<PAGE>
Registration Nos. 2-11101
811-242
----------------
SECURITIES AND EXCHANGE COMMISSION
----------------
Washington, DC 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
Pre-Effective Amendment No. [_]
----
Post-Effective Amendment No. 103 [X]
-----
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY [X]
ACT OF 1940
Amendment No. 37 [X]
----
(Check appropriate box or boxes)
----------------
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)
----------------
Robert P. Connolly, Esq.
New England Funds, L.P.
399 Boylston Street
Boston, Massachusetts 02116
(Name and address of agent for service)
Copy to:
Edward A. Benjamin, Esq.
Ropes & Gray
One International Place
Boston, Massachusetts 02110
----------------
It is proposed that this filing will become effective (check appropriate box)
[_] immediately upon filing pursuant to paragraph (b) of Rule 485
[X] on April 15, 1996 pursuant to paragraph (b) of Rule 485
[_] 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 filed on February 28, 1996 the Rule
24f-2 Notice for the Registrant's fiscal year ended December 31, 1995.
<PAGE>
CALCULATION OF REGISTRATION FEE
UNDER THE SECURITIES ACT OF 1933
<TABLE>
<CAPTION>
=======================================================================================
Title of Amount being Proposed Proposed Amount of
securities being registered maximum maximum registration
offered offering price aggregate fee**
per unit* offering price
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares of 51,806,761 $11.436 $592,462,118.80 $100.00
beneficial shares
interest
=======================================================================================
</TABLE>
* Estimated solely for the purpose of determining the registration fee pursuant
to Rule 457(d) under the Securities Act of 1933, on the basis of the average
of the maximum public offering prices of all classes and series of the
Registrant's shares on April 1, 1996.
** The calculation of the registration fee is made pursuant to Rule 24e-2 under
the Investment Company Act of 1940. The following information is furnished
pursuant to the requirements of paragraph (b) thereof:
<TABLE>
<S> <C>
Total amount of securities redeemed
or repurchased during the previous
year: 51,781,402 shares
Total amount of redeemed or
repurchased securities used for
reductions pursuant to paragraph
(a) of Rule 24e-2 or pursuant to
paragraph (c) of Rule 24f-2 in all
previous filings during the current
year: -0-
Amount of redeemed or repurchased
securities being used for such
reduction in this amendment: 51,781,402 shares
Amount being registered hereby
in excess of amount of redeemed
or repurchased securities being
used for reduction in this
amendment (proposed maximum
aggregate offering price
$290,005.52): 25,359 shares
-------------
Total amount being registered: 51,806,761 shares
</TABLE>
<PAGE>
NEW ENGLAND FUNDS TRUST II
(Prospectus and Statement of Additional Information)
CROSS-REFERENCE SHEET
Items required by Form N-1A
<TABLE>
<CAPTION>
Item No. of
Form N-1A Caption in Prospectus
- --------- ---------------------
<S> <C>
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 Investment Companies and the
Funds' Adviser and Subadvisers; 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
<CAPTION>
Item No. of Caption in Statement of
Form N-1A Additional Information
- --------- ----------------------
<S> <C>
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
</TABLE>
<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 -- MAY 1, 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
May 1, 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.
1
<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
Investment Objectives The investment goal for each Fund.
New England Investment Companies
and the Funds' Advisers and
Subadvisers
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
6 Ways to Buy Fund Shares add to 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 exchange Fund shares.
Fund Dividend Payments
- --------------------------------------------------------------------------------
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 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
Glossary of Terms
2
<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
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
<TABLE>
<CAPTION>
ALL FUNDS
(EXCEPT NEW ENGLAND GROWTH FUND)
--------------------------------
Class A Class B Class C
------- ------- -------
<S> <C> <C> <C>
Maximum Initial Sales Charge Imposed on a Purchase 5.75% None None
(as a percentage of offering price)(1)(2)
Maximum Contingent Deferred Sales Charge
(as a percentage of original purchase price
or redemption proceeds, as applicable)(2) (3) 4.00% None
</TABLE>
<TABLE>
<CAPTION>
NEW ENGLAND
GROWTH FUND
---------------------------------
Class A Class B Class C
------- ------- -------
<S> <C> <C> <C>
Maximum Initial Sales Charge Imposed on a Purchase 6.50% None None
(as a percentage of offering price)(1)(2)
Maximum Contingent Deferred Sales Charge
(as a percentage of original purchase price or
redemption proceeds, as applicable)(2) (3) 4.00% None
</TABLE>
(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)
<TABLE>
<CAPTION>
NEW ENGLAND NEW ENGLAND
CAPITAL GROWTH FUND BALANCED FUND
---------------------------- ---------------------------
Class A Class B Class C Class A Class B Class C
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Management Fees 0.75% 0.75% 0.75% 0.74% 0.74% 0.74%
12b-1 Fees 0.25% 1.00%* 1.00%* 0.25% 1.00%* 1.00%*
Other Expenses 0.61% 0.61% 0.61% 0.37% 0.37% 0.37%
Total Fund Operating Expenses 1.61% 2.36% 2.36% 1.36% 2.11% 2.11%
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
NEW ENGLAND
INTERNATIONAL EQUITY FUND***
----------------------------
Class A Class B Class C
------- ------- -------
<S> <C> <C> <C>
Management Fees 0.82%** 0.82%** 0.82%**
(after voluntary fee waiver and expense reduction)
12b-1 Fees 0.25% 1.00%* 1.00%*
Other Expenses 0.68% 0.68% 0.68%
Total Fund Operating Expenses
(after voluntary fee waiver and expense reduction) 1.75%** 2.50%** 2.50%**
</TABLE>
<TABLE>
<CAPTION>
NEW ENGLAND NEW ENGLAND
STAR ADVISERS FUND VALUE FUND
--------------------------- ---------------------------
Class A Class B Class C Class A Class B Class C
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Management Fees 1.05% 1.05% 1.05% 0.74% 0.74% 0.74%
12b-1 Fees 0.25% 1.00%* 1.00%* 0.25% 1.00%* 1.00%*
Other Expenses 0.52% 0.52% 0.52% 0.38% 0.38% 0.38%
Total Fund Operating Expenses 1.82% 2.57% 2.57% 1.37% 2.12% 2.12%
</TABLE>
<TABLE>
<CAPTION>
NEW ENGLAND GROWTH NEW ENGLAND
OPPORTUNITIES FUND*** GROWTH FUND
------------------------- ----------------
Class A Class B Class C Class A
------- ------- ------- -------
<S> <C> <C> <C> <C>
Management Fees 0.70% 0.70% 0.70% 0.68%
12b-1 Fees 0.25% 1.00%* 1.00%* 0.25%
Other Expenses 0.46% 0.46% 0.46% 0.27%
Total Fund Operating Expenses 1.41% 2.16% 2.16% 1.20%
</TABLE>
* Because of the higher 12b-1 fees, long-term shareholders may pay more than
the economic equivalent of the maximum front-end sales charge permitted by
rules of the National Association of Securities Dealers, Inc.
** Without the voluntary fee waiver and expense reduction by the Fund's
adviser, Management Fees would be 0.79% for all classes and Total Fund
Operating Expenses would be 1.83% for Class A shares, 2.58% for Class B
shares and 2.58% for Class C shares. These voluntary limitations can be
terminated by the Fund's adviser at any time. See "Fund Management."
*** The expense 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.
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.
<TABLE>
<CAPTION>
NEW ENGLAND NEW ENGLAND
CAPITAL GROWTH FUND BALANCED FUND
------------------------------- ------------------------------
Class A Class B Class C Class A Class B Class C
------- ----------- ------- ------- ----------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(1) (2) (1) (2)
1 year $73 $64 $24 $24 $71 $61 $21 $21
3 years $105 $104 $74 $74 $98 $96 $66 $66
5 years $140 $136 $126 $126 $128 $123 $113 $113
10 years* $238 $251 $251 $270 $212 $225 $225 $244
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
NEW ENGLAND NEW ENGLAND
GROWTH FUND INTERNATIONAL EQUITY FUND
---------------- ------------------------------
Class A Class A Class B Class C
------- ------- ----------- -------
<S> <C> <C> <C> <C> <C>
(1) (2)
1 year $76 $74 $65 $25 $25
3 years $101 $109 $108 $78 $78
5 years $127 $147 $143 $133 $133
10 years* $201 $252 $265 $265 $284
</TABLE>
<TABLE>
<CAPTION>
NEW ENGLAND NEW ENGLAND
STAR ADVISERS FUND VALUE FUND
----------------------------- ------------------------------
Class A Class B Class C Class A Class B Class C
------- ----------- ------- ------- ----------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(1) (2) (1) (2)
1 year $75 $66 $26 $26 $71 $62 $22 $22
3 years $111 $110 $80 $80 $98 $96 $66 $66
5 years $150 $147 $137 $137 $128 $124 $114 $114
10 years* $259 $272 $272 $290 $213 $226 $226 $245
</TABLE>
<TABLE>
<CAPTION>
NEW ENGLAND GROWTH
OPPORTUNITIES FUND
------------------------------
Class A Class B Class C
------- ----------- --------
<S> <C> <C> <C> <C>
(1) (2)
1 year $71 $62 $22 $22
3 years $100 $98 $68 $68
5 years $130 $126 $116 $116
10 years* $217 $230 $230 $249
</TABLE>
(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.
5
<PAGE>
FINANCIAL HIGHLIGHTS
(For Class A, B and C shares of each Fund outstanding throughout the indicated
periods.)
The Financial Highlights presented on pages 6 through 17 have been included in
financial statements for the Funds. The financial statements for New England
Capital Growth Fund, New England Balanced Fund, New England International Equity
Fund, New England Star Advisers Fund and New England Value Funds' Class A, B and
C and the financial statements for the Class A shares of New England Growth Fund
(which has only one class) have been examined by Price Waterhouse LLP,
independent accountants. The financial statements for New England Growth
Opportunities Fund's Class A, B and C shares have been examined by Coopers &
Lybrand LLP, independent accountants. The Financial Highlights should be read
in conjunction with the financial statements and the notes thereto incorporated
by reference in Part II of the Statement. Each Fund's annual report contains
additional performance information and is made available upon request and
without charge.
NEW ENGLAND CAPITAL GROWTH FUND
<TABLE>
<CAPTION>
CLASS A CLASS B
------------------------------------------- ----------------------------------
AUGUST 3(A) SEPT. 13 (A)
THROUGH YEAR ENDED DECEMBER 31, THROUGH YEAR ENDED DEC. 31,
------------------------------ ---------------------
DEC. 31, DEC. 31,
1992 1993 1994 1995 1993 1994 1995
--------- -------- -------- -------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period $12.50 $14.23 $15.27 $15.02 $14.79 $15.24 $14.89
--------- -------- -------- -------- --------- -------- --------
Income from investment operations
- ---------------------------------
Net investment income (loss) 0.02 0.00 (0.08) (0.11)(e) 0.00 (0.08) (0.16)(e)
Net gain (loss) on investments (both
realized and unrealized) 1.84 1.12 (0.17) 4.74 0.53 (0.27) 4.60
--------- -------- -------- -------- --------- -------- --------
Total income (loss) from investment
operations 1.86 1.12 (0.25) 4.63 0.53 (0.35) 4.44
--------- -------- -------- -------- --------- -------- --------
Less distributions
- ------------------
Distributions (from net investment
income) (0.02) 0.00 0.00 0.00 0.00 0.00 0.00
Distributions (from net realized
capital gains) (0.11) (0.08) 0.00 (1.24) (0.08) 0.00 (1.24)
--------- -------- -------- -------- --------- -------- --------
Total distributions (0.13) (0.08) 0.00 (1.24) (0.08) 0.00 (1.24)
--------- -------- -------- -------- --------- -------- --------
Net asset value, end of period $14.23 $15.27 $15.02 $18.41 $15.24 $14.89 $18.09
========= ======== ======== ======== ========= ======== ========
Total return (%)(c) 14.9 7.9 (1.6) 30.7 3.6 (2.3) 29.7
Ratios/Supplemental data
- ------------------------
Net assets, end of period (000) $34,772 $98,735 $95,803 $123,504 $6,748 $15,390 $26,234
Ratio of operating expenses to 1.00(b) 1.23 1.63 1.61 2.29(b) 2.38 2.36
average net assets (%)(d)
Ratio of net investment income
(loss) to average net assets (%) 0.74(b) (0.03) (0.45) (0.67) (1.15)(b) (1.20) (1.42)
Portfolio turnover rate (%) 15 77 82 69 77 82 69
</TABLE>
6
<PAGE>
NEW ENGLAND CAPITAL GROWTH FUND CONTINUED
<TABLE>
<CAPTION>
CLASS C
-----------------------
YEAR
ENDED
DECEMBER 31,
1995
-----------------------
<S> <C>
Net asset value, beginning of period $14.89
Income from investment operations
- ---------------------------------
Net investment income (0.09)(e)
Net gains or losses on investments (both realized and unrealized) 4.52
-------------
Total income from investment operations 4.43
-------------
Less distributions
- ------------------
Distributions (from net investment income) 0.00
Distributions (from net realized capital gains) (1.24)
Total distributions (1.24)
-------------
Net asset value, end of period $18.08
=============
Total return (%)(c) 29.7
Ratios/Supplemental data
- ------------------------
Net assets, end of period (000) $354
Ratio of operating expenses to average net assets (%)(d) 2.36
Ratio of net investment income (loss) to average net assets (%) (1.42)
Portfolio turnover rate (%) 69
</TABLE>
(a) The Fund commenced operations on August 3, 1992. Class B shares were first
offered on September 13, 1993. Class C shares were first offered on January
3, 1995.
(b) Computed on an annualized basis.
(c) A sales charge in the case of the Class A shares and a contingent deferred
sales charge in the case of the Class B shares are not reflected in total
return calculations. Periods of less than one year are not annualized.
(d) The ratio of operating expenses to average net assets without giving effect
to the voluntary expense limitations in effect from August 3, 1992 through
September 30, 1993 would have been: (%)
<TABLE>
<CAPTION>
Class A Class B
-------------------- ----------
<S> <C> <C>
8/3/92 - Year Ended 9/13/93 -
12/31/92 12/31/93 12/31/93
-------- -------- ---------
2.20(b) 1.58 2.97(b)
</TABLE>
(e) Per share net investment income (loss) does not reflect current period's
reclassification of permanent differences between book and tax basis net
investment income (loss).
7
<PAGE>
NEW ENGLAND BALANCED FUND (A)
<TABLE>
<CAPTION>
CLASS A
--------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------------------------------
1986 1987 1988 1989 1990 1991 1992 1993 1994 1995
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning
of period $10.97 $10.30 $8.94 $9.50 $9.47 $8.11 $10.15 $11.16 $12.13 $11.27
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Income from investment operations
- ---------------------------------
Net investment income 0.34 0.23 0.39 0.34 0.35 0.30 0.30 0.31 0.33 0.42
Net gains or losses on
investments (both realized
and unrealized) 1.87 (0.11) 0.50 0.65 (1.34) 2.05 1.10 1.26 (0.65) 2.49
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total income (loss) from
investment operations 2.21 0.12 0.89 0.99 (0.99) 2.35 1.40 1.57 (0.32) 2.91
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Less distributions
- ------------------
Distributions (from net
investment income) (0.37) (0.39) (0.33) (0.41) (0.35) (0.30) (0.30) (0.31) (0.33) (0.40)
Distributions (from net
realized capital gains) (2.51) (1.09) 0.00 (0.61) 0.00 0.00 (0.09) (0.29) (0.21) (0.64)
Distributions (from
paid-in capital) 0.00 0.00 0.00 0.00 (0.02) (0.01) 0.00 0.00 0.00 0.00
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total distributions (2.88) (1.48) (0.33) (1.02) (0.37) (0.31) (0.39) (0.60) (0.54) (1.04)
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Net asset value end
of period $10.30 $8.94 $9.50 $9.47 $8.11 $10.15 $11.16 $12.13 $11.27 $13.14
======== ======== ======== ======== ======== ======== ======== ======== ======== ========
Total return(%)(d) 22.1 0.8 10.0 10.4 (10.6) 29.2 13.9 14.2 (2.7) 26.3
Ratios/Supplemental data
- ------------------------
Net assets, end of period
(000) $33,332 $46,632 $51,902 $59,405 $52,134 $67,467 $90,527 $158,308 $158,332 $196,514
Ratio of operating expenses
to average net assets(%) 1.19 1.52(e) 1.52 1.52 1.58 1.53 1.48 1.40 1.40 1.36
Ratio of net investment
income to average net
assets(%) 3.25 2.33 4.19 3.35 4.00 3.18 2.84 2.66 2.91 3.37
Portfolio turnover rate(%) 91 63 58 111 68 51 38 50 36 54
</TABLE>
8
<PAGE>
NEW ENGLAND BALANCED FUND (A) CONTINUED
<TABLE>
<CAPTION>
CLASS B CLASS C
------------------------------------ --------
SEPT. 13 (B) YEAR
THROUGH YEAR ENDED DEC. 31, ENDED
-----------------------
DEC. 31, DEC. 31,
1993 1994 1995 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net asset value, beginning of period $12.16 $12.11 $11.24 $11.24
-------- -------- -------- --------
Income from investment operations
- ---------------------------------
Net investment income 0.16 0.26 0.34 0.35
Net gains or losses on investments (both realized and
unrealized) 0.24 (0.66) 2.46 2.44
-------- -------- -------- --------
Total income (loss) from investment operations 0.40 (0.40) 2.80 2.79
-------- -------- -------- --------
Less distributions
- ------------------
Distributions (from net investment income) (0.16) (0.26) (0.32) (0.34)
Distributions (from net realized capital gains) (0.29) (0.21) (0.64) (0.64)
Distributions (from paid-in capital) 0.00 0.00 0.00 0.00
-------- -------- -------- --------
Total distributions (0.45) (0.47) (0.96) (0.98)
-------- -------- -------- --------
Net asset value end of period $12.11 $11.24 $13.08 $13.05
======== ======== ======== ========
Total return(%)(d) 3.3 (3.4) 25.3 25.2
Ratios/Supplemental data
- ------------------------
Net assets, end of period (000) $4,691 $21,607 $40,361 $718
Ratio of operating expenses to average net assets(%) 2.36(c) 2.15 2.11 2.11
Ratio of net investment income to average net assets(%) 1.92(c) 2.16 2.62 2.62
Portfolio turnover rate(%) 50 36 54 54
</TABLE>
(a) The Fund was changed from an "equity income" fund to a "balanced" fund on
March 1, 1990. Results for periods prior to March 1, 1990 reflect former
investment policies and are not necessarily representative of results that
would have been achieved had the Fund's current investment policies then
been in effect.
(b) Commencement of offering of Class B shares. Class C shares were first
offered on January 3, 1995.
(c) Computed on an annualized basis.
(d) A sales charge in the case of the Class A shares and a contingent deferred
sales charge in the case of the Class B shares are not reflected in total
return calculations. Periods of less than one year are not annualized.
(e) In 1987, the Fund's adviser and principal underwriter voluntarily agreed to
waive a portion of their fees in order to limit the Fund's expenses
(exclusive of trustees' fees) to 1.50% of the Fund's average daily net
assets. The ratio of operating expenses to average net assets without
giving effect to the voluntary expense limitation would have been 1.64%.
9
<PAGE>
NEW ENGLAND GROWTH FUND
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
- -----------------------------------------------------------------------------------------------------------------------------------
1986 1987 1988 1989 1990 1991 1992 1993 1994 1995
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $8.77 $8.88 $7.59 $7.46 $8.49 $8.85 $11.19 $10.08 $10.44 $8.87
------- ------- ------- ------- ------- ------- -------- -------- -------- -------
Income from investment
- ----------------------
operations
----------
Net investment
income 0.05 (0.01)(a) 0.28 0.09 0.07 0.10 0.09 0.02 0.11 0.05
Net gains or losses
on investments
(both realized and
unrealized) 1.45 1.62 (0.17) 1.56 0.38 4.92 (0.83) 1.12 (0.84) 3.30
------- ------- ------- ------- ------- ------- -------- -------- -------- -------
Total income from
investment operations 1.50 1.61 0.11 1.65 0.45 5.02 (0.74) 1.14 (0.73) 3.35
------- ------- ------- ------- ------- ------- -------- -------- -------- -------
Less distributions
- ------------------
Distributions (from
net investment
income) (0.07) (0.05) (0.24) (0.11) (0.09) (0.10) (0.09) (0.01) (0.11) (0.05)
Distributions (from
net realized capital
gains) (1.32) (2.85) 0.00 (0.46) 0.00 (2.57) (0.28) (0.77) (0.73) (1.62)
Distributions (from
paid-in capital) 0.00 0.00 0.00 (0.05) 0.00 (0.01) 0.00 0.00 0.00 0.00
------- ------- ------- ------- ------- ------- -------- -------- -------- -------
Total distributions (1.39) (2.90) (0.24) (0.62) (0.09) (2.68) (0.37) (0.78) (0.84) (1.67)
------- ------- ------- ------- ------- ------- -------- -------- -------- -------
Net asset value, end
of period $8.88 $7.59 $7.46 $8.49 $8.85 $11.19 $10.08 $10.44 $8.87 $10.55
======= ======= ======= ======= ======= ======= ======== ======== ======== =======
Total return (%)(b) 18.6 18.5 1.5 22.3 5.1 56.7 (6.6) 11.3 (7.1) 38.1
Ratios/Supplemental data
- ------------------------
Net assets, end of
period (000) $304,381 $440,851 $462,495 $555,659 $614,018 $996,813 $1,173,948 $1,200,515 $988,430 $1,201
Ratio of operating
expenses to average
net assets (%) 0.84 1.29 1.26 1.22 1.23 1.14 1.15 1.18 1.19 1.20
Ratio of net investment
income to average
net assets (%) 0.62 (0.06) 3.64 1.19 0.77 0.89 0.89 0.16 1.05 0.42
Portfolio turnover rate (%) 153 154 283 203 185 186 218 145 141 235
</TABLE>
(a) Net investment income per share has been calculated based upon the averages
of monthly shares outstanding.
(b) A sales charge was not reflected in total return calculations.
10
<PAGE>
NEW ENGLAND INTERNATIONAL EQUITY FUND
<TABLE>
<CAPTION>
CLASS A CLASS B
------------------------------------------ ------------------------------------
MAY 21 (A) SEPT. 13 (A)
THROUGH YEAR ENDED DECEMBER 31, THROUGH YEAR ENDED DEC. 31,
---------------------------- ---------------------
DEC. 31, DEC. 31,
1992 1993 1994 1995 1993 1994 1995
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning
of period $12.50 $11.80 $14.85 $15.50 $15.19 $14.81 $15.35
------ ------ ------ ------ ------ ------ ------
Income from investment operations
- ---------------------------------
Net investment income 0.01 0.11 0.00 0.27 0.12 0.00 0.19
Net gains or losses on investments
(both realized and unrealized) (0.63) 3.37 1.19 0.63 (0.06) 1.08 0.58
------ ------ ------ ------ ------ ------ ------
Total income from investment
operations (0.62) 3.48 1.19 0.90 0.06 1.08 0.77
------ ------ ------ ------ ------ ------ ------
Less distributions
- ------------------
Distributions (from net
investment income) (0.01) (0.11) 0.00 (0.27) (0.12) 0.00 (0.19)
Distributions (from net
realized capital gains) 0.00 (0.32) (0.53) 0.00 (0.32) (0.53) 0.00
Distributions (from
paid-in capital) (0.07) 0.00 (0.01) 0.00 0.00 (0.01) 0.00
------ ------ ------ ------ ------ ------ ------
Total distributions (0.08) (0.43) (0.54) (0.27) (0.44) (0.54) (0.19)
------ ------ ------ ------ ------ ------ ------
Net asset value, end of period $11.80 $14.85 $15.50 $16.13 $14.81 $15.35 $15.93
======= ====== ====== ====== ====== ====== ======
Total return(%)(c) (5.0) 29.4 8.1 5.8 0.3 7.3 5.0
Ratios/Supplemental data
- ------------------------
Net assets, end of period (000) $21,731 $80,937 $142,917 $136,848 $9,176 $41,601 $52,895
Ratio of operating expenses to
average net assets(%)(d) 1.50(b) 1.60 1.75 1.75 2.50(b) 2.50 2.50
Ratio of net investment income to
average net assets(%) 0.10(b) 0.24 0.01 1.24 (1.69)(b) (0.74) 0.49
Portfolio turnover rate(%) 62 101 123 119 101(e) 123 119
</TABLE>
(a) The Fund commenced operations on May 21, 1992. Class B shares were first
offered on September 13, 1993. Class C shares were first offered on January
3, 1995.
(b) Computed on an annualized basis.
(c) A sales charge in the case of the Class A shares and a contingent deferred
sales charge in the case of the Class B shares are not reflected in total
return calculations. Periods of less than one year are not annualized.
(d) The ratio of operating expenses to average net assets without giving effect
to the voluntary expense limitations would have been: (%)
<TABLE>
<CAPTION>
Class A Class B
----------------------------------- -----------------------
5/21/92 - Year Ended Year Ended 9/13/93 - Year Ended
12/31/92 12/31/93 12/31/94 12/31/94 12/31/94
--------- ---------- ---------- --------- -----------
<S> <C> <C> <C> <C>
2.89(b) 2.16 1.79 3.36(b) 2.54
</TABLE>
(e) Not computed on an annualized basis.
11
<PAGE>
NEW ENGLAND INTERNATIONAL EQUITY FUND CONTINUED
<TABLE>
<CAPTION>
CLASS C
----------------------
YEAR
ENDED
DECEMBER 31,
1995
----------------------
<S> <C>
Net asset value, beginning of period $15.35
--------
Income from investment operations
- ---------------------------------
Net investment income 0.19
Net gains or losses on investments
(both realized and unrealized) 0.61
--------
Total income from investment operations 0.80
--------
Less distributions
- ------------------
Distributions (from net investment (0.19)
income)
Distributions (from net realized 0.00
capital gains)
Distributions (from paid-in capital) 0.00
--------
Total distributions (0.19)
--------
Net asset value, end of period $15.96
========
Total return(%)(c) 5.2
Ratios/Supplemental data
- ------------------------
Net assets, end of period (000) $1,066
Ratio of operating expenses to average
net assets(%)(d) 2.5
Ratio of net investment income to
average net assets(%) 0.49
Portfolio turnover rate(%) 119
</TABLE>
12
<PAGE>
NEW ENGLAND STAR ADVISERS FUND
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
--------------------- --------------------- ----------------------
JULY 7 (A) YEAR JULY 7 (A) YEAR JULY 7 (A) YEAR
THROUGH ENDED THROUGH ENDED THROUGH ENDED
DEC. 31, DEC. 31, DEC. 31, DEC. 31, DEC. 31, DEC. 31,
1994 1995 1994 1995 1994 1995
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period $12.50 $13.25 $12.50 $13.23 $12.50 $13.24
------ ------ ------ ------- ------ ------
Income from investment operations
- ---------------------------------
Net investment income 0.05 0.00 0.02 0.00 0.02 0.00
Net gains or losses on investments
(both realized and unrealized) 0.75 4.52 0.73 4.39 0.74 4.40
------ ------ ------ ------- ------ ------
Total income from investment operations 0.80 4.52 0.75 4.39 0.76 4.40
------ ------ ------ ------- ------ ------
Less distributions
- ------------------
Distributions (from net investment (0.05) 0.00 (0.02) 0.00 (0.02) 0.00
income)
Distributions (from capital gains) 0.00 (0.99) 0.00 (0.99) 0.00 (0.99)
------ ------ ------ ------- ------ ------
Total distributions (0.05) (0.99) (0.02) (0.99) (0.02) (0.99)
------ ------ ------ ------- ------ ------
Net asset value, end of period $13.25 $16.78 $13.23 $16.63 $13.24 $16.65
====== ====== ====== ======= ====== ======
Total return(%)(c) 6.4 34.4 6.0 33.4 6.0 33.4
Ratios/Supplemental data
- ------------------------
Net assets, end of period (000) $91,218 $223,596 $72,889 $220,017 $20,096 $45,672
Ratio of operating expenses to
average net assets(%)(d) 1.94(b) 1.82 2.69(b) 2.57 2.69(b) 2.57
Ratio of net investment income to
average net assets(%) 1.06(b) (0.33) 0.31(b) (1.08) 0.31(b) (1.08)
Portfolio turnover rate(%) 100 142 100 142 100 142
</TABLE>
(a) Commencement of operations.
(b) Computed on an annualized basis.
(c) A sales charge of 5.75% (maximum) in the case of Class A shares and a
contingent deferred sales charge in the case of Class B shares are not
reflected in total return calculations. Periods of less than one year are
not annualized.
(d) The ratio of operating expenses to average net assets (computed on an
annualized basis) for Class A, B and C shares without giving effect to the
voluntary expense limitations in effect from July 7, 1994 through December
31, 1994 would have been 1.98%, 2.75% and 2.75%, respectively.
13
<PAGE>
NEW ENGLAND VALUE FUND
<TABLE>
<CAPTION>
CLASS A
--------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------------------------------
1986 1987 1988 1989 1990 1991 1992 1993 1994 1995
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $8.06 $8.73 $6.42 $6.07 $6.51 $5.44 $6.69 $7.28 $7.87 $7.27
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Income from investment operations
- ---------------------------------
Net investment income 0.10 0.04 0.20 0.12 0.16 0.13 0.09 0.07 0.08 0.10
Net gains or losses on
investments (both realized
and unrealized) 1.62 0.90 (0.34) 1.25 (1.04) 1.35 1.02 1.16 (0.19) 2.21
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total income from investment
operations 1.72 0.94 (0.14) 1.37 (0.88) 1.48 1.11 1.23 (0.11) 2.31
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Less distributions
- ------------------
Distributions (from net
investment income) (0.14) (0.14) (0.21) (0.12) (0.16) (0.13) (0.09) (0.07) (0.08) (0.09)
Distributions (from net
realized capital gains) (0.91) (3.11) 0.00 (0.80) 0.00 (0.10) (0.43) (0.57) (0.41) (0.71)
Distributions (from paid-in
capital) 0.00 0.00 0.00 (0.01) (0.03) 0.00 0.00 0.00 0.00 0.00
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total distributions (1.05) (3.25) (0.21) (0.93) (0.19) (0.23) (0.52) (0.64) (0.49) (0.80)
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Net asset value, end of period $8.73 $6.42 $6.07 $6.51 $5.44 $6.69 $7.28 $7.87 $7.27 $8.78
======== ======== ======== ======== ======== ======== ======== ======== ======== ========
Total return(%)(c) 24.2 11.6 (2.2) 22.6 (13.6) 27.1 16.6 17.0 (1.4) 32.3
Ratios/Supplemental data
- ------------------------
Net assets, end of period
(000) $104,002 $141,775 $136,443 $146,831 $139,248 $145,790 $156,240 $189,779 $190,869 $241,038
Ratio of operating expenses
to average net assets(%) 0.90 1.29 1.29 1.29 1.31 1.28 1.32 1.34 1.37 1.37
Ratio of net investment
income to average net
assets(%) 1.28 0.55 3.13 1.69 2.87 1.84 1.26 0.83 1.00 1.22
Portfolio turnover rate(%) 164 202 243 111 68 51 38 40 29 52
</TABLE>
14
<PAGE>
NEW ENGLAND VALUE FUND CONTINUED
<TABLE>
<CAPTION>
CLASS B CLASS C
------------------------------------ --------
SEPT. 13(A) YEAR
THROUGH YEAR ENDED DEC. 31, ENDED
-----------------------
DEC. 31, DEC. 31,
1993 1994 1995 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net asset value, beginning of period $7.97 $7.85 $7.23 $7.23
------ ------ ------ ------
Income from investment operations
- ---------------------------------
Net investment income 0.11 0.04 0.05 0.05
Net gains or losses on investments (both realized and
unrealized) 0.39 (0.20) 2.18 2.18
------ ------ ------ ------
Total income from investment operations 0.50 (0.16) 2.23 2.23
------ ------ ------ ------
Less distributions
- ------------------
Distributions (from net investment income) (0.05) (0.05) (0.05) (0.05)
Distributions (from net realized capital gains) (0.57) (0.41) (0.71) (0.71)
Distributions (from paid-in capital) 0.00 0.00 0.00 0.00
------ ------ ------ ------
Total distributions (0.62) (0.46) (0.76) (0.76)
------ ------ ------ ------
Net asset value, end of period $7.85 $7.23 $8.70 $8.70
====== ====== ====== ======
Total return(%)(c) 6.5 (2.0) 31.3 31.3
Ratios/Supplemental data
- ------------------------
Net assets, end of period (000) $2,182 $13,830 $27,941 $1,224
Ratio of operating expenses to average net assets(%) 2.16(b) 2.12 2.12 2.12
Ratio of net investment income to average net assets(%) 0.05(b) 0.25 0.47 0.47
Portfolio turnover rate(%) 40 29 52 52
</TABLE>
(a) Commencement of operations. Class C shares were first offered on January 3,
1995.
(b) Computed on an annualized basis.
(c) A sales charge in the case of the Class A shares and a contingent deferred
sales charge in the case of the Class B shares are not reflected in total
return calculations. Periods of less than one year are not annualized.
15
<PAGE>
NEW ENGLAND GROWTH OPPORTUNITIES FUND(A)
<TABLE>
<CAPTION>
CLASS A
--------------------------------------------------------------------------------------------
YEAR
ENDED SEVEN
MAY 31, MONTHS YEAR ENDED DECEMBER 31,
------------- -------------------------------------------------------
ENDED
1986 1987 1988(B) 12/31/88(B) 1989 1990 1991 1992 1993* 1994 1995
------ ------ ------ ---------- ------ ------ ------ ------ ------ ------ ------
<C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $10.77 $12.70 $10.37 $11.92 $9.55 $10.88 $9.54 $11.79 $12.20 $12.67 $12.41
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Income from investment operations
- ---------------------------------
Net investment income 0.35 0.35 0.19 0.33 0.29 0.30 0.26 0.23 0.21 0.22 0.18
Net gains or losses
on investments (both
realized and
unrealized) 2.97 0.73 0.25 (1.22) 2.32 (0.76) 2.63 0.86 0.75 (0.10) 4.01
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total income from
investment operations 3.32 1.08 0.44 (0.89) 2.61 (0.46) 2.89 1.09 0.96 0.12 4.19
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Less distributions
- ------------------
Distributions (from
net investment income) (0.34) (0.34) (0.18) (0.35) (0.29) (0.30) (0.26) (0.23) (0.21) (0.21) (0.18)
Distributions in
excess of net
investment income 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 (0.01) 0.00 0.00
Distributions (from
net realized capital
gains) (1.05) (1.52) (1.08) (0.30) (0.95) (0.56) (0.38) (0.45) (0.27) (0.17) (2.03)
Distributions (from
paid-in capital) 0.00 0.00 0.00 (0.01) (0.04) (0.02) 0.00 0.00 0.00 0.00 0.00
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total distributions (1.39) (1.86) (1.26) (0.66) (1.28) (0.88) (0.64) (0.68) (0.49) (0.38) (2.21)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Net asset value, end
of period $12.70 $11.92 $9.55 $10.37 $10.88 $9.54 $11.79 $12.20 $12.67 $12.41 $14.39
====== ====== ====== ====== ====== ====== ====== ====== ====== ====== ======
Total return(%)(f) 31.3 8.9 7.3(e) (7.3) 27.6 (4.3) 30.6 9.3 8.0 1.00 35.1
Ratios/Supplemental data
- ------------------------
Net assets, end of
period (000) $72,862 $70,427 $55,041 $58,552 $62,688 $55,726 $70,263 $90,945 $109,168 $104,081 $150,693
Ratio of operating
expenses to average
net assets(%) 1.00 1.24 1.33(e) 1.25(d) 1.15 1.18 1.23 1.94 1.21 1.28 1.38
Ratio of net
investment income to
average net assets(%) 3.01 2.65 3.10(e) 2.90 2.68 2.92 2.28 1.18 1.70 1.75 1.31
Portfolio turn-over
rate(%) 21 25 83(e) 8 17 6 12 10 4 6 69
</TABLE>
16
<PAGE>
NEW ENGLAND GROWTH OPPORTUNITIES FUND (A) CONTINUED
<TABLE>
<CAPTION>
CLASS B CLASS C
------------------------------------ --------
SEPT. 13 (C) MAY 1 (C)
THROUGH YEAR ENDED DEC. 31, THROUGH
-----------------------
DEC. 31, DEC. 31,
1993 1994 1995 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net asset value, beginning of period $12.95 $12.66 $12.42 $13.84
------ ------ ------ ------
Income from investment operations
- ---------------------------------
Net investment income 0.06 0.16 0.10 0.06
Net gains or losses on investments (both realized
and unrealized) 0.01 (0.09) 4.01 2.58
------ ------ ------ ------
Total income from investment operations 0.07 0.07 4.11 2.64
------ ------ ------ ------
Less distributions
- ------------------
Distributions (from net investment income) (0.03) (0.14) (0.10) (0.06)
Distributions in excess of net investment income (0.06) 0.00 0.00 0.00
Distributions (from net realized capital gains) (0.27) (0.17) (2.03) (2.03)
Distributions (from paid-in capital) 0.00 0.00 0.00 0.00
------ ------ ------ ------
Total distributions (0.36) (0.31) (2.13) (2.09)
------ ------ ------ ------
Net asset value, end of period $12.66 $12.42 $14.40 $14.39
====== ====== ====== ======
Total return(%)(f) 0.60 0.60 34.3 20.2
Ratios/Supplemental
- -------------------
Net assets, end of period (000) $1,498 $5,185 $29,026 $4,707
Ratio of operating expenses to average net
assets(%) 2.08(e) 1.93 2.11 2.11(e)
Ratio of net investment income to average net
assets(%) 0.71(e) 1.10 0.56 0.56(e)
Portfolio turnover rate(%) 4 6 69 69
</TABLE>
(a) Information shown for all years is audited. The accountants' report
incorporated by reference in the Statement covers years ended May 31, 1987
through December 31, 1995. The accountants' report for the year ended May
31, 1986 is on file with the SEC.
(b) Fiscal year end changed in 1988 from May 31 to December 31. The Fund's
former adviser, Back Bay Advisors, L.P., assumed that function on July 27,
1988.
(c) Commencement of offering of Class B or Class C shares.
(d) Until May 18, 1988, the Fund's former adviser, Back Bay Advisors, L.P.,
voluntarily agreed to limit total Fund expenses to 1.25% of the Fund's
average annual net assets. Without such limitation, Fund expenses would
have been 1.31% of average net assets.
(e) Computed on an annualized basis.
(f) A sales charge of 5.75% (maximum) in the case of the Class A shares and a
contingent deferred sales charge in the case of the Class B shares are not
reflected in total return calculations. Unless otherwise indicated, periods
of less than one year are not annualized.
* As of January 1, 1993, the Fund discontinued the use of equalization
accounting.
The Fund's current adviser and subadviser assumed those functions on May 1,
1995. These financial highlights reflect results achieved by earlier advisers
under investment policies that are no longer in effect.
17
<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., 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 34.
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 $81
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.
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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 $6 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").
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.
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[] 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.
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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.
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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.
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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
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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
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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 1.2% and 0% 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."
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[] 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.
26
<PAGE>
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
27
<PAGE>
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. For example, as of December 31, 1995, the
percentage of the Fund's net assets held in the segments of the Fund managed by
Berger, Founders, Janus Capital and Loomis Sayles were 24%, 27%, 25% and 24%,
respectively. Net cash inflows or outflows resulting from sales and redemptions
of the Fund's shares will, however, continue to be allocated on an equal basis
among the four segments of the portfolio without regard to the relative size of
the segments. The Fund does not intend to reallocate assets among the segments
to reduce these differences in size.
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.
28
<PAGE>
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 (except the Growth Fund). Under a service
agreement between CGM and New England Securities Corporation ("New England
Securities"), an affiliate of the Distributor, New England Securities has agreed
to provide certain administrative services to the Growth Fund. New England
Securities has entered into an agreement with the Distributor under which the
Distributor provides such services to the Fund. The services are provided at no
extra cost to the 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. As of June 30, 1996, Bruce A. Ebel, Vice President of
Loomis Sayles, will replace Mr. Hurckes as co-portfolio manager of the Capital
Growth Fund. 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 and Mr. Ebel who, prior to the time they joined Loomis Sayles,
were Equity Portfolio Manger of the Illinois State Board of Investment and
Senior Vice President, Kemper Asset Management, respectively.
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 0.68% 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.
29
<PAGE>
Each Fund other than the Growth Fund pays NEFM a management fee at the annual
rate set forth in the following table:
<TABLE>
<CAPTION>
Management fee paid by Fund to NEFM
Fund (as a percentage of average daily net assets of
the Fund)
- ---------------------------- ------------------------------------------------
<S> <C> <C>
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 Fund 0.70% of the first $200 million
0.65% of the next $300 million
0.60% of amounts in excess of $500 million
International Equity Fund 0.90% of the first $200 million
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
</TABLE>
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.
30
<PAGE>
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:
<TABLE>
<CAPTION>
Subadvisory fee payable by NEFM to subadviser
Fund Subadviser (as a percentage of average daily net assets of the Fund)
- ---------------------------- -------------- ----------------------------------------------------------
<S> <C> <C>
Balanced Fund Loomis Sayles 0.535% of the first $200 million
0.350% of the next $300 million
0.300% of amounts in excess of $500 million
Capital Growth Fund Loomis Sayles 0.60% of the first $25 million
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 Opportunities Fund Westpeak 0.50% of the first $25 million
0.40% of the next $75 million
0.35% of the next $100 million
0.30% of amounts in excess of $200 million
International Equity Fund Draycott 0.54% of the first $200 million
0.49% of the next $300 million
0.44% of amounts in excess of $500 million
Value Fund Loomis Sayles 0.535% of the first $200 million
0.350% of the next $300 million
0.300% of amounts in excess of $500 million
</TABLE>
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.
31
<PAGE>
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.
Draycott is an indirect, wholly-owned subsidiary of Cursitor Alliance LLC which
inturn is indirectly controlled by The Equitable Life Assurance Society of the
United States, the parent company of which is 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.
32
<PAGE>
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.
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.
[] 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.
33
<PAGE>
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;
34
<PAGE>
(5) The spouses, parents, children, siblings, grandparents or grandchildren of
any of the above persons; and
(6) 401(k) retirement plans and any pension plan that invests $5 million or
more.
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
<TABLE>
<CAPTION>
SALES CHARGE AS A % OF DEALER'S
-------------------------
CONCESSION
NET AS % OF
VALUE OF TOTAL OFFERING AMOUNT OFFERING
INVESTMENT PRICE INVESTED PRICE
- ------------------------ ------------ ------------ ------------
<S> <C> <C> <C>
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 *
</TABLE>
GROWTH FUND
<TABLE>
<CAPTION>
SALES CHARGE AS A % OF DEALER'S
-------------------------
CONCESSION
NET AS % OF
VALUE OF TOTAL OFFERING AMOUNT OFFERING
INVESTMENT PRICE INVESTED PRICE
- ------------------------ ------------ ------------ ------------
<S> <C> <C> <C>
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 *
</TABLE>
* The Distributor may, at its discretion, pay investment dealers who initiate
and are responsible for such purchases (except investments by plans under
Sections 401(a) or 401(k) of the Code whose total investment amount to $1
million or more or that have 100 or more eligible employees ["Retirement
Plans"]) a commission of up to the following amounts: 1% on
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<PAGE>
the first $3 million invested; 0.50% on the next $2 million; and 0.25% on the
excess over $5 million. For investments by Retirement Plans, 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 $3 million invested; and 0.50% on amounts over $3 million and up
to $10 million. Retirement Plans that have total investment assets of at least
$10 million are eligible to purchase Class Y shares of the Funds, which are
described in a separate prospectus. 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 or purchases by Retirement
Plans as defined above, 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:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED
SALES CHARGE AS A
YEAR SINCE PERCENTAGE OF DOLLAR
PURCHASE AMOUNT SUBJECT TO CHARGE
--------------- --------------------------
<S> <C>
1st .................. 4%
2nd .................. 3%
3rd .................. 3%
4th .................. 2%
5th .................. 1%
thereafter .................. 0%
</TABLE>
Year one ends one year after the day on which the purchase was accepted, and so
on.
The CDSC is deducted from the proceeds of the redemption, 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.
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<PAGE>
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
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<PAGE>
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), 401(k) or 457 of the Code and "rabbi trusts." Investors may be
charged a fee if they effect transactions through a broker or agent.
38
<PAGE>
[] Shares of the Funds are available at net asset value for investments in
participant-directed 401(a) and 401(k) plans that have 100 or more eligible
employees.
[] Shares of the Funds are available at net asset value for investments by
non-discretionary and non-retirement accounts of bank trust departments or trust
companies, but are unavailable if the trust department or institution is part of
an organization not principally engaged in banking or trust activities.
[] 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.
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<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 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.
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<PAGE>
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.
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<PAGE>
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.
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<PAGE>
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.
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<PAGE>
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.
44
<PAGE>
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.)
45
<PAGE>
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 $563,284 for the Capital Growth Fund, $2,041,399 for the Balanced Fund,
$2,030,882 for the Growth Fund, $514,256 for the International Equity Fund and
$1,651,994 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.
46
<PAGE>
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, foundations, bank trust
departments or trust companies. The minimum initial investment is $1 million
for these entities and the minimum for each subsequent investment is $10,000.
Class Y shares may also be purchased by plan sponsors of 401(a), 401(k), 457 or
403(b) plans ("Plans") that have total investment assets in these Plans of at
least $10 million and by The New England and any other insurance company
affiliated with The New England or any of their successor entities ("Insurance
Company Accounts"). Plan sponsors' investment assets in multiple 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 Plans, Separate
Accounts, Special Accounts or Insurance Company 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 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.
47
<PAGE>
[] 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. Each Fund will send a single
copy of its annual and semi-annual reports to an address at which more than one
shareholder of record with the same last name has indicated that mail is to be
delivered. Shareholders may request additional copies of any annual or semi-
annual report in writing or by telephone.
[] 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.
48
<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.
49
<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 -- MAY 1, 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
May 1, 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.
1
<PAGE>
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.
2
<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
Investment Objectives The investment goal for each Fund.
New England Investment The Funds' adviser and subadvisers
Companies and the Funds' are affiliates of NEIC.
Adviser and Subadvisers
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
6 Ways to Buy Fund Shares to 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 convenient
Funds ways to exchange Fund shares.
Fund Dividend Payments
- --------------------------------------------------------------------------------
SELLING FUND SHARES
5 Ways to Sell Fund Shares How to withdraw money or close your
[] Through your investment account.
dealer
[] By telephone
[] By mail
[] By check
[] By Systematic Withdrawal
Plan
Repurchase Option (Class A An opportunity to reinvest your redemption
Shares Only) proceeds within 120 days for no sales
charge.
- --------------------------------------------------------------------------------
FUND DETAILS Additional information you may find
How Fund Share Price is important.
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
and Strategic Income Funds.
Glossary of Terms
3
<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
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
<TABLE>
<CAPTION>
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
------------ ------------- -------------
<S> <C> <C> <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 (3) 4.00% None
redemption proceeds, as applicable)(2)
</TABLE>
<TABLE>
<CAPTION>
NEW ENGLAND NEW ENGLAND
LIMITED TERM ADJUSTABLE RATE U.S.
U.S. GOVERNMENT FUND GOVERNMENT FUND
--------------------------- -------------------
Class A Class B Class C Class A Class B
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
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%
</TABLE>
(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."
4
<PAGE>
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
<TABLE>
<CAPTION>
NEW ENGLAND NEW ENGLAND
GOVERNMENT LIMITED TERM U.S.
SECURITIES FUND GOVERNMENT FUND*****
------------------- ----------------------------
Class A Class B Class A Class B Class C
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Management Fees 0.65% 0.65% 0.64% 0.64% 0.64%
12b-1 Fees 0.25% 1.00%* 0.35% 1.00%* 1.00%*
Other Expenses 0.45% 0.45% 0.23% 0.23% 0.23%
Total Fund Operating Expenses 1.35% 2.10% 1.22% 1.87% 1.87%
</TABLE>
<TABLE>
<CAPTION>
NEW ENGLAND MUNICIPAL NEW ENGLAND
INCOME FUND BOND INCOME FUND
--------------------- -----------------------------
Class A Class B Class A Class B Class C
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Management Fees 0.44% 0.44% 0.44% 0.44% 0.44%
12b-1 Fees 0.25% 1.00%* 0.25% 1.00%* 1.00%*
Other Expenses 0.24% 0.24% 0.45% 0.45% 0.45%
Total Fund Operating Expenses 0.93% 1.68% 1.14% 1.89% 1.89%
</TABLE>
<TABLE>
<CAPTION>
NEW ENGLAND ADJUSTABLE RATE NEW ENGLAND
U.S. GOVERNMENT FUND***** HIGH INCOME FUND
------------------------------ -----------------------
Class A Class B Class A Class B
------- ------- ------- -------
<S> <C> <C> <C> <C>
Management Fees
(after voluntary fee waiver
and expense reduction) 0.22%** 0.22%** 0.63%**** 0.63%****
12b-1 Fees 0.25% 1.00%* 0.35% 1.00%*
Other Expenses 0.19% 0.19% 0.62% 0.62%
Total Fund Operating Expenses
(after voluntary fee waiver
and expense reduction) 0.66%** 1.41%** 1.60%**** 2.25%****
</TABLE>
<TABLE>
<CAPTION>
NEW ENGLAND
STRATEGIC INCOME FUND
------------------------------------
Class A Class B Class C
------- ------- -------
<S> <C> <C> <C>
Management Fees
(after voluntary fee waiver) 0.30%*** 0.30%*** 0.30%***
12b-1 Fees 0.25% 1.00%* 1.00%*
Other Expenses 0.68% 0.68% 0.68%
Total Fund Operating Expenses
(after voluntary fee waiver) 1.23%*** 1.98%*** 1.98%***
</TABLE>
* Because of the higher 12b-1 fees, long-term shareholders may pay more than
the economic equivalent of the maximum front-end sales charge permitted by
rules of the National Association of Securities Dealers, Inc.
** Without the voluntary fee waiver and expense reduction by the Fund's
adviser, Management Fees would be 0.39% for both classes and Total Fund
Operating Expenses would be 0.83% for Class A shares and 1.58% for Class B
shares. These voluntary limitations can be terminated by the Fund's
adviser at any time. See "Fund Management."
5
<PAGE>
*** Without the voluntary fee waiver by the Fund's subadviser, Management Fees
would be 0.65% for all classes and Total Fund Operating Expenses would be
1.58% for Class A shares, 2.33% for Class B shares and 2.33% for Class C
shares. This voluntary limitation can be terminated by the Fund's
subadviser at any time. See "Fund Management."
**** Without the voluntary fee waiver by the Fund's adviser, Management Fees
would be 0.75% for all classes and Total Fund Operating Expenses would be
1.72% for Class A shares and 2.37% for Class B shares. This voluntary
limitation can be terminated by the Fund's adviser at any time. See "Fund
Management."
***** The expense information contained in this table and its footnotes for New
England Limited Term U.S. Government Fund and New England 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.
<TABLE>
<CAPTION>
NEW ENGLAND NEW ENGLAND NEW ENGLAND
GOVERNMENT SECURITIES LIMITED TERM U.S. ADJUSTABLE RATE U.S.
FUND GOVERNMENT FUND GOVERNMENT FUND
-------------------- --------------------------------- ------------------------
Class A Class B Class A Class B Class C Class A Class B
-------- --------- --------- --------- --------- --------- ---------
(1) (2) (1) (2) (1) (2)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 year $58 $61 $21 $42 $59 $19 $19 $17 $54 $14
3 years $86 $96 $66 $68 $89 $59 $59 $31 $75 $45
5 years $116 $123 $113 $95 $111 $101 $101 $46 $87 $77
10 years* $200 $224 $224 $173 $202 $202 $219 $91 $149 $149
</TABLE>
<TABLE>
<CAPTION>
NEW ENGLAND NEW ENGLAND
STRATEGIC INCOME FUND BOND INCOME FUND
------------------------------- --------------------------------
Class A Class B Class C Class A Class B Class C
--------- --------- --------- --------- --------- ---------
(1) (2) (1) (2)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 year $57 $60 $20 $20 $56 $59 $19 $19
3 years $82 $92 $62 $62 $80 $89 $59 $59
5 years $110 $117 $107 $107 $105 $112 $102 $102
10 years* $187 $211 $211 $231 $177 $202 $202 $221
</TABLE>
<TABLE>
<CAPTION>
NEW ENGLAND NEW ENGLAND MUNICIPAL
HIGH INCOME FUND INCOME FUND
------------------------ -----------------------
Class A Class B Class A Class B
--------- --------- --------- ---------
(1) (2) (1) (2)
<S> <C> <C> <C> <C> <C> <C>
1 year $61 $63 $23 $54 $57 $17
3 years $93 $100 $70 $73 $83 $53
5 years $128 $130 $120 $94 $101 $91
10 years* $226 $242 $242 $154 $179 $179
</TABLE>
(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
6
<PAGE>
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.
7
<PAGE>
FINANCIAL HIGHLIGHTS
(For Class A and B shares of each Fund and Class C shares of New England Limited
Term U.S. Government Fund, New England Strategic Income Fund and New England
Bond Income Fund outstanding throughout the indicated periods.)
The Financial Highlights presented on pages 9 through 27 have been included in
financial statements for the Funds' Class A, B and C shares. The financial
statements for New England Government Securities Fund, New England Bond Income
Fund, New England Municipal Income Fund and New England Strategic Income Fund
have been examined by Price Waterhouse LLP, independent accountants, and the
financial statements for New England Limited Term U.S. Government Fund, New
England Adjustable Rate U.S. Government Fund and New England High Income Fund
have been examined by Coopers & Lybrand LLP, independent accountants. The
Financial Highlights should be read in conjunction with the financial statements
and the notes thereto incorporated by reference in Part II of the Statement.
Each Fund's annual report contains additional performance information and is
made available upon request and without charge.
8
<PAGE>
NEW ENGLAND GOVERNMENT SECURITIES FUND
<TABLE>
<CAPTION>
CLASS A
--------------------------------------------------------
YEAR NOV. 30
ENDED THROUGH YEAR ENDED DEC. 31,
------------------------------
NOV. 30, DEC. 31,
1986 1986(A) 1987 1988 1989
--------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of
period $12.72 $13.51 $13.48 $12.10 $11.85
--------- --------- -------- -------- --------
Income from investment operations
- ---------------------------------
Net investment income 1.07 0.08 0.89 0.93 0.90
Net gains or losses on investments
(both realized and unrealized) 0.82 (0.04) (0.93) (0.18) 0.52
--------- --------- -------- -------- --------
Total income from investment
operations 1.89 0.04 (0.04) 0.75 1.42
Less distributions
- ------------------
Distributions (from net investment
income) (1.07) (0.07) (0.89) (0.85) (0.95)
Distributions (from net realized
capital gains) (0.03) 0.00 (0.45) (0.15) 0.00
Distributions (from paid-in
capital) 0.00 0.00 0.00 0.00 (0.33)
--------- --------- -------- -------- --------
Total distributions (1.10) (0.07) (1.34) (1.00) (1.28)
--------- --------- -------- -------- --------
Net asset value, end of period
$13.51 $13.48 $12.10 $11.85 $11.99
========= ========= ======== ======== ========
Total return (%)(c) 15.5 0.3 (0.1) 6.8 12.6
Ratios/Supplemental data
- ------------------------
Net assets, end of period (000) $186,040 $190,416 $192,250 $179,130 $183,669
Ratio of operating expenses to
average net assets(%)(d) 0.94 1.21(b) 1.30 1.24 1.21
Ratio of net investments income to
average net assets (%) 7.82 6.85(b) 7.20 7.69 7.50
Portfolio turnover rate(%) 66 0(b) 178 150 389
</TABLE>
9
<PAGE>
NEW ENGLAND GOVERNMENT SECURITIES FUND (CONTINUED)
<TABLE>
<CAPTION>
CLASS A
-------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------
1990 1991 1992 1993 1994 1995
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
period $11.99 $11.38 $11.92 $11.73 $11.75 $10.43
------- ------- ------- ------- ------- -------
Income from investment operations
- ---------------------------------
Net investment income 0.86 0.82 0.70 0.72 0.69 0.74
Net gains or losses on investments
(both realized and unrealized) (0.27) 0.75 0.07 0.32 (1.32) 1.29
------- ------- ------- ------- ------- -------
Total income from investment
operations 0.59 1.57 0.77 1.04 (0.63) 2.03
------- ------- ------- ------- ------- -------
Less distributions
- ------------------
Distributions (from net investment
income) (0.89) (0.82) (0.68) (0.72) (0.69) (0.73)
Distributions (from net realized
capital gains) 0.00 (0.21) (0.28) (0.30) 0.00 0.00
Distributions (from paid-in
capital) (0.31) 0.00 0.00 0.00 0.00 0.00
------- ------- ------- ------- ------- -------
Total distributions (1.20) (1.03) (0.96) (1.02) (0.69) (0.73)
------- ------- ------- ------- ------- -------
Net asset value, end of period $11.38 $11.92 $11.73 $11.75 $10.43 $11.73
======= ======= ======= ======= ======= =======
Total return (%)(c) 5.7 14.9 6.8 9.0 (5.5) 20
Ratios/Supplemental data
- ------------------------
Net assets, end of period (000) $181,343 $180,198 $178,030 $182,436 $147,986 $147,503
Ratio of operating expenses to
average net assets(%)(d) 1.21 1.21 1.23 1.22 1.29 1.35
Ratio of net investments income to
average net assets (%) 7.63 7.28 5.92 5.70 6.66 6.69
Portfolio turnover rate(%) 737 305 730 276 809 559
</TABLE>
10
<PAGE>
NEW ENGLAND GOVERNMENT SECURITIES FUND (CONTINUED)
(a) Fiscal year end changed from November 30 to December 31 in 1986.
(b) Computed on an annualized basis.
(c) A sales charge is not reflected in total return calculations. Periods of
less than one year are not annualized.
(d) The ratio of expenses to average net assets without giving effect to
voluntary expense limitations would have been 1.21% for the year ended
November 30, 1986.
11
<PAGE>
NEW ENGLAND GOVERNMENT SECURITIES FUND (CONTINUED)
<TABLE>
<CAPTION>
CLASS B
-------------------------------------------
SEPT. 23(A)
THROUGH YEAR ENDED DEC. 31,
-------------------------
DEC. 31,
1993 1994 1995
---------- -------- --------
<S> <C> <C> <C>
Net asset value, beginning of
period $12.26 $11.75 $10.43
-------- -------- --------
Income from investment operations
- ---------------------------------
Net investment income 0.16 0.60 0.65
Net gains or losses on investments
(both realized and unrealized) (0.30) (1.32) 1.30
-------- -------- --------
Total income from investment
operations (0.14) (0.72) 1.95
-------- -------- --------
Less distributions
- ------------------
Distributions (from net investment
income) (0.16) (0.60) (0.64)
Distributions (from net realized
capital gains) (0.21) 0.00 0.00
Distributions (from paid-in
capital) 0.00 0.00 0.00
-------- -------- --------
Total distributions (0.37) (0.60) (0.64)
-------- -------- --------
Net asset value, end of period $11.75 $10.43 $11.74
======== ======== ========
Total return (%)(c) (1.2) (6.2) 19.2
Ratios/Supplemental data
- ------------------------
Net assets, end of period (000) $1,255 $2,760 $4,858
Ratio of operating expenses to
average net assets(%)(d) 1.97(b) 2.04 2.10
Ratio of net investments income to
average net assets (%) 5.03(b) 5.91 5.94
Portfolio turnover rate(%) 276(d) 809 559
</TABLE>
(a) Class B shares were first offered on September 23, 1993.
(b) Computed on an annualized basis.
(c) A contingent deferred sales charge is not reflected in total return
calculations. Period of less than one year are not annualized.
(d) Represents portfolio turnover rate for the Fund as a whole for the entire
fiscal year.
12
<PAGE>
NEW ENGLAND LIMITED TERM U.S. GOVERNMENT FUND
<TABLE>
<CAPTION>
CLASS A
-----------------------------------------------------------------------------
JAN. 3(A)
THROUGH YEAR ENDED DEC. 31,
DEC. 31, ---------------------------------------------------------------
1989 1990 1991 1992 1993 1994 1995
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
period $12.50 $12.53 $12.44 $12.86 $12.54 $12.49 $11.49
-------- -------- -------- -------- -------- -------- --------
Income from investment operations
- ---------------------------------
Net investment income 0.97 0.94 0.93 0.80 0.71 0.82 0.86
Net gains or losses on investments
(both realized and unrealized) 0.27 0.29 0.69 (0.11) 0.08 (1.10) 0.59
-------- -------- -------- -------- -------- -------- --------
Total income from investment
operations 1.24 1.23 1.62 0.69 0.79 (0.28) 1.45
-------- -------- -------- -------- -------- -------- --------
Less distributions
- ------------------
Distributions (from net investment
income) (0.96) (0.94) (0.94) (0.80) (0.71) (0.72) (0.84)
Distributions (from net realized
capital gains) 0.00 0.00 0.00 0.00 (0.01) 0.00 0.00
Distributions (from paid-in
capital) (0.25) (0.38) (0.26) (0.21) (0.12) 0.00 0.00
-------- -------- -------- -------- -------- -------- --------
Total distributions (1.21) (1.32) (1.20) (1.01) (0.84) (0.72) (0.84)
-------- -------- -------- -------- -------- -------- --------
Net asset value, end of period $12.53 $12.44 $12.86 $12.54 $12.49 $11.49 $12.10
======== ======== ======== ======== ======== ======== ========
Total return (%)(c) 10.4 10.5 13.8 5.7 6.4 (2.3) 13
Ratios/Supplemental data
- ------------------------
Net assets, end of period (000) $8,430 $50,062 $271,966 $477,396 $562,184 $412,399 $361,520
Ratio of operating expenses to
average net assets(%)(d) 1.31 1.25 1.25 1.16 1.14 1.18 1.22
Ratio of net investments income to
average net assets (%) 7.92 7.95 7.24 6.24 5.64 6.80 7.18
Portfolio turnover rate(%) 731 55 277 323 124 244 247
</TABLE>
13
<PAGE>
NEW ENGLAND LIMITED TERM U.S. GOVERNMENT FUND (CONTINUED)
<TABLE>
<CAPTION>
CLASS B CLASS C
----------------------------------- ---------
SEPT. 27(A) YEAR
THROUGH, YEAR ENDED DEC. 31, ENDED
--------------------
DEC. 31, DEC. 31,
1993 1994 1995 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net asset value, beginning of period $12.76 $12.49 $11.48 $11.48
-------- -------- -------- --------
Income from investment operations
- ---------------------------------
Net investment income 0.17 0.71 0.76 0.64
Net gains or losses on investments (both realized
and unrealized) (0.24) (1.08) 0.61 0.64
-------- -------- -------- --------
Total income from investment operations (0.07) (0.37) 1.37 1.28
-------- -------- -------- --------
Less distributions
- ------------------
Distributions (from net investment income) (0.16) (0.64) (0.76) (0.65)
Distributions (from net realized capital gains) (0.01) 0.00 0.00 0.00
Distributions (in excess of net investment income) 0.00 0.00 0.00 (0.01)
Distributions (from paid-in capital) (0.03) 0.00 0.00 0.00
-------- -------- -------- --------
Total distributions (0.20) (0.64) (0.76) (0.66)
-------- -------- -------- --------
Net asset value, end of period $12.49 $11.48 $12.09 $12.10
======== ======== ======== ========
Total return (%)(d) (0.6) (2.9) 12.3 11.4
Ratios/Supplemental data
- ------------------------
Net assets, end of period (000) $6,221 $11,891 $18,056 $5,936
Ratio of operating expenses to average net assets(%)(b) 1.96(c) 1.83 1.87 1.87
Ratio of net investments income to average net assets (%) 4.30(c) 6.15 6.53 6.53
Portfolio turnover rate(%) 124(e) 244 247 247
</TABLE>
(a) The Fund commenced operations on January 3, 1989. Class B shares were first
offered beginning September 27, 1993. Class C shares were first offered
beginning January 3, 1995.
(b) Commencing May 18, 1989 through March 31, 1992, expenses were voluntarily
limited to 1.25% of average daily net assets. The ratio of expenses to
average net assets without giving effect to this expense limitation would
have been 3.47% for the period ended December 31, 1989 and 1.62% for the
year ended December 31, 1990.
(c) Computed on an annualized basis.
(d) A sales charge of 3% maximum in the case of Class A shares and a contingent
deferred sales charge in the case of Class B shares are not reflected in
total return calculations. Periods of less than one year are not
annualized.
(e) Represents portfolio turnover rate for the Fund as a whole for the entire
fiscal year.
14
<PAGE>
NEW ENGLAND ADJUSTABLE RATE U.S. GOVERNMENT FUND
<TABLE>
<CAPTION>
CLASS A
--------------------------------------------------------
OCT. 18 (A)
THROUGH YEAR ENDED DEC. 31,
------------------------------------------
DEC. 31,
1991 1992 1993 1994 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of
period $7.50 $7.50 $7.46 $7.45 $7.20
-------- -------- -------- -------- --------
Income from investment operations
- ---------------------------------
Net investment income 0.09 0.42 0.33 0.37 0.47
Net gains or losses on investments
(both realized and unrealized) 0.00 (0.06) (0.03) (0.31) 0.14
-------- -------- -------- -------- --------
Total income from investment
operations 0.09 0.36 0.30 0.06 0.61
-------- -------- -------- -------- --------
Less distributions
- ------------------
Distributions (from net investment
income) (0.09) (0.40) (0.31) (0.31) (0.44)
-------- -------- -------- -------- --------
Total distributions (0.09) (0.40) (0.31) (0.31) (0.44)
-------- -------- -------- -------- --------
Net asset value, end of period $7.50 $7.46 $7.45 $7.20 $7.37
======== ======== ======== ======== ========
Total return (%)(c) 1.2 4.9 4.0 0.8 8.6
Ratios/Supplemental data
- ------------------------
Net assets, end of period (000) $60,684 $294,687 $734,251 $489,637 $331,112
Ratio of operating expenses to
average net assets(%)(d) 0.50(c) 0.57 0.60 0.60 0.66
Ratio of net investments income to
average net assets (%) 6.43(c) 5.39 4.39 4.85 6.29
Portfolio turnover rate(%) 52(c) 49 54 17 73
</TABLE>
15
<PAGE>
NEW ENGLAND ADJUSTABLE RATE U.S. GOVERNMENT FUND (CONTINUED)
<TABLE>
<CAPTION>
CLASS B
-------------------------------------------
SEPT. 23(A)
THROUGH YEAR ENDED DEC. 31,
-------------------------
DEC. 31,
1993 1994 1995
---------- -------- --------
<S> <C> <C> <C>
Net asset value, beginning of
period $7.52 $7.45 $7.20
---------- -------- --------
Income from investment operations
- ---------------------------------
Net investment income 0.08 0.29 0.41
Net gains or losses on investments (both
realized and unrealized) (0.08) (0.29) 0.14
---------- -------- --------
Total income from investment
operations 0.00 0.00 0.55
---------- -------- --------
Less distributions
- ------------------
Distributions (from net investment
income) (0.07) (0.25) (0.38)
---------- -------- --------
Total distributions (0.07) (0.25) (0.38)
---------- -------- --------
Net asset value, end of period $7.45 $7.20 $7.37
========== ======== ========
Total return (%)(c) 0.0 0.10 7.8
Ratios/Supplemental data
- ------------------------
Net assets, end of period (000) $855 $2,056 $2,368
Ratio of operating expenses to
average net assets(%)(d) 1.35(c) 1.35 1.41
Ratio of net investments income to
average net assets (%) 3.50(c) 4.1 5.54
Portfolio turnover rate(%) 54(e) 17 73
</TABLE>
(a) The Fund commenced operations on October 18, 1991. Class B shares were
first offered on September 13, 1993.
(b) From October 19, 1991 through March 20, 1992 expenses were voluntarily
limited to 0.50% of average daily net assets. Commencing April 1, 1992
expenses were voluntarily limited to 0.60% of Class A average daily net
assets, and, effective September 13, 1993, 1.35% of Class B average daily
net assets. The ratio of operating expenses to average net assets without
giving effect to these expense limitations would have been 1.26%
(annualized) and 0.96%, 0.86%, 0.88% and 0.88% for Class A shares for the
period ended December 31,1991 and the years ended December 31, 1992, 1993,
1994 and 1995, respectively, and 1.61% (annualized), 1.63% and 1.65% for
Class B shares for the period September 13, 1993 through December 31, 1993
and the year ended December 31, 1994 and the year ended December 31, 1995,
respectively.
(c) Computed on an annualized basis.
(d) A sales charge of 1.00% (maximum) in the case of Class A shares and a
contingent deferred sales charge in the case of Class B shares are not
reflected in total return calculations. Periods of less than one year are
not annualized.
(e) Represents portfolio turnover rate for the Fund as a whole for the entire
fiscal year.
16
<PAGE>
NEW ENGLAND BOND INCOME FUND
<TABLE>
<CAPTION>
CLASS A
------------------------------------------------------------------
YEAR JULY 1
ENDED THROUGH YEAR ENDED DEC. 31,
----------------------------------------
JUNE 30, DEC. 31,
1986 1986(D) 1987 1988 1989 1990
--------- --------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
period $10.93 $11.45 $11.73 $10.98 $10.89 $11.23
--------- --------- -------- -------- -------- --------
Income from investment operations
- ---------------------------------
Net investment income 0.98 0.49 0.90 0.85 0.91 0.89
Net gains or losses on investments
(both realized and unrealized) 0.71 0.26 (0.75) (0.06) 0.34 (0.10)
--------- --------- -------- -------- -------- --------
Total income from investment
operations 1.69 0.75 0.15 0.79 1.25 0.79
--------- --------- -------- -------- -------- --------
Less distributions
- ------------------
Distributions (from net investment
income) (1.17) (0.47) (0.90) (0.88) (0.91) (0.90)
Distributions (from net realized
capital gains) 0.00 0.00 0.00 0.00 0.00 0.00
--------- --------- -------- -------- -------- --------
Total distributions (1.17) (0.47) (0.90) (0.88) (0.91) (0.90)
--------- --------- -------- -------- -------- --------
Net asset value, end of period $11.45 $11.73 $10.98 $10.89 $11.23 $11.12
========= ========= ======== ======== ======== ========
Total return (%)(c) 16.6 6.7 1.4 7.4 11.9 7.5
Ratios/Supplemental data
- ------------------------
Net assets, end of period (000) $46,175 $54,210 $60,071 $67,548 $76,662 $85,372
Ratio of operating expenses to
average net assets(%)(d) 8.80 1.02(b) 1.31 1.20 1.18 1.18
Ratio of net investments income to
average net assets (%) 0.92 8.29(b) 8.03 7.68 8.27 8.05
Portfolio turnover rate(%) 242 352(b) 307 88 77 126
</TABLE>
17
<PAGE>
NEW ENGLAND BOND INCOME FUND (CONTINUED)
<TABLE>
<CAPTION>
CLASS A
------------------------------------------------------
YEAR ENDED DECEMBER 31,
------------------------------------------------------
1991 1992 1993 1994 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of
period $11.12 $12.14 $12.12 $12.18 $10.95
-------- -------- -------- -------- --------
Income from investment operations
- ---------------------------------
Net investment income 0.88 0.85 0.77 0.72 0.81
Net gains or losses on investments
(both realized and unrealized) 1.04 0.01 0.66 (1.23) 1.40
-------- -------- -------- -------- --------
Total income from investment
operations 1.92 0.86 1.43 (0.51) 2.21
-------- -------- -------- -------- --------
Less distributions
- ------------------
Distributions (from net investment
income) (0.90) (0.86) (0.78) (0.72) (0.80)
Distributions (from net realized
capital gains) 0.00 (0.02) (0.59) 0.00 0.00
-------- -------- -------- -------- --------
Total distributions (0.90) (0.88) (1.37) (0.72) (0.80)
-------- -------- -------- -------- --------
Net asset value, end of period $12.14 $12.12 $12.18 $10.95 $12.36
======== ======== ======== ======== ========
Total return (%)(c) 18.1 7.5 12.1 (4.2) 20.8
Ratios/Supplemental data
- ------------------------
Net assets, end of period (000) $113,759 $145,184 $179,264 $155,362 $200,285
Ratio of operating expenses to
average net assets(%)(d) 1.15 1.08 1.04 1.08 1.14
Ratio of net investments income to
average net assets (%) 7.69 7.08 6.10 6.46 6.81
Portfolio turnover rate(%) 218 89 202 77 81
</TABLE>
18
<PAGE>
NEW ENGLAND BOND INCOME FUND (CONTINUED)
<TABLE>
<CAPTION>
CLASS B CLASS C
----------------------------------- ---------
SEPT. 13(A) YEAR
THROUGH, YEAR ENDED DEC. 31, ENDED
--------------------
DEC. 31, DEC. 31,
1993 1994 1995 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net asset value, beginning of period $13.06 $12.18 $10.95 $10.95
-------- -------- -------- --------
Income from investment operations
- ---------------------------------
Net investment income 0.20 0.63 0.72 0.56
Net gains or losses on investments
(both realized and unrealized) (0.30) (1.23) 1.40 1.40
-------- -------- -------- --------
Total income from investment operations (0.10) (0.60) 2.12 1.96
-------- -------- -------- --------
Less distributions
- ------------------
Distributions (from net investment income) (0.19) (0.63) (0.71) (0.55)
Distributions (from net realized capital gains) (0.59) 0.00 0.00 0.00
-------- -------- -------- --------
Total distributions (0.78) (0.63) (0.71) (0.55)
-------- -------- -------- --------
Net asset value, end of period $12.18 $10.95 $12.36 $12.36
======== ======== ======== ========
Total return (%)(c) (0.8) (4.9) 19.9 18.1
Ratios/Supplemental data
- ------------------------
Net assets, end of period (000) $2,661 $9,435 $23,398 $1,009
Ratio of operating expenses to
average net assets(%)(d) 1.81(b) 1.83 1.89 1.89
Ratio of net investments income to
average net assets (%) 4.79(b) 5.71 6.06 6.06
Portfolio turnover rate(%) 202(e) 77 81 81
</TABLE>
(a) Class B shares were first offered on September 13, 1993. Class C shares
were first offered on January 3, 1995.
(b) Computed on an annualized basis.
(c) A sales charge in the case of the Class A shares and a contingent deferred
sales charge in the case of Class B shares are not reflected in total return
calculations. Periods of less than one year are not annualized.
(d) Fiscal year end changed in 1986 from June 30 to December 31.
(e) Represents portfolio turnover rate for the Fund as a whole for the entire
fiscal year.
19
<PAGE>
NEW ENGLAND HIGH INCOME FUND
<TABLE>
<CAPTION>
CLASS A
-------------------------------------------------------------
FOUR MONTHS YEAR
YEAR ENDED AUGUST 31, ENDED ENDED
------------------------------
DEC. 31, DEC. 31,
1986 1987 1988 1988(D) 1989
-------- -------- -------- ------------- -----------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of
period $14.56 $14.52 $13.77 $11.69 $11.08
-------- -------- -------- -------- --------
Income from investment operations
- ---------------------------------
Net investment income 1.54 1.50 1.53 0.43 1.31
Net gains or losses on investments
(both realized and unrealized) 1.72 1.24 (0.39) (0.13) 0.38
-------- -------- -------- -------- --------
Total income from investment
operations (1.56) (1.56) (1.53) (0.43) (1.31)
-------- -------- -------- -------- --------
Less distributions
- ------------------
Distributions (from net investment
income) 0.00 0.00 0.00 0.00 0.00
Distributions (from net realized
capital gains) (0.20) (0.43) (0.13) 0.00 0.00
Distributions (from paid-in
capital) 0.00 0.00 (0.03) (0.05) (0.08)
-------- -------- -------- -------- --------
Total distributions (1.76) (1.99) (1.69) (0.48) (1.39)
-------- -------- -------- -------- --------
Net asset value, end of period
$14.52 $13.77 $11.69 $11.08 $10.07
======== ======== ======== ======== ========
Total return (%)(c) 12.4 9.0 (2.6) (1.2) 3.3
Ratios/Supplemental data
- ------------------------
Net assets, end of period (000) $22,080 $20,439 $14,517 $11,870 $9,070
Ratio of operating expenses to
average net assets(%)(b) 1.50 1.50(f) 1.57 1.50(c) 1.50
Ratio of net investments income to
average net assets (%) 10.53 10.60 12.45 11.58(c) 12.28
Portfolio turnover rate(%) 86 39 29 1(c) 30
</TABLE>
20
<PAGE>
NEW ENGLAND HIGH INCOME FUND (CONTINUED)
<TABLE>
<CAPTION>
CLASS A
-------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------
1990 1991 1992 1993 1994 1995
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
period $10.07 $7.56 $9.07 $9.46 $10.06 $8.89
-------- -------- -------- -------- -------- --------
Income from investment operations
- ---------------------------------
Net investment income 1.30 1.02 0.94 0.90 0.88 0.88
Net gains or losses on investments
(both realized and unrealized) (2.49) 1.58 0.44 0.61 (1.19) (0.13)
-------- -------- -------- -------- -------- --------
Total income from investment
operations (1.19) 2.60 1.38 1.51 (0.31) 1.01
-------- -------- -------- -------- -------- --------
Less distributions
- ------------------
Distributions (from net investment
income) (1.30) (1.02) (0.94) (0.90) (0.86) (0.88)
Distributions (in excess of net
investment income) 0.00 0.00 0.00 (0.01) 0.00 (0.04)
Distributions (from net realized
capital gains) 0.00 0.00 0.00 0.00 0.00 0.00
Distributions (from paid-in
capital) (0.02) (0.07) (0.05) 0.00 0.00 0.00
-------- -------- -------- -------- -------- --------
Total distributions (1.32) (1.09) (0.99) (0.91) (0.86) (0.92)
-------- -------- -------- -------- -------- --------
Net asset value, end of period $7.56 $9.07 $9.46 $10.06 $8.89 $8.98
======== ======== ======== ======== ======== ========
Total return (%)(c) (13.1) 36.3 15.8 16.5 (3.3) 11.8
Ratios/Supplemental data
- ------------------------
Net assets, end of period (000) $6,814 $12,280 $20,992 $31,176 $33,673 $39,148
Ratio of operating expenses to
average net assets(%)(d) 1.50 1.50 1.50 1.54 1.60 1.60
Ratio of net investments income to
average net assets (%) 14.00 11.56 9.74 9.17 9.18 9.71
Portfolio turnover rate(%) 7 30 19 43 33 30
</TABLE>
21
<PAGE>
NEW ENGLAND HIGH INCOME FUND (CONTINUED)
<TABLE>
<CAPTION>
CLASS B
-------------------------------------------
SEPT. 20(A)
THROUGH YEAR ENDED DEC. 31,
-------------------------
DEC. 31,
1993 1994 1995
---------- -------- --------
<S> <C> <C> <C>
Net asset value, beginning of period $9.87 $10.06 $8.88
-------- -------- --------
Income from investment operations
- ---------------------------------
Net investment income 0.23 0.79 0.83
Net gains or losses on investments (both
realized and unrealized) 0.20 (1.18) 0.13
-------- -------- --------
Total income from investment operations 0.43 (0.39) 0.96
-------- -------- --------
Less distributions
- ------------------
Distributions (from net investment income)(e) (0.23) (0.78) (0.81)
Distributions (in excess of net investment
income) (0.01) (0.01) (0.05)
Distributions (from net realized capital
gains) 0.00 0.00 0.00
Distributions (from paid-in capital) 0.00 0.00 0.00
-------- -------- --------
Total distributions (0.24) (0.79) (0.86)
-------- -------- --------
Net asset value, end of period $10.06 $8.88 $8.98
======== ======== ========
Total return (%)(g) 4.4 (4.0) 11.2
Ratios/Supplemental data
- ------------------------
Net assets, end of period (000) $1,232 $5,233 $10,625
Ratio of operating expenses to average
net assets(%)(b) 2.25(c) 2.25 2.25
Ratio of net investments income to
average net assets (%) 7.66(c) 8.53 8.96
Portfolio turnover rate(%) 43(h) 33 30
</TABLE>
(a) Commencement of offering of Class B shares.
(b) Commencing October 1, 1993 expenses were voluntarily limited to the annual
rate of 1.60% of Class A average net assets and 2.25% of Class B average
net assets. From May 18, 1989 through September 30, 1993, expenses
(including non-recurring items) were voluntarily limited to 1.50% of
average daily net assets of Class A shares. From July 27, 1988 through May
17, 1989, and during all periods prior to May 18, 1988, expenses (excluding
certain non-recurring items) were limited to 1.50% of average net assets of
Class A shares. Non-recurring expenses excluded for purposes of calculating
this expense limitation were $3,267 for the year ended August 31, 1988,
$51,751 for the four months ended December 31, 1988 and $42,482 for the
period from January 1 through May 17, 1989. The ratios of expenses to
average net assets for Class A shares, including all non-recurring expenses
and assuming the foregoing expense limitations had not been in effect,
would have been 2.34% and 2.34%, respectively, for the years ended August
31, 1987 and 1988, 2.63% (on an annualized basis) for the four months ended
December 31, 1988, 3.08%, 3.02%, 2.63%, 2.00%, 1.82%, 1.83% and 1.72% for
the years ended December 31, 1989, 1990, 1991, 1992, 1993, 1994 and 1995.
Excluding all non-recurring expenses, these ratios would have been 2.07%,
2.32%, 2.23% (on an annualized basis), 2.68%, 2.97%, 2.63%, 2.00%, 1.82%
and 1.83% for Class A shares for the years ended August 31, 1987 and 1988,
the period ended December 31, 1988 and the years ended December 31, 1989,
1990, 1991, 1992, 1993 and 1994, respectively. The ratio of expenses to
average net assets for Class B shares assuming the foregoing expense
limitation had not been in effect, would have been 2.53% (on an annualized
basis), 2.48% for the period September 20, 1993 through December 31, 1993,
the year ended December 31, 1994 and 2.37% for the year ended December 31,
1995.
(c) Computed on an annualized basis.
22
<PAGE>
(d) Fiscal year end changed in 1988 from August 31 to December 31. Back Bay
Advisors assumed that function on July 27, 1988.
(e) Amounts distributed include tax basis distributions from paid in capital of
approximately $0.06 and $0.02 per share for the year ended August 31, 1988
and the four months ended December 31, 1988, respectively.
(f) One-time litigation settlement costs of $56,920 (0.27% of average net
assets) were incurred in fiscal 1987. The ratio of operating expenses to
average net assets, if calculated including these non-recurring costs,
would have been 1.77%, after giving effect to the expense limitation in
effect during such period and described above.
(g) A sales charge in the case of the Class A shares and a contingent deferred
sales charge in the case of the Class B shares are not reflected in total
return calculations. Periods of less than one year are not annualized.
(h) Represents portfolio turnover rate for the Fund as a whole for the entire
fiscal year.
23
<PAGE>
NEW ENGLAND MUNICIPAL INCOME FUND (FORMERLY NAMED NEW ENGLAND TAX EXEMPT INCOME
FUND)
<TABLE>
<CAPTION>
CLASS A
------------------------------------------
YEAR ENDED DECEMBER 31,
------------------------------------------
1986 1987 1988 1989
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net asset value, beginning of
period $7.53 $7.74 $6.79 $7.10
-------- -------- -------- --------
Income from investment operations
- ---------------------------------
Net investment income 0.53 0.46 0.46 0.47
Net gains or losses on investments
(both realized and unrealized) 0.96 (0.67) 0.29 0.20
-------- -------- -------- --------
Total income from investment
operations 1.49 (0.21) 0.75 0.67
-------- -------- -------- --------
Less distributions
- ------------------
Distributions (from net investment
income) (0.68) (0.42) (0.44) (0.48)
Distributions (from net realized
capital gains) (0.60) (0.32) 0.00 0.00
Distributions (from paid-in
capital) 0.00 0.00 0.00 0.00
-------- -------- -------- --------
Total distributions (1.28) (0.74) (0.44) (0.48)
-------- -------- -------- --------
Net asset value, end of period $7.74 $6.79 $7.10 $7.29
======== ======== ======== ========
Total return (%)(c) 21.2 (2.9) 11.5 9.8
Ratios/Supplemental data
- ------------------------
Net assets, end of period (000) $116,503 $125,661 $131,776 $142,976
Ratio of operating expenses to
average net assets(%)(d) 0.85 1.04 0.98 0.96
Ratio of net investments income to
average net assets (%) 6.81 6.56 6.67 6.58
Portfolio turnover rate(%) 156 196 97 89
</TABLE>
24
<PAGE>
NEW ENGLAND MUNICIPAL INCOME FUND (CONTINUED)
<TABLE>
<CAPTION>
CLASS A
-------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------
1990 1991 1992 1993 1994 1995
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
period $7.29 $7.21 $7.53 $7.54 $7.87 $6.85
-------- -------- -------- -------- -------- --------
Income from investment operations
- ---------------------------------
Net investment income 0.46 0.45 0.44 0.40 0.39 0.42
Net gains or losses on investments
(both realized and unrealized) (0.08) 0.35 0.21 0.53 (1.01) 0.74
-------- -------- -------- -------- -------- --------
Total income from investment
operations 0.38 0.80 0.65 0.93 (0.62) 1.16
-------- -------- -------- -------- -------- --------
Less distributions
- ------------------
Distributions (from net investment
income) (0.46) (0.43) (0.46) (0.42) (0.40) (0.41)
Distributions (from net realized
capital gains) 0.00 (0.01) (0.18) (0.18) 0.00 0.00
Distributions (from paid-in
capital) 0.00 (0.04) 0.00 0.00 0.00 0.00
-------- -------- -------- -------- -------- --------
Total distributions (0.46) (0.48) (0.64) (0.60) (0.40) (0.41)
-------- -------- -------- -------- -------- --------
Net asset value, end of period $7.21 $7.53 $7.54 $7.87 $6.85 $7.60
======== ======== ======== ======== ======== ========
Total return (%)(c) 5.5 11.6 8.9 12.7 (8.0) 17.2
Ratios/Supplemental data
- ------------------------
Net assets, end of period (000) $146,232 $162,991 $183,276 $226,881 $184,202 $195,301
Ratio of operating expenses to
average net assets(%)(d) 0.97 0.95 0.95 0.91 0.92 0.93
Ratio of net investments income to
average net assets (%) 6.46 6.18 5.80 5.27 5.44 5.52
Portfolio turnover rate(%) 85 126 85 86 88 93
</TABLE>
25
<PAGE>
NEW ENGLAND MUNICIPAL INCOME FUND (CONTINUED)
<TABLE>
<CAPTION>
CLASS B
-------------------------------------------
SEPT. 13(A)
THROUGH YEAR ENDED DEC. 31,
-------------------------
DEC. 31,
1993 1994 1995
---------- -------- --------
<S> <C> <C> <C>
Net asset value, beginning of period $8.03 $7.86 $6.85
---------- -------- --------
Income from investment operations
- ---------------------------------
Net investment income 0.07 0.34 0.36
Net gains or losses on investments (both
realized and unrealized) 0.01 (1.01) 0.74
---------- -------- --------
Total income from investment operations 0.08 (0.67) 1.10
Less distributions
- ------------------
Distributions (from net investment income) (0.07) (0.34) (0.35)
Distributions (from net realized capital
gains) (0.18) 0.00 0.00
---------- -------- --------
Total distributions (0.25) (0.34) (0.35)
---------- -------- --------
Net asset value, end of period $7.86 $6.85 $7.60
========== ======== ========
Total return(%) 1.0(c) (8.6) 16.3
Ratios/Supplemental data
- ------------------------
Net assets, end of period (000) $3,395 $7,997 $12,069
Ratio of operating expenses to average net
assets(%) 1.65(b) 1.67 1.68
Ratio of net investment income to average
net assets(%) 3.91(b) 4.69 4.77
Portfolio turnover rate(%) 86(d) 88 93
</TABLE>
(a) Commencement of offering of Class B shares.
(b) Computed on an annualized basis.
(c) A sales charge in the case of Class A shares and a contingent deferred
sales charge in the case of Class B shares are not reflected in total
return calculations. Periods of less than one year are not annualized.
(d) Represents portfolio turnover rate for the Fund as a whole for the entire
year.
26
<PAGE>
NEW ENGLAND STRATEGIC INCOME FUND
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
------------ ------------ ------------
MAY 1 (A) MAY 1 (A) MAY 1 (A)
THROUGH THROUGH THROUGH
DEC. 31, DEC. 31, DEC. 31,
1995 1994 1995
------------ ------------ ------------
<S> <C> <C> <C>
Net asset value, beginning of period $ 12.50 $ 12.50 $ 12.50
---------- ---------- ----------
Income from investment operations
- ---------------------------------
Net investment income 0.74 0.68 0.67
Net gains or losses on investments (both realized and
unrealized)
0.49 0.49 0.49
---------- ---------- ----------
Total income from investment operations 1.23 1.17 1.16
---------- ---------- ----------
Less distributions
- ------------------
Distributions (from net investment income) (0.73) (0.67) (0.66)
Distributions (in excess of net investment income) (0.01) (0.01) (0.01)
---------- ---------- ----------
Total distributions (0.74) (0.68) (0.67)
---------- ---------- ----------
Net asset value, end of period $ 12.99 $ 12.99 $ 12.99
========== ========== ==========
Total return (%) 10.3(c) 9.7(c) 9.7(c)
Ratios/Supplemental data
- ------------------------
Net assets, end of period (000) $36,939 $38,767 $12,252
Ratio of operating expenses to average net assets(%) 0.93(b) 1.68(b) 1.68(b)
Ratio of net investment income to average net assets (%) 8.75(b) 8.00(b) 8.00(b)
Portfolio turnover rate(%) 22(b) 22(b) 22(b)
(a) Commencement of operations.
(b) Computed on an annualized basis.
(c) Not computed on an annualized basis
(d) The ratio of operating expenses to average net assets
without giving effect to the voluntary expense
limitations described in Note 4 to the Financial
Statements would have been (%): 1.58(b) 2.33(b) 2.33(b)
</TABLE>
27
<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.
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 $81 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.
28
<PAGE>
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 $6 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 $6 billion of assets under management. Loomis Sayles
manages portfolios for mutual funds and other institutional investors and
individuals.
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.
29
<PAGE>
"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
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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 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 instruments that are unrated. 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. 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 instruments that 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
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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, 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 $40,000 filing a joint return would have to earn a taxable yield of
8.33% to equal a tax-free yield of 6.0%. This example and the following table do
not take into account the effect of state or local income taxes, if any, or
federal income taxes on social security benefits which may arise as a result of
receiving tax exempt income, or the federal alternative minimum tax that may be
payable to the extent that Fund dividends are derived from interest on "private
activity" bonds (see below). Also, a portion of the Fund's distributions may
consist of ordinary income or short-term or long-term capital gains and will be
taxable to you as such.
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TAX FREE INVESTING
Tax-Exempt Equivalent Yields
<TABLE>
<CAPTION>
TAXABLE INCOME FEDERAL IF TAX EXEMPT YIELD IS
SINGLE JOINT MARGINAL 4.0% 4.5% 5.0% 5.5% 6.0%
RETURN ($) RETURN ($) TAX RATE THEN THE EQUIVALENT TAXABLE YIELD WOULD BE:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
0 - 24,000 0 - 40,100 15.00% 4.71% 5.29% 5.88% 6.47% 7.06%
24,001 - 58,150 40,101 - 96,900 28.00% 5.56% 6.25% 6.94% 7.64% 8.33%
58,151 - 121,300 96,901 - 147,700 31.00% 5.80% 6.52% 7.25% 7.97% 8.70%
121,301 - 263,750 147,701 - 263,750 36.00% 6.25% 7.03% 7.81% 8.59% 9.38%
263,751 AND OVER 263,751 AND OVER 39.60% 6.62% 7.45% 8.28% 9.11% 9.93%
</TABLE>
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
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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.
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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, 18% and 14% of the average
month-end net assets of the Bond Income Fund, and Municipal Income Fund,
respectively, were invested in fixed-income securities rated in the rating
categories below investment grade (BBB/Baa). The composition of the
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<PAGE>
High Income Fund and the Strategic 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
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<PAGE>
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
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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
38
<PAGE>
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
39
<PAGE>
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.
40
<PAGE>
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 $6 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.
NEFM intends to recommend to the Board of the Trust that Loomis Sayles be
approved as sub-advisor to the High Income Fund replacing Back Bay Advisors.
This change is contingent upon the approval of the Trusties and the vote of the
shareholders of the Fund. A proxy containing more detailed information regarding
this proposed change will be sent to the shareholders of the Fund and at such
time the change is effective, the prospectus will be supplemented.
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:
<TABLE>
<CAPTION>
Management fee paid by Fund to NEFM
Fund (as a percentage of average daily net assets of the Fund)
- --------------------------------- --------------------------------------------------------
<S> <C> <C>
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 Fund 0.650% of the first $200 million
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
</TABLE>
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<PAGE>
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:
<TABLE>
<CAPTION>
Subadvisory fee payable to NEFM to subadviser
Fund Subadviser (as a percentage of average daily net assets of the Fund)
----------------------- -------------- ---------------------------------------------------------
<S> <C> <C> <C>
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 Fund Back Bay 0.3250% of the first $200 million
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. Government Fund Back Bay 0.3250% of the first $200 million
Advisors 0.3125% of the next $300 million
0.3000% of amounts in excess of $500 million
Strategic Income Fund Loomis Sayles 0.35% of the first $200 million
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
</TABLE>
Prior to January 2, 1996, Back Bay Advisors served as adviser to each Fund other
than the Strategic Income Fund.
Loomis Sayles has voluntarily agreed until further notice to the Strategic
Income Fund to waive its entire subadvisory fee (which is paid by NEFM) and NEFM
has agreed to reduce its management fee (which is paid by the Fund) by an equal
amount. These agreements may be terminated by Loomis Sayles or NEFM at any time.
In addition, under an expense deferral arrangement, which NEFM may terminate at
any time, NEFM has agreed to defer its management fees (to the extent that they
are not waived as provided in the preceding sentence) for the Strategic Income
Fund until further notice, but only to the extent necessary to limit the Fund's
expenses to the annual rate of 1.40% for Class A shares, 2.15% for Class B
shares and 2.15% for Class C shares, subject to the obligation of the Fund to
pay NEFM such deferred 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 deferred fees more than two years after the end of the
fiscal year in which such fee was deferred.
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.
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<PAGE>
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.
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<PAGE>
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.
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.
[] 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.
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<PAGE>
[] 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.
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<PAGE>
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
<TABLE>
<CAPTION>
SALES CHARGE AS A % OF DEALER'S
----------------------------- CONCESSION
NET AS % OF
OFFERING AMOUNT OFFERING
VALUE OF TOTAL INVESTMENT PRICE INVESTED PRICE
- ----------------------------- ----------- --------------- ------------
<S> <C> <C> <C>
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 *
<CAPTION>
LIMITED TERM U.S. GOVERNMENT FUND
SALES CHARGE AS A % OF DEALER'S
----------------------------- CONCESSION
NET AS % OF
OFFERING AMOUNT OFFERING
VALUE OF TOTAL INVESTMENT PRICE INVESTED PRICE
- ----------------------------- ----------- --------------- ------------
<S> <C> <C> <C>
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 *
<CAPTION>
ADJUSTABLE RATE FUND
SALES CHARGE AS A % OF DEALER'S
----------------------------- CONCESSION
NET AS % OF
OFFERING AMOUNT OFFERING
VALUE OF TOTAL INVESTMENT PRICE INVESTED PRICE
- ----------------------------- ----------- --------------- ------------
<S> <C> <C> <C>
Up to - $999,999 1.00% 1.01% 0.85%
$1,000,000 or more None None *
</TABLE>
* 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 and investments by plans under Section 401(a) or 401(k) of the
Code whose total investment amount to $1 million or more or that have 100
or more eligible employees ("Retirement Plans") a commission of up to the
following amounts: 1% on the first $3 million invested; 0.50% on the next
$2 million; and 0.25% 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. For investments
by Retirement Plans,
46
<PAGE>
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 $3 million invested; and 0.50% on amounts over $3
million and up to $10 million. Retirement plans that have total investment
assets of at least $10 million are eligible to purchase Class Y shares of
the Funds, which are described in a separate prospectus. 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 or purchases by Retirement
Plans as defined above, 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:
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<PAGE>
<TABLE>
<CAPTION>
CONTINGENT DEFERRED
SALES CHARGE AS A
YEAR SINCE PERCENTAGE OF DOLLAR
PURCHASE AMOUNT SUBJECT TO CHARGE
------------ ---------------------------
<S> <C>
1st.................... 4%
2nd.................... 3%
3rd.................... 3%
4th.................... 2%
5th.................... 1%
thereafter.................... 0%
</TABLE>
Year one ends one year after the day on which the purchase was accepted and so
on.
The CDSC is deducted from the proceeds of the redemption, not the amount
remaining in the account, unless otherwise requested, and is paid to the
Distributor. The CDSC may be eliminated for certain persons and organizations.
See "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
48
<PAGE>
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).
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<PAGE>
[] 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
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), 401(k) 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 are available at net asset value for investments in
participant-directed 401(a) and 401(k) plans that have 100 or more eligible
employees.
[] Shares of the Funds are available at net asset value for investments by
non-discretionary and non-retirement accounts of bank trust departments or trust
companies but are unavailable if the trust department or institution is part of
an organization not principally engaged in banking or trust activities.
[] 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.
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<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.
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<PAGE>
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.
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<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.
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<PAGE>
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.
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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.
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<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.
56
<PAGE>
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.
57
<PAGE>
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: $1,583,658 for the Government Securities Fund;
$2,272,725 for the Limited Term U.S. Government Fund; $1,929,283 for the
Adjustable Rate Fund; $1,919,349 for the Bond Income Fund; and $1,700,600 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.
58
<PAGE>
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.
59
<PAGE>
[] 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, foundations, bank trust departments or
trust companies. The minimum initial investment is $1 million for these entities
and the minimum for each subsequent investment is $10,000. Class Y shares may
also be purchased by plan sponsors of 401(a), 401(k), 457 or 403(b) plans
("Plans") that have total investment assets in these Plans of at least $10
million and by The New England and any other insurance company affiliated with
The New England or any of their successor entities ("Insurance Company
Accounts"). Plan sponsors' investment assets in multiple 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 Plans, Separate Accounts or
Insurance Company 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 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.
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<PAGE>
[] Each Fund's annual report contains additional performance information and
is made available upon request and without charge. Each Fund will send a single
copy of its annual and semi-annual reports to an address at which more than one
shareholder of record with the same last name has indicated that mail is to be
delivered. Shareholders may request additional copies of any annual or semi-
annual report in writing or by telephone.
[] 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.
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<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.
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<PAGE>
A P P E N D I X B
AVERAGE MONTHLY PORTFOLIO COMPOSITION TABLE OF THE
HIGH INCOME FUND FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
PERCENTAGE
OF NET
SECURITY ASSETS
-------- ------
<S> <C>
Preferred Stock................................... 0%
Short-term Obligations and Other Assets........... 4%
Debt -- Unrated................................... 1%
Debt -- Standard and Poor's Rating................
AAA....................................... 2%
BBB....................................... 0%
BB........................................ 19%
B......................................... 67%
CAA....................................... 6%
CA........................................ 1%
</TABLE>
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 S&P 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.
63
<PAGE>
A P P E N D I X B
AVERAGE MONTHLY PORTFOLIO COMPOSITION TABLE OF THE
STRATEGIC INCOME FUND FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
PERCENTAGE
OF NET
SECURITY ASSETS
-------- ------
<S> <C>
Preferred Stock................................... 9.63%
Short-term Obligations and Other Assets........... 0.16%
Common Stock...................................... 9.32%
Debt -- Unrated................................... 17.08%
Debt -- Standard and Poor's Rating................
AAA....................................... 8.24%
AA........................................ 3.42%
A......................................... 5.35%
BBB....................................... 11.07%
BB........................................ 15.92%
B......................................... 16.07%
CCC....................................... 8.40%
CD........................................ 0.34%
</TABLE>
The chart above indicates the composition of the Strategic Income Fund for the
fiscal year ended December 31, 1995, with the debt securities rated by S&P
separated into the indicated categories. The percentages were calculated on a
dollar-weighted average basis by determining monthly the percentage of the
Strategic Income Fund's net assets invested in each category as of the end of
each month during the year. Loomis Sayles 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.
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<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).
65
<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 -- MAY 1, 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 May
1, 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 1-800-225-5478. 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.
1
<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
2
<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 Purchase None
Maximum Contingent Deferred Sales Charge None
ANNUAL FUND OPERATING EXPENSES
(as a percentage of
average net assets)
NEW ENGLAND
INTERNATIONAL
EQUITY FUND*
------------
Class Y
------------
Management Fees
(after voluntary fee waiver and 0.18%**
expense reduction)
12b-1 Fees None
Other Expenses 0.82%
Total Fund Operating Expenses
(after voluntary fee waiver and 1.00%**
expense reduction)
NEW ENGLAND
CAPITAL NEW ENGLAND
GROWTH BALANCED
FUND FUND
---------- ------------
Class Y Class Y
---------- ------------
Management Fees 0.75% 0.74%
12b-1 Fees None None
Other Expenses 0.61% 0.37%
Total Fund Operating 1.36% 1.11%
Expenses
NEW ENGLAND NEW ENGLAND
STAR NEW ENGLAND GROWTH
ADVISERS VALUE OPPORTUNITIES
FUND FUND FUND*
---------- ------------- ---------------
Class Y Class Y Class Y
----------- -------------- ---------------
Management Fees 1.05% 0.74% 0.65%
12b-1 Fees None None None
Other Expenses 0.52% 0.38% 0.46%
Total Fund Operating 1.57% 1.12% 1.16%
Expenses
3
<PAGE>
* 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.
** Without the voluntary fee waiver and expense reduction by the Fund's
adviser, Management Fees would be 0.68% and Total Fund Operating Expenses
would be 1.50%. These voluntary limitations can be terminated by the Fund's
adviser at any time. See "Fund Management."
4
<PAGE>
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 $ 14 $ 11
3 years $ 43 $ 35
5 years $ 74 $ 61
10 years $164 $135
NEW ENGLAND NEW ENGLAND
INTERNATIONAL EQUITY FUND STAR ADVISERS FUND
------------------------- -------------------
Class Y Class Y
------------------------- -------------------
1 year $ 10 $ 16
3 years $ 32 $ 50
5 years $ 55 $ 86
10 years $122 $187
NEW ENGLAND NEW ENGLAND GROWTH
VALUE FUND OPPORTUNITIES FUND
-------------------- -------------------
Class Y Class Y
-------------------- -------------------
1 year $ 11 $ 12
3 years $ 36 $ 37
5 years $ 62 $ 64
10 years $136 $141
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.
5
<PAGE>
FINANCIAL HIGHLIGHTS
(For a Class Y share of each Fund, except New England Capital Growth and New
England Growth Opportunities Funds, outstanding throughout the indicated period.
In the case of New England Capital Growth and New England Growth Opportunities
Funds which had no Class Y shares outstanding during 1995, financial highlights
are presented for a Class A, B and C share of each Fund outstanding throughout
the indicated period.)
The Financial Highlights presented on pages __ through __ have been included in
financial statements for the Funds. The financial statements for New England
Value Fund, New England Balanced Fund, New England International Equity Fund,
New England Capital Growth Fund and New England Star Advisers Fund for periods
through December 31, 1995 have been examined by Price Waterhouse LLP,
independent accountants. The financial statements for the Growth Opportunities
Fund's Class A shares for the years ended May 31, 1986, 1987 and 1988, the seven
month period ended December 31, 1988 and the years ended December 31, 1989,
1990, 1991, 1992, 1993, 1994 and 1995 and the Fund's Class B shares for the
period September 13, 1993 through December 31, 1993 and the years ended December
31, 1994 and 1995 have been examined by Coopers & Lybrand LLP, independent
accountants. The Financial Highlights should be read in conjunction with the
financial statements and the notes thereto incorporated by reference in Part II
of the Statement. Each Fund's annual report contains additional performance
information and is made available upon request and with charge.
6
<PAGE>
NEW ENGLAND CAPITAL GROWTH FUND
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
--------------------------------------------- --------------------------------------- -----------
AUGUST 3 (a) SEPT. 13 (a) YEAR YEAR
THROUGH THROUGH ENDED ENDED DEC.
DEC. 31, YEAR ENDED DECEMBER 31, DEC. 31, DEC. 31, 31,
--------------------------------------------- --------------------------------------- ----------
1992 1993 1994 1995 1993 1994 1995 1995
--------------- -------- -------- --------- ------------- -------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning
of Period $ 12.50 $ 14.23 $ 15.27 $ 15.02 $14.79 $ 15.24 $ 14.89 $14.89
-------------------------------------------------------------------------------------------------
Income From Investment Operations
- ---------------------------------
Net Investment Income 0.02 0.00 (0.08) (0.11)(e) 0.00 (0.08) (0.16)(e) (0.09)(e)
Net Gains or Losses on
Investments (both
realized and unrealized) 1.84 1.12 (0.17) 4.74 0.53 (0.27) 4.60 4.52
-------------------------------------------------------------------------------------------------
Total Income From
Investment Operations 1.86 1.12 (0.25) 4.63 0.53 (0.35) 4.44 4.43
-------------------------------------------------------------------------------------------------
Less Distributions
- -----------------------
Distributions (from net
investment income) (0.02) 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Distributions (from net
realized capital gains) (0.11) (0.08) 0.00 (1.24) (0.08) 0.00 (1.24) (1.24)
-------------------------------------------------------------------------------------------------
Total Distributions (0.13) (0.08) 0.00 (1.24) (0.08) 0.00 (1.24) (1.24)
-------------------------------------------------------------------------------------------------
Net Asset Value, End of
Period $ 14.23 $ 15.27 $ 15.02 $ 18.41 $15.24 $ 14.89 $ 18.09 $18.08
=================================================================================================
Total Return (%) (c) 14.9 7.9 (1.6) 30.7 3.6 (2.3) 29.7 29.7
Ratios/Supplemental Data
- ---------------------------
Net Assets, End of Period
(000) $34,722 $98,735 $95,803 $123,504 $6,748 $15,390 $26,234 $ 354
Ratio of Operating
Expenses to Average Net
Assets (%)(d) 1.00(b) 1.23 1.63 1.61 2.29(b) 2.38 2.36 2.36
Ratio of Net Investment
Income (Loss) to Average
Net Assets (%) 0.74(b) (0.03) (0.45) (0.67) (1.15)(b) (1.20) (1.42) (1.42)
Portfolio Turnover Rate (%)
15 77 82 69 77 82 69 69
</TABLE>
(a) The Fund commenced operations on August 3, 1992. Class B shares were first
offered on September 13, 1993.
(b) Computed on an annualized basis.
(c) A sales charge in the case of Class A shares and contingent deferred sales
charge in the case of Class B shares are not reflected in total return
calculations. Periods of less than one year are not annualized.
(d) The ratio of operating expenses to average net assets without giving effect
to the voluntary expense limitations in effect from August 3, 1992 through
September 30, 1993 would have been: (%)
Class A Class B
------------------------- ----------
8/3/92 - Year Ended 9/13/93 -
12/31/92 12/31/93 12/31/93
------------------------- ----------
2.20(b) 1.58 2.97(b)
(e) Per share investment income (loss) does not reflect the current period's
reclassification of permanent differences between book and tax basis net
investment income (loss).
7
<PAGE>
NEW ENGLAND VALUE FUND
CLASS Y
------------------------
MARCH 31(a) YEAR
THROUGH ENDED
DEC. 31, DEC. 31,
1994 1995
-------------- --------
Net asset value, beginning of period $ 7.57 $ 7.24
------------------------
Income from investment operations
- ---------------------------------
Net investment income 0.10 0.12
Net gains or losses on investments 0.08 2.21
(both realized and unrealized)
------------------------
Total income from investment operations 0.18 2.33
------------------------
Less distributions
- ------------------
Distributions (from net investment (0.10) (0.11)
income)
Distributions (from capital gains) (0.41) (0.71)
------------------------
Total distributions (0.51) (0.82)
------------------------
Net asset value, end of period $ 7.24 $ 8.75
========================
Total return (%) 2.4 (c) 32.8
Ratios/Supplemental data
- -------------------------
Net assets, end of period (000) $4,001 $6,738
Ratio of operating expenses to average 1.54 (b) 1.12
net assets (%)
Ratio of net investment income to 1.05 (b) 1.47
average net assets (%)
Portfolio turnover rate (%) 29 52
(a) Commencement of offering of Class Y shares.
(b) Computed on an annualized basis.
(c) Not computed on an annualized basis.
8
<PAGE>
NEW ENGLAND BALANCED FUND
CLASS Y
--------------------------------
MARCH 8 (a) YEAR
THROUGH ENDED
DECEMBER 31, DECEMBER 31,
1994 1995
-------------- ------------
Net asset value, beginning of period $ 12.20 $ 11.27
--------------------------------
Income from investment operations
- ----------------------------------------
Net investment income 0.38 0.46
Net gains or losses on investments
(both realized and unrealized) (0.72) 2.51
--------------------------------
Total income from investment operations (0.34) 2.97
--------------------------------
Less distributions
- ------------------
Distributions (from net investment (0.38) (0.45)
income)
Distributions (from net realized (0.21) (0.64)
capital gains)
--------------------------------
Total distributions (0.59) (1.09)
--------------------------------
Net asset value, end of period $ 11.27 $ 13.15
================================
Total return (%) (2.8)(c) 26.8
Ratios/Supplemental data
- -------------------------
Net assets, end of period (000) $39,183 $59,411
Ratio of operating expenses to average 0.99 (b) 1.11
net assets (%)
Ratio of net investment income to 3.69 (b) 3.62
average net assets (%)
Portfolio turnover rate (%) 36 54
(a) Commencement of offering of Class Y shares.
(b) Computed on an annualized basis.
(c) Not computed on an annualized basis.
9
<PAGE>
NEW ENGLAND INTERNATIONAL EQUITY FUND
CLASS Y
----------------------------------
SEPT. 9, (a) YEAR
THROUGH ENDED
DECEMBER 31, DECEMBER 31,
------------- ------------------
1993 1994 1995
------------- -------- --------
Net asset value, beginning of period $15.19 $ 14.86 $ 15.64
----------------------------------
Income from investment operations
- ---------------------------------
Net investment income 0.13 0.00 0.42
Net gains or losses on investments
(both realized and unrealized) (0.01) 1.32 0.60
----------------------------------
Total income from investment operations 0.12 1.32 1.02
----------------------------------
Less distributions
- ------------------
Distributions (from net investment (0.13) 0.00 (0.41)
income)
Distributions (from net realized (0.32) (0.53) 0.00
capital gains)
Distributions (from paid in capital) 0.00 (0.01) 0.00
----------------------------------
Total distributions (0.45) (0.54) (0.41)
----------------------------------
Net asset value, end of period $14.86 $ 15.64 $ 16.25
==================================
Total return (%) 0.7 (c) 8.9 6.6
Ratios/Supplemental data
- ------------------------
Net assets, end of period (000) $7,006 $56,561 $83,119
Ratio of operating expenses to average
net assets (%) (d) 1.00 (b) 1.00 1.00
Ratio of net investment income to
average net assets (%) 0.33 (b) 0.76 1.49
Portfolio turnover rate (%) 101 (c) 123 119
(a) Commencement of offering of Class Y shares.
(b) Computed on an annualized basis.
(c) Not computed on an annualized basis.
(d) The ratio of operating expenses to average net assets without giving effect
to the voluntary expense limitations would have been 1.35 (b) and 1.04%,
respectively.
10
<PAGE>
<TABLE>
<CAPTION>
NEW ENGLAND GROWTH OPPORTUNITIES FUND (a)
- ----------------------------------------------------------------------
CLASS A
---------------------------------------------------------------------------------------------------------
SEVEN
MONTHS
YEAR ENDED MAY 31, ENDED YEAR ENDED DECEMBER 31,
--------------------------- --------------------------------------------------------------------------
1986 1987 1988(b) 12/31/88(b) 1989 1990 1991 1992 1993* 1994 1995
------ ------ ------ --------- ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning
of period
$10.77 $12.70 $11.92 $10.37 $ 9.55 $10.88 $ 9.54 $11.79 $12.20 $12.67 $12.41
---------------------------------------------------------------------------------------------------------
Income from investment operations
- ---------------------------------
Net investment income 0.35 0.35 0.33 0.19 0.29 0.30 0.26 0.23 0.21 0.22 0.18
Net gains or losses on
investments (both
realized and un-realized) 2.97 0.73 (1.22) 0.25 2.32 (0.76) 2.63 0.86 0.75 (0.10) 4.01
---------------------------------------------------------------------------------------------------------
Total income from
investment operations 3.32 1.08 (0.89) 0.44 2.61 (0.46) 2.89 1.09 0.96 0.12 4.19
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions
- ------------------
Distributions (from net
investment income) (0.34) (0.34) (0.35) (0.18) (0.29) (0.30) (0.26) (0.23) (0.21) (0.21) (0.18)
Distributions in excess
of net investment income 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 (0.01) 0.00 0.00
</TABLE>
11
<PAGE>
NEW ENGLAND GROWTH OPPORTUNITIES FUND (a) [CONTINUED]
<TABLE>
<CAPTION>
CLASS A
---------------------------------------------------------------------------------------------------------
SEVEN
MONTHS
YEAR ENDED MAY 31, ENDED YEAR ENDED DECEMBER 31,
--------------------------- --------------------------------------------------------------------------
1986 1987 1988(b) 12/31/88(b) 1989 1990 1991 1992 1993* 1994 1995
------ ------ ------ --------- ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Distributions (from net
realized capital gains) (1.05) (1.52) (0.30) (1.08) (0.95) (0.56) (0.38) (0.45) (0.27) (0.17) (2.03)
Distribution (from paid
in capital) 0.00 0.00 (0.01) 0.00 (0.04) (0.02) 0.00 0.00 0.00 0.00 0.00
----------------------------------------------------------------------------------------------------------
Total distributions (1.39) (1.86) (0.66) (1.26) (1.28) (0.88) (0.64) (0.68) (0.49) (0.38) (2.21)
----------------------------------------------------------------------------------------------------------
Net asset value, end of
period $ 12.70 $ 11.92 $ 10.37 $ 9.55 $10.88 $ 9.54 $ 11.79 $12.20 $ 12.67 $12.41 $14.39
==========================================================================================================
Total return (%) (f) 31.3 8.9 (7.3) 7.3(e) 27.6 (4.3) 30.6 9.3 8.0 1.00 35.1
Ratios/Supplemental data
- ---------------------------
Net assets, end of period
(000) $72,862 $70,427 $58,552 $55,041 $62,688 $55,726 $70,263 $90,945 $109,168 $104,081 $150,693
Ratio of operating
expenses to average net
assets (%) 1.00 1.24 1.25(d) 1.33(e) 1.15 1.18 1.23 1.94 1.21 1.28 1.38
</TABLE>
12
<PAGE>
NEW ENGLAND GROWTH OPPORTUNITIES FUND (a) [CONTINUED]
<TABLE>
<CAPTION>
CLASS A
---------------------------------------------------------------------------------------
SEVEN MONTHS ENDED
YEAR ENDED MAY 31, YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1986 1987 1988(b) 12/31/88(b) 1989 1990 1991 1992 1993* 1994 1995
---- ---- ---- ------------------ ---- ---- ---- ---- ---- ---- ----
Ratio of net investment income to
average net assets (%) 3.01 2.65 2.90 3.10(e) 2.68 2.92 2.28 1.18 1.70 1.75 1.31
Portfolio turnover rate (%) 21 25 8 83(e) 17 6 12 10 4 6 69
</TABLE>
13
<PAGE>
NEW ENGLAND GROWTH OPPORTUNITIES FUND (a) [CONTINUED]
<TABLE>
<CAPTION>
CLASS B CLASS C
-------------------------------------------------------
SEPT. 13, (c) THROUGH YEAR MAY 1(c)
DEC. 31, ENDED THROUGH
DEC. 31, DEC. 31,
-------------------------------------------------------
1993* 1994 1995 1995
------------------------ ------- -------- -----------
<S> <C> <C> <C> <C>
Net asset value, beginning of period $12.95 $12.66 $ 12.42 $13.84
----------------------------------------------------------
Income from investment operations
- ----------------------------------
Net invest-ment income 0.06 0.16 0.10 0.06
Net gains or losses on investments
(both realized and unrealized) 0.01 (0.09) 4.01 2.58
-------------------------------------------------------
Total income from investment operations 0.07 0.07 4.11 2.64
-------------------------------------------------------
Less distributions
- ------------------
Distributions (from net investment (0.03) (0.14) (0.10) (0.06)
income)
Distributions in excess of net
investment income (0.06) 0.00 0.00 0.00
Distributions (from net realized (0.27) (0.17) (2.03) (2.03)
capital gains)
Distribution (from paid in capital) 0.00 0.00 0.00 0.00
-------------------------------------------------------
Total distributions (0.36) (0.31) (2.13) (2.09)
-------------------------------------------------------
Net asset value, end of period $12.66 $12.42 $ 14.40 $14.39
=======================================================
Total return (%) (f) 0.60 0.60 34.3 20.2
Ratios/Supplemental data
- ------------------------
Net assets, end of period (000) $1,498 $5,185 $29,026 $4,707
Ratio of operating expenses to average
net assets (%) 2.08(e) 1.93 2.11 2.11
Ratio of net investment income to
average net assets (%) 0.71(e) 1.10 0.56 0.56
Portfolio turnover rate (%) 4 6 69 69
</TABLE>
(a) Information shown for all years is audited. The accountants' report
incorporated by reference in the Statement covers years ended May 31,
1987 through December 31, 1994. Accountants' reports for years ended May
31, 1985 through May 31, 1986 are on file with the SEC.
(b) Fiscal year end changed in 1988 from May 31 to December 31. The Fund's
former adviser, Back Bay Advisors, L.P., assumed that function on July
27, 1988.
(c) Commencement of operations.
(d) Until May 18, 1988, the Fund's former adviser, Back Bay Advisors, L.P.,
voluntarily agreed to limit total Fund expenses to 1.25% of the Fund's
average annual net assets. Without such limitation, Fund expenses would
have been 1.31% of average net assets.
(e) Computed on an annualized basis.
(f) A sales charge of 5.75% (maximum) in the case of the Class A shares and a
contingent deferred sales charge in the case of the Class B shares are
not reflected in total return calculations. Unless otherwise indicated,
periods of less than one year are not annualized.
* As of January 1, 1993, the Fund discontinued the use of equalization
accounting.
The Fund's current adviser and subadviser assumed those functions
on May 1, 1995. These financial highlights reflect results achieved by
earlier advisers under investment policies that are no longer in effect.
14
<PAGE>
NEW ENGLAND STAR ADVISERS FUND
<TABLE>
<CAPTION>
CLASS Y
-----------------------
NOV. 15,(a) YEAR
THROUGH ENDED
DEC. 31, DEC. 31,
1994 1995
----------- ---------
<S> <C> <C>
Net asset value, beginning of $13.59 $13.24
period
-----------------------
Income from investment operations
---------------------------------
Net investment income 0.06 0.00
Net gains or losses on investments
(both realized and unrealized) (0.35) 4.58
-----------------------
Total income from investment (0.29) 4.58
operations
-----------------------
Less distributions
------------------
Distributions (from net (0.06) 0.00
investment income)
Distributions (from realized 0.00 (0.99)
capital gains)
-----------------------
Total distributions (0.06) (0.99)
-----------------------
Net asset value, end of period $13.24 $16.83
=======================
Total return (%) (2.1) (c) 34.8
Ratios/Supplemental data
------------------------
Net assets, end of period (000) $ 196 $5,569
Ratio of operating expenses to 1.79 (b) 1.57
average net assets (%) (d)
Ratio of net investment income to 2.26 (b) (0.08)
average net assets (%)
Portfolio turnover rate (%) 100 142
</TABLE>
(a) Commencement of offering of Class Y shares.
(b) Computed on an annualized basis.
(c) Not computed on an annualized basis.
(d) The ratio of operating expenses to average net assets (computed on an
annualized basis) without giving effect to the voluntary expense
limitations in effect from November 15, 1994 through December 31, 1994
would have been 1.90% for the period ended December 31, 1994.
15
<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
16
<PAGE>
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
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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-
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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.
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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
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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
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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 1.2%
and 0% 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.
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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.
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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.
24
<PAGE>
[] 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. For example, as of December 31, 1995, the
percentage of the Fund's net assets held in the segments of the Fund managed
by Berger, Founders, Janus Capital and Loomis Sayles were 24%, 27%, 25% and
24%, respectively. Net cash inflows or outflows resulting from sales and
redemptions of the Fund's shares will be allocated on an equal basis among
the four segments of the portfolio without regard to the relative size of the
segments. The Fund does not intend to reallocate assets among the segments
to reduce these differences in size.
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.
25
<PAGE>
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. As of June 30, 1996, Bruce
A. Ebel, Vice President of Loomis Sayles, will replace Mr. Hurckes as co-
portfolio manager of the Capital Growth Fund. 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 and Mr.
Ebel who, prior to the time they joined Loomis Sayles, were Equity Portfolio
Manger of the Illinois State Board of Investment and Senior Vice President,
Kemper Asset Management, respectively.
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:
<TABLE>
<CAPTION>
Management fee paid by Fund to NEFM
Fund (as a percentage of average daily net assets of the Fund)
----------------- ---------------------------------------------------------
<S> <C> <C>
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 Fund 0.70% of the first $200 million
0.65% of the next $300 million
0.60% of amounts in excess of $500 million
International Equity Fund 0.90% of the first $200 million
0.85% of the next $300 million
0.80% of amounts in excess of $500 million
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
Management fee paid by Fund to NEFM
Fund (as a percentage of average daily net assets of the Fund)
----------------- ---------------------------------------------------------
<S> <C> <C>
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
</TABLE>
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
27
<PAGE>
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:
<TABLE>
<CAPTION>
Subadvisory fee payable by NEFM to
subadviser
(as a percentage of average daily
Fund Subadviser net assets of the Fund)
- --------------------------- ------------- --------------------------------
<S> <C> <C> <C>
Balanced Fund Loomis Sayles 0.535% of the first $200
0.350% million
0.300% of the next $300
million
of amounts in excess
of $500 million
Capital Growth Fund Loomis Sayles 0.60% of the first $25
0.55% million
0.50% of the next $75
0.35% million
0.30% of the next $100
million
of the next $300
million
of amounts in excess
of $500 million
Growth Opportunities Fund Westpeak 0.50% of the first $25
0.40% million
0.35% of the next $75
0.30% million
of the next $100
million
of amounts in excess
of $200 million
International Equity Fund Draycott 0.54% of the first $200
0.49% million
0.44% of the next $300
million
of amounts in excess
of $500 million
Value Fund Loomis Sayles 0.535% of the first $200
0.350% million
0.300% of the next $300
million
of amounts in excess
of $500 million
</TABLE>
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 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.
Draycott is an indirect wholly-owned subsidiary of Cursitor Alliance LLC,
L.P., which in turn is indirectly controlled by The Equitable Life Assurance
Society of the United States, the parent company of which is controlled by
AXA, a French 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
28
<PAGE>
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.)
29
<PAGE>
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, foundations, bank
trust departments or trust companies. The minimum initial investment is $1
million for these entities and $10,000 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, and by The New England and any other insurance
company affiliated with The New England or any of their successor entities
("Insurance Company Accounts"). 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, Special
Accounts or Insurance Company 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.
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
30
<PAGE>
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.
31
<PAGE>
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.
32
<PAGE>
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.
33
<PAGE>
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.
34
<PAGE>
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
35
<PAGE>
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.
36
<PAGE>
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. Each Fund will send a
single copy of its annual and semi-annual reports to an address at which more
than one shareholder of record with the same last name has indicated that
mail is to be delivered. Shareholders may request additional copies of any
annual or semi-annual report in writing or by telephone.
37
<PAGE>
[] 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.
38
<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 -- MAY 1, 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 May 1, 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 1-800-225-5478. 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.
1
<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
Appendix B
2
<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
<TABLE>
<CAPTION>
ALL FUNDS
--------
<S> <C>
Class Y
--------
Maximum Initial Sales Charge Imposed None
on a Purchase
Maximum Contingent Deferred Sales None
Charge
</TABLE>
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
<TABLE>
<CAPTION>
NEW ENGLAND NEW
NEW ENGLAND LIMITED ENGLAND
GOVERNMENT TERM U.S. BOND
SECURITIES GOVERNMENT INCOME
FUND FUND* FUND
----------- ---------- --------
Class Y Class Y Class Y
------- ------- -------
<S> <C> <C> <C>
Management Fees 0.65% 0.64% 0.44%
12b-1 Fees None None None
Other Expenses 0.45% 0.23% 0.45%
Total Fund Operating 1.10% 0.87% 0.89%
Expenses
NEW
ENGLAND
ADJUSTABLE
RATE U.S.
GOVERNMENT
FUND*
----------
Class Y
-------
Management Fees
(after voluntary fee waiver and 0.22%**
expense reduction)
12b-1 Fees None
Other Expenses 0.19%
Total Fund Operating Expenses
(after voluntary fee waiver and 0.41%**
expense reduction)
NEW
ENGLAND
STRATEGIC
INCOME
FUND
---------
Class Y
-------
Management Fees (after voluntary fee waiver) 0.30%***
12b-1 Fees None
Other Expenses 0.68%
Total Fund Operating Expenses (after voluntary fee 0.98%***
waiver)
</TABLE>
3
<PAGE>
* 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.
** Without the voluntary fee waiver and expense reduction by the Fund's
adviser, Management Fees would be 0.39% and Total Fund Operating Expenses
would be 0.58%. These voluntary limitations can be terminated by the Fund's
adviser at any time. See "Fund Management."
*** Without the voluntary fee waiver by the Fund's subadviser, Management Fees
would be 0.65% and Total Fund Operating Expenses would be 1.33%. This
voluntary limitation can be terminated by the Fund's subadviser at any
time. See "Fund Management."
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.
<TABLE>
<CAPTION>
NEW ENGLAND NEW ENGLAND NEW ENGLAND
GOVERNMENT LIMITED TERM U.S. ADJUSTABLE RATE
SECURITIES FUND GOVERNMENT FUND U.S. GOVERNMENT FUND
--------------- ----------------- --------------------
Class Y Class Y Class Y
------- ------- -------
<S> <C> <C> <C>
1 year $ 11 $ 9 $ 4
3 years $ 35 $ 28 $ 13
5 years $ 61 $ 48 $ 23
10 years $134 $107 $ 52
</TABLE>
<TABLE>
<CAPTION>
NEW ENGLAND STRATEGIC NEW ENGLAND
INCOME FUND BOND INCOME FUND
--------------------- ----------------
Class Y Class Y
------ -------
<S> <C> <C>
1 year $ 10 $ 9
3 years $ 31 $ 28
5 years $ 54 $ 49
10 years $ 120 $ 110
</TABLE>
The purpose of this fee schedule is to assist you in understanding the various
costs and expenses that you will bear directly or indirectly if you invest in
the Funds. For additional information about the 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.
4
<PAGE>
FINANCIAL HIGHLIGHTS
(For a Class Y share of New England Limited Term U.S. Government Fund, New
England Government Securities Fund and New England Bond Income Fund outstanding
throughout the indicated period. In the case of New England Adjustable Rate
U.S. Government Fund and New England Strategic Income Fund, which had no Class Y
shares outstanding during 1995, financial highlights are presented for a Class A
and Class B (and Class C for Strategic Income Fund) share of each Fund
outstanding throughout the indicated period.)
The Financial Highlights presented on pages 6 through 12 have been included in
financial statements for the Funds. The financial Statements for New England
Government Securities Fund, New England Bond Income Fund and New England
Strategic Income Fund have been examined by Price Waterhouse LLP, independent
accountants, and the financial statements for the New England Limited Term U.S.
Government Fund and New England Adjustable Rate U.S. Government Fund have been
examined by Coopers & Lybrand LLP, independent accountants. The Financial
Highlights should be read in conjunction with the financial statements and the
notes thereto incorporated by reference in the Statement. Each Fund's annual
report contains additional performance information and is made available upon
request and without charge.
5
<PAGE>
NEW ENGLAND GOVERNMENT SECURITIES FUND
CLASS Y
MARCH 31 (a) YEAR
THROUGH ENDED
DECEMBER 31, DECEMBER 31,
1994 1995
------------- -------------
Net asset value, beginning of period $11.20 $10.44
-----------------------------
Income from investment operations
- ---------------------------------
Net investment income 0.54 0.80
Net gains or losses on investments
(both realized and unrealized) (0.77) 1.26
-----------------------------
Total income from investment operations (0.23) 2.06
-----------------------------
Less distributions
- ------------------
Distributions (from net investment (0.53) (0.79)
income)
Total distributions (0.53) (0.79)
-----------------------------
Net asset value, end of period $10.44 $11.71
=============================
Total return (%) (2.0) (c) 20.3
Ratios/Supplemental data
- ------------------------
Net assets, end of period (000) $4,104 $7,364
Ratio of operating expenses to
average net assets (%) 0.93 (b) 1.10
Ratio of net investment income to
average net assets (%) 7.25 (b) 6.94
Portfolio turnover rate (%) 809 559
(a) Commencement of offering of Class Y shares.
(b) Computed on an annualized basis.
(c) Not computed on an annualized basis.
6
<PAGE>
NEW ENGLAND LIMITED TERM U.S. GOVERNMENT FUND
CLASS Y
-----------------------------
MARCH 31 (a) YEAR
THROUGH ENDED
DECEMBER 31, DECEMBER 31,
1994 1995
------------- -------------
Net asset value, beginning of period $12.11 $11.51
-----------------------------
Income from investment operations
- ---------------------------------
Net investment income 0.71 0.86
Net gains or losses on investments
(both realized and unrealized) (0.74) 0.63
-----------------------------
Total income from investment operations (0.03) 1.49
-----------------------------
Less distributions
- ------------------
Distributions (from net investment (0.57) (0.87)
income)
-----------------------------
Total distributions (0.57) (0.87)
-----------------------------
Net asset value, end of period $11.51 $12.13
=============================
Total return (%) (c) (0.80) 13.3
Ratios/Supplemental data
- ----------------------------------------
Net assets, end of period (000) $1,822 $5,723
Ratio of operating expenses to
average net assets (%) 0.83 (b) 0.87
Ratio of net investment income to
average net assets (%) 7.15 (b) 7.53
Portfolio turnover rate (%) 244 (b) 247
(a) Commencement of offering of Class Y shares.
(b) Computed on an annualized basis.
(c) Periods less than one year are not annualized.
7
<PAGE>
NEW ENGLAND BOND INCOME FUND*
CLASS Y
--------------
YEAR
ENDED
DECEMBER 31,
1995
----
Net asset value, beginning of period $10.95
--------------
Income from investment operations
- ---------------------------------
Net investment income 0.80
Net gains or losses on investments
(both realized and unrealized) 1.44
--------------
Total income from investment operations 2.24
--------------
Less distributions
- ------------------
Distributions (from net investment (0.79)
income)
--------------
Total distributions (0.79)
--------------
Net asset value, end of period $12.40
==============
Total return (%) 21.0
Ratios/Supplemental data
- ------------------------
Net assets, end of period (000) $2,241
------
Ratio of operating expenses to
average net assets (%) 0.89
Ratio of net investment income to
average net assets (%) 7.06
Portfolio turnover rate (%) 81
* On March 31, 1994, the Fund's shares became effective but had no activity
until December 31, 1994.
8
<PAGE>
NEW ENGLAND ADJUSTABLE RATE U.S. GOVERNMENT FUND
<TABLE>
<CAPTION>
CLASS A CLASS B
--------------------------------------------------------------------------------------------------
OCT. 18, (a) SEPT. 13, (a) YEAR
THROUGH THROUGH ENDED
DEC. 31, YEAR ENDED DECEMBER 31, DEC. 31, DEC. 31,
--------------------------------------------------------------------------------------------------
1991 1992 1993 1994 1995 1993 1994 1995
---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning
of period $ 7.50 $ 7.50 $ 7.46 $ 7.45 $ 7.20 $ 7.52 $ 7.45 $ 7.20
------- -------- -------- --------- -------- ------ ------ ------
Income from investment operations
Net investment income 0.09 0.42 0.33 0.37 0.47 0.08 0.29 0.41
Net gains or losses on
investments (both
realized and unrealized) 0.00 (0.06) (0.03) (0.31) 0.14 (0.08) (0.29) 0.14
------- -------- -------- --------- -------- ------ ------ ------
Total income from
investment operations 0.09 0.36 0.30 0.06 0.61 0.00 0.00 0.55
------- -------- -------- --------- -------- ------ ------ ------
Less distributions
Distributions (from net
investment income) (0.09) (0.40) (0.31) (0.31) (0.44) (0.07) (0.25) (0.38)
------- -------- -------- --------- -------- ------ ------ ------
Total distributions (0.09) (0.40) (0.31) (0.31) (0.44) (0.07) (0.25) (0.38)
------- -------- -------- --------- -------- ------ ------ ------
Net asset value, end of
period $ 7.50 $ 7.46 $ 7.45 $ 7.20 $ 7.37 $ 7.45 $ 7.20 $ 7.37
======= ======== ======== ========= ======== ====== ====== ======
Total return (%) (d) 1.2 4.9 4.0 0.8 8.6 0.0 0.10 7.8
Ratios/Supplemental data
Net assets, end of period (000) $60,684 $294,687 $734,251 $489,637 $331,112 $ 855 $2,056 $2,368
Ratio of operating
expenses to average net
assets (%) (b) 0.50(c) 0.57 0.60 0.60 0.66 1.35(c) 1.35 1.41
Ratio of net investment
income to average net
assets (%) 6.43(c) 5.39 4.39 4.85 6.29 3.50(c) 4.1 5.54
Portfolio turnover rate (%) 52(c) 49 54 17 73 54(e) 17 73
</TABLE>
(a) The Fund commenced operations on October 18, 1991. Class B shares were
first offered on September 13, 1993.
(b) From October 19, 1991 through March 20, 1992 expenses were voluntarily
limited to 0.50% of average daily net assets. Commencing April 1, 1992
expenses were voluntarily limited to 0.60% of Class A average daily net
assets, and, effective September 13, 1993, 1.35% of Class B average daily
net assets. The ratio of operating expenses to average net assets without
giving effect to these expense limitations would have been 1.26%
(annualized), 0.96%, 0.86%, 0.88% and 0.88% for Class A shares for the
period ended December 31, 1991 and the years ended December 31, 1992, 1993,
1994 and 1995, respectively, and 1.61% (annualized), 1.63% and 1.65% for
Class B shares for the period September 13, 1993 through December 31, 1993,
the year ended December 31, 1994 and the year ended December 31, 1995,
respectively.
(c) Computed on an annualized basis.
(d) A sales charge of 1.00% (maximum) in the case of Class A shares and a
contingent deferred sales charges in the case of Class B shares are not
reflected in total return calculations. Periods of less than one year are
not annualized.
(e) Represents portfolio turnover rate for the Fund as a whole for the entire
fiscal year.
9
<PAGE>
NEW ENGLAND BOND INCOME FUND
<TABLE>
<CAPTION>
CLASS A
------------------------------------------------------------------------------------------
YEAR JULY 1
ENDED THROUGH
JUNE 30, DEC. 31, YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1986 1986 (d) 1987 1988 1989 1990 1991 1992
------- ------- ------- ------- ------- ------- -------- -----------
Net asset value, beginning
of period $ 10.93 $ 11.45 $ 11.73 $ 10.98 $ 10.89 $ 11.23 $ 11.12 $ 12.14
------- ------- ------- ------- ------- ------- -------- -----------
Income from investment operations
Net investment income 0.98 0.49 0.90 0.85 0.91 0.89 0.88 0.85
Net gains or losses on
investments (both
realized and unrealized) 0.71 0.26 (0.75) (0.06) 0.34 (0.10) 1.04 0.01
------- ------- ------- ------- ------- ------- -------- -----------
Total income from
investment operations 1.69 0.75 0.15 0.79 1.25 0.79 1.92 0.86
------- ------- ------- ------- ------- ------- -------- -----------
Less distributions
Distributions (from net
investment income) (1.17) (0.47) (0.90) (0.88) (0.91) (0.90) (0.90) (0.86)
Distributions (from net
realized capital gains) 0.00 0.00 0.00 0.00 0.00 0.00 0.00 (0.02)
------- ------- ------- ------- ------- ------- -------- -----------
Total distributions (1.17) (0.47) (0.90) (0.88) (0.91) (0.90) (0.90) (0.88)
------- ------- ------- ------- ------- ------- -------- -----------
Net asset value, end of
period $ 11.45 $ 11.73 $ 10.98 $ 10.89 $ 11.23 $ 11.12 $ 12.14 $ 12.12
======= ======= ======= ======= ======= ======= ======== ===========
Total return (%) (c) 16.6 6.7 1.4 7.4 11.9 7.5 18.1 7.5
Ratios/Supplemental data
Net assets, end of period (000) $46,175 $54,210 $60,071 $67,548 $76,662 $85,372 $113,759 $145,184
Ratio of operating
expenses to average net
assets (%) 0.92 1.02(b) 1.31 1.20 1.18 1.18 1.15 1.08
Ratio of net investment
income to average net
assets (%) 8.80 8.29(b) 8.03 7.68 8.27 8.05 7.69 7.08
Portfolio turnover rate (%) 242 352(b) 307 88 77 126 218 89
<CAPTION>
CLASS A
-------------------------------
1993 1994 1995
-------- -------- --------
<S> <C> <C> <C>
Net asset value, beginning
of period $ 12.12 $ 12.18 $ 10.95
-------- -------- --------
Income from investment operations
Net investment income 0.77 0.72 0.81
Net gains or losses on
investments (both
realized and unrealized) 0.66 (1.23) 1.40
-------- -------- --------
Total income from
investment operations 1.43 (0.51) 2.21
-------- -------- --------
Less distributions
Distributions (from net
investment income) (0.78) (0.72) (0.80)
Distributions (from net
realized capital gains) (0.59) 0.00 0.00
-------- -------- --------
Total distributions (1.37) (0.72) (0.80)
-------- -------- --------
Net asset value, end of
period $ 12.18 $ 10.95 $ 12.36
======== ======== ========
Total return (%) (c) 12.1 (4.2) 20.8
Ratios/Supplemental data
Net assets, end of period (000) $179,264 $155,362 $200,285
Ratio of operating
expenses to average net
assets (%) 1.04 1.08 1.14
Ratio of net investment
income to average net
assets (%) 6.10 6.46 6.81
Portfolio turnover rate (%) 202 77 81
</TABLE>
10
<PAGE>
NEW ENGLAND BOND INCOME FUND [CONTINUED]
<TABLE>
<CAPTION>
CLASS B CLASS C
--------------------------------------------------------
SEPT. 13 (a) YEAR MAY 1 (a)
THROUGH ENDED THROUGH
DEC. 31, DEC. 31, DEC. 31,
------------------ ------------------------------------
1993 1994 1995 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net asset value, beginning of period $13.06 $12.18 $10.95 $10.95
--------------------------------------------------------
Income from investment operations
- ----------------------------------------
Net investment income 0.20 0.63 0.72 0.56
- ----------------------------------------
Net gains or losses on investments
(both realized and unrealized) (0.30) (1.23) 1.40 1.40
--------------------------------------------------------
Total income from investment operations
(0.10) (0.60) 2.12 1.96
--------------------------------------------------------
Less distributions
- ----------------------------------------
Distributions (from net investment
income) (0.19) (0.63) (0.71) (0.55)
Distributions (from net realized
capital gains) (0.59) 0.00 0.00 0.00
--------------------------------------------------------
Total distributions (0.78) (0.63) (0.71) (0.55)
--------------------------------------------------------
Net asset value, end of period $12.18 $10.95 $ 12.36 $12.36
========================================================
Total return (%) (c) (0.8) (4.9) 19.9 18.1
Ratios/Supplemental data
- ----------------------------------------
Net assets, end of period 000 $2,661 $9,435 $23,398 $1,009
Ratio of operating expenses to average
net assets (%) 1.81(b) 1.83 1.89 1.89
Ratio of net investment income to
average net assets (%) 4.79(b) 5.71 6.06 6.06
Portfolio turnover rate (%) 202(e) 77 81 81
</TABLE>
(a) Commencement of operations.
(b) Computed on an annualized basis.
(c) A sales charge in the case of Class A shares and a contingent deferred
sales charge in the case of Class B shares are not reflected in total
return calculations. Periods of less than one year are not annualized.
(d) Fiscal year end changed in 1986 from June 30 to December 31.
(e) Represents portfolio turnover rate for the Fund as a whole for the entire
fiscal year.
11
<PAGE>
NEW ENGLAND STRATEGIC INCOME FUND
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
---------- -------- ---------
MAY 1 (a) MAY 1 (a) MAY 1 (a)
THROUGH THROUGH THROUGH
DEC. 31, DEC. 31, DEC. 31,
1995 1994 1995
---------- -------- --------
<S> <C> <C> <C>
Net asset value, beginning of $ 12.50 $ 12.50 $ 12.50
period
------- ------- -------
Income from investment operations
- ----------------------------------------
Net investment income 0.74 0.68 0.67
Net gains or losses on investments
(both realized and unrealized) 0.49 0.49 0.49
------- ------- -------
Total income from investment 1.23 1.17 1.16
operations
------- ------- -------
Less distributions
- ----------------------------------------
Distributions (from net investment (0.73) (0.67) (0.66)
income)
Distributions (in excess of net
investment income) (0.01) (0.01) (0.01)
------- ------- -------
Total distributions (0.74) (0.68) (0.67)
------- ------- -------
Net asset value, end of period $12.99 $12.99 $12.99
======= ======= =======
Total return (%) 10.3(c) 9.7(c) 9.7(c)
Ratios/Supplemental data
- ----------------------------------------
Net assets, end of period (000) $36,939 $38,767 $12,252
Ratio of operating expenses to 0.93(b) 1.68(b) 1.68(b)
average net assets(%)(d)
Ratio of net investment income to 8.75(b) 8.00(b) 8.00(b)
average net assets(%)
Portfolio turnover rate(%) 22(b) 22(b) 22(b)
</TABLE>
(a) Commencement of operations.
(b) Computed on an annualized basis.
(c) Not computed on an annualized basis
(d) The ratio of operating expenses to average net assets
without giving effect to the voluntary expense
limitations described in Note 4 to the Financial
Statements would have been (%):
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1.58(b) 2.33(b) 2.33(b)
</TABLE>
12
<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.
13
<PAGE>
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
14
<PAGE>
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 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. 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.
15
<PAGE>
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.
16
<PAGE>
[] 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.
17
<PAGE>
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, 18% of the average month-end net
assets of the Bond Income Fund were invested in fixed-income securities rated in
the
18
<PAGE>
rating categories below investment grade (BBB/Baa). The composition of the
Strategic Income Fund for the fiscal year ended December 31, 1995 is
summarized in Appendix B to this prospectus.
[] 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.
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<PAGE>
[] 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.
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<PAGE>
[] "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
21
<PAGE>
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.
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<PAGE>
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.
23
<PAGE>
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 $6 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:
<TABLE>
<CAPTION>
<S> <C>
Management fee paid by Fund to NEFM
Fund (as a percentage of average daily 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
Limited Term U.S. 0.650% of the first $200 million
Government 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
</TABLE>
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<PAGE>
NEFM pays each Fund's subadviser a subadvisory fee at the annual rate set forth
in the following table:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Subadvisory fee payable to NEFM to subadviser
Fund Subadviser (as a percentage of average daily 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 Fund Back Bay 0.3250% of the first $200 million
Advisors 0.3125% of the next $300 million
0.3000% of amounts in excess of $500 million
Limited Term U.S. Government Fund Back Bay 0.3250% of the first $200 million
Advisors 0.3125% of the next $300 million
0.3000% of amounts in excess of $200 million
Strategic Income Fund Loomis Sayles 0.35% of the first $200 million
0.30% of amounts in excess of $200 million
</TABLE>
Prior to January 2, 1996, Back Bay Advisors served as adviser to each Fund
other than the Strategic Income Fund.
Loomis Sayles has voluntarily agreed until further notice to the Strategic
Income Fund to waive its entire subadvisory fee (which is paid by NEFM) and
NEFM has agreed to reduce its management fee (which is paid by the Fund) by an
equal amount. These agreements may be terminated by Loomis Sayles or NEFM at
any time. In addition, under an expense deferral arrangement, which NEFM may
terminate at any time, NEFM has agreed to defer its management fees (to the
extent that they are not waived as provided in the preceding sentence) for the
Strategic Income Fund until further notice, but only to the extent necessary
to limit the Fund's expenses to the annual rate of 1.15% for the Class Y
shares, subject to the obligation of the Fund to repay such deferred 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 deferred
fees more than two years after the end of the fiscal year in which such fee
was deferred.
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.
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<PAGE>
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.)
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<PAGE>
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, foundations, bank
trust departments or trust companies. The minimum initial investment is $1
million for these entities and $10,000 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, and by The New England and any
other insurance company affiliated with The New England or any of their
successor entities ("Insurance Company Accounts"). 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, Separate Accounts or Insurance Company
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 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.
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
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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.
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<PAGE>
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.
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<PAGE>
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
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<PAGE>
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.
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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.
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<PAGE>
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.
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<PAGE>
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.
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<PAGE>
[] Each Fund's annual report contains additional performance information and
is made available upon request and without charge. Each Fund will send a
single copy of its annual and semi-annual reports to an address at which
more than one shareholder of record with the same last name has indicated
that mail is to be delivered. Shareholders may request additional copies of
any annual or semi-annual report in writing or by telephone.
[] 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.
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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.
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A P P E N D I X B
AVERAGE MONTHLY PORTFOLIO COMPOSITION TABLE OF THE
STRATEGIC INCOME FUND FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995
PERCENTAGE
OF NET
SECURITY ASSETS
- -------- ------
Preferred Stock........................................... 4.63%
Short-term Obligations and Other Assets................... 0.16%
Common Stock.............................................. 9.32%
Debt -- Unrated........................................... 17.08%
Debt -- Standard and Poor's Rating........................
AAA............................................... 8.24%
AA................................................ 3.42%
A................................................. 5.35%
BBB............................................... 11.07%
BB................................................ 15.92%
B................................................. 16.07%
CCC............................................... 8.40%
CD................................................ 0.34%
The chart above indicates the composition of the Strategic Income Fund for the
fiscal year ended December 31, 1995, with the debt securities rated by S&P
separated into the indicated categories. The percentages were calculated on a
dollar-weighted average basis by determining monthly the percentage of the
Strategic Income Fund's net assets invested in each category as of the end of
each month during the year. Loomis Sayles 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.
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NEW ENGLAND FUNDS
Where The Best Minds Meet(TM)
- --------------------------------------------------------------------------------
NEW ENGLAND MASSACHUSETTS TAX FREE INCOME FUND
PROSPECTUS AND APPLICATION -- MAY 1, 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 May
1, 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.
1
<PAGE>
TABLE OF CONTENTS
PAGE
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 a New England Funds
Shares 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 New England Funds offers
England Funds three convenient ways to
Fund Dividend Payments exchange Fund shares.
- -------------------------------------------------------------
SELLING FUND SHARES
5 Ways to Sell Fund How to withdraw money or
Shares close your account.
[] Through your investment dealer
[] By telephone
[] By mail
[] By check
[] By Systematic Withdrawal Plan
Repurchase Option An opportunity to
(Class A Shares Only) reinvest your 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
2
<PAGE>
FUND EXPENSES AND FINANCIAL INFORMATION
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
<TABLE>
<CAPTION>
Class A Class B
-------- -------
<S> <C> <C>
Maximum Initial Sales Charge Imposed on
a Purchase 4.25% None
(as a percentage of offering
price)(1)(2)
Maximum Contingent Deferred Sales Charge
(as a percentage of original
purchase price or (3) 4.00%
redemption proceeds, as
applicable)(2)
</TABLE>
(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)
<TABLE>
<CAPTION>
Class A Class B
--------- ------
<S> <C> <C>
Management Fees (after voluntary fee 0.19%*** 0.19%***
waiver and expense limitations)
12b-1 Fees 0.35% 1.00%**
Other Expenses 0.31% 0.31%
Total Fund Operating Expenses (after 0.85%*** 1.50%***
voluntary fee waiver and expense
limitations)
</TABLE>
* 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.
*** Without voluntary fee waiver and expense limitations by the Fund's advisor,
the Fund's Management Fees would be 0.58% for Class A and Class B shares and
Total Expenses would be 1.24% for Class A shares and 1.89% for Class B
shares. These voluntary limitations can be terminated by the Fund's advisor
at any time. See "Fund Management."
3
<PAGE>
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.
<TABLE>
<CAPTION>
Class A Class B
------- -------
<S> <C> <C> <C>
(1) (2)
1 year $ 51 $ 55 $ 15
3 years $ 68 $ 77 $ 47
5 years $ 88 $ 92 $ 82
10 years* $143 $161 $161
</TABLE>
(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.
4
<PAGE>
FINANCIAL HIGHLIGHTS
(For a share of the Fund outstanding throughout the indicated periods)
The Financial Highlights presented below have been included in the financial
statements of the Fund examined by Coopers & Lybrand LLP, independent
accountants. The Financial Highlights should be read in conjunction with the
financial statements and the notes thereto incorporated by reference in the
Statement. The Fund's annual report contains additional performance information
and will be made available upon request and without charge.
<TABLE>
<CAPTION>
Class A
------------------------------------------------------
Ten
Months
Year Ended Ended
Last Day of February, Dec. 31,
----------------------------------------- ---------
1986 1987 1988 1988(b)
-------- -------- ------- ---------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning
of Period $ 14.63 $ 16.62 $ 17.23 $ 16.37
-------- -------- ------- -------
- ---------------------------------------------------------------------------------------------------------------------------------
Income From Investment
Operations
Net Investment Income 1.23 1.15 1.11 0.90
Net Gains or Losses on
Investments
(both realized and
unrealized) 2.03 0.66 (0.80) (0.20)
-------- -------- ------- -------
- ---------------------------------------------------------------------------------------------------------------------------------
Total Income From
Investment Operations 3.26 1.81 0.31 0.70
-------- -------- ------- -------
- ---------------------------------------------------------------------------------------------------------------------------------
Less Distributions
Distributions (from net
investment income) (1.22) (1.15) (1.11) (0.90)
Distributions (in excess
of net investment income) 0.00 0.00 0.00 0.00
Distributions (from net
realized capital gains) (0.05) (0.05) (0.06) (0.01)
-------- -------- ------- -------
- ---------------------------------------------------------------------------------------------------------------------------------
Total Distributions (1.27) (1.20) (1.17) (0.91)
-------- -------- ------- -------
- ---------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of
Period $ 16.62 $ 17.23 $ 16.37 $ 16.16
======== ======== ======= =======
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
Total Return (%) (e) 23.4 11.4 2.0 4.6
Ratios/Supplemental Data
Net Assets, End of Period
(000) $ 37,524 $ 50,734 $57,529 $50,770
Ratio of Operating
Expenses to
Average Net Assets (%) (c) 1.13 1.25 1.25 1.51(d)
Ratio of Net Investment
Income to
Average Net Assets (%) 7.92 6.84 6.89 6.63(d)
Portfolio Turnover Rate (%) 65 36 28 18(d)
</TABLE>
5
<PAGE>
[TABLE CONTINUED]
<TABLE>
<CAPTION>
Class B
-------------------------------
Sept.
13(a) Year
through Ended
Year Ended December 31, Dec. 31, Dec. 31,
------------------------------------------------------------------------ ------- ------------------
1989 1990 1991 1992 1993 1994 1995 1993 1994 1995
------- ------- ------- ------- -------- -------- -------- ------- ----- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$16.16 $ 16.27 $ 16.01 $ 16.37 $ 16.62 $ 17.27 $ 15.10 $17.78 $ 17.26 $ 15.08
------- ------- ------- ------- -------- -------- -------- ------- ------- -------
1.06 1.04 1.08 1.03 0.97 0.89 0.88 0.25 0.77 0.78
0.19 (0.24) 0.69 0.40 1.05 (2.15) 1.76 (0.15) (2.14) 1.74
------- ------- ------- ------- -------- -------- -------- ------- ------- -------
1.25 0.80 1.77 1.43 2.02 (1.26) 2.64 0.10 (1.37) 2.52
------- ------- ------- ------- -------- -------- -------- ------- ------- -------
(1.06) (1.03) (1.07) (1.03) (0.97) (0.89) (0.89) (0.22) (0.79) (0.78)
0.00 0.00 0.00 0.00 0.00 (0.02) 0.00 0.00 (0.02) 0.00
(0.08) (0.03) (0.34) (0.15) (0.40) 0.00 0.00 (0.40) 0.00 0.00
------- ------- ------- ------- -------- -------- -------- ------- -------
(1.14) (1.06) (1.41) (1.18) (1.37) (0.91) (0.89) (0.62) (0.81) (0.78)
------- ------- ------- ------- -------- -------- -------- ------- ------- -------
$16.27 $ 16.01 $ 16.37 $ 16.62 $ 17.27 $ 15.10 $ 16.85 $17.26 $ 15.08 $ 16.82
======= ======= ======= ======= ======== ======== ======== ======= ======= =======
8.0 5.2 11.5 9.1 12.4 (7.4) 17.8 0.4 (8.0) 17
$51,269 $55,903 $68,534 $91,932 $128,797 $107,565 $120,229 $1,289 $ 4,523 $ 6,697
1.41 1.35 1.00 0.85 0.85 0.85 0.85 1.50(d) 1.50 1.50
6.54 6.48 6.62 6.25 5.58 5.63 5.46 4.26(d) 4.98 4.81
24 21 86 29 42 48 127 42(f) 48 126
</TABLE>
6
<PAGE>
(a) Class B shares were first offered beginning September 13, 1993.
(b) Fiscal year end changed in 1988 from February 28/29 to December 31.
(c) Commencing May 1, 1991, expenses were voluntarily limited to 0.85% of
average net assets. The ratio of operating expenses to average net assets
without giving effect to this expense limitation would have been 1.34%,
1.26%, 1.21%, 1.24% and 1.24% for the years ended December 31, 1991, 1992,
1993, 1994 and 1995, respectively, for the Fund's Class A shares and 1.86%
(on an annualized basis) for the period from September 13, 1993 through
December 31, 1993, 1.89% for the year ended December 31, 1994 and 1.89% for
the year ended December 31, 1995, for the Fund's Class B shares. From May
18, 1989 through April 30, 1991, expenses were voluntarily limited to 1.35%
of average net assets of Class A shares. The ratio of operating expenses to
average net assets without giving effect to this expense limitation would
have been 1.43% and 1.37% for the years ended December 31, 1989 and 1990,
respectively. For all periods prior to May 18, 1988, expenses were limited
to 1.25% of average net assets of Class A shares. The ratio of operating
expenses to average net assets without giving effect to this expense
limitation would have been 1.39% and 1.56% (annualized) for the year ended
February 29, 1988 and the period ended December 31, 1988, respectively.
(d) Computed on an annualized basis.
(e) A sales charge in the case of Class A shares and a contingent deferred sales
charge in the case of Class B shares are not reflected in total return
calculations. Periods of less than one year are not annualized.
(f) Represents portfolio turnover rate for the Fund as a whole for the entire
fiscal year.
7
<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 for individuals. 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, all 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 on average 10%
of the Fund's net assets were invested in debt obligations the interest from
which is subject to the AMT 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.
8
<PAGE>
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.
<TABLE>
<CAPTION>
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:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
0 - 24,000 0 - 40,100 25.20% 5.35% 6.68% 8.02% 9.36% 10.70%
24,001 - 58,150 40,101 - 96,900 36.64% 6.31% 7.89% 9.47% 11.05% 12.63%
58,151 - 121,300 96,901 - 147,700 39.28% 6.59% 8.23% 9.88% 11.53% 13.18%
121,301 - 263,750 147,701 - 263,750 43.68% 7.10% 8.88% 10.65% 12.43% 14.20%
over 263,750 over 263,750 46.85% 7.53% 9.41% 11.29% 13.17% 15.05%
</TABLE>
* 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
9
<PAGE>
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."
10
<PAGE>
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
11
<PAGE>
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.
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<PAGE>
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
15 mutual fund portfolios and over $6 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 $81 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.
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<PAGE>
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.
[] 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.
14
<PAGE>
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).
15
<PAGE>
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:
<TABLE>
<CAPTION>
SALES CHARGE AS A % OF DEALER'S
----------------------- CONCESSION
NET AS % OF
OFFERING AMOUNT OFFERING
VALUE OF TOTAL INVESTMENT PRICE INVESTED PRICE**
- -------------------- ---------- ---------- ----------
<S> <C> <C> <C>
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 *
</TABLE>
* 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 $3 million invested; 0.50% on the next $2 million;
and 0.25% 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.
16
<PAGE>
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.
<TABLE>
<CAPTION>
CONTINGENT DEFERRED
SALES CHARGE AS A
PERCENTAGE OF DOLLAR
YEAR SINCE PURCHASE AMOUNT SUBJECT TO CHARGE
------------------- -------------------------
<S> <C>
1st ....................... 4%
2nd ....................... 3%
3rd ....................... 3%
4th ....................... 2%
5th ....................... 1%
thereafter 0%
</TABLE>
Year one ends one year after the day on which the purchase was accepted and so
on.
The CDSC is deducted from the proceeds of the redemption, not the amount
remaining in the account, 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.
17
<PAGE>
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 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; and 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. Investors may be charged a fee if they effect transactions
through a broker or agent.
[] Shares of the Fund are available at net asset value for investments by non-
discretionary and non-retirement accounts of bank trust departments or trust
companies, but are unavailable if the trust department or institution is part of
an organization not principally engaged in banking or trust activities.
[] 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
18
<PAGE>
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.
19
<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 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.
20
<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.
21
<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 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
22
<PAGE>
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
23
<PAGE>
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.
24
<PAGE>
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
25
<PAGE>
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 AMT 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 AMT. However, it
is a fundamental policy of the Fund that no more than 20% of the Fund's net
assets will normally be invested in debt obligations the interest on which is
subject to the AMT for individuals.
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.
26
<PAGE>
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.
27
<PAGE>
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 Fund will send a
single copy of its annual and semi-annual reports to an address at which more
than one shareholder of record with the same last name has indicated that mail
is to be delivered. Shareholders may request additional copies of any annual or
semi-annual report in writing or by telephone.
[] 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.
28
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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).
29
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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 - MAY 1, 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
May 1, 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.
1
<PAGE>
TABLE OF CONTENTS
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 a New England Funds
Shares 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 New England Funds offers
England Funds three convenient ways to
Fund Dividend Payments exchange Fund shares.
- -----------------------------------------------------------
SELLING FUND SHARES
5 Ways to Sell Fund How to withdraw money or
Shares close your account.
[] Through your investment dealer
[] By telephone
[] By mail
[] By check
[] By Systematic Withdrawal Plan
Repurchase Option An opportunity to
(Class A Shares Only) reinvest your 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
2
<PAGE>
FUNDS EXPENSES AND FINANCIAL INFORMATION
SCHEDULE OF FEES
SHAREHOLDER TRANSACTION EXPENSES
CALIFORNIA FUND NEW YORK FUND
------------------- --------------------
Class A Class B Class A Class B
--------- ------- --------- --------
Maximum Initial Sales
Charge Imposed on a 2.50% None 2.50% NONE
Purchase (as a percentage
of offering price)(1)(2)
Maximum Contingent
Deferred Sales Charge
(as a percentage of (3) 4.00% (3) 4.00%
original purchase
price or redemption proceeds,
as applicable)(2)
(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."
<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES*
(as a percentage of average net assets)
CALIFORNIA FUND NEW YORK FUND
-------------------- ---------------------
Class A Class B Class A Class B
-------- --------- --------- ---------
<S> <C> <C> <C> <C>
Management Fees
(after voluntary fee waiver and 0.00%*** 0.00%*** 0.00%**** 0.00%****
expense reduction)
12b-1 Fees 0.25% 1.00%** 0.25% 1.00%**
Other Expenses
(after voluntary fee waiver and 0.45%*** 0.45%*** 0.45%**** 0.45%****
expense reduction)
Total Fund Operating Expenses
(after voluntary fee waiver and 0.70%*** 1.45%*** 0.70%**** 1.45%****
expense reduction)
</TABLE>
* 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.
*** Without the voluntary fee waiver and expense reduction by the Fund's
adviser, Management Fees and Other Expenses would be 0.40% and 0.58%,
respectively, for both classes and Total Fund Operating Expenses would be
1.23% for Class A shares and 1.98% for Class B shares. These voluntary
limitations can be terminated by the Fund's adviser at any time. See "Fund
Management."
**** Without the voluntary fee waiver and expense reduction by the Fund's
adviser, estimated Management Fees and Other Expenses would be 0.40% and
0.58%, respectively, for both classes and Total Fund Operating Expenses
would be 1.23% for Class A shares and 1.98% for Class B shares. These
voluntary limitations can be terminated by the Fund's adviser at any time.
See "Fund Management."
3
<PAGE>
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.
<TABLE>
<CAPTION>
CALIFORNIA FUND NEW YORK FUND
------------------- -------------------
Class A Class B Class A Class B
-------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
(1) (2) (1) (2)
1 year $ 32 $ 55 $ 15 32$ $ 55 $ 15
3 years $ 47 $ 76 $ 46 47$ $ 76 $ 46
5 years $ 63 $ 89 $ 79 $ 63 $ 89 $ 79
10 years* $110 $153 $153 $110 $153 $153
</TABLE>
(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.
4
<PAGE>
FINANCIAL HIGHLIGHTS
(For a share of each Fund outstanding throughout the indicated periods)
The Financial Highlights presented below have been included in the financial
statements of the Funds examined by Coopers & Lybrand LLP, independent
accountants. The Financial Highlights should be read in conjunction with the
financial statements and the notes thereto incorporated by reference in the
Statement. The Funds' annual report will contain additional performance
information and will be made available upon request and without charge.
5
<PAGE>
<TABLE>
<CAPTION>
NEW ENGLAND INTERMEDIATE TERM TAX FREE FUND OF CALIFORNIA
CLASS A CLASS B
-------------------------------------------- -----------------------------------------
April 23 (a) through Year Ended Dec. 31, Sept. 13 (a) through Year Ended Dec. 31,
Dec. 31, ------------------- Dec. 31, -------------------
1993 1994 1995 1993 1994 1995
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Period $ 7.50 $ 7.84 $ 7.08 $ 7.92 $ 7.84 $ 7.07
-------- -------- ------- -------- -------- -------
Income From Investment Operations
---------------------------------
Net Investment Income 0.26 0.38 0.39 0.10 0.32 0.33
Net Gains or Losses on
Investments (both realized and
unrealized) 0.38 (0.76) 0.57 (0.04) (0.77) 0.56
-------- -------- ------- -------- -------- -------
Total Income From Investment
Operations 0.64 (0.38) 0.96 0.06 (0.45) 0.89
-------- -------- ------- -------- -------- -------
Less Distributions
------------------
Distributions (from net
investment income) (0.26) (0.38) (0.39) (0.10) (0.32) (0.33)
Distributions (in excess of net
investment income) (0.04) 0.00 0.00 (0.04) 0.00 0.00
-------- -------- ------- -------- -------- -------
Total Distributions (0.30) (0.38) (0.39) (0.14) (0.32) (0.33)
-------- -------- ------- -------- -------- -------
Net Asset Value, End of Period $ 7.84 $ 7.08 $ 7.65 $ 7.84 $ 7.07 $ 7.63
======== ======== ======= ======== ======== =======
Total Return (%) (d) 8.6 (4.9) 13.9 0.80 (5.8) 12.9
Ratios/Supplemental Data
-------------------------
Net Assets, End of Period (000) $28,938 $30,293 $32,707 $1,849 $5,713 $5,617
Ratio of Operating Expenses to
Average Net Assets (%) (b) 0.70(c) 0.70 0.70 1.45(c) 1.45 1.45
Ratio of Net Investment Income
to Average Net Assets (%) 4.88(c) 5.07 5.24 3.68(c) 4.32 4.49
Portfolio Turnover Rate (%) 121(c) 212 167 121(c) 212 167
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
NEW ENGLAND INTERMEDIATE TERM TAX FREE FUND OF NEW YORK
CLASS A CLASS B
-------------------------------------------- -----------------------------------------
April 23 (a) through Year Ended Dec. 31, Sept. 13 (a) through Year Ended Dec. 31,
Dec. 31, ------------------- Dec. 31, -------------------
1993 1994 1995 1993 1994 1995
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Period $ 7.50 $ 7.76 $ 7.07 $ 7.85 $ 7.76 $ 7.06
-------- -------- ------- -------- -------- -------
Income From Investment Operations
---------------------------------
Net Investment Income 0.26 0.37 0.38 0.10 0.32 0.33
Net Gains or Losses on
Investments (both realized and
unrealized) 0.29 (0.68) 0.62 (0.05) (0.69) 0.62
-------- -------- ------- -------- -------- -------
Total Income From Investment
Operations 0.55 (0.31) 1.00 0.05 (0.37) 0.95
-------- -------- ------- -------- -------- -------
Less Distributions
------------------
Distributions (from net
investment income) (0.25) (0.38) (0.39) (0.10) (0.33) (0.34)
Distributions (in excess of net
investment income) (0.04) 0.00 0.00 (0.04) 0.00 0.00
-------- -------- ------- -------- -------- -------
Total Distributions (0.29) (0.38) (0.39) (0.14) (0.33) (0.34)
-------- -------- ------- -------- -------- -------
Net Asset Value, End of Period $ 7.76 $ 7.07 $ 7.68 $ 7.76 $ 7.06 $ 7.67
======== ======== ======= ======== ======== =======
Total Return (%) (d) 7.4 (4.1) 14.5 0.5 (4.9) 13.7
Ratios/Supplemental Data
-------------------------
Net Assets, End of Period (000) $21,122 $15,875 $16,388 $555 $1,152 $1,718
Ratio of Operating Expenses to
Average Net Assets (%) (b) 0.70(d) 0.70 0.70 1.45(c) 1.45 1.45
Ratio of Net Investment Income
to Average Net Assets (%) 4.88(c) 5.13 5.18 3.68(c) 4.38 4.43
Portfolio Turnover Rate (%) 121(c) 219 155 121(c) 219 155
</TABLE>
7
<PAGE>
(a) The Funds commenced operations on April 23, 1993. Class B shares were first
offered beginning September 13, 1993.
(b) Commencing April 23, 1993, expenses were voluntarily limited to 0.70% of
Class A average net assets and, effective September 13, 1993, 1.45% of Class
B average net assets. In the case of New England Intermediate Tax Free Fund
of California, the ratio of operating expenses to average net assets for
Class A shares without giving effect to this expense limitation would have
been 1.49% (annualized) for the period April 23, 1993 through December 31,
1993, 1.33% for year ended December 31, 1994 and 1.31% for the year ended
December 31, 1995; the ratio of operating expenses for Class B shares would
have been 2.24% (annualized) for the period September 13, 1993 through
December 31, 1993, 2.08% for the year ended December 31, 1994 and 2.06% for
the year ended December 31, 1995. In the case of the New England
Intermediate Tax Free Fund of New York, the ratio of operating expenses to
average net assets for Class A shares without giving effect to the expense
limitations would have been 2.11% (annualized) for the period April 23, 1993
through December 31, 1993, 1.79% for the year ended December 31, 1994 and
1.88% for the year ended December 31, 1995. The ratio of operating expenses
for Class B shares would have been 2.86% (annualized) for the period
September 13, 1993 through December 31, 1993, 2.54% for the year ended
December 31, 1994 and 2.63% for the year ended December 31, 1995.
(c) Computed on an annualized basis.
(d) A sales charge of 2.50% (maximum) in the case of the Class A shares and a
contingent deferred sales charge in the case of the Class B shares are not
reflected in total return calculations. Periods of less than one year are
not annualized.
8
<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
9
<PAGE>
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.
<TABLE>
<CAPTION>
TAX FREE INVESTING
CALIFORNIA FUND
1996 COMBINED
FEDERAL
AND
TAXABLE INCOME* CALIFORNIA
----------------------------- IF TAX EXEMPT YIELD IS
SINGLE JOINT MARGINAL 4.00% 4.50% 5.00% 5.50% 6.00%
RETURN ($) RETURN ($) TAX RATE** THEN THE EQUIVALENT TAXABLE YIELD WOULD BE:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
11,550 - 18,068 22,899 - 36,136 18.40% 4.90% 5.51% 6.13% 6.74% 7.35%
18,069 - 24,000 36,137 - 40,100 20.10% 5.01% 5.63% 6.26% 6.88% 7.51%
24,001 - 25,083 40,101 - 50,166 32.32% 5.91% 6.65% 7.39% 8.13% 8.87%
25,084 - 31,700 50,167 - 63,400 33.76% 6.04% 6.79% 7.55% 8.30% 9.06%
31,701 - 58,150 63,401 - 96,900 34.70% 6.13% 6.89% 7.66% 8.42% 9.19%
58,151 - 109,936 96,901 - 147,700 37.42% 6.39% 7.19% 7.99% 8.79% 9.59%
109,937 - 121,300 37.90% 6.44% 7.25% 8.05% 8.86% 9.66%
147,701 - 219,872 41.95% 6.89% 7.75% 8.61% 9.47% 10.34%
121,301 - 219,872 219,872 - 263,750 42.40% 6.94% 7.81% 8.68% 9.55% 10.42%
219,873 - 263,750 43.04% 7.02% 7.90% 8.78% 9.66% 10.53%
263,751 - 439,744 45.64% 7.36% 8.28% 9.20% 10.12% 11.04%
OVER 263,750 OVER 439,744 46.24% 7.44% 8.37% 9.30% 10.23% 11.16%
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
NEW YORK FUND
1996 COMBINED
FEDERAL
AND
TAXABLE INCOME* NEW YORK
----------------------------- IF TAX EXEMPT YIELD IS
SINGLE JOINT MARGINAL 4.00% 4.50% 5.00% 5.50% 6.00%
RETURN ($) RETURN ($) TAX RATE** THEN THE EQUIVALENT TAXABLE YIELD WOULD BE:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
8,401 - 11,000 16,001 - 22,000 20.10% 5.23% 5.88% 6.54% 7.19% 7.84%
11,001 - 13,000 22,001 - 26,000 20.95% 5.29% 5.95% 6.61% 7.27% 7.93%
13,001 - 24,000 26,001 - 40,100 21.06% 5.30% 5.96% 6.62% 7.28% 7.94%
24,001 - 58,150 40,101 - 96,900 33.13% 6.28% 7.06% 7.85% 8.63% 9.42%
58,151 - 121,300 96,901 - 147,700 35.92% 6.55% 7.37% 8.19% 9.01% 9.83%
121,301 - 263,750 147,701 - 263,750 40.56% 7.07% 7.95% 8.84% 9.72% 10.60%
OVER 263,750 OVER 263,750 43.90% 7.49% 8.43% 9.36% 10.30% 11.24%
1996 COMBINED
FEDERAL
AND
NEW YORK
STATE AND
TAXABLE INCOME* CITY
----------------------------- IF TAX EXEMPT YIELD IS****
SINGLE JOINT MARGINAL 4.00% 4.50% 5.00% 5.50% 6.00%
RETURN ($) RETURN ($) TAX RATE*** THEN THE EQUIVALENT TAXABLE YIELD WOULD BE:
8,401 - 11,000 16,001 - 22,000 23.50% 5.23% 5.88% 6.54% 7.19% 7.84%
11,001 - 13,000 22,001 - 26,000 24.35% 5.29% 5.95% 6.61% 7.27% 7.93%
13,001 - 15,000 26,001 - 27,000 24.46% 5.30% 5.96% 6.62% 7.28% 7.94%
15,001 - 24,000 27,001 - 40,100 24.79% 5.32% 5.98% 6.65% 7.31% 7.98%
24,001 - 25,000 40,101 - 45,000 36.29% 6.28% 7.06% 7.85% 8.63% 9.42%
25,001 - 58,150 45,001 - 96,900 36.30% 6.28% 7.06% 7.85% 8.63% 9.42%
58,151 - 60,000 96,901 - 108,000 38.95% 6.55% 7.37% 8.19% 9.01% 9.83%
60,001 - 121,300 108,001 - 147,700 38.99% 6.56% 7.38% 8.20% 9.02% 9.83%
121,301 - 263,750 147,701 - 263,750 43.41% 7.07% 7.95% 8.84% 9.72% 10.60%
OVER 263,750 OVER 263,750 46.60% 7.49% 8.43% 9.36% 10.30% 11.24%
</TABLE>
* 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. In some
cases, income brackets have been combined because the rates are the same,
and the corresponding lower equivalent taxable yield has been used.
*** 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. In some cases,
income brackets have been combined because the rates are the same, and the
corresponding lower equivalent taxable yield has been used.
**** These represent New York State, City and Federal tax equivalent yields.
11
<PAGE>
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.
12
<PAGE>
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.
13
<PAGE>
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.
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<PAGE>
[] 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."
15
<PAGE>
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 15 mutual fund portfolios and over $6 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 has 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 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 $81 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.
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<PAGE>
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.
[] 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-
17
<PAGE>
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).
18
<PAGE>
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:
<TABLE>
<CAPTION>
SALES CHARGE AS A % OF DEALER'S
----------------------- CONCESSION
NET AS % OF
OFFERING AMOUNT OFFERING
VALUE OF TOTAL INVESTMENT PRICE INVESTED PRICE**
- -------------------- ---------- ---------- ----------
<S> <C> <C> <C>
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 *
</TABLE>
* 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 $3 million invested; 0.50% on the next $2 million;
and 0.25% 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
19
<PAGE>
on the number of years from the time of payment for the purchase of Class B
shares until the time of redemption of such shares. The CDSC equals the
following percentages of the dollar amounts subject to the charge.
<TABLE>
<CAPTION>
CONTINGENT DEFERRED
SALES CHARGE AS A
PERCENTAGE OF DOLLAR
YEAR SINCE PURCHASE AMOUNT SUBJECT TO CHARGE
------------------ -------------------------
<S> <C>
1st ....................................... 4%
2nd ....................................... 3%
3rd ....................................... 3%
4th ....................................... 2%
5th ....................................... 1%
thereafter ................................ 0%
</TABLE>
Year one ends one year after the day on which the purchase was accepted and so
on.
The CDSC is deducted from the proceeds of the redemption, not the amount
remaining in the account, unless otherwise requested, and is paid to the
Distributor. The CDSC may be eliminated for certain persons and organizations.
See "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
20
<PAGE>
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; and 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. 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.
[] Shares of the Funds are available at net asset value for investments by
non-discretionary and non-retirement accounts of bank trust departments or trust
companies, but are unavailable if the trust department or institution is part of
an organization not principally engaged in banking or trust activities.
[] 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
21
<PAGE>
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.
22
<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 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.
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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.
24
<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 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.
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<PAGE>
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.
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<PAGE>
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.
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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.
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<PAGE>
If you receive social security benefits, you may be taxed on a portion of those
benefits as a result of receiving tax-exempt income. Also, income from certain
private activity bonds issued after August 7, 1986 is an item of tax preference
for purposes of the federal alternative minimum tax at the maximum rate of 28%
for individuals and 20% for corporations. If the Funds invest in such private
activity bonds, shareholders may become subject to, or have increased liability
under, the alternative minimum tax.
Exempt interest dividends are included in "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
29
<PAGE>
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.
30
<PAGE>
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. Each Fund will send
a single copy of its annual and semi-annual reports to an address at which more
than one shareholder of record with the same last name has indicated that mail
is to be delivered. Shareholders may request additional copies of any annual or
semi-annual report in writing or by telephone.
[] 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.
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[LOGO]
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
MAY 1, 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
May 1, 1996 for Class A, Class B and Class C shares or the Prospectus of the
Funds dated May 1, 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.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
PART I
Investment Restrictions ii
Fund Charges and Expenses ix
Investment Performance of the Funds xix
PART II
Miscellaneous Investment Practices 2
Management of the Trusts 14
Portfolio Transactions and Brokerage 23
Description of the Trusts and Ownership of Shares 26
How to Buy Shares 29
Net Asset Value and Public Offering Price 29
Reduced Sales Charges 30
Shareholder Services 32
Redemptions 36
Standard Performance Measures 38
Income Dividends, Capital Gain Distributions and Tax Status 43
Financial Statements 45
Appendix A - Description of Bond Ratings 46
Appendix B - Publications That May Contain Fund Information 48
Appendix C - Advertising and Promotional Literature 51
Appendix D - Portfolio Composition of the Municipal Income and 55
Bond Income Funds
</TABLE>
i
<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 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;
ii
<PAGE>
*(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);
iii
<PAGE>
(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.
iv
<PAGE>
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
v
<PAGE>
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);
vi
<PAGE>
(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
vii
<PAGE>
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.
viii
<PAGE>
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:
<TABLE>
<CAPTION>
Management fee payable by Fund to NEFM
Fund (as a percentage of average daily net assets of the Fund)
- ------------------------- ---------------------------------------------------------
<S> <C>
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 Fund 0.70% of the first $200 million
0.65% of the next $300 million
0.60% of amounts in excess of $500 million
</TABLE>
ix
<PAGE>
<TABLE>
<CAPTION>
Management fee payable by Fund to NEFM
Fund (as a percentage of average daily net assets of the Fund)
- ------------------------- ---------------------------------------------------------
<S> <C>
International Equity Fund 0.90% of the first $200 million
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
</TABLE>
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
(February 29, 1996, 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:
<TABLE>
<CAPTION>
Subadvisory fee payable by NEFM to subadviser
Fund Subadviser (as a percentage of average daily net assets of the Fund)
- --------------------------- -------------- ---------------------------------------------------------
<S> <C> <C>
Balanced Fund Loomis Sayles 0.535% of the first $200 million
0.350% of the next $300 million
0.300% of amounts in excess of $500 million
Capital Growth Fund Loomis Sayles 0.60% of the first $25 million
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 Opportunities Fund Westpeak 0.50% of the first $25 million
0.40% of the next $75 million
0.35% of the next $100 million
0.30% of amounts in excess of $200 million
International Equity Fund Draycott 0.54% of the first $200 million
0.49% of the next $300 million
0.44% of amounts in excess of $500 million
Value Fund Loomis Sayles 0.535% of the first $200 million
0.350% of the next $300 million
0.300% of amounts in excess of $500 million
</TABLE>
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.
x
<PAGE>
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:
<TABLE>
<CAPTION>
FUND 1993 1994 1995
-------------------------- ------------ ------------ ------------
<S> <C> <C> <C>
Growth Fund $8,074,472 $7,572,051 $7,631,203
Capital Growth Fund $ 558,088 $ 834,943 $ 989,864
Value Fund $1,287,064 $1,543,333 $1,811,567
Balanced Fund $ 954,586 $1,498,050 $1,906,665
International Equity Fund* $ 387,348 $1,541,223 $2,025,005
Growth Opportunities $ 511,327 $ 555,258 $ 856,469
Star Advisers Fund** N/A $ 569,280 $3,599,730
</TABLE>
* As a result of the voluntary expense limitation in effect, the
International Equity Fund paid $171,250, $1,449,606 and $1,756,405,
respectively, in advisory fees for the fiscal years ended December 31,
1993, 1994 and 1995.
xi
<PAGE>
** 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 $3,599,730, 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 $4,526,450,414, respectively,
were allotted to brokers providing research services, and $4,896,039, $4,187,824
and $5,685,876, 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 $5,784,166, respectively.
In 1993, 1994 and 1995, brokerage transactions for the Value Fund
aggregating $10,177,146, $9,382,814 and $14,560,184, respectively, were allotted
to brokers providing research services, and $14,608, $14,664 and $28,143,
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 $658,975, respectively.
In 1993, 1994 and 1995, brokerage transactions for the Balanced Fund
aggregating $12,509,788, $14,761,967 and $12,187,184, respectively, were
allotted to brokers providing research services, and $18,540, $28,267 and
$30,368, 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 $415,773, respectively.
In 1993, 1994 and 1995, the Growth Opportunities Fund paid aggregate
brokerage commissions of $27,372, $9,427 and $ 138,878, 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 $10,615, 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 $191,861, respectively. For the fiscal year ended December 31,
1995, brokerage transactions for the International Equity Fund and the Capital
Growth Fund aggregating $593,996,591 and $130,894,587, respectively, were
allocated to brokers providing research services and $1,446,337 and $157,512,
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 $1,446,337 and $157,512, respectively.
For the period July 7, 1994 (commencement of operations) to December 31,
1994 and the fiscal year ended December 31, 1995, brokerage transactions for the
Star Advisers Fund aggregating $44,236,466 and $191,214,413, respectively, were
allocated to brokers providing research services, and $172,408 and $614,183,
respectively, in commissions were paid these transactions. For the period July
7, 1994 to December 31, 1994 and
xii
<PAGE>
the fiscal year ended December 31, 1995, the Fund paid total brokerage
commissions of $172,408 and $614,183, 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:
<TABLE>
<CAPTION>
FUND 1993 1994 1995
------------------------- --------------- --------------- ----------------
<S> <C> <C> <C>
Growth Fund $2,970,951 $2,777,712 $2,800,465 (Class A)
Value Fund $429,022 $489,686 $545,439 (Class A)
$2,966 $81,490 $206,005 (Class B)*
$3,915 (Class C)**
Balanced Fund $318,195 $401,403 $445,951 (Class A)
$6,196 $141,331 $301,592 (Class B)*
$3,017 (Class C)**
Growth Opportunities Fund $357,066 $376,217 $340,216 (Class A)
$2,469 $35,609 $107,138 (Class B)*
$3,589 (Class C)**
Star Advisers Fund**** N/A $68,910 $404,530 (Class A)
N/A $204,766 $1,458,476 (Class B)
N/A $62,604 $327,977 (Class C)
International Equity Fund $112,228 $341,787 $346,710 (Class A)
$13,893 $262,144 $476,345 (Class B)*
$5,831 (Class C)**
Capital Growth Fund $183,521 $247,956 $277,682 (Class A)
$10,030 $121,432 $207,706 (Class B)*
$1,362 (Class C)**
</TABLE>
* Class B shares were first offered on September 13, 1993.
** Class C shares were first offered on January 3, 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:
<TABLE>
GROWTH FUND
<S> <C> <C>
Compensation to Investment Dealers $2,800,486
Compensation to Distributor's Sales Personnel $0
TOTAL $2,800,486
</TABLE>
xiii
<PAGE>
<TABLE>
VALUE FUND
(Class A shares)
<S> <C> <C>
Compensation to Investment Dealers $545,760
Compensation to Distributor's Sales $0
Personnel
TOTAL $545,760
(Class B shares)
Compensation to Investment Dealers $390,701
TOTAL $390,701
(Class C shares)
Compensation to Investment Dealers $3,915
Compensation to Distributor's Sales $0
Personnel
TOTAL $3,915
BALANCED FUND
(Class A shares)
Compensation to Investment Dealers $446,230
Compensation to Distributor's Sales $0
Personnel
TOTAL $446,230
(Class B shares)
Compensation to Investment Dealers $626,248
TOTAL $626,248
(Class C shares)
Compensation to Investment Dealers $3,017
Compensation to Distributor's Sales $0
Personnel
TOTAL $3,017
GROWTH OPPORTUNITIES FUND
(Class A shares)
Compensation to Investment Dealers $304,910
Compensation to Distributor's Sales $35,306
Personnel
TOTAL $340,217
(Class B shares)
Compensation to Investment Dealers $779,939
TOTAL $779,939
</TABLE>
xiv
<PAGE>
<TABLE>
(Class C shares)
<S> <C> <C>
Compensation to Investment Dealers $5,588
Compensation to Distributor's Sales $0
Personnel
TOTAL $5,588
STAR ADVISERS FUND
(Class A shares)
Compensation to Investment Dealers $406,208
Compensation to Distributor's Sales $0
Personnel
TOTAL $406,208
(Class B shares)
Compensation to Investment Dealers $4,567,857
TOTAL $4,567,857
(Class C shares)
Compensation to Investment Dealers $327,977
TOTAL $327,977
INTERNATIONAL EQUITY FUND
(Class A shares)
Compensation to Investment Dealers $346,104
Compensation to Distributor's Sales $605
Personnel
TOTAL $346,710
(Class B shares)
Compensation to Investment Dealers $655,446
TOTAL $655,446
(Class C shares)
Compensation to Investment Dealers $5,831
Compensation to Distributor's Sales $0
Personnel
TOTAL $5,831
CAPITAL GROWTH FUND
(Class A shares)
Compensation to Investment Dealers $277,675
Compensation to Distributor's Sales $7
Personnel
TOTAL $277,682
</TABLE>
xv
<PAGE>
<TABLE>
(Class B shares)
<S> <C> <C>
Compensation to Investment Dealers $308,412
TOTAL $308,412
(Class C shares)
Compensation to Investment Dealers $1,362
Compensation to Distributor's Sales $0
Personnel
TOTAL $1,362
</TABLE>
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: $2,223,363 relating to the Growth Fund; $482,105 relating to the
Class A shares, $345,495 relating to the Class B shares and $1,278 relating to
the Class C shares of the Value Fund; $387,181 relating to the Class A shares,
$503,830 relating to the Class B shares and $1,606 relating to the Class C
shares of the Balanced Fund; $106,272 relating to the Class A shares, $297,832
relating to the Class B shares and $0 relating to the Class C shares of the
Growth Opportunities Fund; $266,394 relating to the Class A shares, $2,052,764
relating to the Class B shares and $59,625 relating to the Class C shares of the
Star Advisers Fund; $247,105 relating to the Class A shares, $439,856 relating
to the Class B shares and $1,262 relating to the Class C shares of the
International Equity Fund; and $217,870 relating to the Class A shares, $269,249
relating to the Class B shares and $0 relating to the Class C shares of the
Capital Growth Fund. New England Securities paid substantially all of the fees
it received from the Distributor (a) in commissions to its sales personnel and
(b) to defray sales-related overhead costs.
OWNERSHIP OF FUND SHARES
At April 1, 1996, to the Trusts' knowledge, 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:
<TABLE>
<S> <C> <C>
Balanced Fund
Class C shares State Street Bank and Trust Company 12.85%
Custodian for the IRA Rollover of
Paula S. Holmberg
13490 Braun Road
Golden, CO 80401-1647
Great Lakes Elevator, Inc. 7.05%
Employees 401(k) Plan
401 Hall Street, SW, Box 9
Grand Rapids, MI 49503-5098
Bond Income Fund
Class C shares Resources Trust Company Trust IRA 30.55%
FBO Barbara J. Scioscia
P.O. Box 5900
Denver, CO 80217-5900
State Street Bank and Trust Company 6.42%
Custodian for the IRA of
William J. Walker
11 Saddle Club Road
Lexington, MA 02173-2102
</TABLE>
xvi
<PAGE>
<TABLE>
<S> <C> <C>
Capital Growth Fund
Class C shares State Street Bank and Trust Company for 8.68%
the IRA Rollover of
Brain C. Thayer
4 Joel Avenue
Manchester, ME 04351-9543
State Street Bank and Trust Company 7.64%
Custodian for the IRA Rollover of
William J. Walker
11 Saddle Club Road
Lexington, MA 02173-2102
Larry A. Minnick 7.23%
8105 Bromlay Place
Indianapolis, IN 46219-2851
Donaldson Lufkin Jenrette 6.41%
Securities Corporation, Inc.
P.O. Box 2052
Jersey City, NJ 07303-2851
Raymond James & Associates, Inc. 6.28%
Norman P. Swafford IRA Rollover
2236 E. Rock Creek Road
Arnold, MO 63010-3605
Smith Barney, Inc. 6.03%
388 Greenwich Street
New York, NY 10013-2375
State Street Bank and Trust Company 5.56%
Custodian for the IRA Rollover of
Rita D. Kiehle
1716 8th Street, NW
Grand Rapids, MI 49504-3905
Wanda N. Burkett 5.08%
Kenneth D. Burkett
40 Twining Road
Taos Ski Valley, NM 87525
Growth Opportunities Fund
Class C shares State Street Bank and Trust Company 9.00%
Custodian for the IRA of
Michael R. Handzo
1605 Belvue Drive
Forest Hill, MD 21050-2508
Smith Barney 6.15%
388 Greenwich Street
New York, NY 10013-2375
Lorayne Carberry 5.95%
1672 Canton Avenue
Milton, MA 02186-2316
</TABLE>
xvii
<PAGE>
<TABLE>
<S> <C>
International Equity Fund <C>
Class C shares PaineWebber for the Benefit of 8.24%
Polly P. White
240 S. High Haro Avenue
Friday Harbor, WA 98250-9442
PaineWebber for the Benefit of 5.54%
Karen J. Foley
12 Walden Oaks
St. Joseph, MO 64505-9400
PaineWebber for the Benefit of 5.37%
First Minnetonka City Bank
14550 Excelsior Boulevard
Minnetonka, MN 55345-5822
Class Y shares New England Mutual Life Insurance 51.08%
Company, Separate Investment Accounting
501 Boylston Street, 6th Floor
Boston, MA 02116-3706
First Bank North as agent holding shares 11.50%
for
BHS Custody Agency UAD
P.O. Box 64010
St. Paul, MN 55164-0010
Walker Art Center 8.14%
Vineland Place
Minneapolis, MN 55403
The New England 6.12%
Progress Sharing Plan
501 Boylston Street
Boston, MA 02116-3706
Star Advisers Fund
Class Y shares New England Mutual Life Insurance 100.00%
Company, Separate Investment Accounting
501 Boylston Street
Boston, MA 02116-3706
Value Fund
Class Y shares New England Mutual Life Insurance 100.00%
Company, Separate Investment Accounting
501 Boylston Street
Boston, MA 02116-3706
</TABLE>
xviii
<PAGE>
________________________________________________________________________________
INVESTMENT PERFORMANCE OF THE FUNDS
________________________________________________________________________________
PERFORMANCE RESULTS - PERCENT CHANGE*
For The Periods Ended 12/31/95
<TABLE>
<CAPTION>
GROWTH FUND
Aggregate Average Annual
Total Return Total Return
-------------------------------- ------------------------
As a % of 1 Year 5 Years 10 Years 5 Years 10 Years
- ----------------------------------------- ------ ------- -------- --------- -----------
<S> <C> <C> <C> <C> <C>
Net Asset Value 38.06 108.98 282.79 15.88 14.37
Maximum Offering Price 29.04 95.30 258.03 14.32 13.60
<CAPTION>
VALUE FUND
Aggregate Average Annual
Total Return Total Return
-------------------------------- ------------------------
Class A shares: As a % of 1 Year 5 Years 10 Years 5 Years 10 Years
- ----------------------------------------- ------ ------- -------- --------- -----------
<S> <C> <C> <C> <C> <C>
Net Asset Value 32.32 126.28 224.79 17.74 12.50
Maximum Offering Price 24.76 113.34 206.05 16.36 11.84
<CAPTION>
Aggregate Average Annual
Total Return Total Return
-------------------------------- ------------------------
Since Since
Class B shares: As a % of 1 Year 9/13/93** 9/13/93**
- ----------------------------------------- ----------- --------------- ------------------------
<S> <C> <C> <C>
Net Asset Value 37.31 36.81 14.60
Redemption at End of Period 27.31 33.81 13.50
<CAPTION>
Aggregate Annualized
Total Return Total Return
Class C shares: As a % of Since 12/30/94** Since 12/30/94**
- ----------------------------------------- -------------------------------- ------------------------
<S> <C> <C>
Net Asset Value 31.31 31.31
<CAPTION>
Aggregate Annualized
Total Return Total Return
-------------------------------- ------------------------
Since Since
Class Y shares: As a % of 1 Year 3/31/94** 3/31/94**
- ----------------------------------------- ----------- --------------- ------------------------
<S> <C> <C> <C>
Net Asset Value 32.75 35.91 19.13
<CAPTION>
BALANCED FUND
Aggregate Average Annual
Total Return Total Return
-------------------------------- ------------------------
Class A shares: As a % of 1 Year 5 Years 10 Years 5 Years 10 Years
- ----------------------------------------- ------ ------- -------- --------- -----------
<S> <C> <C> <C> <C> <C>
Net Asset Value 26.32 106.65 176.02 15.62 10.69
Maximum Offering Price 19.03 94.87 160.14 14.27 10.03
</TABLE>
xix
<PAGE>
<TABLE>
<CAPTION>
Aggregate Average Annual
Total Return Total Return
-------------------------------- ------------------------
Since Since
Class B shares: As a % of 1 Year 9/13/93** 9/13/93**
- ----------------------------------------- ----------- --------------- ------------------------
<S> <C> <C> <C>
Net Asset Value 25.32 25.09 10.22
Redemption at End of Period 21.32 22.08 9.06
<CAPTION>
Aggregate Annualized
Total Return Total Return
Class C shares: As a % of Since 12/30/94** Since 12/30/94**
- ----------------------------------------- -------------------------------- ------------------------
<S> <C> <C>
Net Asset Value 25.19 25.19
<CAPTION>
Aggregate Average Annual
Total Return Total Return
-------------------------------- ------------------------
Since Since
Class Y shares: As a % of 1 Year 3/8/94** 3/08/94**
- ----------------------------------------- ----------- --------------- ------------------------
<S> <C> <C> <C>
Net Asset Value 26.84 23.28 12.25
<CAPTION>
GROWTH OPPORTUNITIES FUND***
Aggregate Average Annual
Total Return Total Return
-------------------------------- ------------------------
Class A shares: As a % of 1 Year 5 Years 10 Years 5 Years 10 Years
- ----------------------------------------- ------ ------- -------- --------- -----------
<S> <C> <C> <C> <C> <C>
Net Asset Value 35.12 110.25 217.19 16.02 12.24
Maximum Offering Price 27.29 98.15 199.04 14.66 11.58
<CAPTION>
Aggregate Average Annual
Total Return Total Return
-------------------------------- ------------------------
Since Since
Class B shares: As a % of 1 Year 9/13/93** 9/13/93**
- ----------------------------------------- ----------- --------------- ------------------------
<S> <C> <C> <C>
Net Asset Value 34.34 35.90 14.26
Redemption at End of Period 30.34 32.89 13.16
<CAPTION>
Aggregate Average Annual
Total Return Total Return
Class C shares: As a % of Since 5/1/95** Since 5/1/95**
- ----------------------------------------- -------------------------------- ------------------------
<S> <C> <C>
Net Asset Value 20.15 20.15
<CAPTION>
Aggregate Annualized
Total Return Total Return
Since Since
Class Y shares: As a % of 1 Year 3/31/94** 3/31/94**
- ----------------------------------------- ----------- --------------- ------------------------
<S> <C> <C> <C>
Net Asset Value N/A N/A N/A
</TABLE>
xx
<PAGE>
<TABLE>
<CAPTION>
STAR ADVISERS FUND
Aggregate Average Annual
Total Return Total Return
-------------------------------- ------------------------
Since Since
Class A shares: As a % of 1 Year 7/7/94** 7/7/94**
- ----------------------------------------- ----------- --------------- ------------------------
<S> <C> <C> <C>
Net Asset Value 34.36 42.93 27.29
Maximum Offering Price 26.62 34.74 22.32
<CAPTION>
Aggregate Average Annual
Total Return Total Return
-------------------------------- ------------------------
Since Since
Class B shares: As a % of 1 Year 7/7/94** 7/7/94**
- ----------------------------------------- ----------- --------------- ------------------------
<S> <C> <C> <C>
Net Asset Value 33.41 41.41 26.38
Redemption at End of Period 29.41 38.41 24.56
<CAPTION>
Aggregate Average Annual
Total Return Total Return
-------------------------------- ------------------------
Since Since
Class C shares: As a % of 1 Year 7/7/94** 7/7/94**
- ----------------------------------------- ----------- --------------- ------------------------
<S> <C> <C> <C>
Net Asset Value 33.39 N/A 26.40
Redemption at End of Period N/A N/A N/A
<CAPTION>
Aggregate Annualized
Total Return Total Return
-------------------------------- ------------------------
Since Since
Class Y shares: As a % of 1 Year 11/15/94** 11/15/94**
- ----------------------------------------- ----------- --------------- ------------------------
<S> <C> <C> <C>
Net Asset Value 34.77 31.94 27.73
<CAPTION>
INTERNATIONAL EQUITY FUND****
Aggregate Average Annual
Total Return Total Return
-------------------------------- ------------------------
Since Since
Class A shares: As a % of 1 Year 5/21/92** 5/21/92**
- ----------------------------------------- ----------- --------------- ------------------------
<S> <C> <C> <C>
Net Asset Value 5.78 40.54 9.88
Maximum Offering Price -0.33 32.48 8.10
<CAPTION>
Aggregate Average Annual
Total Return Total Return
-------------------------------- ------------------------
Since Since
Class B shares: As a % of 1 Year 9/13/93** 9/13/93**
- ----------------------------------------- ----------- --------------- ------------------------
<S> <C> <C> <C>
Net Asset Value 5.02 13.07 5.49
Redemption at End of Period 1.02 10.07 4.26
</TABLE>
xxi
<PAGE>
<TABLE>
<CAPTION>
Aggregate Annualized
Total Return Total Return
Class C shares: As a % of Since 12/30/94** Since 12/30/94**
- ----------------------------------------- -------------------------------- ------------------------
<S> <C> <C>
Net Asset Value 5.22 5.26
<CAPTION>
Aggregate Average Annual
Total Return Total Return
-------------------------------- ------------------------
Since Since
Class Y shares: As a % of 1 Year 9/9/93** 9/9/93*
- ----------------------------------------- ----------- --------------- ------------------------
<S> <C> <C> <C>
Net Asset Value 6.56 16.92 7.00
<CAPTION>
CAPITAL GROWTH FUND*****
Aggregate Average Annual
Total Return Total Return
-------------------------------- ------------------------
Since Since
Class A shares: As a % of 1 Year 8/3/92** 8/3/92**
- ----------------------------------------- ----------- --------------- ------------------------
<S> <C> <C> <C>
Net Asset Value 30.68 59.37 14.64
Maximum Offering Price 23.14 50.31 12.68
<CAPTION>
Aggregate Average Annual
Total Return Total Return
-------------------------------- ------------------------
Since Since
Class B shares: As a % of 1 Year 9/13/93** 9/13/93**
- ----------------------------------------- ----------- --------------- ------------------------
<S> <C> <C> <C>
Net Asset Value 29.73 31.32 12.58
Redemption at End of Period 25.73 28.32 11.45
<CAPTION>
Aggregate Annualized
Total Return Total Return
Class C shares: As a % of Since 12/30/94** Since 12/30/94**
- ----------------------------------------- -------------------------------- ------------------------
<S> <C> <C>
Net Asset Value 29.66 29.66
<CAPTION>
Aggregate Average Annual
Total Return Total Return
-------------------------------- ------------------------
Since Since
Class Y shares: As a % of 1 Year 3/31/94** 3/31/94**
- ----------------------------------------- ----------- --------------- ------------------------
<S> <C> <C> <C>
Net Asset Value N/A N/A N/A
</TABLE>
* 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 11.52%, 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 198.98%. Based on net asset values, the Fund's
Class A shares' ten-year average annual total return would have been
12.18%, had this limitation not been in effect, and their ten-year
aggregate total return would have been 217.13%.
xxii
<PAGE>
**** 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 6.03%, and their aggregate one-year and since-inception
total returns would have been 0.41% and 30.41%, 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 38.47%, and their one-year and since-inception aggregate
total returns would have been 5.07% and 40.56%, 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 3.37%, 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 0.94% and 9.09%, respectively. Based on net asset values,
the Fund's Class B shares' average annual total return for the since-
inception period would have been 4.51%, and their aggregate total returns
for the one-year and since-inception periods would have been 4.94% and
12.09%, 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 5.18% and 6.40%, respectively, and their since-inception
aggregate total returns would have been 5.14% and 16.32%, 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 11.13%, and their aggregate one-year and since-inception total
returns would have been 23.14% and 48.76%, 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 13.09%, and
their one-year and since inception aggregate total returns would have been
30.69% and 57.90%, 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 11.45%, and their one-year
and since-inception aggregate total returns would have been 25.73% and
28.32%, 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 12.58%, and their one-year and since-inception
aggregate total returns would have been 29.73% and 31.32%, respectively,
without the voluntary limitation. The Fund's Class C shares' average annual
total return for the since-inception period would have been 29.66%, and
their aggregate one-year and since-inception total returns would have been
29.66% and 29.66%, respectively, without the voluntary limitation. The
Fund's Class Y shares' since-inception average annual total return would
have been N/A%, and their one-year and since-inception aggregate total
returns would have been N/A% and N/A%, 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.
xxiii
<PAGE>
[LOGO OF NEW ENGLAND]
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
MAY 1, 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
May 1, 1996 for Class A, Class B or Class C shares, or the Prospectus of the
Funds dated May 1, 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
<TABLE>
<CAPTION>
Page
<S> <C>
PART I
Investment Restrictions ii
Fund Charges and Expenses x
Investment Performance of the Funds xviii
PART II
Miscellaneous Investment Practices 2
Management of the Trusts 14
Portfolio Transactions and Brokerage 23
Description of the Trusts and Ownership of Shares 26
How to Buy Shares 29
Net Asset Value and Public Offering Price 29
Reduced Sales Charges 30
Shareholder Services 32
Redemptions 36
Standard Performance Measures 38
Income Dividends, Capital Gain Distributions and Tax Status 43
Financial Statements 45
Appendix A - Description of Bond Ratings 46
Appendix B - Publications That May Contain Fund Information 48
Appendix C - Advertising and Promotional Literature 51
Appendix D - Portfolio Composition of the Municipal Income and 55
Bond Income Funds
</TABLE>
i
<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
ii
<PAGE>
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;
iii
<PAGE>
*(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.);
iv
<PAGE>
*(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.
v
<PAGE>
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;
vi
<PAGE>
+(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;
vii
<PAGE>
*(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;
viii
<PAGE>
*(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;
ix
<PAGE>
*(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:
x
<PAGE>
<TABLE>
<CAPTION>
Management fee paid by Fund to NEFM
Fund (as a percentage of average daily net assets of the Fund)
- --------------------------------- ---------------------------------------------------------
<S> <C> <C>
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 Fund 0.650% of the first $200 million
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
</TABLE>
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:
<TABLE>
<CAPTION>
Subadvisory fee payable to NEFM to subadviser
Fund Subadviser (as a percentage of average daily net assets of the Fund)
- --------------------------------- ------------------- ---------------------------------------------------------
<S> <C> <C> <C>
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 Fund Back Bay 0.3250% of the first $200 million
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. Government Fund Back Bay 0.3250% of the first $200 million
Advisors 0.3125% of the next $300 million
0.3000% of amounts in excess of $500 million
Strategic Income Fund Loomis Sayles 0.35% of the first $200 million
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
</TABLE>
xi
<PAGE>
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 $911,184,
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 $1,619,477, 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 $1,008,846, respectively.
The Limited Term U.S. Government Fund paid Back Bay Advisors
$3,390,740, $3,163,619 and $2,560,201 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
$872,560, respectively; and the Municipal Income Fund paid advisory fees to Back
Bay Advisors of $911,990, $925,947 and $890,150, 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 $94,978, 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.
xii
<PAGE>
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 $288,711 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 $342,554,
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 may terminate at any
time, NEFM has agreed to defer in full its management fees for the Strategic
Income Fund until further notice, subject to the obligation of the Fund to pay
NEFM such deferred 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 deferred fees more than
two years after the end of the fiscal year in which such fee was deferred.
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 $241,019 in management fees for this period. Under the
terms of the expense deferral arrangement, the Fund may be obligated to pay up
to $111,240 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:
<TABLE>
<CAPTION>
FUND 1993 1994 1995
- ----------------------------------- ------------ ------------- -------------
<S> <C> <C> <C>
Government Securities Fund $465,401 $409,909 $366,630 (Class A)
$1,582 $23,270 $37,075 (Class B)**
Limited Term U.S. Government Fund $1,873,424 $1,705,012 $1,332,412 (Class A)
$7,721 $98,717 $147,768 (Class B)**
$15,410 (Class C)***
Adjustable Rate Fund $1,322,743 $1,551,366 $1,040,897 (Class A)
$1,444 $14,092 $21,684 (Class B)*
Bond Income Fund $416,977 $416,918 $453,844 (Class A)
$3,957 $64,222 $158,962 (Class B)*
$2,428 (Class C)
High Income Fund $96,279 $117,107 $130,876 (Class A)
$1,574 $30,717 $82,798 (Class B)**
$0 (Class C)***
</TABLE>
xiii
<PAGE>
<TABLE>
<CAPTION>
FUND 1993 1994 1995
- ----------------------------------- ------------ ------------- -------------
<S> <C> <C> <C>
Municipal Income Fund $523,343 $512,288 $483,317 (Class A)
$5,363 $66,711 $107,049 (Class B)*
Strategic Income Fund**** $39,089 (Class A)
$155,888 (Class B)
$58,848 (Class C)
</TABLE>
* Class B shares were first offered on September 13, 1993.
** Government Securities Fund Class B shares were first offered September 23,
1993; Limited Term U.S. Government Fund Class B shares were first offered
September 27, 1993; High Income Fund Class B shares were first offered
September 20, 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:
<TABLE>
<S> <C> <C>
GOVERNMENT SECURITIES FUND
(Class A shares)
Compensation to Investment Dealers $366,286
Compensation to Distributor's Sales Personnel $345
TOTAL $366,631
(Class B shares)
Compensation to Investment Dealers $65,747
TOTAL $65,747
LIMITED TERM U.S. GOVERNMENT FUND
(Class A shares)
Compensation to Investment Dealers $950,359
Compensation to Distributor's Sales Personnel $382,055
TOTAL $1,332,414
(Class B shares)
Compensation to Investment Dealers $207,134
TOTAL $207,134
(Class C shares)
Compensation to Investment Dealers $15,410
Compensation to Distributor's Sales Personnel $0
TOTAL $15,410
</TABLE>
xiv
<PAGE>
<TABLE>
<S> <C> <C>
ADJUSTABLE RATE FUND
(Class A shares)
Compensation to Investment Dealers $1,038,424
Compensation to Distributor's Sales Personnel $2,475
TOTAL $1,040,899
(Class B shares)
Compensation to Investment Dealers $23,182
TOTAL $23,182
STRATEGIC INCOME FUND
(Class A shares)
Compensation to Investment Dealers $0
Compensation to Distributor's Sales Personnel $39,091
TOTAL $39,091
(Class B shares)
Compensation to Investment Dealers $1,440,926
TOTAL $1,440,926
(Class C shares)
Compensation to Investment Dealers $58,548
Compensation to Distributor's Sales Personnel $0
TOTAL $58,548
BOND INCOME FUND
(Class A shares)
Compensation to Investment Dealers $454,410
Compensation to Distributor's Sales Personnel $0
TOTAL $454,410
(Class B shares)
Compensation to Investment Dealers $424,667
TOTAL $424,667
(Class C shares)
Compensation to Investment Dealers $2,428
Compensation to Distributor's Sales Personnel $0
TOTAL $2,428
</TABLE>
xv
<PAGE>
<TABLE>
<S> <C> <C>
HIGH INCOME FUND
(Class A shares)
Compensation to Investment Dealers $93,316
Compensation to Distributor's Sales Personnel $37,563
TOTAL $130,879
(Class B shares)
Compensation to Investment Dealers $227,854
TOTAL $227,854
MUNICIPAL INCOME FUND
(Class A shares)
Compensation to Investment Dealers $483,199
Compensation to Distributor's Sales Personnel $118
TOTAL $483,317
(Class B shares)
Compensation to Investment Dealers $167,871
TOTAL $167,871
</TABLE>
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: $314,477 relating to the Class A shares and $24,892 relating to the
Class B shares of the Government Securities Fund; $218,479 relating to the Class
A shares and $17,849 relating to the Class B shares of the Adjustable Rate Fund;
$379,050 relating to the Class A shares and $337,627 relating to the Class B
shares and $2,025 relating to the Class C shares of the Bond Income Fund;
$54,412 relating to the Class A shares and $74,624 relating to the Class B
shares of the High Income Fund; $402,169 relating to the Class A shares and
$113,310 relating to the Class B shares of the Municipal Income Fund; $653,488
relating to the Class A shares, $156,687 relating to Class B shares and $2,609
relating to the Class C shares of the Limited Term U.S. Government Fund; and $-
0- to the Class A shares, $605,340 relating to the Class B shares and $4,133
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
(a) in commissions to its sales personnel and (b) to defray sales-related
overhead costs.
At April 1, 1996, to the Trust's knowledge, the following persons
owned of record or beneficially 5% or more of the indicated Fund:
<TABLE>
<S> <C> <C>
Adjustable Rate U.S. Government Fund
Class A shares San Bernardino County 25.28%
Treasurer
172 W. 3rd Street, 1st Floor
San Bernardino, CA 92415-1001
Molten Metal Technology, Inc. 7.13%
51 Sawyer Road
Waltham, MA 02154-3448
Class B shares Smith Barney, Inc. 6.31%
388 Greenwich Street
New York, NY 10013-2375
</TABLE>
xvi
<PAGE>
<TABLE>
<S> <C> <C>
Adjustable Rate U.S. Lynn C. Knarr 6.23%
Government Fund 14 Canal Road
Class B shares (cont.) Westport, CT 06880-6904
High Income Fund
Class A shares Deferred Compensation Plan 7.10%
for General Agents of
The New England
501 Boylston Street, 6th Floor
Boston, MA 02116
Limited Term U.S. Government Fund
Class C shares Samuel Oschin 15.35%
Michael H. Oschin
P.O. Box 48289
Los Angeles, CA 90048-0289
Hook's Concrete Construction Corp. 5.55%
Defined Benefit Pension Plan and Trust
529 East 169th Street
South Holland, IL 60478-2925
Class Y shares NEIC Master Retirement Trust 54.95%
c/o Defined Contribution Services
P.O. Box 755
Boston, MA 02117-0755
New England Mutual Life Insurance 45.05%
Company, Separate Investment Accounting
501 Boylston Street, 6th Floor
Boston, MA 02116-2706
Bond Income Fund
Class Y shares NEIC Master Retirement Trust 99.99%
c/o Defined Contribution Services
P.O. Box 755
Boston, MA 02117-0755
Municipal Income Fund
Class B shares Smith Barney 5.32%
388 Greenwich Street
New York, NY 10013-2375
Government Securities Fund
Class B shares State Street Bank & Trust Company 5.23%
Custodian for the IRA Rollover of
Edith H. Crowson
22410 Provincial
Katy, TX 77450-1624
Class Y shares New England Mutual Life Insurance 100.00%
Company, Separate Investment Accounting
501 Boylston Street, 6th Floor
Boston, MA 02116-3706
Strategic Income Fund
Class A shares Merrill Lynch Pierce Fenner & Smith Inc. 5.03%
Mutual Fund Operations
4800 Deer Lake Drive East
Jacksonville, FL 32246-6484
</TABLE>
xvii
<PAGE>
________________________________________________________________________________
INVESTMENT PERFORMANCE OF THE FUNDS
________________________________________________________________________________
PERFORMANCE RESULTS - PERCENT CHANGE
For the Periods Ended 12/31/95*
<TABLE>
<CAPTION>
GOVERNMENT SECURITIES FUND
Aggregate Average Annual
Total Return Total Return
--------------------------- -------------------
Class A shares: As a % of 1 Year 5 Years 10 Years 5 Years 10 Years
- ---------------------------------- ------ ------- -------- --------- ----------
<S> <C> <C> <C> <C> <C>
Net Asset Value 20.03 51.67 116.06 8.69 8.01
Maximum Offering Price 14.65 44.80 106.38 7.68 7.51
<CAPTION>
Aggregate Average Annual
Total Return Total Return
--------------------------- -------------------
Since Since
Class B shares: As a % of 1 Year 9/23/93** 9/23/93**
- ---------------------------------- ------ ------------- -------------------
<S> <C> <C> <C>
Net Asset Value 19.24 10.50 4.50
Redemption at End of Period 15.24 7.63 3.29
<CAPTION>
Aggregate Average Annual
Total Return Total Return
--------------------------- -------------------
Since Since
Class Y shares: As a % of 1 Year 3/31/94** 3/31/94**
- ---------------------------------- ------ ------------- -------------------
<S> <C> <C> <C>
Net Asset Value 20.31 17.83 9.83
<CAPTION>
LIMITED TERM U.S. GOVERNMENT FUND
Aggregate Average Annual
Total Return Total Return
--------------------------- -------------------
Since Since
Class A shares: As a % of 1 Year 5 Years 1/3/89** 5 Years 1/3/89**
- ---------------------------------- ------ ------- -------- --------- ----------
<S> <C> <C> <C> <C> <C>
Net Asset Value 13.01 41.32 72.49 7.16 8.11
Maximum Offering Price 9.57 37.13 67.47 6.52 7.64
<CAPTION>
Aggregate Average Annual
Total Return Total Return
--------------------------- -------------------
Since Since
Class B shares: As a % of 1 Year 9/27/93** 9/27/93**
- ---------------------------------- ------ ------------- -------------------
<S> <C> <C> <C>
Net Asset Value 12.30 8.32 3.60
Redemption at End of Period 8.30 5.73 2.48
<CAPTION>
Aggregate Average Annual
Total Return Total Return
Class C shares: As a % of Since 1/3/95** Since 1/3/95**
- ---------------------------------- --------------------------- -------------------
<S> <C> <C>
Net Asset Value 11.35 11.35
</TABLE>
xviii
<PAGE>
<TABLE>
<CAPTION>
Aggregate Average Annual
Total Return Total Return
--------------------------- -------------------
Since Since
Class Y shares: As a % of 1 Year 3/31/94** 3/31/94**
- ---------------------------------- ---------- ------------- -------------------
<S> <C> <C> <C>
Net Asset Value 13.33 13.02 7.25
ADJUSTABLE RATE FUND***
<CAPTION>
Aggregate Average Annual
Total Return Total Return
--------------------------- -------------------
Since 3 Since
Class A shares: As a % of 1 Year 10/19/91** Year 10/18/91**
- ---------------------------------- ---------- ------------- -------------------
<S> <C> <C> <C> <C>
Net Asset Value 8.62 20.92 4.42 4.63
Maximum Offering Price 7.57 19.64 4.05 4.36
<CAPTION>
Aggregate Average Annual
Total Return Total Return
--------------------------- -------------------
Since Since
Class B shares: As a % of 1 Year 9/13/93** 9/13/93**
- ---------------------------------- ---------- ------------- -------------------
<S> <C> <C> <C>
Net Asset Value 7.81 7.82 3.32
Redemption at End of Period 3.81 4.88 2.09
<CAPTION>
Aggregate Average Annual
Total Return Total Return
--------------------------- -------------------
Since Since
Class Y shares: As a % of 1 Year 3/31/94** 3/31/94**
- ---------------------------------- ---------- ------------- -------------------
<S> <C> <C> <C>
Net Asset Value N/A N/A N/A
STRATEGIC INCOME FUND*****
<CAPTION>
Aggregate Annualized
Total Return Total Return
Class A shares: As a % of Since 5/1/95** Since 5/1/95**
- ---------------------------------- --------------------------- -------------------
<S> <C> <C>
Net Asset Value 10.27 15.71
Maximum Offering Price 5.30 8.01
<CAPTION>
Aggregate Annualized
Total Return Total Return
Class B shares: As a % of Since 5/1/95** Since 5/1/95**
- ---------------------------------- --------------------------- -------------------
<S> <C> <C>
Net Asset Value 9.73 14.87
Redemption at End of Period 5.73 8.68
<CAPTION>
Aggregate Annualized
Total Return Total Return
Class C shares: As a % of Since 5/1/95** Since 5/1/95**
- ---------------------------------- --------------------------- -------------------
<S> <C> <C>
Net Asset Value 9.65 14.75
</TABLE>
xix
<PAGE>
<TABLE>
<CAPTION>
Aggregate Annualized
Total Return Total Return
Class Y shares: As a % of Since 5/1/95** Since 5/1/95**
- ---------------------------------- --------------------------- --------------------
<S> <C> <C>
Net Asset Value N/A N/A
<CAPTION>
BOND INCOME FUND
Aggregate Average Annual
Total Return Total Return
--------------------------- --------------------
1 5 10 5 10
Class A shares: As a % of Year Years Years Years Years
- ---------------------------------- ------ ------- -------- --------- ----------
<S> <C> <C> <C> <C> <C>
Net Asset Value 20.77 64.46 148.94 10.47 9.55
Maximum Offering Price 15.29 57.12 137.72 9.46 9.05
<CAPTION>
Aggregate Average Annual
Total Return Total Return
--------------------------- --------------------
Since Since
Class B shares: As a % of 1 Year 9/13/93** 9/13/93**
- ---------------------------------- ---------- ------------- --------------------
<S> <C> <C> <C>
Net Asset Value 19.89 13.04 5.48
Redemption at End of Period 15.89 10.20 4.31
<CAPTION>
Aggregate Average Annual
Total Return Total Return
Class C shares: As a % of Since 1/3/95** Since 1/3/95**
- ---------------------------------- --------------------------- --------------------
<S> <C> <C>
Net Asset Value 18.11 18.11
<CAPTION>
Aggregate Average Annual
Total Return Total Return
--------------------------- --------------------
Since Since
Class Y shares: As a % of 1 Year 3/31/94** 3/31/94**
- ---------------------------------- ---------- ------------- --------------------
<S> <C> <C> <C>
Net Asset Value 20.99 20.99 20.99
<CAPTION>
HIGH INCOME FUND
Aggregate Average Annual
Total Return Total Return
--------------------------- --------------------
1 5 10 5 10
Class A shares: As a % of Year Years Years Years Years
- ---------------------------------- ------ ------- -------- --------- ----------
<S> <C> <C> <C> <C> <C>
Net Asset Value 11.78 98.94 100.02 14.75 7.18
Maximum Offering Price 6.73 89.91 90.98 13.69 6.68
<CAPTION>
Aggregate Average Annual
Total Return Total Return
--------------------------- --------------------
Since Since
Class B shares: As a % of 1 Year 9/20/93** 9/20/93**
- ---------------------------------- ------ ------------- --------------------
<S> <C> <C> <C>
Net Asset Value 11.19 11.37 4.83
Redemption at End of Period 7.19 8.64 3.70
</TABLE>
xx
<PAGE>
<TABLE>
<CAPTION>
MUNICIPAL INCOME FUND
Aggregate Average Annual
Total Return Total Return
--------------------------- -------------------
1 5 10 5 10
Class A shares: As a % of Year Years Years Years Years
- ---------------------------------- ------ ------- -------- --------- ----------
<S> <C> <C> <C> <C> <C>
Net Asset Value 17.23 47.57 124.16 8.09 8.41
Maximum Offering Price 12.00 40.93 114.21 7.10 7.92
<CAPTION>
Aggregate Average Annual
Total Return Total Return
--------------------------- -------------------
Since Since
Class B shares: As a % of 1 Year 9/13/93** 9/13/93**
- ---------------------------------- ------ ------------- -------------------
<S> <C> <C> <C>
Net Asset Value 16.31 7.28 3.10
Redemption at End of Period 12.31 4.44 1.91
</TABLE>
* 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 7.34% and 17.72%, respectively, and
their average annual since-inception total return would have been
2.44% 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 8.39% and 19.00%,
respectively, and their since-inception average annual total return
would have been 2.71%, 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 3.57%
and 4.10%, respectively, had a voluntary expense limitation not been
in effect, and their average annual total return for the since-
inception period would have been 1.31%. 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 7.57% and 7.58%, respectively,
and their average annual total returns for the since-inception period
would have been 2.54%, without the voluntary limitation. The Fund's
Class Y shares' one-year and since-inception aggregate total returns
would have been N/A% and N/A%, respectively, and their since-inception
average annual total return would have been N/A%, 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 6.61%, 86.45% and 83.70%, 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 10.25% and -0.60%, 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 11.66%, 95.48% and
92.74%, respectively, without the voluntary limitation, and their
five-year and ten-year average annual total returns would have been
11.29% and -0.10%, 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 7.07% and 8.01%,
respectively, had a voluntary expense limitation not been in effect,
and their average annual total return for the since-inception period
would have been 3.07%. 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 11.07% and 10.74%, respectively, without the
voluntary limitation, and their average annual total return for the
since-inception period would have been 4.20%.
***** 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 4.65%,
5.08%, 9.00% and N/A%, respectively, had a voluntary expense deferral
arrangement not been in effect, and their annualized total returns for
the since-inception would have been 7.36%, 8.03%, 14.10% and N/A%,
respectively.
xxi
<PAGE>
YIELD FOR THE 30-DAY PERIOD
ENDED 12/31/95
<TABLE>
<CAPTION>
FUND CLASS A CLASS B CLASS C CLASS Y
- ------------------------------------------ --------- --------- --------- ---------
<S> <C> <C> <C> <C>
Government Securities Fund 4.41 3.83 N/A 4.90
Limited Term U.S. Government Fund 4.90 4.42 4.46 5.40
Adjustable Rate U.S. Government Fund 5.79 5.10 N/A N/A
Strategic Income Fund 8.36 7.99 8.05 N/A
Bond Income Fund 6.09 5.63 5.63 6.61
High Income Fund 9.48 9.27 N/A N/A
Municipal Income Fund 5.11 4.60 N/A N/A
</TABLE>
* 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
<TABLE>
<CAPTION>
AS A % OF 30 DAY 3 MONTHS 12 MONTHS
<S> <C> <C> <C>
GOVERNMENT SECURITIES FUND
(Class A shares)
Net Asset Value 6.39 6.39 6.20
Maximum Offering Price 6.11 6.11 5.92
(Class B shares)
Net Asset Value 5.67 5.67 5.48
(Class Y shares)
Net Asset Value 8.30 7.62 6.70
LIMITED TERM U.S. GOVERNMENT FUND
(Class A shares)
Net Asset Value 7.69 7.45 6.94
Maximum Offering Price 7.46 7.23 6.73
(Class B shares)
Net Asset Value 7.05 6.83 6.32
(Class C shares)
Net Asset Value 7.04 6.83 N/A
(Class Y shares)
Net Asset Value 7.22 7.39 7.16
</TABLE>
xxii
<PAGE>
<TABLE>
<S> <C> <C> <C>
ADJUSTABLE RATE FUND
(Class A shares)
Net Asset Value 5.62 5.53 5.91
Maximum Offering Price 5.57 5.47 5.85
(Class B shares)
Net Asset Value 4.87 4.81 5.17
(Class Y shares)
Net Asset Value N/A N/A N/A
STRATEGIC INCOME FUND
(Class A shares)
Net Asset Value 8.58 8.14 N/A
Maximum Offering Price 8.20 7.77 N/A
(Class B shares)
Net Asset Value 7.85 7.61 N/A
(Class C shares)
Net Asset Value 7.57 7.44 N/A
(Class Y shares)
Net Asset Value N/A N/A N/A
BOND INCOME FUND
(Class A shares)
Net Asset Value 6.80 6.80 6.47
Maximum Offering Price 6.49 6.49 6.18
(Class B shares)
Net Asset Value 6.02 6.05 5.77
(Class C shares)
Net Asset Value 6.02 6.18 N/A
(Class Y shares)
Net Asset Value 6.24 6.48 N/A
HIGH INCOME FUND
(Class A shares)
Net Asset Value 9.69 10.04 10.27
Maximum Offering Price 9.25 9.59 9.81
(Class B shares)
Net Asset Value 9.03 9.39 9.62
</TABLE>
xxiii
<PAGE>
<TABLE>
<S> <C> <C> <C>
MUNICIPAL INCOME FUND
(Class A shares)
Net Asset Value 5.37 5.37 5.36
Maximum Offering Price 5.13 5.13 5.12
(Class B shares)
Net Asset Value 4.58 4.58 4.59
</TABLE>
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.
xxiv
<PAGE>
[LOGO OF NEW ENGLAND FUNDS APPEARS HERE]
Where The Best Minds Meet(TM)
- --------------------------------------------------------------------------------
NEW ENGLAND FUNDS TRUST I
NEW ENGLAND FUNDS TRUST II
STATEMENT OF ADDITIONAL INFORMATION -- PART II
MAY 1, 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 May 1, 1996 (the "Prospectuses"). The following
Funds are described in this Statement:
<TABLE>
<CAPTION>
SERIES OF NEW ENGLAND FUNDS TRUST I
- -----------------------------------
<S> <C>
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 Fund (the "International Equity Fund")
New England Star Advisers Fund (the "Star Advisers Fund")
New England Value Fund (the "Value Fund")
New England Government Securities Fund (the "Government Securities Fund")
New England Strategic Income Fund (the "Strategic Income Fund")
New England Bond Income Fund (the "Bond Income Fund")
New England Municipal Income Fund (formerly named New England (the "Municipal Income Fund")
Tax Exempt Income Fund)
SERIES OF NEW ENGLAND FUND TRUST II
- -----------------------------------
New England Growth Opportunities Fund (the "Growth Opportunities Fund")
New England Limited Term U.S. Government Fund (the "Limited Term U.S. Government Fund")
New England Adjustable Rate U.S. Government Fund (the "Adjustable Rate Fund")
New England High Income Fund (the "High Income Fund")
New England Massachusetts Tax Free Income Fund (the "Massachusetts Fund")
New England Intermediate Term Tax Free Fund of California (the "California Fund')
New England Intermediate Free Fund of New York (the "New York Fund")
</TABLE>
1
<PAGE>
________________________________________________________________________________
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
2
<PAGE>
Futures, Options and Swap Contracts 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
3
<PAGE>
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
4
<PAGE>
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).
5
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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
6
<PAGE>
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.
Futures, Options and Swap Contracts
- -----------------------------------
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
7
<PAGE>
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 liquid 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
8
<PAGE>
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
9
<PAGE>
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.
SWAP CONTRACTS. 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 Fund will maintain
10
<PAGE>
at all times in a segregated account with its custodian cash, U.S. Treasury
bills or other high grade liquid obligations in amounts sufficient to satisfy
its obligations under swap contracts.
RISKS. The use of futures contracts, options and swap contracts 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.
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<PAGE>
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,
12
<PAGE>
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
13
<PAGE>
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 (56); 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.
DANIEL M. CAIN - Trustee (51); 452 Fifth Avenue, New York, NY 10018; President,
-------
Cain Brothers & Company (investment banking).
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.
RICHARD DARMAN - Trustee (52); 1001 Pennsylvania Avenue, N.W., Washington, D.C.
-------
20004; Partner and Managing Director, The Carlyle Group (investments);
Trustee, Council for Excellence in Government (not-for-profit); Director,
Frontier Ventures (personal investment); Director, Highway Master
Communications (mobile communications); Managing Partner, Little Falls
Partners (family investment); Director, Sequana Therapeutics
(biotechnology/genomics); Director, Telcom Ventures (telecommunications);
formerly, Director of the U.S. Office of Management and Budget and a member
of President Bush's Cabinet.
SANDRA O. MOOSE -- Trustee (54); 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").
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
_______________________
* Trustee deemed an "interested person" of the Trusts, as defined in the
Investment Company Act of 1940 (the "1940 Act").
14
<PAGE>
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.
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).
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 (40); 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 (mutual fund and unit investment trust sponsor).
ROBERT P. CONNOLLY -- Secretary and Clerk (42); 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.
____________________
* Trustee deemed an "interested person" of the Trusts, as defined in the
Investment Company Act of 1940 (the "1940 Act").
15
<PAGE>
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).
<TABLE>
<CAPTION>
Pension or Total Compensation
Aggregate Aggregate Retirement from the New
Compensation from Compensation from Benefits Accrued England Funds
New England Funds New England Funds as Part of Fund Estimated Annual Trusts, Zenith and
Trust I in Trust II in Expenses in Benefits Upon NEVA in
Name of Trustee 1995 1995 1995 Retirement 1995
- --------------------------- ----------------- ----------------- ----------- ---------- ------------------
<S> <C> <C> <C> <C> <C>
Graham T. Allison, Jr. (a) $26,800 $16,000 $0 $0 $50,000
Daniel M. Cain (b) $ 0 $ 0 $0 $0 $ 0
Kenneth J. Cowan $32,991 $19,784 $0 $0 $69,291
Richard Darman (b) $ 0 $ 0 $0 $0 $ 0
Joseph M. Hinchey (c) $ 7,051 $ 4,079 $0 $0 $50,125
Richard S. Humphrey, Jr. (c) $ 7,051 $ 4,079 $0 $0 $48,167
Robert B. Kittredge (c) $ 6,634 $ 3,787 $0 $0 $78,667 (e)
Laurens MacLure (c) $ 6,692 $ 3,828 $0 $0 $81,500 (e)
Sandra O. Moose $26,943 $15,550 $0 $0 $56,250
James H. Scott (d) $27,984 $16,279 $0 $0 $59,000
John A. Shane $30,318 $17,912 $0 $0 $63,000
Joseph F. Turley (c) $ 7,051 $ 4,079 $0 $0 $48,167
Pendleton P. White $30,318 $17,912 $0 $0 $63,000
</TABLE>
(a) Became a trustee of the Trusts effective April 1, 1995.
(b) Became a trustee of the Trusts effective February 23, 1996.
(c) Resigned as a trustee of the Trusts effective May 1, 1995.
(d) Resigned as a trustee of the Trusts effective March 5, 1996.
(e) 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.
16
<PAGE>
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 eight subsidiary or affiliated asset management firms, collectively,
have more than $81 billion of assets under management or administration.
17
<PAGE>
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 $6 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 Limited ("Cursitor"), an
international investment management firm. Effective February 29, 1996, Cursitor
Alliance LLC, a newly formed Delaware limited liability company, acquired the
stock of Cursitor. Cursitor Alliance LLC is owned (directly and indirectly) 93%
by Alliance Capital Management L.P. and 7% by an entity owned by the principals
of Cursitor. At February 29, 1996, Cursitor Alliance LLC had approximately $17
billion in assets under management. 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 ("The
Equitable"), which is a wholly-owned subsidiary of The Equitable Companies
Incorporated, a holding company controlled by AXA, a French insurance holding
company. As of February 29, 1996, The Equitable owned, directly and indirectly,
approximately 59% of the outstanding limited partnership interest in Alliance
Capital.
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 Funds' 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.
18
<PAGE>
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.
19
<PAGE>
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.
20
<PAGE>
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 report 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.
21
<PAGE>
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 $8,779,918, respectively, of which $8,290,120 and
$7,706,937, 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 $1,913,291, respectively, of
which $573,825, $1,780,651 and $1,752,050, 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, 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. In the case of
the Growth Fund, New England Securities continues to provide such services under
its service agreement with CGM. For the years ended December 31, 1994 and 1995,
New England Securities received $2,261,375 and $3,357,556, 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 $323,029, 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 $1,715,899, 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 $192,366, respectively, from
the International Equity Fund for these services. Class C shares did not
commence operations until January 3, 1995.
22
<PAGE>
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
$1,511,359, 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
$334,777, 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 fees of $46,879 and $22,124 for these services
from the California and New York Funds, respectively.
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 $17.25 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 $15.45 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 $0.95 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; $0.87 for Massachusetts
Tax Free Income Fund, High Income Fund and Limited Term U.S. Government Fund;
$0.78 for International Equity Fund, Capital Growth Fund, Balanced Fund, Value
Fund, Growth Fund and Star Advisers Fund; and $0.70 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 $50,428, $48,931, $48,646, $54,147, $49,949, $51,179, $49,556,
$48,113 and $51,811, 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.
23
<PAGE>
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
24
<PAGE>
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.
25
<PAGE>
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:
<TABLE>
<CAPTION>
Corporation Date of Commencement
----------- --------------------
<S> <C>
NEL Growth Fund, Inc. 1968
NEL Retirement Equity Fund, Inc.* 1969
NEL Equity Fund, Inc.** 1968
NEL Income Fund, Inc.*** 1973
NEL Tax Exempt Bond Fund, Inc.**** 1976
* Predecessor of the Value Fund
** Predecessor of the Balanced Fund
*** Predecessor of the Bond Income Fund
**** Predecessor of the Municipal Income Fund
</TABLE>
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 March 15, 1996.
26
<PAGE>
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
27
<PAGE>
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.
28
<PAGE>
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
29
<PAGE>
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.
30
<PAGE>
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
31
<PAGE>
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), 401(k) 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.
32
<PAGE>
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
33
<PAGE>
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.
34
<PAGE>
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.
35
<PAGE>
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
36
<PAGE>
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 59 1/2 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 70 1/2 (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 59 1/2 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 70 1/2 (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
37
<PAGE>
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.
38
<PAGE>
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.
39
<PAGE>
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,
40
<PAGE>
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
<TABLE>
<CAPTION>
5 YRS. 10 15 20 25 30
--------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
$ 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
</TABLE>
41
<PAGE>
INVESTMENTS AT 10% RATE OF RETURN
<TABLE>
<CAPTION>
5 YRS. 10 15 20 25 30
--------- --------- --------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
$ 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
</TABLE>
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
42
<PAGE>
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
43
<PAGE>
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).
44
<PAGE>
________________________________________________________________________________
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.
45
<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.
46
<PAGE>
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.
47
<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
B'nai B'rith Jewish Monthly
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
48
<PAGE>
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
Internet
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
49
<PAGE>
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
World Wide Web
Worth Magazine
WRKO
50
<PAGE>
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
51
<PAGE>
-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 and
Berger Growth and Income 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 $81 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.
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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:
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<PAGE>
-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.
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APPENDIX D
AVERAGE MONTHLY PORTFOLIO COMPOSITION TABLE OF THE
MUNICIPAL INCOME FUND AS OF DECEMBER 31, 1995
<TABLE>
<CAPTION>
PERCENTAGE
OF NET
SECURITY ASSETS
-------- ------
<S> <C>
Preferred Stock........................................... 0%
Short-term Obligations and Other Assets................... 0%
Debt -- Unrated........................................... 0%
Debt -- Standard and Poor's Rating........................
AAA.................................................. 16%
AA................................................... 9.8%
A.................................................... 9.9%
BBB.................................................. 50.6%
BB................................................... 13.7%
B.................................................... 0%
CAA.................................................. 0%
CA................................................... 0%
</TABLE>
The chart above indicates the composition of the Municipal Income Fund for the
fiscal year ended December 31, 1995, with the debt securities rated by S&P
separated into the indicated categories. The percentages were calculated on a
dollar-weighted average basis by determining monthly the percentage of the
Municipal 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.
55
<PAGE>
APPENDIX D
AVERAGE MONTHLY PORTFOLIO COMPOSITION TABLE OF THE
BOND INCOME FUND AS OF DECEMBER 31, 1995
<TABLE>
<CAPTION>
PERCENTAGE
OF NET
SECURITY ASSETS
-------- ------
<S> <C>
Preferred Stock........................................... 0%
Short-term Obligations and Other Assets................... 0%
Debt -- Unrated........................................... 0%
Debt -- Standard and Poor's Rating........................
AAA.................................................. 35%
AA................................................... 15%
A.................................................... 15%
BBB.................................................. 17%
BB................................................... 18%
B.................................................... 0%
CAA.................................................. 0%
CA................................................... 0%
</TABLE>
The chart above indicates the composition of the Bond Income Fund for the fiscal
year ended December 31, 1995, with the debt securities rated by S&P separated
into the indicated categories. The percentages were calculated on a dollar-
weighted average basis by determining monthly the percentage of the Bond 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.
56
<PAGE>
[LOGO OF NEW ENGLAND]
Where The Best Minds Meet(TM)
- --------------------------------------------------------------------------------
NEW ENGLAND MASSACHUSETTS TAX FREE INCOME FUND
STATEMENT OF ADDITIONAL INFORMATION -- PART I
MAY 1, 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 May 1, 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
<TABLE>
<CAPTION>
Page
<S> <C>
PART I
Investment Restrictions ii
Fund Charges and Expenses iii
Investment Performance of the Fund v
PART II
Miscellaneous Investment Practices 2
Management of the Trusts 14
Portfolio Transactions and Brokerage 23
Description of the Trusts and Ownership of Shares 26
How to Buy Shares 29
Net Asset Value and Public Offering Price 29
Reduced Sales Charges 30
Shareholder Services 32
Redemptions 36
Standard Performance Measures 38
Income Dividends, Capital Gain Distributions and Tax Status 43
Financial Statements 45
Appendix A - Description of Bond Ratings 46
Appendix B - Publications That May Contain Fund Information 48
Appendix C - Advertising and Promotional Literature 51
Appendix D - Portfolio Composition of the Municipal Income
Bond Income Funds 55
</TABLE>
i
<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
ii
<PAGE>
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.
iii
<PAGE>
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 $235,210 ,
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 $697,878, 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, to the Trusts' knowledge, the following persons
owned of record or beneficially 5% or more of the outstanding Class A shares and
Class B shares of the Fund:
Class B shares Willie McGinest 6.24%
2001 Marina Drive #704
North Quincy, MA 02171-1542
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 $399,216, 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 $55,139, respectively, for the Fund's Class B shares.
During the fiscal year ended December 31, 1995, the Distributor paid
$8,934,596 as compensation to investment dealers and $607,103 as compensation to
its sales personnel for the Fund's Class A shares. During the fiscal year ended
December 31, 1995, the Distributor paid $9,923,725 as compensation to investment
dealers for the Fund's Class B shares. Of the amount paid to investment dealers,
$6,062,050 and $5,277,515 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
iv
<PAGE>
fees it received from the Distributor (a) in commissions to its sales personnel
and (b) to defray sales-related overhead costs.
________________________________________________________________________________
INVESTMENT PERFORMANCE OF THE FUND
________________________________________________________________________________
PERFORMANCE RESULTS - PERCENT CHANGE
For the Periods Ended 12/31/95*
<TABLE>
<CAPTION>
Aggregate Average Annual
Total Return Total Return
-------------- ------------
Class A shares:*** As a % of 1 Year 5 Years 10 Years 5 Years 10 Years
----------------- ---- ---- ---- ----- ------
<S> <C> <C> <C> <C> <C>
Net Asset Value 17.84 49.08 117.04 8.31 8.06
Maximum Offering Price 12.83 42.75 107.87 7.38 7.59
<CAPTION>
Aggregate Average Annuall
Total Return Total Return
-------------- ------------
Since Since
Class B shares:**** As a % of 1 Year 9/13/93** 9/13/93**
------------------ ---- ------ ----------
<S> <C> <C> <C>
Net Asset Value 17.03 8.16 3.47
Redemption at End of Period 13.03 5.32 2.28
</TABLE>
* 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
5.49% and 5.70%, 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 12.44%, 40.88% and 105.98%,
respectively. Based on net asset values, the Fund's Class A shares' five-
year and ten-year average annual total returns would have been 6.42% and
6.17%, respectively, without the voluntary limitation, and their aggregate
one-year, five-year and ten-year total returns would have been 17.45%,
47.19% and 115.15%, 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
1.14%, 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 12.64% and 4.18%, respectively. Based on net asset values, the
Class B shares' average annual total return for the since-inception period
would have been 2.33%, without the voluntary limitation, and their
aggregate total returns for the one-year and since-inception periods would
have been 16.64% and 7.02%, 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.
v
<PAGE>
YIELD AND TAXABLE EQUIVALENT YIELDS
for the 30-day period ended 12/31/95
<TABLE>
<CAPTION>
30-day yield:
<S> <C>
Class A 4.96%
Class B 4.54%
<CAPTION>
Taxable equivalent yields:
Combined Tax Rate** Taxable Equivalent Yield
<S> <C> <C> <C>
Class A 46.85% Class A 9.33%
Class B 46.85% Class B 8.54%
</TABLE>
* 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:
<TABLE>
<CAPTION>
Taxable and Tax Free Yields
---------------------------
Taxable Income* If tax exempt yield is
--------------- ----------------------
1996
Combined
MA and
Federal
Tax
Single Return Joint Return Bracket** 4.0% 5.0% 6.0% 7.0% 8.0%
- ------------- ------------ ------- ---- ---- ---- ---- ----
then the equivalent taxable yield would be:
<S> <C> <C> <C> <C> <C> <C> <C>
$0 - 24,000 $0 - 40,100 25.20% 5.35% 6.68% 8.02% 9.36% 10.70%
24,001 - 58,150 40,101 - 96,900 36.64% 6.31% 7.89% 9.47% 11.05% 12.63%
58,151 - 121,300 96,901 - 147,700 39.28% 6.59% 8.23% 9.88% 11.53% 13.18%
121,301 - 263,750 147,701 - 263,750 43.68% 7.10% 8.88% 10.65% 12.43% 14.20%
over 263,750 over 263,750 46.85% 7.53% 9.41% 11.29% 13.17% 15.05%
</TABLE>
* 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.
vi
<PAGE>
DISTRIBUTION RATES
For Periods Ending 12/31/95
<TABLE>
<CAPTION>
AS A % OF 30 DAY 3 MONTHS 12 MONTHS
<S> <C> <C> <C>
(Class A shares)
Net Asset Value 5.16 5.16 5.25
Maximum Offering Price 4.94 4.94 5.03
(Class B shares)
Net Asset Value 4.53 4.53 4.63
</TABLE>
vii
<PAGE>
[LOGO APPEARS HERE]
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
MAY 1, 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 May 1, 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.
<TABLE>
<CAPTION>
T A B L E O F C O N T E N T S
Page
<S> <C> <C>
PART I
Investment Restrictions ii
Fund Charges and Expenses iv
Investment Performance of the Funds vi
PART II
Miscellaneous Investment Practices 2
Management of the Trusts 14
Portfolio Transactions and Brokerage 23
Description of the Trusts and Ownership of Shares 26
How to Buy Shares 29
Net Asset Value and Public Offering Price 29
Reduced Sales Charges 30
Shareholder Services 32
Redemptions 36
Standard Performance Measures 38
Income Dividends, Capital Gain Distributions and Tax Status 43
Financial Statements 45
Appendix A - Description of Bond Ratings 46
Appendix B - Publications That May Contain Fund Information 48
Appendix C - Advertising and Promotional Literature 51
Appendix D - Portfolio Composition of the Municipal Income and Bond 55
Income Funds
</TABLE>
i
<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;
ii
<PAGE>
(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.
iii
<PAGE>
________________________________________________________________________________
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 $150,341, 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 $70,795, 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.
iv
<PAGE>
OWNERSHIP OF FUND SHARES
At April 1, 1996, to the Trusts' knowledge, 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:
<TABLE>
<S> <C> <C>
New York Fund
Class A shares Good Earth Organics Corporation 5.01%
Guenter H. Burkhardt
5960 Broadway
Lancaster, NY 14086-9531
Class B shares PaineWebber for the benefit of 7.48%
Nathan R. Lorman and Vivian Lorman
130 East 63rd Street
New York, NY 10021-7334
Advest, Inc. 7.23%
90 State House Square
Hartford, CT 06103-3702
Frank Paulino, trustee 6.20%
Frank Paulino Revocable Trust
763 Washington Street
Franklin Square, NY 11010-3801
Howard H. Sirota 5.96%
1841 Central Park Avenue, 11G
Yonkers, NY 10710-2934
Julius Slomowitz 5.44%
c/o Hotel Metro
45 W. 35th Street, Room 512
New York, NY 10001-2202
California Fund
Class A shares Merrill Lynch Pierce Fenner & Smith, Inc. 9.64%
Mutual Fund Operations
4800 Deer Lake Drive East
Jacksonville, FL 32246-6484
Smith Barney Shearson 7.31%
388 Greenwich Street
New York, NY 10013-2375
Smith Barney, Inc. 6.03%
388 Greenwich Street
New York, NY 10013-2375
</TABLE>
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 $79,473, 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 $57,947, 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,
v
<PAGE>
these fees amounted to $29,334, $48,644 and $40,660, 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 $14,352, respectively, for the New York
Fund's Class B shares.
During the fiscal year ended December 31, 1995, the Distributor paid
$79,464 and $40,611 as compensation to investment dealers and $10 and $49 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 $19,175 and $22,208 as compensation to investment dealers for
the California and New York Fund's Class B shares, respectively. Of the amount
paid to investment dealers, $16,580 and $4,122 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, $21,590 and $8,994 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 (a) in commissions to its sales personnel and (b)
to defray sales-related overhead costs.
________________________________________________________________________________
INVESTMENT PERFORMANCE OF THE FUNDS
________________________________________________________________________________
PERFORMANCE RESULTS - PERCENT CHANGE
For the Periods Ended 12/31/95*
<TABLE>
<CAPTION>
CALIFORNIA FUND***
Aggregate Average Annual
Total Return Total Return
--------------------------------- --------------------------------
Since Since
Class A shares: As a % of 1 Year 4/23/93** 4/23/93**
- ----------------------------------------- ------------ ----------------- --------------------------------
<S> <C> <C> <C>
Net Asset Value 13.89 17.55 6.20
Maximum Offering Price 11.07 14.65 5.21
<CAPTION>
Aggregate Average Annual
Total Return Total Return
--------------------------------- --------------------------------
Since Since
Class B shares: As a % of 1 Year 9/13/93** 9/13/93**
- ----------------------------------------- ------------ ----------------- --------------------------------
<S> <C> <C> <C>
Net Asset Value 12.91 7.14 3.05
Redemption at End of Period 8.91 4.26 1.83
<CAPTION>
NEW YORK FUND****
Aggregate Average Annual
Total Return Total Return
--------------------------------- --------------------------------
Since Since
Class A shares: As a % of 1 Year 4/23/93** 4/23/93**
- ----------------------------------------- ------------ ----------------- --------------------------------
<S> <C> <C> <C>
Net Asset Value 14.52 17.99 6.34
Maximum Offering Price 11.68 15.08 5.36
</TABLE>
vi
<PAGE>
<TABLE>
<CAPTION>
Aggregate Average Annual
Total Return Total Return
--------------------------------- --------------------------------
Since Since
Class B shares: As a % of 1 Year 9/13/93** 9/13/93**
- ----------------------------------------- ------------ ----------------- --------------------------------
<S> <C> <C> <C>
Net Asset Value 13.68 8.70 3.69
Redemption at End of Period 9.68 5.77 2.47
</TABLE>
* 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 3.18%, 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 10.46% and 12.62%, respectively. Based on net
asset values, the Fund's Class A shares' since-inception average annual
total return would have been 4.17%, and their aggregate one-year and
since-inception total returns would have been 13.28% and 15.52%,
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
- 0.20%, 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 8.30% and 2.23%, respectively. Based on net asset values,
the Fund's Class B shares' average annual total return for the since-
inception period would have been 1.02%, and their aggregate total returns
for the one-year and since-inception periods would have been 12.30% and
5.11%, 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 1.68%, 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 10.50% and 11.40%, respectively. Based on net
asset values, the Fund's Class A shares' since-inception average annual
total returns would have been 2.66%, and their aggregate one-year and
since-inception total returns would have been 13.34% and 14.31%,
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 -1.21%, 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 8.50% and 2.09%, respectively. Based on net asset values, the Class
B shares' average annual total return for the since-inception period
would have been 0.01%, and their aggregate total returns for the one-year
and since-inception periods would have been 12.50% and 5.02%,
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.
vii
<PAGE>
DISTRIBUTION RATES
For Periods Ending 12/31/95
<TABLE>
<CAPTION>
AS A % OF 30 DAY 3 MONTHS 12 MONTHS
<S> <C> <C> <C> <C>
CALIFORNIA FUND
(Class A shares)
Net Asset Value 5.28 5.05 5.11
Maximum Offering Price 5.15 4.93 4.98
(Class B shares)
Net Asset Value 4.53 4.34 4.59
NEW YORK FUND
(Class A shares)
Net Asset Value 3.99 4.75 5.11
Maximum Offering Price 3.89 4.63 4.98
(Class B shares)
Net Asset Value 3.24 4.03 4.38
</TABLE>
viii
<PAGE>
Registration Nos. 2-11101
811-242
NEW ENGLAND FUNDS TRUST II
PART C
OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(a) Per share income and capital changes for all series of the Registrant
except Growth Fund of Israel are included in the prospectuses filed as
Part A hereof. The following financial statements are incorporated in Part
II of the statement of additional information included in Part B hereof by
reference to the annual reports to shareholders of the series of the
Registrant listed below for the fiscal year ended December 31, 1995, which
were filed with the Commission on the dates appearing in parentheses
below:
(1) New England Growth Opportunities Fund (March 11, 1996)
(i) Portfolio Composition
(ii) Statement of Assets & Liabilities
(iii) Statement of Operations
(iv) Statement of Changes in Net Assets
(v) Per Share Data and Ratios
(2) New England Limited Term U.S. Government Fund (March 14, 1996)
(i) Portfolio Composition
(ii) Statement of Assets & Liabilities
(iii) Statement of Operations
(iv) Statement of Changes in Net Assets
(v) Per Share Data and Ratios
(3) New England Adjustable Rate U.S. Government Fund (March 14, 1996)
(i) Portfolio Composition
(ii) Statement of Assets & Liabilities
(iii) Statement of Operations
(iv) Statement of Changes in Net Assets
(v) Per Share Data and Ratios
(4) New England High Income Fund (March 12, 1996)
(i) Portfolio Composition
(ii) Statement of Assets & Liabilities
(iii) Statement of Operations
(iv) Statement of Changes in Net Assets
(v) Per Share Data and Ratios
(5) New England Massachusetts Tax Free Income Fund (March 12, 1996)
(i) Portfolio Composition
(ii) Statement of Assets & Liabilities
(iii) Statement of Operations
(iv) Statement of Changes in Net Assets
(v) Per Share Data and Ratios
<PAGE>
Registration Nos. 2-11101
811-242
(6) New England Intermediate Term Tax Free Fund of California (March 12,
1996)
(i) Portfolio Composition
(ii) Statement of Assets & Liabilities
(iii) Statement of Operations
(iv) Statement of Changes in Net Assets
(v) Per Share Data and Ratios
(7) New England Intermediate Term Tax Free Fund of New York (March 14,
1996)
(i) Portfolio Composition
(ii) Statement of Assets & Liabilities
(iii) Statement of Operations
(iv) Statement of Changes in Net Assets
(v) Per Share Data and Ratios
(b) Exhibits:
1. (a) Second Amended and Restated Agreement and Declaration of Trust of
the Registrant is filed herewith.
(b) Amendment No. 5 to Second Amended and Restated Agreement and
Declaration of Trust of the Registrant is filed herewith.
(c) Amendment No. 6 to Second Amended and Restated Agreement and
Declaration of Trust of the Registrant is filed herewith.
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 are filed herewith:
(i) New England Growth Opportunities Fund
(ii) Growth Fund of Israel
(iii) New England Limited Term U.S. Government Fund
(iv) New England Adjustable Rate U.S. Government Fund
-2-
<PAGE>
Registration Nos. 2-11101
811-242
(v) New England High Income Fund
(i) New England Massachusetts Tax Free Income Fund
(ii) New England Intermediate Term Tax Free Fund of California
(iii) 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 are filed herewith:
(i) New England Growth Opportunities Fund (Westpeak Investment
Advisors, L.P. ("Westpeak"))
(ii) Growth Fund of Israel (Harris Associates L.P. ("Harris"))
(iii) New England Limited Term U.S. Government Fund (Back Bay
Advisors, L.P. ("Back Bay Advisors"))
(iv) New England Adjustable Rate U.S. Government Fund (Back Bay
Advisors)
(v) New England High Income Fund (Back Bay Advisors)
(vi) New England Massachusetts Tax Free Income Fund (Back Bay
Advisors)
(vii) New England Intermediate Term Tax Free Fund of California
(Back Bay Advisors)
(viii) 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. is filed
herewith.
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.
-3-
<PAGE>
Registration Nos. 2-11101
811-242
(d) Form of 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 Class B Shares Remittance Agreement between the Registrant
and New England Funds, L.P., relating to each series of the
Registrant, is filed herewith.
(g) Organizational Expense Reimbursement Agreement between the
Registrant, on behalf of its Growth Fund of Israel, and New
England Funds, L.P. is filed herewith.
(h) Form of Economic and Market Subadvisory Agreement relating to the
Registrant's Growth Fund of Israel Series between NEFM and
Batucha Securities & Investments Ltd. is filed herewith.
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-
-4-
<PAGE>
Registration Nos. 2-11101
811-242
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 is filed herewith.
(g) Opinion and consent of counsel with respect to the Registrant's
Rule 24e-2 Notice is filed herewith.
11. Consent of Coopers & Lybrand L.L.P. is filed herewith.
12. None.
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.
-5-
<PAGE>
Registration Nos. 2-11101
811-242
(b) Form of Rule 12b-1 Plan relating to the Class B shares of each
series of the Registrant is filed herewith.
(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 is filed herewith.
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. (a) 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., Pendleton P. White, John A. Shane and Sandra O.
Moose are incorporated herein by reference to Exhibit 19 to Post-
Effective Amendment No. 100 to this Registration Statement, filed
on October 11, 1995.
(b) Powers of Attorney designating Edward A. Benjamin, Frank Nesvet,
Henry L. P. Schmelzer and Robert P. Connolly as attorneys to sign
for Daniel M. Cain and Richard Darman are filed herewith.
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.
-6-
<PAGE>
Registration Nos. 2-11101
811-242
<TABLE>
<CAPTION>
Title of Series Number of Record Holders
--------------- ------------------------
Class A Class B Class C Class Y
<S> <C> <C> <C> <C>
New England Adjustable Rate 4,126 231 --- 1
U.S. Government Fund
New England Growth 8,729 3,393 215 1
Opportunities Fund
New England Limited Term U.S. 16,001 1,301 136 3
Government Fund
New England High 2,335 716 --- ---
Income Fund
New England Massachusetts Tax 5,352 283 --- ---
Free Income Fund
New England Intermediate Term 597 135 --- ---
Tax Free Fund of California
New England Intermediate Term 575 96 --- ---
Tax Free Fund of New York
Growth Fund of Israel --- --- --- ---
</TABLE>
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
----------------------------------------------------
-7-
<PAGE>
Registration Nos. 2-11101
811-242
(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):
<TABLE>
<CAPTION>
Name and Office with Name and Address of Nature of
Back Bay Advisors Other Affiliations Connection
----------------- ------------------ ----------
<S> <C> <C>
Back Bay Advisors, Inc. None None
General Partner
Charles T. Wallis NEF Corporation Director
President and Chief Executive 399 Boylston Street
Officer Boston, MA 02116
Back Bay Advisors, Inc. President, Chief Executive
399 Boylston Street Officer and Director
Boston, MA 02116
Charles G. Glueck None None
Senior Vice President
Scott A. Millimet Chicago Board of Trade* Senior Vice President and
Executive Vice President 141 West Jackson Boulevard Manager of Carroll,
Chicago, IL 60604 McEntee & McGinley
Edgar M. Reed Aetna Capital Management* Head of Fixed Income
Executive Vice President and 151 Farmington Avenue Management Group
Chief Investment Officer Hartford, CT 06156
Catherine Bunting None None
Senior Vice President
J. Scott Nicholson None None
Senior Vice President
Nathan R. Wentworth None None
Vice President
</TABLE>
-8-
<PAGE>
Registration Nos. 2-11101
811-242
<TABLE>
<S> <C> <C>
Paul Zamagni None None
Vice President and Treasurer
Peter Hanson NEIC Counsel and Senior Vice
Secretary and Clerk President, Assistant
Secretary and Assistant
Clerk
Draycott Partners, Ltd.* Assistant Secretary and
("Draycott") Assistant Clerk
8 City Road
London EC2Y 1HE, England
Harold B. Bjornson None None
Vice President
Peter Palfrey None None
Vice President
Eric Gutterson None None
Vice President
</TABLE>
(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 Cash Management Trust, New England Tax Exempt
Money Market Trust and 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):
<TABLE>
<CAPTION>
Name and Office Name and Address of Nature of
with NEFM Other Affiliations Connection
--------- ------------------ ----------
<S> <C> <C>
NEF Corporation New England Funds, L.P. General Partner
General Partner 399 Boylston Street
Boston, MA 02116
Henry L.P. Schmelzer New England Funds, L.P. President and Chief
President and Chief Executive Officer
Executive Officer
NEF Corporation President, Chief Executive
Officer and Director
Back Bay Advisors, Inc. Director
</TABLE>
-9-
<PAGE>
Registration Nos. 2-11101
811-242
<TABLE>
<CAPTION>
Name and Office Name and Address of Nature of
with NEFM Other Affiliations Connection
--------------- ------------------ ----------
<S> <C> <C>
New England Securities Director
Corporation*
399 Boylston Street
Boston, MA 02116
Frank Nesvet New England Funds, L.P. Senior Vice President and
Senior Vice President, Chief Chief Financial Officer
Financial Officer and
Treasurer
NEF Corporation Senior Vice President,
Chief Financial Officer
and Treasurer
Robert P. Connolly NEF Corporation Senior Vice President,
Senior Vice President, General Counsel, Secretary
General Counsel, Assistant and Clerk
Secretary and Clerk
New England Funds, L.P. Senior Vice President,
General Counsel, Secretary
and Clerk
Kroll Associates, Inc.* Managing Director and
900 3rd Avenue General Counsel
New York, NY 10022
Bruce R. Speca NEF Corporation Executive Vice President
Executive Vice President
New England Funds, L.P. Executive Vice President
Peter H. Duffy NEF Corporation Vice President
Vice President
New England Funds, L.P. Vice President
Martin G. Dyer NEF Corporation Vice President
Vice President
New England Funds, L.P. Vice President
Ralph M. Greggs NEF Corporation Vice President
Vice President
New England Funds, L.P. Vice President
</TABLE>
-10-
<PAGE>
Registration Nos. 2-11101
811-242
<TABLE>
<CAPTION>
<S> <C> <C>
Beatriz A. Pina NEF Corporation Assistant Comptroller
Assistant Controller
New England Funds, L.P. Assistant Comptroller
Sheila M. Barry NEF Corporation Vice President, Senior
Vice President, Secretary Counsel, Assistant Secretary
and Assistant Clerk and Assistant Clerk
New England Funds, L.P. Vice President, Senior
Counsel, Assistant Secretary
and Assistant Clerk
</TABLE>
(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):
<TABLE>
<CAPTION>
Name and Office Name and Address of Nature of
with Westpeak Other Affiliations Connection
------------- ------------------ ----------
<S> <C> <C>
Westpeak Investment None None
Advisors, Inc.
General Partner
Gerald H. Scriver None None
President, Chief Executive
Officer and Chief
Investment Officer
Edward N. Wadsworth NEIC Executive Vice President,
Clerk, Secretary, Chief Clerk, Secretary and General
Legal Officer Counsel
NEIC Inc. Executive Vice President,
Clerk, Secretary and General
Counsel
Marlborough Capital Advisors, Assistant Clerk
Inc.
399 Boylston Street
Boston, MA 02116
</TABLE>
-11-
<PAGE>
Registration Nos. 2-11101
811-242
<TABLE>
<S> <C> <C>
New England Investment Secretary
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. DeWitt The New England Attorney and Assistant
Assistant Secretary and Secretary
Assistant Clerk
TNE Advisers, Inc. Chief Legal Officer, Secretary
501 Boylston Street and Clerk
Boston, MA 02117
</TABLE>
(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:
<TABLE>
<CAPTION>
Name and Office with Name and Address of Nature of
Harris Other Affiliations Connection
------ ------------------ ----------
<S> <C> <C>
Harris Associates Inc. Harris Associates General Partner
General Partner Securities, L.P.
Two North LaSalle Street
Chicago, IL 60602
Victor S. Morgenstern None None
President and Chief
Executive Officer
Donald Terao None None
Chief Financial Officer,
Treasurer and Secretary
</TABLE>
-12-
<PAGE>
Registration Nos. 2-11101
811-242
<TABLE>
<S> <C> <C>
Robert M. Levy None None
Vice President
Roxanne M. Martino None None
Vice President
Anita Nagler None None
Vice President
</TABLE>
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:
<TABLE>
<CAPTION>
Positions and Offices Positions and Offices
Name with Principal Underwriter with Registrant
---- -------------------------- ---------------
<S> <C> <C>
NEF Corporation General Partner None
Henry L.P. Schmelzer President and Chief Executive President and Trustee
Officer
Bruce R. Speca Executive Vice President Executive Vice
President
Robert P. Connolly Senior Vice President, General Secretary
Counsel, Secretary and Clerk
Frank Nesvet Senior Vice President and Chief Treasurer
Financial Officer
Manish Agrawal Vice President None
Elizabeth Burns Vice President None
</TABLE>
-13-
<PAGE>
Registration Nos. 2-11101
811-242
<TABLE>
<CAPTION>
Positions and Offices Positions and Offices
Name with Principal Underwriter with Registrant
---- -------------------------- ---------------
<S> <C> <C>
Sheila M. Barry Vice President, Senior Counsel, Assistant 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. Finnegan Vice President None
Raymond K. Girouard Vice President, Treasurer and None
Controller
Ralph M. Greggs Vice President None
Lynne H. Johnson Vice President None
Caren I. Leedom Vice President None
Marie G. McKenzie Vice President None
Bernard M. Shavelson Vice President None
Christine L. Swanson Vice President Vice President
Kristine E. Swanson Vice President Vice President
Beatriz A. Pina Assistant Comptroller None
</TABLE>
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)
-14-
<PAGE>
Registration Nos. 2-11101
811-242
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)
-15-
<PAGE>
Registration Nos. 2-11101
811-242
(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.
-16-
<PAGE>
Registration Nos. 2-11101
811-242
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 this Post-
Effective Amendment No. 103 to its Registration Statement meets all the
requirements for effectiveness under paragraph (b) of Rule 485 under the
Securities Act of 1933, and that it has duly caused this Post-Effective
Amendment No. 103 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 12th day of April, 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
-17-
<PAGE>
Registration Nos. 2-11101
811-242
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; April 12, 1996
Chief Executive Officer;
Principal Executive Officer;
Trustee
FRANK NESVET
------------
Frank Nesvet Treasurer April 12, 1996
HENRY L.P. SCHMELZER* Trustee and President April 12, 1996
--------------------
Henry L.P. Schmelzer
GRAHAM T. ALLISON, JR.*
---------------------
Graham T. Allison, Jr. Trustee April 12, 1996
DANIEL M. CAIN*
--------------
Daniel M. Cain Trustee April 12, 1996
KENNETH J. COWAN*
----------------
Kenneth J. Cowan Trustee April 12, 1996
RICHARD DARMAN*
--------------
Richard Darman Trustee April 12, 1996
SANDRA O. MOOSE*
---------------
Sandra O. Moose Trustee April 12, 1996
JOHN A. SHANE*
-------------
John A. Shane Trustee April 12, 1996
PENDLETON P. WHITE*
------------------
Pendleton P. White Trustee April 12, 1996
*By: ROBERT P. CONNOLLY
-------------------------
Robert P. Connolly
Attorney-In-Fact
April 12, 1996
-18-
<PAGE>
Registration Nos. 2-11101
811-242
NEW ENGLAND FUNDS TRUST II
EXHIBIT INDEX
EXHIBIT NUMBER EXHIBIT
--------------
1(a) Second Amended and Restated Agreement and
Declaration of Trust of the Registrant
1(b) Amendment No. 5 to Second Amended and Restated
Agreement and Declaration of Trust of the
Registrant
1(c) Amendment No. 6 to Second Amended and Restated
Agreement and Declaration of Trust of the
Registrant
Advisory Agreements between the Registrant and
NEFM relating to the following series of the
Registrant:
----------------------------------------------
5(a)(i) New England Growth Opportunities Fund
5(a)(ii) Growth Fund of Israel
5(a)(iii) New England Limited Term U.S. Government
Fund
5(a)(iv) New England Adjustable Rate U.S.
Government Fund
5(a)(v) New England High Income Fund
5(a)(vi) New England Massachusetts Tax Free
Income Fund
5(a)(vii) New England Intermediate Term Tax Free
Fund of California
5(a)(viii) New England Intermediate Term Tax Free
Fund of New York
Sub-Advisory Agreements relating to the
following series of the Registrant between NEFM
and the subadvisers indicated in parentheses:
-----------------------------------------------
5(b)(i) New England Growth Opportunities Fund
(Westpeak)
-19-
<PAGE>
5(b)(ii) Growth Fund of Israel (Harris)
5(b)(iii) New England Limited Term U.S. Government
Fund (Back Bay Advisors)
5(b)(iv) New England Adjustable Rate U.S.
Government Fund (Back Bay Advisors)
5(b)(v) New England High Income Fund (Back Bay
Advisors)
5(b)(vi) New England Massachusetts Tax Free
Income Fund (Back Bay Advisors)
5(b)(vii) New England Intermediate Term Tax Free
Fund of California (Back Bay Advisors)
5(b)(viii) 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.
9(f) Form of Class B Shares Remittance
Agreement between the Registrant and New
England Funds, L.P., relating to each
series of the Registrant
9(g) Organizational Expense Reimbursement
Agreement between the Registrant, on
behalf of its Growth Fund of Israel, and
New England Funds, L.P.
9(h) Form of Economic and Market Subadvisory
Agreement relating to the Registrant's
Growth Fund of Israel, between NEFM and
Batucha Securities & Investments, Ltd.
10(f) Opinion and consent of counsel with
respect to the Registrant's Growth Fund
of Israel
10(g) Opinion and consent of counsel with
respect to the Registrant's Rule 24e-2
Notice
11 Consent of Coopers & Lybrand L.L.P.
15(b) Form of Rule 12b-1 Plan relating to the
Class B shares of each series of the
Registrant
17 Financial Data Schedule
-20-
<PAGE>
19(b) Powers of Attorney
-21-
<PAGE>
Exhibit 99.1(a)
TNE FUNDS TRUST
(formerly, INVESTMENT TRUST OF BOSTON)
SECOND AMENDED AND RESTATED
AGREEMENT AND DECLARATION OF TRUST
THIS AGREEMENT AND DECLARATION OF TRUST made at Boston, Massachusetts the
6th day of May, 1931 by the Trustees hereunder and the holders of shares of
beneficial interest issued hereunder and to be issued hereunder as hereinafter
provided, amended and restated this 2nd day of February, 1993:
WITNESSETH that
WHEREAS, Section 5 of Article III of this Agreement and Declaration of
Trust, as amended and restated on December 8, 1988 and subsequently amended
prior to the date hereof (the "First Restated Declaration of Trust") provides
that the Trustees shall have the power to amend the Declaration of Trust, at any
time and from time to time, in such manner as the Trustees may determine in
their sole discretion, without the need for Shareholder action, so as to add to,
delete, replace or otherwise modify any provisions relating to the Shares
contained in the First Restated Declaration of Trust for purposes including
designating or establishing Series in addition to the Series established in
Section 6 of Article III of the First Restated Declaration of Trust, provided
that before adopting any such amendment without Shareholder approval the
Trustees shall determine that it is consistent with the fair and equitable
treatment of all Shareholders;
WHEREAS, Section 5 of Article III of the First Restated Declaration of
Trust further provides that, without limiting the generality of the foregoing,
the Trustees may, for the above-stated purposes, amend the Declaration of Trust
to (among other things) (a) create one or more Series or classes of Shares (in
addition to any Series or classes already existing or otherwise) with such
rights and preferences and such eligibility requirements for investment therein
as the Trustees may determine and (b) amend any of the provisions set forth in
paragraphs (a) through (i) of Section 6 of Article III of the First Restated
Declaration of Trust;
WHEREAS, the Trustees hereby determine that it is consistent with the fair
and equitable treatment of all Shareholders to modify certain provisions of the
First Restated Declaration of Trust relating to the Shares, for the purpose of
designating and establishing two new Series to be known as TNE Intermediate Term
Tax Free Fund of California and TNE Intermediate Term Tax Free Fund of New York,
and to restate as follows the provisions of the First Restated Declaration of
Trust as so modified; and
<PAGE>
WHEREAS, the Trustees have agreed to manage all property coming into their
hands as trustees of a Massachusetts business trust in accordance with the
provisions hereinafter set forth.
NOW, THEREFORE, the Trustees hereby amend and restate the First Restated
Declaration of Trust to read in its entirety as follows, effective at such time
as this Second Amended and Restated Agreement and Declaration of Trust is filed
with the Secretary of The Commonwealth of Massachusetts; and direct that this
Second Amended and Restated Agreement and Declaration of Trust be filed with the
Secretary of The Commonwealth of Massachusetts and with the City Clerk of the
City of Boston and do hereby declare that they will hold all cash, securities
and other assets, which they may from time to time acquire in any manner as
Trustees hereunder IN TRUST to manage and dispose of the same upon the following
terms and conditions for the pro rata benefit of the holders from time to time
of Shares in this Trust as hereinafter set forth.
ARTICLE I
Name and Definitions
Section 1. This Trust shall be known as TNE Funds Trust and the Trustees
---------
shall conduct the business of the Trust under that name or any other name as
they may from time to time determine.
Section 2. Definitions. Whenever used herein, unless otherwise required
--------- -----------
by the context or specifically provided
(a) "Trust" refers to the Massachusetts business trust established by this
Agreement and Declaration of Trust, as amended from time to time;
(b) "Trustees" refers to the Trustees of the Trust named in Article IV
hereof or elected in accordance with such Article;
(c) "Shares" means the equal proportionate units of interest into which
the beneficial interest in the Trust or in the Trust property belonging to any
Series of the Trust or in any class of Shares of the Trust (as the context may
require) shall be divided from time to time;
(d) "Shareholder" means a record owner of Shares;
(e) "1940 Act" refers to the Investment Company Act of 1940 and the Rules
and Regulations thereunder, all as amended from time to time;
-2-
<PAGE>
(f) The terms "Commission" and "principal underwriter" shall have the
meanings given them in the 1940 Act;
(g) "Declaration of Trust" shall mean this Second Amended and Restated
Agreement and Declaration of Trust, as amended or restated from time to time;
(h) "By-Laws" shall mean the By-Laws of the Trust as amended from time to
time;
(i) "Series Company" refers to the form of registered open-end investment
company described in Section 18(f)(2) of the 1940 Act or in any successor
statutory provision;
(j) "Series" refers to Series of Shares established and designated under
or in accordance with the provisions of Article III;
(k) "Multi-Class Series" refers to Series of Shares established and
designated as Multi-Class Series under or in accordance with the provisions of
Article III, Section 6; and
(l) The terms "class" and "class of Shares" refer to the division of
Shares representing any Multi-Class Series into two or more classes in
accordance with the provisions of Article III.
ARTICLE II
Purpose of Trust
The purpose of the Trust is to provide investors a managed investment
primarily in securities (including options), debt instruments, commodities,
commodity contracts and options thereon.
ARTICLE III
Shares
Section 1. Division of Beneficial Interest. The beneficial interest in
--------- -------------------------------
the Trust shall at all times be divided into an unlimited number of Shares,
without par value. Subject to the provisions of Section 6 of this Article III,
each Share shall have voting rights as provided in Article V hereof, and holders
of the Shares of any Series or class shall be entitled to receive dividends,
when and as declared with respect thereto in the manner provided in Article VI,
Section 1 hereof. Except as otherwise provided in Section 6 of this Article III
with respect to Shares of Multi-Class Series, no Share shall have any priority
or preference over any other Share of the same Series with respect to dividends
or distributions upon termination of the
-3-
<PAGE>
Trust or of such Series made pursuant to Article VIII, Section 4 hereof. Except
as otherwise provided in Section 6 of this Article III with respect to Shares of
Multi-Class Series, all dividends and distributions shall be made ratably among
all Shareholders of a particular Series from the assets belonging to such Series
according to the number of Shares of such Series held of record by such
Shareholders on the record date for any dividend or distribution or on the date
of termination, as the case may be. Shareholders shall have no preemptive or
other right to subscribe to any additional Shares or other securities issued by
the Trust. The Trustees may from time to time divide or combine the Shares of
any particular Series or class into a greater or lesser number of Shares of that
Series or class without thereby changing the proportionate beneficial interest
of the Shares of that Series or class in the assets belonging to that Series or
class or attributable to that class or in any way affecting the rights of Shares
of any other Series or class.
Section 2. Ownership of Shares. The ownership of Shares shall be recorded
--------- -------------------
on the books of the Trust or a transfer or similar agent for the Trust, which
books shall be maintained separately for the Shares of each Series and class. No
certificates certifying the ownership of Shares shall be issued except as the
Trustees may otherwise determine from time to time. The Trustees may make such
rules as they consider appropriate for the transfer of Shares of each Series and
class and similar matters. The record books of the Trust as kept by the Trust or
any transfer or similar agent, as the case may be, shall be conclusive as to who
are the Shareholders of each Series and class and as to the number of Shares of
each Series and class held from time to time by each.
Section 3. Investments in the Trust. The Trustees shall accept investments
--------- ------------------------
in the Trust from such persons and on such terms and for such consideration as
they from time to time authorize.
Section 4. Status of Shares and Limitation of Personal Liability. Shares
--------- -----------------------------------------------------
shall be deemed to be personal property giving only the rights provided in this
instrument. Every Shareholder by virtue of having become a Shareholder shall be
held to have expressly assented and agreed to the terms hereof and to have
become a party hereto. The death of a Shareholder during the continuance of the
Trust shall not operate to terminate the same nor entitle the representative of
any deceased Shareholder to an accounting or to take any action in court or
elsewhere against the Trust or the Trustees, but entitles such representative
only to the rights of said deceased Shareholder under this Trust. Ownership of
Shares shall not entitle the Shareholder to any title in or to the whole or any
part of the Trust property or right to call for a partition or division of the
same or for an accounting, nor shall the ownership of Shares constitute the
Shareholders partners. Neither the Trust nor the Trustees, nor any officer,
employee or agent of the Trust, shall have any power to bind personally any
Shareholders, nor except as specifically provided herein to call upon any
Shareholder for the payment of any sum of money or assessment whatsoever other
than such as the Shareholder may at any time personally agree to pay.
-4-
<PAGE>
Section 5. Power of Trustees to Change Provisions Relating to Shares.
--------- ---------------------------------------------------------
Notwithstanding any other provisions of this Declaration of Trust and without
limiting the power of the Trustees to amend the Declaration of Trust as provided
elsewhere herein, the Trustees shall have the power to amend this Declaration of
Trust, at any time and from time to time, in such manner as the Trustees may
determine in their sole discretion, without the need for Shareholder action, so
as to add to, delete, replace or otherwise modify any provisions relating to the
Shares contained in this Declaration of Trust for the purpose of (i) responding
to or complying with any regulations, orders, rulings or interpretations of any
governmental agency or any laws, now or hereafter applicable to the Trust, or
(ii) designating and establishing Series or classes in addition to those
established under or in accordance with the provisions of Section 6 of this
Article III; provided that before adopting any such amendment without
Shareholder approval the Trustees shall determine that it is consistent with the
fair and equitable treatment of all Shareholders. The establishment and
designation of any Series of Shares in addition to the Series established and
designated in Section 6 of this Article III shall be effective upon the
execution by a majority of the then Trustees of an amendment to this Declaration
of Trust, taking the form of a complete restatement or otherwise, setting forth
such establishment and designation and the relative rights and preferences of
such Series, or as otherwise provided in such instrument. The establishment and
designation of any class of Shares shall be effective upon either the execution
by a majority of the then Trustees of an amendment to this Declaration of Trust
or the adoption by vote or written consent of a majority of the then Trustees of
a resolution setting forth such establishment and designation and the relative
rights and preferences of such class and such eligibility requirements for
investment therein as the Trustees may determine, or as otherwise provided in
such amendment or resolution.
Without limiting the generality of the foregoing, the Trustees may, for the
above-stated purposes, amend the Declaration of Trust to:
(a) create one or more Series or classes of Shares (in addition to any
Series or classes already existing or otherwise) with such rights and
preferences and such eligibility requirements for investment therein as the
Trustees shall determine and reclassify any or all outstanding Shares as shares
of particular Series or classes in accordance with such eligibility
requirements;
(b) amend any of the provisions set forth in paragraphs (a) through (j) of
Section 6 of this Article III;
(c) combine one or more Series or classes of Shares into a single Series
or class on such terms and conditions as the Trustees shall determine;
(d) change or eliminate any eligibility requirements for investment in
Shares of any Series or class, including without limitation the power to provide
for the issue of Shares of any Series or class in connection with any merger or
consolidation of the Trust with another trust
-5-
<PAGE>
or company or any acquisition by the Trust of part or all of the assets of
another trust or company;
(e) change the designation of any Series or class of Shares;
(f) change the method of allocating dividends among the various Series and
classes of Shares;
(g) allocate any specific assets or liabilities of the Trust or any
specific items of income or expense of the Trust to one or more Series or
classes of Shares; and
(h) specifically allocate assets to any or all Series or classes of Shares
or create one or more additional Series or classes of Shares which are preferred
over all other Series or classes of Shares in respect of assets specifically
allocated thereto or any dividends paid by the Trust with respect to any net
income, however determined, earned from the investment and reinvestment of any
assets so allocated or otherwise and provide for any special voting or other
rights with respect to such Series or classes.
Section 6. Establishment and Designation of Series and Classes. Without
--------- ---------------------------------------------------
limiting the authority of the Trustees set forth in Section 5, inter alia, to
establish and designate any further Series or classes or to modify the rights
and preferences of any Series or class, each of the following Series shall be,
and is hereby, established and designated: (1) TNE Massachusetts Tax Free Income
Fund, (2) TNE High Income Fund, (3) TNE Premium Income Fund, (4) TNE Adjustable
Rate U.S. Government Fund, (5) TNE Growth Opportunities Fund, (6) TNE
Intermediate Term Tax Free Fund of California and (7) TNE Intermediate Term Tax
Free Fund of New York; and the following Series shall be, and hereby are,
designated Multi-Class Series: TNE Intermediate Term Tax Free Fund of California
and TNE Intermediate Term Tax Free Fund of New York.
Shares of each Series established in this Section 6 shall have the
following rights and preferences relative to Shares of each other Series, and
Shares of each class of a Multi-Class Series shall have such rights and
preferences relative to other classes of the same Series as are set forth below,
together with such other rights and preferences relative to such other classes
as are set forth in any resolution of the Trustees establishing and designating
such class of Shares:
(a) Assets belonging to Series. Subject to the provisions of paragraph (c)
--------------------------
of this Section 6:
All consideration received by the Trust for the issue or sale of Shares of
a particular Series, together with all assets in which such consideration is
invested or reinvested, all income, earnings, profits and proceeds thereof from
whatever source derived, including, without limitation, any proceeds derived
from the sale, exchange or liquidation of such assets,
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<PAGE>
and any funds or payments derived from any reinvestment of such proceeds in
whatever form the same may be, shall irrevocably belong to that Series for all
purposes, subject only to the rights of creditors, and shall be so recorded upon
the books of account of the Trust. Such consideration, assets, income, earnings,
profits and proceeds thereof, from whatever source derived, including, without
limitation, any proceeds derived from the sale, exchange or liquidation of such
assets, and any funds or payments derived from any reinvestment of such
proceeds, in whatever form the same may be, are herein referred to as "assets
belonging to" that Series. In the event that there are any assets, income,
earnings, profits and proceeds thereof, funds or payments which are not readily
identifiable as belonging to any particular Series (collectively "General
Assets"), the Trustees shall allocate such General Assets to, between or among
any one or more of the Series established and designated from time to time in
such manner and on such basis as they, in their sole discretion, deem fair and
equitable, and any General Asset so allocated to a particular Series shall
belong to that Series. Each such allocation by the Trustees shall be conclusive
and binding upon the Shareholders of all Series for all purposes.
(b) Liabilities Belonging to Series. Subject to the provisions of
-------------------------------
paragraph (c) of this Section 6:
The assets belonging to each particular Series shall be charged solely with
the liabilities of the Trust in respect to that Series, expenses, costs, charges
and reserves attributable to that Series, and any general liabilities of the
Trust which are not readily identifiable as belonging to any particular Series
but which are allocated and charged by the Trustees to and among any one or more
of the Series established and designated from time to time in a manner and on
such basis as the Trustees in their sole discretion deem fair and equitable. The
liabilities, expenses, costs, charges and reserves so charged to a Series are
herein referred to as "liabilities belonging to" that Series. Each allocation of
liabilities, expenses, costs, charges and reserves by the Trustees shall be
conclusive and binding upon the holders of all Series for all purposes.
(c) Apportionment of Assets etc. in Case of Multi-Class Series. In the
----------------------------------------------------------
case of any Multi-Class Series, to the extent necessary or appropriate to give
effect to the relative rights and preferences of any classes of Shares of such
Series, (i) any assets, income, earnings, profits, proceeds, liabilities,
expenses, charges, costs and reserves belonging or attributable to that Series
may be allocated or attributed to a particular class of Shares of that Series or
apportioned among two or more classes of Shares of that Series; and (2) Shares
of any class of such Series may have priority or preference over shares of other
classes of such Series with respect to dividends or distributions upon
termination of the Trust or of such Series or class or otherwise, provided that
no Share shall have any priority or preference over any other Shares of the same
class and that all dividends and distributions to shareholders or a particular
class shall be made ratably among all Shareholders of such class according to
the number of Shares and such class held of record by such Shareholders on the
record date for any dividend or distribution or on the date of termination, as
the case may be.
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<PAGE>
(d) Dividends, Distributions, Redemptions and Repurchases. Notwithstanding
-----------------------------------------------------
any other provisions of this Declaration, including, without limitation, Article
VI, no dividend or distribution (including, without limitation, any distribution
paid upon termination of the Trust or of any Series or class) with respect to,
nor any redemption or repurchase of, the Shares of any Series or class shall be
effected by the Trust other than from the assets belonging to such Series or
attributable to such class, nor shall any Shareholder of any particular Series
or class otherwise have any right or claim against the assets belonging to any
other Series or attributable to any other class except to the extent that such
Shareholder has such a right or claim hereunder as a Shareholder of such other
Series or class.
(e) Voting. Notwithstanding any of the other provisions of this
------
Declaration, including, without limitation, Section 1 of Article V, the
Shareholders of any particular Series or class shall not be entitled to vote on
any matters as to which such Series or class is not affected. On any matter
submitted to a vote of Shareholders, all Shares of the Trust then entitled to
vote shall be voted by individual Series, unless otherwise required by the 1940
Act or other applicable law.
(f) Equality. Except to the extent necessary or appropriate to give
--------
effect to the relative rights and preferences of any classes of Shares of a
Multi-Class Series, all the Shares of each particular Series shall represent an
equal proportionate interest in the assets belonging to that Series (subject to
the liabilities belonging to that Series), and each Share of any particular
Series shall be equal to each other Share of that Series. All the Shares of each
particular class of Shares within a Multi-Class Series shall represent an equal
proportionate interest in the assets belonging to such Series that are
attributable to such class (subject to the liabilities attributable to such
class), and each Share of any particular class within a Multi-Class Series shall
be equal to each other Share of such class.
(g) Fractions. Any fractional Share of a Series or class shall carry
---------
proportionately all the rights and obligations of a whole share of that Series
or class, including rights with respect to voting, receipt of dividends and
distributions, redemption of Shares and termination of the Trust.
(h) Exchange Privilege. The Trustees shall have the authority to provide
------------------
that the holders of Shares of any Series or class shall have the right to
exchange said Shares for Shares of one or more other Series or classes of Shares
in accordance with such requirements and procedures as may be established by the
Trustees.
(i) Combination of Series. Trustees shall have the authority, without the
---------------------
approval of the Shareholders of any Series unless otherwise required by
applicable law, to combine the assets and liabilities belonging to any two or
more Series into assets and liabilities belonging to a single Series.
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<PAGE>
(j) Elimination of Series or Class. At any time that there are no Shares
------------------------------
outstanding of any particular Series previously established and designated, the
Trustees may amend this Declaration of Trust to abolish that Series and to
rescind the establishment and designation thereof, such amendment to be effected
in the manner provided in Section 5 of this Article III. At any time that there
are no Shares outstanding of any particular class previously established and
designated of a Multi-Series Class, the Trustees may abolish that class and
rescind the establishment and designation thereof, either by amending this
Declaration of Trust in the manner provided in Section 5 of this Article III (if
such class was established and designated by an amendment to this Declaration of
Trust), or by vote or written consent of a majority of the then Trustees (if
such class was established and designated by Trustee vote or written consent).
Section 7. Indemnification of Shareholders. In case any Shareholder or
--------- -------------------------------
former Shareholder shall be held to be personally liable solely by reason of his
or her being or having been a Shareholder of the Trust or of a particular Series
or class and not because of his or her acts or omissions or for some other
reason, the Shareholder or former Shareholder (or his or her heirs, executors,
administrators or other legal representatives or in the case of a corporation or
other entity, its corporate or other general successor) shall be entitled out of
the assets of the Series (or attributable to the class) of which he is a
Shareholder or former Shareholder to be held harmless from and indemnified
against all loss and expense arising from such liability.
Section 8. No Preemptive Rights. Shareholders shall have no preemptive or
--------- --------------------
other right to subscribe to any additional Shares or other securities issued by
the Trust.
ARTICLE IV
The Trustees
Section 1. Election and Tenure. The Trustees may fix the number of
--------- -------------------
Trustees, fill vacancies in the Trustees, including vacancies arising from an
increase in the number of Trustees, or remove Trustees with or without cause.
Each Trustee shall serve during the continued lifetime of the Trust until he
dies, resigns or is removed, or, if sooner, until the next meeting of
Shareholders called for the purpose of electing Trustees and until the election
and qualification of his successor. Any Trustee may resign at any time by
written instrument signed by him and delivered to any officer of the Trust or to
a meeting of the Trustees. Such resignation shall be effective upon receipt
unless specified to be effective at some other time. Except to the extent
expressly provided in a written agreement with the Trust, no Trustee resigning
and no Trustee removed shall have any right to any compensation for any period
following his resignation or removal, or any right to damages on account of such
removal. The Shareholders may fix the number of Trustees and elect Trustees at
any meeting of Shareholders called by the Trustees for that purpose and to the
extent required by applicable law, including paragraphs (a) and (b) of Section
16 of the 1940 Act.
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<PAGE>
Section 2. Effect of Death, Resignation, etc. of a Trustee. The death,
--------- -----------------------------------------------
declination, resignation, retirement, removal or incapacity of the Trustees, or
any of them, shall not operate to annul the Trust or to revoke any existing
agency created pursuant to the terms of this Declaration of Trust.
Section 3. Powers. Subject to the provisions of this Declaration of
--------- ------
Trust, the business of the Trust shall be managed by the Trustees, and they
shall have all powers necessary or convenient to carry out that responsibility
including the power to engage in securities transactions of all kinds on behalf
of the Trust. Without limiting the foregoing, the Trustees may adopt By-Laws not
inconsistent with this Declaration of Trust providing for the regulation and
management of the affairs of the Trust and may amend and repeal them to the
extent that such By-Laws do not reserve that right to the Shareholders; they may
fill vacancies in or remove from their number (including any vacancies created
by an increase in the number of Trustees); they may remove from their number
with or without cause; they may elect and remove such officers and appoint and
terminate such agents as they consider appropriate; they may appoint from their
own number and terminate one or more committees consisting of two or more
Trustees which may exercise the powers and authority of the Trustees to the
extent that the Trustees determine; they may employ one or more custodians of
the assets of the Trust and may authorize such custodians to employ
subcustodians and to deposit all or any part of such assets in a system or
systems for the central handling of securities or with a Federal Reserve Bank,
retain a transfer agent or a shareholder servicing agent, or both, provide for
the distribution of Shares by the Trust, through one or more principal
underwriters or otherwise, set record dates for the determination of
Shareholders with respect to various matters, and in general delegate such
authority as they consider desirable to any officer of the Trust, to any
committee of the Trustees and to any agent or employee of the Trust or to any
such custodian or underwriter.
Without limiting the foregoing, the Trustees shall have power and
authority:
(a) To invest and reinvest cash, and to hold cash uninvested;
(b) To sell, exchange, lend, pledge, mortgage, hypothecate, lease, write
options with respect to or otherwise deal in any property rights relating to any
or all of the assets of the Trust;
(c) To vote or give assent, or exercise any rights of ownership, with
respect to stock or other securities or property; and to execute and deliver
proxies or powers of attorney to such person or persons as the Trustees shall
deem proper, granting to such person or persons such power and discretion with
relation to securities or property as the Trustees shall deem proper;
(d) To exercise powers and rights of subscription or otherwise which in
any manner arise out of ownership of securities;
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<PAGE>
(e) To hold any security or property in a form not indicating any trust,
whether in bearer, unregistered or other negotiable form, or in its own name or
in the name of a custodian or subcustodian or a nominee or nominees or
otherwise;
(f) To consent to or participate in any plan for the reorganization,
consolidation or merger of any corporation or issuer of any security which is
held in the Trust; to consent to any contract, lease, mortgage, purchase or sale
of property by such corporation or issuer; and to pay calls or subscriptions
with respect to any security held in the Trust;
(g) To join with other security holders in acting through a committee,
depositary, voting trustee or otherwise, and in that connection to deposit any
security with, or transfer any security to, any such committee, depositary or
trustee, and to delegate to them such power and authority with relation to any
security (whether or not so deposited or transferred) as the Trustees shall deem
proper, and to agree to pay, and to pay, such portion of the expenses and
compensation of such committee, depositary or trustee as the Trustees shall deem
proper;
(h) To compromise, arbitrate or otherwise adjust claims in favor of or
against the Trust or any matter in controversy, including but not limited to
claims for taxes;
(i) To enter into joint ventures, general or limited partnerships and any
other combinations or associations;
(j) To borrow funds or other property;
(k) To endorse or guarantee the payment of any notes or other obligations
of any person; to make contracts of guaranty or suretyship, or otherwise assume
liability for payment thereof;
(l) To purchase and pay for entirely out of Trust property such insurance
as they may deem necessary or appropriate for the conduct of the business,
including without limitation, insurance policies insuring the assets of the
Trust and payment of distributions and principal on its portfolio investments,
and insurance policies insuring the Shareholders, Trustees, officers, employees,
agents, investment advisers, principal underwriters or independent contractors
of the Trust individually against all claims and liabilities of every nature
arising by reason of holding, being or having held any such office or position,
or by reason of any action alleged to have been taken or omitted by any such
person as Trustee, officer, employee, agent, investment adviser, principal
underwriter, or independent contractor, including any action taken or omitted
that may be determined to constitute negligence, whether or not the Trust would
have the power to indemnify such person against liability; and
(m) To pay pensions as deemed appropriate by the Trustees and to adopt,
establish and carry out pension, profit-sharing, share bonus, share purchase,
savings, thrift and other retirement, incentive and benefit plans, trusts and
provisions, including the purchasing of life
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<PAGE>
insurance and annuity contracts as a means of providing such retirement and
other benefits, for any or all of the Trustees, officers, employees and agents
of the Trust.
The Trustees shall not in any way be bound or limited by any present or
future law or custom in regard to investments by Trustees. The Trustees shall
not be required to obtain any court order to deal with any assets of the Trust
or take any other action hereunder.
Section 4. Payment of Expenses by the Trust. The Trustees are authorized
--------- --------------------------------
to pay or cause to be paid out of the principal or income of the Trust, or
partly out of principal and partly out of income, as they deem fair, all
expenses, fees, charges, taxes and liabilities incurred or arising in connection
with the Trust, or in connection with the management thereof, including but not
limited to, the Trustees' compensation and such expenses and charges for the
services of the Trust's officers, employees, investment advisers or managers,
principal underwriter, auditor, counsel, custodian, transfer agent, shareholder
servicing agent and such other agents or independent contractors and such other
expenses and charges as the Trustees may deem necessary or proper to incur.
Section 5. Payment of Expenses by Shareholders. The Trustees shall have
--------- -----------------------------------
the power, as frequently as they may determine, to cause each Shareholder, or
each Shareholder of any particular Series or class, to pay directly, in advance
or arrears, for charges of the Trust's custodian or transfer, shareholder
servicing or similar agent, an amount fixed from time to time by the Trustees,
by setting off such charges due from such Shareholder from declared but unpaid
dividends owed such Shareholder and/or by reducing the number of Shares in the
account of such Shareholder by that number of full and/or fractional Shares
which represents the outstanding amount of such charges due from such
Shareholder.
Section 6. Ownership of Assets of the Trust. Title to all of the assets
--------- --------------------------------
of the Trust shall at all times be considered as vested in the Trustees.
Section 7. Advisory, Management and Distribution Contracts. Subject to
--------- -----------------------------------------------
such requirements and restrictions as may be set forth in the By-Laws, the
Trustees may, at any time and from time to time, contract for exclusive or
nonexclusive advisory and/or management services for the Trust or for any Series
or class with New England Mutual Life Insurance Company or any other
corporation, trust, association or other organization (the "Manager"); and any
such contract may contain such other terms as the Trustees may determine,
including without limitation, authority for a Manager to determine from time to
time without prior consultation with the Trustees what investments shall be
purchased, held, sold or exchanged and what portion, if any, of the assets of
the Trust shall be held uninvested and to make changes in the Trust's
investments. The Trustees may also, at any time and from time to time, contract
with TNE Investment Services Corporation, the Manager or any other corporation,
trust, association or other organization, appointing it exclusive or
nonexclusive distributor or principal underwriter for the Shares, every such
contract to comply with such
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<PAGE>
requirements and restrictions as may be set forth in the By-Laws; and any such
contract may contain such other terms as the Trustees may determine.
The fact that:
(i) any of the Shareholders, Trustees or officers of the Trust is a
shareholder, director, officer, partner, trustee, employee, manager,
adviser, principal underwriter, distributor or affiliate or agent of or for
any corporation, trust, association, or other organization, or of or for
any parent or affiliate of any organization, with which an advisory or
management contract, or principal underwriter's or distributor's contract,
or transfer, shareholder servicing or other agency contract may have been
or may hereafter be made, or that any such organization, or any parent or
affiliate thereof, is a Shareholder or has an interest in the Trust, or
that
(ii) any corporation, trust, association or other organization with
which an advisory or management contract or principal underwriter's or
distributor's contract, or transfer, shareholder servicing or other agency
contract may have been or may hereafter be made also has an advisory or
management contract, or principal underwriter's or distributor's contract,
or transfer, shareholder servicing or other agency contract with one or
more other corporations, trusts, associations, or other organizations, or
has other business or interests
shall not affect the validity of any such contract or disqualify any
Shareholder, Trustee or officer of the Trust from voting upon or executing the
same or create any liability or accountability to the Trust or its Shareholders.
ARTICLE V
Shareholders' Voting Powers and Meetings
Section 1. Voting Powers. The Shareholders shall have power to vote only
--------- -------------
(i) for the election of Trustees as provided in Article IV, Section 1, (ii) with
respect to any amendment of this Declaration of Trust to the extent and as
provided in Article VIII, Section 8, (iii) to the same extent as the
stockholders of a Massachusetts business corporation as to whether or not a
court action, proceeding or claim should or should not be brought or maintained
derivatively or as a class action on behalf of the Trust or the Shareholders,
(iv) with respect to the termination of the Trust or any Series to the extent
and as provided in Article VIII, Section 4, (v) to remove Trustees from office
to the extent and as provided in Article V, Section 7 and (vi) with respect to
such additional matters relating to the Trust as may be required by this
Declaration of Trust, the By-Laws or any registration of the Trust with the
Commission (or any successor agency) or any state, or as the Trustees may
consider necessary or desirable. Each whole Share shall be entitled to one vote
as to any matter on which it is entitled to vote
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<PAGE>
and each fractional Share shall be entitled to a proportionate fractional vote.
There shall be no cumulative voting in the election of Trustees. Shares may be
voted in person or by proxy. A proxy with respect to Shares held in the name of
two or more persons shall be valid if executed by any one of them unless at or
prior to exercise of the proxy the Trust receives a specific written notice to
the contrary from any one of them. A proxy purporting to be executed by or on
behalf of a Shareholder shall be deemed valid unless challenged at or prior to
its exercise and the burden of proving invalidity shall rest on the challenger.
At any time when no Shares of a Series are outstanding the Trustees may exercise
all rights of Shareholders of that Series with respect to matters affecting that
Series and may with respect to that Series take any action required by law, this
Declaration of Trust or the By-Laws to be taken by the Shareholders.
Section 2. Voting Power and Meetings. Meetings of the Shareholders may be
--------- -------------------------
called by the Trustees for the purpose of electing Trustees as provided in
Article IV, Section 1 and for such other purposes as may be prescribed by law,
by this Declaration of Trust or by the By-Laws. Meetings of the Shareholders may
also be called by the Trustees from time to time for the purpose of taking
action upon any other matter deemed by the Trustees to be necessary or
desirable. A meeting of Shareholders may be held at any place designated by the
Trustees. Written notice of any meeting of Shareholders shall be given or caused
to be given by the Trustees by mailing such notice at least seven days before
such meeting, postage prepaid, stating the time and place of the meeting, to
each Shareholder at the Shareholder's address as it appears on the records of
the Trust. Whenever notice of a meeting is required to be given to a Shareholder
under this Declaration of Trust or the By-Laws, a written waiver thereof,
executed before or after the meeting by such Shareholder or his attorney
thereunto authorized and filed with the records of the meeting, shall be deemed
equivalent to such notice.
Section 3. Quorum and Required Vote. Except when a larger quorum is
--------- ------------------------
required by law, by the By-Laws or by this Declaration of Trust, 40% of the
Shares entitled to vote shall constitute a quorum at a Shareholders' meeting.
When any one or more Series or classes is to vote as a single class separate
from any other Shares which are to vote on the same matters as a separate class
or classes, 40% of the Shares of each such class entitled to vote shall
constitute a quorum at a Shareholder's meeting of that class. Any meeting of
Shareholders may be adjourned from time to time by majority of the votes
properly cast upon the question, whether or not a quorum is present, and the
meeting may be held as adjourned within a reasonable time after the date set for
the original meeting without further notice. When a quorum is present at any
meeting, a majority of the Shares voted shall decide any questions and a
plurality shall elect a Trustee, except when a larger vote is required by any
provision of this Declaration of Trust or the By-Laws or by law. If any question
on which the Shareholders are entitled to vote would adversely affect the rights
of any Series or class of Shares, the vote of a majority (or such larger vote as
is required as aforesaid) of the Shares of such Series or class which are
entitled to vote, voting separately, shall also be required to decide such
question.
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<PAGE>
Section 4. Action by Written Consent. Any action taken by Shareholders
--------- -------------------------
may be taken without a meeting if Shareholders holding a majority of the Shares
entitled to vote on the matter (or such larger proportion thereof as shall be
required by any express provision of this Declaration of Trust or by the By-
Laws) and holding a majority (or such larger proportion as aforesaid) of the
Shares of any Series or class entitled to vote separately on the matter consent
to the action in writing and such written consents are filed with the records of
the meetings of Shareholders. Such consent shall be treated for all purposes as
a vote taken at a meeting of Shareholders.
Section 5. Record Dates. For the purpose of determining the Shareholders
--------- ------------
of any Series or class who are entitled to vote or act at any meeting or any
adjournment thereof, the Trustees may from time to time fix a time, which shall
be not more than 60 days before the date of any meeting of Shareholders, as the
record date for determining the Shareholders of such Series or class having the
right to notice of and to vote at such meeting and any adjournment thereof, and
in such case only Shareholders of record on such record date shall have such
right, notwithstanding any transfer of shares on the books of the Trust after
the record date. For the purpose of determining the Shareholders of any Series
or class who are entitled to receive payment of any dividend or of any other
distribution, the Trustees may from time to time fix a date, which shall be
before the date for the payment of such dividend or such other payment, as the
record date for determining the Shareholders of such Series or class having the
right to receive such dividend or distribution. Without fixing a record date the
Trustees may for voting and/or distribution purposes close the register or
transfer books for one or more Series or classes for all or any part of the
period between a record date and a meeting of shareholders or the payment of a
distribution. Nothing in this section shall be construed as precluding the
Trustees from setting different record dates for different Series or classes.
Section 6. Additional Provisions. The By-Laws may include further
--------- ---------------------
provisions for Shareholders' votes and meetings and related matters.
Section 7. Removal of Trustees. No natural person shall serve as Trustee
--------- -------------------
after the holders of record of not less than two-thirds of the outstanding
Shares have declared that such Trustee be removed from that office either by
declaration in writing filed with the Trust's custodian or by votes cast in
person or by proxy at a meeting called for the purpose. The Trustees shall
promptly call a meeting of shareholders for the purpose of voting upon the
question of removal of any Trustee when requested in writing so to do by the
record holders of not less than 10 per centum of the outstanding Shares.
Whenever ten or more shareholders of record who have been such for at least
six months preceding the date of application, and who hold in the aggregate
Shares having a net asset value of at least 1 per centum of the outstanding
Shares, shall apply to the Trustees in writing, stating that they wish to
communicate with other shareholders with a view to obtaining signatures to a
request for a meeting pursuant to this Section and accompanied by a
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<PAGE>
form of communication and request which they wish to transmit, the Trustees
shall within five business days after receipt of such application either (a)
afford to such applicants access to a list of the names and addresses of all
shareholders as recorded on the books of the Trust; or (b) inform such
applicants as to the approximate number of shareholders of record, and the
approximate cost of mailing to them the proposed communication and form of
request. If the Trustees elect to follow the course specified in clause (b), the
Trustees, upon the written request of such applicants, accompanied by a tender
of the material to be mailed and of the reasonable expenses of mailing, shall,
with reasonable promptness, mail such material to all shareholders of record at
their addresses as recorded on the books of the Trust, unless within five
business days after such tender the Trustees shall mail to such applicants and
file with the Commission, together with a copy of the material proposed to be
mailed, a written statement signed by at least a majority of the Trustees to the
effect that in their opinion either such material contains untrue statements of
fact or omits to state facts necessary to make the statements contained therein
not misleading, or would be in violation of applicable law, and specifying the
basis of such opinion. If the Commission shall enter an order refusing to
sustain any of the objections specified in the written statement so filed, or
if, after the entry of an order sustaining one or more of such objections, the
Commission shall find, after notice and opportunity for hearing, that all
objections so sustained have been met, and shall enter an order so declaring,
the Trustees shall mail copies of such material to all shareholders with
reasonable promptness after the entry of such order and the renewal of such
tender.
ARTICLE VI
Net Income, Distributions, and Redemptions and Repurchases
Section 1. Distributions of Net Income. The Trustees shall each year, or
--------- ---------------------------
more frequently if they so determine in their sole discretion, distribute to the
Shareholders of each Series, in shares of that Series, cash or otherwise, an
amount approximately equal to the net income attributable to the assets
belonging to such Series and may from time to time distribute to the
Shareholders of each Series, in shares of that Series, cash or otherwise, such
additional amounts, but only from the assets belonging to such Series, as they
may authorize. Except as otherwise permitted by paragraph (c) of Section 6 of
Article III in the case of Multi-Class Series, all dividends and distributions
on Shares of a particular Series shall be distributed pro rata to the holders of
that Series in proportion to the number of Shares of that Series held by such
holders and recorded on the books of the Trust at the date and time of record
established for that payment of such dividend or distributions.
The manner of determining net income, income, asset values, capital gains,
expenses, liabilities and reserves of any Series or class may from time to time
be altered as necessary or desirable in the judgment of the Trustees to conform
such manner of determination to any other method prescribed or permitted by
applicable law. Net income shall be determined by the Trustees or by such person
as they may authorize at the times and in the manner provided
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<PAGE>
in the By-Laws. Determinations of net income of any Series or class and
determinations of income, asset value, capital gains, expenses, and liabilities
made by the Trustees, or by such person as they may authorize, in good faith,
shall be binding on all parties concerned. The foregoing sentence shall not be
construed to protect any Trustee, officer or agent of the Trust against any
liability to the Trust or its security holders to which he 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 office.
If, for any reason, the net income of any Series or class determined at any
time is a negative amount, the pro rata share of such negative amount allocable
to each Shareholder of such Series or class shall constitute a liability of such
Shareholder to that Series or class which shall be paid out of such
Shareholder's account at such times and in such manner as the Trustees may from
time to time determine (x) out of the accrued dividend account of such
Shareholder, (y) by reducing the number of Shares of that Series or class in the
account of such Shareholder, or (z) otherwise.
Section 2. Redemptions and Repurchases. The Trust shall purchase such
--------- ---------------------------
Shares as are offered by any Shareholder for redemption, upon the presentation
of a proper instrument of transfer together with a request directed to the Trust
or a person designated by the Trust that the Trust purchase such Shares or in
accordance with such other procedures for redemption as the Trustees may from
time to time authorize; and the Trust will pay therefor the net asset value
thereof, as determined in accordance with the By-Laws, next determined. Payment
for said Shares shall be made by the Trust to the Shareholder within seven days
after the date on which the request is made. The obligation set forth in this
Section 2 is subject to the provision that in the event that any time the New
York Stock Exchange is closed for other than weekends or holidays, or if
permitted by the rules of the Commission during periods when trading on the
Exchange is restricted or during any emergency which makes it impracticable for
the Trust to dispose of the investments of the applicable Series or to determine
fairly the value of the net assets belonging to such Series or attributable to
any class thereof or during any other period permitted by order of the
Commission for the protection of investors, such obligations may be suspended or
postponed by the Trustees. The Trust may also purchase or repurchase Shares at a
price not exceeding the net asset value of such Shares in effect when the
purchase or repurchase or any contract to purchase or repurchase is made.
The redemption price may in any case or cases be paid wholly or partly in
kind if the Trustees determine that such payment is advisable in the interest of
the remaining Shareholders of the Series the Shares of which are being redeemed.
In making any such payment wholly or partly in kind, the Trust shall, so far as
may be practicable, deliver assets which approximate the diversification of all
of the assets belonging at the time to the Series the Shares of which are being
redeemed. Subject to the foregoing, the fair value, selection and quantity of
securities or other property so paid or delivered as all or part of the
redemption price may be determined by or under authority of the Trustees. In no
case shall the Trust be liable for any
-17-
<PAGE>
delay of any corporation or other person in transferring securities selected for
delivery as all or part of any payment in kind.
Section 3. Redemptions at the Option of the Trust. The Trust shall have
--------- --------------------------------------
the right at its option and at any time to redeem Shares of any Shareholder at
the net asset value thereof as described in Section 1 of this Article VI: (i) if
at such time such Shareholder owns Shares of any Series or class having an
aggregate net asset value of less than an amount determined from time to time by
the Trustees; or (ii) to the extent that such Shareholder owns Shares equal to
or in excess of a percentage determined from time to time by the Trustees of the
outstanding Shares of the Trust or of any Series or class.
ARTICLE VII
Compensation and Limitation of Liability of Trustees
Section 1. Compensation. The Trustees as such shall be entitled to
--------- ------------
reasonable compensation from the Trust; they may fix the amount of their
compensation. Nothing herein shall in any way prevent the employment of any
Trustee for advisory, management, legal, accounting, investment banking or other
services and payment for the same by the Trust.
Section 2. Limitation of Liability. The Trustees shall not be responsible
--------- -----------------------
or liable in any event for any neglect or wrong-doing of any officer, agent,
employee, Manager or principal underwriter of the Trust, nor shall any Trustee
be responsible for the act or omission of any other Trustee, but nothing herein
contained shall protect any Trustee against any liability to which he 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
office.
Every note, bond, contract, instrument, certificate or undertaking and
every other act or thing whatsoever issued, executed or done by or on behalf of
the Trust or the Trustees or any of them in connection with the Trust shall be
conclusively deemed to have been issued, executed or done only in or with
respect to their or his capacity as Trustees or Trustee, and such Trustees or
Trustee shall not be personally liable thereon.
ARTICLE VIII
Miscellaneous
Section 1. Trustees, Shareholders, etc. Not Personally Liable;
--------- ---------------------------------------------------
Notice. All persons extending credit to, contracting with or having any claim
- ------
against the Trust or any Series shall look only to the assets of the Trust, or,
to the extent that the liability of the Trust may have
-18-
<PAGE>
been expressly limited by contract to the assets of a particular Series, only to
the assets belonging to the relevant Series, for payment under such credit,
contract or claim; and neither the Shareholders nor the Trustees, nor any of the
Trust's officers, employees or agents, whether past, present or future, shall be
personally liable therefor. Nothing in this Declaration of Trust shall protect
any Trustee against any liability to which such 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 the office of
Trustee.
Every note, bond, contract, instrument, certificate or undertaking made or
issued on behalf of the Trust by the Trustees, by any officers or officer or
otherwise shall give notice that this Declaration of Trust is on file with the
Secretary of The Commonwealth of Massachusetts and shall recite that the same
was executed or made by or on behalf of the Trust or by them as Trustee or
Trustees or as officers or officer or otherwise and not individually and that
the obligations of such instrument are not binding upon any of them or the
shareholders individually but are binding only upon the assets and property of
the Trust or upon the assets belonging to the Series for the benefit of which
the Trustees have caused the note, bond, contract, instrument, certificate or
undertaking to be made or issued, and may contain such further recital as he or
they may deem appropriate, but the omission of any such recital shall not
operate to bind any Trustee or Trustees or officers or officer or Shareholders
or any other person individually.
Section 2. Trustee's Good Faith Action, Expert Advice, No Bond or Surety.
--------- -------------------------------------------------------------
The exercise by the Trustees of their powers and discretions hereunder shall be
binding upon everyone interested. A Trustee shall be liable for his own willful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of the office of Trustee, and for nothing else, and
shall not be liable for errors of judgment or mistakes of fact or law. The
Trustees may take advice of counsel or other experts with respect to the meaning
and operation of this Declaration of Trust, and shall be under no liability for
any act or omission in accordance with such advice or for failing to follow such
advice. The Trustees shall not be required to give any bond as such, nor any
surety if a bond is required.
Section 3. Liability of Third Persons Dealing with Trustees. No person
--------- ------------------------------------------------
dealing with the Trustees shall be bound to make any inquiry concerning the
validity of any transaction made or to be made by the Trustees or to see to the
application of any payments made or property transferred to the Trust or upon
its order.
Section 4. Termination of Trust, Series or Class. Unless terminated as
--------- -------------------------------------
provided herein, the Trust shall continue without limitation of time. The Trust
may be terminated at any time by vote of at least 66-2/3% of the Shares of each
Series entitled to vote and voting separately by Series or by the Trustees by
written notice to the Shareholders. Any Series or class may be terminated at any
time by vote of at least 66-2/3% of the Shares of that Series or class or by the
Trustees by written notice to the Shareholders of that Series or class.
-19-
<PAGE>
Upon termination of the Trust (or any Series or class, as the case may be),
after paying or otherwise providing for all charges, taxes, expenses and
liabilities belonging, severally, to each Series (or the applicable Series or
attributable to the particular class, as the case may be), whether due or
accrued or anticipated as may be determined by the Trustees, the Trust shall in
accordance with such procedures as the Trustees consider appropriate reduce the
remaining assets belonging, severally, to each Series (or the applicable Series
or attributable to the particular class, as the case may be), to distributable
form in cash or shares or other securities, or any combination thereof, and
distribute the proceeds belonging to each Series (or the applicable Series or
attributable to the particular class, as the case may be), to the Shareholders
of that Series (or class, as the case may be), as a Series (or class, as the
case may be), ratably according to the number of Shares of that Series (or
class, as the case may be) held by the several Shareholders on the date of
termination.
Section 5. Merger and Consolidation. The Trustees may cause the Trust to
--------- ------------------------
be merged into or consolidated with another trust or company or its shares
exchanged under or pursuant to any state or federal statute, if any, or
otherwise to the extent permitted by law, if such merger or consolidation or
share exchange has been authorized by vote of a majority of the outstanding
Shares; provided that in all respects not governed by statute or applicable law,
the Trustees shall have power to prescribe the procedure necessary or
appropriate to accomplish a sale of assets, merger or consolidation.
Section 6. Filing of Copies, Reference, Headings. The original or a copy
--------- -------------------------------------
of this instrument and of each amendment hereto shall be kept at the office of
the Trust where it may be inspected by any Shareholder. A copy of this
instrument and of each amendment hereto shall be filed by the Trust with the
Secretary of The Commonwealth of Massachusetts and with any other governmental
office where such filing may from time to time be required. Anyone dealing with
the Trust may rely on a certificate by an officer of the Trust as to whether or
not any such amendments have been made and as to any matters in connection with
the Trust hereunder; and, with the same effect as if it were the original, may
rely on a copy certified by an officer of the Trust to be a copy of this
instrument or of any such amendments. In this instrument and in any such
amendment, references to this instrument, and all expressions like "herein",
"hereof" and "hereunder", shall be deemed to refer to this instrument as amended
or affected by any such amendments. Headings are placed herein for convenience
of reference only and shall not be taken as a part hereof or to control or
affect the meaning, construction or effect of this instrument. This instrument
may be executed in any number of counterparts each of which shall be deemed an
original.
Section 7. Applicable Law. This Declaration of Trust is made in The
--------- --------------
Commonwealth of Massachusetts, and it is created under and is to be governed by
and construed and administered according to the laws of said Commonwealth. The
Trust shall be of the type commonly called a Massachusetts business trust, and
without limiting the provisions hereof, the Trust may exercise all powers which
are ordinarily exercised by such a trust.
-20-
<PAGE>
Section 8. Amendments. This Declaration of Trust may be amended at any
--------- ----------
time by an instrument in writing signed by a majority of the then Trustees when
authorized so to do by vote of a majority of the Shares entitled to vote, except
that amendments described in Article III, Section 5 hereof or having the purpose
of changing the name of the Trust or of supplying any omission, curing any
ambiguity or curing, correcting or supplementing any defective or inconsistent
provision contained herein shall not require authorization by Shareholder vote.
-21-
<PAGE>
IN WITNESS WHEREOF, we have hereunto set our hands for ourselves and for
our successors and assigns this 2nd day of February, 1993.
KENNETH J. COWAN RICHARD S. HUMPHREY, JR.
- ---------------- ------------------------
Kenneth J. Cowan Richard S. Humphrey, Jr.
JOSEPH M. HINCHEY JOHN A. SHANE
- ----------------- -------------
Joseph M. Hinchey John A. Shane
PENDLETON P. WHITE PETER S. VOSS
- ------------------ -------------
Pendleton P. White Peter S. Voss
HENRY L.P. SCHMELZER
- --------------------
Henry L.P. Schmelzer
-22-
<PAGE>
Exhibit 99.1(b)
TNE FUNDS TRUST
Amendment No. 5 to Second Amended and Restated
Agreement and Declaration of Trust
The undersigned, being at least a majority of the Trustees of TNE Funds
Trust (the "Trust"), having determined it to be consistent with the fair and
equitable treatment of all shareholders of the Trust, hereby amend the Trust's
Second Amended and Restated Agreement and Declaration of Trust, as amended by
Amendments Nos. 1, 2, 3 and 4 thereto (the "Declaration of Trust"), a copy of
which is on file in the office of the Secretary of State of The Commonwealth of
Massachusetts, as follows:
1. The phrase "TNE Funds Trust" is hereby deleted in each and every place
where it appears in the Declaration of Trust, and the phrase "New England Funds
Trust II" is hereby inserted in lieu thereof in each any every such place.
2. The first sentence of Section 6 of Article III of the Declaration of
Trust is hereby amended to read in its entirety as follows:
Without limiting the authority of the Trustees set forth in Section 5,
inter alia, to establish and designate any further Series or classes or to
modify the rights and preferences of any Series or class, each of the
following Series shall be, and is hereby, established and designated: (1)
New England Massachusetts Tax Free Income Fund, (2) New England High Income
Fund, (3) New England Limited Term U.S. Government Fund (formerly named New
England Premium Income Fund), (4) New England Adjustable Rate U.S.
Government Fund, (5) New England Growth Opportunities Fund, (6) New England
Intermediate Term Tax Free Fund of California and (7) New England
Intermediate Term Tax Free Fund of New York; and the following Series shall
be, and hereby are, designated Multi-Class Series: New England
Massachusetts Tax Free Income Fund, New England High Income Fund, New
England Limited Term U.S. Government Fund, New England Adjustable Rate U.S.
Government Fund, New England Growth Opportunities Fund, New England
Intermediate Term Tax Free Fund of California and New England Intermediate
Term Tax Free Fund of New York.
The foregoing amendment shall become effective as of the time it is filed
with the Secretary of State of The Commonwealth of Massachusetts.
<PAGE>
IN WITNESS WHEREOF, we have hereunto set our hands for ourselves and for
our successors and assigns as of this 28th day of January, 1994.
SANDRA O. MOOSE HENRY L.P. SCHMELZER
- --------------- --------------------
Sandra O. Moose Henry L.P. Schmelzer
KENNETH J. COWAN JAMES H. SCOTT
- ---------------- --------------
Kenneth J. Cowan James H. Scott
JOSEPH M. HINCHEY JOHN A. SHANE
- ----------------- -------------
Joseph M. Hinchey John A. Shane
RICHARD S. HUMPHREY, JR. JOSEPH F. TURLEY
- ------------------------ ----------------
Richard S. Humphrey, Jr. Joseph F. Turley
ROBERT B. KITTREDGE PETER S. VOSS
- ------------------- -------------
Robert B. Kittredge Peter S. Voss
LAURENS MACLURE PENDLETON P. WHITE
- --------------- ------------------
Laurens MacLure Pendleton P. White
-2-
<PAGE>
Exhibit 99.1(c)
NEW ENGLAND FUNDS TRUST II
Amendment No. 6 to Second Amended and Restated
Agreement and Declaration of Trust
The undersigned, being at least a majority of the Trustees of New England
Funds Trust II (the "Trust"), having determined it to be consistent with the
fair and equitable treatment of all shareholders of the Trust, hereby amend the
Trust's Second Amended and Restated Agreement and Declaration of Trust, as
amended by Amendments Nos. 1, 2, 3, 4 and 5 thereto (the "Declaration of
Trust"), a copy of which is on file in the office of the Secretary of State of
The Commonwealth of Massachusetts, as follows:
1. The first sentence of Section 6 of Article III of the Declaration of
Trust is hereby amended to read in its entirety as follows:
Without limiting the authority of the Trustees set forth in Section 5,
inter alia, to establish and designate any further Series or classes or to
modify the rights and preferences of any Series or class, each of the
following Series shall be, and is hereby, established and designated: (1)
New England Massachusetts Tax Free Income Fund, (2) New England High Income
Fund, (3) New England Limited Term U.S. Government Fund, (4) New England
Adjustable Rate U.S. Government Fund, (5) New England Growth Opportunities
Fund, (6) New England Intermediate Term Tax Free Fund of California, (7)
New England Intermediate Term Tax Free Fund of New York and (8) Growth Fund
of Israel; and the following Series shall be, and hereby are, designated
Multi-Class Series: New England Massachusetts Tax Free Income Fund, New
England High Income Fund, New England Limited Term U.S. Government Fund,
New England Adjustable Rate U.S. Government Fund, New England Growth
Opportunities Fund, New England Intermediate Term Tax Free Fund of
California, New England Intermediate Term Tax Free Fund of New York and
Growth Fund of Israel.
The foregoing amendment shall become effective as of the time it is filed
with the Secretary of State of The Commonwealth of Massachusetts.
<PAGE>
IN WITNESS WHEREOF, we have hereunto set our hands for ourselves and for
our successors and assigns as of this 31st day of October, 1995.
GRAHAM T. ALLISON, JR. KENNETH J. COWAN
- --------------------------- ---------------------
Graham T. Allison, Jr. Kenneth J. Cowan
SANDRA O. MOOSE HENRY L.P. SCHMELZER
- --------------------------- ---------------------
Sandra O. Moose Henry L.P. Schmelzer
JAMES H. SCOTT JOHN A. SHANE
- --------------------------- ---------------------
James H. Scott John A. Shane
PETER S. VOSS PENDLETON P. WHITE
- --------------------------- ---------------------
Peter S. Voss Pendleton P. White
-2-
<PAGE>
Exhibit 99.5(a)(i)
NEW ENGLAND GROWTH OPPORTUNITIES FUND
Advisory Agreement
AGREEMENT made this 2nd day of January, 1996 by and between NEW ENGLAND
FUNDS TRUST II, a Massachusetts business trust (the "Fund"), with respect to its
New England Growth Opportunities Fund series (the "Series"), and NEW ENGLAND
FUNDS MANAGEMENT, L.P., a Delaware limited partnership (the "Manager").
WITNESSETH:
WHEREAS, the Fund and the Manager wish to enter into an agreement setting
forth the terms upon which the Manager (or certain other parties acting pursuant
to delegation from the Manager) will perform certain services for the Series;
NOW, THEREFORE, in consideration of the premises and covenants hereinafter
contained, the parties agree as follows:
1. (a) The Fund hereby employs the Manager to furnish the Fund with
Portfolio Management Services (as defined in Section 2 hereof) and
Administrative Services (as defined in Section 3 hereof), subject to the
authority of the Manager to delegate any or all of its responsibilities
hereunder to other parties as provided in Sections 1(b) and (c) hereof. The
Manager hereby accepts such employment and agrees, at its own expense, to
furnish such services (either directly or pursuant to delegation to other
parties as permitted by Sections 1(b) and (c) hereof) and to assume the
obligations herein set forth, for the compensation herein provided. The
Manager shall, unless otherwise expressly provided or authorized, have no
authority to act for or represent the Fund in any way or otherwise be
deemed an agent of the Fund.
(b) The Manager may delegate any or all of its responsibilities
hereunder with respect to the provision of Portfolio Management Services
(and assumption of related expenses) to one or more other parties (each
such party, a "Sub-Adviser"), pursuant in each case to a written agreement
with such Sub-Adviser that meets the requirements of Section 15 of the
Investment Company Act of 1940 and the rules thereunder (the "1940 Act")
applicable to contracts for service as investment adviser of a registered
investment company (including without limitation the requirements for
approval by the trustees of the Fund and the shareholders of the Series),
subject, however, to such exemptions as may be granted by the Securities
and Exchange Commission. Any Sub-Adviser may (but need not) be affiliated
with the Manager. If different Sub-Advisers are engaged to provide
Portfolio Management Services with respect to different segments of the
<PAGE>
portfolio of the Series, the Manager shall determine, in the manner
described in the prospectus of the Series from time to time in effect, what
portion of the assets belonging to the Series shall be managed by each Sub-
Adviser.
(c) The Manager may delegate any or all of its responsibilities
hereunder with respect to the provision of Administrative Services to one
or more other parties (each such party, an "Administrator") selected by the
Manager. Any Administrator may (but need not) be affiliated with the
Manager.
2. As used in this Agreement, "Portfolio Management Services" means
management of the investment and reinvestment of the assets belonging to the
Series, consisting specifically of the following:
(a) obtaining and evaluating such economic, statistical and financial
data and information and undertaking such additional investment research as
shall be necessary or advisable for the management of the investment and
reinvestment of the assets belonging to the Series in accordance with the
Series' investment objectives and policies;
(b) taking such steps as are necessary to implement the investment
policies of the Series by purchasing and selling of securities, including
the placing of orders for such purchase and sale; and
(c) regularly reporting to the Board of Trustees of the Fund with
respect to the implementation of the investment policies of the Series.
3. As used in this Agreement, "Administrative Services" means the
provision to the Fund, by or at the expense of the Manager, of the following:
(a) office space in such place or places as may be agreed upon from
time to time by the Fund and the Manager, and all necessary office
supplies, facilities and equipment;
(b) necessary executive and other personnel for managing the affairs
of the Series (exclusive of those related to and to be performed under
contract for custodial, transfer, dividend and plan agency services by the
entity or entities selected to perform such services and exclusive of any
managerial functions described in Section 4);
(c) compensation, if any, of trustees of the Fund who are directors,
officers or employees of the Manager, any Sub-Adviser or any Administrator
or of any affiliated person (other than a registered investment company) of
the Manager, any Sub-Adviser or any Administrator; and
-2-
<PAGE>
(d) supervision and oversight of the Portfolio Management Services
provided by each Sub-Adviser, and oversight of all matters relating to
compliance by the Fund with applicable laws and with the Series' investment
policies, restrictions and guidelines, if the Manager has delegated to one
or more Sub-Advisers any or all of its responsibilities hereunder with
respect to the provision of Portfolio Management Services.
4. Nothing in section 3 hereof shall require the Manager to bear, or to
reimburse the Fund for:
(a) any of the costs of printing and mailing the items referred to in
sub-section (n) of this section 4;
(b) any of the costs of preparing, printing and distributing sales
literature;
(c) compensation of trustees of the Fund who are not directors,
officers or employees of the Manager, any Sub-Adviser or any Administrator
or of any affiliated person (other than a registered investment company) of
the Manager, any Sub-Adviser or any Administrator;
(d) registration, filing and other fees in connection with
requirements of regulatory authorities;
(e) the charges and expenses of any entity appointed by the Fund for
custodial, paying agent, shareholder servicing and plan agent services;
(f) charges and expenses of independent accountants retained by the
Fund;
(g) charges and expenses of any transfer agents and registrars
appointed by the Fund;
(h) brokers' commissions and issue and transfer taxes chargeable to
the Fund in connection with securities transactions to which the Fund is a
party;
(i) taxes and fees payable by the Fund to federal, state or other
governmental agencies;
(j) any cost of certificates representing shares of the Fund;
(k) legal fees and expenses in connection with the affairs of the
Fund, including registering and qualifying its shares with Federal and
State regulatory authorities;
(l) expenses of meetings of shareholders and trustees of the Fund;
-3-
<PAGE>
(m) interest, including interest on borrowings by the Fund;
(n) the costs of services, including services of counsel, required in
connection with the preparation of the Fund's registration statements and
prospectuses, including amendments and revisions thereto, annual,
semiannual and other periodic reports of the Fund, and notices and proxy
solicitation material furnished to shareholders of the Fund or regulatory
authorities; and
(o) the Fund's expenses of bookkeeping, accounting, auditing and
financial reporting, including related clerical expenses.
5. All activities undertaken by the Manager or any Sub-Adviser or
Administrator pursuant to this Agreement shall at all times be subject to the
supervision and control of the Board of Trustees of the Fund, any duly
constituted committee thereof or any officer of the Fund acting pursuant to like
authority.
6. The services to be provided by the Manager and any Sub-Adviser or
Administrator hereunder are not to be deemed exclusive and the Manager and any
Sub-Adviser or Administrator shall be free to render similar services to others,
so long as its services hereunder are not impaired thereby.
7. As full compensation for all services rendered, facilities furnished
and expenses borne by the Manager hereunder, the Fund shall pay the Manager
compensation at the annual rate of 0.70% of the first $200 million of the
average daily net assets of the Series, 0.65% of the next $300 million of the
average daily net assets of the Series, and 0.60% over $500 million of such
assets, respectively (or such lesser amount as the Manager may from time to time
agree to receive). Such compensation shall be payable monthly in arrears or at
such other intervals, not less frequently than quarterly, as the Board of
Trustees of the Fund may from time to time determine and specify in writing to
the Manager. The Manager hereby acknowledges that the Fund's obligation to pay
such compensation is binding only on the assets and property belonging to the
Series.
8. If the total of all ordinary business expenses of the Fund as a whole
(including investment advisory fees but excluding interest, taxes, portfolio
brokerage commissions, distribution-related expenses and extraordinary expenses)
for any fiscal year exceeds the lowest applicable percentage of average net
assets or income limitations prescribed by any state in which shares of the
Series are qualified for sale, the Manager shall pay such excess. Solely for
purposes of applying such limitations in accordance with the foregoing sentence,
the Series and the Fund shall each be deemed to be a separate fund subject to
such limitations. Should the applicable state limitation provisions fail to
specify how the average net assets of the Fund or belonging to the Series are to
be calculated, that figure shall be calculated by reference to the average daily
net assets of the Fund or the Series, as the case may be.
-4-
<PAGE>
9. It is understood that any of the shareholders, trustees, officers,
employees and agents of the Fund may be a shareholder, director, officer,
employee or agent of, or be otherwise interested in, the Manager, any affiliated
person of the Manager, any organization in which the Manager may have an
interest or any organization which may have an interest in the Manager; that the
Manager, any such affiliated person or any such organization may have an
interest in the Fund; and that the existence of any such dual interest shall not
affect the validity hereof or of any transactions hereunder except as otherwise
provided in the Agreement and Declaration of Trust of the Fund, the partnership
agreement of the Manager or specific provisions of applicable law.
10. This Agreement shall become effective as of the date of its execution,
and
(a) unless otherwise terminated, this Agreement shall continue in
effect for two years from the date of execution, and from year to year
thereafter so long as such continuance is specifically approved at least
annually (i) by the Board of Trustees of the Fund or by vote of a majority
of the outstanding voting securities of the Series, and (ii) by vote of a
majority of the trustees of the Fund who are not interested persons of the
Fund or the Manager, cast in person at a meeting called for the purpose of
voting on, such approval;
(b) this Agreement may at any time be terminated on sixty days'
written notice to the Manager either by vote of the Board of Trustees of
the Fund or by vote of a majority of the outstanding voting securities of
the Series;
(c) this Agreement shall automatically terminate in the event of its
assignment;
(d) this Agreement may be terminated by the Manager on ninety days'
written notice to the Fund;
(e) if New England Funds, L.P., the Fund's principal underwriter,
requires the Fund or the Series to change its name so as to eliminate all
references to the words "New England" or the letters "TNE" pursuant to the
provisions of the Fund's Distribution Agreement relating to the Series with
said principal underwriter, this Agreement shall automatically terminate at
the time of such change unless the continuance of this Agreement after such
change shall have been specifically approved by vote of a majority of the
outstanding voting securities of the Series and by vote of a majority of
the trustees of the Fund who are not interested persons of the Fund or the
Manager, cast in person at a meeting called for the purpose of voting on
such approval.
Termination of this Agreement pursuant to this Section 10 shall be without
the payment of any penalty.
-5-
<PAGE>
11. This Agreement may be amended at any time by mutual consent of the
parties, provided that such consent on the part of the Fund shall have been
approved by vote of a majority of the outstanding voting securities of the
Series and by vote of a majority of the trustees of the Fund who are not
interested persons of the Fund or the Manager, cast in person at a meeting
called for the purpose of voting on such approval.
12. For the purpose of this Agreement, the terms "vote of a majority of
the outstanding voting securities," "interested person," "affiliated person" and
"assignment" shall have their respective meanings defined in the 1940 Act,
subject, however, to such exemptions as may be granted by the Securities and
Exchange Commission under the 1940 Act. References in this Agreement to any
assets, property or liabilities "belonging to" the Series shall have the meaning
defined in the Fund's Agreement and Declaration of Trust as amended from time to
time.
13. In the absence of willful misfeasance, bad faith or gross negligence
on the part of the Manager, or reckless disregard of its obligations and duties
hereunder, the Manager shall not be subject to any liability to the Fund, to any
shareholder of the Fund or to any other person, firm or organization, for any
act or omission in the course of, or connected with, rendering services
hereunder.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the
day and year first above written.
NEW ENGLAND FUNDS TRUST II
on behalf of its New England Growth
Opportunities Fund series
By: HENRY L.P. SCHMELZER NEW ENGLAND
------------------------------ FUNDS MANAGEMENT, L.P.
Name: Henry L.P. Schmelzer
Title: President By NEF Corporation, its general partner
By: BRUCE R. SPECA
------------------------------
Name: Bruce R. Speca
Title: Executive Vice President
NOTICE
A copy of the Agreement and Declaration of Trust establishing New England
Funds Trust I (the "Fund") is on file with the Secretary of The Commonwealth of
Massachusetts, and notice is hereby given that this Agreement is executed with
respect to the Fund's New England Growth Opportunities Fund series (the
"Series") on behalf of the Fund by officers of the Fund as officers and not
individually and that the obligations of or arising out of this Agreement are
not binding upon any of the trustees, officers or shareholders individually but
are binding only upon the assets and property belonging to the Series.
-6-
<PAGE>
Exhibit 99.5(a)(ii)
GROWTH FUND OF ISRAEL
Advisory Agreement
AGREEMENT made this 29th day of December, 1995 by and between NEW ENGLAND
FUNDS TRUST II, a Massachusetts business trust (the "Fund"), with respect to its
Growth Fund of Israel series (the "Series"), and NEW ENGLAND FUNDS MANAGEMENT,
L.P., a Delaware limited partnership (the "Manager").
WITNESSETH:
WHEREAS, the Fund and the Manager wish to enter into an agreement setting
forth the terms upon which the Manager (or certain other parties acting pursuant
to delegation from the Manager) will perform certain services for the Series;
NOW, THEREFORE, in consideration of the premises and covenants hereinafter
contained, the parties agree as follows:
1. (a) The Fund hereby employs the Manager to furnish the Fund with
Portfolio Management Services (as defined in Section 2 hereof) and
Administrative Services (as defined in Section 3 hereof), subject to the
authority of the Manager to delegate any or all of its responsibilities
hereunder to other parties as provided in Sections 1(b) and (c) hereof. The
Manager hereby accepts such employment and agrees, at its own expense, to
furnish such services (either directly or pursuant to delegation to other
parties as permitted by Sections 1(b) and (c) hereof) and to assume the
obligations herein set forth, for the compensation herein provided. The
Manager shall, unless otherwise expressly provided or authorized, have no
authority to act for or represent the Fund in any way or otherwise be
deemed an agent of the Fund.
(b) The Manager may delegate any or all of its responsibilities
hereunder with respect to the provision of Portfolio Management Services
(and assumption of related expenses) to one or more other parties (each
such party, a "Sub-Adviser"), pursuant in each case to a written agreement
with such Sub-Adviser that meets the requirements of Section 15 of the
Investment Company Act of 1940 and the rules thereunder (the "1940 Act")
applicable to contracts for service as investment adviser of a registered
investment company (including without limitation the requirements for
approval by the trustees of the Fund and the shareholders of the Series),
subject, however, to such exemptions as may be granted by the Securities
and Exchange Commission. Any Sub-Adviser may (but need not) be affiliated
with the Manager. If different Sub-Advisers are engaged to provide
Portfolio Management Services with respect to different segments of the
<PAGE>
portfolio of the Series, the Manager shall determine, in the manner
described in the prospectus of the Series from time to time in effect, what
portion of the assets belonging to the Series shall be managed by each Sub-
Adviser.
(c) The Manager may delegate any or all of its responsibilities
hereunder with respect to the provision of Administrative Services to one
or more other parties (each such party, an "Administrator") selected by the
Manager. Any Administrator may (but need not) be affiliated with the
Manager.
2. As used in this Agreement, "Portfolio Management Services" means
management of the investment and reinvestment of the assets belonging to the
Series, consisting specifically of the following:
(a) obtaining and evaluating such economic, statistical and financial
data and information and undertaking such additional investment research as
shall be necessary or advisable for the management of the investment and
reinvestment of the assets belonging to the Series in accordance with the
Series' investment objectives and policies;
(b) taking such steps as are necessary to implement the investment
policies of the Series by purchasing and selling of securities, including
the placing of orders for such purchase and sale; and
(c) regularly reporting to the Board of Trustees of the Fund with
respect to the implementation of the investment policies of the Series.
3. As used in this Agreement, "Administrative Services" means the provision
to the Fund, by or at the expense of the Manager, of the following:
(a) office space in such place or places as may be agreed upon from
time to time by the Fund and the Manager, and all necessary office
supplies, facilities and equipment;
(b) necessary executive and other personnel for managing the affairs
of the Series (exclusive of those related to and to be performed under
contract for custodial, transfer, dividend and plan agency services by the
entity or entities selected to perform such services and exclusive of any
managerial functions described in Section 4);
(c) compensation, if any, of trustees of the Fund who are directors,
officers or employees of the Manager, any Sub-Adviser or any Administrator
or of any affiliated person (other than a registered investment company) of
the Manager, any Sub-Adviser or any Administrator; and
-2-
<PAGE>
(d) supervision and oversight of the Portfolio Management Services
provided by each Sub-Adviser, and oversight of all matters relating to
compliance by the Fund with applicable laws and with the Series' investment
policies, restrictions and guidelines, if the Manager has delegated to one
or more Sub-Advisers any or all of its responsibilities hereunder with
respect to the provision of Portfolio Management Services.
4. Nothing in section 3 hereof shall require the Manager to bear, or to
reimburse the Fund for:
(a) any of the costs of printing and mailing the items referred to in
sub-section (n) of this section 4;
(b) any of the costs of preparing, printing and distributing sales
literature;
(c) compensation of trustees of the Fund who are not directors,
officers or employees of the Manager, any Sub-Adviser or any Administrator
or of any affiliated person (other than a registered investment company) of
the Manager, any Sub-Adviser or any Administrator;
(d) registration, filing and other fees in connection with
requirements of regulatory authorities;
(e) the charges and expenses of any entity appointed by the Fund for
custodial, paying agent, shareholder servicing and plan agent services;
(f) charges and expenses of independent accountants retained by the
Fund;
(g) charges and expenses of any transfer agents and registrars
appointed by the Fund;
(h) brokers' commissions and issue and transfer taxes chargeable to
the Fund in connection with securities transactions to which the Fund is a
party;
(i) taxes and fees payable by the Fund to federal, state or other
governmental agencies;
(j) any cost of certificates representing shares of the Fund;
(k) legal fees and expenses in connection with the affairs of the
Fund, including registering and qualifying its shares with Federal and
State regulatory authorities;
(l) expenses of meetings of shareholders and trustees of the Fund;
-3-
<PAGE>
(m) interest, including interest on borrowings by the Fund;
(n) the costs of services, including services of counsel, required in
connection with the preparation of the Fund's registration statements and
prospectuses, including amendments and revisions thereto, annual,
semiannual and other periodic reports of the Fund, and notices and proxy
solicitation material furnished to shareholders of the Fund or regulatory
authorities; and
(o) the Fund's expenses of bookkeeping, accounting, auditing and
financial reporting, including related clerical expenses.
5. All activities undertaken by the Manager or any Sub-Adviser or
Administrator pursuant to this Agreement shall at all times be subject to the
supervision and control of the Board of Trustees of the Fund, any duly
constituted committee thereof or any officer of the Fund acting pursuant to like
authority.
6. The services to be provided by the Manager and any Sub-Adviser or
Administrator hereunder are not to be deemed exclusive and the Manager and any
Sub-Adviser or Administrator shall be free to render similar services to others,
so long as its services hereunder are not impaired thereby.
7. As full compensation for all services rendered, facilities furnished and
expenses borne by the Manager hereunder, the Fund shall pay the Manager
compensation at the annual rate of 1.10% of the Series's average daily net
assets (or such lesser amount as the Manager may from time to time agree to
receive). Such compensation shall be payable monthly in arrears or at such other
intervals, not less frequently than quarterly, as the Board of Trustees of the
Fund may from time to time determine and specify in writing to the Manager. The
Manager hereby acknowledges that the Fund's obligation to pay such compensation
is binding only on the assets and property belonging to the Series.
8. If the total of all ordinary business expenses of the Fund as a whole
(including investment advisory fees but excluding interest, taxes, portfolio
brokerage commissions, distribution-related expenses and extraordinary expenses)
for any fiscal year exceeds the lowest applicable percentage of average net
assets or income limitations prescribed by any state in which shares of the
Series are qualified for sale, the Manager shall pay such excess. Solely for
purposes of applying such limitations in accordance with the foregoing sentence,
the Series and the Fund shall each be deemed to be a separate fund subject to
such limitations. Should the applicable state limitation provisions fail to
specify how the average net assets of the Fund or belonging to the Series are to
be calculated, that figure shall be calculated by reference to the average daily
net assets of the Fund or the Series, as the case may be.
9. It is understood that any of the shareholders, trustees, officers,
employees and agents of the Fund may be a shareholder, director, officer,
employee or agent of, or be otherwise
-4-
<PAGE>
interested in, the Manager, any affiliated person of the Manager, any
organization in which the Manager may have an interest or any organization which
may have an interest in the Manager; that the Manager, any such affiliated
person or any such organization may have an interest in the Fund; and that the
existence of any such dual interest shall not affect the validity hereof or of
any transactions hereunder except as otherwise provided in the Agreement and
Declaration of Trust of the Fund, the partnership agreement of the Manager or
specific provisions of applicable law.
10. This Agreement shall become effective as of the date of its execution,
and
(a) unless otherwise terminated, this Agreement shall continue in
effect for two years from the date of execution, and from year to year
thereafter so long as such continuance is specifically approved at least
annually (i) by the Board of Trustees of the Fund or by vote of a majority
of the outstanding voting securities of the Series, and (ii) by vote of a
majority of the trustees of the Fund who are not interested persons of the
Fund or the Manager, cast in person at a meeting called for the purpose of
voting on, such approval;
(b) this Agreement may at any time be terminated on sixty days'
written notice to the Manager either by vote of the Board of Trustees of
the Fund or by vote of a majority of the outstanding voting securities of
the Series;
(c) this Agreement shall automatically terminate in the event of its
assignment;
(d) this Agreement may be terminated by the Manager on ninety days'
written notice to the Fund;
(e) if New England Funds, L.P., the Fund's principal underwriter,
requires the Fund or the Series to change its name so as to eliminate all
references to the words "New England" or the letters "TNE" pursuant to the
provisions of the Fund's Distribution Agreement relating to the Series with
said principal underwriter, this Agreement shall automatically terminate at
the time of such change unless the continuance of this Agreement after such
change shall have been specifically approved by vote of a majority of the
outstanding voting securities of the Series and by vote of a majority of
the trustees of the Fund who are not interested persons of the Fund or the
Manager, cast in person at a meeting called for the purpose of voting on
such approval.
Termination of this Agreement pursuant to this Section 10 shall be without
the payment of any penalty.
11. This Agreement may be amended at any time by mutual consent of the
parties, provided that such consent on the part of the Fund shall have been
approved by vote of a majority of the outstanding voting securities of the
Series and by vote of a majority of the
-5-
<PAGE>
trustees of the Fund who are not interested persons of the Fund or the Manager,
cast in person at a meeting called for the purpose of voting on such approval.
12. For the purpose of this Agreement, the terms "vote of a majority of the
outstanding voting securities," "interested person," "affiliated person" and
"assignment" shall have their respective meanings defined in the 1940 Act,
subject, however, to such exemptions as may be granted by the Securities and
Exchange Commission under the 1940 Act. References in this Agreement to any
assets, property or liabilities "belonging to" the Series shall have the meaning
defined in the Fund's Agreement and Declaration of Trust as amended from time to
time.
13. In the absence of willful misfeasance, bad faith or gross negligence on
the part of the Manager, or reckless disregard of its obligations and duties
hereunder, the Manager shall not be subject to any liability to the Fund, to any
shareholder of the Fund or to any other person, firm or organization, for any
act or omission in the course of, or connected with, rendering services
hereunder.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the
day and year first above written.
NEW ENGLAND FUNDS TRUST II, NEW ENGLAND
on behalf of its Growth Fund of FUNDS MANAGEMENT, L.P.
Israel series
By NEF Corporation, its general
partner
By: BRUCE R. SPECA By: HENRY L.P. SCHMELZER
-------------------------------- ------------------------------
Name: Bruce R. Speca Name: Henry L.P. Schmelzer
Title: Executive Vice President Title: President
NOTICE
A copy of the Agreement and Declaration of Trust establishing New England
Funds Trust II (the "Fund") is on file with the Secretary of The Commonwealth of
Massachusetts, and notice is hereby given that this Agreement is executed with
respect to the Fund's Growth Fund of Israel series (the "Series") on behalf of
the Fund by officers of the Fund as officers and not individually and that the
obligations of or arising out of this Agreement are not binding upon any of the
trustees, officers or shareholders individually but are binding only upon the
assets and property belonging to the Series.
-6-
<PAGE>
Exhibit 99.5(a)(iii)
NEW ENGLAND LIMITED TERM
U.S. GOVERNMENT FUND
Advisory Agreement
AGREEMENT made this 2nd day of January, 1996 by and between NEW ENGLAND
FUNDS TRUST II, a Massachusetts business trust (the "Fund"), with respect to its
New England Limited Term U.S. Government Fund series (the "Series"), and NEW
ENGLAND FUNDS MANAGEMENT, L.P., a Delaware limited partnership (the "Manager").
WITNESSETH:
WHEREAS, the Fund and the Manager wish to enter into an agreement setting
forth the terms upon which the Manager (or certain other parties acting pursuant
to delegation from the Manager) will perform certain services for the Series;
NOW, THEREFORE, in consideration of the premises and covenants hereinafter
contained, the parties agree as follows:
1. (a) The Fund hereby employs the Manager to furnish the Fund with
Portfolio Management Services (as defined in Section 2 hereof) and
Administrative Services (as defined in Section 3 hereof), subject to the
authority of the Manager to delegate any or all of its responsibilities
hereunder to other parties as provided in Sections 1(b) and (c) hereof. The
Manager hereby accepts such employment and agrees, at its own expense, to
furnish such services (either directly or pursuant to delegation to other
parties as permitted by Sections 1(b) and (c) hereof) and to assume the
obligations herein set forth, for the compensation herein provided. The
Manager shall, unless otherwise expressly provided or authorized, have no
authority to act for or represent the Fund in any way or otherwise be
deemed an agent of the Fund.
(b) The Manager may delegate any or all of its responsibilities
hereunder with respect to the provision of Portfolio Management Services
(and assumption of related expenses) to one or more other parties (each
such party, a "Sub-Adviser"), pursuant in each case to a written agreement
with such Sub-Adviser that meets the requirements of Section 15 of the
Investment Company Act of 1940 and the rules thereunder (the "1940 Act")
applicable to contracts for service as investment adviser of a registered
investment company (including without limitation the requirements for
approval by the trustees of the Fund and the shareholders of the Series),
subject, however, to such exemptions as may be granted by the Securities
and Exchange Commission. Any Sub-Adviser may (but need not) be affiliated
with the Manager. If different Sub-Advisers are engaged to
<PAGE>
provide Portfolio Management Services with respect to different segments of
the portfolio of the Series, the Manager shall determine, in the manner
described in the prospectus of the Series from time to time in effect, what
portion of the assets belonging to the Series shall be managed by each Sub-
Adviser.
(c) The Manager may delegate any or all of its responsibilities
hereunder with respect to the provision of Administrative Services to one
or more other parties (each such party, an "Administrator") selected by the
Manager. Any Administrator may (but need not) be affiliated with the
Manager.
2. As used in this Agreement, "Portfolio Management Services" means
management of the investment and reinvestment of the assets belonging to the
Series, consisting specifically of the following:
(a) obtaining and evaluating such economic, statistical and financial
data and information and undertaking such additional investment research as
shall be necessary or advisable for the management of the investment and
reinvestment of the assets belonging to the Series in accordance with the
Series' investment objectives and policies;
(b) taking such steps as are necessary to implement the investment
policies of the Series by purchasing and selling of securities, including
the placing of orders for such purchase and sale; and
(c) regularly reporting to the Board of Trustees of the Fund with
respect to the implementation of the investment policies of the Series.
3. As used in this Agreement, "Administrative Services" means the
provision to the Fund, by or at the expense of the Manager, of the following:
(a) office space in such place or places as may be agreed upon from
time to time by the Fund and the Manager, and all necessary office
supplies, facilities and equipment;
(b) necessary executive and other personnel for managing the affairs
of the Series (exclusive of those related to and to be performed under
contract for custodial, transfer, dividend and plan agency services by the
entity or entities selected to perform such services and exclusive of any
managerial functions described in Section 4);
(c) compensation, if any, of trustees of the Fund who are directors,
officers or employees of the Manager, any Sub-Adviser or any Administrator
or of any affiliated person (other than a registered investment company) of
the Manager, any Sub-Adviser or any Administrator; and
-2-
<PAGE>
(d) supervision and oversight of the Portfolio Management Services
provided by each Sub-Adviser, and oversight of all matters relating to
compliance by the Fund with applicable laws and with the Series' investment
policies, restrictions and guidelines, if the Manager has delegated to one
or more Sub-Advisers any or all of its responsibilities hereunder with
respect to the provision of Portfolio Management Services.
4. Nothing in section 3 hereof shall require the Manager to bear, or to
reimburse the Fund for:
(a) any of the costs of printing and mailing the items referred to in
sub-section (n) of this section 4;
(b) any of the costs of preparing, printing and distributing sales
literature;
(c) compensation of trustees of the Fund who are not directors,
officers or employees of the Manager, any Sub-Adviser or any Administrator
or of any affiliated person (other than a registered investment company) of
the Manager, any Sub-Adviser or any Administrator;
(d) registration, filing and other fees in connection with
requirements of regulatory authorities;
(e) the charges and expenses of any entity appointed by the Fund for
custodial, paying agent, shareholder servicing and plan agent services;
(f) charges and expenses of independent accountants retained by the
Fund;
(g) charges and expenses of any transfer agents and registrars
appointed by the Fund;
(h) brokers' commissions and issue and transfer taxes chargeable to
the Fund in connection with securities transactions to which the Fund is a
party;
(i) taxes and fees payable by the Fund to federal, state or other
governmental agencies;
(j) any cost of certificates representing shares of the Fund;
(k) legal fees and expenses in connection with the affairs of the
Fund, including registering and qualifying its shares with Federal and
State regulatory authorities;
(l) expenses of meetings of shareholders and trustees of the Fund;
-3-
<PAGE>
(m) interest, including interest on borrowings by the Fund;
(n) the costs of services, including services of counsel, required in
connection with the preparation of the Fund's registration statements and
prospectuses, including amendments and revisions thereto, annual,
semiannual and other periodic reports of the Fund, and notices and proxy
solicitation material furnished to shareholders of the Fund or regulatory
authorities; and
(o) the Fund's expenses of bookkeeping, accounting, auditing and
financial reporting, including related clerical expenses.
5. All activities undertaken by the Manager or any Sub-Adviser or
Administrator pursuant to this Agreement shall at all times be subject to the
supervision and control of the Board of Trustees of the Fund, any duly
constituted committee thereof or any officer of the Fund acting pursuant to like
authority.
6. The services to be provided by the Manager and any Sub-Adviser or
Administrator hereunder are not to be deemed exclusive and the Manager and any
Sub-Adviser or Administrator shall be free to render similar services to others,
so long as its services hereunder are not impaired thereby.
7. As full compensation for all services rendered, facilities furnished
and expenses borne by the Manager hereunder, the Fund shall pay the Manager
compensation at the annual rate of 0.650% of the first $200 million of the
average daily net assets of the Series, 0.625% of the next $300 million of the
average daily net assets of the Series, and 0.600% over $500 million of such
assets, respectively (or such lesser amount as the Manager may from time to time
agree to receive). Such compensation shall be payable monthly in arrears or at
such other intervals, not less frequently than quarterly, as the Board of
Trustees of the Fund may from time to time determine and specify in writing to
the Manager. The Manager hereby acknowledges that the Fund's obligation to pay
such compensation is binding only on the assets and property belonging to the
Series.
8. If the total of all ordinary business expenses of the Fund as a whole
(including investment advisory fees but excluding interest, taxes, portfolio
brokerage commissions, distribution-related expenses and extraordinary expenses)
for any fiscal year exceeds the lowest applicable percentage of average net
assets or income limitations prescribed by any state in which shares of the
Series are qualified for sale, the Manager shall pay such excess. Solely for
purposes of applying such limitations in accordance with the foregoing sentence,
the Series and the Fund shall each be deemed to be a separate fund subject to
such limitations. Should the applicable state limitation provisions fail to
specify how the average net assets of the Fund or belonging to the Series are to
be calculated, that figure shall be calculated by reference to the average daily
net assets of the Fund or the Series, as the case may be.
-4-
<PAGE>
9. It is understood that any of the shareholders, trustees, officers,
employees and agents of the Fund may be a shareholder, director, officer,
employee or agent of, or be otherwise interested in, the Manager, any affiliated
person of the Manager, any organization in which the Manager may have an
interest or any organization which may have an interest in the Manager; that the
Manager, any such affiliated person or any such organization may have an
interest in the Fund; and that the existence of any such dual interest shall not
affect the validity hereof or of any transactions hereunder except as otherwise
provided in the Agreement and Declaration of Trust of the Fund, the partnership
agreement of the Manager or specific provisions of applicable law.
10. This Agreement shall become effective as of the date of its execution,
and
(a) unless otherwise terminated, this Agreement shall continue in
effect for two years from the date of execution, and from year to year
thereafter so long as such continuance is specifically approved at least
annually (i) by the Board of Trustees of the Fund or by vote of a majority
of the outstanding voting securities of the Series, and (ii) by vote of a
majority of the trustees of the Fund who are not interested persons of the
Fund or the Manager, cast in person at a meeting called for the purpose of
voting on, such approval;
(b) this Agreement may at any time be terminated on sixty days'
written notice to the Manager either by vote of the Board of Trustees of
the Fund or by vote of a majority of the outstanding voting securities of
the Series;
(c) this Agreement shall automatically terminate in the event of its
assignment;
(d) this Agreement may be terminated by the Manager on ninety days'
written notice to the Fund;
(e) if New England Funds, L.P., the Fund's principal underwriter,
requires the Fund or the Series to change its name so as to eliminate all
references to the words "New England" or the letters "TNE" pursuant to the
provisions of the Fund's Distribution Agreement relating to the Series with
said principal underwriter, this Agreement shall automatically terminate at
the time of such change unless the continuance of this Agreement after such
change shall have been specifically approved by vote of a majority of the
outstanding voting securities of the Series and by vote of a majority of
the trustees of the Fund who are not interested persons of the Fund or the
Manager, cast in person at a meeting called for the purpose of voting on
such approval.
Termination of this Agreement pursuant to this Section 10 shall be without
the payment of any penalty.
-5-
<PAGE>
11. This Agreement may be amended at any time by mutual consent of the
parties, provided that such consent on the part of the Fund shall have been
approved by vote of a majority of the outstanding voting securities of the
Series and by vote of a majority of the trustees of the Fund who are not
interested persons of the Fund or the Manager, cast in person at a meeting
called for the purpose of voting on such approval.
12. For the purpose of this Agreement, the terms "vote of a majority of
the outstanding voting securities," "interested person," "affiliated person" and
"assignment" shall have their respective meanings defined in the 1940 Act,
subject, however, to such exemptions as may be granted by the Securities and
Exchange Commission under the 1940 Act. References in this Agreement to any
assets, property or liabilities "belonging to" the Series shall have the meaning
defined in the Fund's Agreement and Declaration of Trust as amended from time to
time.
13. In the absence of willful misfeasance, bad faith or gross negligence
on the part of the Manager, or reckless disregard of its obligations and duties
hereunder, the Manager shall not be subject to any liability to the Fund, to any
shareholder of the Fund or to any other person, firm or organization, for any
act or omission in the course of, or connected with, rendering services
hereunder.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the
day and year first above written.
NEW ENGLAND FUNDS TRUST II NEW ENGLAND
on behalf of its New England Limited Term FUNDS MANAGEMENT, L.P.
U.S. Government Fund series
By NEF Corporation, its general
partner
By: HENRY L.P. SCHMELZER By: BRUCE R. SPECA
--------------------------- ---------------------------
Name: Henry L.P. Schmelzer Name: Bruce R. Speca
Title: President Title: Executive Vice President
NOTICE
A copy of the Agreement and Declaration of Trust establishing New England
Funds Trust II (the "Fund") is on file with the Secretary of The Commonwealth of
Massachusetts, and notice is hereby given that this Agreement is executed with
respect to the Fund's New England Limited Term U.S. Government Fund series (the
"Series") on behalf of the Fund by officers of the Fund as officers and not
individually and that the obligations of or arising out of this Agreement are
not binding upon any of the trustees, officers or shareholders individually but
are binding only upon the assets and property belonging to the Series.
-6-
<PAGE>
Exhibit 99.5(a)(iv)
NEW ENGLAND ADJUSTABLE RATE U.S. GOVERNMENT FUND
Advisory Agreement
AGREEMENT made this 2nd day of January, 1996 by and between NEW ENGLAND
FUNDS TRUST II, a Massachusetts business trust (the "Fund"), with respect to its
New England Adjustable Rate U.S. Government Fund series (the "Series"), and NEW
ENGLAND FUNDS MANAGEMENT, L.P., a Delaware limited partnership (the "Manager").
WITNESSETH:
WHEREAS, the Fund and the Manager wish to enter into an agreement setting
forth the terms upon which the Manager (or certain other parties acting pursuant
to delegation from the Manager) will perform certain services for the Series;
NOW, THEREFORE, in consideration of the premises and covenants hereinafter
contained, the parties agree as follows:
1. (a) The Fund hereby employs the Manager to furnish the Fund with
Portfolio Management Services (as defined in Section 2 hereof) and
Administrative Services (as defined in Section 3 hereof), subject to the
authority of the Manager to delegate any or all of its responsibilities
hereunder to other parties as provided in Sections 1(b) and (c) hereof. The
Manager hereby accepts such employment and agrees, at its own expense, to
furnish such services (either directly or pursuant to delegation to other
parties as permitted by Sections 1(b) and (c) hereof) and to assume the
obligations herein set forth, for the compensation herein provided. The
Manager shall, unless otherwise expressly provided or authorized, have no
authority to act for or represent the Fund in any way or otherwise be
deemed an agent of the Fund.
(b) The Manager may delegate any or all of its responsibilities
hereunder with respect to the provision of Portfolio Management Services
(and assumption of related expenses) to one or more other parties (each
such party, a "Sub-Adviser"), pursuant in each case to a written agreement
with such Sub-Adviser that meets the requirements of Section 15 of the
Investment Company Act of 1940 and the rules thereunder (the "1940 Act")
applicable to contracts for service as investment adviser of a registered
investment company (including without limitation the requirements for
approval by the trustees of the Fund and the shareholders of the Series),
subject, however, to such exemptions as may be granted by the Securities
and Exchange Commission. Any Sub-Adviser may (but need not) be affiliated
with the Manager. If different Sub-Advisers are engaged to provide
Portfolio Management Services with respect to different segments of the
<PAGE>
portfolio of the Series, the Manager shall determine, in the manner
described in the prospectus of the Series from time to time in effect, what
portion of the assets belonging to the Series shall be managed by each Sub-
Adviser.
(c) The Manager may delegate any or all of its responsibilities
hereunder with respect to the provision of Administrative Services to one
or more other parties (each such party, an "Administrator") selected by the
Manager. Any Administrator may (but need not) be affiliated with the
Manager.
2. As used in this Agreement, "Portfolio Management Services" means
management of the investment and reinvestment of the assets belonging to the
Series, consisting specifically of the following:
(a) obtaining and evaluating such economic, statistical and financial
data and information and undertaking such additional investment research as
shall be necessary or advisable for the management of the investment and
reinvestment of the assets belonging to the Series in accordance with the
Series' investment objectives and policies;
(b) taking such steps as are necessary to implement the investment
policies of the Series by purchasing and selling of securities, including
the placing of orders for such purchase and sale; and
(c) regularly reporting to the Board of Trustees of the Fund with
respect to the implementation of the investment policies of the Series.
3. As used in this Agreement, "Administrative Services" means the
provision to the Fund, by or at the expense of the Manager, of the following:
(a) office space in such place or places as may be agreed upon from
time to time by the Fund and the Manager, and all necessary office
supplies, facilities and equipment;
(b) necessary executive and other personnel for managing the affairs
of the Series (exclusive of those related to and to be performed under
contract for custodial, transfer, dividend and plan agency services by the
entity or entities selected to perform such services and exclusive of any
managerial functions described in Section 4);
(c) compensation, if any, of trustees of the Fund who are directors,
officers or employees of the Manager, any Sub-Adviser or any Administrator
or of any affiliated person (other than a registered investment company) of
the Manager, any Sub-Adviser or any Administrator; and
-2-
<PAGE>
(d) supervision and oversight of the Portfolio Management Services
provided by each Sub-Adviser, and oversight of all matters relating to
compliance by the Fund with applicable laws and with the Series' investment
policies, restrictions and guidelines, if the Manager has delegated to one
or more Sub-Advisers any or all of its responsibilities hereunder with
respect to the provision of Portfolio Management Services.
4. Nothing in section 3 hereof shall require the Manager to bear, or to
reimburse the Fund for:
(a) any of the costs of printing and mailing the items referred to in
sub-section (n) of this section 4;
(b) any of the costs of preparing, printing and distributing sales
literature;
(c) compensation of trustees of the Fund who are not directors,
officers or employees of the Manager, any Sub-Adviser or any Administrator
or of any affiliated person (other than a registered investment company) of
the Manager, any Sub-Adviser or any Administrator;
(d) registration, filing and other fees in connection with
requirements of regulatory authorities;
(e) the charges and expenses of any entity appointed by the Fund for
custodial, paying agent, shareholder servicing and plan agent services;
(f) charges and expenses of independent accountants retained by the
Fund;
(g) charges and expenses of any transfer agents and registrars
appointed by the Fund;
(h) brokers' commissions and issue and transfer taxes chargeable to
the Fund in connection with securities transactions to which the Fund is a
party;
(i) taxes and fees payable by the Fund to federal, state or other
governmental agencies;
(j) any cost of certificates representing shares of the Fund;
(k) legal fees and expenses in connection with the affairs of the
Fund, including registering and qualifying its shares with Federal and
State regulatory authorities;
(l) expenses of meetings of shareholders and trustees of the Fund;
-3-
<PAGE>
(m) interest, including interest on borrowings by the Fund;
(n) the costs of services, including services of counsel, required in
connection with the preparation of the Fund's registration statements and
prospectuses, including amendments and revisions thereto, annual,
semiannual and other periodic reports of the Fund, and notices and proxy
solicitation material furnished to shareholders of the Fund or regulatory
authorities; and
(o) the Fund's expenses of bookkeeping, accounting, auditing and
financial reporting, including related clerical expenses.
5. All activities undertaken by the Manager or any Sub-Adviser or
Administrator pursuant to this Agreement shall at all times be subject to the
supervision and control of the Board of Trustees of the Fund, any duly
constituted committee thereof or any officer of the Fund acting pursuant to like
authority.
6. The services to be provided by the Manager and any Sub-Adviser or
Administrator hereunder are not to be deemed exclusive and the Manager and any
Sub-Adviser or Administrator shall be free to render similar services to others,
so long as its services hereunder are not impaired thereby.
7. As full compensation for all services rendered, facilities furnished
and expenses borne by the Manager hereunder, the Fund shall pay the Manager
compensation at the annual rate of 0.55% of the first $200 million of the
average daily net assets of the Series, 0.51% of the next $300 million of the
average daily net assets of the Series, and 0.47% over $500 million of such
assets, respectively (or such lesser amount as the Manager may from time to time
agree to receive). Such compensation shall be payable monthly in arrears or at
such other intervals, not less frequently than quarterly, as the Board of
Trustees of the Fund may from time to time determine and specify in writing to
the Manager. The Manager hereby acknowledges that the Fund's obligation to pay
such compensation is binding only on the assets and property belonging to the
Series.
8. If the total of all ordinary business expenses of the Fund as a whole
(including investment advisory fees but excluding interest, taxes, portfolio
brokerage commissions, distribution-related expenses and extraordinary expenses)
for any fiscal year exceeds the lowest applicable percentage of average net
assets or income limitations prescribed by any state in which shares of the
Series are qualified for sale, the Manager shall pay such excess. Solely for
purposes of applying such limitations in accordance with the foregoing sentence,
the Series and the Fund shall each be deemed to be a separate fund subject to
such limitations. Should the applicable state limitation provisions fail to
specify how the average net assets of the Fund or belonging to the Series are to
be calculated, that figure shall be calculated by reference to the average daily
net assets of the Fund or the Series, as the case may be.
-4-
<PAGE>
9. It is understood that any of the shareholders, trustees, officers,
employees and agents of the Fund may be a shareholder, director, officer,
employee or agent of, or be otherwise interested in, the Manager, any affiliated
person of the Manager, any organization in which the Manager may have an
interest or any organization which may have an interest in the Manager; that the
Manager, any such affiliated person or any such organization may have an
interest in the Fund; and that the existence of any such dual interest shall not
affect the validity hereof or of any transactions hereunder except as otherwise
provided in the Agreement and Declaration of Trust of the Fund, the partnership
agreement of the Manager or specific provisions of applicable law.
10. This Agreement shall become effective as of the date of its execution,
and
(a) unless otherwise terminated, this Agreement shall continue in
effect for two years from the date of execution, and from year to year
thereafter so long as such continuance is specifically approved at least
annually (i) by the Board of Trustees of the Fund or by vote of a majority
of the outstanding voting securities of the Series, and (ii) by vote of a
majority of the trustees of the Fund who are not interested persons of the
Fund or the Manager, cast in person at a meeting called for the purpose of
voting on, such approval;
(b) this Agreement may at any time be terminated on sixty days'
written notice to the Manager either by vote of the Board of Trustees of
the Fund or by vote of a majority of the outstanding voting securities of
the Series;
(c) this Agreement shall automatically terminate in the event of its
assignment;
(d) this Agreement may be terminated by the Manager on ninety days'
written notice to the Fund;
(e) if New England Funds, L.P., the Fund's principal underwriter,
requires the Fund or the Series to change its name so as to eliminate all
references to the words "New England" or the letters "TNE" pursuant to the
provisions of the Fund's Distribution Agreement relating to the Series with
said principal underwriter, this Agreement shall automatically terminate at
the time of such change unless the continuance of this Agreement after such
change shall have been specifically approved by vote of a majority of the
outstanding voting securities of the Series and by vote of a majority of
the trustees of the Fund who are not interested persons of the Fund or the
Manager, cast in person at a meeting called for the purpose of voting on
such approval.
Termination of this Agreement pursuant to this Section 10 shall be without
the payment of any penalty.
-5-
<PAGE>
11. This Agreement may be amended at any time by mutual consent of the
parties, provided that such consent on the part of the Fund shall have been
approved by vote of a majority of the outstanding voting securities of the
Series and by vote of a majority of the trustees of the Fund who are not
interested persons of the Fund or the Manager, cast in person at a meeting
called for the purpose of voting on such approval.
12. For the purpose of this Agreement, the terms "vote of a majority of
the outstanding voting securities," "interested person," "affiliated person" and
"assignment" shall have their respective meanings defined in the 1940 Act,
subject, however, to such exemptions as may be granted by the Securities and
Exchange Commission under the 1940 Act. References in this Agreement to any
assets, property or liabilities "belonging to" the Series shall have the meaning
defined in the Fund's Agreement and Declaration of Trust as amended from time to
time.
13. In the absence of willful misfeasance, bad faith or gross negligence
on the part of the Manager, or reckless disregard of its obligations and duties
hereunder, the Manager shall not be subject to any liability to the Fund, to any
shareholder of the Fund or to any other person, firm or organization, for any
act or omission in the course of, or connected with, rendering services
hereunder.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the
day and year first above written.
NEW ENGLAND FUNDS TRUST II NEW ENGLAND
on behalf of its New England Adjustable FUNDS MANAGEMENT, L.P.
Rate U.S. Government Fund series
By NEF Corporation, its general
partner
By: HENRY L.P. SCHMELZER By: BRUCE R. SPECA
------------------------------- -------------------------------
Name: Henry L.P. Schmelzer Name: Bruce R. Speca
Title: President Title: Executive Vice President
partner
NOTICE
A copy of the Agreement and Declaration of Trust establishing New England
Funds Trust II (the "Fund") is on file with the Secretary of The Commonwealth of
Massachusetts, and notice is hereby given that this Agreement is executed with
respect to the Fund's New England Adjustable Rate U.S. Government Fund series
(the "Series") on behalf of the Fund by officers of the Fund as officers and not
individually and that the obligations of or arising out of this Agreement are
not binding upon any of the trustees, officers or shareholders individually but
are binding only upon the assets and property belonging to the Series.
-6-
<PAGE>
Exhibit 99.5(a)(v)
NEW ENGLAND HIGH INCOME FUND
Advisory Agreement
AGREEMENT made this 2nd day of January, 1996 by and between NEW ENGLAND
FUNDS TRUST II, a Massachusetts business trust (the "Fund"), with respect to its
New England High Income Fund series (the "Series"), and NEW ENGLAND FUNDS
MANAGEMENT, L.P., a Delaware limited partnership (the "Manager").
WITNESSETH:
WHEREAS, the Fund and the Manager wish to enter into an agreement setting
forth the terms upon which the Manager (or certain other parties acting pursuant
to delegation from the Manager) will perform certain services for the Series;
NOW, THEREFORE, in consideration of the premises and covenants hereinafter
contained, the parties agree as follows:
1. (a) The Fund hereby employs the Manager to furnish the Fund with
Portfolio Management Services (as defined in Section 2 hereof) and
Administrative Services (as defined in Section 3 hereof), subject to the
authority of the Manager to delegate any or all of its responsibilities
hereunder to other parties as provided in Sections 1(b) and (c) hereof. The
Manager hereby accepts such employment and agrees, at its own expense, to
furnish such services (either directly or pursuant to delegation to other
parties as permitted by Sections 1(b) and (c) hereof) and to assume the
obligations herein set forth, for the compensation herein provided. The
Manager shall, unless otherwise expressly provided or authorized, have no
authority to act for or represent the Fund in any way or otherwise be
deemed an agent of the Fund.
(b) The Manager may delegate any or all of its responsibilities
hereunder with respect to the provision of Portfolio Management Services
(and assumption of related expenses) to one or more other parties (each
such party, a "Sub-Adviser"), pursuant in each case to a written agreement
with such Sub-Adviser that meets the requirements of Section 15 of the
Investment Company Act of 1940 and the rules thereunder (the "1940 Act")
applicable to contracts for service as investment adviser of a registered
investment company (including without limitation the requirements for
approval by the trustees of the Fund and the shareholders of the Series),
subject, however, to such exemptions as may be granted by the Securities
and Exchange Commission. Any Sub-Adviser may (but need not) be affiliated
with the Manager. If different Sub-Advisers are engaged to provide
Portfolio Management Services with respect to different segments of the
<PAGE>
portfolio of the Series, the Manager shall determine, in the manner
described in the prospectus of the Series from time to time in effect, what
portion of the assets belonging to the Series shall be managed by each Sub-
Adviser.
(c) The Manager may delegate any or all of its responsibilities
hereunder with respect to the provision of Administrative Services to one
or more other parties (each such party, an "Administrator") selected by the
Manager. Any Administrator may (but need not) be affiliated with the
Manager.
2. As used in this Agreement, "Portfolio Management Services" means
management of the investment and reinvestment of the assets belonging to the
Series, consisting specifically of the following:
(a) obtaining and evaluating such economic, statistical and financial
data and information and undertaking such additional investment research as
shall be necessary or advisable for the management of the investment and
reinvestment of the assets belonging to the Series in accordance with the
Series' investment objectives and policies;
(b) taking such steps as are necessary to implement the investment
policies of the Series by purchasing and selling of securities, including
the placing of orders for such purchase and sale; and
(c) regularly reporting to the Board of Trustees of the Fund with
respect to the implementation of the investment policies of the Series.
3. As used in this Agreement, "Administrative Services" means the provision
to the Fund, by or at the expense of the Manager, of the following:
(a) office space in such place or places as may be agreed upon from
time to time by the Fund and the Manager, and all necessary office
supplies, facilities and equipment;
(b) necessary executive and other personnel for managing the affairs
of the Series (exclusive of those related to and to be performed under
contract for custodial, transfer, dividend and plan agency services by the
entity or entities selected to perform such services and exclusive of any
managerial functions described in Section 4);
(c) compensation, if any, of trustees of the Fund who are directors,
officers or employees of the Manager, any Sub-Adviser or any Administrator
or of any affiliated person (other than a registered investment company) of
the Manager, any Sub-Adviser or any Administrator; and
-2-
<PAGE>
(d) supervision and oversight of the Portfolio Management Services
provided by each Sub-Adviser, and oversight of all matters relating to
compliance by the Fund with applicable laws and with the Series' investment
policies, restrictions and guidelines, if the Manager has delegated to one
or more Sub-Advisers any or all of its responsibilities hereunder with
respect to the provision of Portfolio Management Services.
4. Nothing in section 3 hereof shall require the Manager to bear, or to
reimburse the Fund for:
(a) any of the costs of printing and mailing the items referred to in
sub-section (n) of this section 4;
(b) any of the costs of preparing, printing and distributing sales
literature;
(c) compensation of trustees of the Fund who are not directors,
officers or employees of the Manager, any Sub-Adviser or any Administrator
or of any affiliated person (other than a registered investment company) of
the Manager, any Sub-Adviser or any Administrator;
(d) registration, filing and other fees in connection with
requirements of regulatory authorities;
(e) the charges and expenses of any entity appointed by the Fund for
custodial, paying agent, shareholder servicing and plan agent services;
(f) charges and expenses of independent accountants retained by the
Fund;
(g) charges and expenses of any transfer agents and registrars
appointed by the Fund;
(h) brokers' commissions and issue and transfer taxes chargeable to
the Fund in connection with securities transactions to which the Fund is a
party;
(i) taxes and fees payable by the Fund to federal, state or other
governmental agencies;
(j) any cost of certificates representing shares of the Fund;
(k) legal fees and expenses in connection with the affairs of the
Fund, including registering and qualifying its shares with Federal and
State regulatory authorities;
(l) expenses of meetings of shareholders and trustees of the Fund;
-3-
<PAGE>
(m) interest, including interest on borrowings by the Fund;
(n) the costs of services, including services of counsel, required in
connection with the preparation of the Fund's registration statements and
prospectuses, including amendments and revisions thereto, annual,
semiannual and other periodic reports of the Fund, and notices and proxy
solicitation material furnished to shareholders of the Fund or regulatory
authorities; and
(o) the Fund's expenses of bookkeeping, accounting, auditing and
financial reporting, including related clerical expenses.
5. All activities undertaken by the Manager or any Sub-Adviser or
Administrator pursuant to this Agreement shall at all times be subject to the
supervision and control of the Board of Trustees of the Fund, any duly
constituted committee thereof or any officer of the Fund acting pursuant to like
authority.
6. The services to be provided by the Manager and any Sub-Adviser or
Administrator hereunder are not to be deemed exclusive and the Manager and any
Sub-Adviser or Administrator shall be free to render similar services to others,
so long as its services hereunder are not impaired thereby.
7. As full compensation for all services rendered, facilities furnished and
expenses borne by the Manager hereunder, the Fund shall pay the Manager
compensation at the annual rate of 0.75% of the Series's average daily net
assets (or such lesser amount as the Manager may from time to time agree to
receive). Such compensation shall be payable monthly in arrears or at such other
intervals, not less frequently than quarterly, as the Board of Trustees of the
Fund may from time to time determine and specify in writing to the Manager. The
Manager hereby acknowledges that the Fund's obligation to pay such compensation
is binding only on the assets and property belonging to the Series.
8. If the total of all ordinary business expenses of the Fund as a whole
(including investment advisory fees but excluding interest, taxes, portfolio
brokerage commissions, distribution-related expenses and extraordinary expenses)
for any fiscal year exceeds the lowest applicable percentage of average net
assets or income limitations prescribed by any state in which shares of the
Series are qualified for sale, the Manager shall pay such excess. Solely for
purposes of applying such limitations in accordance with the foregoing sentence,
the Series and the Fund shall each be deemed to be a separate fund subject to
such limitations. Should the applicable state limitation provisions fail to
specify how the average net assets of the Fund or belonging to the Series are to
be calculated, that figure shall be calculated by reference to the average daily
net assets of the Fund or the Series, as the case may be.
9. It is understood that any of the shareholders, trustees, officers,
employees and agents of the Fund may be a shareholder, director, officer,
employee or agent of, or be otherwise
-4-
<PAGE>
interested in, the Manager, any affiliated person of the Manager, any
organization in which the Manager may have an interest or any organization which
may have an interest in the Manager; that the Manager, any such affiliated
person or any such organization may have an interest in the Fund; and that the
existence of any such dual interest shall not affect the validity hereof or of
any transactions hereunder except as otherwise provided in the Agreement and
Declaration of Trust of the Fund, the partnership agreement of the Manager or
specific provisions of applicable law.
10. This Agreement shall become effective as of the date of its execution,
and
(a) unless otherwise terminated, this Agreement shall continue in
effect for two years from the date of execution, and from year to year
thereafter so long as such continuance is specifically approved at least
annually (i) by the Board of Trustees of the Fund or by vote of a majority
of the outstanding voting securities of the Series, and (ii) by vote of a
majority of the trustees of the Fund who are not interested persons of the
Fund or the Manager, cast in person at a meeting called for the purpose of
voting on, such approval;
(b) this Agreement may at any time be terminated on sixty days'
written notice to the Manager either by vote of the Board of Trustees of
the Fund or by vote of a majority of the outstanding voting securities of
the Series;
(c) this Agreement shall automatically terminate in the event of its
assignment;
(d) this Agreement may be terminated by the Manager on ninety days'
written notice to the Fund;
(e) if New England Funds, L.P., the Fund's principal underwriter,
requires the Fund or the Series to change its name so as to eliminate all
references to the words "New England" or the letters "TNE" pursuant to the
provisions of the Fund's Distribution Agreement relating to the Series with
said principal underwriter, this Agreement shall automatically terminate at
the time of such change unless the continuance of this Agreement after such
change shall have been specifically approved by vote of a majority of the
outstanding voting securities of the Series and by vote of a majority of
the trustees of the Fund who are not interested persons of the Fund or the
Manager, cast in person at a meeting called for the purpose of voting on
such approval.
Termination of this Agreement pursuant to this Section 10 shall be without
the payment of any penalty.
11. This Agreement may be amended at any time by mutual consent of the
parties, provided that such consent on the part of the Fund shall have been
approved by vote of a majority of the outstanding voting securities of the
Series and by vote of a majority of the
-5-
<PAGE>
trustees of the Fund who are not interested persons of the Fund or the Manager,
cast in person at a meeting called for the purpose of voting on such approval.
12. For the purpose of this Agreement, the terms "vote of a majority of the
outstanding voting securities," "interested person," "affiliated person" and
"assignment" shall have their respective meanings defined in the 1940 Act,
subject, however, to such exemptions as may be granted by the Securities and
Exchange Commission under the 1940 Act. References in this Agreement to any
assets, property or liabilities "belonging to" the Series shall have the meaning
defined in the Fund's Agreement and Declaration of Trust as amended from time to
time.
13. In the absence of willful misfeasance, bad faith or gross negligence on
the part of the Manager, or reckless disregard of its obligations and duties
hereunder, the Manager shall not be subject to any liability to the Fund, to any
shareholder of the Fund or to any other person, firm or organization, for any
act or omission in the course of, or connected with, rendering services
hereunder.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the
day and year first above written.
NEW ENGLAND FUNDS TRUST II NEW ENGLAND
on behalf of its New England High Income FUNDS MANAGEMENT, L.P.
Fund series
By NEF Corporation, its general
partner
By: HENRY L.P. SCHMELZER By: BRUCE R. SPECA
-------------------------------- ------------------------------
Name: Henry L.P. Schmelzer Name: Bruce R. Speca
Title: President Title: Executive Vice President
NOTICE
A copy of the Agreement and Declaration of Trust establishing New England Funds
Trust II (the "Fund") is on file with the Secretary of The Commonwealth of
Massachusetts, and notice is hereby given that this Agreement is executed with
respect to the Fund's New England High Income Fund series (the "Series") on
behalf of the Fund by officers of the Fund as officers and not individually and
that the obligations of or arising out of this Agreement are not binding upon
any of the trustees, officers or shareholders individually but are binding only
upon the assets and property belonging to the Series.
-6-
<PAGE>
Exhibit 99.5(a)(vi)
NEW ENGLAND MASSACHUSETTS TAX FREE INCOME FUND
Advisory Agreement
AGREEMENT made this 2nd day of January, 1996 by and between NEW ENGLAND
FUNDS TRUST II, a Massachusetts business trust (the "Fund"), with respect to its
New England Massachusetts Tax Free Income Fund series (the "Series"), and NEW
ENGLAND FUNDS MANAGEMENT, L.P., a Delaware limited partnership (the "Manager").
WITNESSETH:
WHEREAS, the Fund and the Manager wish to enter into an agreement setting
forth the terms upon which the Manager (or certain other parties acting pursuant
to delegation from the Manager) will perform certain services for the Series;
NOW, THEREFORE, in consideration of the premises and covenants hereinafter
contained, the parties agree as follows:
1. (a) The Fund hereby employs the Manager to furnish the Fund with
Portfolio Management Services (as defined in Section 2 hereof) and
Administrative Services (as defined in Section 3 hereof), subject to the
authority of the Manager to delegate any or all of its responsibilities
hereunder to other parties as provided in Sections 1(b) and (c) hereof. The
Manager hereby accepts such employment and agrees, at its own expense, to
furnish such services (either directly or pursuant to delegation to other
parties as permitted by Sections 1(b) and (c) hereof) and to assume the
obligations herein set forth, for the compensation herein provided. The
Manager shall, unless otherwise expressly provided or authorized, have no
authority to act for or represent the Fund in any way or otherwise be
deemed an agent of the Fund.
(b) The Manager may delegate any or all of its responsibilities
hereunder with respect to the provision of Portfolio Management Services
(and assumption of related expenses) to one or more other parties (each
such party, a "Sub-Adviser"), pursuant in each case to a written agreement
with such Sub-Adviser that meets the requirements of Section 15 of the
Investment Company Act of 1940 and the rules thereunder (the "1940 Act")
applicable to contracts for service as investment adviser of a registered
investment company (including without limitation the requirements for
approval by the trustees of the Fund and the shareholders of the Series),
subject, however, to such exemptions as may be granted by the Securities
and Exchange Commission. Any Sub-Adviser may (but need not) be affiliated
with the Manager. If different Sub-Advisers are engaged to provide
Portfolio Management Services with respect to different segments of the
<PAGE>
portfolio of the Series, the Manager shall determine, in the manner
described in the prospectus of the Series from time to time in effect, what
portion of the assets belonging to the Series shall be managed by each Sub-
Adviser.
(c) The Manager may delegate any or all of its responsibilities
hereunder with respect to the provision of Administrative Services to one
or more other parties (each such party, an "Administrator") selected by the
Manager. Any Administrator may (but need not) be affiliated with the
Manager.
2. As used in this Agreement, "Portfolio Management Services" means
management of the investment and reinvestment of the assets belonging to the
Series, consisting specifically of the following:
(a) obtaining and evaluating such economic, statistical and financial
data and information and undertaking such additional investment research as
shall be necessary or advisable for the management of the investment and
reinvestment of the assets belonging to the Series in accordance with the
Series' investment objectives and policies;
(b) taking such steps as are necessary to implement the investment
policies of the Series by purchasing and selling of securities, including
the placing of orders for such purchase and sale; and
(c) regularly reporting to the Board of Trustees of the Fund with
respect to the implementation of the investment policies of the Series.
3. As used in this Agreement, "Administrative Services" means the provision
to the Fund, by or at the expense of the Manager, of the following:
(a) office space in such place or places as may be agreed upon from
time to time by the Fund and the Manager, and all necessary office
supplies, facilities and equipment;
(b) necessary executive and other personnel for managing the affairs
of the Series (exclusive of those related to and to be performed under
contract for custodial, transfer, dividend and plan agency services by the
entity or entities selected to perform such services and exclusive of any
managerial functions described in Section 4);
(c) compensation, if any, of trustees of the Fund who are directors,
officers or employees of the Manager, any Sub-Adviser or any Administrator
or of any affiliated person (other than a registered investment company) of
the Manager, any Sub-Adviser or any Administrator; and
-2-
<PAGE>
(d) supervision and oversight of the Portfolio Management Services
provided by each Sub-Adviser, and oversight of all matters relating to
compliance by the Fund with applicable laws and with the Series' investment
policies, restrictions and guidelines, if the Manager has delegated to one
or more Sub-Advisers any or all of its responsibilities hereunder with
respect to the provision of Portfolio Management Services.
4. Nothing in section 3 hereof shall require the Manager to bear, or to
reimburse the Fund for:
(a) any of the costs of printing and mailing the items referred to in
sub-section (n) of this section 4;
(b) any of the costs of preparing, printing and distributing sales
literature;
(c) compensation of trustees of the Fund who are not directors,
officers or employees of the Manager, any Sub-Adviser or any Administrator
or of any affiliated person (other than a registered investment company) of
the Manager, any Sub-Adviser or any Administrator;
(d) registration, filing and other fees in connection with
requirements of regulatory authorities;
(e) the charges and expenses of any entity appointed by the Fund for
custodial, paying agent, shareholder servicing and plan agent services;
(f) charges and expenses of independent accountants retained by the
Fund;
(g) charges and expenses of any transfer agents and registrars
appointed by the Fund;
(h) brokers' commissions and issue and transfer taxes chargeable to
the Fund in connection with securities transactions to which the Fund is a
party;
(i) taxes and fees payable by the Fund to federal, state or other
governmental agencies;
(j) any cost of certificates representing shares of the Fund;
(k) legal fees and expenses in connection with the affairs of the
Fund, including registering and qualifying its shares with Federal and
State regulatory authorities;
(l) expenses of meetings of shareholders and trustees of the Fund;
-3-
<PAGE>
(m) interest, including interest on borrowings by the Fund;
(n) the costs of services, including services of counsel, required in
connection with the preparation of the Fund's registration statements and
prospectuses, including amendments and revisions thereto, annual,
semiannual and other periodic reports of the Fund, and notices and proxy
solicitation material furnished to shareholders of the Fund or regulatory
authorities; and
(o) the Fund's expenses of bookkeeping, accounting, auditing and
financial reporting, including related clerical expenses.
5. All activities undertaken by the Manager or any Sub-Adviser or
Administrator pursuant to this Agreement shall at all times be subject to the
supervision and control of the Board of Trustees of the Fund, any duly
constituted committee thereof or any officer of the Fund acting pursuant to like
authority.
6. The services to be provided by the Manager and any Sub-Adviser or
Administrator hereunder are not to be deemed exclusive and the Manager and any
Sub-Adviser or Administrator shall be free to render similar services to others,
so long as its services hereunder are not impaired thereby.
7. As full compensation for all services rendered, facilities furnished and
expenses borne by the Manager hereunder, the Fund shall pay the Manager
compensation at the annual rate of 0.60% of the first $100 million of the
average daily net assets of the Series and 0.50% over $100 million of such
assets, respectively (or such lesser amount as the Manager may from time to time
agree to receive). Such compensation shall be payable monthly in arrears or at
such other intervals, not less frequently than quarterly, as the Board of
Trustees of the Fund may from time to time determine and specify in writing to
the Manager. The Manager hereby acknowledges that the Fund's obligation to pay
such compensation is binding only on the assets and property belonging to the
Series.
8. If the total of all ordinary business expenses of the Fund as a whole
(including investment advisory fees but excluding interest, taxes, portfolio
brokerage commissions, distribution-related expenses and extraordinary expenses)
for any fiscal year exceeds the lowest applicable percentage of average net
assets or income limitations prescribed by any state in which shares of the
Series are qualified for sale, the Manager shall pay such excess. Solely for
purposes of applying such limitations in accordance with the foregoing sentence,
the Series and the Fund shall each be deemed to be a separate fund subject to
such limitations. Should the applicable state limitation provisions fail to
specify how the average net assets of the Fund or belonging to the Series are to
be calculated, that figure shall be calculated by reference to the average daily
net assets of the Fund or the Series, as the case may be.
9. It is understood that any of the shareholders, trustees, officers,
employees and agents of the Fund may be a shareholder, director, officer,
employee or agent of, or be otherwise
-4-
<PAGE>
interested in, the Manager, any affiliated person of the Manager, any
organization in which the Manager may have an interest or any organization which
may have an interest in the Manager; that the Manager, any such affiliated
person or any such organization may have an interest in the Fund; and that the
existence of any such dual interest shall not affect the validity hereof or of
any transactions hereunder except as otherwise provided in the Agreement and
Declaration of Trust of the Fund, the partnership agreement of the Manager or
specific provisions of applicable law.
10. This Agreement shall become effective as of the date of its execution,
and
(a) unless otherwise terminated, this Agreement shall continue in
effect for two years from the date of execution, and from year to year
thereafter so long as such continuance is specifically approved at least
annually (i) by the Board of Trustees of the Fund or by vote of a majority
of the outstanding voting securities of the Series, and (ii) by vote of a
majority of the trustees of the Fund who are not interested persons of the
Fund or the Manager, cast in person at a meeting called for the purpose of
voting on, such approval;
(b) this Agreement may at any time be terminated on sixty days'
written notice to the Manager either by vote of the Board of Trustees of
the Fund or by vote of a majority of the outstanding voting securities of
the Series;
(c) this Agreement shall automatically terminate in the event of its
assignment;
(d) this Agreement may be terminated by the Manager on ninety days'
written notice to the Fund;
(e) if New England Funds, L.P., the Fund's principal underwriter,
requires the Fund or the Series to change its name so as to eliminate all
references to the words "New England" or the letters "TNE" pursuant to the
provisions of the Fund's Distribution Agreement relating to the Series with
said principal underwriter, this Agreement shall automatically terminate at
the time of such change unless the continuance of this Agreement after such
change shall have been specifically approved by vote of a majority of the
outstanding voting securities of the Series and by vote of a majority of
the trustees of the Fund who are not interested persons of the Fund or the
Manager, cast in person at a meeting called for the purpose of voting on
such approval.
Termination of this Agreement pursuant to this Section 10 shall be without
the payment of any penalty.
11. This Agreement may be amended at any time by mutual consent of the
parties, provided that such consent on the part of the Fund shall have been
approved by vote of a majority of the outstanding voting securities of the
Series and by vote of a majority of the
-5-
<PAGE>
trustees of the Fund who are not interested persons of the Fund or the Manager,
cast in person at a meeting called for the purpose of voting on such approval.
12. For the purpose of this Agreement, the terms "vote of a majority of the
outstanding voting securities," "interested person," "affiliated person" and
"assignment" shall have their respective meanings defined in the 1940 Act,
subject, however, to such exemptions as may be granted by the Securities and
Exchange Commission under the 1940 Act. References in this Agreement to any
assets, property or liabilities "belonging to" the Series shall have the meaning
defined in the Fund's Agreement and Declaration of Trust as amended from time to
time.
13. In the absence of willful misfeasance, bad faith or gross negligence on
the part of the Manager, or reckless disregard of its obligations and duties
hereunder, the Manager shall not be subject to any liability to the Fund, to any
shareholder of the Fund or to any other person, firm or organization, for any
act or omission in the course of, or connected with, rendering services
hereunder.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the
day and year first above written.
NEW ENGLAND FUNDS TRUST II NEW ENGLAND
on behalf of its New England FUNDS MANAGEMENT, L.P.
Massachusetts
Tax Free Income Fund series
By NEF Corporation, its general
partner
By: HENRY L.P. SCHMELZER By: BRUCE R. SPECA
--------------------------------- ----------------------------------
Name: Henry L.P. Schmelzer Name: Bruce R. Speca
Title: President Title: Executive Vice President
NOTICE
A copy of the Agreement and Declaration of Trust establishing New England
Funds Trust II (the "Fund") is on file with the Secretary of The Commonwealth of
Massachusetts, and notice is hereby given that this Agreement is executed with
respect to the Fund's New England Massachusetts Tax Free Income Fund series (the
"Series") on behalf of the Fund by officers of the Fund as officers and not
individually and that the obligations of or arising out of this Agreement are
not binding upon any of the trustees, officers or shareholders individually but
are binding only upon the assets and property belonging to the Series.
-6-
<PAGE>
Exhibit 99.5(a)(vii)
NEW ENGLAND INTERMEDIATE TERM
TAX FREE FUND OF CALIFORNIA
Advisory Agreement
AGREEMENT made this 2nd day of January, 1996 by and between NEW ENGLAND
FUNDS TRUST II, a Massachusetts business trust (the "Fund"), with respect to its
New England Intermediate Term Tax Free Fund of California series (the "Series"),
and NEW ENGLAND FUNDS MANAGEMENT, L.P., a Delaware limited partnership (the
"Manager").
WITNESSETH:
WHEREAS, the Fund and the Manager wish to enter into an agreement setting
forth the terms upon which the Manager (or certain other parties acting pursuant
to delegation from the Manager) will perform certain services for the Series;
NOW, THEREFORE, in consideration of the premises and covenants hereinafter
contained, the parties agree as follows:
1. (a) The Fund hereby employs the Manager to furnish the Fund with
Portfolio Management Services (as defined in Section 2 hereof) and
Administrative Services (as defined in Section 3 hereof), subject to the
authority of the Manager to delegate any or all of its responsibilities
hereunder to other parties as provided in Sections 1(b) and (c) hereof. The
Manager hereby accepts such employment and agrees, at its own expense, to
furnish such services (either directly or pursuant to delegation to other
parties as permitted by Sections 1(b) and (c) hereof) and to assume the
obligations herein set forth, for the compensation herein provided. The
Manager shall, unless otherwise expressly provided or authorized, have no
authority to act for or represent the Fund in any way or otherwise be
deemed an agent of the Fund.
(b) The Manager may delegate any or all of its responsibilities
hereunder with respect to the provision of Portfolio Management Services
(and assumption of related expenses) to one or more other parties (each
such party, a "Sub-Adviser"), pursuant in each case to a written agreement
with such Sub-Adviser that meets the requirements of Section 15 of the
Investment Company Act of 1940 and the rules thereunder (the "1940 Act")
applicable to contracts for service as investment adviser of a registered
investment company (including without limitation the requirements for
approval by the trustees of the Fund and the shareholders of the Series),
subject, however, to such exemptions as may be granted by the Securities
and Exchange Commission. Any Sub-Adviser may (but need not) be affiliated
with the Manager. If different Sub-Advisers are engaged to
<PAGE>
provide Portfolio Management Services with respect to different segments of
the portfolio of the Series, the Manager shall determine, in the manner
described in the prospectus of the Series from time to time in effect, what
portion of the assets belonging to the Series shall be managed by each Sub-
Adviser.
(c) The Manager may delegate any or all of its responsibilities
hereunder with respect to the provision of Administrative Services to one
or more other parties (each such party, an "Administrator") selected by the
Manager. Any Administrator may (but need not) be affiliated with the
Manager.
2. As used in this Agreement, "Portfolio Management Services" means
management of the investment and reinvestment of the assets belonging to the
Series, consisting specifically of the following:
(a) obtaining and evaluating such economic, statistical and financial
data and information and undertaking such additional investment research as
shall be necessary or advisable for the management of the investment and
reinvestment of the assets belonging to the Series in accordance with the
Series' investment objectives and policies;
(b) taking such steps as are necessary to implement the investment
policies of the Series by purchasing and selling of securities, including
the placing of orders for such purchase and sale; and
(c) regularly reporting to the Board of Trustees of the Fund with
respect to the implementation of the investment policies of the Series.
3. As used in this Agreement, "Administrative Services" means the
provision to the Fund, by or at the expense of the Manager, of the following:
(a) office space in such place or places as may be agreed upon from
time to time by the Fund and the Manager, and all necessary office
supplies, facilities and equipment;
(b) necessary executive and other personnel for managing the affairs
of the Series (exclusive of those related to and to be performed under
contract for custodial, transfer, dividend and plan agency services by the
entity or entities selected to perform such services and exclusive of any
managerial functions described in Section 4);
(c) compensation, if any, of trustees of the Fund who are directors,
officers or employees of the Manager, any Sub-Adviser or any Administrator
or of any affiliated person (other than a registered investment company) of
the Manager, any Sub-Adviser or any Administrator; and
-2-
<PAGE>
(d) supervision and oversight of the Portfolio Management Services
provided by each Sub-Adviser, and oversight of all matters relating to
compliance by the Fund with applicable laws and with the Series' investment
policies, restrictions and guidelines, if the Manager has delegated to one
or more Sub-Advisers any or all of its responsibilities hereunder with
respect to the provision of Portfolio Management Services.
4. Nothing in section 3 hereof shall require the Manager to bear, or to
reimburse the Fund for:
(a) any of the costs of printing and mailing the items referred to in
sub-section (n) of this section 4;
(b) any of the costs of preparing, printing and distributing sales
literature;
(c) compensation of trustees of the Fund who are not directors,
officers or employees of the Manager, any Sub-Adviser or any Administrator
or of any affiliated person (other than a registered investment company) of
the Manager, any Sub-Adviser or any Administrator;
(d) registration, filing and other fees in connection with
requirements of regulatory authorities;
(e) the charges and expenses of any entity appointed by the Fund for
custodial, paying agent, shareholder servicing and plan agent services;
(f) charges and expenses of independent accountants retained by the
Fund;
(g) charges and expenses of any transfer agents and registrars
appointed by the Fund;
(h) brokers' commissions and issue and transfer taxes chargeable to
the Fund in connection with securities transactions to which the Fund is a
party;
(i) taxes and fees payable by the Fund to federal, state or other
governmental agencies;
(j) any cost of certificates representing shares of the Fund;
(k) legal fees and expenses in connection with the affairs of the
Fund, including registering and qualifying its shares with Federal and
State regulatory authorities;
(l) expenses of meetings of shareholders and trustees of the Fund;
-3-
<PAGE>
(m) interest, including interest on borrowings by the Fund;
(n) the costs of services, including services of counsel, required in
connection with the preparation of the Fund's registration statements and
prospectuses, including amendments and revisions thereto, annual,
semiannual and other periodic reports of the Fund, and notices and proxy
solicitation material furnished to shareholders of the Fund or regulatory
authorities; and
(o) the Fund's expenses of bookkeeping, accounting, auditing and
financial reporting, including related clerical expenses.
5. All activities undertaken by the Manager or any Sub-Adviser or
Administrator pursuant to this Agreement shall at all times be subject to the
supervision and control of the Board of Trustees of the Fund, any duly
constituted committee thereof or any officer of the Fund acting pursuant to like
authority.
6. The services to be provided by the Manager and any Sub-Adviser or
Administrator hereunder are not to be deemed exclusive and the Manager and any
Sub-Adviser or Administrator shall be free to render similar services to others,
so long as its services hereunder are not impaired thereby.
7. As full compensation for all services rendered, facilities furnished
and expenses borne by the Manager hereunder, the Fund shall pay the Manager
compensation at the annual rate of 0.525% of the first $200 million of the
average daily net assets of the Series, 0.500% of the next $300 million of the
average daily net assets of the Series, and 0.475% over $500 million of such
assets, respectively (or such lesser amount as the Manager may from time to time
agree to receive). Such compensation shall be payable monthly in arrears or at
such other intervals, not less frequently than quarterly, as the Board of
Trustees of the Fund may from time to time determine and specify in writing to
the Manager. The Manager hereby acknowledges that the Fund's obligation to pay
such compensation is binding only on the assets and property belonging to the
Series.
8. If the total of all ordinary business expenses of the Fund as a whole
(including investment advisory fees but excluding interest, taxes, portfolio
brokerage commissions, distribution-related expenses and extraordinary expenses)
for any fiscal year exceeds the lowest applicable percentage of average net
assets or income limitations prescribed by any state in which shares of the
Series are qualified for sale, the Manager shall pay such excess. Solely for
purposes of applying such limitations in accordance with the foregoing sentence,
the Series and the Fund shall each be deemed to be a separate fund subject to
such limitations. Should the applicable state limitation provisions fail to
specify how the average net assets of the Fund or belonging to the Series are to
be calculated, that figure shall be calculated by reference to the average daily
net assets of the Fund or the Series, as the case may be.
-4-
<PAGE>
9. It is understood that any of the shareholders, trustees, officers,
employees and agents of the Fund may be a shareholder, director, officer,
employee or agent of, or be otherwise interested in, the Manager, any affiliated
person of the Manager, any organization in which the Manager may have an
interest or any organization which may have an interest in the Manager; that the
Manager, any such affiliated person or any such organization may have an
interest in the Fund; and that the existence of any such dual interest shall not
affect the validity hereof or of any transactions hereunder except as otherwise
provided in the Agreement and Declaration of Trust of the Fund, the partnership
agreement of the Manager or specific provisions of applicable law.
10. This Agreement shall become effective as of the date of its execution,
and
(a) unless otherwise terminated, this Agreement shall continue in
effect for two years from the date of execution, and from year to year
thereafter so long as such continuance is specifically approved at least
annually (i) by the Board of Trustees of the Fund or by vote of a majority
of the outstanding voting securities of the Series, and (ii) by vote of a
majority of the trustees of the Fund who are not interested persons of the
Fund or the Manager, cast in person at a meeting called for the purpose of
voting on, such approval;
(b) this Agreement may at any time be terminated on sixty days'
written notice to the Manager either by vote of the Board of Trustees of
the Fund or by vote of a majority of the outstanding voting securities of
the Series;
(c) this Agreement shall automatically terminate in the event of its
assignment;
(d) this Agreement may be terminated by the Manager on ninety days'
written notice to the Fund;
(e) if New England Funds, L.P., the Fund's principal underwriter,
requires the Fund or the Series to change its name so as to eliminate all
references to the words "New England" or the letters "TNE" pursuant to the
provisions of the Fund's Distribution Agreement relating to the Series with
said principal underwriter, this Agreement shall automatically terminate at
the time of such change unless the continuance of this Agreement after such
change shall have been specifically approved by vote of a majority of the
outstanding voting securities of the Series and by vote of a majority of
the trustees of the Fund who are not interested persons of the Fund or the
Manager, cast in person at a meeting called for the purpose of voting on
such approval.
Termination of this Agreement pursuant to this Section 10 shall be without
the payment of any penalty.
-5-
<PAGE>
11. This Agreement may be amended at any time by mutual consent of the
parties, provided that such consent on the part of the Fund shall have been
approved by vote of a majority of the outstanding voting securities of the
Series and by vote of a majority of the trustees of the Fund who are not
interested persons of the Fund or the Manager, cast in person at a meeting
called for the purpose of voting on such approval.
12. For the purpose of this Agreement, the terms "vote of a majority of
the outstanding voting securities," "interested person," "affiliated person" and
"assignment" shall have their respective meanings defined in the 1940 Act,
subject, however, to such exemptions as may be granted by the Securities and
Exchange Commission under the 1940 Act. References in this Agreement to any
assets, property or liabilities "belonging to" the Series shall have the meaning
defined in the Fund's Agreement and Declaration of Trust as amended from time to
time.
13. In the absence of willful misfeasance, bad faith or gross negligence
on the part of the Manager, or reckless disregard of its obligations and duties
hereunder, the Manager shall not be subject to any liability to the Fund, to any
shareholder of the Fund or to any other person, firm or organization, for any
act or omission in the course of, or connected with, rendering services
hereunder.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the
day and year first above written.
NEW ENGLAND FUNDS TRUST II NEW ENGLAND
on behalf of its New England Intermediate FUNDS MANAGEMENT, L.P.
Term Tax Free Fund of California series
By NEF Corporation, its general
partner
By: HENRY L.P. SCHMELZER By: BRUCE R. SPECA
-------------------------------- ---------------------------
Name: Henry L.P. Schmelzer Name: Bruce R. Speca
Title: President Title: Executive Vice President
NOTICE
A copy of the Agreement and Declaration of Trust establishing New England
Funds Trust II (the "Fund") is on file with the Secretary of The Commonwealth of
Massachusetts, and notice is hereby given that this Agreement is executed with
respect to the Fund's New England Intermediate Term Tax Free Fund of California
series (the "Series") on behalf of the Fund by officers of the Fund as officers
and not individually and that the obligations of or arising out of this
Agreement are not binding upon any of the trustees, officers or shareholders
individually but are binding only upon the assets and property belonging to the
Series.
-6-
<PAGE>
Exhibit 99.5(a)(viii)
NEW ENGLAND INTERMEDIATE TERM
TAX FREE FUND OF NEW YORK
Advisory Agreement
AGREEMENT made this 2nd day of January, 1996 by and between NEW ENGLAND
FUNDS TRUST II, a Massachusetts business trust (the "Fund"), with respect to its
New England Intermediate Term Tax Free Fund of New York series (the "Series"),
and NEW ENGLAND FUNDS MANAGEMENT, L.P., a Delaware limited partnership (the
"Manager").
WITNESSETH:
WHEREAS, the Fund and the Manager wish to enter into an agreement setting
forth the terms upon which the Manager (or certain other parties acting pursuant
to delegation from the Manager) will perform certain services for the Series;
NOW, THEREFORE, in consideration of the premises and covenants hereinafter
contained, the parties agree as follows:
1. (a) The Fund hereby employs the Manager to furnish the Fund with
Portfolio Management Services (as defined in Section 2 hereof) and
Administrative Services (as defined in Section 3 hereof), subject to the
authority of the Manager to delegate any or all of its responsibilities
hereunder to other parties as provided in Sections 1(b) and (c) hereof. The
Manager hereby accepts such employment and agrees, at its own expense, to
furnish such services (either directly or pursuant to delegation to other
parties as permitted by Sections 1(b) and (c) hereof) and to assume the
obligations herein set forth, for the compensation herein provided. The
Manager shall, unless otherwise expressly provided or authorized, have no
authority to act for or represent the Fund in any way or otherwise be
deemed an agent of the Fund.
(b) The Manager may delegate any or all of its responsibilities
hereunder with respect to the provision of Portfolio Management Services
(and assumption of related expenses) to one or more other parties (each
such party, a "Sub-Adviser"), pursuant in each case to a written agreement
with such Sub-Adviser that meets the requirements of Section 15 of the
Investment Company Act of 1940 and the rules thereunder (the "1940 Act")
applicable to contracts for service as investment adviser of a registered
investment company (including without limitation the requirements for
approval by the trustees of the Fund and the shareholders of the Series),
subject, however, to such exemptions as may be granted by the Securities
and Exchange Commission. Any Sub-Adviser may (but need not) be affiliated
with the Manager. If different Sub-Advisers are engaged to
<PAGE>
provide Portfolio Management Services with respect to different segments of
the portfolio of the Series, the Manager shall determine, in the manner
described in the prospectus of the Series from time to time in effect, what
portion of the assets belonging to the Series shall be managed by each Sub-
Adviser.
(c) The Manager may delegate any or all of its responsibilities
hereunder with respect to the provision of Administrative Services to one
or more other parties (each such party, an "Administrator") selected by the
Manager. Any Administrator may (but need not) be affiliated with the
Manager.
2. As used in this Agreement, "Portfolio Management Services" means
management of the investment and reinvestment of the assets belonging to the
Series, consisting specifically of the following:
(a) obtaining and evaluating such economic, statistical and financial
data and information and undertaking such additional investment research as
shall be necessary or advisable for the management of the investment and
reinvestment of the assets belonging to the Series in accordance with the
Series' investment objectives and policies;
(b) taking such steps as are necessary to implement the investment
policies of the Series by purchasing and selling of securities, including
the placing of orders for such purchase and sale; and
(c) regularly reporting to the Board of Trustees of the Fund with
respect to the implementation of the investment policies of the Series.
3. As used in this Agreement, "Administrative Services" means the
provision to the Fund, by or at the expense of the Manager, of the following:
(a) office space in such place or places as may be agreed upon from
time to time by the Fund and the Manager, and all necessary office
supplies, facilities and equipment;
(b) necessary executive and other personnel for managing the affairs
of the Series (exclusive of those related to and to be performed under
contract for custodial, transfer, dividend and plan agency services by the
entity or entities selected to perform such services and exclusive of any
managerial functions described in Section 4);
(c) compensation, if any, of trustees of the Fund who are directors,
officers or employees of the Manager, any Sub-Adviser or any Administrator
or of any affiliated person (other than a registered investment company) of
the Manager, any Sub-Adviser or any Administrator; and
-2-
<PAGE>
(d) supervision and oversight of the Portfolio Management Services
provided by each Sub-Adviser, and oversight of all matters relating to
compliance by the Fund with applicable laws and with the Series' investment
policies, restrictions and guidelines, if the Manager has delegated to one
or more Sub-Advisers any or all of its responsibilities hereunder with
respect to the provision of Portfolio Management Services.
4. Nothing in section 3 hereof shall require the Manager to bear, or to
reimburse the Fund for:
(a) any of the costs of printing and mailing the items referred to in
sub-section (n) of this section 4;
(b) any of the costs of preparing, printing and distributing sales
literature;
(c) compensation of trustees of the Fund who are not directors,
officers or employees of the Manager, any Sub-Adviser or any Administrator
or of any affiliated person (other than a registered investment company) of
the Manager, any Sub-Adviser or any Administrator;
(d) registration, filing and other fees in connection with
requirements of regulatory authorities;
(e) the charges and expenses of any entity appointed by the Fund for
custodial, paying agent, shareholder servicing and plan agent services;
(f) charges and expenses of independent accountants retained by the
Fund;
(g) charges and expenses of any transfer agents and registrars
appointed by the Fund;
(h) brokers' commissions and issue and transfer taxes chargeable to
the Fund in connection with securities transactions to which the Fund is a
party;
(i) taxes and fees payable by the Fund to federal, state or other
governmental agencies;
(j) any cost of certificates representing shares of the Fund;
(k) legal fees and expenses in connection with the affairs of the
Fund, including registering and qualifying its shares with Federal and
State regulatory authorities;
(l) expenses of meetings of shareholders and
trustees of the Fund;
-3-
<PAGE>
(m) interest, including interest on borrowings by the Fund;
(n) the costs of services, including services of counsel, required in
connection with the preparation of the Fund's registration statements and
prospectuses, including amendments and revisions thereto, annual,
semiannual and other periodic reports of the Fund, and notices and proxy
solicitation material furnished to shareholders of the Fund or regulatory
authorities; and
(o) the Fund's expenses of bookkeeping, accounting, auditing and
financial reporting, including related clerical expenses.
5. All activities undertaken by the Manager or any Sub-Adviser or
Administrator pursuant to this Agreement shall at all times be subject to the
supervision and control of the Board of Trustees of the Fund, any duly
constituted committee thereof or any officer of the Fund acting pursuant to like
authority.
6. The services to be provided by the Manager and any Sub-Adviser or
Administrator hereunder are not to be deemed exclusive and the Manager and any
Sub-Adviser or Administrator shall be free to render similar services to others,
so long as its services hereunder are not impaired thereby.
7. As full compensation for all services rendered, facilities furnished
and expenses borne by the Manager hereunder, the Fund shall pay the Manager
compensation at the annual rate of 0.525% of the first $200 million of the
average daily net assets of the Series, 0.500% of the next $300 million of the
average daily net assets of the Series, and 0.475% over $500 million of such
assets, respectively (or such lesser amount as the Manager may from time to time
agree to receive). Such compensation shall be payable monthly in arrears or at
such other intervals, not less frequently than quarterly, as the Board of
Trustees of the Fund may from time to time determine and specify in writing to
the Manager. The Manager hereby acknowledges that the Fund's obligation to pay
such compensation is binding only on the assets and property belonging to the
Series.
8. If the total of all ordinary business expenses of the Fund as a whole
(including investment advisory fees but excluding interest, taxes, portfolio
brokerage commissions, distribution-related expenses and extraordinary expenses)
for any fiscal year exceeds the lowest applicable percentage of average net
assets or income limitations prescribed by any state in which shares of the
Series are qualified for sale, the Manager shall pay such excess. Solely for
purposes of applying such limitations in accordance with the foregoing sentence,
the Series and the Fund shall each be deemed to be a separate fund subject to
such limitations. Should the applicable state limitation provisions fail to
specify how the average net assets of the Fund or belonging to the Series are to
be calculated, that figure shall be calculated by reference to the average daily
net assets of the Fund or the Series, as the case may be.
-4-
<PAGE>
9. It is understood that any of the shareholders, trustees, officers,
employees and agents of the Fund may be a shareholder, director, officer,
employee or agent of, or be otherwise interested in, the Manager, any affiliated
person of the Manager, any organization in which the Manager may have an
interest or any organization which may have an interest in the Manager; that the
Manager, any such affiliated person or any such organization may have an
interest in the Fund; and that the existence of any such dual interest shall not
affect the validity hereof or of any transactions hereunder except as otherwise
provided in the Agreement and Declaration of Trust of the Fund, the partnership
agreement of the Manager or specific provisions of applicable law.
10. This Agreement shall become effective as of the date of its execution,
and
(a) unless otherwise terminated, this Agreement shall continue in
effect for two years from the date of execution, and from year to year
thereafter so long as such continuance is specifically approved at least
annually (i) by the Board of Trustees of the Fund or by vote of a majority
of the outstanding voting securities of the Series, and (ii) by vote of a
majority of the trustees of the Fund who are not interested persons of the
Fund or the Manager, cast in person at a meeting called for the purpose of
voting on, such approval;
(b) this Agreement may at any time be terminated on sixty days'
written notice to the Manager either by vote of the Board of Trustees of
the Fund or by vote of a majority of the outstanding voting securities of
the Series;
(c) this Agreement shall automatically terminate in the event of its
assignment;
(d) this Agreement may be terminated by the Manager on ninety days'
written notice to the Fund;
(e) if New England Funds, L.P., the Fund's principal underwriter,
requires the Fund or the Series to change its name so as to eliminate all
references to the words "New England" or the letters "TNE" pursuant to the
provisions of the Fund's Distribution Agreement relating to the Series with
said principal underwriter, this Agreement shall automatically terminate at
the time of such change unless the continuance of this Agreement after such
change shall have been specifically approved by vote of a majority of the
outstanding voting securities of the Series and by vote of a majority of
the trustees of the Fund who are not interested persons of the Fund or the
Manager, cast in person at a meeting called for the purpose of voting on
such approval.
Termination of this Agreement pursuant to this Section 10 shall be without
the payment of any penalty.
-5-
<PAGE>
11. This Agreement may be amended at any time by mutual consent of the
parties, provided that such consent on the part of the Fund shall have been
approved by vote of a majority of the outstanding voting securities of the
Series and by vote of a majority of the trustees of the Fund who are not
interested persons of the Fund or the Manager, cast in person at a meeting
called for the purpose of voting on such approval.
12. For the purpose of this Agreement, the terms "vote of a majority of
the outstanding voting securities," "interested person," "affiliated person" and
"assignment" shall have their respective meanings defined in the 1940 Act,
subject, however, to such exemptions as may be granted by the Securities and
Exchange Commission under the 1940 Act. References in this Agreement to any
assets, property or liabilities "belonging to" the Series shall have the meaning
defined in the Fund's Agreement and Declaration of Trust as amended from time to
time.
13. In the absence of willful misfeasance, bad faith or gross negligence
on the part of the Manager, or reckless disregard of its obligations and duties
hereunder, the Manager shall not be subject to any liability to the Fund, to any
shareholder of the Fund or to any other person, firm or organization, for any
act or omission in the course of, or connected with, rendering services
hereunder.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the
day and year first above written.
NEW ENGLAND FUNDS TRUST II NEW ENGLAND
on behalf of its New England Intermediate FUNDS MANAGEMENT, L.P.
Term Tax Free Fund of New York series
By NEF Corporation, its general
partner
By: HENRY L.P. SCHMELZER By: BRUCE R. SPECA
----------------------------------- --------------------------
Name: Henry L.P. Schmelzer Name: Bruce R. Speca
Title: President Title: Executive Vice President
NOTICE
A copy of the Agreement and Declaration of Trust establishing New England
Funds Trust II (the "Fund") is on file with the Secretary of The Commonwealth of
Massachusetts, and notice is hereby given that this Agreement is executed with
respect to the Fund's New England Intermediate Term Tax Free Fund of New York
series (the "Series") on behalf of the Fund by officers of the Fund as officers
and not individually and that the obligations of or arising out of this
Agreement are not binding upon any of the trustees, officers or shareholders
individually but are binding only upon the assets and property belonging to the
Series.
-6-
<PAGE>
Exhibit 99.5(b)(i)
NEW ENGLAND GROWTH OPPORTUNITIES FUND
Sub-Advisory Agreement
(Westpeak)
This Sub-Advisory Agreement (this "Agreement") is entered into as of
January 2, 1996 by and between New England Funds Management, L.P., a Delaware
limited partnership (the "Manager"), and Westpeak Investment Advisors, L.P., a
Delaware limited partnership (the "Sub-Adviser").
WHEREAS, the Manager has entered into an Advisory Agreement dated January
2, 1996 (the "Advisory Agreement") with New England Funds Trust II (the
"Trust"), pursuant to which the Manager provides portfolio management and
administrative services to New England Growth Opportunities Fund, a series of
the Trust (the "Series");
WHEREAS, the Advisory Agreement provides that the Manager may delegate any
or all of its portfolio management responsibilities under the Advisory Agreement
to one or more sub-advisers;
WHEREAS, the Manager and the trustees of the Trust desire to retain the
Sub-Adviser to render portfolio management services in the manner and on the
terms set forth in this Agreement.
NOW, THEREFORE, in consideration of the mutual covenants and agreements set
forth in this Agreement, the Manager and the Sub-Adviser agree as follows:
1. Sub-Advisory Services.
---------------------
a. The Sub-Adviser shall, subject to the supervision of the Manager
and of any administrator appointed by the Manager (the "Administrator"),
manage the investment and reinvestment of the assets of the Series, and
have the authority on behalf of the Series to vote all proxies and exercise
all other rights of the Series as a security holder of companies in which
the Series from time to time invests. The Sub-Adviser shall manage the
Series in conformity with (1) the investment objective, policies and
restrictions of the Series set forth in the Trust's prospectus and
statement of additional information relating to the Series, (2) any
additional policies or guidelines established by the Manager or by the
Trust's trustees that have been furnished in writing to the Sub-Adviser and
(3) the provisions of the Internal Revenue Code (the "Code") applicable to
"regulated investment companies" (as defined in Section 851 of the Code),
all as from time to time in effect (collectively, the "Policies"), and with
all applicable provisions of law, including without limitation all
applicable provisions of the Investment Company Act of 1940 (the "1940
Act") and the rules and regulations
<PAGE>
thereunder. Subject to the foregoing, the Sub-Adviser is authorized, in its
discretion and without prior consultation with the Manager, to buy, sell,
lend and otherwise trade in any stocks, bonds and other securities and
investment instruments on behalf of the Series, without regard to the
length of time the securities have been held and the resulting rate of
portfolio turnover or any tax considerations; and the majority or the whole
of the Series may be invested in such proportions of stocks, bonds, other
securities or investment instruments, or cash, as the Sub-Adviser shall
determine.
b. The Sub-Adviser shall furnish the Manager and the Administrator
monthly, quarterly and annual reports concerning portfolio transactions and
performance of the Series in such form as may be mutually agreed upon, and
agrees to review the Series and discuss the management of it. The Sub-
Adviser shall permit all books and records with respect to the Series to be
inspected and audited by the Manager and the Administrator at all
reasonable times during normal business hours, upon reasonable notice. The
Sub-Adviser shall also provide the Manager with such other information and
reports as may reasonably be requested by the Manager from time to time,
including without limitation all material requested by or required to be
delivered to the Trustees of the Trust.
c. The Sub-Adviser shall provide to the Manager a copy of the Sub-
Adviser's Form ADV as filed with the Securities and Exchange Commission and
a list of the persons whom the Sub-Adviser wishes to have authorized to
give written and/or oral instructions to custodians of assets of the
Series.
2. Obligations of the Manager.
--------------------------
a. The Manager shall provide (or cause the Series' Custodian (as
defined in Section 3 hereof) to provide) timely information to the Sub-
Adviser regarding such matters as the composition of assets of the Series,
cash requirements and cash available for investment in the Series, and all
other information as may be reasonably necessary for the Sub-Adviser to
perform its responsibilities hereunder.
b. The Manager has furnished the Sub-Adviser a copy of the
prospectus and statement of additional information of the Series and agrees
during the continuance of this Agreement to furnish the Sub-Adviser copies
of any revisions or supplements thereto at, or, if practicable, before the
time the revisions or supplements become effective. The Manager agrees to
furnish the Sub-Adviser with minutes of meetings of the trustees of the
Trust applicable to the Series to the extent they may affect the duties of
the Sub-Adviser, and with copies of any financial statements or reports
made by the Series to its shareholders, and any further materials or
information which the Sub-Adviser may reasonably request to enable it to
perform its functions under this Agreement.
-2-
<PAGE>
3. Custodian. The Manager shall provide the Sub-Adviser with a copy of
---------
the Series's agreement with the custodian designated to hold the assets of the
Series (the "Custodian") and any modifications thereto (the "Custody
Agreement"), copies of such modifications to be provided to the Sub-Adviser a
reasonable time in advance of the effectiveness of such modifications. The
assets of the Series shall be maintained in the custody of the Custodian
identified in, and in accordance with the terms and conditions of, the Custody
Agreement (or any sub-custodian properly appointed as provided in the Custody
Agreement). The Sub-Adviser shall have no liability for the acts or omissions of
the Custodian, unless such act or omission is taken in reliance upon instruction
given to the Custodian by a representative of the Sub-Adviser properly
authorized to give such instruction under the Custody Agreement. Any assets
added to the Series shall be delivered directly to the Custodian.
4. Proprietary Rights. The Manager agrees and acknowledges that the Sub-
------------------
Adviser is the sole owner of the name "Westpeak Investment Advisors, L.P." and
that all use of any designation consisting in whole or part of "Westpeak
Investment Advisors, L.P." under this Agreement shall inure to the benefit of
the Sub-Adviser. The Manager on its own behalf and on behalf of the Series
agrees not to use any such designation in any advertisement or sales literature
or other materials promoting the Series, except with the prior written consent
of the Sub-Adviser. Without the prior written consent of the Sub-Adviser, the
Manager shall not, and the Manager shall use its best efforts to cause the
Series not to, make representations regarding the Sub-Adviser in any disclosure
document, advertisement or sales literature or other materials relating to the
Series. Upon termination of this Agreement for any reason, the Manager shall
cease, and the Manager shall use its best efforts to cause the Series to cease,
all use of any such designation as soon as reasonably practicable.
5. Expenses. Except for expenses specifically assumed or agreed to be
--------
paid by the Sub-Adviser pursuant hereto, the Sub-Adviser shall not be liable for
any organizational, operational or business expenses of the Manager or the Trust
including, without limitation, (a) interest and taxes, (b) brokerage commissions
and other costs in connection with the purchase or sale of securities or other
investment instruments with respect to the Series, and (c) custodian fees and
expenses. Any reimbursement of advisory fees required by any expense limitation
provision of any law shall be the sole responsibility of the Manager. The
Manager and the Sub-Adviser shall not be considered as partners or participants
in a joint venture. The Sub-Adviser will pay its own expenses incurred in
furnishing the services to be provided by it pursuant to this Agreement. Neither
the Sub-Adviser nor any affiliated person thereof shall be entitled to any
compensation from the Manager or the Trust with respect to service by any
affiliated person of the Sub-Adviser as an officer or trustee of the Trust
(other than the compensation to the Sub-Adviser payable by the Manager pursuant
to Section 7 hereof).
6. Purchase and Sale of Assets. The Sub-Adviser shall place all orders
---------------------------
for the purchase and sale of securities for the Series with brokers or dealers
selected by the Sub-Adviser, which may include brokers or dealers affiliated
with the Sub-Adviser, provided such orders comply with Rule 17e-1 under the 1940
Act in all respects. To the extent consistent
-3-
<PAGE>
with applicable law, purchase or sell orders for the Series may be aggregated
with contemporaneous purchase or sell orders of other clients of the Sub-
Adviser. The Sub-Adviser shall use its best efforts to obtain execution of
transactions for the Series at prices which are advantageous to the Series and
at commission rates that are reasonable in relation to the benefits received.
However, the Sub-Adviser may select brokers or dealers on the basis that they
provide brokerage, research or other services or products to the Series and/or
other accounts serviced by the Sub-Adviser. To the extent consistent with
applicable law, the Sub-Adviser may pay a broker or dealer an amount of
commission for effecting a securities transaction in excess of the amount of
commission or dealer spread another broker or dealer would have charged for
effecting that transaction if the Sub-Adviser determines in good faith that such
amount of commission was reasonable in relation to the value of the brokerage
and research products and/or services provided by such broker or dealer. This
determination, with respect to brokerage and research services or products, may
be viewed in terms of either that particular transaction or the overall
responsibilities which the Sub-Adviser and its affiliates have with respect to
the Series or to accounts over which they exercise investment discretion. Not
all such services or products need be used by the Sub-Adviser in managing the
Series.
7. Compensation of the Sub-Adviser. As full compensation for all
-------------------------------
services rendered, facilities furnished and expenses borne by the Sub-Adviser
hereunder, the Manager shall pay the Sub-Adviser compensation at the annual rate
of 0.50% of the first $25 million of the average daily net assets of the Series,
0.40% of the next $75 million of the average daily net assets of the Series,
0.35% of the next $100 million of the average daily net assets of the Series and
0.30% in excess of $200 million of such assets, respectively (or such lesser
amount as the Sub-Adviser may from time to time agree to receive). Such
compensation shall be payable monthly in arrears or at such other intervals, not
less frequently than quarterly, as the Manager is paid by the Series pursuant to
the Advisory Agreement.
8. Non-Exclusivity. The Manager and the Series agree that the services
---------------
of the Sub-Adviser are not to be deemed exclusive and that the Sub-Adviser and
its affiliates are free to act as investment manager and provide other services
to various investment companies and other managed accounts, except as the Sub-
Adviser and the Manager or the Administrator may otherwise agree from time to
time in writing before or after the date hereof. This Agreement shall not in any
way limit or restrict the Sub-Adviser or any of its directors, officers,
employees or agents from buying, selling or trading any securities or other
investment instruments for its or their own account or for the account of others
for whom it or they may be acting, provided that such activities do not
adversely affect or otherwise impair the performance by the Sub-Adviser of its
duties and obligations under this Agreement. The Manager and the Series
recognize and agree that the Sub-Adviser may provide advice to or take action
with respect to other clients, which advice or action, including the timing and
nature of such action, may differ from or be identical to advice given or action
taken with respect to the Series. The Sub-Adviser shall for all purposes hereof
be deemed to be an independent contractor and shall, unless otherwise provided
or authorized, have no authority
-4-
<PAGE>
to act for or represent the Series or the Manager in any way or otherwise be
deemed an agent of the Series or the Manager.
9. Liability. Except as may otherwise be provided by the 1940 Act or
---------
other federal securities laws, neither the Sub-Adviser nor any of its officers,
directors, partners, employees or agents (the "Indemnified Parties") shall be
subject to any liability to the Manager, the Trust, the Series or any
shareholder of the Series for any error of judgment, any mistake of law or any
loss arising out of any investment or other act or omission in the course of,
connected with, or arising out of any service to be rendered under this
Agreement, except by reason of willful misfeasance, bad faith or gross
negligence in the performance of the Sub-Adviser's duties or by reason of
reckless disregard by the Sub-Adviser of its obligations and duties hereunder.
The Manager shall hold harmless and indemnify the Sub-Adviser for any loss,
liability, cost, damage or expense (including reasonable attorneys fees and
costs) arising from any claim or demand by any past or present shareholder of
the Series that is not based upon the obligations of the Sub-Adviser under this
Agreement.
10. Effective Date and Termination. This Agreement shall become effective
------------------------------
as of the date of its execution, and
a. unless otherwise terminated, this Agreement shall continue in
effect for two years from the date of execution, and from year to year
thereafter so long as such continuance is specifically approved at least
annually (i) by the Board of Trustees of the Trust or by vote of a majority
of the outstanding voting securities of the Series, and (ii) by vote of a
majority of the trustees of the Trust who are not interested persons of the
Trust, the Manager or the Sub-Adviser, cast in person at a meeting called
for the purpose of voting on such approval;
b. this Agreement may at any time be terminated on sixty days'
written notice to the Sub-Adviser either by vote of the Board of Trustees
of the Trust or by vote of a majority of the outstanding voting securities
of the Series;
c. this Agreement shall automatically terminate in the event of its
assignment or upon the termination of the Advisory Agreement;
d. this Agreement may be terminated by the Sub-Adviser on ninety
days' written notice to the Manager and the Trust, or by the Manager on
ninety days' written notice to the Sub-Adviser.
Termination of this Agreement pursuant to this Section 10 shall be without
the payment of any penalty.
11. Amendment. This Agreement may be amended at any time by mutual
---------
consent of the Manager and the Sub-Adviser, provided that, if required by law,
such amendment shall
-5-
<PAGE>
also have been approved by vote of a majority of the outstanding voting
securities of the Series and by vote of a majority of the trustees of the Trust
who are not interested persons of the Trust, the Manager or the Sub-Adviser,
cast in person at a meeting called for the purpose of voting on such approval.
12. Certain Definitions. For the purpose of this Agreement, the terms
-------------------
"vote of a majority of the outstanding voting securities," "interested person,"
"affiliated person" and "assignment" shall have their respective meanings
defined in the 1940 Act, subject, however, to such exemptions as may be granted
by the Securities and Exchange Commission under the 1940 Act.
13. General.
-------
a. The Sub-Adviser may perform its services through any employee,
officer or agent of the Sub-Adviser, and the Manager shall not be entitled
to the advice, recommendation or judgment of any specific person; provided,
however, that the persons identified in the prospectus of the Series shall
perform the day-to-day portfolio management duties described therein until
the Sub-Adviser notifies the Manager that one or more other employees,
officers or agents of the Sub-Adviser, identified in such notice, shall
assume such duties as of a specific date.
b. If any term or provision of this Agreement or the application
thereof to any person or circumstances is held to be invalid or
unenforceable to any extent, the remainder of this Agreement or the
application of such provision to other persons or circumstances shall not
be affected thereby and shall be enforced to the fullest extent permitted
by law.
c. This Agreement shall be governed by and interpreted in accordance
with the laws of the Commonwealth of Massachusetts.
NEW ENGLAND FUNDS WESTPEAK INVESTMENT
MANAGEMENT, L.P. ADVISORS, L.P.
By NEF Corporation, its general partner By Westpeak Investment Advisors, Inc.,
its general partner
By: BRUCE R. SPECA By: GERALD H. SCRIVER
---------------------------- ----------------------------
Name: Bruce R. Speca Name: Gerald H. Scriver
Title: Executive Vice President Title: President
-6-
<PAGE>
Exhibit 99.5(b)(ii)
GROWTH FUND OF ISRAEL
Sub-Advisory Agreement
(Harris Associates L.P.)
This Sub-Advisory Agreement (this "Agreement") is entered into as of
December 29, 1995 by and between New England Funds Management, L.P., a Delaware
limited partnership (the "Manager"), and Harris Associates L.P., a Delaware
limited partnership (the "Sub-Adviser").
WHEREAS, the Manager has entered into an Advisory Agreement dated December
29, 1995 (the "Advisory Agreement") with New England Funds Trust II (the
"Trust"), pursuant to which the Manager provides portfolio management and
administrative services to Growth Fund of Israel, a series of the Trust (the
"Series");
WHEREAS, the Advisory Agreement provides that the Manager may delegate any
or all of its portfolio management responsibilities under the Advisory Agreement
to one or more sub-advisers;
WHEREAS, the Manager and the trustees of the Trust desire to retain the
Sub-Adviser to render portfolio management services in the manner and on the
terms set forth in this Agreement.
NOW, THEREFORE, in consideration of the mutual covenants and agreements set
forth in this Agreement, the Manager and the Sub-Adviser agree as follows:
1. Sub-Advisory Services.
---------------------
a. The Sub-Adviser shall, subject to the supervision of the Manager
and of any administrator appointed by the Manager (the "Administrator"),
manage the investment and reinvestment of the assets of the Series, and
have the authority on behalf of the Series to vote all proxies and exercise
all other rights of the Series as a security holder of companies in which
the Series from time to time invests. The Sub-Adviser shall manage the
Series in conformity with (1) the investment objective, policies and
restrictions of the Series set forth in the Trust's prospectus and
statement of additional information relating to the Series, (2) any
additional policies or guidelines established by the Manager or by the
Trust's trustees that have been furnished in writing to the Sub-Adviser and
(3) the provisions of the Internal Revenue Code (the "Code") applicable to
"regulated investment companies" (as defined in Section 851 of the Code),
all as from time to time in effect (collectively, the "Policies"), and with
all applicable provisions of law, including without limitation all
applicable provisions of the Investment Company Act of 1940 (the "1940
Act") and the rules and regulations
<PAGE>
thereunder. Subject to the foregoing, the Sub-Adviser is authorized, in its
discretion and without prior consultation with the Manager, to buy, sell,
lend and otherwise trade in any stocks, bonds and other securities and
investment instruments on behalf of the Series, without regard to the
length of time the securities have been held and the resulting rate of
portfolio turnover or any tax considerations; and the majority or the whole
of the Series may be invested in such proportions of stocks, bonds, other
securities or investment instruments, or cash, as the Sub-Adviser shall
determine.
b. The Sub-Adviser shall furnish the Manager and the Administrator
monthly, quarterly and annual reports concerning portfolio transactions and
performance of the Series in such form as may be mutually agreed upon, and
agrees to review the Series and discuss the management of it. The Sub-
Adviser shall permit all books and records with respect to the Series to be
inspected and audited by the Manager and the Administrator at all
reasonable times during normal business hours, upon reasonable notice. The
Sub-Adviser shall also provide the Manager with such other information and
reports as may reasonably be requested by the Manager from time to time,
including without limitation all material requested by or required to be
delivered to the Trustees of the Trust.
c. The Sub-Adviser shall provide to the Manager a copy of the Sub-
Adviser's Form ADV as filed with the Securities and Exchange Commission and
a list of the persons whom the Sub-Adviser wishes to have authorized to
give written and/or oral instructions to custodians of assets of the
Series.
2. Obligations of the Manager.
--------------------------
a. The Manager shall provide (or cause the Series' Custodian (as
defined in Section 3 hereof) to provide) timely information to the Sub-
Adviser regarding such matters as the composition of assets of the Series,
cash requirements and cash available for investment in the Series, and all
other information as may be reasonably necessary for the Sub-Adviser to
perform its responsibilities hereunder.
b. The Manager has furnished the Sub-Adviser a copy of the
prospectus and statement of additional information of the Series and agrees
during the continuance of this Agreement to furnish the Sub-Adviser copies
of any revisions or supplements thereto at, or, if practicable, before the
time the revisions or supplements become effective. The Manager agrees to
furnish the Sub-Adviser with minutes of meetings of the trustees of the
Trust applicable to the Series to the extent they may affect the duties of
the Sub-Adviser, and with copies of any financial statements or reports
made by the Series to its shareholders, and any further materials or
information which the Sub-Adviser may reasonably request to enable it to
perform its functions under this Agreement.
-2-
<PAGE>
3. Custodian. The Manager shall provide the Sub-Adviser with a copy of
---------
the Series's agreement with the custodian designated to hold the assets of the
Series (the "Custodian") and any modifications thereto (the "Custody
Agreement"), copies of such modifications to be provided to the Sub-Adviser a
reasonable time in advance of the effectiveness of such modifications. The
assets of the Series shall be maintained in the custody of the Custodian
identified in, and in accordance with the terms and conditions of, the Custody
Agreement (or any sub-custodian properly appointed as provided in the Custody
Agreement). The Sub-Adviser shall have no liability for the acts or omissions of
the Custodian, unless such act or omission is taken in reliance upon instruction
given to the Custodian by a representative of the Sub-Adviser properly
authorized to give such instruction under the Custody Agreement. Any assets
added to the Series shall be delivered directly to the Custodian.
4. Proprietary Rights. The Manager agrees and acknowledges that the Sub-
------------------
Adviser is the sole owner of the names and marks "Harris Associates L.P." and
"Oakmark" and that all use of any designation consisting in whole or part of
"Harris Associates L.P." or "Oakmark" (a "Harris/Oakmark Mark") under this
Agreement shall inure to the benefit of the Sub-Adviser. The Manager on its own
behalf and on behalf of the Series agrees not to use any Harris Mark in any
advertisement or sales literature or other materials promoting the Series,
except with the prior written consent of the Sub-Adviser. Without the prior
written consent of the Sub-Adviser, the Manager shall not, and the Manager shall
use its best efforts to cause the Series not to, make representations regarding
the Sub-Adviser or the Oakmark Funds in any disclosure document, advertisement
or sales literature or other materials relating to the Series. Upon termination
of this Agreement for any reason, the Manager shall cease, and the Manager shall
use its best efforts to cause the Series to cease, all use of any Harris/Oakmark
Mark(s) as soon as reasonably practicable.
5. Expenses. Except for expenses specifically assumed or agreed to be
--------
paid by the Sub-Adviser pursuant hereto, the Sub-Adviser shall not be liable for
any organizational, operational or business expenses of the Manager or the Trust
including, without limitation, (a) interest and taxes, (b) brokerage commissions
and other costs in connection with the purchase or sale of securities or other
investment instruments with respect to the Series, and (c) custodian fees and
expenses. Any reimbursement of advisory fees required by any expense limitation
provision of any law shall be the sole responsibility of the Manager. The
Manager and the Sub-Adviser shall not be considered as partners or participants
in a joint venture. The Sub-Adviser will pay its own expenses incurred in
furnishing the services to be provided by it pursuant to this Agreement. Neither
the Sub-Adviser nor any affiliated person thereof shall be entitled to any
compensation from the Manager or the Trust with respect to service by any
affiliated person of the Sub-Adviser as an officer or trustee of the Trust
(other than the compensation to the Sub-Adviser payable by the Manager pursuant
to Section 6 hereof).
6. Purchase and Sale of Assets. The Sub-Adviser shall place all orders
---------------------------
for the purchase and sale of securities for the Series with brokers or dealers
selected by the Sub-Adviser, which may include brokers or dealers affiliated
with the Sub-Adviser, provided such
-3-
<PAGE>
orders comply with Rule 17e-1 under the 1940 Act in all respects. To the extent
consistent with applicable law, purchase or sell orders for the Series may be
aggregated with contemporaneous purchase or sell orders of other clients of the
Sub-Adviser. The Sub-Adviser shall use its best efforts to obtain execution of
transactions for the Series at prices which are advantageous to the Series and
at commission rates that are reasonable in relation to the benefits received.
However, the Sub-Adviser may select brokers or dealers on the basis that they
provide brokerage, research or other services or products to the Series and/or
other accounts serviced by the Sub-Adviser. To the extent consistent with
applicable law, the Sub-Adviser may pay a broker or dealer an amount of
commission for effecting a securities transaction in excess of the amount of
commission or dealer spread another broker or dealer would have charged for
effecting that transaction if the Sub-Adviser determines in good faith that such
amount of commission was reasonable in relation to the value of the brokerage
and research products and/or services provided by such broker or dealer. This
determination, with respect to brokerage and research services or products, may
be viewed in terms of either that particular transaction or the overall
responsibilities which the Sub-Adviser and its affiliates have with respect to
the Series or to accounts over which they exercise investment discretion. Not
all such services or products need be used by the Sub-Adviser in managing the
Series.
7. Compensation of the Sub-Adviser. As full compensation for all
-------------------------------
services rendered, facilities furnished and expenses borne by the Sub-Adviser
hereunder, the Manager shall pay the Sub-Adviser compensation at the annual rate
of 0.70% of the first $50 million of the Series's average daily net assets for
such period as compensation is payable, and 0.60% of such assets in excess of
$50 million (or such lesser amount as the Sub-Adviser may from time to time
agree to receive). Such compensation shall be payable monthly in arrears or at
such other intervals, not less frequently than quarterly, as the Manager is paid
by the Series pursuant to the Advisory Agreement.
8. Non-Exclusivity. The Manager and the Series agree that the services
---------------
of the Sub-Adviser are not to be deemed exclusive and that the Sub-Adviser and
its affiliates are free to act as investment manager and provide other services
to various investment companies and other managed accounts, except as the Sub-
Adviser and the Manager or the Administrator may otherwise agree from time to
time in writing before or after the date hereof. This Agreement shall not in any
way limit or restrict the Sub-Adviser or any of its directors, officers,
employees or agents from buying, selling or trading any securities or other
investment instruments for its or their own account or for the account of others
for whom it or they may be acting, provided that such activities do not
adversely affect or otherwise impair the performance by the Sub-Adviser of its
duties and obligations under this Agreement. The Manager and the Series
recognize and agree that the Sub-Adviser may provide advice to or take action
with respect to other clients, which advice or action, including the timing and
nature of such action, may differ from or be identical to advice given or action
taken with respect to the Series. The Sub-Adviser shall for all purposes hereof
be deemed to be an independent contractor and shall, unless otherwise provided
or authorized, have no authority
-4-
<PAGE>
to act for or represent the Series or the Manager in any way or otherwise be
deemed an agent of the Series or the Manager.
9. Liability. Except as may otherwise be provided by the 1940 Act or
---------
other federal securities laws, neither the Sub-Adviser nor any of its officers,
directors, partners, employees or agents (the "Indemnified Parties") shall be
subject to any liability to the Manager, the Trust, the Series or any
shareholder of the Series for any error of judgment, any mistake of law or any
loss arising out of any investment or other act or omission in the course of,
connected with, or arising out of any service to be rendered under this
Agreement, except by reason of willful misfeasance, bad faith or gross
negligence in the performance of the Sub-Adviser's duties or by reason of
reckless disregard by the Sub-Adviser of its obligations and duties hereunder.
The Manager shall hold harmless and indemnify the Sub-Adviser for any loss,
liability, cost, damage or expense (including reasonable attorneys fees and
costs) arising from any claim or demand by any past or present shareholder of
the Series that is not based upon the obligations of the Sub-Adviser under this
Agreement.
10. Effective Date and Termination. This Agreement shall become effective
------------------------------
as of the date of its execution, and
a. unless otherwise terminated, this Agreement shall continue in
effect for two years from the date of execution, and from year to year
thereafter so long as such continuance is specifically approved at least
annually (i) by the Board of Trustees of the Trust or by vote of a majority
of the outstanding voting securities of the Series, and (ii) by vote of a
majority of the trustees of the Trust who are not interested persons of the
Trust, the Manager or the Sub-Adviser, cast in person at a meeting called
for the purpose of voting on such approval;
b. this Agreement may at any time be terminated on sixty days'
written notice to the Sub-Adviser either by vote of the Board of Trustees
of the Trust or by vote of a majority of the outstanding voting securities
of the Series;
c. this Agreement shall automatically terminate in the event of its
assignment or upon the termination of the Advisory Agreement;
d. this Agreement may be terminated by the Sub-Adviser on ninety
days' written notice to the Manager and the Trust, or by the Manager on
ninety days' written notice to the Sub-Adviser.
Termination of this Agreement pursuant to this Section 10 shall be without
the payment of any penalty.
11. Amendment. This Agreement may be amended at any time by mutual
---------
consent of the Manager and the Sub-Adviser, provided that, if required by law,
such amendment shall
-5-
<PAGE>
also have been approved by vote of a majority of the outstanding voting
securities of the Series and by vote of a majority of the trustees of the Trust
who are not interested persons of the Trust, the Manager or the Sub-Adviser,
cast in person at a meeting called for the purpose of voting on such approval.
12. Certain Definitions. For the purpose of this Agreement, the terms
-------------------
"vote of a majority of the outstanding voting securities," "interested person,"
"affiliated person" and "assignment" shall have their respective meanings
defined in the 1940 Act, subject, however, to such exemptions as may be granted
by the Securities and Exchange Commission under the 1940 Act.
13. General.
-------
a. The Sub-Adviser may perform its services through any employee,
officer or agent of the Sub-Adviser, and the Manager shall not be entitled
to the advice, recommendation or judgment of any specific person; provided,
however, that the persons identified in the prospectus of the Series shall
perform the day-to-day portfolio management duties described therein until
the Sub-Adviser notifies the Manager that one or more other employees,
officers or agents of the Sub-Adviser, identified in such notice, shall
assume such duties as of a specific date.
b. If any term or provision of this Agreement or the application
thereof to any person or circumstances is held to be invalid or
unenforceable to any extent, the remainder of this Agreement or the
application of such provision to other persons or circumstances shall not
be affected thereby and shall be enforced to the fullest extent permitted
by law.
c. This Agreement shall be governed by and interpreted in accordance
with the laws of the Commonwealth of Massachusetts.
NEW ENGLAND FUNDS MANAGEMENT, L.P.
By NEF Corporation, its general partner
By: HENRY L.P. SCHMELZER
--------------------------------
Name: Henry L.P. Schmelzer
Title: President
HARRIS ASSOCIATES L.P.
By Harris Associates Inc., its general partner
By: VICTOR A. MORGENSTERN
--------------------------------
Name: Victor A. Morgenstern
Title: President
-6-
<PAGE>
Exhibit 99.5(b)(iii)
NEW ENGLAND LIMITED TERM U.S. GOVERNMENT FUND
Sub-Advisory Agreement
(Back Bay Advisors)
This Sub-Advisory Agreement (this "Agreement") is entered into as of
January 2, 1996 by and between New England Funds Management, L.P., a Delaware
limited partnership (the "Manager"), and Back Bay Advisors, L.P., a Delaware
limited partnership (the "Sub-Adviser").
WHEREAS, the Manager has entered into an Advisory Agreement dated January
2, 1996 (the "Advisory Agreement") with New England Funds Trust II (the
"Trust"), pursuant to which the Manager provides portfolio management and
administrative services to New England Limited Term U.S. Government Fund, a
series of the Trust (the "Series");
WHEREAS, the Advisory Agreement provides that the Manager may delegate any
or all of its portfolio management responsibilities under the Advisory Agreement
to one or more sub-advisers;
WHEREAS, the Manager and the trustees of the Trust desire to retain the
Sub-Adviser to render portfolio management services in the manner and on the
terms set forth in this Agreement.
NOW, THEREFORE, in consideration of the mutual covenants and agreements set
forth in this Agreement, the Manager and the Sub-Adviser agree as follows:
1. Sub-Advisory Services.
---------------------
a. The Sub-Adviser shall, subject to the supervision of the Manager
and of any administrator appointed by the Manager (the "Administrator"),
manage the investment and reinvestment of the assets of the Series, and
have the authority on behalf of the Series to vote all proxies and exercise
all other rights of the Series as a security holder of companies in which
the Series from time to time invests. The Sub-Adviser shall manage the
Series in conformity with (1) the investment objective, policies and
restrictions of the Series set forth in the Trust's prospectus and
statement of additional information relating to the Series, (2) any
additional policies or guidelines established by the Manager or by the
Trust's trustees that have been furnished in writing to the Sub-Adviser and
(3) the provisions of the Internal Revenue Code (the "Code") applicable to
"regulated investment companies" (as defined in Section 851 of the Code),
all as from time to time in effect (collectively, the "Policies"), and with
all applicable provisions of law, including without limitation all
applicable provisions of the Investment Company Act of 1940 (the "1940
Act") and the rules and regulations
<PAGE>
thereunder. Subject to the foregoing, the Sub-Adviser is authorized, in its
discretion and without prior consultation with the Manager, to buy, sell,
lend and otherwise trade in any stocks, bonds and other securities and
investment instruments on behalf of the Series, without regard to the
length of time the securities have been held and the resulting rate of
portfolio turnover or any tax considerations; and the majority or the whole
of the Series may be invested in such proportions of stocks, bonds, other
securities or investment instruments, or cash, as the Sub-Adviser shall
determine.
b. The Sub-Adviser shall furnish the Manager and the Administrator
monthly, quarterly and annual reports concerning portfolio transactions and
performance of the Series in such form as may be mutually agreed upon, and
agrees to review the Series and discuss the management of it. The Sub-
Adviser shall permit all books and records with respect to the Series to be
inspected and audited by the Manager and the Administrator at all
reasonable times during normal business hours, upon reasonable notice. The
Sub-Adviser shall also provide the Manager with such other information and
reports as may reasonably be requested by the Manager from time to time,
including without limitation all material requested by or required to be
delivered to the Trustees of the Trust.
c. The Sub-Adviser shall provide to the Manager a copy of the Sub-
Adviser's Form ADV as filed with the Securities and Exchange Commission and
a list of the persons whom the Sub-Adviser wishes to have authorized to
give written and/or oral instructions to custodians of assets of the
Series.
2. Obligations of the Manager.
--------------------------
a. The Manager shall provide (or cause the Series' Custodian (as
defined in Section 3 hereof) to provide) timely information to the Sub-
Adviser regarding such matters as the composition of assets of the Series,
cash requirements and cash available for investment in the Series, and all
other information as may be reasonably necessary for the Sub-Adviser to
perform its responsibilities hereunder.
b. The Manager has furnished the Sub-Adviser a copy of the
prospectus and statement of additional information of the Series and agrees
during the continuance of this Agreement to furnish the Sub-Adviser copies
of any revisions or supplements thereto at, or, if practicable, before the
time the revisions or supplements become effective. The Manager agrees to
furnish the Sub-Adviser with minutes of meetings of the trustees of the
Trust applicable to the Series to the extent they may affect the duties of
the Sub-Adviser, and with copies of any financial statements or reports
made by the Series to its shareholders, and any further materials or
information which the Sub-Adviser may reasonably request to enable it to
perform its functions under this Agreement.
-2-
<PAGE>
3. Custodian. The Manager shall provide the Sub-Adviser with a copy of
---------
the Series's agreement with the custodian designated to hold the assets of the
Series (the "Custodian") and any modifications thereto (the "Custody
Agreement"), copies of such modifications to be provided to the Sub-Adviser a
reasonable time in advance of the effectiveness of such modifications. The
assets of the Series shall be maintained in the custody of the Custodian
identified in, and in accordance with the terms and conditions of, the Custody
Agreement (or any sub-custodian properly appointed as provided in the Custody
Agreement). The Sub-Adviser shall have no liability for the acts or omissions of
the Custodian, unless such act or omission is taken in reliance upon instruction
given to the Custodian by a representative of the Sub-Adviser properly
authorized to give such instruction under the Custody Agreement. Any assets
added to the Series shall be delivered directly to the Custodian.
4. Proprietary Rights. The Manager agrees and acknowledges that the Sub-
------------------
Adviser is the sole owner of the name "Back Bay Advisors, L.P." and that all use
of any designation consisting in whole or part of "Back Bay Advisors, L.P."
under this Agreement shall inure to the benefit of the Sub-Adviser. The Manager
on its own behalf and on behalf of the Series agrees not to use any such
designation in any advertisement or sales literature or other materials
promoting the Series, except with the prior written consent of the Sub-Adviser.
Without the prior written consent of the Sub-Adviser, the Manager shall not, and
the Manager shall use its best efforts to cause the Series not to, make
representations regarding the Sub-Adviser in any disclosure document,
advertisement or sales literature or other materials relating to the Series.
Upon termination of this Agreement for any reason, the Manager shall cease, and
the Manager shall use its best efforts to cause the Series to cease, all use of
any such designation as soon as reasonably practicable.
5. Expenses. Except for expenses specifically assumed or agreed to be
--------
paid by the Sub-Adviser pursuant hereto, the Sub-Adviser shall not be liable for
any organizational, operational or business expenses of the Manager or the Trust
including, without limitation, (a) interest and taxes, (b) brokerage commissions
and other costs in connection with the purchase or sale of securities or other
investment instruments with respect to the Series, and (c) custodian fees and
expenses. Any reimbursement of advisory fees required by any expense limitation
provision of any law shall be the sole responsibility of the Manager. The
Manager and the Sub-Adviser shall not be considered as partners or participants
in a joint venture. The Sub-Adviser will pay its own expenses incurred in
furnishing the services to be provided by it pursuant to this Agreement. Neither
the Sub-Adviser nor any affiliated person thereof shall be entitled to any
compensation from the Manager or the Trust with respect to service by any
affiliated person of the Sub-Adviser as an officer or trustee of the Trust
(other than the compensation to the Sub-Adviser payable by the Manager pursuant
to Section 7 hereof).
6. Purchase and Sale of Assets. The Sub-Adviser shall place all orders
---------------------------
for the purchase and sale of securities for the Series with brokers or dealers
selected by the Sub-Adviser, which may include brokers or dealers affiliated
with the Sub-Adviser, provided such orders comply with Rule 17e-1 under the 1940
Act in all respects. To the extent consistent
-3-
<PAGE>
with applicable law, purchase or sell orders for the Series may be aggregated
with contemporaneous purchase or sell orders of other clients of the Sub-
Adviser. The Sub-Adviser shall use its best efforts to obtain execution of
transactions for the Series at prices which are advantageous to the Series and
at commission rates that are reasonable in relation to the benefits received.
However, the Sub-Adviser may select brokers or dealers on the basis that they
provide brokerage, research or other services or products to the Series and/or
other accounts serviced by the Sub-Adviser. To the extent consistent with
applicable law, the Sub-Adviser may pay a broker or dealer an amount of
commission for effecting a securities transaction in excess of the amount of
commission or dealer spread another broker or dealer would have charged for
effecting that transaction if the Sub-Adviser determines in good faith that such
amount of commission was reasonable in relation to the value of the brokerage
and research products and/or services provided by such broker or dealer. This
determination, with respect to brokerage and research services or products, may
be viewed in terms of either that particular transaction or the overall
responsibilities which the Sub-Adviser and its affiliates have with respect to
the Series or to accounts over which they exercise investment discretion. Not
all such services or products need be used by the Sub-Adviser in managing the
Series.
7. Compensation of the Sub-Adviser. As full compensation for all
-------------------------------
services rendered, facilities furnished and expenses borne by the Sub-Adviser
hereunder, the Manager shall pay the Sub-Adviser compensation at the annual rate
of 0.3250% of the first $200 million of the average daily net assets of the
Series, 0.3125% of the next $300 million of the average daily net assets of the
Series and 0.3000% in excess of $500 million of such assets, respectively (or
such lesser amount as the Sub-Adviser may from time to time agree to receive).
Such compensation shall be payable monthly in arrears or at such other
intervals, not less frequently than quarterly, as the Manager is paid by the
Series pursuant to the Advisory Agreement.
8. Non-Exclusivity. The Manager and the Series agree that the services
---------------
of the Sub-Adviser are not to be deemed exclusive and that the Sub-Adviser and
its affiliates are free to act as investment manager and provide other services
to various investment companies and other managed accounts, except as the Sub-
Adviser and the Manager or the Administrator may otherwise agree from time to
time in writing before or after the date hereof. This Agreement shall not in any
way limit or restrict the Sub-Adviser or any of its directors, officers,
employees or agents from buying, selling or trading any securities or other
investment instruments for its or their own account or for the account of others
for whom it or they may be acting, provided that such activities do not
adversely affect or otherwise impair the performance by the Sub-Adviser of its
duties and obligations under this Agreement. The Manager and the Series
recognize and agree that the Sub-Adviser may provide advice to or take action
with respect to other clients, which advice or action, including the timing and
nature of such action, may differ from or be identical to advice given or action
taken with respect to the Series. The Sub-Adviser shall for all purposes hereof
be deemed to be an independent contractor and shall, unless otherwise provided
or authorized, have no authority to act for or represent the Series or the
Manager in any way or otherwise be deemed an agent of the Series or the Manager.
-4-
<PAGE>
9. Liability. Except as may otherwise be provided by the 1940 Act or
---------
other federal securities laws, neither the Sub-Adviser nor any of its officers,
directors, partners, employees or agents (the "Indemnified Parties") shall be
subject to any liability to the Manager, the Trust, the Series or any
shareholder of the Series for any error of judgment, any mistake of law or any
loss arising out of any investment or other act or omission in the course of,
connected with, or arising out of any service to be rendered under this
Agreement, except by reason of willful misfeasance, bad faith or gross
negligence in the performance of the Sub-Adviser's duties or by reason of
reckless disregard by the Sub-Adviser of its obligations and duties hereunder.
The Manager shall hold harmless and indemnify the Sub-Adviser for any loss,
liability, cost, damage or expense (including reasonable attorneys fees and
costs) arising from any claim or demand by any past or present shareholder of
the Series that is not based upon the obligations of the Sub-Adviser under this
Agreement.
10. Effective Date and Termination. This Agreement shall become effective
------------------------------
as of the date of its execution, and
a. unless otherwise terminated, this Agreement shall continue in
effect for two years from the date of execution, and from year to year
thereafter so long as such continuance is specifically approved at least
annually (i) by the Board of Trustees of the Trust or by vote of a majority
of the outstanding voting securities of the Series, and (ii) by vote of a
majority of the trustees of the Trust who are not interested persons of the
Trust, the Manager or the Sub-Adviser, cast in person at a meeting called
for the purpose of voting on such approval;
b. this Agreement may at any time be terminated on sixty days'
written notice to the Sub-Adviser either by vote of the Board of Trustees
of the Trust or by vote of a majority of the outstanding voting securities
of the Series;
c. this Agreement shall automatically terminate in the event of its
assignment or upon the termination of the Advisory Agreement;
d. this Agreement may be terminated by the Sub-Adviser on ninety
days' written notice to the Manager and the Trust, or by the Manager on
ninety days' written notice to the Sub-Adviser.
Termination of this Agreement pursuant to this Section 10 shall be without
the payment of any penalty.
11. Amendment. This Agreement may be amended at any time by mutual
---------
consent of the Manager and the Sub-Adviser, provided that, if required by law,
such amendment shall also have been approved by vote of a majority of the
outstanding voting securities of the Series and by vote of a majority of the
trustees of the Trust who are not interested persons of the
-5-
<PAGE>
Trust, the Manager or the Sub-Adviser, cast in person at a meeting called for
the purpose of voting on such approval.
12. Certain Definitions. For the purpose of this Agreement, the terms
-------------------
"vote of a majority of the outstanding voting securities," "interested person,"
"affiliated person" and "assignment" shall have their respective meanings
defined in the 1940 Act, subject, however, to such exemptions as may be granted
by the Securities and Exchange Commission under the 1940 Act.
13. General.
-------
a. The Sub-Adviser may perform its services through any employee,
officer or agent of the Sub-Adviser, and the Manager shall not be entitled
to the advice, recommendation or judgment of any specific person; provided,
however, that the persons identified in the prospectus of the Series shall
perform the day-to-day portfolio management duties described therein until
the Sub-Adviser notifies the Manager that one or more other employees,
officers or agents of the Sub-Adviser, identified in such notice, shall
assume such duties as of a specific date.
b. If any term or provision of this Agreement or the application
thereof to any person or circumstances is held to be invalid or
unenforceable to any extent, the remainder of this Agreement or the
application of such provision to other persons or circumstances shall not
be affected thereby and shall be enforced to the fullest extent permitted
by law.
c. This Agreement shall be governed by and interpreted in accordance
with the laws of the Commonwealth of Massachusetts.
NEW ENGLAND FUNDS BACK BAY ADVISORS, L.P.
MANAGEMENT, L.P.
By NEF Corporation, its general partner By Back Bay Advisors, Inc.,
its general partner
By: BRUCE R. SPECA By: CHARLES T. WALLIS
------------------------- -------------------------
Name: Bruce R. Speca Name: Charles T. Wallis
Title: Executive Vice President Title: President
-6-
<PAGE>
Exhibit 99.5(b)(iv)
NEW ENGLAND ADJUSTABLE RATE U.S. GOVERNMENT FUND
Sub-Advisory Agreement
(Back Bay Advisors)
This Sub-Advisory Agreement (this "Agreement") is entered into as of
January 2, 1996 by and between New England Funds Management, L.P., a Delaware
limited partnership (the "Manager"), and Back Bay Advisors, L.P., a Delaware
limited partnership (the "Sub-Adviser").
WHEREAS, the Manager has entered into an Advisory Agreement dated January
2, 1996 (the "Advisory Agreement") with New England Funds Trust II (the
"Trust"), pursuant to which the Manager provides portfolio management and
administrative services to New England Adjustable Rate U.S. Government Fund, a
series of the Trust (the "Series");
WHEREAS, the Advisory Agreement provides that the Manager may delegate any
or all of its portfolio management responsibilities under the Advisory Agreement
to one or more sub-advisers;
WHEREAS, the Manager and the trustees of the Trust desire to retain the
Sub-Adviser to render portfolio management services in the manner and on the
terms set forth in this Agreement.
NOW, THEREFORE, in consideration of the mutual covenants and agreements set
forth in this Agreement, the Manager and the Sub-Adviser agree as follows:
1. Sub-Advisory Services.
---------------------
a. The Sub-Adviser shall, subject to the supervision of the Manager
and of any administrator appointed by the Manager (the "Administrator"),
manage the investment and reinvestment of the assets of the Series, and
have the authority on behalf of the Series to vote all proxies and exercise
all other rights of the Series as a security holder of companies in which
the Series from time to time invests. The Sub-Adviser shall manage the
Series in conformity with (1) the investment objective, policies and
restrictions of the Series set forth in the Trust's prospectus and
statement of additional information relating to the Series, (2) any
additional policies or guidelines established by the Manager or by the
Trust's trustees that have been furnished in writing to the Sub-Adviser and
(3) the provisions of the Internal Revenue Code (the "Code") applicable to
"regulated investment companies" (as defined in Section 851 of the Code),
all as from time to time in effect (collectively, the "Policies"), and with
all applicable provisions of law, including without limitation all
applicable provisions of the Investment Company Act of 1940 (the "1940
Act") and the rules and regulations
<PAGE>
thereunder. Subject to the foregoing, the Sub-Adviser is authorized, in its
discretion and without prior consultation with the Manager, to buy, sell,
lend and otherwise trade in any stocks, bonds and other securities and
investment instruments on behalf of the Series, without regard to the
length of time the securities have been held and the resulting rate of
portfolio turnover or any tax considerations; and the majority or the whole
of the Series may be invested in such proportions of stocks, bonds, other
securities or investment instruments, or cash, as the Sub-Adviser shall
determine.
b. The Sub-Adviser shall furnish the Manager and the Administrator
monthly, quarterly and annual reports concerning portfolio transactions and
performance of the Series in such form as may be mutually agreed upon, and
agrees to review the Series and discuss the management of it. The Sub-
Adviser shall permit all books and records with respect to the Series to be
inspected and audited by the Manager and the Administrator at all
reasonable times during normal business hours, upon reasonable notice. The
Sub-Adviser shall also provide the Manager with such other information and
reports as may reasonably be requested by the Manager from time to time,
including without limitation all material requested by or required to be
delivered to the Trustees of the Trust.
c. The Sub-Adviser shall provide to the Manager a copy of the Sub-
Adviser's Form ADV as filed with the Securities and Exchange Commission and
a list of the persons whom the Sub-Adviser wishes to have authorized to
give written and/or oral instructions to custodians of assets of the
Series.
2. Obligations of the Manager.
--------------------------
a. The Manager shall provide (or cause the Series' Custodian (as
defined in Section 3 hereof) to provide) timely information to the Sub-
Adviser regarding such matters as the composition of assets of the Series,
cash requirements and cash available for investment in the Series, and all
other information as may be reasonably necessary for the Sub-Adviser to
perform its responsibilities hereunder.
b. The Manager has furnished the Sub-Adviser a copy of the prospectus
and statement of additional information of the Series and agrees during the
continuance of this Agreement to furnish the Sub-Adviser copies of any
revisions or supplements thereto at, or, if practicable, before the time
the revisions or supplements become effective. The Manager agrees to
furnish the Sub-Adviser with minutes of meetings of the trustees of the
Trust applicable to the Series to the extent they may affect the duties of
the Sub-Adviser, and with copies of any financial statements or reports
made by the Series to its shareholders, and any further materials or
information which the Sub-Adviser may reasonably request to enable it to
perform its functions under this Agreement.
-2-
<PAGE>
3. Custodian. The Manager shall provide the Sub-Adviser with a copy of the
---------
Series's agreement with the custodian designated to hold the assets of the
Series (the "Custodian") and any modifications thereto (the "Custody
Agreement"), copies of such modifications to be provided to the Sub-Adviser a
reasonable time in advance of the effectiveness of such modifications. The
assets of the Series shall be maintained in the custody of the Custodian
identified in, and in accordance with the terms and conditions of, the Custody
Agreement (or any sub-custodian properly appointed as provided in the Custody
Agreement). The Sub-Adviser shall have no liability for the acts or omissions of
the Custodian, unless such act or omission is taken in reliance upon instruction
given to the Custodian by a representative of the Sub-Adviser properly
authorized to give such instruction under the Custody Agreement. Any assets
added to the Series shall be delivered directly to the Custodian.
4. Proprietary Rights. The Manager agrees and acknowledges that the Sub-
------------------
Adviser is the sole owner of the name "Back Bay Advisors, L.P." and that all use
of any designation consisting in whole or part of "Back Bay Advisors, L.P."
under this Agreement shall inure to the benefit of the Sub-Adviser. The Manager
on its own behalf and on behalf of the Series agrees not to use any such
designation in any advertisement or sales literature or other materials
promoting the Series, except with the prior written consent of the Sub-Adviser.
Without the prior written consent of the Sub-Adviser, the Manager shall not, and
the Manager shall use its best efforts to cause the Series not to, make
representations regarding the Sub-Adviser in any disclosure document,
advertisement or sales literature or other materials relating to the Series.
Upon termination of this Agreement for any reason, the Manager shall cease, and
the Manager shall use its best efforts to cause the Series to cease, all use of
any such designation as soon as reasonably practicable.
5. Expenses. Except for expenses specifically assumed or agreed to be paid
--------
by the Sub-Adviser pursuant hereto, the Sub-Adviser shall not be liable for any
organizational, operational or business expenses of the Manager or the Trust
including, without limitation, (a) interest and taxes, (b) brokerage commissions
and other costs in connection with the purchase or sale of securities or other
investment instruments with respect to the Series, and (c) custodian fees and
expenses. Any reimbursement of advisory fees required by any expense limitation
provision of any law shall be the sole responsibility of the Manager. The
Manager and the Sub-Adviser shall not be considered as partners or participants
in a joint venture. The Sub-Adviser will pay its own expenses incurred in
furnishing the services to be provided by it pursuant to this Agreement. Neither
the Sub-Adviser nor any affiliated person thereof shall be entitled to any
compensation from the Manager or the Trust with respect to service by any
affiliated person of the Sub-Adviser as an officer or trustee of the Trust
(other than the compensation to the Sub-Adviser payable by the Manager pursuant
to Section 7 hereof).
6. Purchase and Sale of Assets. The Sub-Adviser shall place all orders for
---------------------------
the purchase and sale of securities for the Series with brokers or dealers
selected by the Sub-Adviser, which may include brokers or dealers affiliated
with the Sub-Adviser, provided such orders comply with Rule 17e-1 under the 1940
Act in all respects. To the extent consistent
-3-
<PAGE>
with applicable law, purchase or sell orders for the Series may be aggregated
with contemporaneous purchase or sell orders of other clients of the Sub-
Adviser. The Sub-Adviser shall use its best efforts to obtain execution of
transactions for the Series at prices which are advantageous to the Series and
at commission rates that are reasonable in relation to the benefits received.
However, the Sub-Adviser may select brokers or dealers on the basis that they
provide brokerage, research or other services or products to the Series and/or
other accounts serviced by the Sub-Adviser. To the extent consistent with
applicable law, the Sub-Adviser may pay a broker or dealer an amount of
commission for effecting a securities transaction in excess of the amount of
commission or dealer spread another broker or dealer would have charged for
effecting that transaction if the Sub-Adviser determines in good faith that such
amount of commission was reasonable in relation to the value of the brokerage
and research products and/or services provided by such broker or dealer. This
determination, with respect to brokerage and research services or products, may
be viewed in terms of either that particular transaction or the overall
responsibilities which the Sub-Adviser and its affiliates have with respect to
the Series or to accounts over which they exercise investment discretion. Not
all such services or products need be used by the Sub-Adviser in managing the
Series.
7. Compensation of the Sub-Adviser. As full compensation for all services
-------------------------------
rendered, facilities furnished and expenses borne by the Sub-Adviser hereunder,
the Manager shall pay the Sub-Adviser compensation at the annual rate of 0.275%
of the first $200 million of the average daily net assets of the Series, 0.255%
of the next $300 million of the average daily net assets of the Series and
0.235% in excess of $500 million of such assets, respectively (or such lesser
amount as the Sub-Adviser may from time to time agree to receive). Such
compensation shall be payable monthly in arrears or at such other intervals, not
less frequently than quarterly, as the Manager is paid by the Series pursuant to
the Advisory Agreement.
8. Non-Exclusivity. The Manager and the Series agree that the services of
---------------
the Sub-Adviser are not to be deemed exclusive and that the Sub-Adviser and its
affiliates are free to act as investment manager and provide other services to
various investment companies and other managed accounts, except as the Sub-
Adviser and the Manager or the Administrator may otherwise agree from time to
time in writing before or after the date hereof. This Agreement shall not in any
way limit or restrict the Sub-Adviser or any of its directors, officers,
employees or agents from buying, selling or trading any securities or other
investment instruments for its or their own account or for the account of others
for whom it or they may be acting, provided that such activities do not
adversely affect or otherwise impair the performance by the Sub-Adviser of its
duties and obligations under this Agreement. The Manager and the Series
recognize and agree that the Sub-Adviser may provide advice to or take action
with respect to other clients, which advice or action, including the timing and
nature of such action, may differ from or be identical to advice given or action
taken with respect to the Series. The Sub-Adviser shall for all purposes hereof
be deemed to be an independent contractor and shall, unless otherwise provided
or authorized, have no authority to act for or represent the Series or the
Manager in any way or otherwise be deemed an agent of the Series or the Manager.
-4-
<PAGE>
9. Liability. Except as may otherwise be provided by the 1940 Act or other
---------
federal securities laws, neither the Sub-Adviser nor any of its officers,
directors, partners, employees or agents (the "Indemnified Parties") shall be
subject to any liability to the Manager, the Trust, the Series or any
shareholder of the Series for any error of judgment, any mistake of law or any
loss arising out of any investment or other act or omission in the course of,
connected with, or arising out of any service to be rendered under this
Agreement, except by reason of willful misfeasance, bad faith or gross
negligence in the performance of the Sub-Adviser's duties or by reason of
reckless disregard by the Sub-Adviser of its obligations and duties hereunder.
The Manager shall hold harmless and indemnify the Sub-Adviser for any loss,
liability, cost, damage or expense (including reasonable attorneys fees and
costs) arising from any claim or demand by any past or present shareholder of
the Series that is not based upon the obligations of the Sub-Adviser under this
Agreement.
10. Effective Date and Termination. This Agreement shall become effective
------------------------------
as of the date of its execution, and
a. unless otherwise terminated, this Agreement shall continue in
effect for two years from the date of execution, and from year to year
thereafter so long as such continuance is specifically approved at least
annually (i) by the Board of Trustees of the Trust or by vote of a majority
of the outstanding voting securities of the Series, and (ii) by vote of a
majority of the trustees of the Trust who are not interested persons of the
Trust, the Manager or the Sub-Adviser, cast in person at a meeting called
for the purpose of voting on such approval;
b. this Agreement may at any time be terminated on sixty days' written
notice to the Sub-Adviser either by vote of the Board of Trustees of the
Trust or by vote of a majority of the outstanding voting securities of the
Series;
c. this Agreement shall automatically terminate in the event of its
assignment or upon the termination of the Advisory Agreement;
d. this Agreement may be terminated by the Sub-Adviser on ninety days'
written notice to the Manager and the Trust, or by the Manager on ninety
days' written notice to the Sub-Adviser.
Termination of this Agreement pursuant to this Section 10 shall be without
the payment of any penalty.
11. Amendment. This Agreement may be amended at any time by mutual consent
---------
of the Manager and the Sub-Adviser, provided that, if required by law, such
amendment shall also have been approved by vote of a majority of the outstanding
voting securities of the Series and by vote of a majority of the trustees of the
Trust who are not interested persons of the
-5-
<PAGE>
Trust, the Manager or the Sub-Adviser, cast in person at a meeting called for
the purpose of voting on such approval.
12. Certain Definitions. For the purpose of this Agreement, the terms "vote
-------------------
of a majority of the outstanding voting securities," "interested person,"
"affiliated person" and "assignment" shall have their respective meanings
defined in the 1940 Act, subject, however, to such exemptions as may be granted
by the Securities and Exchange Commission under the 1940 Act.
13. General.
-------
a. The Sub-Adviser may perform its services through any employee,
officer or agent of the Sub-Adviser, and the Manager shall not be entitled
to the advice, recommendation or judgment of any specific person; provided,
however, that the persons identified in the prospectus of the Series shall
perform the day-to-day portfolio management duties described therein until
the Sub-Adviser notifies the Manager that one or more other employees,
officers or agents of the Sub-Adviser, identified in such notice, shall
assume such duties as of a specific date.
b. If any term or provision of this Agreement or the application
thereof to any person or circumstances is held to be invalid or
unenforceable to any extent, the remainder of this Agreement or the
application of such provision to other persons or circumstances shall not
be affected thereby and shall be enforced to the fullest extent permitted
by law.
c. This Agreement shall be governed by and interpreted in accordance
with the laws of the Commonwealth of Massachusetts.
NEW ENGLAND FUNDS BACK BAY ADVISORS, L.P.
MANAGEMENT, L.P.
By NEF Corporation, its general partner By Back Bay Advisors, Inc.,
its general partner
By: BRUCE R. SPECA By: CHARLES T. WALLIS
--------------------------- ---------------------------
Name: Bruce R. Speca Name: Charles T. Wallis
Title: Executive Vice President Title: President
-6-
<PAGE>
Exhibit 99.5(b)(v)
NEW ENGLAND HIGH INCOME FUND
Sub-Advisory Agreement
(Back Bay Advisors)
This Sub-Advisory Agreement (this "Agreement") is entered into as of
January 2, 1996 by and between New England Funds Management, L.P., a Delaware
limited partnership (the "Manager"), and Back Bay Advisors, L.P., a Delaware
limited partnership (the "Sub-Adviser").
WHEREAS, the Manager has entered into an Advisory Agreement dated January
2, 1996 (the "Advisory Agreement") with New England Funds Trust II (the
"Trust"), pursuant to which the Manager provides portfolio management and
administrative services to New England High Income Fund, a series of the Trust
(the "Series");
WHEREAS, the Advisory Agreement provides that the Manager may delegate any
or all of its portfolio management responsibilities under the Advisory Agreement
to one or more sub-advisers;
WHEREAS, the Manager and the trustees of the Trust desire to retain the
Sub-Adviser to render portfolio management services in the manner and on the
terms set forth in this Agreement.
NOW, THEREFORE, in consideration of the mutual covenants and agreements set
forth in this Agreement, the Manager and the Sub-Adviser agree as follows:
1. Sub-Advisory Services.
---------------------
a. The Sub-Adviser shall, subject to the supervision of the Manager
and of any administrator appointed by the Manager (the "Administrator"),
manage the investment and reinvestment of the assets of the Series, and
have the authority on behalf of the Series to vote all proxies and exercise
all other rights of the Series as a security holder of companies in which
the Series from time to time invests. The Sub-Adviser shall manage the
Series in conformity with (1) the investment objective, policies and
restrictions of the Series set forth in the Trust's prospectus and
statement of additional information relating to the Series, (2) any
additional policies or guidelines established by the Manager or by the
Trust's trustees that have been furnished in writing to the Sub-Adviser and
(3) the provisions of the Internal Revenue Code (the "Code") applicable to
"regulated investment companies" (as defined in Section 851 of the Code),
all as from time to time in effect (collectively, the "Policies"), and with
all applicable provisions of law, including without limitation all
applicable provisions of the Investment Company Act of 1940 (the "1940
Act") and the rules and regulations
<PAGE>
thereunder. Subject to the foregoing, the Sub-Adviser is authorized, in its
discretion and without prior consultation with the Manager, to buy, sell,
lend and otherwise trade in any stocks, bonds and other securities and
investment instruments on behalf of the Series, without regard to the
length of time the securities have been held and the resulting rate of
portfolio turnover or any tax considerations; and the majority or the whole
of the Series may be invested in such proportions of stocks, bonds, other
securities or investment instruments, or cash, as the Sub-Adviser shall
determine.
b. The Sub-Adviser shall furnish the Manager and the Administrator
monthly, quarterly and annual reports concerning portfolio transactions and
performance of the Series in such form as may be mutually agreed upon, and
agrees to review the Series and discuss the management of it. The Sub-
Adviser shall permit all books and records with respect to the Series to be
inspected and audited by the Manager and the Administrator at all
reasonable times during normal business hours, upon reasonable notice. The
Sub-Adviser shall also provide the Manager with such other information and
reports as may reasonably be requested by the Manager from time to time,
including without limitation all material requested by or required to be
delivered to the Trustees of the Trust.
c. The Sub-Adviser shall provide to the Manager a copy of the Sub-
Adviser's Form ADV as filed with the Securities and Exchange Commission and
a list of the persons whom the Sub-Adviser wishes to have authorized to
give written and/or oral instructions to custodians of assets of the
Series.
2. Obligations of the Manager.
--------------------------
a. The Manager shall provide (or cause the Series' Custodian (as
defined in Section 3 hereof) to provide) timely information to the Sub-
Adviser regarding such matters as the composition of assets of the Series,
cash requirements and cash available for investment in the Series, and all
other information as may be reasonably necessary for the Sub-Adviser to
perform its responsibilities hereunder.
b. The Manager has furnished the Sub-Adviser a copy of the prospectus
and statement of additional information of the Series and agrees during the
continuance of this Agreement to furnish the Sub-Adviser copies of any
revisions or supplements thereto at, or, if practicable, before the time
the revisions or supplements become effective. The Manager agrees to
furnish the Sub-Adviser with minutes of meetings of the trustees of the
Trust applicable to the Series to the extent they may affect the duties of
the Sub-Adviser, and with copies of any financial statements or reports
made by the Series to its shareholders, and any further materials or
information which the Sub-Adviser may reasonably request to enable it to
perform its functions under this Agreement.
-2-
<PAGE>
3. Custodian. The Manager shall provide the Sub-Adviser with a copy of the
---------
Series's agreement with the custodian designated to hold the assets of the
Series (the "Custodian") and any modifications thereto (the "Custody
Agreement"), copies of such modifications to be provided to the Sub-Adviser a
reasonable time in advance of the effectiveness of such modifications. The
assets of the Series shall be maintained in the custody of the Custodian
identified in, and in accordance with the terms and conditions of, the Custody
Agreement (or any sub-custodian properly appointed as provided in the Custody
Agreement). The Sub-Adviser shall have no liability for the acts or omissions of
the Custodian, unless such act or omission is taken in reliance upon instruction
given to the Custodian by a representative of the Sub-Adviser properly
authorized to give such instruction under the Custody Agreement. Any assets
added to the Series shall be delivered directly to the Custodian.
4. Proprietary Rights. The Manager agrees and acknowledges that the Sub-
------------------
Adviser is the sole owner of the name "Back Bay Advisors, L.P." and that all use
of any designation consisting in whole or part of "Back Bay Advisors, L.P."
under this Agreement shall inure to the benefit of the Sub-Adviser. The Manager
on its own behalf and on behalf of the Series agrees not to use any such
designation in any advertisement or sales literature or other materials
promoting the Series, except with the prior written consent of the Sub-Adviser.
Without the prior written consent of the Sub-Adviser, the Manager shall not, and
the Manager shall use its best efforts to cause the Series not to, make
representations regarding the Sub-Adviser in any disclosure document,
advertisement or sales literature or other materials relating to the Series.
Upon termination of this Agreement for any reason, the Manager shall cease, and
the Manager shall use its best efforts to cause the Series to cease, all use of
any such designation as soon as reasonably practicable.
5. Expenses. Except for expenses specifically assumed or agreed to be paid
--------
by the Sub-Adviser pursuant hereto, the Sub-Adviser shall not be liable for any
organizational, operational or business expenses of the Manager or the Trust
including, without limitation, (a) interest and taxes, (b) brokerage commissions
and other costs in connection with the purchase or sale of securities or other
investment instruments with respect to the Series, and (c) custodian fees and
expenses. Any reimbursement of advisory fees required by any expense limitation
provision of any law shall be the sole responsibility of the Manager. The
Manager and the Sub-Adviser shall not be considered as partners or participants
in a joint venture. The Sub-Adviser will pay its own expenses incurred in
furnishing the services to be provided by it pursuant to this Agreement. Neither
the Sub-Adviser nor any affiliated person thereof shall be entitled to any
compensation from the Manager or the Trust with respect to service by any
affiliated person of the Sub-Adviser as an officer or trustee of the Trust
(other than the compensation to the Sub-Adviser payable by the Manager pursuant
to Section 7 hereof).
6. Purchase and Sale of Assets. The Sub-Adviser shall place all orders for
---------------------------
the purchase and sale of securities for the Series with brokers or dealers
selected by the Sub-Adviser, which may include brokers or dealers affiliated
with the Sub-Adviser, provided such orders comply with Rule 17e-1 under the 1940
Act in all respects. To the extent consistent
-3-
<PAGE>
with applicable law, purchase or sell orders for the Series may be aggregated
with contemporaneous purchase or sell orders of other clients of the Sub-
Adviser. The Sub-Adviser shall use its best efforts to obtain execution of
transactions for the Series at prices which are advantageous to the Series and
at commission rates that are reasonable in relation to the benefits received.
However, the Sub-Adviser may select brokers or dealers on the basis that they
provide brokerage, research or other services or products to the Series and/or
other accounts serviced by the Sub-Adviser. To the extent consistent with
applicable law, the Sub-Adviser may pay a broker or dealer an amount of
commission for effecting a securities transaction in excess of the amount of
commission or dealer spread another broker or dealer would have charged for
effecting that transaction if the Sub-Adviser determines in good faith that such
amount of commission was reasonable in relation to the value of the brokerage
and research products and/or services provided by such broker or dealer. This
determination, with respect to brokerage and research services or products, may
be viewed in terms of either that particular transaction or the overall
responsibilities which the Sub-Adviser and its affiliates have with respect to
the Series or to accounts over which they exercise investment discretion. Not
all such services or products need be used by the Sub-Adviser in managing the
Series.
7. Compensation of the Sub-Adviser. As full compensation for all services
-------------------------------
rendered, facilities furnished and expenses borne by the Sub-Adviser hereunder,
the Manager shall pay the Sub-Adviser compensation at the annual rate of 0.375%
of the average daily net assets of the Series (or such lesser amount as the Sub-
Adviser may from time to time agree to receive). Such compensation shall be
payable monthly in arrears or at such other intervals, not less frequently than
quarterly, as the Manager is paid by the Series pursuant to the Advisory
Agreement.
8. Non-Exclusivity. The Manager and the Series agree that the services of
---------------
the Sub-Adviser are not to be deemed exclusive and that the Sub-Adviser and its
affiliates are free to act as investment manager and provide other services to
various investment companies and other managed accounts, except as the Sub-
Adviser and the Manager or the Administrator may otherwise agree from time to
time in writing before or after the date hereof. This Agreement shall not in any
way limit or restrict the Sub-Adviser or any of its directors, officers,
employees or agents from buying, selling or trading any securities or other
investment instruments for its or their own account or for the account of others
for whom it or they may be acting, provided that such activities do not
adversely affect or otherwise impair the performance by the Sub-Adviser of its
duties and obligations under this Agreement. The Manager and the Series
recognize and agree that the Sub-Adviser may provide advice to or take action
with respect to other clients, which advice or action, including the timing and
nature of such action, may differ from or be identical to advice given or action
taken with respect to the Series. The Sub-Adviser shall for all purposes hereof
be deemed to be an independent contractor and shall, unless otherwise provided
or authorized, have no authority to act for or represent the Series or the
Manager in any way or otherwise be deemed an agent of the Series or the Manager.
-4-
<PAGE>
9. Liability. Except as may otherwise be provided by the 1940 Act or other
---------
federal securities laws, neither the Sub-Adviser nor any of its officers,
directors, partners, employees or agents (the "Indemnified Parties") shall be
subject to any liability to the Manager, the Trust, the Series or any
shareholder of the Series for any error of judgment, any mistake of law or any
loss arising out of any investment or other act or omission in the course of,
connected with, or arising out of any service to be rendered under this
Agreement, except by reason of willful misfeasance, bad faith or gross
negligence in the performance of the Sub-Adviser's duties or by reason of
reckless disregard by the Sub-Adviser of its obligations and duties hereunder.
The Manager shall hold harmless and indemnify the Sub-Adviser for any loss,
liability, cost, damage or expense (including reasonable attorneys fees and
costs) arising from any claim or demand by any past or present shareholder of
the Series that is not based upon the obligations of the Sub-Adviser under this
Agreement.
10. Effective Date and Termination. This Agreement shall become effective
------------------------------
as of the date of its execution, and
a. unless otherwise terminated, this Agreement shall continue in
effect for two years from the date of execution, and from year to year
thereafter so long as such continuance is specifically approved at least
annually (i) by the Board of Trustees of the Trust or by vote of a majority
of the outstanding voting securities of the Series, and (ii) by vote of a
majority of the trustees of the Trust who are not interested persons of the
Trust, the Manager or the Sub-Adviser, cast in person at a meeting called
for the purpose of voting on such approval;
b. this Agreement may at any time be terminated on sixty days' written
notice to the Sub-Adviser either by vote of the Board of Trustees of the
Trust or by vote of a majority of the outstanding voting securities of the
Series;
c. this Agreement shall automatically terminate in the event of its
assignment or upon the termination of the Advisory Agreement;
d. this Agreement may be terminated by the Sub-Adviser on ninety days'
written notice to the Manager and the Trust, or by the Manager on ninety
days' written notice to the Sub-Adviser.
Termination of this Agreement pursuant to this Section 10 shall be without
the payment of any penalty.
11. Amendment. This Agreement may be amended at any time by mutual consent
---------
of the Manager and the Sub-Adviser, provided that, if required by law, such
amendment shall also have been approved by vote of a majority of the outstanding
voting securities of the Series and by vote of a majority of the trustees of the
Trust who are not interested persons of the
-5-
<PAGE>
Trust, the Manager or the Sub-Adviser, cast in person at a meeting called for
the purpose of voting on such approval.
12. Certain Definitions. For the purpose of this Agreement, the terms "vote
-------------------
of a majority of the outstanding voting securities," "interested person,"
"affiliated person" and "assignment" shall have their respective meanings
defined in the 1940 Act, subject, however, to such exemptions as may be granted
by the Securities and Exchange Commission under the 1940 Act.
13. General.
-------
a. The Sub-Adviser may perform its services through any employee,
officer or agent of the Sub-Adviser, and the Manager shall not be entitled
to the advice, recommendation or judgment of any specific person; provided,
however, that the persons identified in the prospectus of the Series shall
perform the day-to-day portfolio management duties described therein until
the Sub-Adviser notifies the Manager that one or more other employees,
officers or agents of the Sub-Adviser, identified in such notice, shall
assume such duties as of a specific date.
b. If any term or provision of this Agreement or the application
thereof to any person or circumstances is held to be invalid or
unenforceable to any extent, the remainder of this Agreement or the
application of such provision to other persons or circumstances shall not
be affected thereby and shall be enforced to the fullest extent permitted
by law.
c. This Agreement shall be governed by and interpreted in accordance
with the laws of the Commonwealth of Massachusetts.
NEW ENGLAND FUNDS BACK BAY ADVISORS, L.P.
MANAGEMENT, L.P.
By NEF Corporation, its general partner By Back Bay Advisors, Inc.,
its general partner
By: BRUCE R. SPECA By: CHARLES T. WALLIS
------------------------------ ---------------------------
Name: Bruce R. Speca Name: Charles T. Wallis
Title: Executive Vice President Title: President
-6-
<PAGE>
Exhibit 99.5(b)(vi)
NEW ENGLAND MASSACHUSETTS TAX FREE INCOME FUND
Sub-Advisory Agreement
(Back Bay Advisors)
This Sub-Advisory Agreement (this "Agreement") is entered into as of
January 2, 1996 by and between New England Funds Management, L.P., a Delaware
limited partnership (the "Manager"), and Back Bay Advisors, L.P., a Delaware
limited partnership (the "Sub-Adviser").
WHEREAS, the Manager has entered into an Advisory Agreement dated January
2, 1996 (the "Advisory Agreement") with New England Funds Trust II (the
"Trust"), pursuant to which the Manager provides portfolio management and
administrative services to New England Massachusetts Tax Free Income Fund, a
series of the Trust (the "Series");
WHEREAS, the Advisory Agreement provides that the Manager may delegate any
or all of its portfolio management responsibilities under the Advisory Agreement
to one or more sub-advisers;
WHEREAS, the Manager and the trustees of the Trust desire to retain the
Sub-Adviser to render portfolio management services in the manner and on the
terms set forth in this Agreement.
NOW, THEREFORE, in consideration of the mutual covenants and agreements set
forth in this Agreement, the Manager and the Sub-Adviser agree as follows:
1. Sub-Advisory Services.
---------------------
a. The Sub-Adviser shall, subject to the supervision of the Manager
and of any administrator appointed by the Manager (the "Administrator"),
manage the investment and reinvestment of the assets of the Series, and
have the authority on behalf of the Series to vote all proxies and exercise
all other rights of the Series as a security holder of companies in which
the Series from time to time invests. The Sub-Adviser shall manage the
Series in conformity with (1) the investment objective, policies and
restrictions of the Series set forth in the Trust's prospectus and
statement of additional information relating to the Series, (2) any
additional policies or guidelines established by the Manager or by the
Trust's trustees that have been furnished in writing to the Sub-Adviser and
(3) the provisions of the Internal Revenue Code (the "Code") applicable to
"regulated investment companies" (as defined in Section 851 of the Code),
all as from time to time in effect (collectively, the "Policies"), and with
all applicable provisions of law, including without limitation all
applicable provisions of the Investment Company Act of 1940 (the "1940
Act") and the rules and regulations
<PAGE>
thereunder. Subject to the foregoing, the Sub-Adviser is authorized, in its
discretion and without prior consultation with the Manager, to buy, sell,
lend and otherwise trade in any stocks, bonds and other securities and
investment instruments on behalf of the Series, without regard to the
length of time the securities have been held and the resulting rate of
portfolio turnover or any tax considerations; and the majority or the whole
of the Series may be invested in such proportions of stocks, bonds, other
securities or investment instruments, or cash, as the Sub-Adviser shall
determine.
b. The Sub-Adviser shall furnish the Manager and the Administrator
monthly, quarterly and annual reports concerning portfolio transactions and
performance of the Series in such form as may be mutually agreed upon, and
agrees to review the Series and discuss the management of it. The Sub-
Adviser shall permit all books and records with respect to the Series to be
inspected and audited by the Manager and the Administrator at all
reasonable times during normal business hours, upon reasonable notice. The
Sub-Adviser shall also provide the Manager with such other information and
reports as may reasonably be requested by the Manager from time to time,
including without limitation all material requested by or required to be
delivered to the Trustees of the Trust.
c. The Sub-Adviser shall provide to the Manager a copy of the Sub-
Adviser's Form ADV as filed with the Securities and Exchange Commission and
a list of the persons whom the Sub-Adviser wishes to have authorized to
give written and/or oral instructions to custodians of assets of the
Series.
2. Obligations of the Manager.
--------------------------
a. The Manager shall provide (or cause the Series' Custodian (as
defined in Section 3 hereof) to provide) timely information to the Sub-
Adviser regarding such matters as the composition of assets of the Series,
cash requirements and cash available for investment in the Series, and all
other information as may be reasonably necessary for the Sub-Adviser to
perform its responsibilities hereunder.
b. The Manager has furnished the Sub-Adviser a copy of the prospectus
and statement of additional information of the Series and agrees during the
continuance of this Agreement to furnish the Sub-Adviser copies of any
revisions or supplements thereto at, or, if practicable, before the time
the revisions or supplements become effective. The Manager agrees to
furnish the Sub-Adviser with minutes of meetings of the trustees of the
Trust applicable to the Series to the extent they may affect the duties of
the Sub-Adviser, and with copies of any financial statements or reports
made by the Series to its shareholders, and any further materials or
information which the Sub-Adviser may reasonably request to enable it to
perform its functions under this Agreement.
-2-
<PAGE>
3. Custodian. The Manager shall provide the Sub-Adviser with a copy of the
---------
Series's agreement with the custodian designated to hold the assets of the
Series (the "Custodian") and any modifications thereto (the "Custody
Agreement"), copies of such modifications to be provided to the Sub-Adviser a
reasonable time in advance of the effectiveness of such modifications. The
assets of the Series shall be maintained in the custody of the Custodian
identified in, and in accordance with the terms and conditions of, the Custody
Agreement (or any sub-custodian properly appointed as provided in the Custody
Agreement). The Sub-Adviser shall have no liability for the acts or omissions of
the Custodian, unless such act or omission is taken in reliance upon instruction
given to the Custodian by a representative of the Sub-Adviser properly
authorized to give such instruction under the Custody Agreement. Any assets
added to the Series shall be delivered directly to the Custodian.
4. Proprietary Rights. The Manager agrees and acknowledges that the Sub-
------------------
Adviser is the sole owner of the name "Back Bay Advisors, L.P." and that all use
of any designation consisting in whole or part of "Back Bay Advisors, L.P."
under this Agreement shall inure to the benefit of the Sub-Adviser. The Manager
on its own behalf and on behalf of the Series agrees not to use any such
designation in any advertisement or sales literature or other materials
promoting the Series, except with the prior written consent of the Sub-Adviser.
Without the prior written consent of the Sub-Adviser, the Manager shall not, and
the Manager shall use its best efforts to cause the Series not to, make
representations regarding the Sub-Adviser in any disclosure document,
advertisement or sales literature or other materials relating to the Series.
Upon termination of this Agreement for any reason, the Manager shall cease, and
the Manager shall use its best efforts to cause the Series to cease, all use of
any such designation as soon as reasonably practicable.
5. Expenses. Except for expenses specifically assumed or agreed to be paid
--------
by the Sub-Adviser pursuant hereto, the Sub-Adviser shall not be liable for any
organizational, operational or business expenses of the Manager or the Trust
including, without limitation, (a) interest and taxes, (b) brokerage commissions
and other costs in connection with the purchase or sale of securities or other
investment instruments with respect to the Series, and (c) custodian fees and
expenses. Any reimbursement of advisory fees required by any expense limitation
provision of any law shall be the sole responsibility of the Manager. The
Manager and the Sub-Adviser shall not be considered as partners or participants
in a joint venture. The Sub-Adviser will pay its own expenses incurred in
furnishing the services to be provided by it pursuant to this Agreement. Neither
the Sub-Adviser nor any affiliated person thereof shall be entitled to any
compensation from the Manager or the Trust with respect to service by any
affiliated person of the Sub-Adviser as an officer or trustee of the Trust
(other than the compensation to the Sub-Adviser payable by the Manager pursuant
to Section 7 hereof).
6. Purchase and Sale of Assets. The Sub-Adviser shall place all orders for
---------------------------
the purchase and sale of securities for the Series with brokers or dealers
selected by the Sub-Adviser, which may include brokers or dealers affiliated
with the Sub-Adviser, provided such orders comply with Rule 17e-1 under the 1940
Act in all respects. To the extent consistent
-3-
<PAGE>
with applicable law, purchase or sell orders for the Series may be aggregated
with contemporaneous purchase or sell orders of other clients of the Sub-
Adviser. The Sub-Adviser shall use its best efforts to obtain execution of
transactions for the Series at prices which are advantageous to the Series and
at commission rates that are reasonable in relation to the benefits received.
However, the Sub-Adviser may select brokers or dealers on the basis that they
provide brokerage, research or other services or products to the Series and/or
other accounts serviced by the Sub-Adviser. To the extent consistent with
applicable law, the Sub-Adviser may pay a broker or dealer an amount of
commission for effecting a securities transaction in excess of the amount of
commission or dealer spread another broker or dealer would have charged for
effecting that transaction if the Sub-Adviser determines in good faith that such
amount of commission was reasonable in relation to the value of the brokerage
and research products and/or services provided by such broker or dealer. This
determination, with respect to brokerage and research services or products, may
be viewed in terms of either that particular transaction or the overall
responsibilities which the Sub-Adviser and its affiliates have with respect to
the Series or to accounts over which they exercise investment discretion. Not
all such services or products need be used by the Sub-Adviser in managing the
Series.
7. Compensation of the Sub-Adviser. As full compensation for all services
-------------------------------
rendered, facilities furnished and expenses borne by the Sub-Adviser hereunder,
the Manager shall pay the Sub-Adviser compensation at the annual rate of 0.30%
of the first $100 million of the average daily net assets of the Series and
0.25% in excess of $100 million of such assets, respectively (or such lesser
amount as the Sub-Adviser may from time to time agree to receive). Such
compensation shall be payable monthly in arrears or at such other intervals, not
less frequently than quarterly, as the Manager is paid by the Series pursuant to
the Advisory Agreement.
8. Non-Exclusivity. The Manager and the Series agree that the services of
---------------
the Sub-Adviser are not to be deemed exclusive and that the Sub-Adviser and its
affiliates are free to act as investment manager and provide other services to
various investment companies and other managed accounts, except as the Sub-
Adviser and the Manager or the Administrator may otherwise agree from time to
time in writing before or after the date hereof. This Agreement shall not in any
way limit or restrict the Sub-Adviser or any of its directors, officers,
employees or agents from buying, selling or trading any securities or other
investment instruments for its or their own account or for the account of others
for whom it or they may be acting, provided that such activities do not
adversely affect or otherwise impair the performance by the Sub-Adviser of its
duties and obligations under this Agreement. The Manager and the Series
recognize and agree that the Sub-Adviser may provide advice to or take action
with respect to other clients, which advice or action, including the timing and
nature of such action, may differ from or be identical to advice given or action
taken with respect to the Series. The Sub-Adviser shall for all purposes hereof
be deemed to be an independent contractor and shall, unless otherwise provided
or authorized, have no authority to act for or represent the Series or the
Manager in any way or otherwise be deemed an agent of the Series or the Manager.
-4-
<PAGE>
9. Liability. Except as may otherwise be provided by the 1940 Act or other
---------
federal securities laws, neither the Sub-Adviser nor any of its officers,
directors, partners, employees or agents (the "Indemnified Parties") shall be
subject to any liability to the Manager, the Trust, the Series or any
shareholder of the Series for any error of judgment, any mistake of law or any
loss arising out of any investment or other act or omission in the course of,
connected with, or arising out of any service to be rendered under this
Agreement, except by reason of willful misfeasance, bad faith or gross
negligence in the performance of the Sub-Adviser's duties or by reason of
reckless disregard by the Sub-Adviser of its obligations and duties hereunder.
The Manager shall hold harmless and indemnify the Sub-Adviser for any loss,
liability, cost, damage or expense (including reasonable attorneys fees and
costs) arising from any claim or demand by any past or present shareholder of
the Series that is not based upon the obligations of the Sub-Adviser under this
Agreement.
10. Effective Date and Termination. This Agreement shall become effective
------------------------------
as of the date of its execution, and
a. unless otherwise terminated, this Agreement shall continue in
effect for two years from the date of execution, and from year to year
thereafter so long as such continuance is specifically approved at least
annually (i) by the Board of Trustees of the Trust or by vote of a majority
of the outstanding voting securities of the Series, and (ii) by vote of a
majority of the trustees of the Trust who are not interested persons of the
Trust, the Manager or the Sub-Adviser, cast in person at a meeting called
for the purpose of voting on such approval;
b. this Agreement may at any time be terminated on sixty days' written
notice to the Sub-Adviser either by vote of the Board of Trustees of the
Trust or by vote of a majority of the outstanding voting securities of the
Series;
c. this Agreement shall automatically terminate in the event of its
assignment or upon the termination of the Advisory Agreement;
d. this Agreement may be terminated by the Sub-Adviser on ninety days'
written notice to the Manager and the Trust, or by the Manager on ninety
days' written notice to the Sub-Adviser.
Termination of this Agreement pursuant to this Section 10 shall be without
the payment of any penalty.
11. Amendment. This Agreement may be amended at any time by mutual consent
---------
of the Manager and the Sub-Adviser, provided that, if required by law, such
amendment shall also have been approved by vote of a majority of the outstanding
voting securities of the Series and by vote of a majority of the trustees of the
Trust who are not interested persons of the
-5-
<PAGE>
Trust, the Manager or the Sub-Adviser, cast in person at a meeting called for
the purpose of voting on such approval.
12. Certain Definitions. For the purpose of this Agreement, the terms "vote
-------------------
of a majority of the outstanding voting securities," "interested person,"
"affiliated person" and "assignment" shall have their respective meanings
defined in the 1940 Act, subject, however, to such exemptions as may be granted
by the Securities and Exchange Commission under the 1940 Act.
13. General.
-------
a. The Sub-Adviser may perform its services through any employee,
officer or agent of the Sub-Adviser, and the Manager shall not be entitled
to the advice, recommendation or judgment of any specific person; provided,
however, that the persons identified in the prospectus of the Series shall
perform the day-to-day portfolio management duties described therein until
the Sub-Adviser notifies the Manager that one or more other employees,
officers or agents of the Sub-Adviser, identified in such notice, shall
assume such duties as of a specific date.
b. If any term or provision of this Agreement or the application
thereof to any person or circumstances is held to be invalid or
unenforceable to any extent, the remainder of this Agreement or the
application of such provision to other persons or circumstances shall not
be affected thereby and shall be enforced to the fullest extent permitted
by law.
c. This Agreement shall be governed by and interpreted in accordance
with the laws of the Commonwealth of Massachusetts.
NEW ENGLAND FUNDS BACK BAY ADVISORS, L.P.
MANAGEMENT, L.P.
By NEF Corporation, its general partner By Back Bay Advisors, Inc.,
its general partner
By: BRUCE R. SPECA By: CHARLES T. WALLIS
--------------------------- ----------------------------
Name: Bruce R. Speca Name: Charles T. Wallis
Title: Executive Vice President Title: President
-6-
<PAGE>
Exhibit 99.5(b)(vii)
NEW ENGLAND INTERMEDIATE TERM
TAX FREE FUND OF CALIFORNIA
Sub-Advisory Agreement
(Back Bay Advisors)
This Sub-Advisory Agreement (this "Agreement") is entered into as of
January 2, 1996 by and between New England Funds Management, L.P., a Delaware
limited partnership (the "Manager"), and Back Bay Advisors, L.P., a Delaware
limited partnership (the "Sub-Adviser").
WHEREAS, the Manager has entered into an Advisory Agreement dated January
2, 1996 (the "Advisory Agreement") with New England Funds Trust II (the
"Trust"), pursuant to which the Manager provides portfolio management and
administrative services to New England Intermediate Term Tax Free Fund of
California, a series of the Trust (the "Series");
WHEREAS, the Advisory Agreement provides that the Manager may delegate any
or all of its portfolio management responsibilities under the Advisory Agreement
to one or more sub-advisers;
WHEREAS, the Manager and the trustees of the Trust desire to retain the
Sub-Adviser to render portfolio management services in the manner and on the
terms set forth in this Agreement.
NOW, THEREFORE, in consideration of the mutual covenants and agreements set
forth in this Agreement, the Manager and the Sub-Adviser agree as follows:
1. Sub-Advisory Services.
---------------------
a. The Sub-Adviser shall, subject to the supervision of the Manager
and of any administrator appointed by the Manager (the "Administrator"),
manage the investment and reinvestment of the assets of the Series, and
have the authority on behalf of the Series to vote all proxies and exercise
all other rights of the Series as a security holder of companies in which
the Series from time to time invests. The Sub-Adviser shall manage the
Series in conformity with (1) the investment objective, policies and
restrictions of the Series set forth in the Trust's prospectus and
statement of additional information relating to the Series, (2) any
additional policies or guidelines established by the Manager or by the
Trust's trustees that have been furnished in writing to the Sub-Adviser and
(3) the provisions of the Internal Revenue Code (the "Code") applicable to
"regulated investment companies" (as defined in Section 851 of the Code),
all as from time to time in effect (collectively, the "Policies"), and with
all
<PAGE>
applicable provisions of law, including without limitation all
applicable provisions of the Investment Company Act of 1940 (the "1940
Act") and the rules and regulations thereunder. Subject to the foregoing,
the Sub-Adviser is authorized, in its discretion and without prior
consultation with the Manager, to buy, sell, lend and otherwise trade in
any stocks, bonds and other securities and investment instruments on behalf
of the Series, without regard to the length of time the securities have
been held and the resulting rate of portfolio turnover or any tax
considerations; and the majority or the whole of the Series may be invested
in such proportions of stocks, bonds, other securities or investment
instruments, or cash, as the Sub-Adviser shall determine.
b. The Sub-Adviser shall furnish the Manager and the Administrator
monthly, quarterly and annual reports concerning portfolio transactions and
performance of the Series in such form as may be mutually agreed upon, and
agrees to review the Series and discuss the management of it. The Sub-
Adviser shall permit all books and records with respect to the Series to be
inspected and audited by the Manager and the Administrator at all
reasonable times during normal business hours, upon reasonable notice. The
Sub-Adviser shall also provide the Manager with such other information and
reports as may reasonably be requested by the Manager from time to time,
including without limitation all material requested by or required to be
delivered to the Trustees of the Trust.
c. The Sub-Adviser shall provide to the Manager a copy of the Sub-
Adviser's Form ADV as filed with the Securities and Exchange Commission and
a list of the persons whom the Sub-Adviser wishes to have authorized to
give written and/or oral instructions to custodians of assets of the
Series.
2. Obligations of the Manager.
--------------------------
a. The Manager shall provide (or cause the Series' Custodian (as
defined in Section 3 hereof) to provide) timely information to the Sub-
Adviser regarding such matters as the composition of assets of the Series,
cash requirements and cash available for investment in the Series, and all
other information as may be reasonably necessary for the Sub-Adviser to
perform its responsibilities hereunder.
b. The Manager has furnished the Sub-Adviser a copy of the prospectus
and statement of additional information of the Series and agrees during the
continuance of this Agreement to furnish the Sub-Adviser copies of any
revisions or supplements thereto at, or, if practicable, before the time
the revisions or supplements become effective. The Manager agrees to
furnish the Sub-Adviser with minutes of meetings of the trustees of the
Trust applicable to the Series to the extent they may affect the duties of
the Sub-Adviser, and with copies of any financial statements or reports
made by the Series to its shareholders, and any further materials or
information which the Sub-
-2-
<PAGE>
Adviser may reasonably request to enable it to perform its functions under
this Agreement.
3. Custodian. The Manager shall provide the Sub-Adviser with a copy of the
---------
Series's agreement with the custodian designated to hold the assets of the
Series (the "Custodian") and any modifications thereto (the "Custody
Agreement"), copies of such modifications to be provided to the Sub-Adviser a
reasonable time in advance of the effectiveness of such modifications. The
assets of the Series shall be maintained in the custody of the Custodian
identified in, and in accordance with the terms and conditions of, the Custody
Agreement (or any sub-custodian properly appointed as provided in the Custody
Agreement). The Sub-Adviser shall have no liability for the acts or omissions of
the Custodian, unless such act or omission is taken in reliance upon instruction
given to the Custodian by a representative of the Sub-Adviser properly
authorized to give such instruction under the Custody Agreement. Any assets
added to the Series shall be delivered directly to the Custodian.
4. Proprietary Rights. The Manager agrees and acknowledges that the Sub-
------------------
Adviser is the sole owner of the name "Back Bay Advisors, L.P." and that all use
of any designation consisting in whole or part of "Back Bay Advisors, L.P."
under this Agreement shall inure to the benefit of the Sub-Adviser. The Manager
on its own behalf and on behalf of the Series agrees not to use any such
designation in any advertisement or sales literature or other materials
promoting the Series, except with the prior written consent of the Sub-Adviser.
Without the prior written consent of the Sub-Adviser, the Manager shall not, and
the Manager shall use its best efforts to cause the Series not to, make
representations regarding the Sub-Adviser in any disclosure document,
advertisement or sales literature or other materials relating to the Series.
Upon termination of this Agreement for any reason, the Manager shall cease, and
the Manager shall use its best efforts to cause the Series to cease, all use of
any such designation as soon as reasonably practicable.
5. Expenses. Except for expenses specifically assumed or agreed to be paid
--------
by the Sub-Adviser pursuant hereto, the Sub-Adviser shall not be liable for any
organizational, operational or business expenses of the Manager or the Trust
including, without limitation, (a) interest and taxes, (b) brokerage commissions
and other costs in connection with the purchase or sale of securities or other
investment instruments with respect to the Series, and (c) custodian fees and
expenses. Any reimbursement of advisory fees required by any expense limitation
provision of any law shall be the sole responsibility of the Manager. The
Manager and the Sub-Adviser shall not be considered as partners or participants
in a joint venture. The Sub-Adviser will pay its own expenses incurred in
furnishing the services to be provided by it pursuant to this Agreement. Neither
the Sub-Adviser nor any affiliated person thereof shall be entitled to any
compensation from the Manager or the Trust with respect to service by any
affiliated person of the Sub-Adviser as an officer or trustee of the Trust
(other than the compensation to the Sub-Adviser payable by the Manager pursuant
to Section 7 hereof).
-3-
<PAGE>
6. Purchase and Sale of Assets. The Sub-Adviser shall place all orders for
---------------------------
the purchase and sale of securities for the Series with brokers or dealers
selected by the Sub-Adviser, which may include brokers or dealers affiliated
with the Sub-Adviser, provided such orders comply with Rule 17e-1 under the 1940
Act in all respects. To the extent consistent with applicable law, purchase or
sell orders for the Series may be aggregated with contemporaneous purchase or
sell orders of other clients of the Sub-Adviser. The Sub-Adviser shall use its
best efforts to obtain execution of transactions for the Series at prices which
are advantageous to the Series and at commission rates that are reasonable in
relation to the benefits received. However, the Sub-Adviser may select brokers
or dealers on the basis that they provide brokerage, research or other services
or products to the Series and/or other accounts serviced by the Sub-Adviser. To
the extent consistent with applicable law, the Sub-Adviser may pay a broker or
dealer an amount of commission for effecting a securities transaction in excess
of the amount of commission or dealer spread another broker or dealer would have
charged for effecting that transaction if the Sub-Adviser determines in good
faith that such amount of commission was reasonable in relation to the value of
the brokerage and research products and/or services provided by such broker or
dealer. This determination, with respect to brokerage and research services or
products, may be viewed in terms of either that particular transaction or the
overall responsibilities which the Sub-Adviser and its affiliates have with
respect to the Series or to accounts over which they exercise investment
discretion. Not all such services or products need be used by the Sub-Adviser in
managing the Series.
7. Compensation of the Sub-Adviser. As full compensation for all services
-------------------------------
rendered, facilities furnished and expenses borne by the Sub-Adviser hereunder,
the Manager shall pay the Sub-Adviser compensation at the annual rate of 0.2625%
of the first $200 million of the average daily net assets of the Series, 0.2500%
of the next $300 million of the average daily net assets of the Series and
0.2375% in excess of $500 million of such assets, respectively (or such lesser
amount as the Sub-Adviser may from time to time agree to receive). Such
compensation shall be payable monthly in arrears or at such other intervals, not
less frequently than quarterly, as the Manager is paid by the Series pursuant to
the Advisory Agreement.
8. Non-Exclusivity. The Manager and the Series agree that the services of
---------------
the Sub-Adviser are not to be deemed exclusive and that the Sub-Adviser and its
affiliates are free to act as investment manager and provide other services to
various investment companies and other managed accounts, except as the Sub-
Adviser and the Manager or the Administrator may otherwise agree from time to
time in writing before or after the date hereof. This Agreement shall not in any
way limit or restrict the Sub-Adviser or any of its directors, officers,
employees or agents from buying, selling or trading any securities or other
investment instruments for its or their own account or for the account of others
for whom it or they may be acting, provided that such activities do not
adversely affect or otherwise impair the performance by the Sub-Adviser of its
duties and obligations under this Agreement. The Manager and the Series
recognize and agree that the Sub-Adviser may provide advice to or take action
with respect to other clients, which advice or action, including the timing and
nature of such action, may differ from or be identical to advice given or action
taken with
-4-
<PAGE>
respect to the Series. The Sub-Adviser shall for all purposes hereof be deemed
to be an independent contractor and shall, unless otherwise provided or
authorized, have no authority to act for or represent the Series or the Manager
in any way or otherwise be deemed an agent of the Series or the Manager.
9. Liability. Except as may otherwise be provided by the 1940 Act or other
---------
federal securities laws, neither the Sub-Adviser nor any of its officers,
directors, partners, employees or agents (the "Indemnified Parties") shall be
subject to any liability to the Manager, the Trust, the Series or any
shareholder of the Series for any error of judgment, any mistake of law or any
loss arising out of any investment or other act or omission in the course of,
connected with, or arising out of any service to be rendered under this
Agreement, except by reason of willful misfeasance, bad faith or gross
negligence in the performance of the Sub-Adviser's duties or by reason of
reckless disregard by the Sub-Adviser of its obligations and duties hereunder.
The Manager shall hold harmless and indemnify the Sub-Adviser for any loss,
liability, cost, damage or expense (including reasonable attorneys fees and
costs) arising from any claim or demand by any past or present shareholder of
the Series that is not based upon the obligations of the Sub-Adviser under this
Agreement.
10. Effective Date and Termination. This Agreement shall become effective
------------------------------
as of the date of its execution, and
a. unless otherwise terminated, this Agreement shall continue in
effect for two years from the date of execution, and from year to year
thereafter so long as such continuance is specifically approved at least
annually (i) by the Board of Trustees of the Trust or by vote of a majority
of the outstanding voting securities of the Series, and (ii) by vote of a
majority of the trustees of the Trust who are not interested persons of the
Trust, the Manager or the Sub-Adviser, cast in person at a meeting called
for the purpose of voting on such approval;
b. this Agreement may at any time be terminated on sixty days' written
notice to the Sub-Adviser either by vote of the Board of Trustees of the
Trust or by vote of a majority of the outstanding voting securities of the
Series;
c. this Agreement shall automatically terminate in the event of its
assignment or upon the termination of the Advisory Agreement;
d. this Agreement may be terminated by the Sub-Adviser on ninety days'
written notice to the Manager and the Trust, or by the Manager on ninety
days' written notice to the Sub-Adviser.
Termination of this Agreement pursuant to this Section 10 shall be without
the payment of any penalty.
-5-
<PAGE>
11. Amendment. This Agreement may be amended at any time by mutual consent
---------
of the Manager and the Sub-Adviser, provided that, if required by law, such
amendment shall also have been approved by vote of a majority of the outstanding
voting securities of the Series and by vote of a majority of the trustees of the
Trust who are not interested persons of the Trust, the Manager or the Sub-
Adviser, cast in person at a meeting called for the purpose of voting on such
approval.
12. Certain Definitions. For the purpose of this Agreement, the terms "vote
-------------------
of a majority of the outstanding voting securities," "interested person,"
"affiliated person" and "assignment" shall have their respective meanings
defined in the 1940 Act, subject, however, to such exemptions as may be granted
by the Securities and Exchange Commission under the 1940 Act.
13. General.
-------
a. The Sub-Adviser may perform its services through any employee,
officer or agent of the Sub-Adviser, and the Manager shall not be entitled
to the advice, recommendation or judgment of any specific person; provided,
however, that the persons identified in the prospectus of the Series shall
perform the day-to-day portfolio management duties described therein until
the Sub-Adviser notifies the Manager that one or more other employees,
officers or agents of the Sub-Adviser, identified in such notice, shall
assume such duties as of a specific date.
b. If any term or provision of this Agreement or the application
thereof to any person or circumstances is held to be invalid or
unenforceable to any extent, the remainder of this Agreement or the
application of such provision to other persons or circumstances shall not
be affected thereby and shall be enforced to the fullest extent permitted
by law.
c. This Agreement shall be governed by and interpreted in accordance
with the laws of the Commonwealth of Massachusetts.
NEW ENGLAND FUNDS BACK BAY ADVISORS, L.P.
MANAGEMENT, L.P.
By NEF Corporation, its general partner By Back Bay Advisors, Inc.,
its general partner
By: BRUCE R. SPECA By: CHARLES T. WALLIS
------------------------------- ------------------------------
Name: Bruce R. Speca Name: Charles T. Wallis
Title: Executive Vice President Title: President
-6-
<PAGE>
Exhibit 99.5(b)(viii)
NEW ENGLAND INTERMEDIATE TERM
TAX FREE FUND OF NEW YORK
Sub-Advisory Agreement
(Back Bay Advisors)
This Sub-Advisory Agreement (this "Agreement") is entered into as of
January 2, 1996 by and between New England Funds Management, L.P., a Delaware
limited partnership (the "Manager"), and Back Bay Advisors, L.P., a Delaware
limited partnership (the "Sub-Adviser").
WHEREAS, the Manager has entered into an Advisory Agreement dated January
2, 1996 (the "Advisory Agreement") with New England Funds Trust II (the
"Trust"), pursuant to which the Manager provides portfolio management and
administrative services to New England Intermediate Term Tax Free Fund of New
York, a series of the Trust (the "Series");
WHEREAS, the Advisory Agreement provides that the Manager may delegate any
or all of its portfolio management responsibilities under the Advisory Agreement
to one or more sub-advisers;
WHEREAS, the Manager and the trustees of the Trust desire to retain the
Sub-Adviser to render portfolio management services in the manner and on the
terms set forth in this Agreement.
NOW, THEREFORE, in consideration of the mutual covenants and agreements set
forth in this Agreement, the Manager and the Sub-Adviser agree as follows:
1. Sub-Advisory Services.
---------------------
a. The Sub-Adviser shall, subject to the supervision of the Manager
and of any administrator appointed by the Manager (the "Administrator"),
manage the investment and reinvestment of the assets of the Series, and
have the authority on behalf of the Series to vote all proxies and exercise
all other rights of the Series as a security holder of companies in which
the Series from time to time invests. The Sub-Adviser shall manage the
Series in conformity with (1) the investment objective, policies and
restrictions of the Series set forth in the Trust's prospectus and
statement of additional information relating to the Series, (2) any
additional policies or guidelines established by the Manager or by the
Trust's trustees that have been furnished in writing to the Sub-Adviser and
(3) the provisions of the Internal Revenue Code (the "Code") applicable to
"regulated investment companies" (as defined in Section 851 of the Code),
all as from time to time in effect (collectively, the "Policies"), and with
all
<PAGE>
applicable provisions of law, including without limitation all applicable
provisions of the Investment Company Act of 1940 (the "1940 Act") and the
rules and regulations thereunder. Subject to the foregoing, the Sub-Adviser
is authorized, in its discretion and without prior consultation with the
Manager, to buy, sell, lend and otherwise trade in any stocks, bonds and
other securities and investment instruments on behalf of the Series,
without regard to the length of time the securities have been held and the
resulting rate of portfolio turnover or any tax considerations; and the
majority or the whole of the Series may be invested in such proportions of
stocks, bonds, other securities or investment instruments, or cash, as the
Sub-Adviser shall determine.
b. The Sub-Adviser shall furnish the Manager and the Administrator
monthly, quarterly and annual reports concerning portfolio transactions and
performance of the Series in such form as may be mutually agreed upon, and
agrees to review the Series and discuss the management of it. The Sub-
Adviser shall permit all books and records with respect to the Series to be
inspected and audited by the Manager and the Administrator at all
reasonable times during normal business hours, upon reasonable notice. The
Sub-Adviser shall also provide the Manager with such other information and
reports as may reasonably be requested by the Manager from time to time,
including without limitation all material requested by or required to be
delivered to the Trustees of the Trust.
c. The Sub-Adviser shall provide to the Manager a copy of the Sub-
Adviser's Form ADV as filed with the Securities and Exchange Commission and
a list of the persons whom the Sub-Adviser wishes to have authorized to
give written and/or oral instructions to custodians of assets of the
Series.
2. Obligations of the Manager.
--------------------------
a. The Manager shall provide (or cause the Series' Custodian (as
defined in Section 3 hereof) to provide) timely information to the Sub-
Adviser regarding such matters as the composition of assets of the Series,
cash requirements and cash available for investment in the Series, and all
other information as may be reasonably necessary for the Sub-Adviser to
perform its responsibilities hereunder.
b. The Manager has furnished the Sub-Adviser a copy of the prospectus
and statement of additional information of the Series and agrees during the
continuance of this Agreement to furnish the Sub-Adviser copies of any
revisions or supplements thereto at, or, if practicable, before the time
the revisions or supplements become effective. The Manager agrees to
furnish the Sub-Adviser with minutes of meetings of the trustees of the
Trust applicable to the Series to the extent they may affect the duties of
the Sub-Adviser, and with copies of any financial statements or reports
made by the Series to its shareholders, and any further materials or
information which the Sub-
-2-
<PAGE>
Adviser may reasonably request to enable it to perform its functions under
this Agreement.
3. Custodian. The Manager shall provide the Sub-Adviser with a copy of the
---------
Series's agreement with the custodian designated to hold the assets of the
Series (the "Custodian") and any modifications thereto (the "Custody
Agreement"), copies of such modifications to be provided to the Sub-Adviser a
reasonable time in advance of the effectiveness of such modifications. The
assets of the Series shall be maintained in the custody of the Custodian
identified in, and in accordance with the terms and conditions of, the Custody
Agreement (or any sub-custodian properly appointed as provided in the Custody
Agreement). The Sub-Adviser shall have no liability for the acts or omissions of
the Custodian, unless such act or omission is taken in reliance upon instruction
given to the Custodian by a representative of the Sub-Adviser properly
authorized to give such instruction under the Custody Agreement. Any assets
added to the Series shall be delivered directly to the Custodian.
4. Proprietary Rights. The Manager agrees and acknowledges that the Sub-
------------------
Adviser is the sole owner of the name "Back Bay Advisors, L.P." and that all use
of any designation consisting in whole or part of "Back Bay Advisors, L.P."
under this Agreement shall inure to the benefit of the Sub-Adviser. The Manager
on its own behalf and on behalf of the Series agrees not to use any such
designation in any advertisement or sales literature or other materials
promoting the Series, except with the prior written consent of the Sub-Adviser.
Without the prior written consent of the Sub-Adviser, the Manager shall not, and
the Manager shall use its best efforts to cause the Series not to, make
representations regarding the Sub-Adviser in any disclosure document,
advertisement or sales literature or other materials relating to the Series.
Upon termination of this Agreement for any reason, the Manager shall cease, and
the Manager shall use its best efforts to cause the Series to cease, all use of
any such designation as soon as reasonably practicable.
5. Expenses. Except for expenses specifically assumed or agreed to be paid
--------
by the Sub-Adviser pursuant hereto, the Sub-Adviser shall not be liable for any
organizational, operational or business expenses of the Manager or the Trust
including, without limitation, (a) interest and taxes, (b) brokerage commissions
and other costs in connection with the purchase or sale of securities or other
investment instruments with respect to the Series, and (c) custodian fees and
expenses. Any reimbursement of advisory fees required by any expense limitation
provision of any law shall be the sole responsibility of the Manager. The
Manager and the Sub-Adviser shall not be considered as partners or participants
in a joint venture. The Sub-Adviser will pay its own expenses incurred in
furnishing the services to be provided by it pursuant to this Agreement. Neither
the Sub-Adviser nor any affiliated person thereof shall be entitled to any
compensation from the Manager or the Trust with respect to service by any
affiliated person of the Sub-Adviser as an officer or trustee of the Trust
(other than the compensation to the Sub-Adviser payable by the Manager pursuant
to Section 7 hereof).
-3-
<PAGE>
6. Purchase and Sale of Assets. The Sub-Adviser shall place all orders for
---------------------------
the purchase and sale of securities for the Series with brokers or dealers
selected by the Sub-Adviser, which may include brokers or dealers affiliated
with the Sub-Adviser, provided such orders comply with Rule 17e-1 under the 1940
Act in all respects. To the extent consistent with applicable law, purchase or
sell orders for the Series may be aggregated with contemporaneous purchase or
sell orders of other clients of the Sub-Adviser. The Sub-Adviser shall use its
best efforts to obtain execution of transactions for the Series at prices which
are advantageous to the Series and at commission rates that are reasonable in
relation to the benefits received. However, the Sub-Adviser may select brokers
or dealers on the basis that they provide brokerage, research or other services
or products to the Series and/or other accounts serviced by the Sub-Adviser. To
the extent consistent with applicable law, the Sub-Adviser may pay a broker or
dealer an amount of commission for effecting a securities transaction in excess
of the amount of commission or dealer spread another broker or dealer would have
charged for effecting that transaction if the Sub-Adviser determines in good
faith that such amount of commission was reasonable in relation to the value of
the brokerage and research products and/or services provided by such broker or
dealer. This determination, with respect to brokerage and research services or
products, may be viewed in terms of either that particular transaction or the
overall responsibilities which the Sub-Adviser and its affiliates have with
respect to the Series or to accounts over which they exercise investment
discretion. Not all such services or products need be used by the Sub-Adviser in
managing the Series.
7. Compensation of the Sub-Adviser. As full compensation for all services
-------------------------------
rendered, facilities furnished and expenses borne by the Sub-Adviser hereunder,
the Manager shall pay the Sub-Adviser compensation at the annual rate of 0.2625%
of the first $200 million of the average daily net assets of the Series, 0.2500%
of the next $300 million of the average daily net assets of the Series and
0.2375% in excess of $500 million of such assets, respectively (or such lesser
amount as the Sub-Adviser may from time to time agree to receive). Such
compensation shall be payable monthly in arrears or at such other intervals, not
less frequently than quarterly, as the Manager is paid by the Series pursuant to
the Advisory Agreement.
8. Non-Exclusivity. The Manager and the Series agree that the services of
---------------
the Sub-Adviser are not to be deemed exclusive and that the Sub-Adviser and its
affiliates are free to act as investment manager and provide other services to
various investment companies and other managed accounts, except as the Sub-
Adviser and the Manager or the Administrator may otherwise agree from time to
time in writing before or after the date hereof. This Agreement shall not in any
way limit or restrict the Sub-Adviser or any of its directors, officers,
employees or agents from buying, selling or trading any securities or other
investment instruments for its or their own account or for the account of others
for whom it or they may be acting, provided that such activities do not
adversely affect or otherwise impair the performance by the Sub-Adviser of its
duties and obligations under this Agreement. The Manager and the Series
recognize and agree that the Sub-Adviser may provide advice to or take action
with
-4-
<PAGE>
respect to other clients, which advice or action, including the timing and
nature of such action, may differ from or be identical to advice given or action
taken with respect to the Series. The Sub-Adviser shall for all purposes hereof
be deemed to be an independent contractor and shall, unless otherwise provided
or authorized, have no authority to act for or represent the Series or the
Manager in any way or otherwise be deemed an agent of the Series or the Manager.
9. Liability. Except as may otherwise be provided by the 1940 Act or other
---------
federal securities laws, neither the Sub-Adviser nor any of its officers,
directors, partners, employees or agents (the "Indemnified Parties") shall be
subject to any liability to the Manager, the Trust, the Series or any
shareholder of the Series for any error of judgment, any mistake of law or any
loss arising out of any investment or other act or omission in the course of,
connected with, or arising out of any service to be rendered under this
Agreement, except by reason of willful misfeasance, bad faith or gross
negligence in the performance of the Sub-Adviser's duties or by reason of
reckless disregard by the Sub-Adviser of its obligations and duties hereunder.
The Manager shall hold harmless and indemnify the Sub-Adviser for any loss,
liability, cost, damage or expense (including reasonable attorneys fees and
costs) arising from any claim or demand by any past or present shareholder of
the Series that is not based upon the obligations of the Sub-Adviser under this
Agreement.
10. Effective Date and Termination. This Agreement shall become effective
------------------------------
as of the date of its execution, and
a. unless otherwise terminated, this Agreement shall continue in
effect for two years from the date of execution, and from year to year
thereafter so long as such continuance is specifically approved at least
annually (i) by the Board of Trustees of the Trust or by vote of a majority
of the outstanding voting securities of the Series, and (ii) by vote of a
majority of the trustees of the Trust who are not interested persons of the
Trust, the Manager or the Sub-Adviser, cast in person at a meeting called
for the purpose of voting on such approval;
b. this Agreement may at any time be terminated on sixty days' written
notice to the Sub-Adviser either by vote of the Board of Trustees of the
Trust or by vote of a majority of the outstanding voting securities of the
Series;
c. this Agreement shall automatically terminate in the event of its
assignment or upon the termination of the Advisory Agreement;
d. this Agreement may be terminated by the Sub-Adviser on ninety days'
written notice to the Manager and the Trust, or by the Manager on ninety
days' written notice to the Sub-Adviser.
Termination of this Agreement pursuant to this Section 10 shall be without
the payment of any penalty.
-5-
<PAGE>
11. Amendment. This Agreement may be amended at any time by mutual consent
---------
of the Manager and the Sub-Adviser, provided that, if required by law, such
amendment shall also have been approved by vote of a majority of the outstanding
voting securities of the Series and by vote of a majority of the trustees of the
Trust who are not interested persons of the Trust, the Manager or the Sub-
Adviser, cast in person at a meeting called for the purpose of voting on such
approval.
12. Certain Definitions. For the purpose of this Agreement, the terms "vote
-------------------
of a majority of the outstanding voting securities," "interested person,"
"affiliated person" and "assignment" shall have their respective meanings
defined in the 1940 Act, subject, however, to such exemptions as may be granted
by the Securities and Exchange Commission under the 1940 Act.
13. General.
-------
a. The Sub-Adviser may perform its services through any employee,
officer or agent of the Sub-Adviser, and the Manager shall not be entitled
to the advice, recommendation or judgment of any specific person; provided,
however, that the persons identified in the prospectus of the Series shall
perform the day-to-day portfolio management duties described therein until
the Sub-Adviser notifies the Manager that one or more other employees,
officers or agents of the Sub-Adviser, identified in such notice, shall
assume such duties as of a specific date.
b. If any term or provision of this Agreement or the application
thereof to any person or circumstances is held to be invalid or
unenforceable to any extent, the remainder of this Agreement or the
application of such provision to other persons or circumstances shall not
be affected thereby and shall be enforced to the fullest extent permitted
by law.
c. This Agreement shall be governed by and interpreted in accordance
with the laws of the Commonwealth of Massachusetts.
NEW ENGLAND FUNDS BACK BAY ADVISORS, L.P.
MANAGEMENT, L.P.
By NEF Corporation, its general partner By Back Bay Advisors, Inc.,
its general partner
By: BRUCE R. SPECA By: CHARLES T. WALLIS
-------------------------- ----------------------------
Name: Bruce R. Speca Name: Charles T. Wallis
Title: Executive Vice President Title: President
-6-
<PAGE>
Exhibit 99.6(a)
[NAME OF FUND]
Distribution Agreement
AGREEMENT made this [DAY] day of [MONTH], 1995 by and between NEW
ENGLAND FUNDS TRUST II, a Massachusetts business trust (the "Trust"), and NEW
ENGLAND FUNDS, L.P., a Delaware limited partnership (the "Distributor").
W I T N E S S E T H:
WHEREAS, this Agreement has been approved by the Trustees of the Trust in
contemplation of the transfer by the Distributor of its rights to receive the
Class B Distribution Fee (as defined in the Class B Distribution and Service
Plan attached hereto as Exhibit A) and/or contingent deferred sales charges to a
financing party in order to raise funds to cover distribution expenditures;
WHEREAS, the Trustees of the Trust recognize the importance to the Trust of
the Distributor being able to obtain financing with which to pay commissions on
Class B shares at the time of sale;
WHEREAS, the Trustees of the Trust acknowledge that by providing financing
to the Distributor the financing party enables the Distributor to provide
valuable services to the Series (as defined below); and
WHEREAS, the Trustees of the Trust, in the context of considering the best
interests of the Series and its shareholders at the time of and in preparation
for any vote, consent or other action that the Trustees of the Trust may from
time to time take relating to the continued receipt by the Distributor (and/or
the financing party) of the Distribution Fee, intend to consider the effect on
the Distributor and any financing party of any such vote, consent or action.
NOW, THEREFORE, in consideration of the premises and covenants hereinafter
contained, the Trust and the Distributor agree as follows:
1. Distributor. The Trust hereby appoints the Distributor as general
-----------
distributor of shares of beneficial interest ("Series shares") of the
Trust's [NAME OF FUND] series (the "Series") during the term of this
Agreement. The Trust reserves the right, however, to refuse at any time or
times to sell any Series shares hereunder for any reason deemed adequate by
the Board of Trustees of the Trust.
<PAGE>
2. Sale and Payment. Under this agreement, the following provisions shall
----------------
apply with respect to the sale of and payment for Series shares:
(a) The Distributor shall have the right, as principal, to purchase Series
shares from the Trust at their net asset value and to sell such shares
to the public against orders therefor at the applicable public
offering price, as defined in Section 4 hereof. The Distributor shall
also have the right, as principal, to sell shares to dealers against
orders therefor at the public offering price less a concession
determined by the Distributor.
(b) Prior to the time of delivery of any shares by the Trust to, or on the
order of, the Distributor, the Distributor shall pay or cause to be
paid to the Trust or to its order an amount in Boston or New York
clearing house funds equal to the applicable net asset value of such
shares. The Distributor shall retain so much of any sales charge or
underwriting discount as is not allowed by it as a concession to
dealers.
3. Fees. For its services as general distributor of the Class B Series
----
shares, the Trust shall cause the Series to pay to the Distributor (or its
designee or transferee) in addition to the sales charge, if any, referred
to in Section 4 below, the Class B Distribution Fee at the rate and upon
the terms and conditions set forth in the Class B Distribution and Service
Plan attached as Exhibit A hereto, and as amended from time to time, and
the Distributor shall also be entitled to receive any contingent deferred
sales charges that may be payable upon redemption or repurchase of Class B
Series shares. The Class B Distribution Fee shall be accrued daily and paid
monthly to the Distributor (or, at its direction, to its designee or
transferee) as soon as practicable after the end of the calendar month in
which it accrues, but in any event within five business days following the
last day of the month. So long as this agreement and the Class B
Distribution and Service Plan have not been terminated in accordance with
their respective terms, the Series' obligation to pay the Class B
Distribution Fee to the Distributor shall be absolute and unconditional and
shall not be subject to any dispute, offset, counterclaim or defense
whatsoever (it being understood that nothing in this sentence shall be
deemed a waiver by the Trust or the Series of its right separately to
pursue any claims it may have against the Distributor and to enforce such
claims against any assets (other than its rights to be paid the Class B
Distribution Fee and to be paid contingent deferred sales charges with
respect to Class B Series shares) of the Distributor).
4. Public Offering Price. The public offering price shall be the net asset
---------------------
value of Series shares, plus any applicable sales charge, all as set forth
in the current prospectus and statement of additional information
("prospectus") of the Trust relating to the Series shares. In no event
shall the public offering price exceed 1000/935 of such net asset value,
and in no event shall any applicable sales charge or underwriting discount
-2-
<PAGE>
exceed 6.5% of the public offering price. The net asset value of Series
shares shall be determined in accordance with the provisions of the
agreement and declaration of trust and by-laws of the Trust and the current
prospectus of the Trust relating to the Series shares.
5. Trust Issuance of Series Shares. The delivery of Series shares shall be
-------------------------------
made promptly by a credit to a shareholder's open account for the Series or
by delivery of a share certificate. The Trust reserves the right (a) to
issue Series shares at any time directly to the shareholders of the Series
as a stock dividend or stock split, (b) to issue to such shareholders
shares of the Series, or rights to subscribe to shares of the Series, as
all or part of any dividend that may be distributed to shareholders of the
Series or as all or part of any optional or alternative dividend that may
be distributed to shareholders of the Series, and (c) to sell Series shares
in accordance with the current applicable prospectus of the Trust relating
to the Series shares.
6. Redemption or Repurchase. The Distributor shall act as agent for the Trust
------------------------
in connection with the redemption or repurchase of Series shares by the
Trust to the extent and upon the terms and conditions set forth in the
current applicable prospectus of the Trust relating to the Series shares,
and the Trust agrees to reimburse the Distributor, from time to time upon
demand, for any reasonable expenses incurred in connection with such
redemptions or repurchases. The Trust will remit to the Distributor any
contingent deferred sales charges imposed on redemptions or repurchases of
Series shares (other than Class B shares) upon the terms and conditions set
forth in the then current prospectus of the Trust. The Trust will also
remit to the Distributor (or its designee or transferee), in addition to
the Class B Distribution Fee, any contingent deferred sales charges imposed
on redemptions or repurchases of Class B shares, in accordance with the
Remittance Agreement attached hereto as Exhibit B.
7. Undertaking Regarding Sales. The Distributor shall use reasonable efforts
---------------------------
to sell Series shares but does not agree hereby to sell any specific number
of Series shares and shall be free to act as distributor of the shares of
other investment companies. Series shares will be sold by the Distributor
only against orders therefor. The Distributor shall not purchase Series
shares from anyone except in accordance with Sections 2 and 6 and shall not
take "long" or "short" positions in Series shares contrary to the agreement
and declaration of trust or by-laws of the Trust.
8. Compliance. The Distributor shall conform to the Rules of Fair Practice of
----------
the NASD and the sale of securities laws of any jurisdiction in which it
sells, directly or indirectly, any Series shares. The Distributor agrees to
make timely filings, with the Securities and Exchange Commission in
Washington, D.C. (the "SEC"), the NASD and such other regulatory
authorities as may be required, of any sales literature relating to the
Series and intended for distribution to prospective investors. The
Distributor also agrees to furnish to the Trust sufficient copies of any
agreements or plans it
-3-
<PAGE>
intends to use in connection with any sales of Series shares in adequate
time for the Trust to file and clear them with the proper authorities
before they are put in use (which the Trust agrees to use its best efforts
to do as expeditiously as reasonably possible), and not to use them until
so filed and cleared.
9. Registration and Qualification of Series Shares. The Trust agrees to
-----------------------------------------------
execute such papers and to do such acts and things as shall from time to
time be reasonably requested by the Distributor for the purpose of
qualifying and maintaining qualification of the Series shares for sale
under the so-called Blue Sky Laws of any state or for maintaining the
registration of the Trust and of the Series shares under the federal
Securities Act of 1933 and the federal Investment Company Act of 1940 (the
"1940 Act"), to the end that there will be available for sale from time to
time such number of Series shares as the Distributor may reasonably be
expected to sell. The Trust shall advise the Distributor promptly of (a)
any action of the SEC or any authorities of any state or territory, of
which it may be advised, affecting registration or qualification of the
Trust or the Series shares, or rights to offer Series shares for sale, and
(b) the happening of any event which makes untrue any statement or which
requires the making of any change in the Trust's registration statement or
its prospectus relating to the Series shares in order to make the
statements therein not misleading.
10. Distributor Independent Contractor. The Distributor shall be an
----------------------------------
independent contractor and neither the Distributor nor any of its officers
or employees as such is or shall be an employee of the Trust. The
Distributor is responsible for its own conduct and the employment, control
and conduct of its agents and employees and for injury to such agents or
employees or to others through its agents or employees. The Distributor
assumes full responsibility for its agents and employees under applicable
statutes and agrees to pay all employer taxes thereunder.
11. Expenses Paid by Distributor. While the Distributor continues to act as
----------------------------
agent of the Trust to obtain subscriptions for and to sell Series shares,
the Distributor shall pay the following:
(a) all expenses of printing (exclusive of typesetting) and distributing
any prospectus for use in offering Series shares for sale, and all
other copies of any such prospectus used by the Distributor, and
(b) all other expenses of advertising and of preparing, printing and
distributing all other literature or material for use in connection
with offering Series shares for sale.
12. Interests in and of Distributor. It is understood that any of the
-------------------------------
shareholders, trustees, officers, employees and agents of the Trust may be
a shareholder, director, officer, employee or agent of, or be otherwise
interested in, the Distributor, any affiliated
-4-
<PAGE>
person of the Distributor, any organization in which the Distributor may
have an interest or any organization which may have an interest in the
Distributor; that the Distributor, any such affiliated person or any such
organization may have an interest in the Trust; and that the existence of
any such dual interest shall not affect the validity hereof or of any
transaction hereunder except as otherwise provided in the agreement and
declaration of trust or by-laws of the Trust, in the limited partnership
agreement of the Distributor or by specific provision of applicable law.
13. Words "New England" and Letters "TNE". The Distributor and/or its parent
-------------------------------------
organizations, New England Mutual Life Insurance Company ("The New
England") and New England Investment Companies, L.P. ("NEIC"), retain
proprietary rights in the words "New England" and the letters "TNE", which
may be used by the Trust and the Series only with the consent of the
Distributor, which is authorized by The New England and NEIC to give such
consent as provided herein. The Distributor consents to the use by the
Series of the name "[NAME OF FUND]" or any other name embodying the words
"New England" or the letters "TNE", in such forms as the Distributor shall
in writing approve, but only on condition and so long as (i) this Agreement
shall remain in full force and (ii) the Trust shall fully perform, fulfill
and comply with all provisions of this Agreement expressed herein to be
performed, fulfilled or complied with by it. No such name shall be used by
the Trust or the Series at any time or in any place or for any purposes or
under any conditions except as in this section provided. The foregoing
authorization by the Distributor as agent of The New England and NEIC to
the Trust and the Series to use said words or letters as part of a business
or name is not exclusive of the right of the Distributor itself to use, or
to authorize others to use, the same; the Trust acknowledges and agrees
that as between the Distributor and the Trust and the Series, the
Distributor has the exclusive right so to use, or authorize others to use,
said words and letters, and the Trust agrees to take such action as may
reasonably be requested by the Distributor to give full effect to the
provisions of this section (including, without limitation, consenting to
such use of said words or letters). Without limiting the generality of the
foregoing, the Trust agrees that, upon any termination of this Agreement by
either party or upon the violation of any of its provisions by the Trust,
the Trust will, at the request of the Distributor made within six months
after the Distributor has knowledge of such termination or violation, use
its best efforts to change the name of the Trust and the Series so as to
eliminate all reference, if any, to the words "New England" or the letters
"TNE" and will not thereafter transact any business in a name containing
the words "New England" or the letters "TNE" in any form or combination
whatsoever, or designate itself as the same entity as or successor to any
entity of such name, or otherwise use the words "New England" or the
letters "TNE" or any other reference to the Distributor. Such covenants on
the part of the Trust and the Series shall be binding upon it, its
trustees, officers, shareholders, creditors and all other persons claiming
under or through it.
-5-
<PAGE>
14. Effective Date and Termination. This Agreement shall become effective as
------------------------------
of the date of its execution, and
(a) Unless otherwise terminated, this Agreement shall continue in effect
with respect to the shares of the Series so long as such continuation
is specifically approved at least annually (i) by the Board of
Trustees of the Trust or by the vote of a majority of the votes which
may be cast by shareholders of the Series and (ii) by a vote of a
majority of the Board of Trustees of the Trust who are not interested
persons of the Distributor or the Trust, cast in person at a meeting
called for the purpose of voting on such approval.
(b) This Agreement may at any time be terminated on sixty days' notice to
the Distributor either by vote of a majority of the Trust's Board of
Trustees then in office or by the vote of a majority of the votes
which may be cast by shareholders of the Series.
(c) This Agreement shall automatically terminate in the event of its
assignment (excluding for this purpose any assignment of rights to
payment described in the recitals and in Section 19 of the Agreement
which are hereby ratified and approved).
(d) This Agreement may be terminated by the Distributor on ninety days'
written notice to the Trust.
Termination of this Agreement pursuant to this section shall be without payment
of any penalty.
15. Definitions. For purposes of this Agreement, the following definitions
-----------
shall apply:
(a) The "vote of a majority of the votes which may be cast by shareholders
of the Series" means (1) 67% or more of the votes of the Series
present (in person or by proxy) and entitled to vote at such meeting,
if the holders of more than 50% of the outstanding shares of the
Series entitled to vote at such meeting are present; or (2) the vote
of the holders of more than 50% of the outstanding shares of the
Series entitled to vote at such meeting, whichever is less.
(b) The terms "affiliated person", "interested person" and "assignment"
shall have their respective meanings as defined in the 1940 Act
subject, however, to such exemptions as may be granted by the SEC
under the 1940 Act.
16. Amendment. This Agreement may be amended at any time by mutual consent of
---------
the parties, provided that such consent on the part of the Series shall be
approved (i) by the Board of Trustees of the Trust or by vote of a majority
of the votes which may be cast
-6-
<PAGE>
by shareholders of the Series and (ii) by a vote of a majority of the Board
of Trustees of the Trust who are not interested persons of the Distributor
or the Trust cast in person at a meeting called for the purpose of voting
on such approval.
17. Applicable Law and Liabilities. This Agreement shall be governed by and
------------------------------
construed in accordance with the laws of The Commonwealth of Massachusetts.
All sales hereunder are to be made, and title to the Series shares shall
pass, in Boston, Massachusetts.
18. Limited Recourse. The Distributor hereby acknowledges that the Trust's
----------------
obligations hereunder with respect to the shares of the Series are binding
only on the assets and property belonging to the Series.
19. Payments to Distributor's Transferees. The Distributor may transfer its
-------------------------------------
rights to payments hereunder with respect to Class B shares (but not its
obligations hereunder) in order to raise funds to cover distribution
expenditures, and any such transfer shall be effective upon written notice
from the Distributor to the Trust. In connection with the foregoing, the
Series is authorized to pay all or a part of the Distribution Fee and/or
contingent deferred sales charges in respect of Class B shares directly to
such transferee as directed by the Distributor.
20. Liquidation etc. As long as the Class B Distribution and Service Plan is
---------------
in effect, the Series shall not change the manner in which the Distribution
Fee is computed (except as may be required by a change in applicable law
after the date hereof) or adopt a plan of liquidation without the consent
of the Distributor (or any designee or transferee of the Distributor's
rights to receive payment hereunder in respect of Class B shares) except in
circumstances where a surviving entity or transferee of the Series' assets
adopts the Class B Distribution and Service Plan and assumes the
obligations of the Series to make payments to the Distributor (or its
transferee) hereunder in respect of Class B shares.
21. "Distributor's Shares" etc. The Trust, on behalf of the Series, agrees
----------------------
that it will not pay any portion of the Class B Distribution Fee which is
calculated by reference to the "Distributor's Shares" (nor shall it pay a
Distribution Fee calculated by reference to Class B shares ("Other Class B
Shares") other than the Distributor's Shares at a rate exceeding .75% per
annum of the net assets attributable to Other Class B Shares) to any person
other than the Distributor (or its designee or transferee) without the
written consent of the Distributor. "Distributor's Shares" shall mean (i)
Class B shares of the Series that were sold by the Distributor, plus (ii)
Class B shares of the Series issued in connection with the exchange, for
Class B shares of the Series, of Class B shares of another fund in the New
England fund group that were sold by the Distributor, plus (iii) Class B
shares of the Series issued in connection with the exchange, for Class B
shares of the Series, of Class B shares of another fund in the New England
fund group issued in respect of the automatic reinvestment of dividends or
capital gain distributions
-7-
<PAGE>
in respect of Class B shares of such other fund that were sold by the
Distributor, plus (iv) Class B shares of the Series issued in respect of
the automatic reinvestment of dividends or capital gain distributions in
respect of Class B shares of the Series described in clauses (i), (ii) and
(iii). To the extent permitted under the 1940 Act, the terms of this
Section 21 shall survive the termination of this Agreement.
22. Limitation on Reduction of Class B Distribution Fee. The Trust, on behalf
---------------------------------------------------
of the Series, agrees that it will not reduce the Distribution Fee in
respect of Series' assets attributable to Class B shares below the annual
rate of 0.75% unless it has ceased (and not resumed) paying all "service
fees" (within the meaning of Section 26 of the Rules of Fair Practice of
the National Association of Securities Dealers, Inc. or any successor
provision thereto) to the Distributor, to any affiliate of the Distributor
and to any other person in circumstances where substantially all of the
services and functions relating to the distribution of Class B Series
shares have been delegated to, or are being performed by, the Distributor
or an affiliate of the Distributor. To the extent permitted under the 1940
Act, the terms of this Section 22 shall survive the termination of this
Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the
day and year first above written.
NEW ENGLAND FUNDS TRUST II Series,
on behalf of its [NAME OF FUND] series
By FRANK NESVET
------------
Name: Frank Nesvet
Title: Treasurer
NEW ENGLAND FUNDS, L.P.
By: NEF Corporation, its general partner
By BRUCE R. SPECA
--------------
Name: Bruce R. Speca
Title: Executive Vice President
A copy of the Agreement and Declaration of Trust establishing New England
Funds Trust II (the "Trust") is on file with the Secretary of The Commonwealth
of Massachusetts, and notice is hereby given that this Agreement is executed
with respect to the Trust's [NAME OF FUND] series (the "Series") on behalf of
the Trust by officers of the Trust as officers and not individually and that the
obligations of or arising out of this Agreement are not binding
-8-
<PAGE>
upon any of the trustees, officers or shareholders of the Trust individually but
are binding only upon the assets and property of the Series.
-9-
<PAGE>
Schedule Pursuant to Rule 483(d)(2) Under the Securities Act of 1933
--------------------------------------------------------------------
The foregoing form of Distribution Agreement is filed in lieu of 8 separate
Distribution Agreements, one for each series of the Registrant, which differ
from the foregoing form only in that the bracketed terms in the form are
replaced with the following:
[NAME OF FUND] [DAY] [MONTH]
New England Growth Opportunities Fund 1st November
New England Adjustable Rate U.S. 1st November
Government Fund
New England High Income Fund 1st November
New England Massachusetts Tax Free 1st November
Income Fund
New England Intermediate Term Tax Free 1st November
Fund of California
New England Intermediate Term Tax Free 1st November
Fund of New York
New England Limited Term U.S. 1st November
Government Fund
Growth Fund of Israel 29th December
-10-
<PAGE>
Exhibit 99.9(f)
[NAME OF FUND]
CLASS B SHARES REMITTANCE AGREEMENT
Agreement made this [DAY] day of [MONTH], 1995 by and between NEW ENGLAND
FUNDS TRUST II, a Massachusetts business trust (the "Trust"), and NEW ENGLAND
FUNDS, L.P., a Delaware limited partnership (the "Distributor"). Terms used in
the Distribution Agreement (the "Distribution Agreement") dated [MONTH] [DAY],
1995 between the Trust and the Distributor relating to the Trust's [NAME OF
FUND] (the "Series") and not defined herein are used with the meanings so
defined.
WHEREAS, contingent deferred sales charges ("CDSCs") apply to certain
redemptions or repurchases of Class B shares of the Series; and
WHEREAS, the Trust acknowledges that the CDSCs relating to the
Distributor's Shares are the property of the Distributor and not of the Trust;
NOW, THEREFORE, in consideration of the Distributor's agreement to act as
agent for the Trust in connection with the redemption or repurchase of Series
shares by the Trust, the Trust and the Distributor agree as follows:
1. On all redemptions or repurchases of the Distributor's Shares that are
effected by the Distributor as agent for the Trust, the Distributor shall be
entitled to retain the amount of the applicable CDSC out of the proceeds of the
redemption or repurchase, and shall remit to the relevant shareholder the amount
of such redemption or repurchase net of such CDSCs.
2. On all redemptions or repurchases of the Distributor's Shares that are
effected by the Trust directly or through an agent other than the Distributor,
the Trust shall remit to the Distributor any applicable CDSCs in accordance with
the terms and conditions set forth in the then current prospectus of the Trust.
3. The Distributor shall be entitled to receive all applicable CDSCs in
respect of the redemption or repurchase of the Distributor's Shares,
notwithstanding the Distributor's termination as general distributor of the
Class B shares of the Series or any termination of this Agreement or the
Distribution Agreement.
4. The right of the Distributor under Section 1 hereof to retain CDSCs and
the obligation of the Series under Section 2 hereof to remit CDSCs to the
Distributor shall not be
<PAGE>
subject to any dispute, offset, counterclaim or defense whatsoever (it being
understood that nothing in this sentence shall be deemed a waiver by the Trust
or the Series of its right separately to pursue any claims it may have against
the Distributor and to enforce such claims against any assets of the Distributor
(other than its right to be paid the CDSCs with respect to the Distributor's
Shares).
5. The Distributor may assign or transfer its rights to receive CDSCs
hereunder, but shall give prompt written notice to the Trust of any such
assignment or transfer.
6. The Trust shall not waive any CDSCs applicable to redemptions or
repurchases of the Distributor's Shares (other than under the circumstances set
forth in the Trust's prospectus dated May 1, 1995), except with the consent of
the Distributor (or, if the Distributor has assigned or transferred its rights
to receive CDSCs as provided in Section 5 hereof, with the consent of the
assignee or transferee) and shall not take any action, following the termination
of the Distribution Agreement, that would interfere with the Distributor's right
to receive the applicable CDSCs on redemptions or repurchases of the
Distributor's Shares.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the
day and year first above written.
NEW ENGLAND FUNDS TRUST II Series,
on behalf of its [NAME OF FUND] series
By FRANK NESVET
Name: Frank Nesvet
Title: Treasurer
NEW ENGLAND FUNDS, L.P.
By: NEF Corporation, its general partner
By BRUCE R. SPECA
--------------
Name: Bruce R. Speca
Title: Executive Vice President
-2-
<PAGE>
A copy of the Agreement and Declaration of Trust establishing New England
Funds Trust II (the "Trust") is on file with the Secretary of The Commonwealth
of Massachusetts, and notice is hereby given that this Agreement is executed
with respect to the Trust's [NAME OF FUND] series (the "Series") on behalf of
the Trust by officers of the Trust as officers and not individually and that the
obligations of or arising out of this Agreement are not binding upon any of the
trustees, officers or shareholders of the Trust individually but are binding
only upon the assets and property of the Series.
-3-
<PAGE>
Schedule Pursuant to Rule 483(d)(2) Under the Securities Act of 1933
The foregoing form of Class B Shares Remittance Agreement is filed in lieu
of 8 separate Class B Shares Remittance Agreements, one for each series of the
Registrant, which differ from the foregoing form only in that the bracketed
terms in the form are replaced with the following:
[NAME OF FUND] [DAY] [MONTH]
New England Growth Opportunities Fund 1/1st November
New England Adjustable Rate U.S.
Government Fund 1/1st November
New England High Income Fund 1/1st November
New England Massachusetts Tax Free
Income Fund 1/1st November
New England Intermediate Term Tax Free
Fund of California 1/1st November
New England Intermediate Term Tax Free
Fund of New York 1/1st November
New England Limited Term U.S.
Government Fund 1/1st November
Growth Fund of Israel 29/29th December
and in that the language in Section 6, "Trust's prospectus dated May 1, 1995",
is, in the Agreement relating to Growth Fund of Israel, replaced with the
language, "Fund's prospectus dated December 29, 1995".
-4-
<PAGE>
Exhibit 99.9(g)
ORGANIZATIONAL EXPENSE
REIMBURSEMENT AGREEMENT
This Agreement, made this as of the 1st day of December, 1995, by and
between New England Funds Trust II, a Massachusetts business trust (the
"Trust"), on behalf of its Growth Fund of Israel (the "Series") and New England
Funds, L.P. (the "Distributor").
WITNESSETH
WHEREAS, the Trust is registered as an open-end management investment
company under the Investment Company Act of 1940 and was and is in the process
of organizing the Series;
WHEREAS, there have been and will be certain organizational expenses
incurred as a part of such organization, which are properly expenses of the
Series, that have been and will in the future be paid by the Distributor by
reason of the fact that the Series was not or will not be capitalized when such
expenses otherwise became or become due and payable;
WHEREAS, such organizational expenses include expenses necessary to
organize and establish the Series as separate series of the Trust and to create
the necessary relationships and legal qualifications to enable them to commence
business and operations, including, but not by way of limitation, such expenses
as outside legal counsel's fees, fees and taxes imposed by The Commonwealth of
Massachusetts on Massachusetts business trusts, independent public accountant
fees and state blue sky filing and registration fees (such expenses being
hereinafter referred to as "Organization Expenses"):
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, it is agreed as follows:
1. Upon the issuance and sale of shares of beneficial interest of the
Series to the public, the Series shall reimburse and pay to the Distributor up
to $250,000 of the amounts expended by the Distributor for Organization Expenses
for the Series.
2. Such reimbursement shall be paid by the Series to the Distributor upon
demand, without interest, and in no event later than five years from the
commencement of operations of the Series. Upon demand for payment, the
Distributor shall present copies of invoices or receipts, and copies of
cancelled checks or other evidence of payment by the Distributor, of the
Organization Expenses for which it is demanding reimbursement.
New England Funds Trust II New England Funds, L.P.
on behalf of its
Growth Fund of Israel
HENRY L.P. SCHMELZER BRUCE R. SPECA
- -------------------- --------------
Henry L. P. Schmelzer Bruce R. Speca
President Executive Vice President
<PAGE>
EXHIBIT 9(H)
------------
TRUST II
GROWTH FUND OF ISRAEL
Economic and Market Sub-Advisory Agreement
This Agreement (this "Agreement") is entered into as of December 29, 1995
by and between New England Funds Management, L.P., a Delaware limited
partnership (the "Manager"), and Batucha Securities & Investments Ltd., a
corporation organized and existing under the laws of the State of Israel
("Batucha").
WHEREAS, the Manager has entered into an Advisory Agreement dated December
29, 1995 (the "Advisory Agreement") with New England Funds Trust II (the
"Trust"), pursuant to which the Manager provides portfolio management and
administrative services to Growth Fund of Israel, a series of the Trust (the
"Series");
WHEREAS, the Advisory Agreement provides that the Manager may delegate any
or all of its portfolio management responsibilities under the Advisory Agreement
to one or more sub-advisers;
WHEREAS, pursuant to a Sub-Advisory Agreement dated December 29, 1995 (the
"Harris Agreement") by and between the Manager and Harris Associates L.P.
("Harris"), the Manager has retained Harris to render portfolio management
services to the Series, in the manner and on the terms set forth in the Harris
Agreement;
WHEREAS, the Manager and the Trust desire to retain Batucha as special
economic and market sub-adviser for the Series, to render certain services in
the manner and on the terms set forth in this Agreement;
NOW, THEREFORE, in consideration of the mutual covenants and agreements set
forth in this Agreement, the Manager and Batucha agree as follows:
1. Sub-Advisory Services.
---------------------
Batucha shall, subject to the supervision of the Manager and of any
administrator appointed by the Manager (the "Administrator"), provide the
Manager or Harris with such statistical and other factual information,
advice and assistance regarding economic, financial, political,
technological or social matters, trends or changes relating to or affecting
the State of Israel and information on markets and industries in the State
of Israel, as may from time to time be requested by the Manager or Harris.
The Manager, Harris and the Trust acknowledge that Batucha shall not
generally furnish advice or make recommendations regarding the purchase or
sale of securities for the portfolio of the Series, but may provide advice
as to occasional transactions in specific securities.
<PAGE>
2. Expenses. Batucha shall not be liable for any organizational,
--------
operational or business expenses of the Manager, Harris or the Trust including,
without limitation, (a) interest and taxes, (b) brokerage commissions and other
costs in connection with the purchase or sale of securities or other investment
instruments with respect to the Series, and (c) custodian fees and expenses. Any
reimbursement of advisory fees required by any expense limitation provision of
any law shall be the sole responsibility of the Manager. The Manager, Harris and
Batucha shall not be considered as partners or participants in a joint venture.
Batucha will pay its own expenses incurred in furnishing the services to be
provided by it pursuant to this Agreement.
3. Compensation of Batucha. As full compensation for all services
-----------------------
rendered and expenses borne by Batucha hereunder, the Manager shall pay Batucha
compensation at the annual rate of 0.10% of the Series's average daily net
assets for such period as compensation is payable (or such lesser amount as
Batucha may from time to time agree to receive). Such compensation shall be
payable monthly in arrears or at such other intervals, not less frequently than
quarterly, as the Manager is paid by the Series pursuant to the Advisory
Agreement.
4. Non-Exclusivity. The Manager and the Series agree that the services
---------------
of Batucha are not to be deemed exclusive and that Batucha and its affiliates
are free to provide services to various investment companies and other managed
accounts, except as Batucha and the Manager may otherwise agree from time to
time in writing before or after the date hereof. The Manager, Harris and the
Series acknowledge that Batucha may provide advice to or take action with
respect to other clients, which advice or action, including the timing and
nature of such action, may differ from or be identical to advice given or action
taken with respect to the Series. Batucha shall for all purposes hereof be
deemed to be an independent contractor and shall, unless otherwise provided or
authorized, have no authority to act for or represent the Series, the Manager or
Harris in any way or otherwise be deemed an agent of the Series, the Manager or
Harris.
5. Liability. Except as may otherwise be provided by the federal
---------
securities laws, neither Batucha nor any of its officers, directors, partners,
employees or agents (the "Indemnified Parties") shall be subject to any
liability to the Manager, Harris, the Trust, the Series or any shareholder of
the Series for any error of judgment, any mistake of law or any loss arising out
of any investment or other act or omission in the course of, connected with, or
arising out of any service to be rendered under this Agreement, except by reason
of willful misfeasance, bad faith or gross negligence in the performance of
Batucha's duties or by reason of reckless disregard by Batucha of its
obligations and duties hereunder.
6. Effective Date and Termination. This Agreement shall become effective
------------------------------
as of the date first above written, and may be terminated by Batucha on ninety
days' written notice to the Manager and the Trust, or by the Manager on ninety
days' written notice to Batucha. Termination of this Agreement pursuant to this
Section 6 shall be without the payment of any penalty.
-2-
<PAGE>
7. Amendment. This Agreement may be amended at any time by mutual
---------
consent of the Manager and Batucha.
8. General.
-------
a. Batucha may perform its services through any employee, officer or
agent of Batucha, and the Manager shall not be entitled to the advice,
recommendation or judgment of any specific person.
b. If any term or provision of this Agreement or the application
thereof to any person or circumstances is held to be invalid or
unenforceable to any extent, the remainder of this Agreement or the
application of such provision to other persons or circumstances shall not
be affected thereby and shall be enforced to the fullest extent permitted
by law.
c. This Agreement shall be governed by and interpreted in accordance
with the laws of the Commonwealth of Massachusetts.
IN WITNESS WHEREOF, the Manager and Batucha have executed this Agreement as
of the date first above written.
NEW ENGLAND FUNDS MANAGEMENT, L.P.
By NEF Corporation, its general partner
By:__________________________________
Name:_____________________________
Title:____________________________
BATUCHA SECURITIES & INVESTMENTS LTD.
By:__________________________________
Name:_____________________________
Title:____________________________
-3-
<PAGE>
Exhibit 99.10(f)
Ropes & Gray
One International Place
Boston, Massachusetts 02110-2624
(617) 951-7000
Fax: (617) 951-7050
December 29, 1995
New England Funds Trust II
399 Boylston Street
Boston, Massachusetts 02116
Gentlemen:
You have informed us that you propose to register under the Securities Act
of 1933, as amended (the "Act"), and offer and sell from time to time shares of
beneficial interest, without par value, of your Growth Fund of Israel series
("Shares"), at not less than net asset value.
We have examined an executed copy of your Second Amended and Restated
Agreement and Declaration of Trust dated February 2, 1993, as amended through
Amendment No. 6 thereto (as so amended, the "Declaration of Trust"), and are
familiar with the action taken by your trustees to authorize the issue and sale
to the public from time to time of authorized and unissued Shares. We have
further examined a copy of your By-Laws and such other documents and records as
we have deemed necessary for the purpose of this opinion.
Based on the foregoing, we are of the opinion that:
1. The beneficial interest in your Growth Fund of Israel series is divided
into an unlimited number of Shares.
2. The issue and sale of the authorized but unissued Shares has been duly
authorized under Massachusetts law. Upon the original issue and sale of any of
such authorized but unissued Shares and upon receipt of the authorized
consideration therefor in an amount not less than the applicable net asset
value, the Shares so issued will be validly issued, fully paid and nonassessable
by the Trust.
The Trust is an entity of the type commonly known as a "Massachusetts
business trust." Under Massachusetts law, shareholders could, under certain
circumstances, be held personally liable for the obligations of the Trust.
However, the Declaration of Trust disclaims shareholder liability for acts or
obligations of the Trust and requires that notice of such disclaimer be given in
each agreement, obligation or instrument entered into or executed by
<PAGE>
the Trust or its trustees. The Declaration of Trust provides for indemnification
out of the property of the Growth Fund of Israel series (the "Series") for all
loss and expense of any shareholder of the Series held personally liable solely
by reason of his or her being or having been such a shareholder. Thus, the risk
of a shareholder incurring financial loss on account of shareholder liability is
limited to circumstances in which the Series itself would be unable to meet its
obligations.
We understand that this opinion is to be used in connection with the
registration of an indefinite number of shares for offering and sale pursuant to
the Act. We consent to the filing of this opinion with and as part of your
Registration Statement on Form N-1A (File No. 2-11101) relating to such offering
and sale.
Very truly yours,
Ropes & Gray
-2-
<PAGE>
Exhibit 99.10(g)
ROPES & GRAY
ONE INTERNATIONAL PLACE
BOSTON, MASSACHUSETTS 02110-2624
(617) 951-7000
FAX: (617) 951-7050
April 12, 1996
New England Funds Trust II
399 Boylston Street
Boston, Massachusetts 02116
Ladies and Gentlemen:
You have informed us that you propose to offer and sell from time to time
51,806,761 of your shares of beneficial interest, no par value, belonging to
your New England Growth Opportunities Fund, New England Massachusetts Tax Free
Income Fund, New England High Income Fund, New England Limited Term U.S.
Government Fund, New England Adjustable Rate U.S. Government Fund, New England
Intermediate Term Tax Free Fund of California, New England Intermediate Term Tax
Free Fund of New York and Growth Fund of Israel (the "Shares"), for cash or
securities at the net asset value per share, determined in accordance with your
By-Laws, which Shares are in addition to your shares of beneficial interest
which you have previously offered and sold or which you are currently offering.
We have examined your Second Amended and Restated Agreement and Declaration
of Trust and Amendments Nos. 1, 2, 3, 4, 5 and 6 thereto (together, the
"Agreement and Declaration of Trust") on file in the office of the Secretary of
State of The Commonwealth of Massachusetts and are familiar with the actions
taken by your Trustees to authorize the issuance and sale from time to time of
your authorized and unissued shares of beneficial interest at not less than net
asset value. We have also examined a copy of your By-Laws and such other
documents, receipts and records as we have deemed necessary for the purposes of
this opinion.
Based upon the foregoing, we are of the opinion that:
1. New England Funds Trust II (the "Trust") is a legally organized and
validly existing voluntary association with transferable shares of beneficial
interest under the laws of
<PAGE>
The Commonwealth of Massachusetts and is authorized to issue an unlimited number
of shares of beneficial interest.
2. Upon the issue of any of the Shares for cash or securities at net
asset value, and the receipt of the appropriate consideration therefor as
provided in your By-Laws, such Shares so issued will be validly issued, fully
paid and nonassessable by the Trust.
The Trust is an entity of the type commonly known as a "Massachusetts
business trust." Under Massachusetts law, shareholders could, under certain
circumstances, be held personally liable for the obligations of the Trust.
However, the Agreement and Declaration of Trust disclaims shareholder liability
for acts or obligations of the Trust and requires that notice of such disclaimer
be given in each agreement, obligation or instrument entered into or executed by
the Trust or its Trustees. The Agreement and Declaration of Trust provides for
indemnification out of the property of the particular series of shares for all
loss and expense of any shareholder of that series held personally liable for
the obligations of the Trust solely by reason of his or her being or having been
such a shareholder. Thus, the risk of a shareholder's incurring financial loss
on account of shareholder liability is limited to circumstances in which the
series of shares itself would be unable to meet its obligations.
We understand that this opinion is to be used in connection with the
registration of the Shares for offering and sale pursuant to the Securities Act
of 1933, as amended, and the provisions of Rule 24e-2 under the Investment
Company Act of 1940, as amended. We consent to the filing of this opinion with
and as part of Post-Effective Amendment No. 103 to your Registration Statement
on Form N-1A (File No. 2-11101).
Very truly yours,
ROPES & GRAY
-2-
<PAGE>
Coopers Coopers & Lybrand L.L.P
& Lybrand
a professional services firm
CONSENT OF INDEPENDENT ACCOUNTANTS
To the Board of Trustees of
New England Funds Trust II:
We consent to the incorporation by reference in Post-Effective Amendment No. 103
to the Registration Statement of New England Funds Trust II (comprising,
respectively, the New England Limited Term U.S. Government Fund, New England
Growth Opportunities 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 New York and New England Intermediate
Term Tax Free Fund of California - the "Series") on Form N-1A (File Nos. 2-11101
and 811-242) of our reports dated February 2, 1996 on our audits of the
financial statements and financial highlights of the respective Series, which
reports are included in the Annual Report to Shareholders for the year ended
December 31, 1995, which are incorporated by reference in the Registration
Statement. We also consent to the reference to our Firm under captions
"Financial Highlights", "Independent Accountants" and "Experts".
Boston, Massachusetts COOPERS & LYBRAND L.L.P.
April 12, 1996
<PAGE>
Exhibit 99.15(b)
[NAME OF FUND]
Class B Distribution and Service Plan
This Plan (the "Plan") as amended and restated on [DATE1] constitutes the
Distribution and Service Plan relating to the Class B shares of [NAME OF FUND]
(the "Series"), a series of New England Funds Trust II, a Massachusetts business
trust (the "Trust").
Section 1. Service Fee. The Trust, on behalf of the Series, will pay to
-----------
New England Funds, L.P. ("NEF"), a Delaware limited partnership which acts as
the Principal Distributor of the Series' shares, or such other entity as shall
from time to time act as the Principal Distributor of the Series' shares (the
"Distributor"), a fee (the "Service Fee") at an annual rate not to exceed .25%
of the Series' average daily net assets attributable to the Class B shares.
Subject to such limit and subject to the provisions of Section 7 hereof, the
Service Fee shall be as approved from time to time by (a) the Trustees of the
Trust and (b) the Independent Trustees of the Trust; provided, however, that no
-------- -------
Service Fee or other fee that is a "service fee" as defined in Section 26 of the
Rules of Fair Practice of the National Association of Securities Dealers, Inc.
(or any successor provision thereto) as in effect from time to time (the "NASD
Rule") shall be paid, with respect to Class B shares of the Series, to NEF (or
to any affiliate of NEF, or to any other person in circumstances where
substantially all of the services and functions relating to the distribution of
Class B shares of the Series have been delegated to, or are being performed by,
NEF or an affiliate of NEF), under this Plan or otherwise, if the Distribution
Fee is terminated or is reduced below the rate set forth in Section 2. The
Service Fee shall be accrued daily and paid monthly or at such other intervals
as the Trustees shall determine. The Distributor may pay all or any portion of
the Service Fee to securities dealers or other organizations (including, but not
limited to, any affiliate of the Distributor) as service fees pursuant to
agreements with such organizations for providing personal services to investors
in Class B shares of the Series and/or the maintenance of shareholder accounts,
and may retain all or any portion of the Service Fee as compensation for
providing personal services to investors in Class B shares of the Series and/or
the maintenance of shareholder accounts. All payments under this Section 1 are
intended to qualify as "service fees" as defined in the NASD Rule.
Section 2. Distribution Fee. In addition to the Service Fee, the Trust,
----------------
on behalf of the Series, will pay to the Distributor a fee (the "Distribution
Fee") at an annual rate of 0.75% (unless reduced as contemplated by and
permitted pursuant to the next sentence hereof) of the Series' average daily net
assets attributable to the Class B shares in consideration of the services
rendered in connection with the sale of such shares by the Distributor. The
Trust will not terminate the Distribution Fee in respect of Series assets
attributable to Class B shares, or pay such fee at an annual rate of less than
.75% of the Series' average daily net assets
<PAGE>
attributable to the Class B shares, unless it has ceased, and not resumed,
paying the Service Fee (or any other fee that constitutes a "service fee" as
defined in the NASD Rule) to NEF (or to any affiliate of NEF, or to any other
person in circumstances where substantially all of the services and functions
relating to the distribution of Class B shares of the Series have been delegated
to, or are being performed by, NEF or an affiliate of NEF). Subject to such
restriction and subject to the provisions of Section 7 hereof, the Distribution
Fee shall be as approved from time to time by (a) the Trustees of the Trust and
(b) the Independent Trustees of the Trust. The Distribution Fee shall be accrued
daily and paid monthly or at such other intervals as the Trustees shall
determine.
The obligation of the Series to pay the Distribution Fee shall terminate
upon the termination of this Plan or the relevant distribution agreement between
the Distributor and the Trust relating to the Series, in accordance with the
terms hereof or thereof, but until any such termination shall not be subject to
any dispute, offset, counterclaim or defense whatsoever (it being understood
that nothing in this sentence shall be deemed a waiver by the Trust or the
Series of its right separately to pursue any claims it may have against the
Distributor and enforce such claims against any assets of the Distributor (other
than its right to be paid the Distribution Fee and to be paid contingent
deferred sales charges).
The right of NEF to receive the Distribution Fee (but not the relevant
distribution agreement or NEF's obligations thereunder) may be transferred by
NEF in order to raise funds which may be useful or necessary to perform its
duties as principal underwriter, and any such transfer shall be effective upon
written notice from NEF to the Trust. In connection with the foregoing, the
Series is authorized to pay all or part of the Distribution Fee directly to such
transferee as directed by NEF.
The Distributor may pay all or any portion of the Distribution Fee to
securities dealers or other organizations (including, but not limited to, any
affiliate of the Distributor) as commissions, asset-based sales charges or other
compensation with respect to the sale of Class B shares of the Series, and may
retain all or any portion of the Distribution Fee as compensation for the
Distributor's services as principal underwriter of the Class B shares of the
Series. All payments under this Section 2 are intended to qualify as "asset-
based sales charges" as defined in the NASD Rule.
Section 3. This Plan shall continue in effect for a period of more than
one year after [DATE2] only so long as such continuance is specifically approved
at least annually by votes of the majority (or whatever other percentage may,
from time to time, be required by Section 12(b) of the Investment Company Act of
1940 (the "Act") or the rules and regulations thereunder) of both (a) the
Trustees of the Trust, and (b) the Independent Trustees of the Trust, cast in
person at a meeting called for the purpose of voting on this Plan or such
agreement.
Section 4. Any person authorized to direct the disposition of monies paid
or payable
-2-
<PAGE>
by the Trust pursuant to this Plan or any related agreement shall provide to the
Trustees of the Trust, and the Trustees shall review, at least quarterly, a
written report of the amounts so expended and the purposes for which such
expenditures were made.
Section 5. This Plan may be terminated at any time by vote of a majority
of the Independent Trustees, or by vote of a majority of the outstanding Class B
shares of the Series.
Section 6. All agreements with any person relating to implementation of
this Plan shall be in writing, and any agreement related to this Plan shall
provide:
A. That such agreement may be terminated at any time, without payment of
any penalty, by vote of a majority of the Independent Trustees or by
vote of a majority of the outstanding Class B shares of the Series, on
not more than 60 days' written notice to any other party to the
agreement; and
B. That such agreement shall terminate automatically in the event of its
assignment.
Section 7. This Plan may not be amended to increase materially the amount
of expenses permitted pursuant to Sections 1 or 2 hereof without approval by a
vote of at least a majority of the outstanding Class B shares of the Series, and
all material amendments of this Plan shall be approved in the manner provided
for continuation of this Plan in Section 3.
Section 8. As used in this Plan, (a) the term "Independent Trustees" shall
mean those Trustees of the Trust who are not interested persons of the Trust,
and have no direct or indirect financial interest in the operation of this Plan
or any agreements related to it, and (b) the terms "assignment" and "interested
person" shall have the respective meanings specified in the Act and the rules
and regulations thereunder, and the term "majority of the outstanding Class B
shares of the Series" shall mean the lesser of the 67% or the 50% voting
requirements specified in clauses (A) and (B), respectively, of the third
sentence of Section 2(a)(42) of the Act, all subject to such exemptions as may
be granted by the Securities and Exchange Commission.
-3-
<PAGE>
Schedule Pursuant to Rule 483(d)(2) Under the Securities Act of 1933
--------------------------------------------------------------------
The foregoing form of Class B Distribution and Service Plan is filed in
lieu of 8 separate Class B Distribution and Service Plans, one for each series
of the Registrant, which differ from the foregoing form only in that the
bracketed terms in the form are replaced with the following:
[NAME OF FUND] [DATE 1] [DATE 2]
New England Growth November 1, 1995 October 31, 1995
Opportunities Fund
New England Adjustable Rate U.S. November 1, 1995 October 31, 1995
Government Fund
New England High Income Fund November 1, 1995 October 31, 1995
New England Massachusetts Tax November 1, 1995 October 31, 1995
Free Income Fund
New England Intermediate Term November 1, 1995 October 31, 1995
Tax Free Fund of California
New England Intermediate Term November 1, 1995 October 31, 1995
Tax Free Fund of New York
New England Limited Term U.S. November 1, 1995 October 31, 1995
Government Fund
Growth Fund of Israel December 29, 1995 December 28, 1995
and in that the language in the first line, "as amended and restated on", is, in
the Plan relating to Growth Fund of Israel, replaced by the word "dated".
-4-
<PAGE>
Exhibit 99.19(b)
POWER OF ATTORNEY
I, the undersigned, hereby constitute Edward A. Benjamin, Frank Nesvet,
Henry L.P. Schmelzer and Robert P. Connolly, each of them singly, my true and
lawful attorneys, with full power to them and each of them to sign for me, and
in my name in the capacity indicated below, any and all registration statements
and any and all amendments thereto to be filed with the Securities and Exchange
Commission for the purpose of registering from time to time investment companies
of which I am now or hereafter a Director or Trustee and for which New England
Funds Management, L.P., Capital Growth Management Limited Partnership, Back Bay
Advisors, L.P., Loomis, Sayles & Company, L.P., Westpeak Investment Advisors,
L.P. and/or any other affiliate of New England Mutual Life Insurance Company
serves as adviser, sub-adviser or co-adviser, registering the shares of such
companies and generally to do all such things in my name and in my behalf to
enable such registered investment companies to comply with the provisions of the
Securities Act of 1933, as amended, and the Investment Company Act of 1940, as
amended, and all requirements and regulations of the Securities and Exchange
Commission, hereby ratifying and confirming my signature as it may be signed by
my said attorneys and any and all registration statements and amendments
thereto.
Witness my hand on the 1st day of April, 1996.
DANIEL M. CAIN
------------------------------
Daniel M. Cain - Trustee
<PAGE>
POWER OF ATTORNEY
-----------------
I, the undersigned, hereby constitute Edward A. Benjamin, Frank Nesvet,
Henry L.P. Schmelzer and Robert P. Connolly, each of them singly, my true and
lawful attorneys, with full power to them and each of them to sign for me, and
in my name in the capacity indicated below, any and all registration statements
and any and all amendments thereto to be filed with the Securities and Exchange
Commission for the purpose of registering from time to time investment companies
of which I am now or hereafter a Director or Trustee and for which New England
Funds Management L.P., Capital Growth Management Limited Partnership, Back Bay
Advisors, L.P., Loomis, Sayles & Company, L.P., Westpeak Investment Advisors,
L.P. and/or any other affiliate of New England Mutual Life Insurance Company
serves as adviser, sub-adviser or co-adviser, registering the shares of such
companies and generally to do all such things in my name and in my behalf to
enable such registered investment companies to comply with the provisions of the
Securities Act of 1933, as amended, and the Investment Company Act of 1940, as
amended, and all requirements and regulations of the Securities and Exchange
Commission, hereby ratifying and confirming my signature as it may be signed by
my said attorneys and any and all registration statements and amendments
thereto.
Witness my hand on the 1st day of April, 1996.
RICHARD DARMAN
---------------------------------
Richard Darman - Trustee
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 1
<NAME> NE GROWTH OPP-A
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<INVESTMENTS-AT-COST> 144809484
<INVESTMENTS-AT-VALUE> 189182616
<RECEIVABLES> 2560779
<ASSETS-OTHER> 14876
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 191755271
<PAYABLE-FOR-SECURITIES> 6677864
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 654680
<TOTAL-LIABILITIES> 7332544
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 137870574
<SHARES-COMMON-STOCK> 10468941
<SHARES-COMMON-PRIOR> 8383570
<ACCUMULATED-NII-CURRENT> 1655576
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<PAGE>
<ARTICLE> 6
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<NAME> NE GROWTH OPP-B
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<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 3
<NAME> NE GROWTH OPP-C
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<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 5
<NAME> NE HIGH INCOME-A
<S> <C>
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<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 6
<NAME> NE HIGH INCOME-B
<S> <C>
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<FISCAL-YEAR-END> DEC-31-1995
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</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 7
<NAME> NE MASS-A
<S> <C>
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<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
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<NAME> NE MASS-B
<S> <C>
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<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 9
<NAME> NE LTD-A
<S> <C>
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<PAGE>
<ARTICLE> 6
<SERIES>
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<NAME> NE LTD-B
<S> <C>
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<PAGE>
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<SERIES>
<NUMBER> 11
<NAME> NE LTD-C
<S> <C>
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