of an issuer of tax exempt bonds
may not be as extensive as that made available by corporations
whose securities are publicly traded.
The ratings of Moody's Investors Service, Inc. ("Moody's")
and Standard and Poor's Ratings Group ("Standard & Poor's" or
"S&P") represent their opinions and are not absolute standards
of quality. Tax exempt bonds with the same maturity, interest
rate and rating may have different yields while tax exempt bonds
of the same maturity and interest rate with different ratings
may have the same yield.
Obligations of issuers of tax exempt bonds are subject to
the provisions of bankruptcy, insolvency and other laws, such as
the Bankruptcy Reform Act of 1978, affecting the rights and
remedies of creditors. Congress or state legislatures may seek
to extend the time for payment of principal or interest, or
both, or to impose other constraints upon enforcement of such
obligations. There is also the possibility that, as a result of
litigation or other conditions, the power or ability of issuers
to meet their obligations for the payment of interest and
principal on their tax exempt bonds may be materially affected,
or their obligations may be found to be invalid or
unenforceable. Such litigation or conditions may from time to
time have the effect of introducing uncertainties in the market
for tax exempt bonds or certain segments thereof, or materially
affecting the credit risk with respect to particular bonds.
Adverse economic, business, legal or political developments
might affect all or a substantial portion of the Fund's tax
exempt bonds in the same manner.
From time to time, proposals have been introduced before
Congress for the purpose of restricting or eliminating the
federal income tax exemption for interest on debt obligations
issued by states and their political subdivisions and similar
proposals may well be introduced in the future. If such a
proposal were enacted, the availability of tax exempt securities
for investment by the Fund and the value of the Fund's portfolio
could be materially affected, in which event the Fund would
reevaluate its investment objective and policies and consider
changes in the structure of the Fund or dissolution.
All debt securities, including tax exempt bonds, are
subject to credit and market risk. Generally, for any given
change in the level of interest rates, prices for longer
maturity issues tend to fluctuate more than prices for shorter
maturity issues. The ability of the Fund to invest in
securities other than tax exempt bonds is limited by a
requirement of the Code that at least 50% of the Fund's total
assets be invested in tax exempt bonds at the end of each
calendar quarter.
State Tax Exempt Securities. The Fund may invest in "State Tax
Exempt Securities" which term refers to debt securities the
interest from which is, in the opinion of bond counsel, exempt
from federal income tax and State personal income taxes (other
than the possible incidence of any alternative minimum taxes).
State Tax Exempt Securities consist primarily of bonds of the
Fund's named state, their political subdivisions (for example,
counties, cities, towns, villages and school districts) and
authorities issued to obtain funds for various public purposes,
including the construction of a wide range of public facilities
such as airports, bridges, highways, housing, hospitals, mass
transportation, schools, streets and water and sewer works.
Other public purposes for which certain State Tax Exempt
Securities may be issued include the refunding of outstanding
obligations, obtaining funds for general operating expenses, or
obtaining funds to lend to public or private institutions for
the construction of facilities such as educational, hospital and
housing facilities. In addition, certain types of industrial
development bonds and private activity bonds have been or may be
issued by public authorities or on behalf of state or local
governmental units to finance privately operated housing
facilities, sports facilities, convention or trade facilities,
air or water pollution control facilities and certain local
facilities for water supply, gas, electricity or sewage or solid
waste disposal. Other types of industrial development and
private activity bonds are used to finance the construction,
equipment, repair or improvement of privately operated
industrial or commercial facilities. Industrial development
bonds and private activity bonds are included within the term
"State Tax Exempt Securities" if the interest paid thereon is,
in the opinion of bond counsel, exempt from federal income tax
and State personal income taxes (other than the possible
incidence of any alternative minimum taxes). The Fund may
invest more than 25% of the value of its total assets in such
bonds, but not more than 25% in bonds backed by non-governmental
users in any one industry (see "Investment Restrictions" in Part
I of this Statement). However, as described in the Fund's
Prospectus, the income from certain private activity bonds is an
item of tax preference for purposes of the federal alternative
minimum tax, and it is a fundamental policy of the Fund that
distributions from interest income on such private activity
bonds, together with distributions of interest income on
investments other than State Tax Exempt Securities, will
normally not exceed 10% of the total amount of the Fund's income
distributions.
In addition, the term "State Tax Exempt Securities"
includes debt obligations issued by other governmental entities
(for example, U. S. territories) if such debt obligations
generate interest income which is exempt from federal income tax
and State personal income taxes (other than any alternative
minimum taxes).
There are, of course, variations in the quality of State
Tax Exempt Securities, both within a particular classification
and between classifications, depending on numerous factors (see
Appendix A).
The yields on State Tax Exempt Securities are dependent on
a variety of factors, including general money market conditions,
the financial condition of the issuer, general conditions of the
State Tax Exempt Securities market, the size of a particular
offering, the maturity of the obligation and the rating of the
issue. The ratings of Moody's and Standard and Poor's represent
their opinions as to the quality of the State Tax Exempt
Securities which they undertake to rate. It should be
emphasized, however, that ratings are general and are not
absolute standards of quality. Consequently, State Tax Exempt
Securities with the same maturity, interest rate and rating may
have different yields while State Tax Exempt Securities of the
same maturity and interest rates with different ratings may have
the same yield. Subsequent to its purchase by the Fund, an
issue of State Tax Exempt Securities or other investments may
cease to be rated or the rating may be reduced below the minimum
rating required for purchase by the Fund. Neither event will
require the elimination of an investment from the Fund's
portfolio, but the Fund's subadviser will consider such an event
as part of its normal, ongoing review of all the Fund's
portfolio securities.
The Fund does not currently intend to invest in so-called
"moral obligation" bonds, where repayment is backed by a moral
commitment of an entity other than the issuer, unless the credit
of the issuer itself, without regard to the "moral obligation,"
meets the investment criteria established for investments by the
Fund.
Securities in which the Fund may invest, including State
Tax Exempt Securities, are subject to the provisions of
bankruptcy, insolvency and other laws affecting the rights and
remedies of creditors, such as the federal Bankruptcy Code, and
laws, if any, which may be enacted by Congress or the State
legislature extending the time for payment of principal or
interest, or both, or imposing other constraints upon
enforcement of such obligations. There is also the possibility
that as a result of litigation or other conditions the power or
ability of issuers to meet their obligations for the payment of
interest and principal on their State Tax Exempt Securities may
be materially affected or that their obligations may be found to
be invalid and unenforceable.
The Fund's named state and certain of its cities and towns
and public bodies have from time to time encountered financial
difficulties which have adversely affected their respective
credit standings and borrowing abilities. Such difficulties
could, of course, affect outstanding obligations of such
entities, including obligations held by the Fund.
Options and Futures
Futures Contracts. A futures contract is an agreement between
two parties to buy and sell a particular commodity (e.g., an
interest-bearing security) for a specified price on a specified
future date. In the case of futures on an index, the seller and
buyer agree to settle in cash, at a future date, based on the
difference in value of the contract between the date it is
opened and the settlement date. The value of each contract is
equal to the value of the index from time to time multiplied by
a specified dollar amount. For example, long-term municipal
bond index futures trade in contracts equal to $1000 multiplied
by the Bond Buyer Municipal Bond Index, and Standard & Poor's
500 Index futures trade in contracts equal to $500 multiplied by
the Standard & Poor's 500 Index.
When a trader, such as the Fund, enters into a futures
contract, it is required to deposit with (or for the benefit of)
its broker as "initial margin" an amount of cash or short-term
high-quality securities (such as U.S. Treasury Bills or high-
quality tax exempt bonds acceptable to the broker) equal to
approximately 2% to 5% of the delivery or settlement price of
the contract (depending on applicable exchange rules). Initial
margin is held to secure the performance of the holder of the
futures contract. As the value of the contract changes, the
value of futures contract positions increases or declines. At
the end of each trading day, the amount of such increase and
decline is received and paid respectively by and to the holders
of these positions. The amount received or paid is known as
"variation margin." If the Fund has a long position in a
futures contract it will establish a segregated account with the
Fund's custodian containing cash or certain illiquid assets
equal to the purchase price of the contract (less any margin on
deposit). For short positions in futures contracts, the Fund
will establish a segregated account with the custodian with cash
or high grade liquid debt assets that, when added to the amounts
deposited as margin, equal the market value of the instruments
or currency underlying the futures contracts.
Although futures contracts by their terms require actual
delivery and acceptance of securities (or cash in the case of
index futures), in most cases the contracts are closed out
before settlement. A futures sale is closed by purchasing a
futures contract for the same aggregate amount of the specific
type of financial instrument or commodity and with the same
delivery date. Similarly, the closing out of a futures purchase
is closed by the purchaser selling an offsetting futures
contract.
Gain or loss on a futures position is equal to the net
variation margin received or paid over the time the position is
held, plus or minus the amount received or paid when the
position is closed, minus brokerage commissions.
Options. An option on a futures contract obligates the writer,
in return for the premium received, to assume a position in a
futures contract (a short position if the option is a call and a
long position if the option is a put), at a specified exercise
price at any time during the period of the option. Upon
exercise of the option, the delivery of the futures position by
the writer of the option to the holder of the option generally
will be accompanied by delivery of the accumulated balance in
the writer's futures margin account, which represents the amount
by which the market price of the futures contract, at exercise,
exceeds, in the case of a call, or is less than, in the case of
a put, the exercise price of the option. The premium paid by
the purchaser of an option will reflect, among other things, the
relationship of the exercise price to the market price and
volatility of the underlying contract, the remaining term of the
option, supply and demand and interest rates. Options on
futures contracts traded in the United States may only be traded
on a United States board of trade licensed by the Commodity
Futures Trading Commission (the "CFTC").
An option on a security entitles the holder to receive (in
the case of a call option) or to sell (in the case of a put
option) a particular security at a specified exercise price. An
"American style" option allows exercise of the option at any
time during the term of the option. A "European style" option
allows an option to be exercised only at the end of its term.
Options on securities may be traded on or off a national
securities exchange.
A call option on a futures contract written by the Fund is
considered by the Fund to be covered if the Fund owns the
security subject to the underlying futures contract or other
securities whose values are expected to move in tandem with the
values of the securities subject to such futures contract, based
on historical price movement volatility relationships. A call
option on a security written by the Fund is considered to be
covered if the Fund owns a security deliverable under the
option. A written call option is also covered if the Fund holds
a call on the same futures contract or security as the call
written where the exercise price of the call held (a) is equal
to or less than the exercise price of the call written or (b) is
greater than the exercise price of the call written if the
difference is maintained by the Fund in cash, Treasury bills or
other high grade liquid obligations in a segregated account with
its custodian.
A put option on a futures contract written by the Fund, or
a put option on a security written by the Fund, is covered if
the Fund maintains cash, U.S. Treasury bills or other high-grade
liquid debt obligations with a value equal to the exercise price
in a segregated account with the Fund's custodian, or else holds
a put on the same futures contract (or security, as the case may
be) as the put written where the exercise price of the put held
is equal to or greater than the exercise price of the put
written.
If the writer of an option wishes to terminate its
position, it may effect a closing purchase transaction by buying
an option identical to the option previously written. The
effect of the purchase is that the writer's position will be
canceled. Likewise, the holder of an option may liquidate its
position by selling an option identical to the option previously
purchased.
Closing a written call option will permit the Fund to write
another call option on the portfolio securities used to cover
the closed call option. Closing a written put option will
permit the Fund to write another put option secured by the
segregated cash, U.S. Treasury bills or other high-grade liquid
obligations used to secure the closed put option. Also,
effecting a closing transaction will permit the cash or proceeds
from the concurrent sale of any futures contract or securities
subject to the option to be used for other Fund investments. If
the Fund desires to sell particular securities covering a
written call option position, it will close out its position or
will designate from its portfolio comparable securities to cover
the option prior to or concurrent with the sale of the covering
securities.
The Fund will realize a profit from closing out an option
if the price of the offsetting position is less than the premium
received from writing the option or is more than the premium
paid to purchase the option; the Fund will realize a loss from
closing out an option transaction if the price of the offsetting
option position is more than the premium received from writing
the option or is less than the premium paid to purchase the
option. Because increases in the market price of a call option
will generally reflect increases in the market price of the
covering securities, any loss resulting from the closing of a
written call option position is expected to be offset in whole
or in part by appreciation of such covering securities.
Since premiums on options having an exercise price close to
the value of the underlying securities or futures contracts
usually have a time value component (i.e., a value that
diminishes as the time within which the option can be exercised
grows shorter) an option writer may profit from the lapse of
time even though the value of the futures contract (or security
in some cases) underlying the option (and of the security
deliverable under the futures contract) has not changed.
Consequently, profit from option writing may or may not be
offset by a decline in the value of securities covering the
option. If the profit is not entirely offset, the Fund will
have a net gain from the options transaction, and the Fund's
total return will be enhanced. Likewise, the profit or loss
from writing put options may or may not be offset in whole or in
part by changes in the market value of securities acquired by
the Fund when the put options are closed.
As an alternative to purchasing call and put options on
index futures, the Fund may purchase or sell call or put options
on the underlying indices themselves. Such options would be
used in a manner identical to the use of options on index
futures.
The Fund may purchase put warrants and call warrants whose
values vary depending on the change in the value of one or more
specified securities indices ("index warrants"). Index warrants
are generally issued by banks or other financial institutions
and give the holder the right, at any time during the term of
the warrant, to receive upon exercise of the warrant a cash
payment from the issuer based on the value of the underlying
index at the time of exercise. In general, if the value of the
underlying index rises above the exercise price of the index
warrant, the holder of a call warrant will be entitled to
receive a cash payment from the issuer upon exercise based on
the difference between the value of the index and the exercise
price of the warrant; if the value of the underlying index
falls, the holder of a put warrant will be entitled to receive a
cash payment from the issuer upon exercise based on the
difference between the exercise price of the warrant and the
value of the index. The holder of a warrant would not be
entitled to any payments from the issuer at a time when, in the
case of a call warrant, the exercise price is less than the
value of the underlying index, or in the case of a put warrant,
the exercise price is less than the value of the underlying
index. If the Fund were not to exercise an index warrant prior
to its expiration, then the Fund would lose the amount of the
purchase price paid by it for the warrant.
The Fund will normally use index warrants in a manner
similar to its use of options on securities indices. The risks
of the Fund's use of index warrants are generally similar to
those relating to its use of index options. Unlike most index
options, however, index warrants are issued in limited amounts
and are not obligations of a regulated clearing agency, but are
backed only by the credit of the bank or other institution which
issues the warrant. Also, index warrants generally have longer
terms than index options. Although the Fund will normally
invest only in exchange-listed warrants, index warrants are not
likely to be as liquid as certain index options backed by a
recognized clearing agency. In addition, the terms of index
warrants may limit the Fund's ability to exercise the warrants
at such time, or in such quantities, as the Fund would otherwise
wish to do.
The Fund may buy and write options on foreign currencies in
a manner similar to that in which futures or forward contracts
on foreign currencies will be utilized. For example, a decline
in the U.S. dollar value of a foreign currency in which
portfolio securities are denominated will reduce the U.S. dollar
value of such securities, even if their value in the foreign
currency remains constant. In order to protect against such
diminutions in the value of the portfolio securities, the Fund
may buy put options on the foreign currency. If the value of
the currency declines, the Fund will have the right to sell such
currency for a fixed amount in U.S. dollars, thereby offsetting,
in whole or in part, the adverse effect on its portfolio.
Conversely, when a rise in the U.S. dollar value of a
currency in which securities to be acquired are denominated is
projected, thereby increasing the cost of such securities, the
Fund may buy call options on the foreign currency. The purchase
of such options could offset, at least partially, the effects of
the adverse movements in exchange rates. As in the case of
other types of options, however, the benefit to the Fund from
purchases of foreign currency options will be reduced by the
amount of the premium and related transactions costs. In
addition, if currency exchange rates do not move in the
direction or to the extent desired, the Fund could sustain
losses on transactions in foreign currency options that would
require the Fund to forego a portion or all of the benefits of
advantageous changes in those rates.
The Fund may also write options on foreign currencies. For
example, to hedge against a potential decline in the U.S. dollar
value of foreign currency denominated securities due to adverse
fluctuations in exchange rates, the Fund could, instead of
purchasing a put option, write a call option on the relevant
currency. If the expected decline occurs, the option will most
likely not be exercised and the diminution in value of portfolio
securities be offset at least in part by the amount of the
premium received.
Similarly, instead of purchasing a call option to hedge
against a potential increase in the U.S. dollar cost of
securities to be acquired, the Fund could write a put option on
the relevant currency which, if rates move in the manner
projected, will expire unexercised and allow the Fund to hedge
the increased cost up to the amount of the premium. If exchange
rates do not move in the expected direction, the option may be
exercised and the Fund would be required to buy or sell the
underlying currency at a loss, which may not be fully offset by
the amount of the premium. Through the writing of options on
foreign currencies, the Fund also may lose all or a portion of
the benefits which might otherwise have been obtained from
favorable movements in exchange rates.
All call options written by the Fund on foreign currencies
will be "covered." A call option written on a foreign currency
by the Fund is "covered" if the Fund owns the foreign currency
underlying the call or has an absolute and immediate right to
acquire that foreign currency without additional cash
consideration (or for additional cash consideration held in a
segregated account by its custodian) upon conversion or exchange
of other foreign currencies held in its portfolio. A call
option is also covered if the Fund has a call on the same
foreign currency in the same principal amount as the call
written if the exercise price of the call held (i) is equal to
or less than the exercise price of the call written or (ii) is
greater than the exercise price of the call written, if the
difference is maintained by the Fund in cash or high-grade
liquid assets in a segregated account with the Fund's custodian.
For this purpose, a call option is also considered covered if
the Fund owns securities denominated in (or which trade
principally in markets where settlement occurs in) the same
currency, which securities are readily marketable, and the Fund
maintains in a segregated account with its custodian cash or
liquid high-grade obligations in an amount that at all times at
least equals the excess of (x) the amount of the Fund's
obligation under the call option over (y) the value of such
securities.
Risks. The use of futures contracts and options involves risks.
One risk arises because of the imperfect correlation between
movements in the price of futures contracts and movements in the
price of the securities that are the subject of the hedge. The
Fund's hedging strategies will not be fully effective unless the
Fund can compensate for such imperfect correlation. There is no
assurance that the Fund will be able to effect such
compensation.
The correlation between the price movement of the futures
contract and the hedged security may be distorted due to
differences in the nature of the markets. For example, to the
extent that the Municipal Income Fund enters into futures
contracts on securities other than tax exempt bonds, the value
of such futures may not vary in direct proportion to the value
of tax exempt bonds that the Fund owns or intends to acquire,
because of an imperfect correlation between the movement of
taxable securities and tax exempt bonds. If the price of the
futures contract moves more than the price of the hedged
security, the relevant Fund would experience either a loss or a
gain on the future that is not completely offset by movements in
the price of the hedged securities. In an attempt to compensate
for imperfect price movement correlations, the Fund may purchase
or sell futures contracts in a greater dollar amount than the
hedged securities if the price movement volatility of the hedged
securities is historically greater than the volatility of the
futures contract. Conversely, the Fund may purchase or sell
fewer contracts if the volatility of the price of hedged
securities is historically less than that of the futures
contracts.
The price of index futures may not correlate perfectly with
movement in the relevant index due to certain market
distortions. First, all participants in the futures market are
subject to margin deposit and maintenance requirements. Rather
than meeting additional margin deposit requirements, investors
may close futures contracts through offsetting transactions,
which could distort the normal relationship between the index
and futures markets. Secondly, the deposit requirements in the
futures market are less onerous than margin requirements in the
securities market, and as a result the futures market may
attract more speculators than does the securities market. In
addition, trading hours for foreign stock index futures may not
correspond perfectly to hours of trading on the foreign exchange
to which a particular foreign stock index future relates. This
may result in a disparity between the price of index futures and
the value of the relevant index due to the lack of continuous
arbitrage between the index futures price and the value of the
underlying index. Finally, hedging transactions using stock
indices involve the risk that movements in the price of the
index may not correlate with price movements of the particular
portfolio securities being hedged.
Price movement correlation also may be distorted by the
illiquidity of the futures and options markets and the
participation of speculators in such markets. If an
insufficient number of contracts are traded, commercial users
may not deal in futures contracts or options because they do not
want to assume the risk that they may not be able to close out
their positions within a reasonable amount of time. In such
instances, futures and options market prices may be driven by
different forces than those driving the market in the underlying
securities, and price spreads between these markets may widen.
The participation of speculators in the market enhances its
liquidity. Nonetheless, speculators trading spreads between
futures markets may create temporary price distortions unrelated
to the market in the underlying securities.
Positions in futures contracts and options on futures
contracts may be established or closed out only on an exchange
or board of trade. There is no assurance that a liquid market
on an exchange or board of trade will exist for any particular
contract or at any particular time. The liquidity of markets in
futures contracts and options on futures contracts may be
adversely affected by "daily price fluctuation limits"
established by commodity exchanges which limit the amount of
fluctuation in a futures or options price during a single
trading day. Once the daily limit has been reached in a
contract, no trades may be entered into at a price beyond the
limit, which may prevent the liquidation of open futures or
options positions. Prices have in the past exceeded the daily
limit on a number of consecutive trading days. If there is not
a liquid market at a particular time, it may not be possible to
close a futures or options position at such time, and, in the
event of adverse price movements, the Fund would continue to be
required to make daily cash payments of variation margin.
However, if futures or options are used to hedge portfolio
securities, an increase in the price of the securities, if any,
may partially or completely offset losses on the futures
contract.
An exchange-traded option may be closed out only on a
national securities or commodities exchange which generally
provides a liquid secondary market for an option of the same
series. If a liquid secondary market for an exchange-traded
option does not exist, it might not be possible to effect a
closing transaction with respect to a particular option with the
result that the Fund would have to exercise the option in order
to realize any profit. If the Fund is unable to effect a
closing purchase transaction in a secondary market, it will be
not be able to sell the underlying security until the option
expires or it delivers the underlying security upon exercise.
Reasons for the absence of a liquid secondary market on an
exchange include the following: (i) there may be insufficient
trading interest in certain options; (ii) restrictions may be
imposed by an exchange on opening transactions or closing
transactions or both; (iii) trading halts, suspensions or other
restrictions may be imposed with respect to particular classes
or series of options or underlying securities; (iv) unusual or
unforeseen circumstances may interrupt normal operations on an
exchange; (v) the facilities of an exchange or the Options
Clearing Corporation or other clearing organization may not at
all times be adequate to handle current trading volume or (vi)
one or more exchanges could, for economic or other reasons,
decide or be compelled at some future date to discontinue the
trading of options (or a particular class or series of options),
in which event the secondary market on that exchange (or in that
class or series of options) would cease to exist, although
outstanding options on that exchange that had been issued by the
Options Clearing Corporation as a result of trades on that
exchange would continue to be exercisable in accordance with
their terms.
Because the specific procedures for trading foreign stock
index futures on futures exchanges are still under development,
additional or different margin requirements as well as
settlement procedures may be applicable to foreign stock index
futures at the time the International Equity Fund purchases
foreign stock index futures.
The successful use of transactions in futures and options
depends in part on the ability of a Fund's adviser or
subadviser(s) to forecast correctly the direction and extent of
interest rate movements within a given time frame. To the
extent interest rates move in a direction opposite to that
anticipated, the Fund may realize a loss on the hedging
transaction that is not fully or partially offset by an increase
in the value of portfolio securities. In addition, whether or
not interest rates move during the period that the Fund holds
futures or options positions, the Fund will pay the cost of
taking those positions (i.e., brokerage costs). As a result of
these factors, the Fund's total return for such period may be
less than if it had not engaged in the hedging transaction.
Options trading involves price movement correlation risks
similar to those inherent in futures trading. Additionally,
price movements in options on futures may not correlate with
price movements in the futures underlying the options. Like
futures, options positions may become less liquid because of
adverse economic circumstances. The securities covering written
option positions are expected to offset adverse price movements
if those options positions cannot be closed out in a timely
manner, but there is no assurance that such offset will occur.
Also, an option writer may not effect a closing purchase
transaction after it has been notified of the exercise of an
option.
Over-the-Counter Options. An over-the-counter option (an option
not traded on a national securities exchange) may be closed out
only with the other party to the original option transaction.
While the Fund will seek to enter into over-the-counter options
only with dealers who agree to or are expected to be capable of
entering into closing transactions with the Fund, there can be
no assurance that the Fund will be able to liquidate an over-the-
counter option at a favorable price at any time prior to its
expiration. Accordingly, the Fund might have to exercise an
over-the-counter option it holds in order to realize any profit
thereon and thereby would incur transactions costs on the
purchase or sale of the underlying assets. If the Fund cannot
close out a covered call option written by it, it will not be
able to sell the underlying security until the option expires or
is exercised. Furthermore, over-the-counter options are not
subject to the protections afforded purchasers of listed options
by the Options Clearing Corporation or other clearing
organizations.
The staff of the Securities and Exchange Commission (the
"SEC") has taken the position that over-the-counter options on
U.S. Government securities and the assets used as cover for
written over-the-counter options on U.S. Government securities
should generally be treated as illiquid securities for purposes
of the investment restrictions prohibiting the Government
Securities Fund from investing more than 15% of its net assets
in illiquid securities. However, if a dealer recognized by the
Federal Reserve Bank of New York as a "primary dealer" in U.S.
Government securities is the other party to an option contract
written by the Fund, and the Fund has the absolute right to
repurchase the option from the dealer at a formula price
established in a contract with the dealer, the SEC staff has
agreed that the Fund only needs to treat as illiquid that amount
of the "cover" assets equal to the amount at which (i) the
formula price exceeds (ii) any amount by which the market value
of the securities subject to the options exceeds the exercise
price of the option (the amount by which the option is "in-the-
money"). Although Back Bay Advisors, L.P. ("Back Bay
Advisors"), the Government Securities Fund's subadviser, does
not believe that over-the-counter options on U.S. Government
securities are generally illiquid, the Fund has agreed that
pending resolution of this issue it will conducts its operations
in conformity with the views of the SEC staff on such matters.
Back Bay Advisors has established standards for the
creditworthiness of the primary dealers with which the
Government Securities Fund may enter into over-the-counter
option contracts having the formula-price feature referred to
above. Those standards, as modified from time to time, are
implemented and monitored by Back Bay Advisors. Such contracts
will provide that the Fund has the absolute right to repurchase
an option it writes at any time at a repurchase price which
represents the fair market value, as determined in good faith
through negotiation between the parties, but which in no event
will exceed a price determined pursuant to a formula contained
in the contract. Although the specific details of the formula
may vary between contracts with different primary dealers, the
formula will generally be based on a multiple of the premium
received by the Fund for writing the option, plus the amount, if
any, by which the option is "in-the-money." The formula will
also include a factor to account for the difference between the
price of the securities and the exercise price of the option if
the option is written out-of-the-money. Although each agreement
will provide that the Fund's repurchase price shall be
determined in good faith (and that it shall not exceed the
maximum determined pursuant to the formula), the formula price
will not necessarily reflect the market value of the option
written, and therefore the Fund might pay more to repurchase the
option contract than the Fund would pay to close out a similar
exchange-traded option.
Economic Effects and Limitations. Income earned by the Fund
from its hedging activities will be treated as capital gain and,
if not offset by net recognized capital losses incurred by the
Fund, will be distributed to shareholders in taxable
distributions. Although gain from futures and options
transactions may hedge against a decline in the value of the
Fund's portfolio securities, that gain, to the extent not offset
by losses, will be distributed in light of certain tax
considerations and will constitute a distribution of that
portion of the value preserved against decline. If the
Municipal Income Fund is required to use taxable fixed-income
securities as margin, the portion of the Fund's dividends that
is taxable to shareholders will be larger than if that Fund is
permitted to use tax exempt bonds for that purpose.
The Fund intends to comply with guidelines of eligibility
for exclusion from the definition of the term "commodity pool
operator" adopted by the CFTC and the National Futures
Association, which regulate trading in the futures markets. The
Fund will use futures contracts and related options primarily
for bona fide hedging purposes within the meaning of CFTC
regulations. To the extent that the Fund holds positions in
futures contracts and related options that do not fall within
the definition of bona fide hedging transactions, the aggregate
initial margin and premiums required to establish such positions
will not exceed 5% of the fair market value of the Fund's net
assets, after taking into account unrealized profits and
unrealized losses on any such contracts it has entered into.
Future Developments. The above discussion relates to the Fund's
proposed use of futures contracts, options and options on
futures contracts currently available. The relevant markets and
related regulations are still in the developing stage. In the
event of future regulatory or market developments, the Fund may
also use additional types of futures contracts or options and
other investment techniques for the purposes set forth above.
Foreign Currency Hedging Transactions. To protect against a
change in the foreign currency exchange rate between the date on
which the Fund contracts to purchase or sell a security and the
settlement date for the purchase or sale, or to "lock in" the
equivalent of a dividend or interest payment in another
currency, the Fund might purchase or sell a foreign currency on
a spot (or cash) basis at the prevailing spot rate. If
conditions warrant, the Fund may also enter into contracts with
banks or broker-dealers to purchase or sell foreign currencies
at a future date ("forward contracts"). The Fund will maintain
cash or high-quality debt obligations in a segregated account
with the custodian in an amount at least equal to (i) the
difference between the current value of the Fund's liquid
holdings that settle in the relevant currency and the Fund's
outstanding obligations under currency forward contracts, or
(ii) the current amount, if any, that would be required to be
paid to enter into an offsetting forward currency contract which
would have the effect of closing out the original forward
contract. The Fund's use of currency hedging transactions may
be limited by tax considerations. The Fund may also purchase or
sell foreign currency futures contracts traded on futures
exchanges. Foreign currency futures contract transactions
involve risks similar to those of other futures transactions.
See "Options and Futures" above.
MANAGEMENT OF THE TRUSTS
Trustees
Trustees of the Trusts and their ages (in parentheses), addresses
and principal occupations during the past five years are as
follows:
GRAHAM T. ALLISON, JR.--Trustee (55); 79 John F. Kennedy Street,
Cambridge, MA 02138; Douglas Dillon Professor and Director
for the Center of Science and International Affairs, John F.
Kennedy School of Government; Special Advisor to the United
States Secretary of Defense; formerly, Assistant Secretary
of Defense; formerly, Dean, John F. Kennedy School of
Government.
KENNETH J. COWAN -- Trustee (63); One Beach Drive, S.E. #2103,
St. Petersburg, Florida 33701; Retired; formerly, Senior
Vice President-Finance and Chief Financial Officer, Blue
Cross of Massachusetts, Inc. and Blue Shield of
Massachusetts, Inc.; formerly, Director, Neworld Bank for
Savings and Neworld Bancorp.
SANDRA O. MOOSE -- Trustee (53); 135 E. 57th Street New York, NY
10022; Senior Vice President and Director, The Boston
Consulting Group, Inc. (management consulting); Director,
GTE Corporation and Rohm and Haas Company (specialty
chemicals).
HENRY L.P. SCHMELZER* -- Trustee and President (52); President,
Chief Executive Officer and Director, NEF Corporation;
President and Chief Executive Officer, New England Funds,
L.P.; President and Chief Executive Officer, New England
Funds Management, L.P. ("NEFM"); Director, Back Bay
Advisors, Inc. ("BBAI"); formerly, Director, New England
Securities Corporation ("New England Securities").
* Trustee deemed an "interested person" of the Trusts, as
defined in the Investment Company Act of 1940 (the "1940
Act").
JOHN A. SHANE -- Trustee (62); 300 Unicorn Park Drive, Woburn,
Massachusetts 01801; President, Palmer Service Corporation
(venture capital organization); General Partner, The Palmer
Organization and Palmer Partners L.P.; Director, Arch
Communications Group, Inc. (paging service); Director,
Dowden Publishing Company, Inc. (publishers of medial
magazines); Director, Eastern Bank Corporation; Director,
Gensym Corporation (expert system software); Director,
Overland Data, Inc. (manufacturer of computer tape drives);
Director, Summa Four, Inc. (manufacturer of telephone
switching equipment); Director, United Asset Management
Corporation (holding company for institutional money
management); formerly, Director, Abt Associates, Inc.
(consulting firm); formerly, Director, Aviv Corporation
(manufacturer of controllers); formerly, Director, Banyan
Systems, Inc. (manufacturer of network software); formerly,
Director, Cerjac Inc. (manufacturer of telephone testing
equipment).
PETER S. VOSS* -- Chairman of the Board, Chief Executive Officer
and Trustee (49); President and Chief Executive Officer, New
England Investment Companies, L.P. ("NEIC"); Director,
President and Chief Executive Officer, New England
Investment Companies, Inc. ("NEIC Inc."); Chairman of the
Board and Director, NEF Corporation; Chairman of the Board
and Director, BBAI; Director, New England Mutual Life
Insurance Company ("The New England"); formerly, Group Head
of International Banking, Trading and Securities, Security
Pacific National Bank and Chief Executive Officer, Security
Pacific Investment Group.
* Trustee deemed an "interested person" of the Trusts, as
defined in the Investment Company Act of 1940 (the "1940
Act").
PENDLETON P. WHITE -- Trustee (64); 6 Breckenridge Lane, Savannah,
Georgia 31411; Retired; formerly, President and Chairman of the
Executive Committee, Studwell Associates (executive search
consultants); formerly, Trustee, The Faulkner Corporation
(community hospital corporation).
[add new trustees]
Officers
Officers of the Trusts, in addition to Messrs. Schmelzer and Voss,
and their ages (in parentheses) and principal occupations during
the past five years are as follows:
BRUCE R. SPECA -- Executive Vice President (39); Executive Vice
President, NEF Corporation; Executive Vice President, New
England Funds, L.P.; Executive Vice President, NEFM.
FRANK NESVET -- Treasurer (52); Senior Vice President and Chief
Financial Officer, NEF Corporation ; Senior Vice President
and Chief Financial Officer, New England Funds, L.P.; Senior
Vice President and Chief Financial Officer, NEFM; formerly,
Executive Vice President, SuperShare Services Corporation
(____________).
ROBERT P. CONNOLLY -- Secretary and Clerk (41); Senior Vice
President and General Counsel, NEF Corporation; Senior Vice
President and General Counsel, New England Funds, L.P.;
Senior Vice President and General Counsel, NEFM; formerly,
Managing Director and General Counsel, Kroll Associates,
Inc. (business consulting company); formerly, Managing
Director and General Counsel, Equitable Capital Management
Corporation.
Each person listed above holds the same position(s) with
both Trusts. Previous positions during the past five years with
The New England, New England Funds, L.P. or NEFM are omitted, if
not materially different from a trustee's or officer's current
position with such entity. Each of the Trusts' trustees is also
a director or trustee of certain other investment companies for
which New England Funds, L.P. acts as principal underwriter and
Back Bay Advisors acts as investment adviser. Except as
indicated above, the address of each trustee and officer of the
Trusts is 399 Boylston Street, Boston, Massachusetts 02116.
Trustee Fees
The Trusts pay no compensation to their officers or to their
trustees who are interested persons thereof.
Each Trustee who is not an interested person of the Trusts
receives, in the aggregate for serving on the boards of the
Trusts and New England Cash Management Trust and New England Tax
Exempt Money Market Trust (all four trusts collectively, the "New
England Funds Trusts"), comprising a total of 22 mutual fund
portfolios, a retainer fee at the annual rate of $40,000 and
meeting attendance fees of $2,500 for each meeting of the boards
he or she attends and $1,500 for each meeting he or she attends
of a committee of the board of which he or she is a member. Each
committee chairman receives an additional retainer fee at the
annual rate of $2,500. These fees are allocated among the Funds
and the five other mutual fund portfolios in the New England
Funds Trusts based on a formula that takes into account, among
other factors, the net assets of each fund.
During the fiscal year ended December 31, 1995, the persons
who were then trustees of the Trusts received the amounts set
forth in the following table for serving as a trustee of the
Trusts and for also serving on the governing boards of the other
New England Funds Trusts, New England Zenith Fund ("Zenith") and
New England Variable Annuity Fund I ("NEVA"), comprising as of
April 15, 1996 a total of 37 mutual fund portfolios (not all of
which were in existence during all of 1995).
Pension Total
or Retire- Compensat
Aggregate Aggregate ment ion from
Compensat Compensat Benefits the New
ion from ion from Accrued England
New New as Part Estimated Funds
England England of Fund Annual Trusts,
Funds Funds Expenses Benefits Zenith
Trust I Trust II in Upon and NEVA
in in 1995 Retire- in
Name of Trustee 1995 1995 ------- ment 1995
- ------------------ --------- --------- ------- ---------
Graham T. Allison, $ $ $0 $0 $
Jr. (a)
Kenneth J. Cowan $ $ $0 $0 $
Joseph M. Hinchey $ $ $0 $0 $
(b)
Richard S. $ $ $0 $0 $
Humphrey, Jr. (b)
Robert B. $ $ $0 $0 $
Kittredge (b) (d)
Laurens MacLure $ $ $0 $0 $
(b) (d)
Sandra O. Moose $ $ $0 $0 $
James H. Scott (c) $ $ $0 $0 $
John A. Shane $ $ $0 $0 $
Joseph F. Turley $ $ $0 $0 $
(b)
Pendleton P. White $ $ $0 $0 $
(a) Became a trustee of the Trusts effective April 1, 1995.
(b) Resigned as a trustee of the Trusts effective May 1, 1995.
(c) Resigned as a trustee of the Trusts effective ________, 1996.
(d) Also includes compensation paid by the 5 CGM Funds, a group of
mutual funds for which Capital Growth Management Limited
Partnership ("CGM"), the investment adviser of the Growth
Fund, Zenith's Capital Growth Series and NEVA, serves as
investment adviser.
The Funds provide no pension or retirement benefits to
trustees, but have adopted a deferred payment arrangement under
which each trustee may elect not to receive fees from the Funds
on a current basis but to receive in a subsequent period an
amount equal to the value that such fees would have if they had
been invested in each Fund on the normal payment date for such
fees. As a result of this method of calculating the deferred
payments, each Fund, upon making the deferred payments, will be
in the same financial position as if the fees had been paid on
the normal payment dates.
At April 15, 1996, the officers and trustees of each Trust
as a group owned less than 1% of the outstanding shares of each
Fund.
Advisory and Subadvisory Agreements
Each Fund's advisory agreement between the Fund and NEFM
(between the Fund and CGM, in the case of the Growth Fund)
provides that the adviser (NEFM or CGM) will furnish or pay the
expenses of the applicable Fund for office space, facilities and
equipment, services of executive and other personnel of the
Trust and certain administrative services.
Each Fund pays all expenses not borne by its adviser or
subadviser(s) including, but not limited to, the charges and
expenses of the Fund's custodian and transfer agent, independent
auditors and legal counsel for the Fund and the Trusts'
independent trustees, all brokerage commissions and transfer
taxes in connection with portfolio transactions, all taxes and
filing fees, the fees and expenses for registration or
qualification of its shares under federal and state securities
laws, all expenses of shareholders' and trustees' meetings and
of preparing, printing and mailing reports to shareholders and
the compensation of trustees who are not directors, officers or
employees of the Fund's adviser, subadviser(s) or their
affiliates, other than affiliated registered investment
companies. Each Fund (except the Growth Fund) also pays NEFM
for certain legal and accounting services provided to the Fund
by NEFM.
Under each Fund's advisory agreement, if the total ordinary
business expenses of the Fund or the applicable Trust as a whole
for any fiscal year exceed the lowest applicable limitation
(based on percentage of average net assets or income) prescribed
by any state in which the shares of the Fund or Trust are
qualified for sale, the Fund's adviser shall pay such excess.
At present, the most restrictive state annual expense limitation
is 2 1/2% of the average annual net assets up to $30 million, 2%
of the next $70 million and 1 1/2% of such assets in excess of
$100 million. The adviser will not be required to reduce its
fee or pay such expenses to an extent or under circumstances
which might result in the Fund's inability to qualify as a
regulated investment company under the Code. The term
"expenses" is defined in the relevant advisory agreement and
excludes brokerage commissions, taxes, interest, distribution-
related expenses and extraordinary expenses. This means that
the distribution fees payable to New England Funds, L.P. under
each Fund's Distribution Agreement and the Distribution Plans
would be excluded from "expenses."
Each Fund's advisory agreement and (except in the case of
the Growth Fund) each Fund's subadvisory agreement between NEFM
and the subadviser that manages the Fund (or, in the case of the
Star Advisers Fund, each subadvisory agreement between NEFM and
the subadviser that manages a segment of the Fund's portfolio)
provides that it will continue in effect for two years from its
date of execution and thereafter from year to year if its
continuance is approved at least annually (i) by the board of
trustees of the relevant Trust by vote of a majority of the
outstanding voting securities of the relevant Fund and (ii) by
vote of a majority of the trustees who are not "interested
persons" of the relevant Trust, as that term is defined in the
1940 Act, cast in person at a meeting called for the purpose of
voting on such approval. Any amendment to an advisory or
subadvisory agreement must be approved by vote of a majority of
the outstanding voting securities of the relevant Fund and by
vote of a majority of the trustees of the relevant Trust who are
not such interested persons, cast in person at a meeting called
for the purpose of voting on such approval. Each advisory and
subadvisory agreement may be terminated without penalty by vote
of the relevant Trust's board of trustees or by vote of a
majority of the outstanding voting securities of the relevant
Fund, upon 60 days' written notice, or by the Fund's adviser
upon 90 days' written notice, and each terminates automatically
in the event of its assignment. Each subadvisory agreement also
may be terminated by the subadviser upon 90 days' notice and
automatically terminated upon termination of the related
advisory agreement. In addition, each advisory agreement will
automatically terminate if the Trust or the Fund shall at any
time be required by the Distributor to eliminate all reference
to the words "New England" or the letters "TNE" in the name of
the relevant Trust or the relevant Fund, unless the continuance
of the agreement after such change of name is approved by a
majority of the outstanding voting securities of the relevant
Fund and by a majority of the trustees who are not interested
persons of the relevant Trust or the Fund's adviser or
subadviser.
Each advisory and subadvisory agreement provides that the
adviser or subadviser shall not be subject to any liability in
connection with the performance of its services thereunder in
the absence of willful misfeasance, bad faith, gross negligence
or reckless disregard of its obligations and duties.
NEFM, formed in 1995, is a limited partnership whose sole
general partner, NEF Corporation, is a wholly-owned subsidiary
of NEIC Holdings, Inc. ("NEIC Holdings"), which is a wholly-
owned subsidiary of NEIC. NEF Corporation is also the sole
general partner of New England Funds, L.P., the distributor of
the Funds. NEIC owns the entire limited partnership interest in
each of NEFM and New England Funds, L.P.
NEIC's sole general partner, NEIC Inc., is a wholly-owned
subsidiary of The New England, which owns a majority limited
partnership interest in NEIC. NEIC and its [seven] subsidiary
or affiliated asset management firms, collectively, have more
than $__ billion of assets under management or administration.
Back Bay Advisors, formed in 1986, is a limited partnership
whose sole general partner, BBAI, is a wholly-owned subsidiary
of NEIC Holdings. NEIC owns the entire limited partnership
interest in Back Bay Advisors. Back Bay Advisors provides
investment management services to institutional clients,
including other registered investment companies and accounts of
The New England and its affiliates. Back Bay Advisors
specializes in fixed-income management and currently manages
over $_ billion in total assets.
Loomis, Sayles & Company, L.P. ("Loomis Sayles") was
organized in 1926 and is one of the oldest and largest
investment counsel firms in the country. An important feature
of the Loomis Sayles investment approach is its emphasis on
investment research. Recommendations and reports of the Loomis
Sayles research department are circulated throughout the Loomis
Sayles organization and are available to the individuals in the
Loomis Sayles organization who have been assigned the
responsibility for making investment decisions for the Funds'
portfolios. Loomis Sayles provides investment advice to
numerous other institutional and individual clients. These
clients include some accounts of The New England and its
affiliates ("New England Accounts"). Loomis Sayles is a limited
partnership whose sole general partner, Loomis, Sayles &
Company, Incorporated, is a wholly-owned subsidiary of NEIC
Holdings. NEIC owns the entire limited partnership interest in
Loomis Sayles.
CGM is a limited partnership whose sole general partner,
Kenbob, Inc., is a corporation owned in equal shares by Robert
L. Kemp and G. Kenneth Heebner. NEIC owns a majority limited
partnership interest in CGM. Prior to March 1, 1990, the Growth
Fund was managed by Loomis Sayles' Capital Growth Management
Division. On March 1, 1990, Loomis Sayles reorganized its
Capital Growth Management Division into CGM. In addition to
advising the Growth Fund, CGM acts as investment adviser of CGM
Capital Development Fund, CGM Trust, NEVA and Zenith's Capital
Growth Series. CGM also provides investment advice to other
institutional and individual clients.
Westpeak Investment Advisors, L.P. ("Westpeak"), organized
in 1991, provides investment management services to
institutional clients, including accounts of The New England and
its affiliates. Westpeak is a limited partnership whose sole
general partner, Westpeak Investment Advisors, Inc., is a wholly-
owned subsidiary of NEIC Holdings. NEIC owns the entire limited
partnership interest in Westpeak.
Draycott Partners, Ltd. ("Draycott"), formed in 1991,
provides investment management services to institutional
clients, including separate accounts of The New England.
Draycott was a wholly-owned subsidiary of NEIC until December
29, 1995, when NEIC sold Draycott to Cursitor Holdings Ltd. U.K.
("Cursitor"). Cursitor is an international investment
management group that had approximately $__ billion in assets
under management at _______, 1996. Alliance Capital Management
L.P. ("Alliance Capital") is expected to acquire the business of
Cursitor later in 1996. As a result of this transaction,
Draycott will become a wholly-owned subsidiary of a new entity,
Cursitor Alliance LLC, in which Alliance Capital will directly
and indirectly own a 93% interest. Alliance Capital Management
Corporation ("ACMC") is the sole general partner of, and the
owner of a 1% general partnership interest in, Alliance Capital.
ACMC is an indirectly wholly-owned subsidiary of The Equitable
Life Assurance Society of the United States, which is a wholly-
owned subsidiary of The Equitable Companies Incorporated, a
holding company controlled by AXA, a French insurance holding
company.
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 policy
holders of The New England and MetLife and receipt of certain
regulatory approvals. After such merger, NEIC Inc. will be a
wholly-owned subsidiary of MetLife, and MetLife will own,
directly or indirectly, a majority limited partnership in NEIC.
Berger Associates, Inc. ("Berger") serves as investment
adviser to the mutual funds in the Berger fund group and to
pension and profit-sharing plans and other institutional and
private investors. Kansas City Southern Industries, Inc.
("KCSI") a publicly-traded holding company, owns approximately
80% of the stock of Berger.
Founders Asset Management, Inc. ("Founders") was organized
in 1938. It serves as investment adviser to the Founders mutual
funds as well as to private accounts. Bjorn K. Borgen, Chief
Executive Officer of Founders, owns all of the stock of
Founders.
Janus Capital Corporation ("Janus Capital") serves as
investment adviser to the Janus mutual funds and to other mutual
funds, individual, charitable, corporate and retirement
accounts. KCSI owns approximately 83% of the outstanding voting
stock of Janus Capital. Thomas H. Bailey, President and
Chairman of the Board of Janus Capital, owns approximately 12%
of Janus Capital's voting stock and, by agreement with KCSI,
selects a majority of Janus Capital's board.
Certain officers and employees of Back Bay Advisors have
responsibility for portfolio management of other advisory
accounts and clients (including other registered investment
companies and accounts of affiliates of Back Bay Advisors) that
may invest in securities in which the Funds may invest. Where
Back Bay Advisors determines that an investment purchase or sale
opportunity is appropriate and desirable for more than one
advisory account, purchase and sale orders may be executed
separately or may be combined and, to the extent practicable,
allocated by Back Bay Advisors to the participating accounts.
Where advisory accounts have competing interests in a limited
investment opportunity, Back Bay Advisors will allocate an
investment purchase opportunity based on the relative time the
competing accounts have had funds available for investment, and
the relative amounts of available funds, and will allocate an
investment sale opportunity based on relative cash requirements
and the time the competing accounts have had investments
available for sale. It is Back Bay Advisors' policy to
allocate, to the extent practicable, investment opportunities to
each client over a period of time on a fair and equitable basis
relative to its other clients. It is believed that the ability
of the Funds for which Back Bay Advisors acts as subadviser to
participate in larger volume transactions in this manner will in
some cases produce better executions for the Funds. However, in
some cases, this procedure could have a detrimental effect on
the price and amount of a security available to a Fund or the
price at which a security may be sold. The trustees are of the
view that the benefits of retaining Back Bay Advisors as
investment manager outweigh the disadvantages, if any, that
might result from participating in such transactions.
Certain officers of Loomis Sayles have responsibility for
the management of other client portfolios. The Pasadena office
of Loomis Sayles buys and sells portfolio securities for the
Value and Balanced Funds, the Chicago office buys and sells
portfolio securities for the Capital Growth Fund, the Detroit
office buys and sells portfolio securities for the segment of
the Star Advisers Fund's portfolio that is advised by Loomis
Sayles and the Boston office buys and sells portfolio securities
for the Strategic Income Fund. These offices buy and sell
securities independently of one another. The other investment
companies and clients served by Loomis Sayles sometimes invest
in securities in which the Capital Growth, Value, Balanced and
Star Advisers Funds also invest. If one of these Funds and such
other clients advised by the same office of Loomis Sayles desire
to buy or sell the same portfolio securities at about the same
time, purchases and sales will be allocated, to the extent
practicable, on a pro rata basis in proportion to the amounts
desired to be purchased or sold for each. It is recognized that
in some cases the practices described in this paragraph could
have a detrimental effect on the price or amount of the
securities which each of the Funds purchases or sells. In other
cases, however, it is believed that these practices may benefit
the relevant Fund. It is the opinion of the trustees that the
desirability of retaining Loomis Sayles as subadviser for the
Strategic Income, Capital Growth, Value, Balanced and Star
Advisers Funds outweighs the disadvantages, if any, which might
result from these practices.
Certain officers and employees of Draycott have
responsibility for portfolio management for other clients
(including affiliates of Draycott), some of which may invest in
securities in which the International Equity Fund also may
invest. When the Fund and other clients desire to purchase or
sell the same security at or about the same time, purchase and
sale orders are ordinarily placed and confirmed separately but
may be combined to the extent practicable and allocated as
nearly as practicable on a pro rata basis in proportion to the
amounts desired to be purchased or sold for each. It is
believed that the ability of those clients to participate in
larger volume transactions will in some cases produce better
executions for the Fund. However, in some cases this procedure
could have a detrimental effect on the price and amount of a
security available to the Fund or the price at which a security
may be sold. It is the opinion of the trustees that the
desirability of retaining Draycott as subadviser to the Fund
outweighs the disadvantages, if any, which might result from
such procedure.
In addition to managing a segment of the Star Advisers
Fund's portfolio, Berger serves as investment adviser or
subadviser to other mutual funds, pension and profit-sharing
plans, and other institutional and private investors. At times,
Berger may effect purchases and sales of the same investment
securities for the Fund, and for one or more other investment
accounts. In such cases, it will be the practice of Berger to
allocate the purchase and sale transactions among the Fund and
the accounts in such manner as it deems equitable. In making
such allocation, the main factors to be considered are the
respective investment objectives of the Fund and the accounts,
the relative size of portfolio holdings of the same or
comparable securities, the current availability of cash for
investment by the Fund and each account, the size of investment
commitments generally held by the Fund and each account, and the
opinions of the persons at Berger responsible for selecting
investments for the Fund and the accounts. It is the opinion of
the trustees that the desirability of retaining Berger as a
subadviser to the Fund outweighs the disadvantages, if any,
which might result from these procedures.
The segment of the Star Advisers Fund managed by Founders
and one or more of the other mutual funds or clients to which
Founders serves as investment adviser may own the same
securities from time to time. If purchases or sales of
securities for the segment of the Fund advised by Founders and
other funds or clients advised by Founders arise for
consideration at or about the same time, transactions in such
securities will be made, insofar as feasible, for the Fund and
other clients in a manner deemed equitable to all. To the
extent that transactions on behalf of more than one client
during the same period may increase the demand for securities
being purchased or the supply of securities being sold, there
may be an adverse effect on the price and amount of the security
being purchased or sold for the Fund. However, the ability of
the Fund to participate in volume transactions may possibly
produce better executions for the Fund in some cases. It is the
opinion of the trustees that the desirability of retaining
Founders as a subadviser to the Fund outweighs the
disadvantages, if any, which might result from these procedures.
Janus Capital performs investment advisory services for
other mutual funds, individual, charitable, corporate and
retirement accounts (the "private accounts"), as well as for a
segment of the portfolio of the Fund. Although the overall
investment objective of the Fund may differ from the objectives
of the private accounts and other funds served by Janus Capital,
there may be securities that are suitable for the portfolio of
the Fund as well as for one or more of the other funds or the
private accounts. Therefore, purchases and sales of the same
investment securities may be recommended for the Fund and for
one or more of the other funds or private accounts. To the
extent that the Fund and one or more of the other funds or
private accounts seek to acquire or sell the same security at
the same time, either the price obtained by the Fund or the
amount of securities that may be purchased or sold by the Fund
at one time may be adversely affected. In such cases, the
purchase and sale transactions are allocated among the Fund, the
other funds and the private accounts in a manner believed by the
management of Janus Capital to be equitable to each. It is the
opinion of the trustees that the desirability of retaining Janus
Capital as a subadviser to the Fund outweighs the disadvantages,
if any, which might result from these procedures.
Certain officers of Westpeak have responsibility for
portfolio management for other clients (including affiliates of
Westpeak), some of which may invest in securities in which the
Growth Opportunities Fund also may invest. When the Fund and
other clients desire to purchase or sell the same security at or
about the same time, the purchase and sale orders are ordinarily
placed and confirmed separately but may be combined to the extent
practicable and allocated as nearly as practicable on a pro rata
basis in proportion to the amounts desired to be purchased or
sold for each. It is believed that the ability of those clients
to participate in larger volume transactions will in some cases
produce better executions for the Fund. However, in some cases
this procedure could have a detrimental effect on the price and
amount of a security available to the Fund or the price at which
a security may be sold. It is the opinion of the trustees of the
Fund that the desirability of retaining Westpeak as subadviser
for the Fund outweighs the disadvantages, if any, which might
result from these practices.
Distribution Agreements and Rule 12b-1 Plans. Under a
separate agreement with each Fund, New England Funds, L.P.
serves as the general distributor of each class of shares of the
Funds. Under these agreements, New England Funds, L.P. is not
obligated to sell a specific number of shares. New England
Funds, L.P. bears the cost of making information about the Funds
available through advertising and other means and the cost of
printing and mailing Prospectuses to persons other than
shareholders. Each Fund pays the cost of registering and
qualifying its shares under state and federal securities laws
and the distribution of Prospectuses to existing shareholders.
New England Funds, L.P. is compensated under each agreement
through receipt of the sales charges on Class A shares described
below under "Net Asset Value and Public Offering Price" and is
paid by the Funds the service and distribution fees described in
the Prospectus.
As described in the Prospectuses, each Fund has adopted
Rule 12b-1 plans (the "Plans") for its Class A, Class B and
Class C shares which, among other things, permit it to pay the
Fund's distributor (currently New England Funds, L.P.) monthly
fees out of its net assets. Pursuant to Rule 12b-1 under the
1940 Act, each Plan was approved by the shareholders of each
Fund, and (together with the related Distribution Agreement) by
the board of trustees, including a majority of the trustees who
are not interested persons of the relevant Trust (as defined in
the 1940 Act) and who have no direct or indirect financial
interest in the operation of the Plan or the Distribution
Agreement (the "Independent Trustees").
Each Plan may be terminated by vote of a majority of the
relevant Independent Trustees, or by vote of a majority of the
outstanding voting securities of the relevant class of shares of
the relevant Fund. Each Plan may be amended by vote of the
relevant trustees, including a majority of the relevant
Independent Trustees, cast in person at a meeting called for
that purpose. Any change in any Plan that would materially
increase the fees payable thereunder by the relevant class of
shares of the relevant Fund requires approval by vote of the
holders of a majority of such shares outstanding. The Trusts'
trustees review quarterly a written reports of such costs and
the purposes for which such costs have been incurred. For so
long as a Plan is in effect, selection and nomination of those
trustees who are not interested persons of the relevant Trust
shall be committed to the discretion of such disinterested
persons.
New England Funds, L.P. has entered into selling agreements
with investment dealers, including New England Securities, an
affiliate of New England Funds, L.P., for the sale of the Funds'
shares. New England Securities is registered as a broker-dealer
under the Securities Exchange Act of 1934. New England Funds,
L.P. may at its expense pay an amount not to exceed 0.50% of the
amount invested to dealers who have selling agreements with the
Distributor. Class Y shares of the Funds may be offered by
registered representatives of New England Securities who are
also employees of New England Investment Associates, Inc.
("NEIA"), an indirect, wholly-owned subsidiary of NEIC. NEIA
may receive compensation from each Fund's adviser or subadviser
with respect to sales of Class Y shares.
The Distribution Agreement for any Fund may be terminated
at any time on 60 days' written notice without payment of any
penalty by New England Funds, L.P. or by vote of a majority of
the outstanding voting securities of the relevant Fund or by
vote of a majority of the relevant Independent Trustees.
The Distribution Agreements and the Plans will continue in
effect for successive one-year periods, provided that each such
continuance is specifically approved (i) by the vote of a
majority of the relevant Independent Trustees and (ii) by the
vote of a majority of the entire board of trustees cast in
person at a meeting called for that purpose or by a vote of a
majority of the outstanding securities of a Fund (or the
relevant class, in the case of the Plans).
With the exception of New England Funds, L.P., New England
Securities and their direct and indirect corporate parents (NEIC
and The New England), no interested person of the Trusts nor any
trustee of the Trusts had any direct or indirect financial
interest in the operation of the Plans or any related agreement.
Benefits to the Funds and their shareholders resulting from
the Plans are believed to include (1) enhanced shareholder
service, (2) asset retention, (3) enhanced bargaining position
with third party service providers and economies of scale
arising from having higher asset levels and (4) portfolio
management opportunities arising from having an enhanced
positive cash flow.
New England Funds, L.P. controls the words "New England" in
the names of the Trusts and the Funds and if it should cease to
be the distributor, New England Funds Trust I, New England Funds
Trust II or the affected Fund may be required to change their
names and delete these words or letters. New England Funds,
L.P. also acts as general distributor for New England Cash
Management Trust and New England Tax Exempt Money Market Trust.
During the year ended December 31, 1993, New England Funds,
L.P. received commissions on the sale of the Class A shares of
New England Funds Trust I aggregating $12,478,105, of which
$1,428,524 was retained by New England Funds, L.P. During the
years ended December 31, 1994 and 1995, New England Funds, L.P.
received commissions on the sale of shares of New England Funds
Trust I aggregating $9,569,312 and $_________, respectively, of
which $8,290,120 and $_________, respectively, was allowed to
other securities dealers and the balanced retained by New
England Funds, L.P. See "Other Arrangements" for information
about amounts received by New England Funds, L.P. from New
England Funds Trust I's investment advisers and subadvisers or
the Funds directly for providing certain administrative services
relating to New England Funds Trust I.
During the years ended December 31, 1993, 1994 and 1995,
New England Funds, L.P. received commissions on the sale of the
Class A shares of New England Funds Trust II aggregating
$5,970,295, $2,071,744 and $_________, respectively, of which
$573,825, $1,780,651 and $_________, respectively, were
reallowed to other securities dealers and the balance retained
by New England Funds, L.P. See "Other Arrangements" for
information about amounts received by New England Funds, L.P.
from Back Bay Advisors or the Funds directly for providing
certain administrative services relating to New England Funds
Trust II.
Custodial Arrangements. State Street Bank and Trust
Company ("State Street Bank"), 225 Franklin Street, Boston,
Massachusetts 02110, is the Trusts' custodian. As such, State
Street Bank holds in safekeeping certificated securities and
cash belonging to each Fund and, in such capacity, is the
registered owner of securities in book-entry form belonging to
each Fund. Upon instruction, State Street Bank receives and
delivers cash and securities of each Fund in connection with
Fund transactions and collects all dividends and other
distributions made with respect to Fund portfolio securities.
State Street Bank also maintains certain accounts and records of
the Trusts and calculates the total net asset value, total net
income and net asset value per share of each Fund on a daily
basis.
Independent Accountants. New England Funds Trust I's
independent accountants are Price Waterhouse LLP, 160 Federal
Street, Boston, Massachusetts 02110. New England Funds Trust
II's independent accountants are Coopers & Lybrand LLP, 1 Post
Office Square, Boston, MA 02109. The independent accountants of
each Trust conduct an annual audit of that Trust's financial
statements, assist in the preparation of federal and state
income tax returns and consult with the Trusts as to matters of
accounting and federal and state income taxation. The
information concerning financial highlights in the Prospectuses,
and financial statements contained in the Funds' annual reports
for the year ended December 31, 1995 and incorporated by
reference into this statement, have been so included in reliance
on the reports of each Trusts' independent accountants, given on
the authority of such firms as experts in auditing and
accounting.
Other Arrangements
Prior to January 2, 1996 (_____, 1996 in the case of the
Growth Fund), office space, facilities, equipment and certain
other administrative services for the Funds in New England Funds
Trust I (except the International Equity, Capital Growth and
Star Advisers Funds) were furnished by New England Securities,
an affiliate of New England Funds, L.P., under service
agreements with CGM, Loomis Sayles or Back Bay Advisors. For
the years ended December 31, 1994 and 1995, New England
Securities received $2,261,375 and $________, respectively, from
the Fund's advisers under these agreements. In the case of the
Capital Growth Fund, New England Funds, L.P. provided similar
services under a service agreement with Loomis Sayles. For the
years ended December 31, 1994 and 1995, New England Funds, L.P.
received $278,333 and $_______, respectively, from Loomis Sayles
under this agreement. In the case of the Star Advisers Fund,
New England Funds, L.P. provided similar services under a
service agreement with NEIC. For the years ended December 31,
1994 and 1995, New England Funds, L.P. received $269,302 and
$______, respectively, from NEIC under this agreement. In the
case of the International Equity Fund, New England Funds, L.P.
provided similar services prior to December 29, 1995 under an
administrative services agreement with the Fund under which the
International Equity Fund paid a fee at the annual rate of 0.10%
of the average daily net assets attributable to the Fund's Class
A, Class B and Class C shares and 0.05% of such assets
attributable to the Fund's Class Y shares. For the fiscal years
ended December 31, 1994 and 1995, New England Funds, L.P.
received $167,715 and $_______, respectively, from the
International Equity Fund for these services. Class C shares
did not commence operations until January 3, 1995.
Prior to January 2, 1996, New England Funds, L.P. provided
similar services for the Growth Opportunities, Limited Term U.S.
Government, Massachusetts and High Income Funds under an
agreement with Back Bay Advisors. For the years ended December
31, 1994 and 1995, New England Funds, L.P. received $676,787 and
$______, respectively, from Back Bay Advisors under this
agreement. In the case of the Adjustable Rate Fund, New England
Funds, L.P. provided similar services under an Administrative
Services Agreement with the Fund, under which the Fund paid a
fee at the annual rate of 0.15% of the first $200 million of the
Fund's average daily net assets, 0.135% of the next $300 million
of such assets and 0.12% of such assets in excess of $500
million. For the years ended December 31, 1994 and 1995, New
England Funds, L.P. received $382,335 and $______, respectively,
from the Adjustable Rate Fund for these services. In the case
of the California and New York Funds, New England Funds, L.P.
provided similar services under Administrative Services
Agreements with the Funds under which the Funds paid a fee at
the rate of 0.125% of each Fund's average daily net assets. For
the year ended December 31, 1994, New England Funds, L.P. waived
its fees of $49,097 and $25,557 for these services for the
California and New York Funds, respectively, and for the year
ended December 31, 1995, New England Funds, L.P. [waived its]
[received] fees of $______ and $______ for these services from
the California and New York Funds, respectively. Since _______,
1996, New England Funds, L.P. has provided similar services for
the Growth Fund under an administrative services agreement with
CGM.
Pursuant to a contract between the Funds and New England
Funds, L.P., New England Funds, L.P. acts as shareholder
servicing and transfer agent for the Funds and is responsible
for services in connection with the establishment, maintenance
and recording of shareholder accounts, including all related tax
and other reporting requirements and the implementation of
investment and redemption arrangements offered in connection
with the sale of the Funds' shares. The Funds pay per-account
fees to New England Funds, L.P. for these services in the amount
of $____ for the Balanced Fund, Growth Fund, Capital Growth
Fund, Value Fund, International Equity Fund, Star Advisers Fund,
Growth Opportunities Fund and Strategic Income Fund; and $____
for the High Income Fund, Massachusetts Tax Free Income Fund,
Limited Term U.S. Government Fund, Adjustable Rate Fund,
Intermediate Term Tax Free Fund of California, Intermediate Term
Tax Free Fund of New York, Bond Income Fund, Municipal Income
Fund and Government Securities Fund. New England Funds, L.P.
has subcontracted with State Street Bank for it to provide,
through its subsidiary, Boston Financial Data Services, Inc.
("BFDS") transaction processing, mail and other services. For
these services, New England Funds, L.P. pays BFDS a per account
fee of $____ for the Intermediate Term Tax Free Fund of
California, Intermediate Term Tax Free Fund of New York, Bond
Income Fund, Municipal Income Fund, Adjustable Rate Fund,
Government Securities Fund and Strategic Income Fund; $____ for
Massachusetts Tax Free Income Fund, High Income Fund and Limited
Term U.S. Government Fund; $____ for International Equity Fund,
Capital Growth Fund, Balanced Fund, Value Fund, Growth Fund and
Star Advisers Fund; and $____ for the Growth Opportunities Fund.
In addition, during the fiscal year ended 1995, New England
Funds, L.P. received legal and accounting services fees paid by
the Growth Fund, Balanced Fund, Value Fund, Bond Income Fund,
Municipal Income Fund, Government Securities Fund, International
Equity Fund, Capital Growth Fund and Star Advisers Funds in the
amounts of $______, $______, $______, $______, $______, $______,
$______, $______ and $______, respectively.
PORTFOLIO TRANSACTIONS AND BROKERAGE
All Funds (except segments of the Star Advisers Fund
advised by Berger and Janus Capital). In placing orders for the
purchase and sale of portfolio securities for each Fund, Back
Bay Advisors, CGM, Draycott, Founders, Westpeak and Loomis
Sayles always seek the best price and execution. Some of each
Fund's portfolio transactions are placed with brokers and
dealers who provide Back Bay Advisors, CGM, Draycott, Founders,
Westpeak or Loomis Sayles with supplementary investment and
statistical information or furnish market quotations to that
Fund, the other Funds or other investment companies advised by
Back Bay Advisors, CGM, Draycott, Founders, Westpeak or Loomis
Sayles. The business would not be so placed if the Funds would
not thereby obtain the best price and execution. Although it is
not possible to assign an exact dollar value to these services,
they may, to the extent used, tend to reduce the expenses of
Back Bay Advisors, CGM, Draycott, Founders, Westpeak or Loomis
Sayles. The services may also be used by Back Bay Advisors,
CGM, Draycott, Founders, Westpeak or Loomis Sayles in connection
with their other advisory accounts and in some cases may not be
used with respect to the Funds.
In placing orders for the purchase and sale of equity
securities, each Fund's adviser or subadviser selects only
brokers which it believes are financially responsible, will
provide efficient and effective services in executing, clearing
and settling an order and will charge commission rates that,
when combined with the quality of the foregoing services, will
produce best price and execution for the transaction. This does
not necessarily mean that the lowest available brokerage
commission will be paid. However, the commissions are believed
to be competitive with generally prevailing rates. Each Fund's
adviser or subadviser will use its best efforts to obtain
information as to the general level of commission rates being
charged by the brokerage community from time to time and will
evaluate the overall reasonableness of brokerage commissions
paid on transactions by reference to such data. In making such
evaluation, all factors affecting liquidity and execution of the
order, as well as the amount of the capital commitment by the
broker in connection with the order, are taken into account. No
Fund will pay a broker a commission at a higher rate than
otherwise available for the same transaction in recognition of
the value of research services provided by the broker or in
recognition of the value of any other services provided by the
broker which do not contribute to the best price and execution
of the transaction.
Star Advisers Fund (segment advised by Berger). Berger
places portfolio transactions for its segment of the Star
Advisers Fund only with brokers and dealers who render
satisfactory service in the execution of orders at the most
favorable prices and at reasonable commission rates. However,
Berger may place such transactions with a broker with whom it
has negotiated a commission that is in excess of the commission
then being charged by another broker where such commission is
the result of Berger having reasonably taken into account the
quality and reliability of the brokerage services, including,
without limitation, the availability and value of research
services or execution services. Berger places portfolio
brokerage business of its segment of the Star Advisers Fund with
brokers who provide useful research services to Berger. Such
research services typically consist of studies made by
investment analysts or economists relating either to the past
record of and future outlook for companies and the industries in
which they operate, or to national and worldwide economic
conditions, monetary conditions and trends in investors'
sentiment, and the relationship of these factors to the
securities market. In addition, such analysts may be available
for regular consultation so that Berger may be apprised of
current developments in the above-mentioned factors. The
research services received from brokers are often helpful to
Berger in performing its investment advisory responsibilities to
its segment of the Star Advisers Fund, but they are not
essential, and the availability of such services from brokers
does not reduce the responsibility of Berger advisory personnel
to analyze and evaluate the securities in which its segment of
the Star Advisers Fund invests. The research services obtained
as a result of the Fund's brokerage business also will be useful
to Berger in making investment decisions for its other advisory
accounts, and, conversely, information obtained by reason of
placement of brokerage business of such other accounts may be
used by Berger in rendering investment advice to its segment of
the Star Advisers Fund. Although such research services may be
deemed to be of value to Berger, they are not expected to
decrease the expenses that Berger would otherwise incur in
performing investment advisory services for its segment of the
Star Advisers Fund nor will the subadvisory fees that are
received by Berger from NEFM for providing services to the Fund
be reduced as result of the availability of such research
services from brokers.
Star Advisers Fund (segment advised by Janus Capital).
Decisions as to the assignment of portfolio business for the
segment of the Star Advisers Fund's portfolio advised by Janus
Capital and negotiation of its commission rates are made by
Janus Capital, whose policy is to obtain the "best execution"
(prompt and reliable execution at the most favorable securities
price) of all portfolio transactions. In placing portfolio
transactions for its segment of the Star Advisers Fund's
portfolio, Janus Capital may agree to pay brokerage commissions
for effecting a securities transaction, in an amount higher than
another broker or dealer would have charged for effecting that
transaction as authorized, under certain circumstances, by the
Securities Exchange Act of 1934.
In selecting brokers and dealers and in negotiating
commissions, Janus Capital considers a number of factors,
including but not limited to: Janus Capital's knowledge of
currently available negotiated commission rates or prices of
securities currently available and other current transaction
costs; the nature of the securities being traded; the size and
type of the transaction; the nature and character of the markets
for the security to be purchased or sold; the desired timing of
the trade; the activity existing and expected in the market for
the particular security; confidentiality; the quality of the
execution, clearance and settlement services; financial
stability of the broker or dealer; the existence of actual or
apparent operational problems of any broker or dealer; and
research products or services provided. In recognition of the
value of the foregoing factors, Janus Capital may place
portfolio transactions with a broker or dealer with whom it has
negotiated a commission that is in excess of the commission
another broker or dealer would have charged for effecting that
transaction if Janus Capital determines in good faith that such
amount of commission was reasonable in relation to the value of
the brokerage and research provided by such broker or dealer
viewed in terms of either that particular transaction or of the
overall responsibilities of Janus Capital. Research may include
furnishing advice, either directly or through publications or
writing, as to the value of securities, the advisability of
purchasing or selling specific securities and the availability
of securities or purchasers or sellers of securities; furnishing
seminars, information, analyses and reports concerning issuers,
industries, securities, trading markets and methods, legislative
developments, changes in accounting practices, economic factors
and trends and portfolio strategy; access to research analysts,
corporate management personnel, industry experts, economists and
government officials; comparative performance evaluation and
technical measurement services and quotation services, and
products and other services (such as third party publications,
reports and analyses, and computer and electronic access,
equipment, software, information and accessories that deliver,
process or otherwise utilize information, including the research
described above) that assist Janus Capital in carrying out its
responsibilities. Research received from brokers or dealers is
supplemental to Janus Capital's own research efforts.
Janus Capital may use research products and services in
servicing other accounts in addition to the Star Advisers Fund.
If Janus Capital determines that any research product or service
has a mixed use, such that it also serves functions that do not
assist in the investment decision-making process, Janus Capital
may allocate the costs of such service or product accordingly.
Only that portion of the product or service that Janus Capital
determines will assist it in the investment decision-making
process may be paid for in brokerage commission dollars. Such
allocation may create a conflict of interest for Janus Capital.
Janus Capital may also consider sales of shares of mutual
funds advised by Janus Capital by a broker-dealer or the
recommendation of a broker-dealer to its customers that they
purchase shares of such funds as a factor in the selection of
broker-dealers to execute portfolio transactions for the Star
Advisers Fund. In placing portfolio business with such broker-
dealers, Janus Capital will seek the best execution of each
transaction.
General
Portfolio turnover is not a limiting factor with respect to
investment decisions. The Funds anticipate that their portfolio
turnover rates will vary significantly from time to time
depending on the volatility of economic and market conditions.
Subject to procedures adopted by the Board of Trustees of
the Trusts, the Funds' brokerage transactions may be executed by
brokers that are affiliated with NEIC or the Funds' advisers or
subadvisers. Any such transactions will comply with Rule 17e-1
under the 1940 Act.
The Bond Income, Government Securities and Municipal Income
Funds and all the Funds of New England Funds Trust II may pay,
[but during their three most recent fiscal years have not paid,]
brokerage commissions to New England Securities for acting as
the respective Fund's agent on purchases and sales of
securities. SEC rules require that the commissions paid to New
England Securities by a Fund for portfolio transactions not
exceed "usual and customary" brokerage commissions. The rules
define "usual and customary" commissions to include amounts
which are "reasonable and fair compared to the commission, fee
or other remuneration received or to be received by other
brokers in connection with comparable transactions involving
similar securities being purchased or sold on a securities
exchange during a comparable period of time." The trustees of
each Trust, including those who are not "interested persons" of
the Trust, have adopted procedures for evaluating the
reasonableness of commissions paid to New England Securities and
will review these procedures periodically.
Under the 1940 Act, persons affiliated with each Trust are
prohibited from dealing with each Trust's Funds as a principal
in the purchase and sale of securities. Since transactions in
the over-the-counter market usually involve transactions with
dealers acting as principals for their own accounts, affiliated
persons of the Trusts, such as New England Securities, may not
serve as the Trusts' dealer in connection with such
transactions.
It is expected that the portfolio transactions in fixed-
income securities will generally be with issuers or dealers on a
net basis without a stated commission. Securities firms may
receive brokerage commissions on transactions involving options,
futures and options on futures and the purchase and sale of
underlying securities upon exercise of options. The brokerage
commissions associated with buying and selling options may be
proportionately higher than those associated with general
securities transactions.
DESCRIPTION OF THE TRUSTS AND OWNERSHIP OF SHARES
New England Funds Trust I is organized as a Massachusetts
business trust under the laws of Massachusetts by an Agreement
and Declaration of Trust (a "Declaration of Trust") dated June
7, 1985, as amended, and is a "series" company as described in
Section 18(f)(2) of the 1940 Act. The Trust has eleven separate
portfolios. The Growth Fund currently offers one class of
shares, the Municipal Income Fund currently offers two classes
of shares, the Capital Growth, Strategic Income and Government
Securities Funds and New England Star Worldwide Fund each
currently offers three classes of shares and the Balanced,
Value, International Equity, Star Advisers, Strategic Income and
Bond Income Funds each currently offers four classes of shares.
Until September 1986, the name of the Trust was "New England
Life Government Securities Trust"; from September 1986 to April
1994, its name was "The New England Funds." Prior to January 5,
1996, the name of the Municipal Income Fund was "New England Tax
Exempt Income Fund." The initial portfolio of the Trust (the
Fund now called New England Government Securities Fund)
commenced operations on September 16, 1985. The International
Equity Fund commenced operations on May 22, 1992. The Capital
Growth Fund was organized in 1992 and commenced operations on
August 3, 1992. The Star Advisers Fund was organized in 1994
and commenced operations on July 7, 1994. The Strategic Income
Fund was organized in 1995 and commenced operations on May 1,
1995. New England Star Worldwide Fund was organized in 1995 and
commenced operations on December 29, 1995. The remaining Funds
in the Trust are successors to the following corporations which
commenced operations in the years indicated:
Corporation Date of Commencement
NEL Growth Fund, Inc. 1968
NEL Retirement Equity Fund, 1969
Inc.*
NEL Equity Fund, Inc.** 1968
NEL Income Fund, Inc.*** 1973
NEL Tax Exempt Bond Fund, 1976
Inc.****
* Predecessor of the Value Fund
** Predecessor of the Balanced Fund
*** Predecessor of the Bond Income
Fund
**** Predecessor of the Municipal
Income Fund
New England Funds Trust II is organized as a Massachusetts
business trust pursuant to a Declaration of Trust dated May 6,
1931, as amended, and consisted of a single investment portfolio
(now the Growth Opportunities Fund) until January 1989, when the
Trust was reorganized as a "series" company as described in
Section 18(f)(2) of the 1940 Act. The Trust has eight separate
portfolios. The High Income, Massachusetts, California and New
York Funds each currently offers two classes of shares, the
Adjustable Rate U.S. Government Fund and Growth Fund of Israel
each currently offers three classes of shares and the Growth
Opportunities and Limited Term U.S. Government Funds each
currently offers four classes of shares. Until December 1988,
the name of the Trust was "Investment Trust of Boston"; from
December 1988 until April 1992, its name was "Investment Trust
of Boston Funds"; from April 1992 until April 1994, its name was
"TNE Funds Trust." The High Income Fund and the Massachusetts
Fund are successors to separate investment companies that were
organized in 1983 and 1984, respectively, and reorganized as
series of the Trust in January 1989. The Limited Term U.S.
Government Fund was organized in 1988 and commenced operations
in January 1989. The Adjustable Rate Fund was organized in 1991
and commenced operations on October 18 of that year. The
California and New York Funds were organized in 1993 and
commenced operations on April 23 of that year. Growth Fund of
Israel was organized in 1995 and commenced operations on
_________, 1996.
The Declarations of Trust of New England Funds Trust I and
New England Funds Trust II currently permit each Trust's
trustees to issue an unlimited number of full and fractional
shares of each series. Each Fund is represented by a particular
series of shares. The Declarations of Trust further permit each
Trust's trustees to divide the shares of each series into any
number of separate classes, each having such rights and
preferences relative to other classes of the same series as the
trustees may determine. The shares of each Fund do not have any
preemptive rights. Upon termination of any Fund, whether
pursuant to liquidation of the Trust or otherwise, shareholders
of each class of the Fund are entitled to share pro rata in the
net assets attributable to that class of shares of the Fund
available for distribution to shareholders. The Declarations of
Trust also permit the trustees to charge shareholders directly
for custodial, transfer agency and servicing expenses.
The shares of all the Funds (except as noted in the first
two paragraphs of this section) are divided into four classes,
Class A, Class B, Class C and Class Y. Each Fund offers such
classes of shares as set forth in such Fund's Prospectus. Class
Y shares are available for purchase only by certain eligible
institutional investors and have higher minimum purchase
requirements than Classes A, B and C. All expenses of each Fund
[excluding transfer agency fees and expenses of printing and
mailing Prospectuses to shareholders ("Other Expenses")] are
borne by its Class A, B, C and Y shares on a pro rata basis,
except for 12b-1 fees, which are borne only by Classes A, B and
C and may be charged at a separate rate to each such class.
Other Expenses of Classes A, B and C are borne by such classes
on a pro rata basis, but Other Expenses relating to the Class Y
shares may be allocated separately to the Class Y shares.
The assets received by each class of a Fund for the issue
or sale of its shares and all income, earnings, profits, losses
and proceeds therefrom, subject only to the rights of the
creditors, are allocated to, and constitute the underlying
assets of, that class of a Fund. The underlying assets of each
class of a Fund are segregated and are charged with the expenses
with respect to that class of a Fund and with a share of the
general expenses of the relevant trust. Any general expenses of
the Trust that are not readily identifiable as belonging to a
particular class of a Fund are allocated by or under the
direction of the trustees in such manner as the trustees
determine to be fair and equitable. While the expenses of each
Trust are allocated to the separate books of account of each
Fund, certain expenses may be legally chargeable against the
assets of all of the Funds in a Trust.
The Declarations of Trust also permit each Trust's
trustees, without shareholder approval, to subdivide any series
or class of shares or fund into various sub-series or sub-
classes with such dividend preferences and other rights as the
trustees may designate. While the trustees have no current
intention to exercise this power, it is intended to allow them
to provide for an equitable allocation of the impact of any
future regulatory requirements which might affect various
classes of shareholders differently. The trustees may also,
without shareholder approval, establish one or more additional
series or classes or merge two or more existing series or
classes.
The Declarations of Trust provide for the perpetual
existence of the Trusts. Either Trust or any Fund, however, may
be terminated at any time by vote of at least two-thirds of the
outstanding shares of each Fund affected. Similarly, any class
within a Fund may be terminated by vote of at least two-thirds
of the outstanding shares of such class. While each Declaration
of Trust further provides that the board of trustees may also
terminate the relevant Trust upon written notice to its
shareholders, the 1940 Act requires that the Trust receive the
authorization of a majority of its outstanding shares in order
to change the nature of its business so as to cease to be an
investment company.
Voting Rights
As summarized in the Prospectuses, shareholders are
entitled to one vote for each full share held (with fractional
votes for each fractional share held) and may vote (to the
extent provided therein) in the election of trustees and the
termination of the Trust and on other matters submitted to the
vote of shareholders.
The Declarations of Trust provide that on any matter
submitted to a vote of all shareholders of a Trust, all Trust
shares entitled to vote shall be voted together irrespective of
series or class unless the rights of a particular series or
class would be adversely affected by the vote, in which case a
separate vote of that series or class shall also be required to
decide the question. Also, a separate vote shall be held
whenever required by the 1940 Act or any rule thereunder. Rule
18f-2 under 1940 Act provides in effect that a series or class
shall be deemed to be affected by a matter unless it is clear
that the interests of each series or class in the matter are
substantially identical or that the matter does not affect any
interest of such series or class. On matters affecting an
individual series or class, only shareholders of that series or
class are entitled to vote. Consistent with the current
position of the SEC, shareholders of all series and classes vote
together, irrespective of series or class, on the election of
trustees and the selection of the Trust's independent
accountants, but shareholders of each series vote separately on
other matters requiring shareholder approval, such as certain
changes in investment policies of that series or the approval of
the investment advisory and subadvisory agreement relating to
that series, and shareholders of each class within a series vote
separately as to the Rule 12b-1 plan (if any) relating to that
class.
There will normally be no meetings of shareholders for the
purpose of electing trustees except that, in accordance with the
1940 Act, (i) a Trust will hold a shareholders' meeting for the
election of trustees at such time as less than a majority of the
trustees holding office have been elected by shareholders, and
(ii) if, as a result of a vacancy on the board of trustees, less
than two-thirds of the trustees holding office have been elected
by the shareholders, that vacancy may be filled only by a vote
of the shareholders. In addition, trustees may be removed from
office by a written consent signed by the holders of two-thirds
of the outstanding shares and filed with a Trust's custodian or
by a vote of the holders of two-thirds of the outstanding shares
at a meeting duly called for that purpose, which meeting shall
be held upon the written request of the holders of not less than
10% of the outstanding shares.
Upon written request by the holders of shares having a net
asset value of at least $25,000 or at least 1% of the
outstanding shares stating that such shareholders wish to
communicate with the other shareholders for the purpose of
obtaining the signatures necessary to demand a meeting to
consider removal of a trustee, the Trusts have undertaken to
provide a list of shareholders or to disseminate appropriate
materials (at the expense of the requesting shareholders).
Except as set forth above, the trustees shall continue to
hold office and may appoint successor trustees. Shareholder
voting rights are not cumulative.
No amendment may be made to a Declaration of Trust without
the affirmative vote of a majority of the outstanding shares of
the relevant Trust except (i) to change the Trust's or a Fund's
name or to cure technical problems in the Declaration of Trust,
(ii) to establish and designate new series or classes of Trust
shares and (iii) to establish, designate or modify new and
existing series or classes of Trust shares or other provisions
relating to Trust shares in response to applicable laws or
regulations.
Shareholder and Trustee Liability
Under Massachusetts law, shareholders could, under certain
circumstances, be held personally liable for the obligations of
a Trust. However, the Declarations of Trust disclaim
shareholder liability for acts or obligations of a Trust and
require that notice of such disclaimer be given in each
agreement, obligation or instrument entered into or executed by
a Trust or the trustees. The Declarations of Trust provide for
indemnification out of each Fund's property for all loss and
expense of any shareholder held personally liable for the
obligations of the Fund by reason of owning shares of such Fund.
Thus, the risk of a shareholder incurring financial loss on
account of shareholder liability is considered remote since it
is limited to circumstances in which the disclaimer is
inoperative and a Fund itself would be unable to meet its
obligations.
The Declarations of Trust further provide that the relevant
board of trustees will not be liable for errors of judgment or
mistakes of fact or law. However, nothing in the Declarations
of Trust protects a trustee against any liability to which the
trustee would otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence or reckless disregard
of the duties involved in the conduct of his or her office. The
By-Laws of each Trust provide for indemnification by the Trust
of trustees and officers of the relevant Trust, except with
respect to any matter as to which any such person did not act in
good faith in the reasonable belief that his or her action was
in or not opposed to the best interests of the Trust.
Such persons may not be indemnified against any liability
to the Trust or the Trust's shareholders to which he or she
would otherwise be subject by reason of willful misfeasance, bad
faith, gross negligence or reckless disregard of the duties
involved in the conduct of his or her office.
HOW TO BUY SHARES
The procedures for purchasing shares of the Funds are
summarized in the Prospectus. Banks may charge a fee for
transmitting funds by wire. With respect to shares purchased by
federal funds, shareholders should bear in mind that wire
transfers may take two or more hours to complete.
For purchase of Fund shares by mail, the settlement date is
the first business day after receipt of the check by the
transfer agent so long as it is received by the close of regular
trading of the New York Stock Exchange on a day when the
Exchange is open; otherwise the settlement date is the following
business day. For telephone orders, the settlement date is the
fifth business day after the order is made.
Shares may also be purchased either in writing, by phone
or, in the case of Class A, B and C shares, by electronic funds
transfer using Automated Clearing House ("ACH"), or by exchange
as described in the Prospectuses through firms that are members
of the National Association of Securities Dealers, Inc. and that
have selling agreements with New England Funds, L.P.
New England Funds, L.P. may at its discretion accept a
telephone order for the purchase of $5,000 or more of a Fund's
Class A, B and C shares. Payment must be received by New
England Funds, L.P. within five business days following the
transaction date or the order will be subject to cancellation.
Telephone orders must be placed through New England Funds, L.P.
or your investment dealer.
NET ASSET VALUE AND PUBLIC OFFERING PRICE
The method for determining the public offering price and
net asset value per share is summarized in the Prospectus.
The total net asset value of each class of shares of a Fund
(the excess of the assets of such Fund attributable to such
class over the liabilities attributable to such class) is
determined as of the close of regular trading (normally 4:00
p.m. Eastern time) on each day that the New York Stock Exchange
is open for trading. The weekdays that the New York Stock
Exchange is expected to be closed are New Year's Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day,
Labor Day, Thanksgiving Day and Christmas Day. Securities
listed on a national securities exchange or on the NASDAQ
National Market System are valued at their last sale price, or,
if there is no reported sale during the day, the last reported
bid price estimated by a broker. Unlisted securities traded in
the over-the-counter market are valued at the last reported bid
price in the over-the-counter market or on the basis of yield
equivalents as obtained from one or more dealers that make a
market in the securities. U.S. Government securities are traded
in the over-the-counter market. Options, interest rate futures
and options thereon that are traded on exchanges are valued at
their last sale price as of the close of such exchanges.
Securities for which current market quotations are not readily
available and all other assets are taken at fair value as
determined in good faith by the board of trustees, although the
actual calculations may be made by persons acting pursuant to
the direction of the board.
Generally, trading in foreign government securities and
other fixed-income securities, as well as trading in equity
securities in markets outside the United States, is
substantially completed each day at various times prior to the
close of the New York Stock Exchange. Securities traded on a
non-U.S. exchange will be valued at their last sale price (or
the last reported bid price, if there is no reported sale during
the day), on the exchange on which they principally trade, as of
the close of regular trading on such exchange. The value of
other securities principally traded outside the United States
will be computed as of the completion of substantial trading for
the day on the markets on which such securities principally
trade. Securities principally traded outside the United States
will generally be valued several hours before the close of
regular trading on the New York Stock Exchange, generally 4:00
p.m. Eastern time, when the Funds compute the net asset value of
their shares. Occasionally, events affecting the value of
securities principally traded outside the United States may
occur between the completion of substantial trading of such
securities for the day and the close of the New York Stock
Exchange, which events will not be reflected in the computation
of a Fund's net asset value. If events materially affecting the
value of a Fund's securities occur during such period, then
these securities will be valued at their fair value as
determined in good faith by or in accordance with procedures
approved by the Trusts' trustees.
Trading in some of the portfolio securities of some of the
Funds takes place in various markets outside the Untied States
on days and at times other than when the New York Stock Exchange
is open for trading. Therefore, the calculation of these Funds'
net asset value does not take place at the same time as the
prices of many of its portfolio securities are determined, and
the value of the Fund's portfolio may change on days when the
Fund is not open for business and its shares may not be
purchased or redeemed.
The per share net asset value of a class of a Fund's shares
is computed by dividing the number of shares outstanding into
the total net asset value attributable to such class. The
public offering price of a Class A share of a Fund is the net
asset value per share next-determined after a properly completed
purchase order is accepted by New England Funds, L.P. or State
Street Bank, plus a sales charge as set forth in the Fund's
Prospectus. The public offering price of a Class B, C or Y
share of a Fund is the next-determined net asset value.
REDUCED SALES CHARGES
Class A Shares Only
Special purchase plans are enumerated in the text of the
Prospectus.
Cumulative Purchase Discount. A Fund shareholder making an
additional purchase of Class A shares may be entitled to a
discount on the sales charge payable on that purchase. This
discount will be available if the shareholder's "total
investment" in the Fund reaches the breakpoint for a reduced
sales charge in the table under "Buying Fund Shares -- Sales
Charges" in the Prospectus. The total investment is determined
by adding the amount of the additional purchase, including sales
charge, to the current public offering price of all series and
classes of shares of both Trusts held by the shareholder in one
or more accounts. If the total investment exceeds the
breakpoint, the lower sales charge applies to the entire
additional investment even though some portion of that
additional investment is below the breakpoint to which a reduced
sales charge applies. For example, if a shareholder who already
owns shares of one or more Funds with a value at the current
public offering price of $30,000 makes an additional purchase of
$20,000 of Class A shares of another Fund (other than the Growth
Fund), the reduced sales charge of 4.5% of the public offering
price will apply to the entire amount of the additional
investment.
Letter of Intent. A Letter of Intent (a "Letter"), which
can be effected at any time, is a privilege available to
investors which reduces the sales charge on investments in Class
A shares. Ordinarily, reduced sales charges are available for
single purchases of Class A shares only when they reach certain
breakpoints (e.g., $50,000, $100,000, etc.). By signing a
Letter, a shareholder indicates an intention to invest enough
money in Class A shares within 13 months to reach a breakpoint.
If the shareholder's intended aggregate purchases of all series
and classes of the Trusts over a defined 13-month period will be
large enough to qualify for a reduced sales charge, the
shareholder may invest the smaller individual amounts at the
public offering price calculated using the sales load applicable
to the 13-month aggregate investment.
A Letter is a non-binding commitment, the amount of which
may be increased, decreased or canceled at any time. The
effective date of a Letter is the date it is received in good
order at New England Funds, L.P., or, if communicated by a
telephone exchange or order, at the date of telephoning provided
a signed Letter, in good order, reaches New England Funds, L.P.
within five business days.
A reduced sales charge is available for aggregate purchases
of all series and classes of shares of the Trusts pursuant to a
written Letter effected within 90 days after any purchase. In
the event the account was established prior to 90 days before
the Letter effective date, the account will be credited with
Rights of Accumulation ("ROA") towards the breakpoint level that
will be reached upon the completion of the 13 months' purchases.
The ROA credit is the value of all shares held as of the
effective date of the Letter based on the "public offering price
computed on such date."
The cumulative purchase discount, described above, permits
the aggregate value at the current public offering price of
Class A shares of any accounts with the Trusts held by a
shareholder to be added to the dollar amount of the intended
investment under a Letter, provided the shareholder lists them
on the account application.
State Street Bank will hold in escrow shares with a value
at the current public offering price of 5% of the aggregate
amount of the intended investment. The amount in escrow will be
released when the Letter is completed. If the shareholder does
not purchase shares in the amount indicated in the Letter, the
shareholder agrees to remit to State Street Bank the difference
between the sales charge actually paid and that which would have
been paid had the Letter not been in effect, and authorizes
State Street Bank to redeem escrowed shares in the amount
necessary to make up the difference in sales charges.
Reinvested dividends and distributions are not included in
determining whether the Letter has been completed.
Combining Purchases. Purchases of all series and classes
of the Trusts by or for an investor, the investor's spouse,
parents, children, siblings, grandparents or grandchildren and
any other account of the investor, including sole
proprietorships, in either Trust may be treated as purchases by
a single individual for purposes of determining the availability
of a reduced sales charge. Purchases for a single trust estate
or a single fiduciary account may also be treated as purchases
by a single individual for this purpose, as may purchases on
behalf of a participant in a tax-qualified retirement plan and
other employee benefit plans, provided that the investor is the
sole participant in the plan.
Combining with Other Series and Classes of the Trusts. A
shareholder's total investment for purposes of the cumulative
purchase discount and purchases under a Letter of Intent
includes the value at the current public offering price of any
shares of series and classes of the Trusts that the shareholder
owns (which includes shares of New England Cash Management Trust
and New England Tax Exempt Money Market Trust [the "Money Market
Funds"] unless such shares were purchased by exchanging shares
of either of the Trusts). Shares owned by persons described in
the preceding paragraph may also be included.
Unit Holders of Unit Investment Trusts. Unit investment
trust distributions may be invested in Class A shares of any
Fund at a reduced sales charge of 1.50% of the public offering
price (or 1.52% of the net amount invested); for large purchases
on which a sales charge of less than 1.50% would ordinarily
apply, such lower charge also applies to investments of unit
investment trust distributions.
Clients of Advisers or Subadvisers. No sales charge or
contingent deferred sales charge applies to investments of
$100,000 or more in Class A shares of the Funds by (1) clients
of an adviser or subadviser to the Funds; any director, officer
or partner of a client of an adviser or subadviser to the Funds;
and the spouse, parents, children, siblings, grandparents or
grandchildren of the foregoing; (2) any individual who is a
participant in a Keogh or IRA Plan under a prototype of an
adviser or subadviser to the Funds if at least one participant
in the plan qualifies under category (1) above; and (3) an
individual who invests through an IRA and is a participant in an
employee benefit plan that is a client of an adviser or
subadviser to the Funds. Any investor eligible for this
arrangement should so indicate in writing at the time of the
purchase.
Offering to Employees of The New England and Associated
Entities. There is no sales charge, CDSC or initial investment
minimum related to investments in Class A shares of any Fund by
any of the Trusts' investment advisers or subadvisers, New
England Funds, L.P. or any other company affiliated with The New
England; current and former directors and trustees of the
Trusts; 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 that have selling arrangements with New England
Funds, L.P.; the spouse, parents, children, siblings,
grandparents or grandchildren of the persons listed above and
any trust, pension, profit sharing or other benefit plans for
any of the foregoing persons and any separate account of The New
England or any other company affiliated with The New England.
Eligible Governmental Authorities. There is no sales
charge or contingent deferred sales charge related to
investments in Class A shares of any Fund (except the Star
Advisers Fund) by any state, county or city or any
instrumentality, department, authority or agency thereof that
has determined that a Fund is a legally permissible investment
and that is prohibited by applicable investment laws from paying
a sales charge or commission in connection with the purchase of
shares of any registered investment company.
Investment Advisory Accounts. Shares of any Fund may be
purchased at net asset value by investment advisers, financial
planners or other intermediaries who place trades for their own
accounts or the accounts of their clients and who charge a
management, consulting or other fee for their services; clients
of such investment advisers, financial planners or other
intermediaries who place trades for their own accounts if the
accounts are linked to the master account of such investment
adviser, financial planner or other intermediary on the books
and records of the broker or agent; and retirement and deferred
compensation plans and trusts used to fund those plans,
including, but not limited to, those defined in Section 401(a),
403(b) or 457 of the Code and "rabbi trusts." Investors may be
charged a fee if they effect transactions through a broker or
agent.
Certain Broker-Dealers and Financial Services
Organizations. Shares of any Fund also may be purchased at net
asset value through certain broker-dealers and/or financial
services organizations without any transaction fee. Such
organizations may receive compensation, in an amount of up to
0.35% annually of the average value of the Fund shares held by
their customers. This compensation may be paid by NEFM and/or a
Fund's subadviser out of their own assets, or may be paid
indirectly by the Fund in the form of servicing, distribution or
transfer agent fees.
Shareholders of Reich and Tang Government Securities Trust.
Shareholders of Reich and 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 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.
SHAREHOLDER SERVICES
Open Accounts
A shareholder's investment is automatically credited to an
open account maintained for the shareholder by State Street
Bank. Following each transaction in the account, a shareholder
will receive a confirmation statement disclosing the current
balance of shares owned and the details of recent transactions
in the account. After the close of each calendar year, State
Street Bank will send each shareholder a statement providing
federal tax information on dividends and distributions paid to
the shareholder during the year. This statement should be
retained as a permanent record. New England Funds, L.P. may
charge a fee for providing duplicate information.
The open account system provides for full and fractional
shares expressed to three decimal places and, by making the
issuance and delivery of stock certificates unnecessary,
eliminates problems of handling and safekeeping, and the cost
and inconvenience of replacing lost, stolen, mutilated or
destroyed certificates.
The costs of maintaining the open account system are paid
by the Funds and no direct charges are made to shareholders.
Although the Funds have no present intention of making such
direct charges to shareholders, they each reserve the right to
do so. Shareholders will receive prior notice before any such
charges are made.
Automatic Investment Plans (Class A, B and C Shares)
Subject to each Fund's investor eligibility requirements,
investors may automatically invest in additional shares of a
Fund on a monthly basis by authorizing New England Funds, L.P.
to draw checks on an investor's bank account. The checks are
drawn under the Investment Builder Program, a program designed
to facilitate such periodic payments, and are forwarded to New
England Funds, L.P. for investment in the Fund. A plan may be
opened with an initial investment of $50 or more and thereafter
regular monthly checks of $50 or more will be drawn on the
investor's account. The reduced minimum initial investment
pursuant to an automatic investment plan is referred to in the
Prospectus. An Investment Builder application must be completed
to open an automatic investment plan. An application may be
found in the Prospectus or may be obtained by calling New
England Funds, L.P. at 1-800-225-5478 or your investment dealer.
This program is voluntary and may be terminated at any time
by New England Funds, L.P. upon notice to existing plan
participants.
The Investment Builder Program plan may be discontinued at
any time by the investor by written notice to New England Funds,
L.P., which must be received at least five business days prior
to any payment date. The plan may be discontinued by State
Street Bank at any time without prior notice if any check is not
paid upon presentation; or by written notice to you at least
thirty days prior to any payment date. State Street Bank is
under no obligation to notify shareholders as to the nonpayment
of any check.
Retirement Plans Offering Tax Benefits (Class A, B and C Shares)
The federal tax laws provide for a variety of retirement
plans offering tax benefits. These plans may be funded with
shares of the Funds or with certain other investments. The
plans include H.R. 10 (Keogh) plans for self-employed
individuals and partnerships, individual retirement accounts
(IRAs), corporate pension trust and profit sharing plans,
including 401(k) plans, and retirement plans for public school
systems and certain tax exempt organizations, i.e., 403(b)
plans.
The reduced minimum initial investment available to
retirement plans offering tax benefits is referred to in the
Prospectus. For these plans, initial and subsequent investments
in a Fund must be at least $250 for each participant in
corporate pension and profit sharing plans, IRAs and Keogh plans
and $50 for subsequent investments. There is a special initial
and subsequent investment minimum of $25 for payroll deduction
investment programs for 401(k), SARSEP, 403(b) and certain other
retirement plans. Income dividends and capital gain
distributions must be reinvested (unless the investor is over
age 59 1/2 or disabled). Plan documents and further information
can be obtained from New England Funds, L.P.
An investor should consult a competent tax or other adviser
as to the suitability of a Fund's shares as a vehicle for
funding a plan, in whole or in part, under the Employee
Retirement Income Security Act of 1974 and as to the eligibility
requirements for a specific plan and its state as well as
federal tax aspects.
Certain retirement plans may also be eligible to purchase
Class Y shares. See the Prospectus relating to Class Y shares.
Systematic Withdrawal Plans (Class A, B and C Shares)
An investor owning a Fund's shares having a value of $5,000
or more at the current public offering price may establish a
Systematic Withdrawal Plan providing for periodic payments of a
fixed or variable amount. An investor may terminate the plan at
any time. A form for use in establishing such a plan is
available from the servicing agent or your investment dealer.
Withdrawals may be paid to a person other than the shareholder
if a signature guarantee is provided. Please consult your
investment dealer or New England Funds, L.P.
A shareholder under a Systematic Withdrawal Plan may elect
to receive payments monthly, quarterly, semiannually or annually
for a fixed amount of not less than $50 or a variable amount
based on (1) the market value of a stated number of shares, (2)
a specified percentage of the account's market value or (3) a
specified number of years for liquidating the account (e.g., a
20-year program of 240 monthly payments would be liquidated at a
monthly rate of 1/240, 1/239, 1/238, etc.). The initial payment
under a variable payment option may be $50 or more.
In the case of shares subject to a CDSC, the amount or
percentage you specify may not, on an annualized basis, exceed
10% of the value, as of the time you make the election, of your
account with the Fund with respect to which you are electing the
Plan. Withdrawals of Class B shares of a Fund under the Plan
will be treated as redemptions of shares purchased through the
reinvestment of Fund distributions, or, to the extent such
shares in your account are insufficient to cover Plan payments,
as redemptions from the earliest purchased shares of such Fund
in your account. No CDSC applies to a redemption pursuant to
the Plan.
All shares under the Plan must be held in an open
(uncertificated) account. Income dividends and capital gain
distributions will be reinvested (without a sales charge in the
case of Class A shares) at net asset value determined on the
record date.
Since withdrawal payments represent proceeds from the
liquidation of shares, withdrawals may reduce and possibly
exhaust the value of the account, particularly in the event of a
decline in net asset value. Accordingly, the shareholder should
consider whether a Systematic Withdrawal Plan and the specified
amounts to be withdrawn are appropriate in the circumstances.
The Funds and New England Funds, L.P. make no recommendations or
representations in this regard. It may be appropriate for the
shareholder to consult a tax adviser before establishing such a
plan.
It may be disadvantageous for a shareholder to purchase on
a regular basis additional Fund shares with a sales charge while
redeeming shares under a Systematic Withdrawal Plan.
Accordingly, the Funds and New England Funds, L.P. do not
recommend additional investments in Class A shares by a
shareholder who has a withdrawal plan in effect and who would be
subject to a sales load on such additional investments.
Because of statutory restrictions this plan is not
available to pension or profit-sharing plans, IRAs or 403(b)
plans that have State Street Bank as trustee.
Exchange Privilege
A shareholder may exchange the shares of any Fund (in the
case of Class A shares of the Adjustable Rate and California and
New York Funds, only if such shares have been held for at least
six months) for shares of the same class of any other fund of
the Trusts (subject to the investor eligibility requirements of
the fund into which the exchange is being made) on the basis of
relative net asset values at the time of the exchange without
any sales charge. When an exchange is made from the Class B
shares of one Fund to the Class B shares of another Fund, the
shares received in exchange will have the same age
characteristics as the shares exchanged. The age of the shares
determines the expiration of the CDSC and the conversion date.
If you own Class A and Class B shares, you may also elect to
exchange your shares of any fund of the Trusts for shares of the
same class of the Money Market Funds. Class C shares may also
be exchanged for Class A shares of the Money Market Funds. On
all exchanges of Class A shares subject to a CDSC and Class B
shares into the Money Market Funds, the exchange stops the aging
period relating to the CDSC and, for Class B shares only,
conversion to Class A shares. The aging resumes only when an
exchange is made back into Class B shares of a fund of the
Trusts. If you own Class Y shares, you may exchange those
shares for Class Y shares of other Funds or for Class A shares
of the Money Market Funds. These options are summarized in the
Prospectus. An exchange may be effected, provided that neither
the registered name nor address of the accounts are different
and provided that a certificate representing the shares being
exchanged has not been issued to the shareholder, by (1) a
telephone request to New England Funds, L.P. at (800) 223-7124
or (2) a written exchange request to New England Funds, P.O. Box
8551, Boston, MA 02266-8551. You must acknowledge receipt of a
current Prospectus for a Fund before an exchange for that Fund
can be effected.
The investment objectives of the funds in the Trusts and the
Money Market Funds are as follows:
Stock Funds:
New England Growth Fund seeks long-term growth of capital
through investments in equity securities of companies whose
earnings are expected to grow at a faster rate than the United
States economy.
New England Capital Growth Fund seeks long-term growth of
capital.
New England Value Fund seeks a reasonable long-term
investment return from a combination of market appreciation and
dividend income from equity securities.
New England Balanced Fund seeks a reasonable long-term
investment return from a combination of long-tern capital
appreciation and moderate current income.
New England Growth Opportunities Fund seeks opportunities
for long-term growth of capital and income.
New England International Equity Fund seeks total return
from long-term growth of capital and dividend income primarily
through investment in a diversified portfolio of marketable
international equity securities.
New England Star Advisers Fund seeks long-term growth of
capital.
New England Star Worldwide Fund seeks long-term growth of
capital.
Growth Fund of Israel seeks long-term growth of capital.
Bond Funds:
New England Government Securities Fund seeks a high level
of current income consistent with safety of principal by
investing in U.S. Government securities and engaging in
transactions involving related options, futures and options on
futures.
New England Limited Term U.S. Government Fund seeks a high
current return consistent with preservation of capital.
New England Adjustable Rate U.S. Government Fund seeks a
high level of current income consistent with low volatility of
principal.
New England Strategic Income Fund seeks high current income
with a secondary objective of capital growth.
New England Bond Income Fund seeks a high level of current
income consistent with what the Fund considers reasonable risk.
The Bond Income Fund invests primarily in corporate and U.S.
Government bonds.
New England High Income Fund seeks high current income plus
the opportunity for capital appreciation to produce a high total
return.
New England Municipal Income Fund seeks as high a level of
current income exempt from federal income taxes as is consistent
with reasonable risk and protection of shareholders' capital.
The Municipal Income Fund invests primarily in debt securities
of municipal issuers, the interest of which is exempt from
federal income tax but may be subject to the federal alternative
minimum tax, and may engage in transactions in financial futures
contracts and options on futures.
New England Massachusetts Tax Free Income Fund seeks as
high a level of current income exempt from federal income tax
and Massachusetts personal income taxes as Back Bay Advisors,
the Fund's subadviser, believes is consistent with preservation
of capital.
New England Intermediate Term Tax Free Fund of California
seeks as high a level of current income exempt from federal
income tax and its state personal income tax as is consistent
with preservation of capital.
New England Intermediate Term Tax Free Fund of New York
seeks as high a level of current income exempt from federal
income tax and its state personal income tax and New York City
personal income tax as is consistent with preservation of
capital.
Money Market Funds:
NEW ENGLAND CASH MANAGEMENT TRUST -
Money Market Series -- maximum current income consistent
with preservation of capital and liquidity.
U.S. Government Series -- highest current income
consistent with preservation of capital and liquidity.
NEW ENGLAND TAX EXEMPT MONEY MARKET TRUST -- current income
exempt from federal income taxes consistent with preservation of
capital and liquidity.
As of April 15, 1996, the net assets of the funds in the
Trusts and the Money Market Funds totaled over $5 billion.
An exchange constitutes a sale of shares for federal income
tax purposes in which the investor may realize a long- or short-
term capital gain or loss.
Automatic Exchange Plan (Class A, B and C Shares)
As described in the Prospectus following the caption
"Owning Fund Shares," a shareholder may establish an Automatic
Exchange Plan under which shares of a Fund are automatically
exchanged each month for shares of the same class of one or more
of the other funds in the Trusts. Registration on all accounts
must be identical. The exchanges are made on the 15th of each
month or the first business day thereafter if the 15th is not a
business day until the account is exhausted or until New England
Funds, L.P. is notified in writing to terminate the plan.
Exchanges may be made in amounts of $500 or over ($1000 for
spousal IRAs). The Service Options Form is available from New
England Funds, L.P. or your financial representative to
establish an Automatic Exchange Plan.
REDEMPTIONS
The procedures for redemption of shares of a Fund are
summarized in the Prospectus. As described in the Prospectus, a
CDSC may be imposed on certain purchases of Class A shares and
on purchases of Class B shares. For purposes of the CDSC, an
exchange of shares from one Fund 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 sale and a
purchase and, therefore, would be considered a taxable event on
which you may recognize a gain or loss. In determining whether
a CDSC is applicable to a redemption of Class B shares, the
calculation will be determined in the manner that results in the
lowest rate being charged. Therefore, it will be assumed that
the redemption is first of any Class A shares in the
shareholder's Fund account, second of shares held for over five
years, third of shares issued in connection with dividend
reinvestment and fourth of shares held longest during the five-
year period. The charge will not be applied to dollar amounts
representing an increase in the net asset value of shares since
the time of purchase or reinvested distributions associated with
such shares. Unless you request otherwise at the time of
redemption, the CDSC is deducted from the redemption, not the
amount remaining in the account.
To illustrate, assume an investor purchased 100 shares at
$10 per share (at a cost of $1,000) and in the second year after
purchase, the net asset value per share is $12 and, during such
time, the investor has acquired 10 additional shares under
dividend reinvestment. If at such time the investor makes his
or her first redemption of 50 shares (proceeds of $600), 10
shares will not be subject to the CDSC because of dividend
reinvestment. With respect to the remaining 40 shares, the CDSC
is applied only to the original cost of $10 per share and not to
the increase in the net asset value of $2 per share. Therefore,
$400 of the $600 redemption proceeds will be charged at a rate
of 3% (the applicable rate in the second year after purchase).
Signatures on redemption requests must be guaranteed by an
"Eligible Guarantor Institution," as defined in Rule 17Ad-15
under the Securities Exchange Act of 1934. However, a signature
guarantee will not be required if the proceeds of the redemption
do not exceed $100,000 and the proceeds check is made payable to
the registered owner(s) and mailed to the record address.
If you select the telephone redemption service in the
manner described in the next paragraph, shares of a Fund may be
redeemed by calling toll free (800) 225-5478. A wire fee,
currently $5.00, will be deducted from the proceeds. Telephone
redemption requests must be received by the close of regular
trading on the New York Stock Exchange. Requests made after
that time or on a day when the New York Stock Exchange is not
open for business cannot be accepted and a new request on a
later day will be necessary. The proceeds of a telephone
withdrawal will normally be sent on the first business day
following receipt of a proper redemption request.
In order to redeem shares by telephone, a shareholder must
either select this service when completing the Fund application
or must do so subsequently on the Service Options Form,
available from your investment dealer. When selecting the
service, a shareholder must designate a bank account to which
the redemption proceeds should be sent. Any change in the bank
account so designated may be made by furnishing to your
investment dealer a completed Service Options Form with a
signature guarantee. Whenever the Service Options Form is used,
the shareholder's signature must be guaranteed as described
above. Telephone redemptions may only be made if the designated
bank is a member of the Federal Reserve System or has a
correspondent bank that is a member of the System. If the
account is with a savings bank, it must have only one
correspondent bank that is a member of the System.
The redemption price will be the net asset value per share
(less any applicable CDSC) next determined after the redemption
request and any necessary special documentation are received by
State Street Bank or your investment dealer in proper form.
Payment normally will be made by State Street Bank on behalf of
the Fund within seven days thereafter. However, in the event of
a request to redeem shares for which the Fund has not yet
received good payment, the Fund reserves the right to withhold
payments of redemption proceeds if the purchase of shares was
made by a check which was deposited less than fifteen days prior
to the redemption request (unless the Fund is aware that the
check has cleared).
The CDSC may be waived on redemptions made from IRA
accounts due to attainment of age 591/2 for IRA shareholders who
established accounts prior to January 3, 1995. The CDSC may
also be waived on redemptions made from IRA accounts due to
death, disability, return of excess contribution, required
minimum distributions at age 701/2 (waivers apply only to
amounts necessary to meet the required minimum amount), certain
withdrawals pursuant to a systematic withdrawal plan, not be
exceed 10% annually of the value of the account, and redemptions
made from the account to pay custodial fees.
The CDSC may be waived on redemptions made from 403(b)(7)
custodial accounts due to attainment of age 591/2 for
shareholders who established custodial accounts prior to January
3, 1995.
The CDSC may also by waived on redemptions necessary to pay
plan participants or beneficiaries from qualified retirement
plans under Section 401 of the Code, including profit sharing
plans, money purchase plans, 401(k) and custodial accounts under
Section 403(b)(7) of the Code. Distributions necessary to pay
plan participants and beneficiaries include payment made due to
death, disability, separation from service, normal or early
retirement as defined in the plan document, loans from the plan
and hardship withdrawals, return of excess contributions,
required minimum distributions at age 701/2 (waivers only apply
to amounts necessary to meet the required minimum amount),
certain withdrawals pursuant to a systematic withdrawal plan,
not to exceed 10% annually of the value of your account, and
redemptions made from qualified retirement accounts or Section
403(b)(7) custodial accounts necessary to pay custodial fees.
A CDSC will apply in the event of plan level transfers,
including transfers due to changes in investment where assets
are transferred outside of New England Funds, including IRA and
403(b)(7) participant-directed transfers of assets to other
custodians (except for the reasons given above) or qualified
transfers of assets due to trustee-directed movement of plan
assets due to merger, acquisition or addition of additional
funds to the plan.
The Funds will normally redeem shares for cash; however,
the Funds reserve the right to pay the redemption price wholly
or partly in kind if the relevant Trust's board of trustees
determines it to be advisable and in the interest of the
remaining shareholders of a Fund. If portfolio securities are
distributed in lieu of cash, the shareholder will normally incur
brokerage commissions upon subsequent disposition of any such
securities. However, the Funds have elected to be governed by
Rule 18f-1 under the 1940 Act, pursuant to which the Funds are
obligated to redeem shares solely in cash for any shareholder
during any 90-day period up to the lesser of $250,000 or 1% of
the total net asset value of the relevant Trust at the beginning
of such period. The Funds do not currently intend to impose any
redemption charge (other than the CDSC imposed by the Funds'
distributor), although they reserve the right to charge a fee
not exceeding 1% of the redemption price. A redemption
constitutes a sale of shares for federal income tax purposes on
which the investor may realize a long- or short-term capital
gain or loss. See also "Income Dividends, Capital Gain
Distributions and Tax Status," below.
Reinstatement Privilege (Class A shares only)
The Prospectuses describe redeeming shareholders'
reinstatement privileges for Class A shares. Written notice and
the investment check from persons wishing to exercise this
reinstatement privilege must be received by your investment
dealer within 120 days after the date of the redemption. The
reinstatement or exchange will be made at net asset value next
determined after receipt of the notice and the investment check
and will be limited to the amount of the redemption proceeds or
to the nearest full share if fractional shares are not
purchased.
Even though an account is reinstated, the redemption will
constitute a sale for federal income tax purposes. Investors
who reinstate their accounts by purchasing shares of the Funds
should consult with their tax advisers with respect to the
effect of the "wash sale" rule if a loss is realized at the time
of the redemption.
STANDARD PERFORMANCE MEASURES
Calculations of Yield
Each Fund (except the Growth, Value, Growth Opportunities,
Star Advisers, International Equity and Capital Growth Funds)
may advertise the yield of its Class A, Class B, Class C and
Class Y shares. Yield for each class will be computed by
annualizing net investment income per share for a recent 30-day
period and dividing that amount by the maximum offering price
per share of the relevant class (reduced by any undeclared
earned income expected to be paid shortly as a dividend) on the
last trading day of that period. Net investment income will
reflect amortization of any market value premium or discount of
fixed-income securities (except for obligations backed by
mortgages or other assets) and may include recognition of a pro
rata portion of the stated dividend rate of dividend paying
portfolio securities. Each Fund's yield will vary from time to
time depending upon market conditions, the composition of its
portfolio and operating expenses of the Trust allocated to each
Fund. These factors, possible differences in the methods used
in calculating yield and the tax exempt status of distributions
should be considered when comparing a Fund's yield to yields
published for other investment companies and other investment
vehicles. Yield should also be considered relative to changes
in the value of the Fund's shares and to the relative risks
associated with the investment objectives and policies of the
Fund. Yields do not take into account any applicable sales
charges or CDSC. Yield may be stated with or without giving
effect to any expense limitations in effect for a Fund.
The Municipal Income Fund, the Massachusetts Fund and the
California and New York Funds each may also advertise a taxable
equivalent yield, calculated as described above except that, for
any given tax bracket, net investment income will be calculated
using as gross investment income an amount equal to the sum of
(i) any taxable income of the Fund plus (ii) the tax exempt
income of the Fund divided by the difference between 1 and the
effective federal (or combined federal and state) income tax
rate for taxpayers in that tax bracket.
At any time in the future, yields and total return may be
higher or lower than past yields and there can be no assurance
that any historical results will continue.
Investors in the Funds are specifically advised that share
prices, expressed as the net asset values per share, will vary
just as yield will vary. An investor's focus on the yield of a
Fund to the exclusion of the consideration of the share price of
that Fund may result in the investor's misunderstanding the
total return he or she may derive from the Fund.
Calculation of Total Return. Total return is a measure of
the change in value of an investment in a Fund over the period
covered, which assumes that any dividends or capital gains
distributions are automatically reinvested in shares of the same
class of that Fund rather than paid to the investor in cash.
The formula for total return used by the Funds is prescribed by
the SEC and includes three steps: (1) adding to the total number
of shares of the particular class that would be purchased by a
hypothetical $1,000 investment in the Fund (with or without
giving effect to the deduction of sales charge or CDSC, if
applicable) all additional shares that would have been purchased
if all dividends and distributions paid or distributed during
the period had been automatically reinvested; (2) calculating
the value of the hypothetical initial investment as of the end
of the period by multiplying the total of shares owned at the
end of the period by the net asset value per share of the
relevant class on the last trading day of the period; (3)
dividing this account value for the hypothetical investor by the
amount of the initial investment, and annualizing the result for
periods of less than one year. Total return may be stated with
or without giving effect to any expense limitations in effect
for a Fund.
Performance Comparisons
Yield and Total Return. Yields and total returns will
generally be higher for Class A shares than for Class B and
Class C shares of the same Fund, because of the higher levels of
expenses borne by the Class B and Class C shares. Because of
its lower operating expenses, Class Y shares of each Fund can be
expected to achieve a higher yield and total return than the
same Fund's Class A, Class B and Class C shares. The Funds may
from time to time include their yield and total return in
advertisements or in information furnished to present or
prospective shareholders. The Funds may from time to time
include in advertisements its total return and the ranking of
those performance figures relative to such figures for groups of
mutual funds categorized by Lipper Analytical Services as having
similar investment objectives.
Total return may also be used to compare the performance of
the Fund against certain widely acknowledged standards or
indices for stock and bond market performance or against the
U.S. Bureau of Labor Statistics' Consumer Price Index.
The Standard & Poor's Composite Index of 500 Stocks (the
"S&P 500") is a market value-weighted and unmanaged index
showing the changes in the aggregate market value of 500 stocks
relative to the base period 1941-43. The S&P 500 is composed
almost entirely of common stocks of companies listed on the New
York Stock Exchange, although the common stocks of a few
companies listed on the American Stock Exchange or traded over-
the-counter are included. The 500 companies represented include
400 industrial, 60 transportation and 40 financial services
concerns. The S&P 500 represents about 80% of the market value
of all issues traded on the New York Stock Exchange.
The Salomon Brothers World Government Bond Index includes a
broad range of institutionally-traded fixed-rate government
securities issued by the national governments of the nine
countries whose securities are most actively traded. The index
generally excludes floating- or variable-rate bonds, securities
aimed principally at non-institutional investors (such as U.S.
Savings Bonds) and private-placement type securities.
The Shearson Lehman Government Bond Index (the "SL
Government Index") is a measure of the market value of all
public obligations of the U.S. Treasury; all publicly issued
debt of all agencies of the U.S. Government and all quasi-
federal corporations; and all corporate debt guaranteed by the
U.S. Government. Mortgage backed securities, flower bonds and
foreign targeted issues are not included in the SL Government
Index.
The Shearson Lehman Government/Corporate Bond Index (the
"SL Government/Corporate Index") is a measure of the market
value of approximately 5,300 bonds with a face value currently
in excess of $1.3 trillion. To be included in the SL
Government/Corporate Index, an issue must have amounts
outstanding in excess of $1 million, have at least one year to
maturity and be rated "Baa" or higher ("investment grade") by a
nationally recognized rated agency.
The Lehman Brothers Municipal Bond Index is a composite
measure of the total return performance of the municipal bond
market. This index is computed from prices on approximate 1800
bonds.
The Dow Jones Industrial Average is a market value-weighted
and unmanaged index of 30 large industrial stocks traded on the
New York Stock Exchange.
The Merrill Lynch High Yield Index includes over 750 issues
and represents public debt greater than $10 million (original
issuance rated BBB/BB and below), and the First Boston High
Yield Index includes over 350 issues and represents all public
debt greater than $100 million (original issuance and rated
BBB/BB and below).
The Salomon Brothers Broad Investment Grade Bond Index is a
price composite of a broad range of institutionally based U.S.
Government mortgage-backed and corporate debt securities of
investment outstanding of at least $1 million and with a
remaining period to maturity of at least one year.
The Consumer Price Index, published by the U.S. Bureau of
Labor Statistics, is a statistical measure of changes, over
time, in the prices of goods and services in major expenditure
groups.
Lipper Analytical Services, Inc. is an independent service
that monitors the performance of over 1,300 mutual funds, and
calculates total return for the funds grouped by investment
objective.
The Morgan Stanley Capital International Europe, Australia
and Far East (Gross Domestic Product) Index (the "EAFE Index")
is a market-value weighted and unmanaged index of common stocks
traded outside the U.S. The stocks in the index are selected
with reference to national and industry representation and
weighted in the EAFE Index according to their relative market
value (market price per share times the number of shares
outstanding).
The Morgan Stanley Capital International Europe, Australia
and Far East Index (the "EAFE [GDP] Index") is a market-value
weighted and unmanaged index of common stocks traded outside the
U.S. The stocks in the index are selected with reference to
national and industry representation and weighted in the EAFE
(GDP) Index according to their relative market values. The
relative market value of each country is further weighted with
reference to the country's relative gross domestic product.
The International Equity Fund may compare its performance
to the Salomon-Russell Broad Market Index Global X-US and to
universes of similarly managed investment pools compiled by
Frank Russell Company and Intersec Research Corporation.
From time to time, the Adjustable Rate Fund advertisements
and other materials and communications may cite statistics to
reflect the Fund's performance over time, utilizing comparisons
to indexes including those based on U.S. Treasury securities and
those derived from a calculated measure such as a cost of funds
index or a moving average of mortgage rates. Commonly used
indexes include the one-, three-, five-, ten- and 30-year
constant maturity Treasury rates, the three-month and 180-day
Treasury bill rate, rates on longer-term Treasury certificates,
the 11th District Federal Home Loan Bank Cost of Funds, the
National Median Cost of Funds, the one-month, three-month, six-
month or one-year London Interbank Offered Rate (LIBOR), the
prime lending rate of one or several banks, or commercial paper
rates. Some indexes, such as the one-year constant maturity
Treasury rate, closely mirror changes in market interest rate
levels. Others, such as the 11th District Federal Home Loan
Bank Cost of Funds Index, tend to lag behind changes in market
rate levels and tend to be somewhat less volatile.
The current interest rate on many FNMA ARMs is set by
reference to the 11th District Cost of Funds Index published
monthly by the Federal Reserve. Since June 1987, the current
interest rate on these ARMs, measured on a monthly basis, has
been higher than the average yield of taxable money market funds
represented by Donoghue's Taxable Money Fund Average and current
rates on newly issued one year bank certificates of deposit.
The interest rates on other ARMs and the yield on the Adjustable
Rate Fund's portfolio may be higher or lower than the interest
rates on FNMA ARMs and there is also no assurance that
historical yield relationships among different types of
investments will continue.
Advertising and promotional materials may refer to the
maturity and duration of the Bond Funds. Maturity refers to the
period of time before a bond or other debt instrument becomes
due. Duration is a commonly used measure of the price
responsiveness of a fixed-income security to an interest rate
change (i.e., the change in price one can expect from a given
change in yield).
Articles and releases, developed by the Funds and other
parties, about the Funds regarding performance, rankings,
statistics and analyses of the individual Funds' and the fund
group's asset levels and sales volumes, numbers of shareholders
by Fund or in the aggregate for New England Funds, statistics
and analyses of industry sales volumes and asset levels, and
other characteristics may appear in advertising, promotional
literature, publications, including, but not limited to, those
publications listed in Appendix B to this Statement, and on
various computer networks, for example, the Internet. In
particular, some or all of these publications may publish their
own rankings or performance reviews of mutual funds, including
the Funds. References to or reprints of such articles may be
used in the Funds' advertising and promotional literature. Such
advertising and promotional material may refer to NEIC, its
structure, goals and objectives and the advisory subsidiaries of
NEIC, including their portfolio management responsibilities,
portfolio managers and their categories and background; their
tenure, styles and strategies and their shared commitment to
fundamental investment principles and may identify specific
clients, as well as discuss the types of institutional investors
who have selected the advisers to manage their investment
portfolios and the reasons for that selection. The references
may discuss the independent, entrepreneurial nature of each
advisory organization and allude to or include excerpts from
articles appearing in the media regarding NEIC, its advisory
subsidiaries and their personnel. For additional information
about the Funds' advertising and promotional literature, see
Appendix C.
The Funds may enter into arrangements with banks exempted
from registration under the Securities Exchange Act of 1934.
Advertising and sales literature developed to publicize such
arrangements will explain the relationship of the bank to New
England Funds and New England Funds, L.P. as well as the
services provided by the bank relative to the Funds. The
material may identify the bank by name and discuss the history
of the bank including, but not limited to, the type of bank, its
asset size, the nature of its business and services and its
status and standing in the industry.
The Funds may use the accumulation charts below in their
advertisements to demonstrate the benefits of monthly savings at
an 8% and 10% rate of return, respectively.
Investments At 8% Rate of Return
5 yrs. 10 15 20 25 30
------- ------- ------- ------- ------- -------
$ 50 3,698 9,208 17,417 29,647 47,868 75,015
75 5,548 13,812 26,126 44,471 71,802 112,522
100 7,396 18,417 34,835 59,295 95,737 150,029
150 11,095 27,625 52,252 88,942 143,605 225,044
200 14,793 36,833 69,669 118,589 191,473 300,059
500 36,983 92,083 174,173 296,474 478,683 750,148
Investments At 10% Rate of Return
5 yrs. 10 15 20 25 30
------- ------- ------- ------- ------- ---------
$ 50 3,904 10,328 20,896 38,285 66,895 113,966
75 5,856 15,491 31,344 57,427 100,342 170,949
100 7,808 20,655 41,792 76,570 133,789 227,933
150 11,712 30,983 62,689 114,855 200,684 341,899
200 15,616 41,310 83,585 153,139 267,578 455,865
500 39,041 103,276 208,962 382,848 668,945 1,139,663
The Funds' advertising and sales literature may refer to
historical, current and prospective political, social, economic
and financial trends and developments that affect domestic and
international investment as it relates to any of the New England
Funds. The Funds' advertising and sales literature may include
historical and current performance and total returns of
investment alternatives to the New England Funds. For example,
the Adjustable Rate Fund's advertising and sales literature may
include the historical and current performance and total returns
of bank certificates of deposits, bank and mutual fund money
market accounts and other income investments; and the
advertising and sales literature of any of the New England
Funds, but particularly that of Growth Fund of Israel, New
England Star Worldwide Fund and New England International Equity
Fund, may discuss all of the above international developments,
including but not limited to, international developments
involving Europe, North and South America, Asia, the Middle East
and Africa, as well as events and issues affecting specific
countries that directly or indirectly may have had consequences
for the New England Funds or may have influenced past
performance or may influence current or prospective performance
of the New England Funds. Articles, releases, advertising and
literature may discuss the range of services offered by the
Trusts and New England Funds, L.P., as distributor and transfer
agent of the Funds, with respect to investing in shares of the
Funds and customer service. Such materials may discuss the
multiple classes of shares available through the Trusts and
their features and benefits, including the details of the
pricing structure.
New England Funds, L.P. will make reference in its
advertising and sales literature to awards, citations and honors
bestowed on it by industry organizations and other observers and
raters including, but not limited to Dalbar's Quality Tested
Service Seal and Key Honors Award. Such reference may explain
the criteria for the award, indicate the nature and significance
of the honor and provide statistical and other information about
the award and New England Funds, L.P.'s selection including, but
not limited to, the scores and categories in which New England
Funds, L.P. excelled, the names of funds and fund companies that
have previously won the award and comparative information and
data about those against whom New England Funds, L.P. competed
for the award, honor or citation.
New England Funds, L.P. may publish, allude to or
incorporate in its advertising and sales literature testimonials
from shareholders, clients, brokers who sell or own shares,
broker-dealers, industry organizations and officials and other
members of the public, including, but not limited to, fund
performance, features and attributes, or service and assistance
provided by departments within the organization, employees or
associates of New England Funds, L.P.
Advertising and sales literature may also refer to the beta
coefficient of the New England Funds. A beta coefficient is a
measure of systematic or undiversifiable risk of a stock. A
beta coefficient of more than 1 means that the company's stock
has shown more volatility than the market index (e.g., the S&P
500) to which it is being related. If the beta is less than 1,
it is less volatile than the market average to which it is being
compared. If it equals 1, its risk is the same as the market
index. High variability in stock price may indicate greater
business risk, instability in operations and low quality of
earnings. The beta coefficients of the New England Funds may be
compared to the beta coefficients of other funds.
The Funds may enter into arrangements with banks exempted
from registration under the Securities Exchange Act of 1934.
Advertising and sales literature developed to publicize such
arrangements will explain the relationship of the bank to New
England Funds and New England Funds, L.P. as well as the
services provided by the bank relative to the Funds. The
material may identify the bank by name and discuss the history
of the bank including, but not limited to, the type of bank, its
asset size, the nature of its business and services and its
status and standing in the industry.
In addition, sales literature may be published concerning
topics of general investor interest for the benefit of
registered representatives and the Funds' prospective
shareholders. These materials may include, but are not limited
to, discussions of college planning, retirement planning,
reasons for investing and historical examples of the investment
performance of various classes of securities, securities markets
and indices.
INCOME DIVIDENDS, CAPITAL GAIN DISTRIBUTIONS AND TAX STATUS
As described in the Funds' Prospectuses, it is the policy
of each Fund to pay its shareholders, as dividends,
substantially all net investment income and to distribute
annually all net realized long-term capital gains, if any, after
offsetting any capital loss carryovers.
Income dividends and capital gain distributions are payable
in full and fractional shares of the relevant class of the
particular Fund based upon the net asset value determined as of
the close of the New York Stock Exchange on the record date for
each dividend or distribution. Shareholders, however, may elect
to receive their income dividends or capital gain distributions,
or both, in cash. The election may be made at any time by
submitting a written request directly to New England Funds. In
order for a change to be in effect for any dividend or
distribution, it must be received by New England Funds on or
before the record date for such dividend or distribution.
As required by federal law, detailed federal tax
information will be furnished to each shareholder for each
calendar year on or before January 31 of the succeeding year.
Each Fund intends to qualify each year as a regulated
investment company under Subchapter M of the Code. In order to
qualify, each Fund must, among other things (i) derive at least
90% of its gross income from dividends, interest, payments with
respect to certain securities loans, gains from sale of
securities or foreign currencies, or other income (including but
not limited to gains from options, futures or forward contracts)
derived with respect to its business of investing in such stock,
securities or currencies; (ii) derive less than 30% of its gross
income from gains from the sale or other disposition of
securities held for less than three months; (iii) distribute at
least 90% of its dividend, interest and certain other taxable
income each year; and (iv) at the end of each fiscal quarter
maintain at least 50% of the value of its total assets in cash,
government securities, securities of other regulated investment
companies, other securities of issuers which represent, with
respect to each issuer, no more than 5% of the value of the
Fund's total assets and 10% of the outstanding voting securities
of such issuer, and with no more than 25% of its assets invested
in the securities (other than those of the U.S. government or
other regulated investment companies) of any one issuer or of
two or more issuers which the Fund controls and which are
engaged in the same, similar or related trades and businesses.
So long as it qualifies for treatment as a regulated investment
company, a Fund will not be subject to federal income tax on
income paid to its shareholders in the form of dividends or
capital gains distributions.
An excise tax at the rate of 4% will be imposed on the
excess, if any, of each Fund's "required distribution" over its
actual distributions in any calendar year. Generally, the
"required distribution" is 98% of the Fund's ordinary income for
the calendar year plus 98% of its capital gain net income
recognized during the one-year period ending on October 31 (or
December 31, if the Fund so elects) plus undistributed amounts
from prior years. Each Fund intends to make distributions
sufficient to avoid imposition of the excise tax. Distributions
declared by a Fund during October, November or December to
shareholders of record on a date in any such month and paid by
the Fund during the following January will be treated for
federal tax purposes as paid by the Fund and received by
shareholders on December 31 of the year in which declared.
Shareholders of each Fund will be subject to federal income
taxes on distributions made by the Fund (other than "exempt-
interest dividends" paid by the Municipal Income, Massachusetts,
New York and California Funds, as described in the relevant
Prospectuses) whether received in cash or additional shares of
the Fund. Distributions by each Fund of net income and short-
term capital gains, if any, will be taxable to shareholders as
ordinary income. Distributions of long-term capital gains, if
any, will be taxable to shareholders as long-term capital gains,
without regard to how long a shareholder has held shares of the
Fund. A loss on the sale of shares held for 6 months or less
will be treated as a long-term capital loss to the extent of any
long-term capital gain dividend paid to the shareholder with
respect to such shares.
Dividends and distributions on Fund shares received shortly
after their purchase, although in effect a return of capital,
are subject to federal income taxes.
The International Equity Fund may be eligible to make and,
if eligible, may make an election under Section 853 of the Code
so that its shareholders will be able to claim a credit or
deduction on their income tax returns for, and will be required
to treat as part of the amounts distributed to them, their pro
rata portion of qualified taxes paid by the Fund to foreign
countries. The ability of shareholders of the Fund to claim a
foreign tax credit is subject to certain limitations imposed by
Section 904 of the Code, which in general limit the amount of
foreign tax that may be used to reduce a shareholder's U.S. tax
liability to that amount of U.S. tax which would be imposed on
the amount and type of income in respect of which the foreign
tax was paid. A shareholder who for U.S. income tax purposes
claims a foreign tax credit in respect of Fund distributions may
not claim a deduction for foreign taxes paid by the Fund,
regardless of whether the shareholder itemizes deductions.
Also, under Section 63 of the Code, no deduction in respect of
income taxes paid to foreign countries may be claimed by
shareholders who do not itemize deductions on their federal
income tax returns. The Fund will notify shareholders each year
of the amount for dividends and distributions and the
shareholder's pro rata share of qualified taxes paid by the Fund
to foreign countries.
Each Fund's transactions, if any, in foreign currencies are
likely to result in a difference between the Fund's book income
and taxable income. This difference may cause a portion of the
Fund's income distributions to constitute a return of capital
for tax purposes or require the Fund to make distributions
exceeding book income to avoid excise tax liability and to
qualify as a regulated investment company.
The International Fund may own shares in certain foreign
investment entities, referred to as "passive foreign investment
companies." In order to avoid U.S. federal income tax, and an
additional charge on a portion of any "excess distribution" from
such companies or gain from the disposition of such shares, the
Fund has elected to "mark to market" annually its investments in
such entities and to distribute any resulting net gain to
shareholders. As a result, the Fund may be required to sell
securities it would have otherwise continued to hold in order to
make distributions to shareholders in or order to avoid any Fund-
level tax.
Redemptions and exchanges of each Fund's shares are taxable
events and, accordingly, shareholders may realize gains and
losses on these transactions. If shares have been held for more
than one year, gain or loss realized will be long-term capital
gain or loss, provided the shareholder holds the shares as a
capital asset. Furthermore, no loss will be allowed on the sale
of Fund shares to the extent the shareholder acquired other
shares of the same Fund within 30 days prior to the sale of the
loss shares or 30 days after such sale.
The foregoing is a general and abbreviated summary of the
applicable provisions of the Code and related regulations
currently in effect. For the complete provisions, reference
should be made to the pertinent Code sections and regulations.
The Code and regulations are subject to change by legislative or
administrative actions.
Dividends and distributions also may be subject to state
and local taxes. Shareholders are urged to consult their tax
advisers regarding specific questions as to federal, state or
local taxes.
The foregoing discussion relates solely to U.S. federal
income tax law. Non-U.S. investors should consult their tax
advisers concerning the tax consequences of ownership of shares
of the Fund, including the possibility that distributions may be
subject to a 30% United States withholding tax (or a reduced
rate of withholding provided by treaty).
FINANCIAL STATEMENTS
The financial statements of New England Funds Trust I and
New England Funds Trust II and the related reports of
independent accountants included in their annual reports for the
year ended December 31, 1995 are incorporated herein by
reference.
<PAGE>
APPENDIX A
DESCRIPTION OF BOND RATINGS
STANDARD & POOR'S CORPORATION
AAA
This is the highest rating assigned by Standard & Poor's to a
debt obligation and indicates an extremely strong capacity to
pay interest and repay principal.
AA
Bonds rated AA also qualify as high quality debt obligations.
Capacity to pay interest and repay principal is very strong, and
in the majority of instances they differ from AAA issues only in
small degree.
A
Bonds rated A have a strong capacity to pay interest and repay
principal, although they are somewhat more susceptible to the
adverse effects of changes in circumstances and economic
conditions.
BBB
Bonds rated BBB are regarded as having an adequate capacity to
pay interest and repay principal. Whereas they normally exhibit
adequate protection parameters, adverse economic conditions or
changing circumstances are more likely to lead to a weakened
capacity to repay principal and pay interest for bonds in this
category than for bonds in higher rated categories.
BB, B, CCC, CC, C
Bonds rated BB, B, CCC, CC and C are regarded, on balance, as
predominantly speculative with respect to capacity to pay
interest and repay principal in accordance with the terms of the
obligation. BB indicates the lowest degree of speculation and C
the highest degree of speculation. While such bonds will likely
have some quality and protective characteristics, these are
outweighed by large uncertainties or major risk exposures to
adverse conditions.
CI
The rating CI is reserved for income bonds on which no interest
is being paid.
D
Bonds rated D are in default, and payment of interest and/or
repayment of principal is in arrears.
Plus (+) or Minus (-); The ratings from "AA" to "B" may be
modified by the addition of a plus or minus sign to show
relative standing within the major rating categories.
MOODY'S INVESTORS SERVICE, INC.
Aaa
Bonds that are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are
generally referred to as "gilt edge." Interest payments are
protected by a large, or by an exceptionally stable, margin, and
principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most
unlikely to impair the fundamentally strong position of such
issues.
Aa
Bonds that are rated Aa are judged to be high quality by all
standards. Together with the Aaa group they comprise what are
generally known as high grade bonds. They are rated lower than
the best bonds because margins of protection may not be as large
as in Aaa securities or fluctuation of protective elements may
be of greater amplitude or there may be other elements present
that make the long-term risks appear somewhat larger than in Aaa
securities.
A
Bonds that are rated A possess many favorable investment
attributes and are to be considered as upper medium grade
obligations. Factors giving security to principal and interest
are considered adequate, but elements may be present that
suggest a susceptibility to impairment sometime in the future.
Baa
Bonds that are rated Baa are considered as medium grade
obligations; i.e., they are neither highly protected nor poorly
secured. Interest payments and principal security appear
adequate for the present, but certain protective elements may be
lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment
characteristics and, if fact, have speculative characteristics
as well.
Ba
Bonds which are rated Ba are judged to have speculative
elements; their future cannot be considered as well assured.
Often the protection of interest and principal payments may be
very moderate, and thereby not well safeguarded during both good
and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B
Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal
payments or of maintenance of other terms of the contract over
any long period of time may be small.
Caa
Bonds which are rated Caa are of poor standing. Such issues may
be in default of there may be present elements of danger with
respect to principal or interest.
Ca
Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default
or have other marked shortcomings.
C
Bonds which are rated C are the lowest rated class of bonds, and
issues so rated can be regarded as having extremely poor
prospects of ever attaining any real investment standing.
Should no rating be assigned by Moody's, the reason may be one
of the following:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities
that are not rated as a matter of policy.
3. There is a lack of essential data pertaining to the
issue or issuer.
4. The issue was privately placed in which case the rating
is not published in Moody's publications.
Suspension or withdrawal may occur if new and material
circumstances arise, the effects of which preclude satisfactory
analysis; if there is not longer available reasonable up-to-date
data to permit a judgment to be formed; if a bond is called for
redemption; or for other reasons.
Note: Those bonds in the Aa, A, Baa, Ba and B groups which
Moody's believes possess the strongest investment attributes are
designated by the symbols Aa1, A1, Baa1, and B1.
<PAGE>
APPENDIX B
PUBLICATIONS THAT MAY CONTAIN FUND INFORMATION
ABC and affiliates
Adam Smith's Money World
America On Line
Anchorage Daily News
Atlanta Constitution
Atlanta Journal
Arizona Republic
Austin American Statesman
Baltimore Sun
Bank Investment Marketing
Barron's
Bergen County Record (NJ)
Bloomberg Business News
Bond Buyer
Boston Business Journal
Boston Globe
Boston Herald
Broker World
Business Radio Network
Business Week
CBS and affiliates
CFO
Changing Times
Chicago Sun Times
Chicago Tribune
Christian Science Monitor
Christian Science Monitor News Service
Cincinnati Enquirer
Cincinnati Post
CNBC
CNN
Columbus Dispatch
CompuServe
Dallas Morning News
Dallas Times-Herald
Denver Post
Des Moines Register
Detroit Free Press
Donoghues Money Fund Report
Dorfman, Dan (syndicated column)
Dow Jones News Service
Economist
FACS of the Week
Fee Adviser
Financial News Network
Financial Planning
Financial Planning on Wall Street
Financial Research Corp.
Financial Services Week
Financial World
Fitch Insights
Forbes
Fort Worth Star-Telegram
Fortune
Fox Network and affiliates
Fund Action
Fund Decoder
Global Finance
(the) Guarantor
Hartford Courant
Houston Chronicle
INC
Indianapolis Star
Individual Investor
Institutional Investor
International Herald Tribune
Investment Advisor
Investment Company Institute
Investment Dealers Digest
Investment Profiles
Investment Vision
Investor's Daily
IRA Reporter
Journal of Commerce
Kansas City Star
KCMO (Kansas City)
KOA-AM (Denver)
LA Times
Leckey, Andrew (syndicated column)
Lear's
Life Association News
Lifetime Channel
Miami Herald
Milwaukee Sentinel
Money
Money Maker
Money Management Letter
Morningstar
Mutual Fund Market News
Mutual Funds Magazine
National Public Radio
National Underwriter
NBC and affiliates
New England Business
New England Cable News
New Orleans Times-Picayune
New York Daily News
New York Times
Newark Star Ledger
Newsday
Newsweek
Nightly Business Report
Orange County Register
Orlando Sentinel
Palm Beach Post
Pension World
Pensions and Investments
Personal Investor
Philadelphia Inquirer
Porter, Sylvia (syndicated column)
Portland Oregonian
Prodigy
Public Broadcasting Service
Quinn, Jane Bryant (syndicated column)
Registered Representative
Research Magazine
Resource
Reuters
Rocky Mountain News
Rukeyser's Business (syndicated column)
Sacramento Bee
San Diego Tribune
San Francisco Chronicle
San Francisco Examiner
San Jose Mercury
Seattle Post-Intelligencer
Seattle Times
Securities Industry Management
Smart Money
St. Louis Post Dispatch
St. Petersburg Times
Standard & Poor's Outlook
Standard & Poor's Stock Guide
Stanger's Investment Advisor
Stockbroker's Register
Strategic Insight
Tampa Tribune
Time
Tobias, Andrew (syndicated column)
Toledo Blade
UPI
US News and World Report
USA Today
USA TV Network
Value Line
Wall St. Journal
Wall Street Letter
Wall Street Week
Washington Post
WBZ
WBZ-TV
WCVB-TV
WEEI
WHDH
Worcester Telegram
Worth Magazine
WRKO
APPENDIX C
ADVERTISING AND PROMOTIONAL LITERATURE
References may be included in New England Funds' advertising
and promotional literature to NEIC and its affiliates that
perform advisory and subadvisory functions for New England Funds
including, but not limited to: Back Bay Advisors, Harris
Associates L.P., Loomis Sayles, CGM and Westpeak.
References may be included in New England Funds' advertising
and promotional literature to NEIC affiliates that do not perform
advisory or subadvisory functions for the Funds including, but
not limited to, New England Investment Associates, L. P., Copley
Real Estate Advisors, L.P., Marlborough Capital Advisors, L.P.,
Reich & Tang Capital Management and Reich and Tang Mutual Funds
Group.
References to subadvisers unaffiliated with NEIC that
perform subadvisory functions on behalf of New England Funds may
be contained in New England Funds' advertising and promotional
literature including, but not limited to, Berger, Draycott, Janus
Capital, Founders and Montgomery Asset Management, L.P.
New England Funds' advertising and promotional material will
include, but is not limited to, discussions of the following
information about the above entities:
Specific and general investment emphasis, specialties,
competencies, operations and functions
Specific and general investment philosophies, strategies,
processes and techniques
Specific and general sources of information, economic models,
forecasts and data services utilized, consulted or considered
in the course of providing advisory or other services
The corporate histories, founding dates and names of founders
of the entities
Awards, honors and recognition given to the firms
The names of those with ownership interest and the percentage
of ownership
Current capitalization, levels of profitability and other
financial information
Identification of portfolio managers, researchers, economists,
principals and other staff members and employees
The specific credentials of the above individuals, including
but not limited to, previous employment, current and past
positions, titles and duties performed, industry experience,
educational background and degrees, awards and honors
Specific identification of, and general reference to, current
individual, corporate and institutional clients, including
pension and profit sharing plans
Current and historical statistics about:
-total dollar amount of assets managed
-New England Funds' assets managed in total and by Fund
-the growth of assets
-asset types managed
-numbers of principal parties and employees, and the length
of their tenure, including officers, portfolio managers,
researchers, economists, technicians and support staff
-the above individuals' total and average number of years of
industry experience and the total and average length of their
service to the adviser or the subadviser
Specific and general references to portfolio managers and funds
that they serve as portfolio manager of, other than New England
Funds, and those families of funds, other than New England
Funds, including, but not limited to, Star Advisers Fund
portfolio manager Rodney L. Linafelter of Berger and Berger
Funds who also serves as portfolio manager of the Berger 100
Fund; Star Advisers Fund portfolio manager Warren B. Lammert of
Janus Capital and Janus Funds, who also serves as portfolio
manager of Janus Mercury Fund, and New England Star Worldwide
Fund (the "Star Worldwide Fund") portfolio manager Helen Young
Hayes, also of Janus Capital and Janus Funds, who serves as
portfolio manager of the Janus Worldwide Fund, IDEX II Series
Fund - IDEX II Global Portfolio and Janus Aspen Series -
Worldwide Growth Portfolio; Star Worldwide Fund portfolio
managers Josephine S. Jimenez and Bryan L. Sudweeks of
Montgomery Asset Management, L.P., who also serve as portfolio
managers of Montgomery Emerging Markets Fund; Star Advisers
Fund portfolio manager Edward F. Keely and Star Worldwide Fund
portfolio manager Michael W. Gerding of Founders and Founders
Funds, who also serve as portfolio manager of Founders Growth
Fund and Founders Worldwide Growth Fund, respectively; and Star
Advisers Fund portfolio managers Jeffrey C. Petherick and Mary
Champagne of Loomis Sayles and Loomis Sayles Funds, who also
serve as portfolio managers of the Loomis Sayles Small Cap
Fund. Specific and general references may be made to the
Loomis Sayles Funds, the Loomis Sayles Bond Fund and Daniel
Fuss, who serves as portfolio manager of the Strategic Income
Fund and the Loomis Sayles Bond Fund; and Star Worldwide Fund
portfolio manager Robert J. Sanborn and Star Worldwide Fund and
Growth Fund of Israel portfolio manager David G. Herro of
Harris Associates L.P. and Oakmark Funds, who also serve as
portfolio managers of The Oakmark Fund and The Oakmark
International Fund, respectively. Any such references will
indicate that New England Funds and other funds of the managers
differ as to performance, objectives, investment restrictions
and limitations, portfolio composition, asset size and other
characteristics, including fees and expenses. References may
also be made to industry rankings and ratings of the Funds and
other funds managers by the Funds' advisers and subadvisers,
including, but not limited to those provided by Morningstar,
Lipper Analytical Services, Forbes and Worth.
In addition, communications and materials developed by New
England Funds will make reference to the following information
about NEIC and its affiliates:
NEIC is the [fifth] largest publicly traded manager in the
U.S. listed on the New York Stock Exchange. NEIC maintains over
[$78] billion in assets under management. Clients serviced by
NEIC and its affiliates, besides New England Funds, are wealthy
individuals, major corporations and large institutions.
Back Bay Advisors employs a conservative style of management
emphasizing short and intermediate term securities to reduce
volatility, adds value through careful continuous credit analysis
and has expertise in government, corporate and tax-free municipal
bonds and equity securities. Among its clients are Boston City
Retirement System, Public Service Electric and Gas of New Jersey,
Petrolite Corp. and General Mills.
Draycott specializes in international stocks and tracks key
world markets and economic trends from offices in London and
Boston. Its investment approach is based on concentration on
"blue chip" companies in stable, growing economies and is guided
by independent, non-consensus thinking. It monitors country
weightings with strict attention to risk control to promote long-
term returns.
CGM seeks to deliver exceptional growth for its clients
through the selection of stocks with the potential to outperform
the market and grow at a faster rate than the U.S. economy.
Among its approaches are pursuit of growth 50% above the S&P 500,
prompt responses to changes in the market or economy and
aggressive, highly concentrated portfolios.
Loomis Sayles is one of the oldest and largest investment
firms in the U.S. and has provided investment counseling to
individuals and institutions since 1926. Characteristic of
Loomis Sayles is that it has one of the largest staffs of
research analysts in the industry, practices strict buy and sell
disciplines and focuses on sound value in stock and bond
selection. Among its clients are large corporations such as
Chrysler, Mobil Oil and Revlon.
Westpeak employs proprietary research and a disciplined
stock selection process that seeks rigorously to control
unnecessary risk. Its investment process is designed to evaluate
when value and growth styles - two primary approaches to stock
investing - hold potential for reward. Over seventy fundamental
attributes are continuously analyzed by Westpeak's experienced
analysts and sophisticated computer systems. The results are
assessed against Wall Street's consensus thinking, in pursuit of
returns in excess of appropriate benchmarks. The value/growth
strategy is a unique blend of investment styles, seeking
opportunities for increased return with reduced risk. Among the
keys to Westpeak's investment process are continuous review of
timely, accurate data on over 3600 companies, analysis of dozens
of factors for excess return potential and identification of
overvalued and undervalued stocks.
Harris Associates L.P. is a Chicago-based investment
management company with more than $7.6 billion in assets under
management, comprised of the $4 billion Oakmark Fund Group and
$3.6 billion in individual and institutional assets. Harris
Associates L.P.'s investment philosophy is predicated on the
belief that over time market price and value converge and that
investment in securities prices significantly below long-term
value presents the best opportunity to achieve long-term growth
of capital.
On June 30, 1995, NEIC purchased the assets of Graystone
Partners, L.P. ("Graystone"), a Chicago-based consulting firm
focusing exclusively on working with the wealthiest families in
the country. Founded in 1993, Graystone specializes in assisting
high net worth families in developing asset allocation
strategies, identifying appropriate portfolio managers and the
monitoring of investment performance.
References may be included in New England Funds' advertising
and promotional literature about its 401(k) and retirement plans.
The information may include, but is not limited to:
Specific and general references to industry statistics
regarding 401(k) and retirement plans including historical
information and industry trends and forecasts regarding the
growth of assets, numbers of plans, funding vehicles,
participants, sponsors and other demographic data relating to
plans, participants and sponsors, third party and other
administrators, benefits consultants and firms including, but
not limited to, DC Xchange, William Mercer and other
organizations involved in 401(k) and retirement programs with
whom New England Funds may or may not have a relationship.
Specific and general reference to comparative ratings,
rankings and other forms of evaluation as well as statistics
regarding the New England Funds as a 401(k) or retirement plan
funding vehicle produced by, including, but not limited to,
Access Research, Dalbar, Investment Company Institute and
other industry authorities, research organizations and
publications.
Specific and general discussion of economic, legislative, and
other environmental factors affecting 401(k) and retirement
plans, including but not limited to, statistics, detailed
explanations or broad summaries of:
-past, present and prospective tax regulation, Internal
Revenue Service requirements and rules, including, but not
limited to reporting standards, minimum distribution notices,
Form 5500, Form 1099R and other relevant forms and documents,
Department of Labor rules and standards and other regulation.
This includes past, current and future initiatives,
interpretive releases and positions of regulatory authorities
about the past, current or future eligibility, availability,
operations, administration, structure, features, provisions
or benefits of 401(k) and retirement plans
-information about the history, status and future trends of
Social Security and similar government benefit programs
including, but not limited to, eligibility and participation,
availability, operations and administration, structure and
design, features, provisions, benefits and costs
-current and prospective ERISA regulation and requirements.
Specific and general discussion of the benefits of 401(k)
investment and retirement plans, and, in particular, the New
England Funds 401(k) and retirement plans, to the participant
and plan sponsor, including explanations, statistics and other
data, about:
-increased employee retention
-reinforcement or creation of morale
-deductibility of contributions for participants
-deductibility of expenses for employers
-tax deferred growth, including illustrations and charts
-loan features and exchanges among accounts
-educational services materials and efforts, including, but
not limited to, videos, slides, presentation materials,
brochures, an investment calculator, payroll stuffers,
quarterly publications, releases and information on a
periodic basis and the availability of wholesalers and other
personnel.
Specific and general reference to the benefits of investing in
mutual funds for 401(k) and retirement plans, and, in
particular, New England Funds and investing in its 401(k) and
retirement plans, including but not limited to:
-the significant economies of scale experienced by mutual
fund companies in the 401(k) and retirement benefits arena
-broad choice of investment options and competitive fees
-plan sponsor and participant statements and notices
-the plan prototype, summary descriptions and board
resolutions
-plan design and customized proposals
-trusteeship, record keeping and administration
-the services of State Street Bank, including but not limited
to, trustee services and tax reporting
-the services of DST and BFDS, including but not limited to,
mutual fund processing support, participant 800 numbers and
participant 401(k) statements
-the services of Trust Consultants Inc. (TCI), including but
not limited to, sales support, plan record keeping, document
service support, plan sponsor support, compliance testing and
Form 5500 preparation.
Specific and general reference to the role of the investment
dealer and the benefits and features of working with a
financial professional including:
-access to expertise on investments
-assistance in interpreting past, present and future market
trends and economic events
-providing information to clients including participants
during enrollment and on an ongoing basis after participation
-promoting and understanding the benefits of investing,
including mutual fund diversification and professional
management.
<PAGE>
Registration Nos. 2-11101
811-242
NEW ENGLAND FUNDS TRUST II
PART C
OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(a) Financial statements: To be filed by amendment.
(b) Exhibits:
1. (a)Form of Second Amended and Restated Agreement
and Declaration of Trust of the Registrant is
incorporated herein by reference to Exhibit 1(D)
to Post-Effective Amendment No. 91 to this
Registration Statement, filed December 14, 1992.
(b) Amendment No. 6 to Second Amended
and Restated Agreement and Declaration of Trust of
the Registrant will be filed by amendment.
2. (a) Amended and Restated By-Laws of the
Registrant are incorporated herein by reference to
Exhibit 2(B) to Post-Effective Amendment No. 83 to
this Registration Statement, filed on November 4,
1988.
(b) Amendment to the By-Laws of the
Registrant is incorporated herein by reference to
Exhibit 2(B) to Post-Effective Amendment No. 98 to
this Registration Statement, filed on March 2,
1995.
3. Not applicable.
4. Form of share certificate for series of New
England Funds Trust II is incorporated herein by
reference to Exhibit 4 to Post-Effective Amendment No.
98 to this Registration Statement, filed on March 2,
1995.
5. (a) Advisory Agreements between the
Registrant and New England Funds Management, L.P.
("NEFM") relating to the following series of the
Registrant, will be filed by amendment:
New England Growth Opportunities Fund
Growth Fund of Israel
New England Limited Term U.S. Government Fund
New England Adjustable Rate U.S. Government
Fund
New England High Income Fund
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
(b) Sub-Advisory Agreements relating to
the following series of the Registrant between
NEFM and the subadvisers indicated in parentheses,
will be filed by amendment:
New England Growth Opportunities Fund
(Westpeak Investment Advisors, L.P.
("Westpeak"))
Growth Fund of Israel (Harris Associates L.P.
("Harris"))
New England Limited Term U.S. Government Fund
(Back Bay Advisors, L.P. ("Back Bay
Advisors"))
New England Adjustable Rate U.S. Government
Fund (Back Bay Advisors)
New England High Income Fund (Back Bay
Advisors)
New England Massachusetts Tax Free Income Fund
(Back Bay Advisors)
New England Intermediate Term Tax Free Fund of
California (Back Bay Advisors)
New England Intermediate Term Tax Free Fund of
New York (Back Bay Advisors)
6. (a) Form of Distribution Agreement
between the Registrant, on behalf of each of its
series, and New England Funds, L.P. will be filed
by amendment.
7. Not applicable.
8. (a) Letter Agreement between the
Registrant and State Street Bank and Trust Company
relating to the applicability of the Custodian
Contract and the Transfer and Service Agency
Agreement to New England Adjustable Rate U.S.
Government Fund is incorporated herein by
reference to Exhibit 8 (A) to Post-Effective
Amendment No. 91 to this Registration Statement,
filed on December 14, 1992.
(b) Form of Letter Agreement between
the Registrant and State Street Bank and Trust
Company relating to the applicability of the
Custodian Contract and the Transfer Agency and
Service Agreement to New England Intermediate Term
Tax Free Fund of California and New England
Intermediate Term Tax Free Fund of New York is
incorporated herein by reference to Exhibit 8(B)
to Post-Effective Amendment No. 91 to this
Registration Statement, filed on December 14,
1992.
(c) Form of Letter Agreement between
the Registrant and State Street Bank and Trust
Company relating to the applicability of the
Custodian Contract and the Transfer Agency and
Service Agreement to Growth Fund of Israel is
incorporated herein by reference to Post-Effective
Amendment No. 100 to this Registration Statement,
filed on October 11, 1995.
(d) Form of new Custodian Agreement
between the Registrant and State Street Bank and
Trust Company is incorporated herein by reference
to Post-Effective Amendment No. 183 to this
Registration Statement, filed on November 4, 1988.
9. (a) Form of Service Agreement between
Back Bay Advisors and the Distributor is
incorporated herein by reference to Post-Effective
Amendment No. 83 to this Registration Statement,
filed on November 4, 1988.
(b) Form of Transfer Agency Agreement
between the Registrant and State Street Bank and
Trust Company is incorporated herein by reference
to Post-Effective Amendment No. 83 to this
Registration Statement, filed on November 4, 1988.
(c) Form of Dealer Agreement of New
England Funds, L.P., the Registrant's principal
underwriter, is incorporated herein by reference
to Post-Effective Amendment No. 88 to this
Registration Statement, filed on August 2, 1991.
(d) Organizational Expense
Reimbursement Agreement between the Registrant, on
behalf of its New England Adjustable Rate U.S.
Government Fund, and New England Funds, L.P. is
incorporated herein by reference to Post-Effective
Amendment No. 89 to this Registration Statement,
filed on January 30, 1992.
(e) Form of Organizational Expense
Reimbursement Agreement between the Registrant, on
behalf of its New England Intermediate Term Tax
Free Fund of California and New England
Intermediate Term Tax Free Fund of New York, and
New England Funds, L.P. is incorporated herein by
reference to Post-Effective Amendment No. 91 to
this Registration Statement, filed December 14,
1992.
(f) Form of Organizational Expense
Reimbursement Agreement between the Registrant, on
behalf of its Growth Fund of Israel, and New
England Funds, L.P. wil be filed by amendment.
10. (a) Opinion and consent of counsel with
respect to the Registrant's New England Growth
Opportunities Fund, New England High Income Fund,
New England Limited Term U.S. Government Fund, and
New England Massachusetts Tax Free Income Fund is
incorporated herein by reference to Post-Effective
Amendment No. 84 to this Registration Statement,
filed on January 3, 1989.
(b) Opinion and consent of counsel with
respect to the Registrant's New England Adjustable
Rate U.S. Government Fund is incorporated by
reference to Post-Effective Amendment No. 88 to
this Registration Statement, filed on August 2,
1991.
(c) Opinions and consents of counsel
with respect to the Registrant's New England
Intermediate Term Tax Free Fund of California and
New England Intermediate Term Tax Free Fund of New
York are incorporated herein by reference to Post-
Effective Amendment No. 92 to this Registration
Statement, filed on March 2, 1993.
(d) Opinion and consent of counsel with
respect to offering multiple classes of shares for
all series of the Registrant is incorporated
herein by reference to Post-Effective Amendment
No. 95 to this Registration Statement, filed on
December 2, 1993.
(e) Opinion and consent of counsel with
respect to the Registrant's Rule 24e-2 Notice is
incorporated herein by reference to Exhibit 10(E)
to Post-Effective Amendment No. 98 to this
Registration Statement, filed on March 2, 1995.
(f) Opinion and consent of counsel with
respect to the Registrant's Growth Fund of Israel
will be filed by amendment.
11. Consent of Coopers & Lybrand LLP will be filed by
amendment.
12. Not applicable.
13. Not applicable.
14. Model Retirement Plans.
(a) Keogh Plan is incorporated herein
by reference to Exhibit 14(a) to Post-Effective
Amendment No. 78 to this Registration Statement,
filed on August 1, 1985.
(b) IRA Plan is incorporated herein by
reference to Exhibit 14(b) to Post-Effective
Amendment No. 78 to this Registration Statement,
filed on August 1, 1985.
15. (a) Forms of Rule 12b-1 Plans relating
to Class A shares of the Registrant's 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 High Income Fund, New England
Growth Opportunities Fund, New England Limited
Term U.S. Government Fund and New England
Adjustable Rate U.S. Government Fund are
incorporated herein by reference to Post-Effective
Amendment No. 93 to this Registration Statement,
filed on June 25, 1993.
(b) Form of Rule 12b-1 Plan relating to
the Class B shares of each series of the
Registrant will be filed by amendment.
(c) Rule 12b-1 Plan relating to the
Class C shares of New England Limited Term U.S.
Government Fund is incorporated herein reference
to Exhibit 15 (C) to Post-Effective Amendment No.
98 to this Registration Statement, filed on March
2, 1995.
(d) Form of Rule 12b-1 Plan relating to
Class C shares of New England Growth Opportunities
Fund is incorporated herein by reference to
Exhibit 15 (D) to Post-Effective Amendment No. 98
to this Registration Statement, filed on March 2,
1995.
(e) Forms of Rule 12b-1 Plans relating
to the Class A and Class C shares of Growth Fund
of Israel are incorporated herein by reference to
Post-Effective Amendment No. 100 to this
Registration Statement, filed on October 11, 1995.
16. Schedule for computation of performance
quotations is incorporated herein by reference to
Exhibit 16 to Post-Effective Amendment No. 83 to this
Registration Statement, filed on November 4, 1988.
17. Financial Data Schedule will be filed by
amendment.
18. Plan adopted pursuant to Rule 18f-3 under the
1940 Act is incorporated herein by reference to
Exhibit 18 to Post-Effective Amendment No. 99 to this
Registration Statement, filed on May 1, 1995.
19. Powers of Attorney designating Edward A.
Benjamin, Frank Nesvet, Henry L.P. Schmelzer and
Robert P. Connolly as attorneys to sign for Kenneth J.
Cowan, Peter S. Voss, Henry L.P. Schmelzer, Graham T.
Allison Jr., James H. Scott, Pendleton P. White, John
A. Shane and Sandra O. Moose are incorporated herein
by reference to Post-Effective Amendment No. 100 to
this Registration Statement, filed on October 11,
1995.
Item 25. Persons Controlled by or under Common Control with
Registrant
None.
Item 26. Number of Holders of Securities
The following table sets forth the number of record
holders of each class of securities of the
Registrant as of January 31, 1996.
Title of Series Number of Record Holders
Class A Class B Class C Class Y
New England Adjustable Rate4,126 231 --- 1
U.S. Government Fund
New England Growth 8,729 3,393 215 1
Opportunities Fund
New England Limited Term U.S.16,0011,301 136 3
Government Fund
New England High 2,335 716 --- ---
Income Fund
New England Massachusetts Tax5,352 283 --- ---
Free Income Fund
New England Intermediate Term597 135 --- ---
Tax Free Fund of California
New England Intermediate Term575 96 --- ---
Tax Free Fund of New York
Growth Fund of Israel --- --- --- ---
Item 27. Indemnification
See Article 4 of the Trust's Amended and Restated By-Laws,
filed as Exhibit 2(B) to Post-Effective Amendment No. 83
to Registration Statement, filed on November 4, 1988,
which is incorporated herein by reference.
In addition, New England Mutual Life Insurance Company
("The New England"), the parent company of the
Registrant's adviser and distributor, maintains a
directors and officers liability insurance policy with
maximum coverage of $15 million, under which the trustees
and officers of the Registrant are named insured.
Item 28. Business and Other Connections of Investment Adviser
(a) Back Bay Advisors, the subadviser of the
Registrant's 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 High Income Fund, New
England Limited Term U.S. Government Fund and New
England Adjustable Rate U.S. Government Fund, is a
registered investment adviser that is wholly owned by
New England Investment Companies, L.P. ("NEIC"), a New
York Stock Exchange listed company. Back Bay Advisors
serves as investment adviser to a number of other
registered investment companies. Back Bay Advisors'
general partner, directors and officers have been
engaged during the past two fiscal years in the
following businesses, professions, vocations or
employments of a substantial nature (former
affiliations are marked with an asterisk):
Name and Office withName and Address of Nature of
Back Bay Advisors Other Affiliations Connection
Back Bay None None
Advisors, Inc.
General Partner
Charles T. NEF Corporation Director
Wallis, 399 Boylston
President and Street
Chief Executive Boston, MA 02116
Officer
Back Bay President, CEO
Advisors, Inc. and Director
399 Boylston
Street
Boston, MA 02116
Charles G. None None
Glueck,
Senior Vice
President
Scott A. Chicago Board of Senior Vice
Millimet, Trade* President and
Executive Vice 141 West Jackson Manager of
President Boulevard Carroll,
Chicago, IL 60604 McEntee &
McGinley
Edgar M. Reed, Aetna Capital Head of Fixed
Executive Vice Management* Income
President and 151 Farmington Management
Chief Investment Avenue Group
Officer Hartford, CT
06156
Catherine None None
Bunting,
Senior Vice
President
J. Scott None None
Nicholson,
Senior Vice
President
Nathan R. None None
Wentworth,
Vice President
Paul Zamagni, None None
Vice President
and Treasurer
Peter Hanson, NEIC Counsel and
Secretary and Senior Vice
Clerk President,
Assistant
Secretary and
Assistant Clerk
Draycott Assistant
Partners, Ltd.* Secretary and
("Draycott") Assistant Clerk
8 City Road
London EC2Y 1HE,
England
Harold B. None None
Bjornson,
Vice President
Peter Palfrey, None None
Vice President
Eric Gutterson, None None
Vice President
(b) New England Funds Management, L.P. ("NEFM"), a
registered investment adviser that is wholly owned by
NEIC, serves as investment adviser to each of the
series of the Registrant. NEFM, organized in 1995,
also serves as investment adviser to most of the series
of New England Funds Trust I and to New England Equity
Income Fund. NEFM's general partner, directors and
officers have been engaged during the past two fiscal
years in the following businesses, professions,
vocations or employments of a substantial nature
(former affiliations are marked with an asterisk):
Name and Office Name and Address of Nature of
with NEFM Other Affiliations Connection
NEF New England General
Corporation Funds, L.P. Partner
General 399 Boylston
Partner Street
Boston, MA
02116
Henry L.P. New England President and
Schmelzer, Funds, L.P. Chief
President and Executive
Chief Officer
Executive
Officer
NEF President,
Corporation Chief
Executive
Officer and
Director
Back Bay Director
Advisors, Inc.
New England Director
Securities
Corporation*
399 Boylston
Street
Boston, MA
02116
Frank Nesvet, New England Senior Vice
Senior Vice Funds, L.P. President and
President, Chief
Chief Financial
Financial Officer
Officer and
Treasurer
NEF Senior Vice
Corporation President,
Chief
Financial
Officer
and Treasurer
Robert P. NEF Senior Vice
Connolly, Corporation President,
Senior Vice General
President, Counsel,
General Secretary and
Counsel, Clerk
Assistant
Secretary and
Clerk
New England Senior Vice
Funds, L.P. President,
General
Counsel,
Secretary and
Clerk
Kroll Managing
Associates, Director and
Inc.* General
900 3rd Avenue Counsel
New York, NY
10022
Bruce R. NEF Executive Vice
Speca, Corporation President
Executive Vice
President
New England Executive Vice
Funds, L.P. President
Peter H. NEF Vice President
Duffy, Corporation
Vice President Vice President
New England
Funds, L.P.
Martin G. NEF Vice President
Dyer, Corporation
Vice President
New England Vice President
Funds, L.P.
Ralph M. NEF Vice President
Greggs, Corporation
Vice President Vice President
New England
Funds, L.P.
Beatriz A. NEF Assistant
Pina, Corporation Comptroller
Assistant
Controller New England Assistant
Funds, L.P. Comptroller
Sheila M. NEF Vice
Barry, Corporation President,
Vice Senior
President, Counsel,
Secretary and Assistant
Assistant Secretary and
Clerk Assistant
Clerk
New England Vice
Funds, L.P. President,
Senior
Counsel,
Assistant
Secretary and
Assistant
Clerk
(c) Westpeak serves as subadviser to the Registrant's
New England Growth Opportunities Fund and is wholly
owned by NEIC. Organized in 1991, Westpeak provides
investment management services to other mutual funds
and institutional clients. Westpeak's general partner,
directors and officers have been engaged during the
past two fiscal years in the following businesses,
professions, vocations or employments of a substantial
nature (former affiliations are marked with an
asterisk):
Westpeak None None
Investment
Advisors, Inc.
General Partner
Gerald H. None None
Scriver,
President, Chief
Executive Officer
and Chief
Investment
Officer
Edward N. NEIC Executive Vice
Wadsworth, President, Clerk,
Clerk, Secretary, Secretary and
Chief Legal General Counsel
Officer
NEIC Inc. Executive Vice
President, Clerk,
Secretary and
General Counsel
Marlborough Assistant Clerk
Capital Advisors,
Inc.
399 Boylston
Street
Boston, MA 02116
New England Secretary
Investment
Associates, Inc.
("NEIA")
399 Boylston
Street
Boston, MA 02116
Draycott* General Counsel,
Clerk and
Secretary
Robert A. Franz, None None
Senior Vice
President
Philip J. Cooper, None None
Vice President
Portfolio
Management
Beverly J. The New England Attorney and
DeWitt, Assistant
Assistant Secretary
Secretary and
Assistant Clerk
TNE Advisers, Inc. Chief Legal
501 Boylston Officer, Secretary
Street and Clerk
Boston, MA 02117
(d) Harris serves as subadviser to the Registrant's
Growth Fund of Israel. Harris, which is wholly owned
by NEIC, serves as investment adviser to mutual funds,
individuals, trusts, retirement plans, endowments and
foundations, and manages several private partnerships,
and is a registered commodity trading adviser and
commodity pool operator. Harris's general partner,
directors and officers have been engaged during the
past two fiscal years in the following businesses,
professions, vocations or employments of a substantial
nature:
Name and Office withName and Address of Nature of
Harris Other Affiliations Connection
Harris Associates Harris General
Inc., Associates Partner
General Partner Securities,
L.P.
Two North
LaSalle
Street
Chicago, IL
60602
Victor S. None None
Morgenstern,
President and
Chief Executive
Officer
Donald Terao, None None
Chief Financial
Officer,
Treasurer and
Secretary
Robert M. Levy, None None
Vice President
Roxanne M. None None
Martino,
Vice President
Anita Nagler, None None
Vice President
Item 29. Principal Underwriter
(a)New England Funds, L.P., the Registrant's principal
underwriter, also serves as principal underwriter for:
New England Funds Trust I
New England Funds Trust III
New England Tax Exempt Money Market Trust
New England Cash Management Trust
(b)The general partner and officers of the Registrant's
principal underwriter, New England Funds, L.P., and their
address are as follows:
Positions and Offices Positions and Offices
Name with Principal Underwriter with Registrant
NEF Corporation General Partner None
Henry L.P. President and President
Schmelzer Chief Executive and
Officer Trustee
J. Steven Neamtz Executive Vice Executive
President Vice
President
Bruce R. Speca Executive Vice Executive
President Vice
President
Robert P. Senior Vice Secretary
Connolly President, General
Counsel, Secretary
and Clerk
Frank Nesvet Senior Vice Treasurer
President and
Chief Financial
Officer
Manish Agrawal Vice President None
Elizabeth Burns Vice President None
Sheila M. Barry Vice President, Assistant
Senior Counsel, Secretary
Assistant
Secretary and
Assistant Clerk
James H. Davis Vice President None
Peter H. Duffy Vice President None
Martin G. Dyer Vice President None
Tracy Fagan Vice President None
William H. Vice President None
Finnegan
Raymond K. Vice President None
Girouard Treasurer and
Controller
Ralph M. Greggs Vice President None
Lynne H. Johnson Vice President None
Caren I. Leedom
Vice President None
Marie G. Vice President None
McKenzie
Bernard M. Vice President None
Shavelson
Christine L. Vice President Vice
Swanson President
Kristine E. Vice President Vice
Swanson President
Beatriz A. Pina Assistant None
Comptroller
The principal business address of all the above persons or
entities is 399 Boylston Street, Boston, MA 02116.
(c) Not applicable.
Item 30. Location of Accounts and Records
The following companies maintain possession of the documents
required by the specified rules:
(a) Registrant
Rule 31a-1(b)(4)
Rule 31a-2(d)
(b) State Street Bank and Trust Company
225 Franklin Street
Boston, Massachusetts 02110
Rule 31a-1(a)
Rule 31a(b)(1), (2), (3), (5), (6), (7), (8)
Rule 31a-2(d)
(c)(i) For series of the Registrant managed by Back
Bay Advisors:
New England Funds Management, L.P.
399 Boylston Street
Boston, Massachusetts 02116
Rule 31a-1(a); Rule 31a-1(b)(9), (10), (11); Rule 31a-
1(f)
Rule 31a-2(d), (e)
Back Bay Advisors, L.P.
New England Funds Management L.P.
399 Boylston Street
Boston, Massachusetts 02116
Rule 31a-1(a); 31a-1(b)(9), (10), (11); 31a-1(f)
Rule 31a-2(d); and 31a-2(e)
(ii) For New England Growth Opportunities Fund:
New England Funds Management, L.P.
399 Boylston Street
Boston, Massachusetts 02116
Rule 31a-1(a); Rule 31a-1(b)(9), (10), (11); Rule 31a-
1(f)
Rule 31a-2(d), (e)
Westpeak Investment Advisors, L.P.
1011 Walnut Street
Boulder, Colorado 80302
Rule 31a-1(b)(9), (10), (11); Rule 31a-1(f)
Rule 31a-2(d), 31a-2(e)
(iii) For Growth Fund of Israel:
New England Funds Management, L.P.
399 Boylston Street
Boston, Massachusetts 02116
Rule 31a-1(a); Rule 31a-1(b)(9), (10), (11); Rule 31a-
1(f)
Rule 31a-2(d), (e)
Harris Associates L.P.
Two North LaSalle Street
Chicago, Illinois 60602
Rule 31a-1(b)(9), (10), (11); Rule 31a-1(f); Rule 31a-
2(d), (e)
(d) New England Funds, L.P.
399 Boylston Street
Boston, Massachusetts 02116
Rule 31a-1(d)
Rule 31a-2(c)
Item 31. Management Services
None.
Item 32. Undertakings
The Registrant undertakes to provide the annual report of any
of its series to any person who receives a prospectus for such
series and who requests the annual report.
NEW ENGLAND FUNDS TRUST II
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and
the Investment Company Act of 1940, the Registrant certifies that
it has duly caused this Post-Effective Amendment No. 102 to its
Registration Statement to be signed on its behalf by the
undersigned, thereto duly authorized, in the City of Boston, in
the Commonwealth of Massachusetts on the 15th day of February,
1996.
New England Funds Trust II
By: PETER S. VOSS*
Peter S. Voss
Chief Executive Officer
*By: ROBERT P. CONNOLLY
Robert P. Connolly
Attorney-in-fact
Pursuant to the requirements of the Securities Act of 1933,
this Registration Statement has been signed below by the
following persons in the capacities and on the date indicated.
Signature
PETER S. VOSS*
Peter S. Voss Chairman of the Board; February 15, 1996
Chief Executive
Officer;
Principal Executive
Officer;
Trustee
FRANK NESVET
Frank Nesvet Treasurer February 15, 1996
HENRY L.P.
SCHMELZER* Trustee and President February 15, 1996
Henry L.P. Schmelzer
GRAHAM T. ALLISON
JR.* Trustee February 15, 1996
Graham T. Allison
Jr.
KENNETH J. COWAN*
Kenneth J. Cowan Trustee February 15, 1996
SANDRA O. MOOSE*
Sandra O. Moose Trustee February 15, 1996
JOHN A. SHANE*
John A. Shane Trustee February 15, 1996
JAMES H. SCOTT*
James H. Scott Trustee February 15, 1996
PENDLETON P. WHITE*
Pendleton P. White Trustee February 15, 1996
*By: ROBERT P. CONNOLLY
Robert P. Connolly
Attorney-In-Fact
February 15, 1996
